TOMPKINS FINANCIAL CORP (TMP) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Company and its operating subsidiaries for the periods shown. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with other sections of this Report on Form 10-K, including Part I, “Item 1. Business,” and Part II, “Item 8. Financial Statements and Supplementary Data.” A detailed discussion comparing 2020 and 2019 results is incorporated herein by reference to Item 7 of the Company's 2020 annual Report on Form 10-K filed on March 1, 2021.

Overview

Tompkins Financial Corporation (“Tompkins” or the “Company”) is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At December 31, 2021, the Company’s subsidiaries included: four wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile (DBA Tompkins Bank of Castile), Mahopac Bank (DBA Tompkins Mahopac Bank), and VIST Bank (DBA Tompkins VIST Bank). Effective January 1, 2022, the Company’s four wholly-owned banking subsidiaries were combined into one bank, with The Bank of Castile, Mahopac Bank, and VIST Bank merging with and into the Trust Company with the Trust Company as the surviving institution. Following the merger, the Trust Company changed its name to "Tompkins Community Bank." The Company also has a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). Tompkins Community Bank provides a full array of trust and investment services under the Tompkins Financial Advisors brand, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company’s principal offices are located at 118 E. Seneca Street, Ithaca, NY, 14850, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the Symbol “TMP.”

Forward-Looking Statements

This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this Report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by use of such words as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan", or "anticipate", the negative and other variations of these terms and other similar words. Examples of forward-looking statements may include statements regarding the asset quality of the Company's loan portfolios; the level of the Company's allowance for credit losses; whether, when and how borrowers will repay deferred amounts and resume scheduled payments; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates, and to new, changed, or extended government/regulatory expectations; the impact of changes in accounting standards; and trends, plans, prospects, growth and strategies. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those expressed and/or implied by forward-looking statements and historical performance. The following factors, in addition to those listed as Risk Factors in Item 1A are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; the severity and duration of the COVID-19 outbreak and the impact of the outbreak (including the government’s response to the outbreak) on economic

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and financial markets and our borrowers, potential regulatory actions, and modifications to our operations, products, and services relating thereto; disruptions in our and our customers’ operations and loss of revenue due to pandemics, epidemics, widespread health emergencies, government-imposed travel/business restrictions, or outbreaks of infectious diseases such as the COVID-19, and the associated adverse impact on our financial position, liquidity, and our customers’ abilities or willingness to repay their obligations to us or willingness to obtain financial services products from the Company; a decision to amend or modify the terms under which our customers are obligated to repay amounts owed to us; the development of an interest rate environment that may adversely affect the Company’s interest rate spread, other income or cash flow anticipated from the Company’s operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, such as the Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and Consumer Protection Act; legislative and regulatory changes in response to COVID-19 with which we and our subsidiaries must comply, including the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the Appropriation Act and the rules and regulations promulgated thereunder, and federal, state and local government mandates; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; changes in business prospects that could impact goodwill and other intangible assets; fluctuations in market interest rates; uncertainties arising from national and global events, including the potential impact of widespread protests, civil unrest, and political uncertainty on the economy and the financial services industry; and financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses.

Critical Accounting Policies

The accounting and reporting policies followed by the Company conform, in all material respects, to U.S. generally accepted accounting principles ("GAAP") and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position.

Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for credit losses (“allowance”, or “ACL”), and the review of the securities portfolio for other-than-temporary impairment to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations.

The Company’s methodology for estimating the allowance considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to “Allowance for Credit Losses” below, "Note 4 - Allowance for Credit Losses", and "Note 1 – Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K for the year ended December 31, 2021.

For information on the Company's significant accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to "Note 1 – Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K for the year ended December 31, 2021.

Critical Accounting Estimates

The Company's significant accounting policies conform with U.S. generally accepted accounting principles ("GAAP") and are described in Note 1 of Notes to Financial Statements. In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company's reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. The more significant area in which management of the Company apply critical assumptions and estimates include the following:

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•Accounting for credit losses - Effective January 1, 2020 the Company adopted amended accounting guidance that impacts how the allowance for credit losses is determined. Under the new accounting guidance, the allowance for credit losses represents a valuation account that is deducted from the amortized cost basis of certain financial assets, including loans and leases, to present the net amount expected to be collected at the balance sheet date. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. In estimating expected losses in the loan and lease portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. For certain loan pools that share similar risk characteristics, the Company utilizes statistically developed models to estimate amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers' abilities to repay obligations. Such models consider historical correlations of credit losses with various macroeconomic assumptions including unemployment and gross domestic product. These forecasts may be adjusted for inherent limitations or biases of the models. Subsequent to the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. Prior to 2020, the allowance for credit losses represented the amount that in management's judgment reflected incurred credit losses inherent in the loan and lease portfolio as of the balance sheet date. The estimation of the allowance for credit losses prior to 2020 did not consider reasonable and supportable forecasts that could have affected the collectability of the reported amounts. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for credit losses in future periods. A discussion of facts and circumstances considered by management in determining the allowance for credit losses is included herein in Note 4 of Notes to Financial Statements.

COVID-19 Pandemic and Recent Events

The COVID-19 global pandemic continued to present health and economic challenges in 2021. During the year, the Company continued to focus on the health and well-being of its workforce, meeting its clients' needs, and supporting its communities. During the initial phases of the pandemic, the Company designated a Pandemic Planning Committee, which includes key individuals across the Company as well as members of Senior Management, to oversee the Company’s response to COVID-19, and implemented a number of risk mitigation measures designed to protect our employees and customers while maintaining services for our customers and community. These measures included restrictions on business travel, establishment of a hybrid work environment for most non-customer facing employees, and social distancing restrictions for those employees working at our offices and branch locations. In September 2021, New York State activated the HERO Act and the Company has adopted business practices consistent with the changing regulations there under.

