TOMPKINS FINANCIAL CORP (TMP) FY 2023 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." For a detailed discussion of our operating results for the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Item 7 of the Company's 2022 Annual Report on Form 10-K filed on March 1, 2023.

Overview

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. In January 2022, the Company combined its four wholly-owned banking subsidiaries into one bank, with the Bank of Castile, Mahopac Bank, and VIST Bank merging with and into Tompkins Trust Company (the "Trust Company") with the Trust Company as the surviving institution. Immediately following the merger, the Trust Company changed its name to Tompkins Community Bank. At December 31, 2023, the Company had one wholly-owned banking subsidiary, Tompkins Community Bank. The Company also has a wholly-owned insurance agency subsidiary, Tompkins Insurance. Tompkins Financial Advisors, a division of Tompkins Community Bank provides a full array of investment services, including investment management, trust and estate, financial and tax planning 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 Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this Report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by use of such words as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan", or "anticipate", and other similar words. Examples of forward-looking statements may include statements regarding the asset quality of the Company's loan portfolios; the level of the Company's allowance for credit losses; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates, and to new, changed, or extended government/regulatory expectations; the need to sell securities before recovery of amortized cost; the expected increases in interest income attributable to recent sales of available-for-sale debt securities; 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 and historical performance: changes in general economic, market and regulatory conditions; our ability to attract and retain deposits and other sources of liquidity; gross domestic product growth and inflation trends; the impact of the interest rate and inflationary environment on the Company's business, financial condition and results of operations; other income or cash flow anticipated from the Company's operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, including the Dodd-Frank Act, and state and local government mandates; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; technological developments and changes; cybersecurity incidents and threats; 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; the ability to access financial resources in the amounts, at the times, and on the terms required to support the Company's future businesses; and the economic impact of national and global events, including the response to recent bank failures, the wars in Ukraine and Israel, widespread protests, civil unrest, political uncertainty, and pandemics or other public health crises.

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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. Financial Statements and Supplementary Data" of this Report on Form 10-K for the year ended December 31, 2023.

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. Financial Statements and Supplementary Data" of this Report on Form 10-K for the year ended December 31, 2023.

Critical Accounting Estimates

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

•Accounting for credit losses - The Company accounts for the allowance for credit losses using the current expected credit loss model. Under this accounting guidance, the allowance for credit losses represents a valuation account that is deducted from the amortized cost basis of certain financial assets, including loans and leases, to present the net amount expected to be collected at the balance sheet date. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. In estimating expected losses in the loan and lease portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. For certain loan pools that share similar risk characteristics, the Company utilizes statistically developed models to estimate amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers' abilities to repay obligations. Such models consider historical correlations of credit losses with various macroeconomic assumptions including unemployment and gross domestic product. These forecasts may be adjusted for inherent limitations or biases of the models. Subsequent to the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for credit losses in future periods. A discussion of facts and circumstances considered by management in determining the allowance for credit losses is included herein in Note 5 - "Allowance for Credit Losses" in the Notes to the Unaudited Consolidated Financial Statements.

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Recent Events

During the first half of 2023, the banking industry experienced significant volatility with high-profile bank failures, which resulted in industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. In response to these developments, the Company took a number of preemptive actions in the first quarter, which included proactive outreach to clients and actions to maximize its funding sources such as establishing the ability to borrow through the newly established Federal Reserve borrowing program called the Bank Term Funding Program. The Company maintains established borrowing capacity of $1.7 billion through its membership with the Federal Home Loan Bank ("FHLB") and FRB. The Company’s total deposits of $6.4 billion at December 31, 2023 were down $202.4 million, or 3.1% compared to December 31, 2022. At December 31, 2023, the Company estimates total uninsured deposits of $2.9 billion. These uninsured deposit balances of $2.9 billion at December 31, 2023 include $1.0 billion of collateralized government deposits and $1.6 billion of uninsured deposits without liquid collateral pledged. Total insured deposits and collateralized government deposits represent 75.4% of the Company's total FDIC insurance eligible deposits at December 31, 2023. At December 31, 2023, Tier 1 leverage and Total Capital ratios were 9.08% and 13.36%, respectively, compared to 9.34% and 14.42% at December 31, 2022. The decrease from year-end 2022 to year-end 2023 was mainly due to the recognition of the $52.9 million after-tax loss on sales of available-for-sale debt investment securities, including the $47.5 million after-tax loss recognized in the third quarter of 2023 related to the balance sheet repositioning discussed below.

In 2023, the Company completed a balance sheet repositioning for general balance sheet, portfolio and interest rate risk management, by selling approximately $510.5 million of available-for-sale debt securities, which resulted in an pre-tax loss on the sale of approximately $70.0 million. The Company sold these securities in the second ($80.9 million) and third ($429.6 million) quarters of 2023. The securities sold had an average yield of approximately 0.86%, while the proceeds of the sale were largely reinvested into securities with an estimated yield of approximately 5.09%. Average yields on available-for-sale debt securities for the fourth quarter of 2023 were 2.33%, compared to 1.59% for the third quarter of 2023, and 1.44% for the fourth quarter of 2022.

Results of Operations

(Comparison of December 31, 2023 and 2022 results)

General

The Company reported diluted earnings per share of $0.66 in 2023, a decrease of 88.8% compared to diluted earnings per share of $5.89 in 2022. Net income for the year ended December 31, 2023, was $9.5 million, a decrease of 88.8% compared to $85.0 million in 2022. Significant contributors to the year-over-year decrease in net income included an after-tax loss of $52.9 million, or $3.69 loss per diluted share, related to the sale of $510.5 million of available-for-sale debt securities, increased funding costs and an increase in operating expenses. The sale of securities and subsequent reinvestment in the second and third quarters of 2023 favorably impacted securities revenue in the fourth quarter of 2023 as the securities sold had an average yield of 0.86%, while the proceeds of the sale were largely reinvested into securities with an estimated yield of approximately 5.09%. Average yields on securities for the fourth quarter of 2023 were 2.33%, compared to 1.59% for the third quarter of 2023, and 1.44% for the fourth quarter of 2022. Net interest income of $209.5 million for 2023, was down $20.8 million or 9.0% compared to 2022, the increase in interest rates paid on interest-bearing liabilities continues to outpace increases on interest earning asset yields.

