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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2020
 
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
For the transition period from _____ to ______
 
Commission File Number 1-12709

 
  TMP-20200930_G1.JPG  

Tompkins Financial Corporation
(Exact name of registrant as specified in its charter)
New York   16-1482357
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
118 E. Seneca Street, P.O. Box 460, Ithaca, NY
(Address of principal executive offices)
14851
(Zip Code)
 
Registrant’s telephone number, including area code: (888) 503-5753
Former name, former address, and former fiscal year, if changed since last report: NA
Indicate the number of shares of the Registrant’s Common Stock outstanding as of the latest practicable date:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.10 par value TMP NYSE American, LLC
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐.
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☒ Accelerated Filer ☐
Non-Accelerated Filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐
  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒.

Indicate the number of shares of the Registrant's Common Stock outstanding as of the latest practicable date: 14,931,133 shares as of November 3, 2020.



TOMPKINS FINANCIAL CORPORATION
 
FORM 10-Q
 
INDEX
PART I -FINANCIAL INFORMATION
 
      PAGE
 
1
   
2
   
3
   
4
   
6
   
8
 
49
 
71
 
72
 
 
72
 
72
 
74
 
74
 
75
 
75
 
76
77




TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share data) (Unaudited) As of As of
ASSETS 9/30/2020 12/31/2019
  (unaudited) (audited)
Cash and noninterest bearing balances due from banks $ 22,065  $ 136,010 
Interest bearing balances due from banks 352,674  1,972 
Cash and Cash Equivalents 374,739  137,982 
Available-for-sale debt securities, at fair value (amortized cost of $1,637,255 at September 30, 2020 and $1,293,239 at December 31, 2019)
1,666,766  1,298,587 
Equity securities, at fair value (amortized cost $932 at September 30, 2020 and $915 at December 31, 2019)
932  915 
Total loans and leases, net of unearned income and deferred costs and fees 5,398,297  4,917,550 
Less: Allowance for credit losses 52,293  39,892 
Net Loans and Leases 5,346,004  4,877,658 
Federal Home Loan Bank and other stock 17,919  33,695 
Bank premises and equipment, net 89,015  94,355 
Corporate owned life insurance 84,165  82,961 
Goodwill 92,447  92,447 
Other intangible assets, net 5,211  6,223 
Accrued interest and other assets 117,304  100,800 
Total Assets $ 7,794,502  $ 6,725,623 
LIABILITIES
Deposits:
Interest bearing:
  Checking, savings and money market 3,979,253  3,080,686 
  Time 706,401  675,014 
Noninterest bearing 1,915,584  1,457,221 
Total Deposits 6,601,238  5,212,921 
Federal funds purchased and securities sold under agreements to repurchase 63,573  60,346 
Other borrowings 285,000  658,100 
Trust preferred debentures 17,163  17,035 
Other liabilities 113,917  114,167 
Total Liabilities $ 7,080,891  $ 6,062,569 
EQUITY
Tompkins Financial Corporation shareholders' equity:
Common Stock - par value $0.10 per share: Authorized 25,000,000 shares; Issued: 14,962,162 at September 30, 2020; and 15,014,499 at December 31, 2019
1,496  1,501 
Additional paid-in capital 337,329  338,507 
Retained earnings 402,498  370,477 
Accumulated other comprehensive loss (23,864) (43,564)
Treasury stock, at cost – 121,868 shares at September 30, 2020, and 123,956 shares at December 31, 2019
(5,355) (5,279)
Total Tompkins Financial Corporation Shareholders’ Equity 712,104  661,642 
Noncontrolling interests 1,507  1,412 
Total Equity $ 713,611  $ 663,054 
Total Liabilities and Equity $ 7,794,502  $ 6,725,623 
 
See notes to unaudited consolidated financial statements.
1

TOMPKINS FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF INCOME 
Three Months Ended Nine Months Ended
(In thousands, except per share data) (Unaudited) 9/30/2020 9/30/2019 9/30/2020 9/30/2019
INTEREST AND DIVIDEND INCOME
Loans $ 57,892  $ 57,621  $ 169,639  $ 169,685 
Due from banks 83  11  90  31 
Available-for-sale debt securities 6,035  6,511  20,101  22,055 
Held-to-maturity securities 0  862  0  2,583 
Federal Home Loan Bank and other stock 306  770  1,130  2,442 
Total Interest and Dividend Income 64,316  65,775  190,960  196,796 
INTEREST EXPENSE
Time certificates of deposits of $250,000 or more 755  823  2,458  2,184 
Other deposits 3,450  7,583  13,723  20,409 
Federal funds purchased and securities sold under agreements to repurchase 19  34  76  110 
Trust preferred debentures 216  317  758  974 
Other borrowings 1,623  3,862  6,357  15,731 
Total Interest Expense 6,063  12,619  23,372  39,408 
Net Interest Income 58,253  53,156  167,588  157,388 
Less: Provision for credit loss expense 199  1,320  16,145  2,366 
Net Interest Income After Provision for Credit Loss Expense 58,054  51,836  151,443  155,022 
NONINTEREST INCOME
Insurance commissions and fees 8,916  8,517  24,216  24,314 
Investment services income 4,292  4,175  12,414  12,166 
Service charges on deposit accounts 1,444  2,191  4,675  6,210 
Card services income 2,419  2,550  6,885  8,090 
Other income 1,818  1,963  6,388  6,247 
Net (loss) gain on securities transactions (2) 138  446  434 
Total Noninterest Income 18,887  19,534  55,024  57,461 
NONINTEREST EXPENSE
Salaries and wages 23,951  22,960  69,482  66,149 
Other employee benefits 6,690  5,821  18,260  17,094 
Net occupancy expense of premises 3,162  3,236  9,530  10,095 
Furniture and fixture expense 1,886  1,919  5,759  5,894 
Amortization of intangible assets 371  421  1,120  1,251 
Other operating expense 10,289  11,298  34,826  35,451 
Total Noninterest Expenses 46,349  45,655  138,977  135,934 
Income Before Income Tax Expense 30,592  25,715  67,490  76,549 
Income Tax Expense 6,330  5,478  13,779  15,816 
Net Income Attributable to Noncontrolling Interests and Tompkins Financial Corporation 24,262  20,237  53,711  60,733 
Less: Net Income Attributable to Noncontrolling Interests 32  31  101  95 
Net Income Attributable to Tompkins Financial Corporation $ 24,230  $ 20,206  $ 53,610  $ 60,638 
Basic Earnings Per Share $ 1.63  $ 1.34  $ 3.60  $ 3.99 
Diluted Earnings Per Share $ 1.63  $ 1.34  $ 3.59  $ 3.97 
 
See notes to unaudited consolidated financial statements.

2

TOMPKINS FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
Three Months Ended
(In thousands) (Unaudited) 9/30/2020 9/30/2019
Net income attributable to noncontrolling interests and Tompkins Financial Corporation $ 24,262  $ 20,237 
Other comprehensive (loss) income, net of tax:
Available-for-sale debt securities:
Change in net unrealized gain/(loss) during the period (3,303) 3,111 
Reclassification adjustment for net realized gain on sale of available-for-sale debt securities included in net income 0  (101)
Employee benefit plans:
Amortization of net retirement plan actuarial loss 447  310 
Amortization of net retirement plan prior service cost 40  3 
Other comprehensive (loss) income (2,816) 3,323 
Subtotal comprehensive income attributable to noncontrolling interests and Tompkins Financial Corporation 21,446  23,560 
Less: Net income attributable to noncontrolling interests (32) (31)
Total comprehensive income attributable to Tompkins Financial Corporation $ 21,414  $ 23,529 
Nine Months Ended
(In thousands) (Unaudited) 9/30/2020 9/30/2019
Net income attributable to noncontrolling interests and Tompkins Financial Corporation $ 53,711  $ 60,733 
Other comprehensive income, net of tax:
Available-for-sale debt securities:
Change in net unrealized gain/loss during the period 18,563  25,681 
Reclassification adjustment for net realized gain on sale of available-for-sale debt securities included in net income (324) (305)
Employee benefit plans:
Amortization of net retirement plan actuarial loss 1,340  930 
Amortization of net retirement plan prior service cost 121  8 
Other comprehensive income 19,700  26,314 
Subtotal comprehensive income attributable to noncontrolling interests and Tompkins Financial Corporation 73,411  87,047 
Less: Net income attributable to noncontrolling interests (101) (95)
Total comprehensive income attributable to Tompkins Financial Corporation $ 73,310  $ 86,952 

See notes to unaudited consolidated financial statements.

3

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
(In thousands) (Unaudited) 9/30/2020 9/30/2019
OPERATING ACTIVITIES
Net income attributable to Tompkins Financial Corporation $ 53,610  $ 60,638 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit loss expense 16,145  2,366 
Depreciation and amortization of premises, equipment, and software 7,654  7,495 
Amortization of intangible assets 1,120  1,251 
Earnings from corporate owned life insurance (1,617) (1,612)
Net amortization on securities 7,233  5,425 
Amortization/accretion related to purchase accounting (743) (1,091)
Net gain on securities transactions (446) (434)
Net gain on sale of loans originated for sale (1,245) (139)
Proceeds from sale of loans originated for sale 36,568  11,532 
Loans originated for sale (38,484) (9,961)
Net (gain) on sale of bank premises and equipment (3) (110)
Net excess tax benefit from stock based compensation 118  574 
Stock-based compensation expense 3,372  3,009 
Increase in accrued interest receivable (18,919) (488)
(Decrease) in accrued interest payable (785) (114)
Other, net (2,262) (4,132)
Net Cash Provided by Operating Activities 61,316  74,209 
INVESTING ACTIVITIES
Proceeds from maturities, calls and principal paydowns of available-for-sale debt securities 405,886  232,792 
Proceeds from sales of available-for-sale debt securities 42,333  176,249 
Proceeds from maturities, calls and principal paydowns of held-to-maturity securities 0  9,205 
Purchases of available-for-sale debt securities (799,039) (189,940)
Purchases of held-to-maturity securities 0  (7,589)
Net increase in loans (478,455) (28,395)
Proceeds from sale/redemptions of Federal Home Loan Bank stock 41,169  108,289 
Purchases of Federal Home Loan Bank and other stock (25,393) (80,908)
Proceeds from sale of bank premises and equipment 4  449 
Purchases of bank premises, equipment and software (2,894) (4,049)
Redemption of corporate owned life insurance 446  0 
Net cash used in acquisition 0  (436)
Other, net 398  4,887 
Net Cash (Used in) Provided by Investing Activities (815,545) 220,554 
FINANCING ACTIVITIES
Net increase in demand, money market, and savings deposits 1,356,930  416,882 
Net increase in time deposits 31,856  64,831 
Net increase (decrease) in Federal funds purchased and securities sold under agreements to repurchase 3,227  (31,301)
Increase in other borrowings 74,583  252,753 
Repayment of other borrowings (447,683) (899,828)
Cash dividends (23,296) (22,869)
Repurchase of common stock (5,620) (26,992)
Shares issued for dividend reinvestment plan 1,529  0 
Net shares issued related to restricted stock awards (292) (385)
Net proceeds from exercise of stock options (248) (816)
Net Cash Provided by (Used in) Financing Activities 990,986  (247,725)
Net Increase in Cash and Cash Equivalents 236,757  47,038 
Cash and cash equivalents at beginning of period 137,982  80,389 
Total Cash and Cash Equivalents at End of Period $ 374,739  $ 127,427 
 
See notes to unaudited consolidated financial statements.
4

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
(In thousands) (Unaudited) 9/30/2020 9/30/2019
Supplemental Information:
Cash paid during the year for  - Interest $ 24,626  $ 40,204 
Cash paid during the year for  - Taxes 16,243  11,241 
Transfer of loans to other real estate owned 192  774 
Initial recognition of operating lease right-of-use assets 0 35,783 
Initial recognition of operating lease liabilities 0 38,119 
Right-of-use assets obtained in exchange for new lease liabilities 1,230  28 
 
See notes to unaudited consolidated financial statements.
 