Tompkins continues to offer, on a limited basis, assistance to its customers affected by the COVID-19 pandemic by implementing a payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. Our standard program allowed for the deferral of loan payments for up to 90 days; in certain cases we extended additional deferrals or other accommodations. As part of this program, the Company deferred approximately 3,800 loans totaling $1.6 billion. As of December 31, 2020, loans totaling about $1.4 billion had moved out of the deferral status and returned to payment status. As of December 31, 2021, total loans that continued in a deferral status amounted to approximately $4.5 million, representing 0.09% of total loans. Loans in the deferral program continue to accrue interest during the deferral period unless otherwise classified as nonperforming. The provisions of the CARES Act and the interagency guidance issued by Federal banking regulators provided clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. The guidance and clarifications detail certain provisions whereby banks are permitted to make deferrals and modifications to the terms of a loan which would not require the loan to be reported as a troubled debt restructuring ("TDR"). In accordance with the CARES Act and the interagency guidance, the Company elected to adopt the provisions to not report qualified loan modifications as TDRs. The relief related to TDRs under the CARES Act was extended by the Appropriation Act. Under the Appropriations Act, relief under the CARES Act continued until January 1, 2022.

Management continues to monitor credit conditions carefully at the individual borrower level, as well as by industry segment, in order to be responsive to changing credit conditions. It is difficult to assess whether a customer that continues to experience COVID-19 related financial hardship will be able to perform under the original terms of the loan once the deferral period ends. Any such inability to perform may result in increases in past due and nonperforming loans. The balance of loans in deferral as of December 31, 2021 reflects a continued decrease, resulting in immaterial industry concentrations as a percentage of each loan segment.

The Company also participated in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). This program provides borrower guarantees for lenders, and envisions a certain amount of loan forgiveness for loan recipients

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who properly utilize funds, all in accordance with the rules and regulations established by the SBA for the PPP. The Company began accepting applications for PPP loans on April 3, 2020, and had funded 2,998 loans totaling about $465.6 million when the initial program ended. On January 19, 2021, the Company began accepting both first draw and second draw applications for the reopening of the PPP program. The 2021 PPP program funding closed for new applications on May 12, 2021. The Company funded 2,142 PPP loan applications totaling $228.5 million in 2021.

Out of the total $694.1 million of PPP loans that the Company had funded through January 14, 2022, approximately $620.2 million had been forgiven by the SBA under the terms of the program. Total net deferred fees on the remaining balance of PPP loans amounted to $3.0 million at December 31, 2021.

Results of Operations

(Comparison of December 31, 2021 and 2020 results)

General

The Company reported diluted earnings per share of $6.05 in 2021, an increase of 16.4% compared to diluted earnings per share of $5.20 in 2020. Net income for the year ended December 31, 2021, was $89.3 million, an increase of 15.1% compared to $77.6 million in 2020. Earnings performance in 2021 compared to 2020 benefited from growth in noninterest income sources, including insurance, wealth management and card services income and lower provisions for credit losses. Provision expense for the year ended December 31, 2021 was a credit of $2.2 million, compared to an expense of $17.2 million for 2020. The provision for credit losses in 2020 included a provision expense of $16.8 million in the first quarter related to the impact of the economic condition related to COVID-19. Earnings in 2021 also included a $1.9 million ($0.10 per share) purchase accounting charge related to the redemption of $15.2 million in trust preferred securities and $2.9 million ($0.15 per share) in penalties related to the prepayment of $135.0 million in FHLB fixed rate advances.

In addition to earnings per share, key performance measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE was 12.32% in 2021, compared to 11.09% in 2020, while ROA was 1.12% in 2021 and 1.05% in 2020. Tompkins’ 2021 ROE compared favorably with peer ratios of 12.18% for ROE, while ROA trailed by 15 basis points when compared to peer ROA of 1.27%. 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, 2021 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current period numbers.

Segment Reporting

The Company operates in three business segments: banking, insurance and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under the Tompkins Insurance, subsidiary. Wealth management activities include the results of the Company’s trust, financial planning, and wealth management services provided by Tompkins Financial Advisors, a division of Tompkins Community Bank. All other activities are considered banking. For additional financial information on the Company’s segments, refer to “Note 22 Segment and Related Information“ in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.

Banking Segment

The banking segment reported net income of $77.9 million for the year ended December 31, 2021, representing an $8.7 million or 12.5%, increase compared to 2020. The increase in net income in 2021 compared to 2020 was largely driven by a decrease in the provision for credit losses. Net interest income decreased $1.6 million or 0.7% in 2021 compared to 2020. Net interest income in 2021 included a $1.9 million purchase accounting charge related to the redemption of $15.2 million in trust preferred securities. Interest income decreased $13.0 million or 5.1% compared to 2020, while interest expense decreased $11.5 million or 39.5%.

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The provision for credit loss expense was a credit of $2.2 million in 2021, compared to provision expense of $17.2 million in the prior year. The first quarter of 2020 included provision expense of $16.8 million related to the impact of the economic conditions due to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance, and reflects the calculation of the allowance for credit losses in accordance with ASU 2016-13 Financial Instruments - Credit Losses (Topic 326 ): Measurement of Credit Losses on financial Instruments, and its related amendments. Improved credit quality and improving macroeconomic trends in 2021 compared to 2020 contributed to a lower allowance for credit losses at year-end 2021 compared to year-end 2020. For additional information, see the section titled "The Allowance for Credit Losses" below.

Noninterest income of $25.9 million in 2021 was flat compared to 2020. Noninterest expense of $152.6 million for the year ended December 31, 2021, increased $4.9 million or 3.3% from 2020. The year-to-date increase in noninterest expense was mainly attributed to $2.9 million in penalties related to a prepayment of $135.0 million in FHLB advances, merger related expenses, and salary and wages and employee benefits reflecting normal annual merit adjustments.

Insurance Segment

The insurance segment reported net income of $6.3 million, an increase of $1.9 million or 43.3% when compared to 2020, as a $3.5 million or 11.0% increase in noninterest revenue was only partially offset by a $916,000 or 3.5% increase in expenses. The increase in revenue included $1.9 million or 8.8% growth in property and casualty commissions and a $1.1 million or 34.6% increase in contingency revenue over 2020. Health and voluntary benefits were $97,000 or 1.3% less than 2020 while life, financial services and other revenue was $53,000 or 17.0% more than 2020. Revenue growth in 2021 benefited from business development efforts and generally higher policy premium levels.