Excluding the impact of the realized losses on the sales of investment securities, adjusted net income, a non-GAAP financial measure, was $62.4 million for the year ended December 31, 2023, down $23.1 million, or 27.1%, when compared to the prior year. Earnings per diluted share, adjusted to exclude the impact of realized losses on sales of investment securities (“adjusted diluted earnings per share”), a non-GAAP measure, of $4.36 for the year ended December 31, 2023, decreased $1.56 compared to the prior year period. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in the "Non-GAAP Disclosure" on page 54.

In addition to earnings per share, key performance measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE was 1.50% in 2023, compared to 13.25% in 2022, while ROA was 0.12% in 2023 and 1.09% in 2022. Tompkins’ 2023 ROE and 2023 ROA did not compare favorably with peer ratios of 11.18% and 1.01%, respectively, due to the above mentioned securities sale. The peer group data is derived from the FRB's "Bank Holding Company Performance Report", which covers banks and bank holding companies with assets between $3.0 billion and $10.0 billion as of September 30, 2023 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current period numbers. ROA and ROE, adjusted

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to exclude the impact of realized losses on sales of investment securities, ("adjusted ROA" and "adjusted ROE"), non-GAAP measures, were 0.82% and 9.83% for the year ended December 31, 2023. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in "Non-GAAP Disclosure" on page 54.

Segment Reporting

The Company operates in three business segments: banking, insurance and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under the Tompkins Insurance, subsidiary. Wealth management activities include the results of the Company’s trust, financial planning, and wealth management services provided by Tompkins Financial Advisors, a division of Tompkins Community Bank. All other activities are considered banking. For additional financial information on the Company’s segments, refer to "Note 22 Segment and Related Information" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.

Banking Segment

The banking segment reported net income of $74,000 for the year ended December 31, 2023, down $75.4 million or 99.9%, compared to 2022. The decrease in net income in 2023 compared to 2022 was largely driven by the sale of $510.5 million of available-for-sale debt securities, that resulted in an after-tax loss on the sale of securities of $52.9 million. Higher funding costs and increased operating expenses also contributed to the decrease. Net interest income was down $20.8 million or 9.0% in 2023 compared to 2022, primarily due to interest-bearing liabilities outpacing increases on interest earning assets yields due to the higher interest rate environment.

The provision for credit loss expense was a expense of $4.3 million in 2023, compared to provision credit of $2.8 million in the prior year. The increase in the provision for credit losses in 2023 over 2022 was mainly driven by loan growth, current economic forecasts and changes in asset quality. The allowance to total loan ratio at December 31, 2023 was 0.92%, up from 0.87% at December 31, 2022. For additional information, see the section titled "The Allowance for Credit Losses" below.

Noninterest income of $43.7 million in 2023 decreased $69.1 million or 272.0% compared to 2022. The decrease in noninterest income was largely due to the sale of available-for-sale debt securities in the second and third quarters of 2023, which resulted in the recognition of a pre-tax loss of $70.0 million. For the year ended December 31, 2023, card services income increased $464,000, or 4.2% over the same period in 2022, while service charges on deposit accounts decreased $452,000, or 6.1% for the same time period, mainly due to lower overdraft fees.

Noninterest expense of $162.3 million for the year ended December 31, 2023, increased $6.1 million or 3.9% from December 31, 2022. The increases were largely due to nonrecurring expenses which included $879,000 of expenses related to branch closures in 2023; New York State minimum tax expense of $830,000, as a result of the previously mentioned losses on sales of available-for-sale debt securities contributing to state taxes as equity rather than income; and approximately $640,000 in expenses related to staff restructuring charges. FDIC insurance expense in 2023 was up $1.5 million over 2022.

Insurance Segment

The insurance segment reported net income of $6.6 million for 2023, which is in line with 2022, as a $1.1 million or 3.1% increase in noninterest revenue was offset by an increase in noninterest expenses of $1.1 million or 3.9%. The increase in revenue was mainly in property and casualty commissions, which were up $1.8 million or 5.4% in 2023 over 2022. Contingency revenue was down $546,000 or 13.6% in 2023 compared to 2022. Revenue growth in 2023 benefited from business development efforts and generally higher policy premium levels. The increase in expenses was mainly in salaries and wages as a result of normal annual merit increases along with increases in health insurance costs, which were partially offset by a decrease in incentive related accruals.

Wealth Management Segment

The wealth management segment reported net income of $2.9 million for the year ended December 31, 2023, a decrease of $126,000 or 4.2% compared to 2022. Revenue of $18.3 million increased $133,000 or 0.7% compared to 2022. Noninterest expenses increased by $273,000 or 1.9% compared to 2022. The increase was mainly driven by professional fees related to recruiting and increases in expenses related to health insurance and the Company's retirement plans, partially offset by lower incentive related accruals. The fair value of assets under management or in custody at December 31, 2023 totaled $3.1 billion, representing an increase of $181.7 million or 6.2% compared to $2.9 billion at year-end 2022. The increase in assets under management from prior year was mainly a result of market performance seen throughout the year as well as new business.

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Net Interest Income

Net interest income is the Company’s largest source of revenue, representing 95.3% of total revenues for the year ended December 31, 2023, and 74.7% of total revenues for the year ended December 31, 2022. The increase in the ratio of net interest income to revenues in 2023 was largely driven by the decrease in total revenues in 2023 compared to 2022 as a result of the pre-tax loss of $70.0 million on the sales of available-for-sale debt securities during 2023. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. Table 1 – Average Statements of Condition and Net Interest Analysis shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.

Net interest income of $209.5 million for 2023 decreased by $20.8 million or 9.0% from 2022. The decrease was primarily due to higher funding costs and a decrease in average earning assets, partially offset by an increase in the average yield on interest-earning assets in 2023 compared to 2022. The average rates paid on interest-bearing liabilities for the year ended December 31, 2023, was up 136 basis points over the same period in 2022, while the average yield on interest-earning assets increased 71 basis points over the same period.

The net interest margin for 2023 was 2.84% compared to 3.05% for 2022. The decrease in net interest margin for the year ended December 31, 2023 compared to the year ended December 31, 2022 was due to increases in the average rates paid on interest-bearing liabilities outpacing increases on interest earning assets yields due to the higher interest rate environment, as well as increases in higher rate average other borrowings and average time deposits due to lower average interest checking, savings and money market deposit balances.