5

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands except share and per share data) (Unaudited) Common
Stock 		Additional Paid-in Capital Retained
Earnings 		Accumulated Other Comprehensive (Loss) Income Treasury
Stock 		Non-
controlling Interests 		Total
Balances at July 1, 2019 $ 1,520  $ 355,284  $ 344,513  $ (40,174) $ (4,942) $ 1,476  $ 657,677 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation 20,206  31  20,237 
Other comprehensive income 3,323  3,323 
Total Comprehensive Income 23,560 
Cash dividends ($0.50 per share)
(7,554) (7,554)
Net exercise of stock options (2,902 shares)
0  (106) (106)
Common stock repurchased and returned to unissued status (185,107 shares) (18) (14,690) (14,708)
Stock-based compensation expense 997  997 
Directors deferred compensation plan ((2,027) shares)
169  (169) 0 
Restricted stock activity ((2,764) shares)
(1) 0  (1)
Balances at September 30, 2019 $ 1,501  $ 341,654  $ 357,165  $ (36,851) $ (5,111) $ 1,507  $ 659,865 
Balances at July 1, 2020 $ 1,495  $ 335,268  $ 386,025  $ (21,048) $ (5,187) $ 1,476  $ 698,029 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation 24,230  32  24,262 
Other comprehensive loss (2,816) (2,816)
Total Comprehensive Income 21,446 
Cash dividends ($0.52 per share)
(7,757) (7,757)
Net exercise of stock options (417 shares)
  (32) (32)
Shares issued for dividend reinvestment plan (12,723 shares)
1  847  848 
Stock-based compensation expense 1,078  1,078 
Directors deferred compensation plan (2,776 shares)
168  (168) 0 
Restricted stock activity ((1,346) shares)
0 
Partial repurchase of noncontrolling interest (1) (1)
Balances at September 30, 2020 $ 1,496  $ 337,329  $ 402,498  $ (23,864) $ (5,355) $ 1,507  $ 713,611 
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(In thousands except share and per share data)(Unaudited) Common
Stock 		Additional Paid-in Capital Retained
Earnings 		Accumulated Other Comprehensive (Loss) Income Treasury
Stock 		Non-
controlling Interests 		Total
Balances at January 1, 2019 $ 1,535  $ 366,595  $ 319,396  $ (63,165) $ (4,902) $ 1,412  $ 620,871 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation 60,638  95  60,733 
Other comprehensive income 26,314  26,314 
Total Comprehensive Income 87,047 
Cash dividends ($1.00 per share)
(22,869) (22,869)
Net exercise of stock options (15,201 shares)
1  (817) (816)
Common stock repurchased and returned to unissued status (340,200 shares)
(34) (26,958) (26,992)
Stock-based compensation expense 3,009  3,009 
Directors deferred compensation plan ((347) shares)
209  (209) 0 
Restricted stock activity ((11,628) shares)
(1) (384) (385)
Balances at September 30, 2019 $ 1,501  $ 341,654  $ 357,165  $ (36,851) $ (5,111) $ 1,507  $ 659,865 
Balances at January 1, 2020 $ 1,501  $ 338,507  $ 370,477  $ (43,564) $ (5,279) $ 1,412  $ 663,054 
Impact of adoption of ASU 2016-13 1,707  1,707 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation 53,610  101  53,711 
Other comprehensive income 19,700  19,700 
Total Comprehensive Income 73,411 
Cash dividends ($1.56 per share)
(23,296) (23,296)
Net exercise of stock options (3,605 shares)
(248) (248)
Common stock repurchased and returned to unissued status (71,288 shares)
(7) (5,613) (5,620)
Shares issued for dividend reinvestment plan (24,752 shares)
2  1,527  1,529 
Stock-based compensation expense 3,372  3,372 
Directors deferred compensation plan ((2,088) shares)
76  (76) 0 
Restricted stock activity ((9,406) shares)
(292) (292)
Partial repurchase of noncontrolling interest (6) (6)
Balances at September 30, 2020 $ 1,496  $ 337,329  $ 402,498  $ (23,864) $ (5,355) $ 1,507  $ 713,611 
 
See notes to unaudited consolidated financial statements
7

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business
 
Tompkins Financial Corporation (“Tompkins” or the “Company”) is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At September 30, 2020, the Company’s subsidiaries included: four wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile (DBA Tompkins Bank of Castile), Mahopac Bank (DBA Tompkins Mahopac Bank), VIST Bank (DBA Tompkins VIST Bank); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). The Trust Company provides a full array of trust and investment services under the Tompkins Financial Advisors brand, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company’s principal offices are located at 118 E. Seneca Street, P.O. Box 460, Ithaca, New York, 14850, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the symbol “TMP.”

As a registered financial holding company, the Company is regulated under the Bank Holding Company Act of 1956 (“BHC Act”), as amended and is subject to examination and comprehensive regulation by the Federal Reserve Board (“FRB”). The Company is also subject to the jurisdiction of the Securities and Exchange Commission (“SEC”) and is subject to disclosure and regulatory requirements under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Company is subject to the rules of the NYSE American for listed companies.

The Company’s banking subsidiaries are subject to examination and comprehensive regulation by various regulatory authorities, including the Federal Deposit Insurance Corporation (“FDIC”), the New York State Department of Financial Services (“NYSDFS”), and the Pennsylvania Department of Banking and Securities (“PDBS”). Each of these agencies issues regulations and requires the filing of reports describing the activities and financial condition of the entities under its jurisdiction. Likewise, such agencies conduct examinations on a recurring basis to evaluate the safety and soundness of the institutions, and to test compliance with various regulatory requirements, including: consumer protection, privacy, fair lending, the Community Reinvestment Act, the Bank Secrecy Act, sales of non-deposit investments, electronic data processing, and trust department activities.

The trust division of Tompkins Trust Company is subject to examination and comprehensive regulation by the FDIC and NYSDFS.

The Company’s insurance subsidiary is subject to examination and regulation by the NYSDFS and the Pennsylvania Insurance Department.
 
2. Basis of Presentation
 
The unaudited consolidated financial statements included in this quarterly report do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the SEC. In the application of certain accounting policies, management is required to make assumptions regarding the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues, and expenses in the unaudited consolidated financial statements. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policies that management considers critical in this respect are the determination of the allowance for credit losses and the review of its securities portfolio for other than temporary impairment.
 
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In management’s opinion, the unaudited consolidated financial statements reflect all adjustments of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year ended December 31, 2020. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Effective January 1, 2020, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 makes significant changes to the accounting for credit losses on financial instruments presented on an amortized cost basis and disclosures about them. These changes are discussed below, under "Impact of Adoption of ASU 2016-13".

Other than the changes resulting from the adoption of ASU 2016-13, there have been no significant changes to the Company’s accounting policies from those presented in the 2019 Annual Report on Form 10-K. Refer to MD&A under "Recently Issued Accounting Standards" of this Report for a discussion of recently issued accounting guidelines.
 
Cash and cash equivalents in the consolidated statements of cash flow include cash and noninterest bearing balances due from banks, interest-bearing balances due from banks, and money market funds. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risk on cash and cash equivalents.
 
The Company has evaluated subsequent events for potential recognition and/or disclosure, and determined that no further disclosures were required.
 
The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity of the Company and its subsidiaries. Amounts in the prior periods’ unaudited consolidated financial statements are reclassified when necessary to conform to the current periods’ presentation. All significant intercompany balances and transactions are eliminated in consolidation.

Impact of Adoption of ASU 2016-13

Securities
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 (impairment) is due to credit-related factors or noncredit-related factors. 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. However, if the Company intends to sell an impaired available- for-sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

Changes in the allowance for credit losses are recorded as provision (credit) for credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available-for-sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on securities is excluded from the estimate of credit losses.

Acquired Loans
Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while certain purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.

Prior to January 1, 2020, loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered purchased credit impaired (“PCI”) loans. PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial valuation allowance based on a discounted cash flow
9

methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’ assessment of risk inherent in the cash flow estimates. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” was recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” were not recognized on the Statement of Condition and did not result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment were recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows were recognized as impairment. Valuation allowances on PCI loans reflected only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately were not to be received).

Subsequent to January 1, 2020 in connection with the Company's adoption of ASU 2016-13, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.

The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.

Allowance for Credit Losses – Loans
Under the current expected credit loss model, the ACL on loans is a valuation allowance estimated at each balance sheet date in accordance with U.S. GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.

Expected credit losses are reflected in the ACL through a charge to the provision for credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. In general, the principal balance of a loan is charged off in full or in part when management concludes, based on the available facts and circumstances, that collection of principal in full is not probable. Subsequent recoveries, if any, are credited to the ACL when received.

The Company measures expected credit losses of financial assets at the loan level by segment, by pooling loans when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (“DCF”) method to estimate the expected credit losses. Allowance on loans that do not share risk characteristics are evaluated on an individual basis. The Company assigns a credit risk rating to all commercial and commercial real estate loans. The Company reviews commercial and commercial real estate loans rated Substandard or worse, on nonaccrual and greater than $250,000 for loss potential and when deemed appropriate assigns an allowance based on an individual evaluation.

The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert back to average historical loss information on a straight line basis over eight quarters when it can no longer develop reasonable and supportable forecasts.

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The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses: commercial, commercial real estate, residential, home equity, consumer and leases. This segmentation was selected based on the differences in the risk profile of each of these categories and aligns well with regulatory reporting categories. This segmentation separates borrower type, collateral type and the nature of the loan. The differences in risk profiles of these segments enables the ACL to be more precise in its allocation due to the inherent risk in these specific portfolios.

Discounted Cash Flow Method
The Company uses the discounted cash flow method to estimate expected credit losses for the commercial, commercial real estate, residential, home equity, and consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, and time to recovery are based on historical internal data.

The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts one or both of the following economic factors; national unemployment and gross domestic product as loss drivers.

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from an independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics. The model considers a base case forecast and two alternative forecasts and assigns weightings to these three scenarios based on current conditions and expectations for future conditions.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.

The model also considers the need to qualitatively adjust expected loss estimates for information not already captured in the loss estimation process. These qualitative factors include, but are not limited to, those suggested by the Interagency Policy Statement on Allowances for Credit Losses. These qualitative factor adjustments may increase or decrease the Company's estimate of expected credit losses.

Due to the size and characteristics of the leasing portfolio, the remaining life method, using the historical loss rate of the commercial and industrial segment, is used to determine the allowance for credit losses.

Individually Evaluated Financial Assets
Loans that do not share common risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral less cost to sell, and the amortized cost basis of the asset as of the measurement date. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

Troubled Debt Restructuring
A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best
11

course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL. The provisions of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") and interagency guidance issued by Federal banking regulators provided guidance and clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. The guidance and clarifications detail certain provisions whereby banks are permitted to make deferrals and modifications to the terms of a loan which would not require the loan to be reported as a troubled debt restructuring ('TDR"). In accordance with the CARES Act and the interagency guidance, the Company elected to adopt the provisions to not report qualified loan modifications as troubled debt restructurings.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, unused lines of credit and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to the provision for credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company’s consolidated statements of income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using similar methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s statements of condition.

3. Securities

Available-for-Sale Debt Securities
The following table summarizes available-for-sale debt securities held by the Company at September 30, 2020:
Available-for-Sale Debt Securities
September 30, 2020 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair Value
(In thousands)
Obligations of U.S. Government sponsored entities 602,417  10,881  817  612,481 
Obligations of U.S. states and political subdivisions 126,593  2,840  175  129,258 
Mortgage-backed securities – residential, issued by
   U.S. Government agencies 205,507  2,981  987  207,501 
   U.S. Government sponsored entities 700,238  15,785  863  715,160 
U.S. corporate debt securities 2,500  0  134  2,366 
Total available-for-sale debt securities $ 1,637,255  $ 32,487  $ 2,976  $ 1,666,766 
 
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 The following table summarizes available-for-sale debt securities held by the Company at December 31, 2019:  
Available-for-Sale Debt Securities
December 31, 2019 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair Value
(In thousands)
U.S. Treasuries $ 1,840  $ 0  $ 0  $ 1,840 
Obligations of U.S. Government sponsored entities 367,551  5,021  84  372,488 
Obligations of U.S. states and political subdivisions 96,668  1,178  61  97,785 
Mortgage-backed securities – residential, issued by
   U.S. Government agencies 164,643  1,327  1,519  164,451 
   U.S. Government sponsored entities 660,037  2,940  3,387  659,590 
U.S. corporate debt securities 2,500  0  67  2,433 
Total available-for-sale debt securities $ 1,293,239  $ 10,466  $ 5,118  $ 1,298,587 

The available-for-sale portfolio also includes callable securities that may be called by the issuer prior to maturity. The Company may from time to time sell debt securities from its available-for-sale portfolio. Realized gains on available-for-sale debt securities were $0 and $429,000 for the three and nine months ended September 30, 2020 and $133,000 and $999,000 for the three and nine months ended September 30, 2019. Realized losses on available-for-sale debt securities were $0 for the three and nine months ended September 30, 2020 and $0 and $595,000 for the three and nine months ended September 30, 2019. Proceeds from the sale of available-for-sale debt securities were $0 and $42.3 million for the three and nine months ended September 30, 2020, and $24.2 million and $176.2 million for the three and nine months ended September 30, 2019. Sales of available-for-sale investment securities were the result of general investment portfolio and interest rate risk management. The Company also recognized net losses of $2,000 and net gains of $17,000 for the three and nine months ended September 30, 2020, on equity securities, reflecting the change in fair value.
 
13

The following table summarizes available-for-sale debt securities that had unrealized losses at September 30, 2020.
Less than 12 Months 12 Months or Longer Total
(In thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Obligations of U.S. Government sponsored entities $ 303,834  $ 817  $ 0  $ 0  $ 303,834  $ 817 
Obligations of U.S. states and political subdivisions 15,328  175  0  0  15,328  175 
Mortgage-backed securities – residential, issued by
U.S. Government agencies 46,990  736  2,978  251  49,968  987 
U.S. Government sponsored entities 111,120  794  5,512  69  116,632  863 
U.S. corporate debt securities 0  0  2,366  134  2,366  134 
Total available-for-sale debt securities $ 477,272  $ 2,522  $ 10,856  $ 454  $ 488,128  $ 2,976 

The following table summarizes available-for-sale debt securities that had unrealized losses at December 31, 2019.
Less than 12 Months 12 Months or Longer Total
(In thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Obligations of U.S. Government sponsored entities $ 18,654  $ 76  $ 3,479  $ 8  $ 22,133  $ 84 
Obligations of U.S. states and political subdivisions 10,456  54  2,300  7  12,756  61 
Mortgage-backed securities – residential, issued by
   U.S. Government agencies 54,846  489  45,999  1,030  100,845  1,519 
U.S. Government sponsored entities 157,801  752  233,999  2,635  391,800  3,387 
U.S. corporate debt securities 0  0  2,433  67  2,433  67 
Total available-for-sale debt securities $ 241,757  $ 1,371  $ 288,210  $ 3,747  $ 529,967  $ 5,118 

The Company evaluates available-for-sale debt securities for expected credit losses (“ECL”) in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.