Noninterest revenue for 2021 included a non-recurring receipt from the proceeds of an officer life insurance policy in the amount of $140.000. The increase in expenses was mainly attributable to an increase in wages reflecting normal annual merit increases along with commissions and incentives related to the increase in commission revenue partially offset by an overall decrease in health insurance costs. Certain expenses such as auto, travel, entertainment and marketing which have been affected by the COVID-19 pandemic resulting in reductions during 2020 increased slightly in 2021.

Wealth Management Segment

The wealth management segment reported net income of $5.1 million for the year ended December 31, 2021, an increase of $1.1 million or 28.4% compared to 2020. Revenue of $19.7 million increased $1.6 million or 8.8% compared to 2020, mainly a result of increased assets under management and advisory revenue. We saw strong market performance throughout the year which helped revenue year over year. Noninterest expenses remained relatively flat year over year increasing by 1.1%. Increases in salary and wages were mostly offset by small savings in various other operating expenses. The fair value of assets under management or in custody at December 31, 2021 totaled $5.1 billion, an increase of 13.6% compared to year-end 2020. This figure included $1.7 billion at year-end 2021, of Company-owned securities from which no income was recognized as the Trust Company was serving as custodian.

Net Interest Income

Net interest income is the Company’s largest source of revenue, representing 74.0% of total revenues for the year ended December 31, 2021, and 75.3% of total revenues for the year ended December 31, 2020. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. Table 1 – Average Statements of Condition and Net Interest Analysis shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.

Tax-equivalent net interest income for 2021 decreased by $2.0 million or 0.9% from 2020. The decrease resulted mainly from the decrease in average asset yields more than offsetting the growth in average earning assets and lower average funding costs. Funding costs benefited from lower market rates in 2021 compared to 2020 as well the mix of funding sources, including an increase in average noninterest bearing deposits. Average total deposits represented 94.5% of average total liabilities in 2021 compared to 91.7% in 2020, while total average borrowings represented 3.0% of average total liabilities in 2021 and 5.5% in 2020. Average earning assets in 2021 increased 11.0% over 2020, while average asset yields for 2021 decreased 54 basis points compared to 2020. The net interest margin for 2021 was 2.96% compared to 3.31% for 2020. The decline in net interest margin for 2021 when compared to 2020 was mainly due to lower securities yields as well as a slight shift in the composition of average earning assets, with a greater mix of lower yielding securities and interest bearing balances, and a decrease in average loan balances reflecting lower PPP loan balances.

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Tax-equivalent interest income decreased $13.5 million or 5.3% in 2021 from 2020. The decrease in tax-equivalent interest income was mainly due to lower asset yields, partially offset by an increase in the volume of average earning assets. Average asset yields for 2021 decreased 54 basis points compared to 2020, mainly driven by the decrease in market interest rates as well as the growth in lower yielding securities and interest bearing balances. Average loans and leases decreased $43.6 million or 0.8% in 2021 compared to 2020, and represented 68.0% of average earning assets in 2021 compared to 76.1% in 2020. As a result of its participation in the SBA's PPP, the Company recorded net deferred loan fees of $11.2 million in 2021 and $9.2 million in 2020, which are included in interest income. The average yield on loans was 4.16% in 2021, a decrease of 22 basis points compared to 4.38% in 2020. Average balances on securities increased $693.5 million or 48.6% in 2021 compared to 2020, while the average yield on the securities portfolio decreased 60 basis points or 32.8% compared to 2020 due to lower market interest rates.

Interest expense for 2021 decreased $11.5 million or 39.6% compared to 2020, driven mainly by lower funding costs and decreases in average balances on borrowings. Interest expense in 2021 included a $1.9 million purchase accounting charge related to the redemption of $15.2 million in trust preferred securities in 2021. The average cost of interest bearing deposits was 0.23% in 2021, a decrease of 23 basis points from 0.46% in 2020, while the average cost of interest bearing liabilities decreased to 0.35% in 2021 from 0.60% in 2020. Average interest bearing deposits in 2021 increased $392.0 million or 9.0% compared to 2020. Average noninterest bearing deposit balances in 2021 increased $343.3 million or 19.6% over 2020 and represented 30.6% of average total deposits in 2021 compared to 28.7% in 2020. Average total deposits were up $735.3 million or 12.0% in 2021 over 2020. Average deposit balances continue to benefit from the PPP loan program, as the majority of the proceeds of the PPP loans funded by Tompkins during 2020 and the first half of 2021 were deposited in Tompkins checking accounts. Additionally, consumer deposit balances benefited from other government stimulus programs. Average other borrowings decreased by $147.9 million or 40.5% in 2021 from 2020. The decrease in borrowings was due to continued strong deposit growth during 2021 which allowed for reductions in FHLB borrowings. In September 2021, the Company prepaid $135.0 million of fixed rate FHLB advances, incurring prepayment penalties of $2.9 million. The advances carried a weighted average rate of 2.26% and had a weighted average maturity of 1.25 years.

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Table 1 - Average Statements of Condition and Net Interest Analysis

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 2021, 2020, and 2019 to increase tax exempt interest income to tax-equivalent basis.

3 Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s consolidated financial statements included in Part 1 of this annual report on Form 10-K.

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Table 2 - Analysis of Changes in Net Interest Income

1 Interest income includes the tax effects of tax-equivalent adjustments using the Federal income tax rate of 21.0% in 2021, 2020 and 2019 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 2021, net interest income decreased by $2.0 million, resulting from a $11.5 million decrease in interest expense, offset by a $13.5 million decrease in interest income. Lower yields on average earning assets reduced interest income by $21.0 million, while the increase in average balances on interest-earning assets increased interest income by $7.5 million. The decrease in interest expense reflects lower rates paid on interest bearing liabilities, both deposits and other borrowings and a decrease in average borrowings. Lower rates on deposits and borrowing, reduced interest expense by $8.5 million, while lower balances reduced interest expense by $2.9 million.