The quarterly net interest margin for the fourth quarter of 2023 of 2.82% increased from a net interest margin of 2.75% for the third quarter of 2023, and decreased from 3.02% for the fourth quarter of 2022. The increase in net interest margin compared to the third quarter of 2023 was primarily due to securities purchased in the second and third quarters of 2023 yielding higher interest rates compared to securities sold during the same periods. The increase in securities yields was partially offset by the reversal of $1.0 million of accrued interest during the fourth quarter of 2023 related to loans that moved to nonaccrual status during the quarter. The decrease in net interest margin compared to the fourth quarter of last year were primarily attributable to increased interest costs on interest-bearing liabilities outpacing increased interest income on interest earning assets due to the higher interest rate environment.

Interest income increased $46.0 million or 18.3% in 2023 from 2022, mainly driven by higher interest earning asset yields due to the higher interest rate environment, and partially offset by decreases in the volume of average interest-earning assets. For the year ended December 31, 2023, the average yield on interest-earning assets increased 71 basis points over the same period in 2022. Average interest-earning assets for the year ended December 31, 2023, decreased $198.7 million, or 2.6%, compared to the same period in 2022.

Interest income on loans for the year ended December 31, 2023, was up $42.8 million, or 19.7% compared to the same period in 2022, driven by higher average yields and higher average balances. The average yields on loans for the year ended December 31, 2023, of 4.87%, was up 62 basis points from the same period in 2022. The increase in loan yields was a result of market-related increases in interest rates on new loans, a significant increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and new loan originations. Average loans and leases increased $215.6 million or 4.2% in 2023 compared to 2022, and represented 72.3% of average earning assets in 2023 compared to 67.6% in 2022. The increase was largely driven by a growth in the commercial real estate portfolio. As a result of its participation in the SBA's Paycheck Protection Plan ("PPP"), the Company recorded net deferred loan fees of $9,390 in 2023 as compared to $3.0 million in 2022, which are included in interest income.

Interest income on securities, excluding dividends on FHLB stock, for the year ended December 31, 2023, was up $1.9 million or 5.7% as compared to the same period in 2022, as higher average yields more than offset lower average balances. The average yield on total securities for the year ended December 31, 2023, increased 34 basis points, while average balances for securities decreased $350.5 million, or 14.8%, from the same period in 2022. The increase in securities yields were driven by market interest rate increases and the sales and maturities of certain available-for-sale investment securities during 2023. During the second quarter of 2023, the Company sold $80.9 million of available-for-sale debt securities and used the proceeds mainly to pay down overnight borrowings with the FHLB. During the third quarter of 2023, the Company sold $429.6 million of available-for-sale debt securities with an average yield of 0.93% and reinvested $357.3 million of the proceeds into securities with an estimated yield of approximately 5.12%. The weighted average life of the securities purchased and sold was approximately 4.3 years.

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Interest expense for 2023 increased $66.8 million or 317.5% compared to 2022, driven mainly by the increase in average rates paid on interest-bearing liabilities and funding mix, with an increase in average borrowings and average time deposits and a decrease in average interest-bearing checking, savings and money market deposits. The average cost of interest-bearing deposits was 1.58% in 2023, an increase of 123 basis points from 0.35% in 2022, while the average cost of interest bearing liabilities increased to 1.79% in 2023 from 0.43% in 2022. The rate paid on average interest-bearing deposits increased as interest rates on certain interest-bearing deposits were raised in response to market conditions. Average interest bearing deposits in 2023 decreased $149.2 million or 3.2% compared to 2022. Average noninterest bearing deposit balances in 2023 decreased $191.9 million or 8.8% versus 2022 and represented 30.8% of average total deposits in 2023 compared to 32.0% in 2022.

Average other borrowings increased by $168.4 million or 86.3% in 2023 from 2022. The average rate paid on other borrowings for the year ended December 31, 2023, was up 220 basis points over the same period in 2022. The increase in the cost of average borrowings was primarily the result of the greater utilization of comparatively higher rate overnight borrowings to fund loan growth as a result of lower average deposit balances.

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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 2023, 2022, and 2021 to increase tax exempt interest income to tax-equivalent basis.

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

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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 2023, 2022 and 2021 to increase tax exempt interest income to tax-equivalent basis.

Changes in net interest income occur from a combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and in the rate of interest earned or paid on them. The above table illustrates changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of the change. In 2023, net interest income decreased by $21.0 million, resulting from a $66.8 million increase in interest expense, partially offset from a $45.8 million increase in interest income. The increase in interest expense reflects higher rates paid on interest bearing liabilities, both deposits and other borrowings, and increases in average other borrowings and average time deposit.

Provision for Credit Loss Expense

The provision for credit loss expense represents management’s estimate of the expense necessary to maintain the allowance for credit losses at an appropriate level. The ratio of total allowance to total loans and leases increased to 0.92% at December 31, 2023 from 0.87% at December 31, 2022. The increase in the ACL from year-end December 31, 2023 was driven by loan growth, economic forecasts, and changes in asset quality. The provision for credit loss expense was $4.3 million in 2023, compared to provision expense of $2.8 million in 2022. The provision for credit losses for 2023 included a provision credit of $526,000 related to off-balance sheet credit exposures compared to a provision expense of $290,000 for 2022. The section captioned "Financial Condition – The Allowance for Credit Losses" below has further details on the allowance for credit losses and asset quality metrics.

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Noninterest Income

Noninterest income of $10.2 million for the year-ended December 31, 2023 decreased $67.7 million or 86.9% from 2022. Noninterest income represented 4.7% of total revenues in 2023, down from 25.3% in 2022. The decrease in noninterest income was largely due to the previously noted sales of available-for-sale debt securities, mainly in the third quarter of 2023, which resulted in the recognition of a pre-tax loss of $70.0 million for the year ended December 31, 2023. Fee-based revenues, including insurance commissions and fees, wealth management fees, service charges on deposit accounts and card services income, for the year ended December 31, 2023, collectively, increased $1.0 million, or 1.4%, over the same period in 2022.

Insurance commissions and fees of $37.4 million increased $1.2 million or 3.2% in 2023 compared to $36.2 million for 2022. The increase in revenue was mainly in property and casualty commissions, which were up $1.8 million or 5.4% in 2023 over 2022. Contingency revenue was down $546,000 or 13.6% in 2023 compared to 2022. Revenue growth in 2023 benefited from business development efforts and generally higher policy premium levels as a result of general market conditions.

Wealth management fees of $18.0 million in 2023 decreased $140,000 or 0.8% compared to 2022. Wealth management fees includes trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $3.1 billion at December 31, 2023, an increase from $2.9 billion at December 31, 2022. The increase in assets under management was mainly attributable to improved market performance in 2023, in comparison to 2022, with major equity market indices up in 2023 over 2022.