Factors that may be indicative of ECL include, but are not limited to, the following:

• Extent to which the fair value is less than the amortized cost basis.
• Adverse conditions specifically related to the security, an industry, or geographic area (changes in technology,
business practice).
• Payment structure of the debt security with respect to underlying issuer or obligor.
• Failure of the issuer to make scheduled payment of principal and/or interest.
• Changes to the rating of a security or issuer by a nationally recognized statistical rating organization.
• Changes in tax or regulatory guidelines that impact a security or underlying issuer.

For available for sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.

The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and
14

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. In addition, the Company maintains the ability and intent to hold these positions until the recovery of unrealized losses and does not believe that the Company would be required to sell any securities currently in an unrealized loss position.

The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown separately since they are not due at a single maturity date.
September 30, 2020
(In thousands) Amortized Cost Fair Value
Available-for-sale debt securities:
Due in one year or less $ 53,447  $ 54,083 
Due after one year through five years 391,466  401,757 
Due after five years through ten years 221,525  222,846 
Due after ten years 65,072  65,419 
Total 731,510  744,105 
Mortgage-backed securities 905,745  922,661 
Total available-for-sale debt securities $ 1,637,255  $ 1,666,766 

December 31, 2019
(In thousands) Amortized Cost Fair Value
Available-for-sale debt securities:
Due in one year or less $ 107,975  $ 108,089 
Due after one year through five years 270,477  274,798 
Due after five years through ten years 77,710  79,165 
Due after ten years 12,397  12,494 
Total 468,559  474,546 
Mortgage-backed securities 824,680  824,041 
Total available-for-sale debt securities $ 1,293,239  $ 1,298,587 

The Company also holds non-marketable Federal Home Loan Bank New York (“FHLBNY”) stock, non-marketable Federal Home Loan Bank Pittsburgh (“FHLBPITT”) stock and non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock, FHLBPITT stock, and ACBB stock totaled $11.9 million, $5.9 million and $95,000 at September 30, 2020, respectively. These securities are carried at par, which is also cost. The FHLBNY and FHLBPITT continue to pay dividends and repurchase stock. Quarterly, we evaluate our investment in the FHLB for impairment. We evaluate recent and long-term operating performance, liquidity, funding and capital positions, stock repurchase history, dividend history and impact of legislative and regulatory changes. Based on our most recent evaluation, as of September 30, 2020, we have determined that no impairment write-downs are currently required.

15

4. Loans and Leases
Loans and leases at September 30, 2020 and December 31, 2019 were as follows:
(In thousands) 9/30/2020 12/31/2019
Commercial and industrial
Agriculture $ 89,068  $ 105,786 
Commercial and industrial other 790,749  902,275 
PPP loans* 464,058  0 
Subtotal commercial and industrial 1,343,875  1,008,061 
Commercial real estate
Construction 182,605  213,637 
Agriculture 198,049  184,898 
Commercial real estate other 2,161,954  2,045,030 
Subtotal commercial real estate 2,542,608  2,443,565 
Residential real estate
Home equity 206,456  219,245 
Mortgages 1,228,629  1,158,592 
Subtotal residential real estate 1,435,085  1,377,837 
Consumer and other
Indirect 9,534  12,964 
Consumer and other 64,346  61,446 
Subtotal consumer and other 73,880  74,410 
Leases 14,877  17,322 
Total loans and leases 5,410,325  4,921,195 
Less: unearned income and deferred costs and fees (12,028) (3,645)
Total loans and leases, net of unearned income and deferred costs and fees $ 5,398,297  $ 4,917,550 
*Paycheck Protection Program ("PPP")

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 3 – “Loans and Leases” in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in these policies and guidelines since the date of that report. As such, these policies are reflective of new originations as well as those balances held at September 30, 2020. 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 origination, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
 
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Generally loans are placed on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question as well as when required by regulatory agencies. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current, the borrower has established a payment history, and future payments are reasonably assured. When management determines that the collection of principal in full is not probable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs.
 

16

The below table is an age analysis of past due loans, segregated by class of loans, as of September 30, 2020 and December 31, 2019.
 
September 30, 2020
(In thousands) 30-59 Days 60-89 Days 90 Days or More Total Past Due Current Loans Total Loans
Loans and Leases
Commercial and industrial
Agriculture $ 0  $ 0  $ 0  $ 0  $ 89,068  $ 89,068
Commercial and industrial other 923  96  1,443  2,462  788,287  790,749 
PPP loans* 0  0  0  0  464,058  464,058 
Subtotal commercial and industrial 923  96  1,443  2,462  1,341,413  1,343,875 
Commercial real estate
Construction 0  0  0  0  182,605  182,605
Agriculture 0  0  0  0  198,049  198,049
Commercial real estate other 2,255  1,079  12,477  15,811  2,146,143  2,161,954
Subtotal commercial real estate 2,255  1,079  12,477  15,811  2,526,797  2,542,608 
Residential real estate
Home equity 475  135  1,079  1,689  204,767  206,456
Mortgages 482  1,183  2,649  4,314  1,224,315  1,228,629
Subtotal residential real estate 957  1,318  3,728  6,003  1,429,082  1,435,085 
Consumer and other
Indirect 86  32  57  175  9,359  9,534
Consumer and other 119  10  154  283  64,063  64,346
Subtotal consumer and other 205  42  211  458  73,422  73,880 
Leases 0  0  0  0  14,877  14,877 
Total loans and leases 4,340  2,535  17,859  24,734  5,385,591  5,410,325 
Less: unearned income and deferred costs and fees 0  0  0  0  (12,028) (12,028)
Total loans and leases, net of unearned income and deferred costs and fees $ 4,340  $ 2,535  $ 17,859  $ 24,734  $ 5,373,563  $ 5,398,297 
17

December 31, 2019
(In thousands) 30-89 Days 90 Days or More Current Loans Total Loans
90 days and accruing1
Nonaccrual
Loans and Leases
Commercial and industrial
Agriculture $ 0  $ 65  $ 105,721  $ 105,786  $ 0  $ 0 
Commercial and industrial other 413  2,081  899,781  902,275  2  2,335 
Subtotal commercial and industrial 413  2,146  1,005,502  1,008,061  2  2,335 
Commercial real estate
Construction 0  0  213,637  213,637  0  0 
Agriculture 0  0  184,898  184,898  0  0 
Commercial real estate other 1,140  10,780  2,033,110  2,045,030  542  10,789 
Subtotal commercial real estate 1,140  10,780  2,431,645  2,443,565  542  10,789 
Residential real estate
Home equity 348  727  218,170  219,245  55  2,796 
Mortgages 1,344  3,985  1,153,263  1,158,592  195  8,086 
Subtotal residential real estate 1,692  4,712  1,371,433  1,377,837  250  10,882 
Consumer and other
Indirect 312  60  12,592  12,964  0  117 
Consumer and other 167  66  61,213  61,446  0  158 
Subtotal consumer and other 479  126  73,805  74,410  0  275 
Leases 0  0  17,322  17,322  0  0 
Total loans and leases 3,724  17,764  4,899,707  4,921,195  794  24,281 
Less: unearned income and deferred costs and fees 0  0  (3,645) (3,645) 0  0 
Total loans and leases, net of unearned income and deferred costs and fees $ 3,724  $ 17,764  $ 4,896,062  $ 4,917,550  $ 794  $ 24,281 
1 Includes acquired loans that were recorded at fair value at the acquisition date.
























18

The following table presents the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses. The below table is an age analysis of nonaccrual loans, segregated by class of loans, as of September 30, 2020.
(In thousands) Nonaccrual Loans with no Allowance for Credit Losses Nonaccrual Loans Loans Past Due Over 89 Days and Accruing
Loans and Leases
Commercial and industrial
Commercial and industrial other $ 1,469  $ 1,636  $ 0 
Subtotal commercial and industrial 1,469  1,636  0 
Commercial real estate
Agriculture 120  120  0 
Commercial real estate other 10,092  12,657  0 
Subtotal commercial real estate 10,212  12,777  0 
Residential real estate
Home equity 2,793  2,793  0 
Mortgages 9,410  9,410  0 
Subtotal residential real estate 12,203  12,203  0 
Consumer and other
Indirect 144  144  0 
Consumer and other 184  184  0 
Subtotal consumer and other 328  328  0 
Leases 0  0  0 
Total loans and leases $ 24,212  $ 26,944  $ 0 

The Company recognized $0 of interest income on nonaccrual loans during the three and nine months ended September 30, 2020.

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

The Company uses a DCF method to estimate expected credit losses for all loan segments excluding the leasing segment. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, recovery lag probability of default, and loss give 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.

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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 are also considered by management when developing the forecast metrics.

Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses.

The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis.

The Company adopted ASU 2016-13 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 September 30, 2020, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance bases on their judgements and information available to them at the time of their examinations.

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

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

The following table details activity in the allowance for credit losses on loans for the three and nine months ended September 30, 2020 and 2019. As previously discussed, the Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The transition adjustment included a decrease in the allowance of $2.5 million. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Three Months Ended September 30, 2020
(In thousands) Commercial
& Industrial 		Commercial
Real Estate 		Residential
Real Estate 		Consumer
and Other 		Finance
Leases 		Total
Allowance for credit losses:
Beginning balance $ 11,113  $ 24,286  $ 15,012  $ 1,596  $ 75  $ 52,082 
Charge-offs 0  0  (30) (145) 0  (175)
Recoveries 89  9  16  73  0  187 
Provision (credit) for credit loss expense (3,918) 4,264  (65) (75) (7) 199 
Ending Balance $ 7,284  $ 28,559  $ 14,933  $ 1,449  $ 68  $ 52,293 

20

Three Months Ended September 30, 2019
(In thousands) Commercial
& Industrial 		Commercial
Real Estate 		Residential
Real Estate 		Consumer
and Other 		Finance
Leases 		Total
Allowance for credit losses:
Beginning balance $ 11,543  $ 21,005  $ 6,897  $ 1,345  $ 0  $ 40,790 
Charge-offs (6) (551) (87) (190) 0  (834)
Recoveries 10  2  15  68  0  95 
Provision (credit) for credit loss expense (256) 2,143  (733) 166  0  1,320 
Ending Balance $ 11,291  $ 22,599  $ 6,092  $ 1,389  $ 0  $ 41,371 

Nine Months Ended September 30, 2020
(In thousands) Commercial
& Industrial 		Commercial
Real Estate 		Residential
Real Estate 		Consumer
and Other 		Finance
Leases 		Total
Allowance for credit losses:
Beginning balance, prior to adoption of ASC 326 $ 10,541  $ 21,608  $ 6,381  $ 1,362  $ 0  $ 39,892 
Impact of adopting ASC 326 (2,008) (5,917) 4,459  850  82  (2,534)
Charge-offs (1) (1,305) (33) (409) 0  (1,748)
Recoveries 125  40  178  195  0  538 
Provision (credit) for credit loss expense (1,373) 14,133  3,948  (549) (14) 16,145 
Ending Balance $ 7,284  $ 28,559  $ 14,933  $ 1,449  $ 68  $ 52,293 

Nine Months Ended September 30, 2019
(In thousands) Commercial
& Industrial 		Commercial
Real Estate 		Residential
Real Estate 		Consumer
and Other 		Finance
Leases 		Total
Allowance for credit losses:
Beginning balance $ 11,272  $ 23,483  $ 7,345  $ 1,310  $ 0  $ 43,410 
Charge-offs (489) (3,949) (131) (571) 0  (5,140)
Recoveries 92  107  319  217  0  735 
Provision (credit) for credit loss expense 416  2,958  (1,441) 433  0  2,366 
Ending Balance $ 11,291  $ 22,599  $ 6,092  $ 1,389  $ 0  $ 41,371 

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to these loans:

(In thousands) Real Estate Business Assets Other Total ACL Allocation
September 30, 2020
Commercial and Industrial $ 33  $ 507  $ 50  $ 590  $ 48 
Commercial Real Estate 8,085  0  0  8,085  436 
Commercial Real Estate - Agriculture 1,559  0  0  1,559  0 
Residential - Mortgages 384  0  0  384  2 
Total $ 10,061  $ 507  $ 50  $ 10,618  $ 486 



21

The following tables present information pertaining to the allocation of the allowance for credit losses as of December 31, 2019, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13:
 
(In thousands) Commercial
& Industrial 		Commercial
Real Estate 		Residential
Real Estate 		Consumer
and Other 		Finance Leases Total
Allowance for originated loans and leases
December 31, 2019
Individually evaluated for impairment $ 245  $ 662  $ 0  $ 0  $ 0  $ 907 
Collectively evaluated for impairment 10,296  20,895  6,360  1,356  0  38,907 
Ending balance $ 10,541  $ 21,557  $ 6,360  $ 1,356  $ 0  $ 39,814 

(In thousands) Commercial
& Industrial 		Commercial
Real Estate 		Residential
Real Estate 		Consumer
and Other 		Finance
Leases 		Total
Allowance for acquired loans
December 31, 2019
Individually evaluated for impairment $ 0  $ 0  $ 0  $ 0  $ 0  $ 0 
Collectively evaluated for impairment 0  51  21  6  0  78 
Ending balance $ 0  $ 51  $ 21  $ 6  $ 0  $ 78 
 
The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of December 31, 2019 was as follows:
(In thousands) Commercial
& Industrial 		Commercial
Real Estate 		Residential
Real Estate 		Consumer 
and Other 		Finance Leases Total
Originated loans and leases
December 31, 2019
Individually evaluated for impairment $ 2,110  $ 13,496  $ 3,779  $ 0  $ 0  $ 19,385 
Collectively evaluated for impairment 966,875  2,283,152  1,340,687  73,625  17,322  4,681,661 
Total $ 968,985  $ 2,296,648  $ 1,344,466  $ 73,625  $ 17,322  $ 4,701,046 
 
(In thousands) Commercial
& Industrial 		Commercial
Real Estate 		Residential
Real Estate 		Consumer 
and Other 		Finance
Leases 		Total
Acquired loans
December 31, 2019
Individually evaluated for impairment $ 2  $ 714  $ 2,114  $ 0  $ 0  $ 2,830 
Loans acquired with deteriorated credit quality 173  5,674  3,302  0  0  9,149 
Collectively evaluated for impairment 38,901  140,529  27,955  785  0  208,170 
Total $ 39,076  $ 146,917  $ 33,371  $ 785  $ 0  $ 220,149 
 
22

Prior to the adoption of ASC 326, a loan was considered impaired when, based on current information and events, it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consisted of non-homogenous nonaccrual loans, and all loans restructured in a troubled debt restructuring (TDR). Specific reserves on individually identified impaired loans that were not collateral dependent were measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that were collateral dependent, impairment was measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts were generally charged off. The majority of impaired loans were collateral dependent impaired loans that had limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans, and previous charge-offs. Interest payments on impaired 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.