Provision for Credit Loss Expense

The provision for credit loss expense represents management’s estimate of the expense necessary to maintain the allowance for credit losses at an appropriate level. Relatively stable credit conditions and improving macroeconomic trends contributed to a lower allowance for credit losses at December 31, 2021 when compared to December 31, 2020. The ratio of total allowance to total loans and leases decreased to 0.84% at December 31, 2021 from 0.98% at December 31, 2020. The provision for credit loss expense was a credit of $2.2 million in 2021, compared to provision expense of $17.2 million in 2020. The provision for credit losses for 2021 included a provision of $586,000 related to off-balance sheet credit exposures compared to a provision of $1.1 million, respectively, for 2020. The first quarter of 2020 included a provision expense of $16.8 million related to the impact of COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance, and reflects the calculation of the allowance for credit losses in accordance with ASU 2016-13. The fourth quarter of 2021 included a $7.0 million charge-off of a commercial real estate relationship consisting of two loans that were previously reported as nonperforming loans. The section captioned “Financial Condition – The Allowance for Credit Losses” below has further details on the allowance for credit losses and asset quality metrics.

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Noninterest Income

Noninterest income of $78.8 million in 2021 increased $5.0 million or 6.8% over 2020, reflecting growth in insurance commissions and fees, investment services and card services income. Noninterest income represented 26.1% of total revenues in 2021, and 24.7% in 2020.

Insurance commissions and fees of $34.8 million increased $3.3 million or 10.6% compared to $31.5 million for 2020. The increase in insurance commissions and fees in 2021 over 2020 was due to $1.9 million or 8.8% of organic growth in property and casualty commissions, and an increase of $1.1 million or 35.0% in contingency revenue over 2020.

Investment services income of $19.4 million increased $1.9 million or 10.7% in 2021 compared to 2020, mainly due to an increase in advisory fee income resulting from the growth in assets under management, driven by new business and an increase in fair value due to favorable market conditions. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $5.1 billion at December 31, 2021, an increase from $4.4 billion at December 31, 2020. The fair value of assets in custody at December 31, 2021 and 2020 includes $1.7 billion and $1.2 billion, respectively, of Company-owned securities where the Trust Company is custodian.

Service charges on deposit accounts in 2021 were in line with prior year. Net overdraft fees are the largest component of service charges on deposit accounts, and decreased $120,000 or 3.4% in 2021 compared to 2020. The decreases in overdraft/insufficient funds charges during 2021 were primarily related to a decrease in the volume of overdrafts relative to 2020. Service fees on personal and business accounts, increased $77,000 or 3.1% in 2021 over 2020.

Card services income increased $1.6 million or 16.9% over 2020. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. The increase in card services income in 2021, when compared to 2020, is s result of higher transaction volumes, which benefited from the easement of pandemic-related travel and business restrictions in 2021.

Other income of $7.2 million decreased $1.6 million or 18.3% compared to 2020. The decrease was largely due to gains on sales of residential mortgage loans of $2.0 million in 2020, compared to gains of $943,000 in 2021, due to a higher volume of loans sold and higher premiums paid on loans sold in 2020.

Noninterest Expense

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Noninterest expense as a percentage of total revenue was 62.9% in 2021, compared to 61.6% in 2020.

Expenses associated with salaries and wages and employee benefits are the largest component of total noninterest expense. In 2021, these expenses increased $2.9 million or 2.5% compared to 2021. Salaries and wages increased $3.5 million or 3.8% in 2021 over the prior year, mainly as a result of annual merit pay increases. Other employee benefits decreased $640,000 or 2.6% over 2020, mainly in health insurance, which was down $1.1 million or 10.7% in 2021 over 2020. The number of employees as measured by average full time equivalents (FTEs) for 2021 were 1,032, decreased from 1,057 for 2020.

Other operating expenses of $44.5 million increased by $2.2 million or 5.1% compared to 2020. The primary components of other operating expenses in 2021 were technology expense ($11.7 million), professional fees ($6.9 million), marketing expense ($4.3 million), and cardholder expense ($3.5 million). The increase in other operating expenses in 2021 compared to 2020 included a nonrecurring $2.9 million prepayment penalty, related to pay down of $135.0 million of FHLB fixed rate advances, along with professional fees (up $855,000 or 14.1%), and cardholder expense (up $280,000 or 8.6%). These increases were partially offset by decreases in marketing related expenses in 2021 over 2020 (down $431,000 or 9.1%). The FHLB advances, which were paid off in September 2021, carried a weighted average interest rate of 2.26% and had a weighted average maturity of 1.25 years.

Noncontrolling Interests

Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of $127,000 in 2021, down $27,000 from 2020. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company’s New York banking subsidiaries.

Income Tax Expense

The provision for income taxes provides for Federal, New York State, Pennsylvania and other miscellaneous state income taxes. The 2021 provision was $25.2 million, which increased $5.3 million or 26.4% compared to the 2020 provision. The effective tax rate for the Company was 22.0% in 2021, up from 20.4% in 2020. The effective rates for 2021 and 2020 differed from the U.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation. The increase in the effective tax rate for 2021 over 2020 was due to a higher level of taxable income to total income.

The Company's banking subsidiary has an investment in a real estate investment trust that provides certain benefits on its New York State tax return for qualifying entities. A condition to claim the benefit is that the consolidated company has average assets of no more than $8 billion for the taxable year. As of December 31, 2021, 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 2022 to determine future eligibility.

Financial Condition

Total assets were $7.8 billion at December 31, 2021, increasing by 2.6% or $197.8 million from the previous year end. The increase in total assets was mainly due to increases in securities. Total securities increased $701.3 million or 43.1% over December 31, 2020. Total deposits at year-end 2021 increased $353.7 million or 5.5% over year-end 2020.

Loans and leases were 64.9% of total assets at December 31, 2021, compared to 69.0% of total assets at December 31, 2020. Total loan balances were $5.1 billion at December 31, 2021, a decrease of $184.9 million or 3.5% compared to the $5.2 billion reported at year-end 2020. The decrease is mainly due to PPP loan balances being forgiven as part of the SBA program. PPP loan balances totaled $71.3 million at year-end 2021, compared to $291.3 million at year-end 2020. A more detailed discussion of the loan portfolio is provided below in this section under the caption “Loans and Leases”.