Service charges on deposit accounts of $6.9 million decreased $452,000 or 6.1% in 2023 compared to 2022. The decrease was driven by lower net overdraft fees in 2023 compared to 2022.

Card services income increased $464,000 or 4.2% in 2023 over 2022. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. The increase over prior year reflects an increase in the number and dollar volume of transactions.

Other income of $6.5 million increased $586,000 or 9.9% compared to 2022. The increase was largely due to higher earnings on bank owned life insurance ("BOLI"). Earnings on BOLI totaled $1.7 million in 2023, up from $1.2 million in 2022, reflecting the net impact of gain on death benefits of $962,000, partially offset by write-downs on separate account BOLI policies surrendered in the fourth quarter of 2023. Derivative fee income increased to $485,000 in 2023 from $57,000 in 2022, driven mainly by income on an interest rate swap.

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Noninterest Expense

Noninterest expense as a percentage of total revenue was 92.5% in 2023, compared to 63.5% in 2022. Noninterest expense for the year ended 2023 of $203.3 million, increased $7.5 million, or 3.9% compared to the same period in 2022. The increase in noninterest expense in 2023 over the same period in 2022 was mainly driven by other operating expenses, which increased $4.3 million; FDIC insurance, which increased $1.4 million; and higher personnel-related expenses, which increased $1.5 million.

Expenses associated with salaries and wages and employee benefits are the largest component of total noninterest expense. In 2023, these expenses increased $1.5 million or 1.2% compared to 2022. Salaries and wages decreased $891,000 or 0.9% in 2023 over the prior year, as increases driven mainly by annual merit pay increases were more than offset by lower incentive related accruals. Salaries and wages in 2023 included $638,000 of personnel-related charges. The number of employees as measured by average full time equivalents (FTEs) for 2023 were 1,014, compared to 1,020 for 2022. Other employee benefits increased $2.4 million or 9.5% over 2022, mainly in health insurance, which was up $1.8 million or 18.3% in 2023 over 2022.

The increase in net occupancy expense of premises and furniture and fixture expense in 2023 over 2022, included $879,000 related to the closure of three branch locations in the latter half of 2023.

Other operating expenses of $52.0 million increased by $4.3 million or 9.1% compared to 2022. The primary components of other operating expenses in 2023 were technology ($15.9 million), professional fees ($7.5 million), marketing ($5.3 million), and cardholder expense ($4.2 million). Contributing to the growth in other operating expenses for the year ended December 31, 2023, compared to the same period in 2022 were the following: expenses related to the Company’s retirement plans, up $1.7 million, or 441.3%, professional fees, up $604,000, or 8.7%; and accrual for New York State minimum tax, up $830,000, mainly as a result of the losses on the sales of available-for-sale debt securities. Marketing expenses in 2023 were down $444,000, or 7.8% when compared to 2022 which was driven by one time expenses related to rebranding of $156,000 in 2022 along with a reduction in media buys of $464,000; offset by donation expense being up $317,000 or 29.9%.

Noncontrolling Interests

Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of $124,000 in 2023, in line with 2022. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company.

Income Tax Expense

The provision for income taxes provides for Federal, New York State, Pennsylvania and other miscellaneous state income taxes. The 2023 provision was $2.5 million, which decreased $22.1 million or 89.8% compared to the 2022 provision. The decrease in income tax expense between comparable periods reflects the decrease in pre-tax income, due primarily to the realized losses on the sale of certain available-for-sale debt securities. The effective tax rate for the Company was 20.8% in 2023, down from 22.4% in 2022. The effective rates for 2023 and 2022 differed from the U.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation. The fourth quarter 2023 included the impact of surrendering certain separate account BOLI policies, which added $1.8 million to tax expense for the quarter.

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The Company's banking subsidiary has an investment in a real estate investment trust that provides certain benefits on its New York State tax return for qualifying entities. A condition to claim the benefit is that the consolidated company has average assets of no more than $8.0 billion for the taxable year. As of December 31, 2023, the Company's consolidated average assets, as defined by New York tax law, were under the $8.0 billion threshold. The Company will continue to monitor the consolidated average assets during 2024 to determine future eligibility.

Financial Condition

Total assets were $7.8 billion at December 31, 2023, up by 1.9% or $149.1 million from the previous year end. Total securities decreased $178.3 million or 9.3% from December 31, 2022, while total loans increased $337.0 million or 6.4%. Total deposits at year-end 2023 decreased $202.4 million or 3.1% from year-end 2022, while total borrowings increased $310.8 million or 106.7%.

Loans and leases were 71.7% of total assets at December 31, 2023, compared to 68.7% of total assets at December 31, 2022. Total loan balances were $5.6 billion at December 31, 2023, an increase of $337.0 million or 6.4% compared to the $5.3 billion reported at year-end 2022. The increase was mainly in commercial real estate loans. A more detailed discussion of the loan portfolio is provided below in this section under the caption "Loans and Leases".

As of December 31, 2023, total securities comprised 22.1% of total assets, compared to 24.9% of total assets at year-end 2022. Securities decreased $178.3 million or 9.3% at December 31, 2023, compared to December 31, 2022. Contributing to the decrease in securities from year-end 2022 was the the sale of available-for-sale debt securities, payments, maturities and calls. These were partially offset by securities purchases in 2023. A detailed discussion of the securities portfolio is provided below in this section under the caption "Securities".

Total deposits at year-end 2023 decreased by $202.4 million or 3.1% compared to December 31, 2022. At December 31, 2023 noninterest bearing deposits decreased by $233.2 million or 10.8%, time deposit balances increased $366.6 million or 58.1% and checking, savings and money market accounts decreased $335.9 million or 8.8% when compared to December 31, 2022. Other borrowings, consisting mainly of short term advances with the FHLB, increased $310.8 million or 106.7% from December 31, 2022. A more detailed discussion of deposits and borrowings is provided below in this section under the caption "Deposits and Other Liabilities".

Shareholders’ Equity

The Consolidated Statements of Changes in Shareholders’ Equity included in the Consolidated Financial Statements of the Company contained in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K, detail changes in equity capital over prior year end. Total shareholders’ equity increased $52.5 million or 8.5% to $669.9 million at December 31, 2023, from $617.4 million at December 31, 2022. The increase was primarily the result of a decrease in unrealized losses on the available-for-sale portfolio mainly due to the recognition of the $70.0 million pre-tax loss on sales of available-for-sale investment securities, including the $62.9 million pre-tax loss recognized in the third quarter of 2023 related to balance sheet repositioning, as well as market interest rates.