Impaired loans at December 31, 2019 were as follows: 
December 31, 2019
(In thousands) Recorded Investment Unpaid Principal Balance Related Allowance
Originated loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other $ 1,865  $ 1,965  $ 0 
Commercial real estate
Commercial real estate other 10,205  11,017  0 
Residential real estate
Home equity 3,779  3,992  0 
Subtotal $ 15,849  $ 16,974  $ 0 
Originated loans and leases with related allowance
Commercial & industrial
Commercial and industrial other 245  245  245 
Commercial real estate
Commercial real estate other 3,291  3,291  662 
Subtotal $ 3,536  $ 3,536  $ 907 
Total $ 19,385  $ 20,510  $ 907 
 
December 31, 2019
(In thousands) Recorded Investment Unpaid Principal Balance Related Allowance
Acquired loans with no related allowance
Commercial & industrial
Commercial and industrial other $ 2  $ 2  $ 0 
Commercial real estate
Commercial real estate other 714  714  0 
Residential real estate
Home equity 2,114  2,217  0 
Total $ 2,830  $ 2,933  $ 0 

23

The following table presents average impaired loans, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13, and interest recognized on such loans, for the three months ended September 30, 2019: 
Three Months Ended September 30, 2019
(In thousands) Average Recorded Investment Interest Income Recognized
Originated loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other $ 1,505  $ 0 
Commercial real estate
Commercial real estate other 7,380  0 
Residential real estate
Home equity 3,963  0 
Subtotal $ 12,848  $ 0 
Originated loans and leases with related allowance
Commercial & industrial
Commercial and industrial other 273  0 
Commercial real estate
Commercial real estate other 1,708  0 
Subtotal $ 1,981  $ 0 
Total $ 14,829  $ 0 
 
Three Months Ended September 30, 2019
(In thousands) Average Recorded Investment Interest Income Recognized
Acquired loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other $ 29  $ 0 
Commercial real estate
Commercial real estate other 857  0 
Residential real estate
Home equity 2,585  0 
Total $ 3,471  $ 0 


24

The average recorded investment and interest income recognized on impaired loans for the nine months ended September 30, 2019 was as follows:
Nine Months Ended September 30, 2019
(In thousands) Average Recorded Investment Interest Income Recognized
Originated loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other $ 2,123  $ 0 
Commercial real estate
Commercial real estate other 6,509  0 
Residential real estate
Home equity 3,978  0 
Subtotal $ 12,610  $ 0 
Originated loans and leases with related allowance
Commercial & industrial
Commercial and industrial other 154  0 
Commercial real estate
Commercial real estate other 757  0 
Subtotal $ 911  $ 0 
Total $ 13,521  $ 0 
Nine Months Ended September 30, 2019
(In thousands) Average Recorded Investment Interest Income Recognized
Acquired loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other $ 28  $ 0 
Commercial real estate
Commercial real estate other 834  0 
Residential real estate
Home equity 2,606  0 
Total $ 3,468  $ 0 
 
Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes concessions to the borrower that it would not otherwise consider. These modifications may include, among others, an extension for the term of the loan, and granting a period when interest-only payments can be made with the principal payments made over the remaining term of the loan or at maturity.
 
25

The following tables present information on loans modified in troubled debt restructuring during the periods indicated. Post-modification amounts are presented as of September 30, 2020 and 2019.

Three Months Ended
September 30, 2020
Defaulted TDRs2
(In thousands) Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Post-Modification Outstanding Recorded Investment
Commercial real estate
  Commercial real estate other1
1 $ 196  $ 196  0 $ 0 
Consumer and other
  Consumer and other1
1  $ 4  $ 4  $ 0  $ 0 
Total 2  $ 200  $ 200  0  $ 0 
 1 Represents the following concessions:  extension of term and reduction of rate.
2 TDRs that defaulted during the three months ended September 30, 2020 that were restructured in the prior twelve months.
Three Months Ended
September 30, 2019
Defaulted TDRs2
(In thousands) Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Post-Modification Outstanding Recorded Investment
Commercial and Industrial
Commercial and industrial other1
1  $ 9  $ 9  0  $ 0 
Commercial real estate
  Commercial real estate other1
1 $ 1,577  $ 1,577  0 $ 0 
Residential real estate
  Home equity1
0  $ 0  $ 0  $ 1  $ 93 
Total 2  $ 1,586  $ 1,586  1  $ 93 
 1 Represents the following concessions:  extension of term and reduction of rate.
2 TDRs that defaulted during the three months ended September 30, 2019 that were restructured in the prior twelve months.
 
Nine Months Ended
September 30, 2020
Defaulted TDRs2
(In thousands) Number of
Loans 		Pre-
Modification
Outstanding
Recorded
Investment 		Post-Modification Outstanding Recorded Investment Number of
Loans 		Post-
Modification
Outstanding
Recorded
Investment
Commercial & industrial
  Commercial and industrial other1
0  $ 0  $ 0  0  $ 0 
Commercial real estate
  Commercial real estate other1
1  196  196  1  37 
Residential real estate
  Home equity1
2  121  121  1  87 
Consumer and other
  Consumer and other1
1  $ 4  $ 4  0  $ 0 
Total 4  $ 321  $ 321  2  $ 124 
1 Represents the following concessions:  extension of term and reduction of rate.
2 TDRs that defaulted during the nine months ended September 30, 2020 that were restructured in the prior twelve months.

26

Nine Months Ended
September 30, 2019
Defaulted TDRs2
(In thousands) Number of
Loans 		Pre-
Modification
Outstanding
Recorded
Investment 		Post-Modification Outstanding Recorded Investment Number of
Loans 		Post-
Modification
Outstanding
Recorded
Investment
Commercial & industrial
  Commercial and industrial other1
2  $ 604  $ 604  0  $ 0 
Commercial real estate
  Commercial real estate other1
1  $ 1,577  $ 1,577  0  $ 0 
Residential real estate
  Home equity1
1  $ 168  $ 168  1  $ 93 
Total 4  $ 2,349  $ 2,349  1  $ 93 
1 Represents the following concessions:  extension of term and reduction of rate.
2 TDRs that defaulted during the nine months ended September 30, 2019 that were restructured in the prior twelve months.

The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of September 30, 2020.
27

(In thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Loans
Commercial & Industrial - Other:
Pass $ 61,772  $ 78,283  $ 61,289  $ 65,282  $ 38,317  $ 303,190  $ 160,124  $ 11,790  $ 780,047 
Special Mention 69  494  529  1,281  2,458  26  1,456  0  6,313 
Substandard 42  60  999  265  312  879  1,832  0  4,389 
Total Commercial & Industrial - Other $ 61,883  $ 78,837  $ 62,817  $ 66,828  $ 41,087  $ 304,095  $ 163,412  $ 11,790  $ 790,749 
Commercial and Industrial - PPP:
Pass $ 464,058  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 464,058 
Special Mention $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0 
Substandard $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0 
Total Commercial and Industrial - PPP $ 464,058  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 0  $ 464,058 
Commercial and Industrial - Agriculture:
Pass $ 11,203  $ 9,128  $ 13,160  $ 7,060  $ 3,857  $ 2,934  $ 33,800  $ 467  $ 81,609 
Special Mention 0  0  59  771  0  0  1,681  0  2,511 
Substandard 100  91  0  220  0  2,309  2,228  0  4,948 
Total Commercial and Industrial - Agriculture $ 11,303  $ 9,219  $ 13,219  $ 8,051  $ 3,857  $ 5,243  $ 37,709  $ 467  $ 89,068 
Commercial Real Estate
Pass $ 157,664  $ 234,828  $ 240,343  $ 246,787  $ 304,856  $ 732,205  $ 65,076  $ 44,039  $ 2,025,798 
Special Mention 0  14,439  19,172  6,869  34,367  30,733  526  0  106,106 
Substandard 349  1,700  739  3,608  924  22,385  345  0  30,050 
Total Commercial Real Estate $ 158,013  $ 250,967  $ 260,254  $ 257,264  $ 340,147  $ 785,322  $ 65,947  $ 44,039  $ 2,161,954 
Commercial Real Estate - Agriculture:
Pass $ 16,925  $ 35,850  $ 44,991  $ 21,833  $ 17,562  $ 45,966  $ 121  $ 5,655  $ 188,903 
Special Mention 1,516  0  579  1,379  1,064  150  0  0  4,688 
Substandard 0  0  0  1,779  718  1,569  392  0  4,458 
Total Commercial Real Estate - Agriculture $ 18,441  $ 35,850  $ 45,570  $ 24,991  $ 19,344  $ 47,685  $ 513  $ 5,655  $ 198,049 
Commercial Real Estate - Construction
Pass $ 12,983  $ 22,285  $ 8,019  $ 2,629  $ 2,018  $ 8,324  $ 107,970  $ 15,434  $ 179,662 
Special Mention 0  0  0  0  0  529  2,085  0  2,614 
Substandard 0  0  0  0  0  329  0  0  329 
Total Commercial Real Estate - Construction $ 12,983  $ 22,285  $ 8,019  $ 2,629  $ 2,018  $ 9,182  $ 110,055  $ 15,434  $ 182,605 

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The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of September 30, 2020, continued.

(In thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Loans
Residential - Home Equity
Performing $ 1,297  $ 2,801  $ 1,235  $ 2,088  $ 823  $ 1,573  $ 192,549  $ 1,297  $ 203,663 
Nonperforming 0  18  0  0  197  390  2,188  0  2,793 
Total Residential - Home Equity $ 1,297  $ 2,819  $ 1,235  $ 2,088  $ 1,020  $ 1,963  $ 194,737  $ 1,297  $ 206,456 
Residential - Mortgages
Performing $ 232,860  $ 198,718  $ 129,779  $ 166,414  $ 191,858  $ 286,255  $ 12,391  $ 944  $ 1,219,219 
Nonperforming 0  262  402  368  1,213  7,105  60  0  9,410 
Total Residential - Mortgages $ 232,860  $ 198,980  $ 130,181  $ 166,782  $ 193,071  $ 293,360  $ 12,451  $ 944  $ 1,228,629 
Consumer - Direct
Performing $ 12,884  $ 12,595  $ 8,728  $ 7,534  $ 3,219  $ 11,904  $ 7,298  $ 0  $ 64,162 
Nonperforming 0  29  115  13  0  3  24  $ 0  184 
Total Consumer - Direct $ 12,884  $ 12,624  $ 8,843  $ 7,547  $ 3,219  $ 11,907  $ 7,322  $ 0  $ 64,346 
Consumer - Indirect
Performing $ 1,266  $ 2,200  $ 3,840  $ 1,388  $ 521  $ 175  $ 0  $ 0  $ 9,390 
Nonperforming 0  61  33  3  30  17  0  0  144 
Total Consumer Indirect $ 1,266  $ 2,261  $ 3,873  $ 1,391  $ 551  $ 192  $ 0  $ 0  $ 9,534 

The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of December 31, 2019. 
December 31, 2019
(In thousands) Commercial & Industrial Other Commercial & Industrial Agriculture Commercial Real Estate Other Commercial Real Estate Agriculture Commercial Real Estate Construction Total
Originated Loans and Leases
Internal risk grade:
Pass $ 851,517  $ 89,892  $ 1,857,142  $ 166,888  $ 212,302  $ 3,177,741 
Special Mention 8,306  1,698  16,623  3,173  0  29,800 
Substandard 3,376  14,196  25,880  14,640  0  58,092 
Total $ 863,199  $ 105,786  $ 1,899,645  $ 184,701  $ 212,302  $ 3,265,633 
 
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December 31, 2019
(In thousands) Commercial & Industrial Other Commercial & Industrial Agriculture Commercial Real Estate Other Commercial Real Estate Agriculture Commercial Real Estate Construction Total
Acquired Loans and Leases
Internal risk grade:
Pass $ 38,879  $ 0  $ 143,175  $ 197  $ 1,335  $ 183,586 
Special Mention 0  0  0  0  0  0 
Substandard 197  0  2,210  0  0  2,407 
Total $ 39,076  $ 0  $ 145,385  $ 197  $ 1,335  $ 185,993 
 
The following tables present credit quality indicators by class of residential real estate loans and by class of consumer loans. Nonperforming loans include nonaccrual, impaired, and loans 90 days past due and accruing interest. All other loans were considered performing as of December 31, 2019. For purposes of this footnote, acquired loans that were recorded at fair value at the acquisition date and are 90 days or greater past due are considered performing.
 