As of December 31, 2021, total securities comprised 29.8% of total assets, compared to 21.4% of total assets at year-end 2020. Securities increased $701.3 million or 43.1% at December 31, 2021, compared to December 31, 2020. The increase in securities from year-end 2020 was largely due to the investment of excess liquidity into securities. A detailed discussion of the securities portfolio is provided below in this section under the caption “Securities”.

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Total deposits at year-end 2021 increased by $353.7 million or 5.5% compared to December 31, 2020. At December 31, 2021 noninterest bearing deposits increased by $206.2 million or 10.7%, time deposit balances decreased $106.6 million or 14.3% and checking, savings and money market accounts increased $254.1 million or 6.8% when compared to December 31, 2020. Other borrowings, consisting mainly of short term advances with the FHLB, decreased $141.0 million or 53.2% from December 31, 2020, as growth in deposits were used to reduce borrowings. A more detailed discussion of deposits and borrowings is provided below in this section under the caption “Deposits and Other Liabilities”.

Shareholders’ Equity

The Consolidated Statements of Changes in Shareholders’ Equity included in the Consolidated Financial Statements of the Company contained in Part II, Item 8. of this Report, detail changes in equity capital over prior year end. Total shareholders’ equity increased $11.3 million or 1.6% to $728.9 million at December 31, 2021, from $717.7 million at December 31, 2020. Additional paid-in capital decreased by $21.4 million, from $334.0 million at December 31, 2020, to $312.5 million at December 31, 2021. The $21.4 million decrease included the following: a $23.8 million aggregate purchase price related to the Company's repurchase and retirement of 304,513 shares of its common stock in connection with Board-approved repurchase plans, and $3.1 million related to the exercise of stock options and restricted stock activity. These were partially offset by $5.1 million attributed to stock based compensation expense, and $257,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by $56.8 million, reflecting net income of $89.3 million, less dividends paid of $32.4 million for year-ended December 31, 2021.

Accumulated other comprehensive loss increased from $32.1 million at December 31, 2020 to $56.0 million at December 31, 2021, reflecting a $35.2 million increase in unrealized losses on available-for-sale debt securities due to market interest rates, partially offset by a $11.3 million actuarial gain associated with employee benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale debt securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage capital ratios.

Total shareholders’ equity increased $54.6 million or 8.2% to $717.7 million at December 31, 2020, from $663.1 million at December 31, 2019. Additional paid-in capital decreased by $4.5 million, from $338.5 million at December 31, 2019, to $334.0 million at December 31, 2020. The $4.5 million decrease included the following: $9.4 million aggregate purchase price related to the Company's repurchase and retirement of 127,690 shares of its common stock in connection with the 2020 Repurchase Plan and $1.9 million related to the exercise of stock options and restricted stock activity. These were partially offset by $4.7 million attributed to stock based compensation expense, $1.8 million related to shares issued in connection with the Company's dividend reinvestment program, and $255,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by $47.9 million, reflecting net income of $77.6 million, less dividends paid of $31.4 million and the net cumulative effect adjustment related to the adoption of ASU 2016-13 of $1.7 million.

Accumulated other comprehensive loss decreased from $43.6 million at December 31, 2019 to $32.1 million at December 31, 2020; reflecting a $16.6 million increase in unrealized gains on available-for-sale debt securities due to market interest rates, and a $5.1 million increase in actuarial loss associated with employee benefit plans.

The Company continued its long history of increasing cash dividends with a per share increase of 4.3% in 2021, which followed an increase of 4.0% in 2020. Dividends per share were $2.19 in 2021, compared to $2.10 in 2020, and $2.02 in 2019. Cash dividends paid represented 36.3%, 40.4%, and 37.5% of after-tax net income in 2021, 2020, and 2019, respectively.

On January 30, 2020, the Company’s Board of Directors authorized a stock repurchase plan (the "2020 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. In the third quarter of 2021, the Company reached the 400,000 share limit under the 2020 Repurchase Plan; the 400,000 shares were purchased at an average price of $75.99.

On October 22, 2021, the Company’s Board of Directors authorized a share repurchase plan (the “2021 Repurchase Plan”) for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. Shares may be repurchased from time to time under the 2021 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2021 Repurchase Plan, the Company repurchased 32,203 shares through December 31, 2021, at an average cost of $80.65.

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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, 2021, the capital ratios for the Company’s four subsidiary banks exceeded the minimum levels required to be considered well capitalized. Effective January 1, 2022, the Company's four wholly-owned banking subsidiaries were combined into one bank, with the Bank of Castile, Mahopac Bank, and VIST Bank merging with and into Tompkins Trust Company. Immediately following the merger, Tompkins Trust Company changed its name to Tompkins Community Bank. Additional information on the Company’s capital ratios and regulatory requirements is provided in “Note 20 - Regulations and Supervision” in Notes to Consolidated Financial Statements in Part II, Item 8. 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. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee.

The Company classifies its securities at date of purchase as available-for-sale, held-to-maturity or trading.  Securities, other than certain obligations of states and political subdivisions thereof, are generally classified as available-for-sale. Securities available-for-sale may be used to enhance total return, provide additional liquidity, or reduce interest rate risk. Securities in the held-to-maturity portfolio would consists of obligations of the U.S. Government, U.S. Government sponsored entities and obligations of state and political subdivisions. Securities in the trading portfolio would reflect those securities that the Company elects to account for at fair value, with the adoption of ASC Topic 825, Financial Instruments.

The Company’s total securities portfolio at December 31, 2021 was $2.3 billion compared to $1.6 billion at December 31, 2020. The table below shows the composition of the available-for-sale and held-to-maturity securities portfolios as of year-end 2021, 2020 and 2019. The increase in the available-for-sale portfolio at year-end 2021 over year-end 2020 reflects the reinvestment of excess liquidity. The Company purchased approximately $1.4 billion of securities in 2021, which were partially offset by $452.9 million of payments, maturities and calls and $142.7 million of sales of available-for-sale securities. In 2021, fair values were unfavorably impacted by changes in market interest rates.

Additional information on the securities portfolio is available in “Note 2 Securities” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report, which details the types of securities held, the carrying and fair values, and the contractual maturities as of December 31, 2021 and 2020.