Additional paid-in capital decreased by $5.6 million, from $302.8 million at December 31, 2022, to $297.2 million at December 31, 2023. The $5.6 million decrease included the following: a $8.7 million aggregate purchase price related to the Company's repurchase and retirement of 150,000 shares of its common stock in the first six months of 2023 pursuant to its publicly announced stock repurchase plan; and $1.3 million related to the exercise of stock options and restricted stock activity. These were partially offset by $4.1 million attributed to stock based compensation expense, and $331,000 related to shares issued for the Company's director deferred compensation plan.

Retained earnings decreased by $25.2 million, reflecting net income of $9.5 million, less dividends paid of $34.7 million for the year-ended December 31, 2023.

Accumulated other comprehensive loss decreased from $208.7 million at December 31, 2022 to $125.0 million at December 31, 2023, reflecting a $79.3 million decrease in unrealized losses on available-for-sale debt securities due to market interest rates and the aforementioned $70.0 million pre-tax loss on available-for-sale debt securities sales, and $4.4 million related to employee post-retirement benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale debt securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage capital ratios.

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Total shareholders’ equity decreased $111.6 million or 15.3% to $617.4 million at December 31, 2022, from $728.9 million at December 31, 2021. Additional paid-in capital decreased by $9.8 million, from $312.5 million at December 31, 2021, to $302.8 million at December 31, 2022. The $9.8 million decrease included the following: a $15.4 million aggregate purchase price related to the Company's repurchase and retirement of 197,979 shares of its common stock in connection with Board-approved repurchase plans, and $2.3 million related to the exercise of stock options and restricted stock activity. These were partially offset by $4.3 million attributed to stock based compensation expense, $2.9 million related to shares issued for Company's employee stock ownership plan, and $488,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by $51.5 million, reflecting net income of $85.0 million, less dividends paid of $33.6 million for the year ended December 31, 2022.

Accumulated other comprehensive loss increased from $56.0 million at December 31, 2021 to $208.7 million at December 31, 2022; reflecting a $164.2 million increase in unrealized losses on available-for-sale debt securities due to market interest rates; partially offset by a $11.5 million related to employee post-retirement benefit plans.

The Company increased cash dividends per share by 3.9% in 2023 over 2022, which followed an increase of 5.5% in 2022 over 2021. Dividends per share were $2.40 in 2023, compared to $2.31 in 2022, and $2.19 in 2021. Cash dividends paid represented 364.6%, 39.5%, and 36.3% of after-tax net income in 2023, 2022, and 2021, respectively. The increase in the ratio of cash dividends to after-tax net income in 2023 reflects the year-over-year decrease in net income, which was largely due to the previously noted recognition of an after-tax loss of $52.9 million for the year-ended December 31, 2023, on the sales of available-for-sale debt securities, mainly in the third quarter of 2023. Cash dividends paid in 2023 represents 55.6% of adjusted net income, a non-GAAP financial measure, which excludes the impact of the after-tax loss of $52.9 million on the sales of available-for-sale debt securities.

On October 22, 2021, the Company’s Board of Directors authorized a share repurchase plan (the "2021 Repurchase Plan") for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the 2021 Repurchase Plan. Under the 2021 Repurchase Plan, the Company had repurchased 380,182 shares as of July 20, 2023, at an average cost of $70.14. No further shares will be repurchased under the 2021 Repurchase Plan.

On July 20, 2023, the Company’s Board of Directors authorized a replacement share repurchase plan (the “2023 Repurchase Plan”) under which it may repurchase up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. Shares may be repurchased from time to time under the 2023 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. As of December 31, 2023, there have been no shares repurchased under the 2023 Repurchase Plan.

The Company and its subsidiary bank are subject to various regulatory capital requirements administered by federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary bank are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary bank meet all capital adequacy requirements to which they are subject.

In addition to setting higher minimum capital ratios, the Basel III Capital Rules introduced a capital conservation buffer, which must be added to each of the minimum capital ratios and is designed to absorb losses during periods of economic stress. The capital conservation buffer was phased-in over a three year period that began on January 1, 2016, and was fully phased-in on January 1, 2019 at 2.5%.

As of December 31, 2023, the capital ratios for the Company’s subsidiary bank exceeded the minimum levels required to be considered well capitalized. Additional information on the Company’s capital ratios and regulatory requirements is provided in "Note 20 - Regulations and Supervision" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.

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Securities

The Company maintains a portfolio of securities such as U.S. Treasuries, U.S. government sponsored entities securities, U.S. government agencies, non-U.S. Government agencies or sponsored entities mortgage-backed securities, obligations of states and political subdivisions thereof and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company’s Board of Directors. The investment policy established by the Company’s Board of Directors is based on the asset/liability management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee and Investment Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee.

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

The Company’s total securities portfolio at December 31, 2023 was $1.7 billion compared to $1.9 billion at December 31, 2022. The table below shows the composition of the available-for-sale and held-to-maturity debt securities portfolios as of year-end 2023, 2022 and 2021. The decrease in securities from year-end 2022 was largely driven by $510.5 million of sales of available-for-sale debt securities and $161.8 million of payments, maturities and calls, partially offset by $391.5 million of securities purchases. Unrealized losses on the available-for-sale debt securities portfolio were $131.8 million at year-end 2023, down from $236.8 million at year-end 2022. The sale of securities and market conditions contributed to the decrease in unrealized losses at year-end 2023 from prior year end.

Additional information on the securities portfolio is available in "Note 2 Securities" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K, which details the types of securities held, the carrying and fair values, and the contractual maturities as of December 31, 2023 and 2022.

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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.

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of December 31, 2023, the held-to- maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including Federal National Mortgage Agency, Federal Home Loan Bank, and Federal Farm Credit Banks Funding Corporation. U.S. Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk-free," and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of December 31, 2023.

The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation ("FHLMC"), and U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit-related quality of the investment securities. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost.

The Company also holds non-marketable Federal Home Loan Bank New York ("FHLBNY") stock and non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock and ACBB stock totaled $33.6 million and $95,000 at December 31, 2023, respectively. These securities are carried at par, which is also cost. The FHLBNY continues to pay dividends and repurchase stock. As such, the Company has

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not recognized any impairment on its holdings of FHLBNY. At December 31, 2022, the Company’s holdings of FHLBNY stock and ACBB stock totaled $17.6 million and $95,000, respectively.