December 31, 2019
(In thousands) Residential
Home Equity 		Residential
Mortgages 		Consumer
Indirect 		Consumer
Other 		Total
Originated Loans and Leases
Performing $ 201,970  $ 1,133,237  $ 12,847  $ 60,503  $ 1,408,557 
Nonperforming 1,924  7,335  117  158  9,534 
Total $ 203,894  $ 1,140,572  $ 12,964  $ 60,661  $ 1,418,091 
 
December 31, 2019
(In thousands) Residential
Home Equity 		Residential
Mortgages 		Consumer
Indirect 		Consumer
Other 		Total
Acquired Loans and Leases
Performing $ 14,479  $ 17,269  $ 0  $ 785  $ 32,533 
Nonperforming 872  751  0  0  1,623 
Total $ 15,351  $ 18,020  $ 0  $ 785  $ 34,156 

6. Earnings Per Share
 
Earnings per share in the table below, for the three and nine month periods ended September 30, 2020 and 2019 are calculated under the two-class method as required by ASC Topic 260, Earnings Per Share. ASC 260 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company has issued restricted stock awards that contain such rights and are therefore considered participating securities. Basic earnings per common share are calculated by dividing net income allocable to common stock by the weighted average number of common shares, excluding participating securities, during the period. Diluted earnings per common share include the dilutive effect of participating securities.
 
30

Three Months Ended
(In thousands, except share and per share data) 9/30/2020 9/30/2019
Basic
Net income available to common shareholders $ 24,230  $ 20,206 
Less: income attributable to unvested stock-based compensation awards (278) (317)
Net earnings allocated to common shareholders 23,952  19,889 
Weighted average shares outstanding, including unvested stock-based compensation awards 14,920,924  15,063,202 
Less: average unvested stock-based compensation awards (223,392) (236,088)
Weighted average shares outstanding - Basic 14,697,532  14,827,114 
Diluted
Net earnings allocated to common shareholders 23,952  19,889 
Weighted average shares outstanding - Basic 14,697,532  14,827,114 
Plus:  incremental shares from assumed conversion of stock-based compensation awards 30,209  60,512 
Weighted average shares outstanding - Diluted 14,727,741  14,887,626 
Basic EPS $ 1.63  $ 1.34 
Diluted EPS $ 1.63  $ 1.34 

Stock-based compensation awards representing 10,449 and 17,956 of common shares during the three months ended September 30, 2020 and 2019, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been anti-dilutive.
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Nine Months Ended
(In thousands, except share and per share data) 9/30/2020 9/30/2019
Basic
Net income available to common shareholders $ 53,610  $ 60,638 
Less: income attributable to unvested stock-based compensation awards (628) (972)
Net earnings allocated to common shareholders 52,982  59,666 
Weighted average shares outstanding, including unvested stock-based compensation awards 14,929,628  15,204,170 
Less: unvested stock-based compensation awards (230,181) (236,088)
Weighted average shares outstanding - Basic 14,699,447  14,968,082 
Diluted
Net earnings allocated to common shareholders 52,982  59,666 
Weighted average shares outstanding - Basic 14,699,447  14,968,082 
Plus: incremental shares from assumed conversion of stock-based compensation awards 39,474  67,698 
Weighted average shares outstanding - Diluted 14,738,921  15,035,780 
Basic EPS $ 3.60  $ 3.99 
Diluted EPS $ 3.59  $ 3.97 

Stock-based compensation awards representing approximately 10,090 and 18,396 of common shares during the nine months ended September 30, 2020 and 2019, respectively were not included in the computations of diluted earnings per common share because the effect on those periods would have been anti-dilutive.

7. Other Comprehensive Income (Loss)

The following tables present reclassifications out of accumulated other comprehensive income (loss) for the three and nine month periods ended September 30, 2020 and 2019.
Three Months Ended September 30, 2020
(In thousands) Before-Tax
Amount 		Tax (Expense)
Benefit 		Net of Tax
Available-for-sale debt securities:
Change in net unrealized gain/loss during the period $ (4,374) $ 1,071  $ (3,303)
Reclassification adjustment for net realized gain on sale of available-for-sale debt securities included in net income 0  0  0 
Net unrealized gains/losses (4,374) 1,071  (3,303)
Employee benefit plans:
Amortization of net retirement plan actuarial gain 593  (146) 447 
Amortization of net retirement plan prior service cost 53  (13) 40 
Employee benefit plans 646  (159) 487 
Other comprehensive (loss) income $ (3,728) $ 912  $ (2,816)
 
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Three Months Ended September 30, 2019
(In thousands) Before-Tax
Amount 		Tax (Expense)
Benefit 		Net of Tax
Available-for-sale debt securities:
Change in net unrealized gain/loss during the period $ 4,122  $ (1,011) $ 3,111 
Reclassification adjustment for net realized gain on sale of available-for-sale debt securities included in net income (133) 32  (101)
Net unrealized gains/losses 3,989  (979) 3,010 
Employee benefit plans:
Amortization of net retirement plan actuarial gain 411  (101) 310 
Amortization of net retirement plan prior service cost 4  (1) 3 
Employee benefit plans 415  (102) 313 
Other comprehensive income $ 4,404  $ (1,081) $ 3,323 
Nine Months Ended September 30, 2020
(In thousands) Before-Tax
Amount 		Tax (Expense)
Benefit 		Net of Tax
Available-for-sale debt securities:
Change in net unrealized gain/loss during the period $ 24,592  $ (6,029) $ 18,563 
Reclassification adjustment for net realized gain on sale of available-for-sale debt securities included in net income (429) 105  (324)
Net unrealized gains/losses 24,163  (5,924) 18,239 
Employee benefit plans:
Amortization of net retirement plan actuarial loss 1,775  (435) 1,340 
Amortization of net retirement plan prior service cost 160  (39) 121 
Employee benefit plans 1,935  (474) 1,461 
Other comprehensive income $ 26,098  $ (6,398) $ 19,700 
Nine Months Ended September 30, 2019
(In thousands) Before-Tax
Amount 		Tax (Expense)
Benefit 		Net of Tax
Available-for-sale debt securities:
Change in net unrealized gain/loss during the period $ 34,014  $ (8,333) $ 25,681 
Reclassification adjustment for net realized gain on sale of available-for-sale debt securities included in net income (404) 99  (305)
Net unrealized gains/losses 33,610  (8,234) 25,376 
Employee benefit plans:
Amortization of net retirement plan actuarial loss 1,232  (302) 930 
Amortization of net retirement plan prior service cost 11  (3) 8 
Employee benefit plans 1,243  (305) 938 
Other comprehensive income $ 34,853  $ (8,539) $ 26,314 

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The following table presents the activity in our accumulated other comprehensive income (loss) for the periods indicated:
 
(In thousands) Available-for-
Sale Debt Securities 		Employee
Benefit Plans 		Accumulated
Other
Comprehensive
(Loss) Income
Balance at July 1, 2020 $ 25,581  $ (46,629) $ (21,048)
Other comprehensive (loss) income before reclassifications (3,303) 0  (3,303)
Amounts reclassified from accumulated other comprehensive (loss) income 0  487  487 
Net current-period other comprehensive (loss) income (3,303) 487  (2,816)
Balance at September 30, 2020 $ 22,278  $ (46,142) $ (23,864)
Balance at January 1, 2020 $ 4,039  $ (47,603) $ (43,564)
Other comprehensive (loss) income before reclassifications 18,563  0  18,563 
Amounts reclassified from accumulated other comprehensive (loss) income (324) 1,461  1,137 
Net current-period other comprehensive income 18,239  1,461  19,700 
Balance at September 30, 2020 $ 22,278  $ (46,142) $ (23,864)

(In thousands) Available-for-
Sale Debit Securities 		Employee
Benefit Plans 		Accumulated
Other
Comprehensive
(Loss) Income
Balance at July 1, 2019 $ (1,223) $ (38,951) $ (40,174)
Other comprehensive income (loss) before reclassifications 3,111  0  3,111 
Amounts reclassified from accumulated other comprehensive (loss) income (101) 313  212 
Net current-period other comprehensive income 3,010  313  3,323 
Balance at September 30, 2019 $ 1,787  $ (38,638) $ (36,851)
Balance at January 1, 2019 $ (23,589) $ (39,576) $ (63,165)
Other comprehensive income (loss) before reclassifications 25,681  0  25,681 
Amounts reclassified from accumulated other comprehensive (loss) income (305) 938  633 
Net current-period other comprehensive income 25,376  938  26,314 
Balance at September 30, 2019 $ 1,787  $ (38,638) $ (36,851)















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The following tables present the amounts reclassified out of each component of accumulated other comprehensive (loss) income for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended September 30, 2020
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income1
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale debt securities:
Unrealized gains and losses on available-for-sale debt securities $ 0  Net gain on securities transactions
0  Tax expense
0  Net of tax
Employee benefit plans:
Amortization of the following 2
Net retirement plan actuarial loss (593) Other operating expense
Net retirement plan prior service cost (53) Other operating expense
(646) Total before tax
159  Tax benefit
$ (487) Net of tax
 
Three Months Ended September 30, 2019
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income1
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale debt securities:
Unrealized gains and losses on available-for-sale debt securities $ 133  Net gain on securities transactions
(32) Tax expense
101  Net of tax
Employee benefit plans:
Amortization of the following2
Net retirement plan actuarial loss (411) Other operating expense
Net retirement plan prior service cost (4) Other operating expense
(415) Total before tax
102  Tax benefit
$ (313) Net of tax
35

Nine Months Ended September 30, 2020
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income1
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale debt securities:
Unrealized gains and losses on available-for-sale debt securities $ 429  Net gain on securities transactions
(105) Tax expense
324  Net of tax
Employee benefit plans:
Amortization of the following2
Net retirement plan actuarial loss (1,775) Other operating expense
Net retirement plan prior service cost (160) Other operating expense
(1,935) Total before tax
474  Tax benefit
$ (1,461) Net of tax
Nine Months Ended September 30, 2019
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income1
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale debt securities:
Unrealized gains and losses on available-for-sale debt securities $ 404  Net gain on securities transactions
(99) Tax expense
305  Net of tax
Employee benefit plans:
Amortization of the following2
Net retirement plan actuarial loss (1,232) Other operating expense
Net retirement plan prior service cost (11) Other operating expense
(1,243) Total before tax
305  Tax benefit
$ (938) Net of tax
1 Amounts in parentheses indicated debits in income statement.
2 The accumulated other comprehensive (loss) income components are included in the computation of net periodic benefit cost (See Note 8 - “Employee Benefit Plan”).
 

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8. Employee Benefit Plans
 
The following table sets forth the amount of the net periodic benefit cost recognized by the Company for the Company’s pension plan, post-retirement plan (Life and Health), and supplemental employee retirement plans (“SERP”) including the following components: service cost, interest cost, expected return on plan assets for the period, amortization of the unrecognized transitional obligation or transition asset, and the amounts of recognized gains and losses, prior service cost recognized, and gain or loss recognized due to settlement or curtailment.

Components of Net Periodic Benefit Cost
Pension Benefits
Three Months Ended 		Life and Health
Three Months Ended 		SERP Benefits
Three Months Ended
(In thousands) 9/30/2020 9/30/2019 9/30/2020 9/30/19 9/30/2020 9/30/2019
Service cost $ 0  $ 0  $ 43  $ 40  $ 54  $ 38 
Interest cost 593  734  61  72  228  228 
Expected return on plan assets (1,354) (1,233) 0  0  0  0 
Amortization of net retirement plan actuarial loss 353  333  39  0  200  78 
Amortization of net retirement plan prior service (credit) cost (2) (3) (15) (15) 71  22 
Net periodic benefit (income) cost $ (410) $ (169) $ 128  $ 97  $ 553  $ 366 
Pension Benefits
Nine Months Ended 		Life and Health
Nine Months Ended 		SERP Benefits
Nine Months Ended
(In thousands) 9/30/2020 9/30/2019 9/30/2020 9/30/2019 9/30/2020 9/30/2019
Service cost $ 0  $ 0  $ 129  $ 120  $ 161  $ 115 
Interest cost 1,778  2,202  183  217  685  684 
Expected return on plan assets (4,062) (3,699) 0  0  0  0 
Amortization of net retirement plan actuarial loss 1,058  1,000  116  0  600  232 
Amortization of net retirement plan prior service cost (credit) (7) (8) (45) (46) 214  65 
Net periodic benefit (income) cost $ (1,233) $ (505) $ 383  $ 291  $ 1,660  $ 1,096 

  
The service component of net periodic benefit cost for the Company's benefit plans is recorded as a part of salaries and wages in the consolidated statements of income. All other components are recorded as part of other operating expenses in the consolidated statements of income.
 
The Company realized approximately $1,461,000 and $938,000, net of tax, as amortization of amounts previously recognized in accumulated other comprehensive (loss) income, for the nine months ended September 30, 2020 and 2019, respectively.
 
The Company is not required to contribute to the pension plan in 2020, but it may make voluntary contributions. The Company did not contribute to the pension plan in the first nine months of 2020 and 2019.

37

9. Other Income and Operating Expense
 
Other income and operating expense totals are presented in the table below.  Components of these totals exceeding 1% of the aggregate of total noninterest income and total noninterest expenses for any of the periods presented below are stated separately.
 