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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.

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

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Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost.

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of December 31, 2021, 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, 2021.

The Company also holds non-marketable Federal Home Loan Bank New York (“FHLBNY”) stock, non-marketable Federal Home Loan Bank Pittsburgh (“FHLBPITT”) stock and non-marketable Atlantic Community Bankers Bank (“ACBB”) stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock, FHLBPITT stock and ACBB stock totaled $9.9 million, $1.0 million and $95,000 at December 31, 2021, respectively. These securities are carried at par, which is also cost. The FHLBNY and FHLBPITT continue to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of FHLBNY and FHLBPITT stock. At December 31, 2020, the Company’s holdings of FHLBNY stock, FHLBPITT stock, and ACBB stock totaled $11.0 million, $5.2 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, 2021, 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.

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Table 3 - Maturity Distribution

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 1.23% in 2021, 1.83% in 2020 and 2.30% in 2019.

At December 31, 2021, 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.

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Loans and Leases

Table 4 - Composition of Loan and Lease Portfolio

Total loans and leases of $5.1 billion at December 31, 2021 decreased $184.9 million or 3.5% from December 31, 2020. The decrease was mainly in PPP loans, which totaled $71.3 million at year end 2021, and $291.3 million at year-end 2020. The decrease in PPP loans is due to the PPP loan forgiveness program and pay downs made in 2021. In total, the Company funded approximately $694.1 million in PPP loans, of which $620.2 million had been forgiven by the SBA under the terms of the program as of January 14, 2022. As of December 31, 2021, total loans and leases represented 64.9% of total assets compared to 69.0% of total assets at December 31, 2020.

Residential real estate loans, including home equity loans, were $1.5 billion at December 31, 2021, an increase of $37.6 million or 2.6% compared to the $1.4 billion reported at year-end 2020. Residential real estate loans comprised 29.0% of total loans and leases at December 31, 2021 compared to 27.3% at December 31, 2020. Growth in residential loan balances is impacted by the Company’s decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to 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 2021, 2020, and 2019, the Company sold residential mortgage loans totaling $31.5 million, $51.7 million, and $16.9 million, respectively, and realized net gains on these sales of $943,000, $2.1 million, and $227,000, respectively. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides

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the Company with a source of fee income. In connection with the sales in 2021, 2020, and 2019, the Company recorded mortgage-servicing assets of $236,000, $388,000, and $127,000, respectively.

The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/1 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate given the low interest rate environment. Adjustable rate residential real estate loans may be underwritten based upon an initial rate which is below the fully indexed rate; however, the initial rate is generally less than 100 basis points below the fully indexed rate. As such, the Company does not believe that this practice creates any significant credit risk.

Commercial real estate loans totaled $2.7 billion at December 31, 2021, an increase of $84.0 million or 3.3% compared to December 31, 2020, and represented 52.3% of total loans and leases at December 31, 2021, compared to 48.8% at December 31, 2020.

Commercial and industrial loans totaled $869.6 million at December 31, 2021, which is a decrease of $309.2 million or 26.2% from December 31, 2020. Commercial and industrial loans represented 17.1% of total loans at December 31, 2021 compared to 22.4% at December 31, 2020. The decrease at year-end 2021 from year-end 2020 was mainly due to PPP loans forgiven by the SBA. At December 31, 2021 the total outstanding balances of PPP loans was $71.3 million compared to $291.3 million at December 31, 2020.

As of December 31, 2021, agriculturally-related loans totaled $295.1 million or 5.8% of total loans and leases compared to $296.4 million or 5.6% of total loans and leases at December 31, 2020. 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 $72.1 million at December 31, 2021, compared to $69.8 million at December 31, 2020.

The lease portfolio decreased by 1.8% to $13.9 million at December 31, 2021 from $14.2 million at December 31, 2020. As of December 31, 2021, 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 2021. 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 four subsidiary banks. 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.

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Analysis of Past Due and Nonperforming Loans

1 The 2019, 2018 and 2017 columns in the above table exclude $794,000, $1.3 million, and $1.1 million, respectively, of acquired loans that are 90 days past due and accruing interest.  These loans were originally recorded at fair value on the acquisition date 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 0.40% at December 31, 2021, a decrease from 0.60% at December 31, 2020, and compares to its peer group's most recent ratio of 0.54% at September 30, 2021. 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 $31.2 million at December 31, 2021 and decreased 31.9% from December 31, 2020. Nonperforming loans and leases represented 0.61% of total loans at December 31, 2021, compared to 0.87% of total loans at December 31, 2020, and 0.64% of total loans at December 31, 2019. Nonperforming loans and leases in the commercial real estate portfolio at year-end 2021 decreased by $9.7 million compared to 2020; the decrease was mainly due to one credit totaling approximately $11.8 million in the hospitality industry that paid off in the fourth quarter of 2021.

The Company implemented a payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. As of December 31, 2021, total loans that continued in a deferral status amounted to approximately $4.5 million, representing 0.09% of total loans and $212.2 million at December 31, 2020.

Loans are considered modified in a troubled debt restructuring (“TDR”) when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that the Company would not otherwise consider. When modifications are provided for reasons other than as a result of the financial distress of the borrower, these loans are not classified as TDRs or impaired. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the following categories: “loans 90 days past due and accruing”, “nonaccrual loans”, or “troubled debt restructurings not included above”. Loans in the latter category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and have shown a satisfactory period of repayment (generally six consecutive months) and where full collection of all is reasonably assured. At December 31, 2021, the Company had $6.8 million in TDR balances, which are included in the above table, of which $5.1 million are included in the line captioned “Troubled debt restructurings not included above” and the remainder are included within nonaccrual loans.

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In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when called for by regulatory requirements. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal and interest income is recorded only after principal recovery is reasonably assured. For additional financial information on the difference between the interest income that would have been recorded if these loans and leases had been paid in accordance with their original terms and the interest income that was recorded, refer to “Note 3 – Loans and Leases” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.