Management’s policy is to purchase investment grade securities that, on average, have relatively short expected durations. This policy helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital. The contractual maturity distribution of debt securities and mortgage-backed securities as of December 31, 2023, along with the weighted average yield of each category, is presented in Table 3-Maturity Distribution below. Balances are shown at amortized cost and weighted average yields are calculated on a fully tax-equivalent basis. Expected maturities will differ from contractual maturities presented in Table 3-Maturity Distribution below, because issuers may have the right to call or prepay obligations with or without penalty and mortgage-backed securities will pay throughout the periods prior to contractual maturity.

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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 1.74% in 2023, 1.40% in 2022 and 1.23% in 2021.

At December 31, 2023, there were no holdings of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of the Company’s shareholders’ equity.

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Loans and Leases

Table 4 - Composition of Loan and Lease Portfolio

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The below table shows a more detailed break-out of commercial real estate ("CRE") loans as of December 31, 2023 and December 31, 2022:

Total loans and leases of $5.6 billion at December 31, 2023 increased $337.0 million or 6.4% from December 31, 2022. The increase was mainly in commercial real estate loans, but all loan portfolios grew in 2023. At December 31, 2023, total loans and leases represented 71.7% of total assets compared to 68.7% of total assets at December 31, 2022.

Residential real estate loans, including home equity loans, were $1.6 billion at December 31, 2023, an increase of $26.7 million or 1.7% compared to $1.5 billion at year-end 2022. Residential real estate loans comprised 27.9% of total loans and leases at December 31, 2023 compared to 29.1% at December 31, 2022. Growth in residential loan balances is impacted by the Company’s decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to FHLMC or State of New York Mortgage Agency ("SONYMA") without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these representations and warranties.

During 2023, 2022, and 2021, the Company sold residential mortgage loans totaling $4.5 million, $8.9 million, and $31.5 million, respectively, and realized net gains on these sales of $96,000, $155,000, and $943,000, respectively. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2023, 2022, and 2021, the Company recorded mortgage-servicing assets of $34,000, $66,000, and $236,000, respectively.

The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/6 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts semi-annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate loans. Adjustment rate loans have increased in popularity due to the rising interest rate environment. Adjustable rate residential real estate loans are underwritten based upon the initial rate when the fixed rate period is 5 years or longer. For loans with an initial fixed rate of less than 5 years, the fully indexed rate is utilized for ability to repay qualifying and underwriting. This underwriting practice matches secondary market guidelines.

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Commercial real estate loans totaled $3.1 billion at December 31, 2023, an increase of $259.2 million or 9.1% compared to December 31, 2022, and represented 55.5% of total loans and leases at December 31, 2023, compared to 54.2% at December 31, 2022.

Commercial and industrial loans totaled $823.5 million at December 31, 2023, which was an increase of $32.0 million or 4.0% from December 31, 2022. Commercial and industrial loans represented 14.7% of total loans at December 31, 2023 compared to 15.0% at December 31, 2022.

As of December 31, 2023, agriculturally-related loans totaled $322.9 million or 5.8% of total loans and leases compared to $300.0 million or 5.7% of total loans and leases at December 31, 2022. Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops.

The consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were $97.8 million at December 31, 2023, compared to $77.6 million at December 31, 2022.

The lease portfolio decreased by 4.7% to $15.4 million at December 31, 2023 from $16.1 million at December 31, 2022. As of December 31, 2023, commercial leases and municipal leases represented 100.0% of total leases.

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company’s existing policies, underwriting standards and loan review during 2023. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.

The Company’s loan and lease customers are located primarily in the New York and Pennsylvania communities served by its subsidiary bank. Although operating in numerous communities in New York State and Pennsylvania, the Company is still dependent on the general economic conditions of these states. As a result, the economic consequences of the pandemic on our market area generally and on the Company in particular continue to be difficult to quantify. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.

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Analysis of Past Due and Nonperforming Loans

1 The 2020 and 2019 columns in the above table exclude $794,000 and $1.3 million, respectively, of acquired loans that were 90 days past due and accruing interest. These loans were originally recorded at fair value on the acquisition date of August 1, 2012. These loans are considered to be accruing as the Company can reasonably estimate future cash flows on these acquired loans and the Company expects to fully collect the carrying value of these loans. Therefore, the Company is accreting the difference between the carrying value of these loans and their expected cash flows into interest income.

The level of nonperforming assets as of the past five year-ends is illustrated in the table above. The Company’s total nonperforming assets as a percentage of total assets was 0.80% at December 31, 2023, compared to 0.43% at December 31, 2022, and compared to its peer group's most recent ratio of 0.34% at September 30, 2023. The peer data is from the Federal Reserve Board and represents banks or bank holding companies with assets between $3.0 billion and $10.0 billion.

Nonperforming loans and leases totaled $62.3 million at December 31, 2023 and increased 89.6% from December 31, 2022. Nonperforming loans and leases represented 1.11% of total loans at December 31, 2023, compared to 0.62% of total loans at December 31, 2022, and 0.61% of total loans at December 31, 2021. Nonperforming loans and leases in the commercial real estate portfolio at year-end 2023 increased by $30.6 million compared to year-end 2022. The increase in nonperforming loans at year-end 2023, was mainly due to the addition of one relationship with three commercial real estate loans on two properties, including a technology and healthcare business park and a student housing property totaling approximately $33.8 million. The Company believes that the existing collateral securing the loans is sufficient to cover the exposure as of December 31, 2023, and as such there is no allowance for credit losses designated for these loans.

The Company adopted ASU 2022-02 effective January 1, 2023. This standard eliminated the previous troubled debt restructuring ("TDR") accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Prior year TDRs are included in the above table within the following categories: "loans 90 days past due and accruing", "nonaccrual loans", or "troubled debt restructurings not included above".

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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. Financial Statements and Supplementary Data" of this Report on Form 10-K.

The Company’s recorded investment in loans and leases that are individually evaluated totaled $44.4 million at December 31, 2023, and $20.8 million at December 31, 2022. The increase in nonperforming loans at December 31, 2023, was mainly due to the addition of the above mentioned relationship totaling approximately $33.8 million. A loan is individually evaluated when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Individually evaluated loans consist of our non-homogenous nonaccrual loans and loans that are 90 days or more past due. Specific reserves on individually evaluated loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off.