Three Months Ended Nine Months Ended
(In thousands) 9/30/2020 9/30/2019 9/30/2020 9/30/2019
Noninterest Income
Other service charges $ 720  $ 809  $ 2,108  $ 2,405 
Increase in cash surrender value of corporate owned life insurance 559  425  1,617  1,612 
Net gains on the sales of loans originated for sale 378  25  1,245  139 
Other income 161  704  1,418  2,091 
Total other income $ 1,818  $ 1,963  $ 6,388  $ 6,247 
Noninterest Expenses
Marketing expense $ 927  $ 899  $ 2,806  $ 3,706 
Professional fees 1,398  2,426  4,654  7,169 
Legal fees 418  347  955  788 
Technology expense 2,941  2,813  8,771  8,016 
Cardholder expense 827  811  2,396  2,372 
Off-balance sheet commitments (417) 0  1,273  0 
Other expenses 4,195  4,002  13,971  13,400 
Total other operating expense $ 10,289  $ 11,298  $ 34,826  $ 35,451 
 
10. Revenue Recognition

In addition to revenue from loans and securities, the Company also generates revenues from other services provided as described below.

Insurance Commissions and Fees
Fees are earned upon the effective date of bound coverage, as no significant performance obligation remains after coverage is bound. The Company has historically recognized revenue in this manner, with the noted exception related to installment billing discussed below.

Installment Billing - Agency Bill
Revenue associated with the issuance of policies is recognized upon the effective date of the associated policy regardless of the billing method. Revenue is accrued based upon the completion of the performance obligation creating a current asset for the unbilled revenue until such time as an invoice is generated, typically not to exceed twelve months.

Contingent Commissions
Contingent commissions represent a form of variable consideration associated with the same performance obligation, which is the placement of coverage, for which we earn core commissions. Contingent commissions are estimated with an appropriate constraint applied and accrued relative to the recognition of the corresponding core commissions. The resulting effect on the timing of recognition of contingent commissions will more closely follow a similar pattern as our core commissions with true-ups recognized when payments are received or as additional information that affects the estimate becomes available.

Refund of Commissions
The contract with the insurance carrier dictates the level of commissions paid to the Company that will be refunded to the carrier upon cancellation by the policyholder. As a result, the Company has established a liability for the estimated amount of commission to which the Company does not expect to be entitled, and a corresponding reduction to the gross commission received or receivable. The refund liability is updated at the end of each reporting period for changes in circumstances.

38

Trust & Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Mutual Fund & Investment Income
Mutual fund and investment income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, investment advisory fees from the Company’s Strategic Asset Management (“SAM”) Services wealth management product. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from the wealth management product is earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. The Company does engage a third party, LPL Financial, LLC (“LPL”), to satisfy part of this performance obligation, and therefore this income is reported net of any corresponding expenses paid to LPL.

Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Card Services Income
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for fees and exchange are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Other
Other service charges include revenue from processing wire and ACH transfers, lock box service and safe deposit box rental. Both wire transfer fees and lock box services are charged on per item basis. Wire and ACH transfer fees are charged at the time of transfer and charged directly to the customer account. Lock box customers are billed monthly and payments are received in the following month through a direct charge to customers’ accounts. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

39

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of ASC 606, for the three and nine months ended September 30, 2020 and 2019.
Three Months Ended
(In thousands) 09/30/2020 09/30/2019
Noninterest Income
In-scope of Topic 606:
Commissions and Fees $ 8,136  $ 7,918 
Installment Billing 175  150 
Refund of Commissions (104) (51)
Contract Liabilities/Deferred Revenue 0  0 
Contingent Commissions 709  500 
Subtotal Insurance Revenues 8,916  8,517 
Trust and Asset Management 3,070  2,920 
Mutual Fund & Investment Income 1,222  1,255 
Subtotal Investment Service Income 4,292  4,175 
Service Charges on Deposit Accounts 1,444  2,191 
Card Services Income 2,419  2,550 
Other 285  306 
Noninterest Income (in-scope of ASC 606) 17,356  17,739 
Noninterest Income (out-of-scope of ASC 606) 1,531  1,795 
Total Noninterest Income $ 18,887  $ 19,534 

Nine Months Ended
(In thousands) 09/30/2020 09/30/2019
Noninterest Income
In-scope of Topic 606:
Commissions and Fees $ 22,545  $ 21,984 
Installment Billing 96  58 
Refund of Commissions (458) (31)
Contract Liabilities/Deferred Revenue (208) (188)
Contingent Commissions 2,241  2,491 
Subtotal Insurance Revenues 24,216  24,314 
Trust and Asset Management 8,798  8,417 
Mutual Fund & Investment Income 3,616  3,749 
Subtotal Investment Service Income 12,414  12,166 
Service Charges on Deposit Accounts 4,675  6,210 
Card Services Income 6,885  8,090 
Other 837  878 
Noninterest Income (in-scope of ASC 606) 49,027  51,658 
Noninterest Income (out-of-scope of ASC 606) 5,997  5,803 
Total Noninterest Income $ 55,024  $ 57,461 

Contract Balances
Receivables primarily consist of amounts due for insurance and wealth management services performed for which the Company's performance obligations have been fully satisfied. Receivables amounted to $4.8 million and $2.0 million, respectively, at September 30, 2020, compared to $4.7 million and $2.0 million, respectively, at December 31, 2019 and were included in other assets in the accompanying unaudited Consolidated Statements of Condition.

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A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). The Company’s noninterest revenue streams, excluding some insurance commissions and fees, are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2020 and December 31, 2019, the Company did not have any significant contract balances.

A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company often receives cash payments from customers in advance of the Company’s performance resulting in contract liabilities. As of September 30, 2020 and December 31, 2019, contract liabilities were $448,000 and $2,000,000, respectively, and are included within other liabilities in the accompanying unaudited Consolidated Statements of Condition. The liabilities include premiums due to insurance carriers in addition to unearned commission revenue.

The decrease in the contract liability balance during the nine-month period ended September 30, 2020 is primarily a result of timing differences in the recognition of revenue related to contract effective dates along with accompanying cash payments received in advance of satisfying performance obligations.

Contract Acquisition Costs
The Company is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less.

11. Financial Guarantees
 
The Company currently does not issue any guarantees that would require liability recognition or disclosure, other than standby letters of credit. The Company extends standby letters of credit to its customers in the normal course of business. The standby letters of credit are generally short-term. As of September 30, 2020, the Company’s maximum potential obligation under standby letters of credit was $32.0 million compared to $28.2 million at December 31, 2019. Management uses the same credit policies to extend standby letters of credit that it uses for on-balance sheet lending decisions and may require collateral to support standby letters of credit based upon its evaluation of the counterparty. Management does not anticipate any significant losses as a result of these transactions, and has determined that the fair value of standby letters of credit is not significant.
 
12. Segment and Related Information
 
The Company manages its operations through three reportable business segments in accordance with the standards set forth in FASB ASC 280, “Segment Reporting”: (i) banking (“Banking”), (ii) insurance (“Tompkins Insurance”) and (iii) wealth management (“Tompkins Financial Advisors”). The Company’s insurance services and wealth management services, other than trust services, are managed separately from the Banking segment.
 
Banking
The Banking segment is primarily comprised of the Company’s four banking subsidiaries: Tompkins Trust Company, a commercial bank with fourteen banking offices located in Ithaca, NY and surrounding communities; The Bank of Castile (DBA Tompkins Bank of Castile), a commercial bank with sixteen banking offices located in the Genesee Valley region of New York State as well as Monroe County; Mahopac Bank (DBA Tompkins Mahopac Bank), a commercial bank with fourteen full-service banking offices located in the counties north of New York City; and VIST Bank (DBA Tompkins VIST Bank), a banking organization with twenty banking offices headquartered and operating in the areas surrounding southeastern Pennsylvania.
 
Insurance
The Company provides property and casualty insurance services and employee benefits consulting through Tompkins Insurance Agencies, Inc., a 100% wholly-owned subsidiary of the Company, headquartered in Batavia, New York. Tompkins Insurance is an independent insurance agency, representing many major insurance carriers and provides employee benefit consulting to employers in Western and Central New York and Southeastern Pennsylvania, assisting them with their medical, group life insurance and group disability insurance. Tompkins Insurance has five stand-alone offices in Western New York.
41

 
Wealth Management
The Wealth Management segment is generally organized under the Tompkins Financial Advisors brand. Tompkins Financial Advisors offers a comprehensive suite of financial services to customers, including trust and estate services, investment management and financial and insurance planning for individuals, corporate executives, small business owners and high net worth individuals. Tompkins Financial Advisors has offices in each of the Company’s four subsidiary banks. 

Summarized financial information concerning the Company’s reportable segments and the reconciliation to the Company’s consolidated results is shown in the following table. Investment in subsidiaries is netted out of the presentations below. The “Intercompany” column identifies the intercompany activities of revenues, expenses and other assets between the banking, insurance and wealth management services segments. The Company accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the services provided. Intercompany items relate primarily to the use of human resources, information systems, accounting and marketing services provided by any of the banks and the holding company. All other accounting policies are the same as those described in the summary of significant accounting policies in the 2019 Annual Report on Form 10-K.
 
As of and for the three months ended September 30, 2020
(In thousands) Banking Insurance Wealth Management Intercompany Consolidated
Interest income $ 64,316  $ 1  $ 0  $ (1) $ 64,316 
Interest expense 6,064  0  0  (1) 6,063 
Net interest income 58,252  1  0  0  58,253 
Provision for credit loss expense 199  0  0  0  199 
Noninterest income 5,976  9,023  4,434  (546) 18,887 
Noninterest expense 36,988  6,559  3,348  (546) 46,349 
Income before income tax expense 27,041  2,465  1,086  0  30,592 
Income tax expense 5,397  670  263  0  6,330 
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation 21,644  1,795  823  0  24,262 
Less:  Net income attributable to noncontrolling interests 32  0  0  0  32 
Net Income attributable to Tompkins Financial Corporation $ 21,612  $ 1,795  $ 823  $ 0  $ 24,230 
Depreciation and amortization $ 2,474  $ 57  $ 18  $ 0  $ 2,549 
Assets 7,738,933  42,269  26,956  (13,656) 7,794,502 
Goodwill 64,585  19,866  7,996  0  92,447 
Other intangibles, net 2,600  2,507  104  0  5,211 
Net loans and leases 5,346,004  0  0  0  5,346,004 
Deposits 6,613,421  0  0  (12,183) 6,601,238 
Total Equity 657,370  32,095  24,146  0  713,611 
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As of and for the three months ended September 30, 2019
(In thousands) Banking Insurance Wealth
Management 		Intercompany Consolidated
Interest income $ 65,775  $ 1  $ 0  $ (1) $ 65,775 
Interest expense 12,620  0  0  (1) 12,619 
Net interest income 53,155  1  0  0  53,156 
Provision for credit loss expense 1,320  0  0  0  1,320 
Noninterest income 7,134  8,620  4,310  (530) 19,534 
Noninterest expense 36,309  6,672  3,204  (530) 45,655 
Income before income tax expense 22,660  1,949  1,106  0  25,715 
Income tax expense 4,669  526  283  0  5,478 
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation 17,991  1,423  823  0  20,237 
Less:  Net income attributable to noncontrolling interests 31  0  0  0  31 
Net Income attributable to Tompkins Financial  Corporation $ 17,960  $ 1,423  $ 823  $ 0  $ 20,206 
Depreciation and amortization $ 2,483  $ 56  $ 10  $ 0  $ 2,549 
Assets 6,575,073  42,753  23,497  (13,341) 6,627,982 
Goodwill 64,370  19,866  8,211  0  92,447 
Other intangibles, net 3,472  3,011  164  0  6,647 
Net loans and leases 4,815,702  0  0  0  4,815,702 
Deposits 5,382,174  0  0  (12,184) 5,369,990 
Total Equity 605,572  33,116  21,177  0  659,865 

Nine months ended September 30, 2020
(In thousands) Banking Insurance Wealth
Management 		Intercompany Consolidated
Interest income $ 190,960  $ 3  $ 0  $ (3) $ 190,960 
Interest expense 23,375  0  0  (3) 23,372 
Net interest income 167,585  3  0  0  167,588 
Provision for credit loss expense 16,145  0  0  0  16,145 
Noninterest income 19,217  24,533  12,903  (1,629) 55,024 
Noninterest expense 111,387  19,479  9,740  (1,629) 138,977 
Income before income tax expense 59,270  5,057  3,163  0  67,490 
Income tax expense 11,665  1,362  752  0  13,779 
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation 47,605  3,695  2,411  0  53,711 
Less:  Net income attributable to noncontrolling interests 101  0  0  0  101 
Net Income attributable to Tompkins Financial Corporation $ 47,504  $ 3,695  $ 2,411  $ 0  $ 53,610 
Depreciation and amortization $ 7,443  $ 173  $ 38  $ 0  $ 7,654 

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Nine months ended September 30, 2019
(In thousands) Banking Insurance Wealth
Management 		Intercompany Consolidated
Interest income $ 196,797  $ 2  $ 0  $ (3) $ 196,796 
Interest expense 39,410  0  0  (2) 39,408 
Net interest income 157,387  2  0  (1) $ 157,388 
Provision for credit loss expense 2,366  0  0  0  2,366 
Noninterest income 21,852  24,621  12,567  (1,579) 57,461 
Noninterest expense 108,704  19,279  9,529  (1,578) 135,934 
Income before income tax expense 68,169  5,344  3,038  (2) $ 76,549 
Income tax expense 13,650  1,418  748  0  15,816 
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation 54,519  3,926  2,290  (2) $ 60,733 
Less:  Net income attributable to noncontrolling interests 95  0  0  0  95 
Net Income attributable to Tompkins Financial Corporation $ 54,424  $ 3,926  $ 2,290  $ (2) $ 60,638 
Depreciation and amortization $ 7,296  $ 168  $ 31  $ 0  $ 7,495 

13. Fair Value Measurements

 FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC Topic 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Transfers between levels, when determined to be appropriate, are recognized at the end of each reporting period.  
 