The Company’s recorded investment in loans and leases that are individually evaluated totaled $20.5 million at December 31, 2021, and $32.2 million at December 31, 2020. 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, 2021, there were specific reserves of $67,000, mainly related to one commercial real estate loan and one commercial loan compared to $308,000 of specific reserves on four commercial real estate loans and five commercial loans at December 31, 2020. 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 2021, 2020 and 2019.

The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 137.5% at December 31, 2021, compared to 112.9% at December 31, 2020. 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 25 commercial relationships totaling $36.5 million at December 31, 2021 that were potential problem loans. At December 31, 2020, there were 35 relationships totaling $40.8 million in the loan portfolio that were considered potential problem loans. Of the 25 commercial relationships from the portfolio that were classified as potential problem loans at December 31, 2021, there were 9 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $32.1 million. The potential problem loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management’s attention is focused on these credits, which are reviewed on at least a quarterly basis.

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.

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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, 2021, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance bases on their judgements and information available to them at the time of their examinations.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company's consolidated statements of income. As of December 31, 2021, the Company's reserve for off-balance sheet credit exposures was $2.5 million, compared to $1.9 million at December 31, 2020. As a result of the adoption of ASC 326, the Company recorded a net cumulative-effect adjustment increasing the allowance for credit losses on off-balance sheet credit exposures by $381,000 from $477,000 at December 31, 2019, to $858,000 at January 1, 2020.

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The allocation of the Company’s allowance as of December 31, 2021, 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 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. Also in 2020 was a $14.9 million increase in provision expense driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. Improved forecasts for unemployment and economic growth contributed to the decrease in the allowance between year-end 2021 and year-end 2020.

As of December 31, 2021, the total allowance for credit losses was $42.8 million, a decrease of $8.8 million or 17.1% from year-end 2020. The decrease reflects net charge-offs of $6.0 million and a credit to provision expense of $2.8 million. The fourth quarter of 2021 included a $7.0 million charge-off of a commercial real estate relationship in the hospitality industry that was moved to nonaccrual in the second quarter of 2021. The lower allowance at December 31, 2021 compared to December 31, 2020 was mainly driven by improvement in forecasts for both unemployment and the gross domestic product used in our model at year-end 2021 compared to year-end 2020. Qualitative reserves are down from year-end 2020. Qualitative reserves for loans within the hospitality and certain other industries that may have an elevated level of risk due to the adverse economic impact of the COVID-19 pandemic, and for loans that were part of the Company's payment deferral program implemented in response to the COVID-19 pandemic decreased over the course of the 2021 as pandemic restrictions eased and the economy started to reopen and loans exited the deferral program and returned to repayment status. Estimates of future delinquency and credit loss performance is extremely difficult given the uncertainties centering around the evolution of the virus, including the

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spread of the Delta variant, the efficacy of vaccination programs, the related pace of the full resumption of business activities, and the strength of the economic recovery as government assistance programs are phased out. The decrease in these qualitative reserves were partially offset by qualitative reserves for local (county) unemployment trends and changes in commercial real estate and residential real estate indices. The qualitative reserves were added to all portfolio segments, with the majority of the impact resulting in the commercial real estate portfolio, followed by residential real estate and commercial and industrial portfolios.

Total loans were $5.1 billion at December 31, 2021, a decrease of $184.9 million or 3.5% from December 31, 2020. The decrease from year-end 2021 was mainly due to the pay down of guaranteed PPP loans which were down $220.0 million compared to the same period prior year. Since the PPP loans are guaranteed by the SBA, there are no reserves allocated to these loans. Credit quality metrics at December 31, 2021, were improved when compared to year-end 2020. Nonperforming assets represented 0.40% of total assets at December 31, 2021, compared to 0.60% at December 31, 2020. Nonperforming loans and leases decreased $14.6 million or 31.9% from year end 2020 and represented 0.61% of total loans at December 31, 2021 compared to 0.87% at December 31, 2020. Loans internally-classified Special Mention or Substandard decreased $52.3 million or 27.6% compared to December 31, 2020. The improvement over December 31, 2020, were mainly due to improved economic conditions as pandemic-related restrictions are being lifted and businesses are reopening.

Table 6 - Analysis of the Allowance for Credit Losses

The above table shows the activity in the allowance for credit losses over the past five years. The allowance at December 31, 2021 was $42.8 million, a decrease of $8.8 million from year-end 2020, reflecting net charge-offs of $6.0 million and a credit to provision expense of $2.8 million. The year-over-year decrease is mainly due to one commercial real estate relationship that included included two loans and was charged off in the fourth quarter of 2021. For 2019, favorable trends in certain qualitative factors, lower historical loss rates in all loan portfolios except for commercial real estate at year-end 2019 compared to year-end

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2018, and lower specific reserves for impaired loans contributed to the lower allowance level at December 31, 2019 compared to December 31, 2018 and a decrease in provision expense in 2019 compared to 2018. As mentioned above, the $16.2 million provision expense in 2020 was driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. The majority of the increase in the allowance and provision expense in 2020 was in the first quarter of 2020. 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.

The ratio of the allowance for credit losses as a percentage of total loans was 0.84% at year-end 2021 compared to 0.98% at year-end 2020. The allowance coverage to nonperforming loans and leases was 137.50% at December 31, 2021 compared to 112.87% at December 31, 2020. Management believes that, based upon its evaluation as of December 31, 2021, the allowance is appropriate.

Deposits and Other Liabilities

Total deposits were $6.8 billion at December 31, 2021, an increase of $353.7 million or 5.5% compared to year-end 2020. The increase from year-end 2020 consisted of savings and money market balances, and noninterest bearing deposits up $254.1 million, and $206.1 million, respectively. This was partially offset by a reduction in time deposits, which decreased $106.6 million. Deposit balances have benefited from PPP loan originations and government stimulus payments related to COVID-19. The majority of the Company's PPP loan originations were deposited in Tompkins checking accounts.

The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of $250,000 or more, brokered deposits, municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits increased by $626.4 million or 12.2% to $5.8 billion at year-end 2021 from $5.2 billion at year-end 2020. Core deposits represented 85.1% of total deposits at December 31, 2021, compared to 80.1% of total deposits at December 31, 2020.