At December 31, 2023, there were specific reserves of $1.1 million, related to one commercial real estate relationship totaling $7.4 million compared to $3,000 of specific reserves on residential real estate loans at December 31, 2022. The majority of the individually evaluated loans are collateral dependent loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans or the loans have been written down to fair value. Interest payments on individually evaluated loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. There was no interest income recognized on individually evaluated loans and leases for 2023, 2022 and 2021.

The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 82.84% at December 31, 2023, compared to 139.86% at December 31, 2022. The decrease in the ratio from year-end 2022 to year-end 2023 was mainly due to the increase in nonperforming loans discussed in more detail above. The Company’s nonperforming loans are mostly made up of collateral dependent loans requiring little to no specific allowance due to the level of collateral available with respect to these loans and/or previous charge-offs.

Management reviews the loan portfolio for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases. The Company, through its credit administration function, identified 17 commercial relationships totaling $26.0 million at December 31, 2023 that were potential problem loans. At December 31, 2022, there were 17 commercial relationships totaling $33.3 million in the loan portfolio that were considered potential problem loans. Of the 17 commercial relationships from the portfolio that were classified as potential problem loans at December 31, 2023, there were 4 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $22.9 million. The potential problem loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management’s attention is focused on these credits, which are reviewed on at least a quarterly basis.

The Allowance for Credit Losses

Management reviews the appropriateness of the ACL on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated credit loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses.

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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, 2023 considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance based on their judgements and information available to them at the time of their examinations.

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

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company's consolidated statements of income. As of December 31, 2023, the Company's reserve for off-balance sheet credit exposures was $2.3 million, compared to $2.8 million at December 31, 2022.

As of December 31, 2023, the total allowance for credit losses was $51.6 million, an increase of $5.7 million or 12.3% from year-end 2022. The increase reflects net loan recoveries of $721,000 and provision for credit loss expense of $4.9 million. The ratio of the allowance for credit losses as a percentage of total loans was 0.92% at year-end 2023 compared to 0.87% at year-end 2022. The allowance coverage to nonperforming loans and leases was 82.84% at December 31, 2023 compared to 139.86% at December 31, 2022.

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The increase in the ACL from year-end 2022 reflects loan growth, mainly in the real estate portfolios, and changes in asset quality; partially offset by improvements in economic forecasts for unemployment and gross domestic product ("GDP"). Forecasts related to unemployment continue to improve and GDP forecasts show more growth compared to prior forecasts. Qualitative reserves were added to the commercial real estate portfolio at year-end 2023 driven by the uncertain impact of economic conditions, as well as increases in non-performing loans during the fourth quarter of 2023, primarily driven by one large commercial relationship, consisting of loans on two commercial properties.

Total loans were $5.6 billion at December 31, 2023, an increase of $337.0 million or 6.4% from December 31, 2022. The increase from year-end 2022 was mainly due to loan growth in the commercial real estate portfolio. Credit quality metrics at December 31, 2023, were mixed when compared to year-end 2022. Nonperforming assets represented 0.80% of total assets at December 31, 2023, compared to 0.43% at December 31, 2022. Nonperforming loans and leases increased $29.4 million or 89.6% from year end 2022 and represented 1.11% of total loans at December 31, 2023 compared to 0.62% at December 31, 2022. Loans internally-classified Special Mention or Substandard increased $24.8 million or 25.2% compared to December 31, 2022. The increase was mainly due to one relationship with three commercial real estate loans totaling $33.8 million being downgraded during 2023. Net loan recoveries totaled $721,000 in 2023, compared to net recoveries of $592,000 in 2022.

The allocation of the Company’s allowance as of December 31, 2023, and each of the previous four years is illustrated in Table 5- Allocation of the Allowance for Credit Losses, below. The table represents the allowance for credit losses calculated under the new accounting guidance as of December 31, 2020, and the prior periods show amounts calculated under the incurred loss methodology calculation used prior to adoption. The table provides an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category.

Table 5 - Allocation of the Allowance for Credit Losses

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The above table shows a fairly consistent allocation of the loan portfolio and allowance over the period with commercial real estate and residential real estate representing the largest proportion of total loans and the allowance. The increase in commercial and industrial loans at year-end 2020, was mainly due to PPP loans, which decreased at year end 2021 and 2022 as these loans were forgiven by the SBA. Given the SBA guaranty of the PPP loans, there were no reserves allocated to PPP loans.

Table 6 - Analysis of the Allowance for Credit Losses shows the activity in the allowance for credit losses over the past five years. The allowance at December 31, 2023 was $51.6 million, an increase of $5.7 million from year-end 2022, reflecting a provision expense of $4.9 million and net recoveries of $721,000 for the year-ended December 31, 2023. Net charge-offs of $6.0 million in 2021, were mainly due to one commercial real estate relationship that included two loans and was charged off in the fourth quarter of 2022. The $16.2 million provision expense in 2020 was driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. The majority of the increase in the allowance and provision expense in 2020 was in the first quarter of 2020. Provision expense decreased in 2021, as businesses opened and economic conditions continued to improve, resulting in the ability to reverse some of the provision expense booked in the first quarter of 2020 related to the COVID-19 pandemic.

Table 6 - Analysis of the Allowance for Credit Losses

As a result of the adoption of ASU 2016-13, the Company recorded a net cumulative-effect adjustment reducing the allowance for credit losses by $2.5 million from $39.9 million at December 31, 2019 to $37.4 million at January 1, 2020.

Management believes that, based upon its evaluation as of December 31, 2023, the allowance is appropriate.

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Deposits and Other Liabilities

Total deposits were $6.4 billion at December 31, 2023, a decrease of $202.4 million or 3.1% compared to year-end 2022. The decrease from year-end 2022 consisted of savings and money market balances, and noninterest bearing deposits, which were down $335.9 million, and $233.2 million, respectively. This was partially offset by an increase in time deposit balances, which increased $366.6 million. The decrease in deposits was largely driven by inflation and persistent rate competition for deposits due to the current interest rate environment and tightening monetary policy.

The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of $250,000 or more, brokered deposits, municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits decreased by $390.4 million or 7.0% to $5.2 billion at year-end 2023 from $5.6 billion at year-end 2022. Core deposits represented 81.1% of total deposits at December 31, 2023, compared to 84.5% of total deposits at December 31, 2022.

Municipal money market accounts and reciprocal deposit relationships with municipalities totaled $542.1 million at year-end 2023, which decreased 25.3% from year-end 2022. In general, there is a seasonal pattern to municipal deposits starting with a low point during July and August. Account balances tend to increase throughout the fall and into the winter months from tax deposits and receive an additional inflow at the end of March from the electronic deposit of state funds.