The three levels of the fair value hierarchy under FASB ASC Topic 820 are:
 
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; 

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
 
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).  
 
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The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value.
 
Recurring Fair Value Measurements
September 30, 2020
(In thousands) Total (Level 1) (Level 2) (Level 3)
Available-for-sale debt securities
Obligations of U.S. Government sponsored entities $ 612,481  $ 0  $ 612,481  $ 0 
Obligations of U.S. states and political subdivisions 129,258  0  129,258  0 
Mortgage-backed securities – residential, issued by:
U.S. Government agencies 207,501  0  207,501  0 
U.S. Government sponsored entities 715,160  0  715,160  0 
U.S. corporate debt securities 2,366  0  2,366  0 
Total Available-for-sale debt securities $ 1,666,766  $ 0  $ 1,666,766  $ 0 
Equity securities, at fair value $ 932  $ 0  $ 0  $ 932 
 
Recurring Fair Value Measurements
December 31, 2019
(In thousands) Total (Level 1) (Level 2) (Level 3)
Available-for-sale debt securities
U.S. Treasuries $ 1,840  $ 0  $ 1,840  $ 0 
Obligations of U.S. Government sponsored entities 372,488  0  372,488  0 
Obligations of U.S. states and political subdivisions 97,785  0  97,785  0 
Mortgage-backed securities – residential, issued by:
U.S. Government agencies 164,451  0  164,451  0 
U.S. Government sponsored entities 659,590  0  659,590  0 
U.S. corporate debt securities 2,433  0  2,433  0 
Total Available-for-sale debt securities $ 1,298,587  $ 0  $ 1,298,587  $ 0 
Equity securities, at fair value $ 915  $ 0  $ 0  $ 915 
 
Securities: Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.

The change in the fair value of equity securities valued using significant unobservable inputs (level 3), for the periods ended September 30, 2020 and December 31, 2019, was immaterial.
 
There were no transfers between Levels 1, 2 and 3 for the nine months ended September 30, 2020.
 
The Company determines fair value for its available-for-sale debt securities using an independent bond pricing service for identical assets or very similar securities.  The Company determines fair value for its equity securities based on the underlying equity fund’s pricing and valuation procedures which consider recent sales price, market quotations from a pricing service, or market quotes from an independent broker-dealer.  The Company has reviewed the pricing sources, including methodologies used, and finds them to be fairly stated.

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Certain assets are measured at fair value on a nonrecurring basis. For the Company, these include loans held for sale, individually evaluated loans, and other real estate owned (“OREO”). For the three and nine months ended September 30, 2020, certain individually evaluated loans were remeasured and reported at fair value through a specific valuation allowance and/or partial charge-offs for credit losses based upon the fair value of the underlying collateral. Collateral values are estimated using Level 2 inputs based upon observable market data. In addition to collateral dependent evaluated loans, certain other real estate owned were remeasured and reported at fair value based upon the fair value of the underlying collateral. The fair values of other real estate owned are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. In general, the fair values of other real estate owned are based upon appraisals, with discounts made to reflect estimated costs to sell the real estate. Upon initial recognition, fair value write-downs are taken through a charge-off to the allowance for credit losses. Subsequent fair value write-downs on other real estate owned are reported in other noninterest expense.
 
Three months ended September 30, 2020
(In thousands) Fair value measurements at reporting
date using: 		Gain (losses)
from fair
value changes
Assets: As of 09/30/2020 Quoted prices in
active markets for
identical assets
(Level 1) 		Significant other
observable inputs
(Level 2) 		Significant
unobservable inputs
(Level 3) 		Three months ended 9/30/2020
Individually evaluated $ 6,330  $ 0  $ 6,330  $ 0  $ 0 
Other real estate owned 36  0  36  0  (4)
  
Three months ended September 30, 2019
(In thousands) Fair value measurements at reporting
date using: 		Gain (losses)
from fair
value changes
Assets: As of 09/30/2019 Quoted prices in
active markets for
identical assets
(Level 1) 		Significant other
observable inputs
(Level 2) 		Significant
unobservable inputs
(Level 3) 		Three months ended 9/30/2019
Impaired loans $ 10,096  $ 0  $ 10,096  $ 0  $ (550)
Other real estate owned 139  0  139  0  95 

Nine months ended September 30, 2020
(In thousands) Fair value measurements at reporting
date using: 		Gain (losses)
from fair
value changes
Assets: As of 09/30/2020 Quoted prices in
active markets for
identical assets
(Level 1) 		Significant other
observable inputs
(Level 2) 		Significant
unobservable inputs
(Level 3) 		Nine months ended 9/30/2020
Individually evaluated $ 10,759  $ 0  $ 10,759  $ 0  $ (1,305)
Other real estate owned 124  0  124  0  (27)

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Nine months ended September 30, 2019
(In thousands) Fair value measurements at reporting
date using: 		Gain (losses)
from fair
value changes
Assets: As of 09/30/2019 Quoted prices in
active markets for
identical assets
(Level 1) 		Significant other
observable inputs
(Level 2) 		Significant
unobservable inputs
(Level 3) 		Nine months ended 9/30/2019
Impaired loans $ 12,565  $ 0  $ 12,565  $ 0  $ (4,184)
Other real estate owned 888  0  888  0  0 

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2020 and December 31, 2019. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions.
 
The fair value estimates, methods and assumptions set forth below for the Company's financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by U.S. GAAP and should be read in conjunction with the financial statements and notes included in this Report.
 
Estimated Fair Value of Financial Instruments
September 30, 2020
(In thousands) Carrying
Amount 		Fair Value (Level 1) (Level 2) (Level 3)
Financial Assets:
Cash and cash equivalents $ 374,739  $ 374,739  $ 374,739  $ 0  $ 0 
FHLB and other stock 17,919  17,919  0  17,919  0 
Accrued interest receivable 38,212  38,212  0  38,212  0 
Loans/leases, net1
5,346,004  5,370,911  0  10,759  5,360,152 
Financial Liabilities:
Time deposits $ 706,401  $ 714,256  $ 0  $ 714,256  $ 0 
Other deposits 5,894,837  5,894,837  0  5,894,837  0 
Fed funds purchased and securities sold
under agreements to repurchase 63,573  63,573  0  63,573  0 
Other borrowings 285,000  295,374  0  295,374  0 
Trust preferred debentures 17,163  21,240  0  21,240  0 
Accrued interest payable 1,702  1,702  0  1,702  0 
 
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Estimated Fair Value of Financial Instruments
December 31, 2019
(In thousands) Carrying
Amount 		Fair  Value (Level 1) (Level 2) (Level 3)
Financial Assets:
Cash and cash equivalents $ 137,982  $ 137,982  $ 137,982  $ 0  $ 0 
FHLB and other stock 33,695  33,695  0  33,695  0 
Accrued interest receivable 19,293  19,293  0  19,293  0 
Loans/leases, net1
4,877,658  4,798,268  0  14,050  4,784,218 
Financial Liabilities:
Time deposits $ 675,014  $ 677,205  $ 0  $ 677,205  $ 0 
Other deposits 4,537,907  4,537,907  0  4,537,907  0 
Fed funds purchased and securities
sold under agreements to repurchase 60,346  60,346  0  60,346  0 
Other borrowings 658,100  659,895  0  659,895  0 
Trust preferred debentures 17,035  21,904  0  21,904  0 
Accrued interest payable 2,486  2,486  0  2,486  0 
1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.
 
The following methods and assumptions were used in estimating fair value disclosures for financial instruments:
 
Cash and Cash Equivalents: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.
 
Loans and Leases: Fair value for loans are calculated using an exit price notion. The Company's valuation methodology takes into account factors such as estimated cash flows, including contractual cash flow and assumptions for prepayments; liquidity risk; and credit risk. The fair values of residential loans were estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans were estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair values of loans held for sale were determined based upon contractual prices for loans with similar characteristics.
 
FHLB Stock: The carrying amount of FHLB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock. For miscellaneous equity securities, carrying value is cost.
 
Accrued Interest Receivable and Accrued Interest Payable: The carrying amount of these short term instruments approximate fair value.
 
Deposits: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.
 
Securities Sold Under Agreements to Repurchase: The carrying amounts of repurchase agreements and other short-term borrowings approximate their fair values. Fair values of long-term borrowings are estimated using a discounted cash flow approach, based on current market rates for similar borrowings. For securities sold under agreements to repurchase where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.
 
Other Borrowings: The fair values of other borrowings are estimated using discounted cash flow analysis, discounted at the Company’s current incremental borrowing rate for similar borrowing arrangements. For other borrowings where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.
 
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Trust Preferred Debentures: The fair value of the trust preferred debentures has been estimated using a discounted cash flow analysis which uses a discount factor of a market spread over current interest rates for similar instruments.
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS
 
Corporate Overview and Strategic Initiatives
Tompkins Financial Corporation (“Tompkins” or the “Company”) is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At September 30, 2020, the Company’s subsidiaries included: four wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile (DBA Tompkins Bank of Castile), Mahopac Bank (DBA Tompkins Mahopac Bank), VIST Bank (DBA Tompkins VIST Bank); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). The trust division of the Trust Company provides a full array of investment services, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company’s principal offices are located at 118 E. Seneca Street, Ithaca, New York, 14851, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the symbol “TMP.”

The Tompkins strategy centers around our core values and a commitment to delivering long-term value to our clients, communities, and shareholders. To achieve this, the Company has developed a variety of strategic initiatives focused on delivering high quality products and services; a continual focus on improving operational effectiveness, investing in our people through talent management and development, maintaining appropriate risk management programs, and delivering profitable growth across all of our business lines. The Company's growth strategy includes initiatives to grow organically through our current businesses, as well as through possible acquisitions of financial institutions, branches, and financial services businesses. As such, the Company has acquired, and from time to time considers acquiring, banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses that would complement the Company’s business or its geographic reach. The Company generally targets merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services.

Business Segments
Banking services consist primarily of attracting deposits from the areas served by the Company’s four banking subsidiaries’ 64 banking offices (44 offices in New York and 20 offices in Pennsylvania) and using those deposits to originate a variety of commercial loans, consumer loans, real estate loans (including commercial loans collateralized by real estate), and leases. The Company’s lending function is managed within the guidelines of a comprehensive Board-approved lending policy. Reporting systems are in place to provide management with ongoing information related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans. Banking services also include a full suite of products such as debit cards, credit cards, remote deposit, electronic banking, mobile banking, cash management, and safe deposit services.
 
Wealth management services consist of investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. Wealth management services are provided by the Trust Company under the trade name Tompkins Financial Advisors. Tompkins Financial Advisors has office locations, and services are available to customers, at the Company’s four subsidiary banks.
 
Insurance services include property and casualty insurance, employee benefit consulting, and life, long-term care and disability insurance. Tompkins Insurance is headquartered in Batavia, New York. Over the years, Tompkins Insurance has acquired smaller insurance agencies in the market areas serviced by the Company’s banking subsidiaries and successfully consolidated them into Tompkins Insurance. In the second quarter of 2019, Tompkins Insurance acquired the Cali Agency, Inc., an insurance agency located in western New York, in a cash transaction. The Company recorded the following intangible assets as a result of the acquisition: goodwill ($0.2 million), customer related intangible ($0.2 million) and a covenant-not-to-compete ($0.1 million). The values of the customer related intangible and covenant-not-to-compete are being amortized over 15 years and 5 years, respectively. The goodwill is not being amortized but will be evaluated at least annually for impairment. Tompkins Insurance offers services to customers of the Company’s banking subsidiaries by sharing offices with The Bank of Castile, Trust Company, and VIST Bank. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York.
49

 
The Company’s principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for credit losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities.
 
Competition
Competition for commercial banking and other financial services is strong in the Company’s market areas. In one or more aspects of its businesses, the Company’s subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Some of these competitors have substantially greater resources and lending capabilities and may offer services that the Company does not currently provide. In addition, many of the Company’s non-bank competitors are not subject to the same extensive Federal regulations that govern financial holding companies and Federally-insured banks.
 
Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of facilities and services, and, in the case of loans to commercial borrowers, relative lending limits. Management believes that a community-based financial organization is better positioned to establish personalized financial relationships with both commercial customers and individual households. The Company’s community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized financial services, are factors that contribute to the Company’s competitiveness. Management believes that each of the Company’s subsidiary banks can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability. In addition, the Company focuses on providing unparalleled customer service, which includes offering a strong suite of products and services. Although management feels that this business model has caused the Company to grow its customer base in recent years and allows it to compete effectively in the markets it serves, we cannot assure you that such factors will result in future success.
Regulation
Banking, insurance services and wealth management are highly regulated. As a financial holding company with four community banks, a registered investment adviser, and an insurance agency subsidiary, the Company and its subsidiaries are subject to examination and regulation by the Federal Reserve Board (“FRB”), Securities and Exchange Commission (“SEC”), the Federal Deposit Insurance Corporation (“FDIC”), the New York State Department of Financial Services, Pennsylvania Department of Banking and Securities, the Financial Industry Regulatory Authority, and the Pennsylvania Insurance Department.


OTHER IMPORTANT INFORMATION
 
The following discussion is intended to provide an understanding of the consolidated financial condition and results of operations of the Company for the three and nine months ended September 30, 2020. It should be read in conjunction with the Company’s Audited Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the Unaudited Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.
 