Municipal money market accounts and reciprocal deposit relationships with municipalities totaled $802.1 million at year-end 2021, which increased 17.0% over year-end 2020. 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 $66.8 million at December 31, 2021, and $65.8 million at December 31, 2020. Management generally views local repurchase agreements as an alternative to large time deposits. Refer to “Note 8 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company’s repurchase agreements.

The Company’s other borrowings totaled $124.0 million at year-end 2021, which was $141.0 million below prior year end. The decrease in borrowings was due to deposit growth from year-end 2020. In the third quarter of 2021, the Company prepaid $135.0 million of FHLB fixed rate advances and incurred prepayment penalties of $2.9 million, recorded in noninterest expense. The advances, which were paid off in September 2021, carried a weighted average rate of 2.26% and had a weighted average maturity of 1.25 years. The $124.0 million in borrowings at December 31, 2021, represented $14.0 million in overnight advances from the FHLB and $110.0 million in term advances from the FHLB. Borrowings of $265.0 million at year-end 2020 represented FHLB term advances. Of the $110.0 million in FHLB term advances at year-end 2021, $100.0 million are due in over one year. Refer to “Note 9 - Other Borrowings” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company’s term borrowings with the FHLB.

Liquidity Management

As of December 31, 2021, the Company had not experienced any significant impact to our liquidity or funding capabilities as a result of the COVID-19 pandemic. The Company has a long-standing liquidity plan in place that is designed to ensure that appropriate liquidity resources are available to fund the balance sheet. Additionally, given the uncertainties related to the impact of the COVID-19 crisis on liquidity, the Company has confirmed the availability of funds at the FHLB of NY, completed actions required to activate participation in the Federal Reserve Bank PPP lending facility, and confirmed availability of Federal Fund lines with correspondent bank partners.

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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 banks. This Committee reviews periodic reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur.

Core deposits, discussed above under “Deposits and Other Liabilities”, are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, brokered time deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase, overnight borrowings and term advances from the FHLB and other funding sources. Rates and terms are the primary determinants of the mix of these funding sources.

Non-core funding sources totaled $1.2 billion at December 31, 2021, a decrease of $412.8 million or 25.6% from $1.6 billion at December 31, 2020. The decrease was driven mainly by the repayment of $200.0 million of brokered time deposits that matured during the second quarter of 2021 and the prepayment of $135.0 million of FHLB term borrowings during the third quarter of 2021. Non-core funding sources decreased year-over-year as the Company experienced sufficient growth in core deposits to fund earning asset growth. Non-core funding sources as a percentage of total liabilities decreased from 23.4% at year-end 2020 to 17.0% at year-end 2021.

Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.4 billion at December 31, 2021 and 2020, were either pledged or sold under agreements to repurchase. Pledged securities or securities sold under agreements to repurchase represented 59.4% of total securities at December 31, 2021, compared to 75.3% of total securities at December 31, 2020.

Cash and cash equivalents totaled $63.1 million as of December 31, 2021, a decrease from $388.5 million at December 31, 2020. Short-term investments, consisting of securities due in one year or less, increased from $55.0 million at December 31, 2020, to $77.9 million at December 31, 2021.

Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but they have monthly principal reductions. Total mortgage-backed securities, at fair value, were $947.7 million at December 31, 2021 compared with $887.6 million at December 31, 2020. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.6 billion at December 31, 2021 compared to $1.5 billion at December 31, 2020. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.

Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At December 31, 2021, the unused borrowing capacity on established lines with the FHLB was $2.3 billion.

As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets and securities to secure additional borrowings from the FHLB. At December 31, 2021, total unencumbered mortgage loans and securities of the Company were $1.6 billion. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB.

The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term.

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Table 7 - Loan Maturity

Of the loan amounts shown above in Table 7 - Loan Maturity, maturing over 1 year, $2.1 billion have fixed rates and $2.6 billion have adjustable rates.

Off-Balance Sheet Arrangements

In the normal course of business, the Company is party to certain financial instruments, which in accordance with accounting principles generally accepted in the United States, are not included in its Consolidated Statements of Condition. These transactions include commitments under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans and are undertaken to accommodate the financing needs of the Company’s customers. Loan commitments are agreements by the Company to lend monies at a future date. These loan and letter of credit commitments are subject to the same credit policies and reviews as the Company’s loans. Because most of these loan commitments expire within one year from the date of issue, the total amount of these loan commitments as of December 31, 2021, are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities is provided in “Note 17 Commitments and Contingent Liabilities” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.

Contractual Obligations

The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5 to 20 years. In addition, the Company has a software contract for its core banking application through June 30, 2024 along with contracts for more specialized software programs through 2021. Further information on the Company’s lease arrangements is provided in “Note 6 Premises and Equipment” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company’s contractual obligations as of December 31, 2021, are shown in Table 8-Contractual Obligations and Commitments below.

Table 8 - Contractual Obligations and Commitments

1 Operating leases include renewals the Company considers reasonably certain to exercise.

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Non-GAAP Disclosure

The following table summarizes the Company’s results of operations on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. The non-GAAP financial measures adjust GAAP measures to exclude the effects of non-operating items, such as acquisition related intangible amortization expense, and significant nonrecurring income or expense on earnings, equity, and capital. The Company believes the non-GAAP measures provide meaningful comparisons of our underlying operational performance and facilitate management's and investors' assessments of business and performance trends in comparison to others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a measure of the Company's profitability or liquidity; they are in addition to, and are not a substitute for, financial measures under GAAP. The non-GAAP financial measures presented herein may be different from non-GAAP financial measures used by other companies, and may not be comparable to similarly titled measures reported by other companies. In the future, the Company may utilize other measures to illustrate performance. Non-GAAP financial measures have limitations since they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP.

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Newly Adopted Accounting Standards

ASU No 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 became effective for the Company on January 1, 2021, and did not have a significant impact on our consolidated financial statements.

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Accounting Standards Pending Adoption

ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU update improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. OR This ASU update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606. The update is effective for public entities for fiscal years beginning after December 15, 2022,including interim periods within those fiscal years.

ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This ASU requires business entities to make annual disclosures about transactions with a government they account for by analogizing to a grant or contribution accounting model under ASC 958-605. We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and determined it will not have a material impact.

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.