The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $51.0 million at December 31, 2023, and $56.3 million at December 31, 2022. Management generally views local repurchase agreements as an alternative to large time deposits. Refer to "Note 8 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for further details on the Company’s repurchase agreements.

The Company’s other borrowings totaled $602.1 million at year-end 2023, which were up $310.8 million over prior year end. Loan growth and lower deposit balances compared to year-end 2022 contributed to the increase in borrowings year-over-year. The $602.1 million in borrowings at December 31, 2023, represented $477.1 million in overnight advances from the FHLB and $125.0 million in term advances from the FHLB. Borrowings of $291.3 million at year-end 2022 represented $241.3 million in overnight borrowings and $50.0 million in FHLB term advances. Of the $125.0 million in FHLB term advances at year-end 2023, $85.0 million are due in over one year. Refer to "Note 9 - Other Borrowings" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for further details on the Company’s term borrowings with the FHLB.

Liquidity Management

The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, operating expenses, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company may also use borrowings as part of a growth strategy. Asset and liability positions are monitored primarily through the Asset/Liability Management Committee of the Company’s subsidiary bank. This Committee reviews periodic reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur. Management measures liquidity, including the level of cash, unencumbered securities, and the availability of dependable borrowing sources. The board has set a policy limit stating that reliable sources of liquidity should remain in excess of 6% of total assets. The ratio was 18.3% of assets at December 31, 2023.

Core deposits, discussed above under "Deposits and Other Liabilities", are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, municipal money market deposits, brokered deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase and overnight and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources of $1.9 billion at December 31, 2023 increased $493.5 million, or 36.0% as compared to December 31, 2022.

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Non-core funding sources, as a percentage of total liabilities, were 26.1% at December 31, 2023, compared to 19.4% at December 31, 2022.

Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.0 billion at December 31, 2023 were either pledged or sold under agreements to repurchase, compared to $1.8 billion at December 31, 2022. Pledged securities or securities sold under agreements to repurchase represented 54.8% of total securities at December 31, 2023, compared to 82.4% of total securities at December 31, 2022.

Cash and cash equivalents totaled $79.5 million as of December 31, 2023 which increased from $77.8 million at December 31, 2022. Short-term investments, consisting of securities due in one year or less, increased from $50.3 million at December 31, 2022, to $98.7 million on December 31, 2023.

Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities, at fair value, were $766.1 million at December 31, 2023 compared with $738.9 million at December 31, 2022. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.7 billion at December 31, 2023, up $46.0 million, or 2.8% compared with December 31, 2022. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.

Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary bank, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets and securities to secure additional borrowings from the FHLB. At December 31, 2023, the established borrowing capacity with the FHLB was $1.6 billion, or 20.0% of total assets, with available unencumbered mortgage-related assets of $642.2 million. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB. Through various programs at the Federal Reserve Bank, the Company has the ability to use certain unencumbered mortgage-related assets and securities to secure borrowings from the Federal Reserve Bank's Discount Window. At December 31, 2023 the available borrowing capacity with the Federal Reserve Bank was $92.6 million, secured by investment securities. In addition to the available borrowing lines at the FHLB and Federal Reserve Bank, the Company maintains $687.0 million of unencumbered securities which could be pledged to further enhance secured borrowing capacity.

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

Table 7 - Loan Maturity

Of the loan amounts shown above in Table 7 - Loan Maturity, maturing over 1 year, $2.3 billion have fixed rates and $2.8 billion have adjustable rates.

Off-Balance Sheet Arrangements

In the normal course of business, the Company is party to certain financial instruments, which in accordance with accounting principles generally accepted in the United States, are not included in its Consolidated Statements of Condition. These transactions include commitments under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans and are undertaken to accommodate the financing needs of the Company’s customers. Loan commitments are agreements by the Company to lend monies at a future date. These loan and letter of credit commitments are subject to the same credit policies and reviews as the Company’s loans. Because most of these loan commitments expire within one year from the

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date of issue, the total amount of these loan commitments as of December 31, 2023, are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities is provided in "Note 17 Commitments and Contingent Liabilities" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.

Contractual Obligations

The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5 to 20 years. In addition, the Company has a software contract for its core banking application through June 30, 2024 along with contracts for more specialized software programs through 2026. Further information on the Company’s lease arrangements is provided in "Note 6 Premises and Equipment" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. The Company’s contractual obligations as of December 31, 2023, are shown in Table 8-Contractual Obligations and Commitments below.

Table 8 - Contractual Obligations and Commitments

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

Non-GAAP Disclosure

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

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Newly Adopted Accounting Standards

ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying U.S. generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.

ASU 2022-01, "Derivatives and Hedging (Topic 815)" ("ASU 2022-01"): provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASU 2022-01, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02"): eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 became effective for the Company on January 1, 2023. The Company elected to apply the ASU on a modified retrospective basis to recognize any change in the allowance for credit losses that had been recognized for receivables previously modified (or reasonably expected to be modified) in a TDR. This election resulted in cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amount of the adjustment to retained earnings was a decrease of $64,000. See Note 5 to the Consolidated Financial Statements for changes in disclosures related to this adoption. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.

ASU No. 2022-03, "Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." The amendments in this update provides clarification on guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and provides new disclosure requirements for equity securities subject to contractual sale restrictions, that are measured at fair value. ASU 2022-03 became effective for the Company on January 1, 2023. As there are no equity securities subject to contract sales during the current or prior year, the adoption of ASU 2022-03 had no effect on the financial statements for the current fiscal year, and the Company will apply the guidance prospectively to future acquisitions.

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Accounting Standards Pending Adoption

ASU No. 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." This update will allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits or other income tax benefits. This update applies this to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC specific guidance removed from Subtopic 323-740 has been applied. Additionally, the disclosure requirements apply to investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method (including investments within that elected program that do not meet the conditions to apply the proportional amortization method). The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years beginning after December 15, 2023 and interim periods in those years. The adoption of ASU 2023-02 is not expected to have a significant effect on the Company's financial statements.

ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments in this Update improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods in those years, and its adoption is not expected to have a significant effect on our financial statements.

ASU No. 2023-09, "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures." The amendments in this Update related to the rate reconciliation and income taxes paid disclosures improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and interim periods in those years. Tompkins is currently evaluating the potential impact of ASU 2023-09 on our consolidated financial statements.

The Company reviewed new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.