In this Report, there are comparisons of the Company’s performance to that of a peer group, which is comprised of the group of 146 domestic bank holding companies with $3 billion to $10 billion in total assets as defined in the Federal Reserve’s “Bank Holding Company Performance Report” for June 30, 2020 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current quarter numbers.

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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this Report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by use of such words as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan", or "anticipate", and other similar words. Examples of forward-looking statements may include statements regarding the asset quality of the Company's loan portfolios; the level of the Company's allowance for credit losses; whether, when and how borrowers will repay deferred amounts and resume scheduled payments; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates, and to new, changed, or extended government/regulatory expectations; the impact of changes in accounting standards; and trends, plans, prospects, growth and strategies. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those expressed and/or implied by forward-looking statements. The following factors, in addition to those listed as Risk Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, and Item 1A in this Quarterly Report on Form 10-Q, are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; the severity and duration of the COVID-19 outbreak and the impact of the outbreak (including the government’s response to the outbreak) on economic and financial markets, potential regulatory actions, and modifications to our operations, products, and services relating thereto; disruptions in our and our customers’ operations and loss of revenue due to pandemics, epidemics, widespread health emergencies, government-imposed travel/business restrictions, or outbreaks of infectious diseases such as the COVID-19, and the associated adverse impact on our financial position, liquidity, and our customers’ abilities or willingness to repay their obligations to us or willingness to obtain financial services products from the Company; a decision to amend or modify the terms under which our customers are obligated to repay amounts owed to us; the development of an interest rate environment that may adversely affect the Company’s interest rate spread, other income or cash flow anticipated from the Company’s operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, such as the Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and Consumer Protection Act; legislative and regulatory changes in response to COVID-19 with which we and our subsidiaries must comply, including the CARES Act and the rules and regulations promulgated thereunder, and federal, state and local government mandates; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; uncertainties arising from national and global events, including the potential impact of widespread protests, civil unrest, and political uncertainty on the economy and the financial services industry; and financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses.

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

Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for credit losses (“allowance”, or “ACL”), and the review of the securities portfolio for other-than-temporary impairment to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations. On January 1, 2020, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which resulted in changes to the Company's existing critical accounting policy that existed at December 31, 2019.

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 5 - Allowance for Credit Losses, and Note 2 – Basis of Presentation in the accompanying notes to the unaudited consolidated financial statements elsewhere in this report for further discussion of the allowance.
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For information on the Company's significant accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Refer to "Recently Issued Accounting Standards" in Management's Discussion and Analysis in this Quarterly Report on Form 10-Q for a discussion of recent accounting updates.

COVID-19 Pandemic and Recent Events

The COVID-19 global pandemic continued to present health and economic challenges on an unprecedented scale during the third quarter of 2020. During the third quarter, the Company continued to focus on the health and well-being of its workforce, meeting its clients' needs, and supporting its communities. The Company has designated a Pandemic Planning Committee, which includes key individuals across the Company as well as members of Senior Management, to oversee the Company’s response to COVID-19, and has implemented a number of risk mitigation measures designed to protect our employees and customers while maintaining services for our customers and community. These measures included restrictions on business travel, establishment of a remote work environment for most non-customer facing employees, and social distancing restrictions for those employees working at our offices and branch locations. In July 2020, we began initiating the reopening of our offices and reinstatement of branch services, and the return of our workforce, but as of September 30, 2020, approximately 85% of our noncustomer facing employees continued to work remotely. With a view toward protecting the health and well-being of the Company's workforce, customers, and visitors as we reopen, we implemented several new social distancing protocols and other protective measures, such as temperature screenings, distribution of personal protective equipment, and workforce self-certifications.

Tompkins continues to offer assistance to its customers affected by the COVID-19 pandemic by implementing a payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. Our standard program allows for the deferral of loan payments for up to 90 days. In certain cases we extend additional deferrals or other accommodations. Weekly deferral requests for the month of September were down 96.8% from peak levels the Company experienced in late March. As of September 30, 2020, total loans that continued in a deferral status amounted to approximately $120.0 million, representing 2.2% of total loans. Of the loans that had come out of the deferral program as of September 30, 2020, about 85.0% had made a payment and 0.18% were more than 30 days delinquent. We expect that loans that are currently in deferral will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. The provisions of the CARES Act and interagency guidance issued by Federal banking regulators provided clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. The guidance and clarifications detail certain provisions whereby banks are permitted to make deferrals and modifications to the terms of a loan which would not require the loan to be reported as a troubled debt restructuring. In accordance with the CARES Act and the interagency guidance, the Company elected to adopt the provisions to not report qualified loan modifications as troubled debt restructurings.

Management continues to monitor credit conditions carefully at the individual borrower level, as well as by industry segment, in order to be responsive to changing credit conditions. The table below list certain larger industry concentrations within our loan portfolio and the percentage of each segment that are currently in a deferral status.

Deferral Credit Concentrations
(in thousands) As of September 30, 2020
Description Portfolio Balance Concentration* Deferral Balance Percent of Loans Currently in Deferral Status
Lessors of Residential Buildings and Dwellings $ 500,197  15.60  % $ 17,587  3.52  %
Hotels and Motels 190,432  5.90  % 3,063  1.61  %
Dairy Cattle and Milk Production 184,294  5.80  % 7,553  4.10  %
Health Care and Social Assistance 173,327  5.40  % 649  0.37  %
Lessors of Other Real Estate Property 126,615  4.00  % 2,754  2.18  %
$ 1,174,865  $ 31,606 
*Concentration is defined as outstanding loan balances as a percent of total commercial and commercial real estate
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The Company is also participating in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). This program provides borrower guarantees for lenders, and envisions a certain amount of loan forgiveness for loan recipients who properly utilize funds, all in accordance with the rules and regulations established by the SBA for the PPP. The Company began accepting applications for PPP loans on April 3, 2020, and approved and funded 2,998 loans totaling approximately $465.6 million during the second quarter of 2020. At September 30, 2020, 295 loans totaling $51.9 million had been submitted to the SBA for forgiveness under the terms of the PPP program and are under review; no loans had been forgiven by the SBA as of September 30, 2020. As of October 26, 2020, the Company had received $6.2 million of funds related to 168 loans forgiven by the SBA. During the three and nine months ended September 30, 2020, the Company recorded net deferred loan fees of $2.5 million and $4.8 million, respectively, which are included in interest income, related to the PPP loan program.

As of September 30, 2020, the Company's nonperforming assets represented 0.44% of total assets, down from 0.47% at December 31, 2019. Despite relatively stable trends in nonperforming assets and other delinquency, some customers have experienced continued cash flow stress related to the pandemic, resulting in an increase in loans rated Special Mention, which totaled $122.7 million at September 30, 2020, up from $44.7 million at June 30, 2020. The downgrades to Special Mention were mainly in the retail, hospitality, and agriculture industries. At September 30, 2020, loans rated Substandard declined to $45.4 million from $48.0 million at June 30, 2020. As mentioned above, the Company is working with its customers who are dealing with hardships caused by the pandemic, and as part of those efforts, the Company implemented a loan payment deferral program and participates in the PPP. As of September 30, 2020, the Company had not experienced any significant impact to our liquidity or funding capabilities as a result of COVID-19. The Company’s participation as a lender in the PPP has been a use of liquidity; however, the Federal Reserve Bank has provided a lending facility that may be used by banks to obtain funding specifically for PPP loans. PPP loans would be pledged as collateral on a bank's borrowings under the Federal Reserve Bank's designated PPP lending facility.

RESULTS OF OPERATION
 
Performance Summary
Net income for the third quarter of 2020 was $24.2 million or $1.63 diluted earnings per share, compared to $20.2 million or $1.34 diluted earnings per share for the same period in 2019. Net income for the first nine months of 2020 was $53.6 million or $3.59 diluted earnings per share compared to $60.6 million or $3.97 diluted earnings per share for the first nine months of 2019. Net income for the quarter ended September 30, 2020, compared to the same period in the prior year, increased primarily due to an increase in net interest income and a decrease in provision expense, partially offset by a decrease in noninterest income and an increase in noninterest expense.

Return on average assets (“ROA”) for the quarter ended September 30, 2020 was 1.27%, compared to 1.21% for the quarter ended September 30, 2019. Return on average shareholders’ equity (“ROE”) for the third quarter of 2020 was 13.59%, compared to 12.15% for the same period in 2019. For the year-to-date period ended September 30, 2020, ROA and ROE totaled 0.99% and 10.33%, respectively, compared to 1.21% and 12.53%, for the same period in 2019.

Segment Reporting
The Company operates in the following three business segments, banking, insurance, and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under the Tompkins Insurance Agencies, Inc. subsidiary. Wealth management activities include the results of the Company’s trust, financial planning, and wealth management services, organized under the Tompkins Financial Advisors brand. All other activities are considered banking.
 
Banking Segment
The banking segment reported net income of $21.6 million for the third quarter of 2020, an increase of $3.7 million or 20.3% from net income of $18.0 million for the same period in 2019. For the nine months ended September 30, 2020, the banking segment reported net income of $47.5 million, a decrease of $6.9 million or 12.7% from the same period in 2019.
 
Net interest income of $58.3 million for the third quarter of 2020 increased $5.1 million or 9.6% over the same period in 2019. For the nine months ended September 30, 2020, net interest income of $167.6 million was up $10.2 million or 6.5% compared to the first nine months of 2019. The increase in net interest income was mainly a result of a decrease in interest expense resulting from lower market interest rates and a shift in funding mix from borrowings to deposits. Interest income also benefited from loan growth and an asset mix consisting of a greater percentage of loans to total assets. Loan growth included $465.6 million of PPP loans originated during the second quarter of 2020.
 
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Provision for credit losses in the third quarter of 2020 was $199,000 compared to $1.3 million for the same period in 2019. Provision expense for the nine months ended September 30, 2020 was $16.1 million, compared to $2.4 million for the same period in 2019. The first quarter of 2020 included provision expense of $16.3 million related to the impact of the economic conditions due to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance, and reflects the calculation of the allowance for credit losses in accordance with ASU 2016-13. For additional information see the section titled "The Allowance for Credit Losses" below.
 
Noninterest income of $6.0 million for the three months ended September 30, 2020 was down $1.2 million or 16.2% compared to the same period in 2019. For the nine months ended September 30, 2020, noninterest income of $19.2 million was down $2.6 million or 12.1% compared to the nine months ended September 30, 2019. The decrease in the three and nine month periods ended September 30, 2020, compared to the same periods in the prior year was mainly in fee based services and largely a result of the decrease in transactions attributable to the economic impact of pandemic-related travel and business restrictions, which reduced card services and service charge income. However, card services fees and deposit fees in the third quarter of 2020 were up over the second quarter of 2020, by 6.0% and 15.7%, respectively. This decrease was partially offset by gains on sales of residential loans, which were up $353,000 and $1.1 million for the three and nine months ended September 30, 2020 over the same periods in 2019.

Noninterest expense of $37.0 million for the third quarter of 2020, and $111.4 million for the nine months ended September 30, 2020, was up $679,000 or 1.9% and up $2.7 million or 2.5%, respectively, from the same periods in 2019. The increases were mainly attributed to increases in salary and wages and employee benefits reflecting normal annual merit increases, premium pay for employees required to be on-site during pandemic-related business restrictions, and incentive adjustments over the comparable periods in the prior year. Noninterest expenses for the nine months ended September 30, 2020, included $1.3 million related to the allowance for credit losses for off-balance sheet exposures.
 
Insurance Segment
The insurance segment reported record net income of $1.8 million for the three months ended September 30, 2020, which was up $372,000 or 26.1% compared to the third quarter of 2019. The increase was due to revenue growth and an overall decrease in expenses. Total revenue was up $403,000 or 4.7% for the third quarter of 2020 compared to the same quarter in the prior year. The increase in insurance commissions and fees in the third quarter of 2020 over the same period in 2019, was mainly in property and casualty commissions and contingency income. The decrease in expenses for the third quarter of 2020 compared to the third quarter of 2019 was a result of lower commissions and incentives related to a decrease in new business volumes in the third quarter of 2020 compared to the third quarter of 2019, as well as decreases in travel and entertainment related expenses, which were impacted by COVID-19 related travel restrictions. For the nine months ended September 30, 2020, net income was down $231,000 or 5.9% compared to the same period in the prior year. Total revenue was down $88,000 or 0.4% compared to the same period in the prior year. The decrease in revenues and net income for the nine months ended September 30, 2020 compared to the prior year is mainly due to lower contingency revenues and an increase in reserves for cancellations and policy changes as a result of economic uncertainties related to COVID-19. New business volumes have also been negatively impacted by COVID-19.

Noninterest expenses for the three months ended September 30, 2020 were down $113,000 or 1.7% compared to the three months ended September 30, 2019. Year-to-date noninterest expenses were up $200,000 or 1.0% compared to the nine months ended September 30, 2019. The increase in noninterest expense for the nine months ended September 30, 2020 was mainly the result of an increase in salaries and wages and employee benefits reflecting normal annual merit increases and increases in medical insurance premiums. Other expenses including new business commissions, auto and travel, entertainment, business meetings, supplies, building maintenance and sponsorships for the three and nine months ended September 30, 2020, were down compared to the same periods in the prior year, mainly a result of the pandemic-related travel and business restrictions.

Wealth Management Segment
The wealth management segment reported net income of $823,000 for the three months ended September 30, 2020, which was flat compared to the third quarter of 2019. Revenue for the third quarter of 2020 was up $124,000 or 2.9% compared to the third quarter of 2019; this was offset by an increase in salaries and wages expense compared to the same period prior year. For the nine months ended September 30, 2020, net income of $2.4 million was up $121,000 or 5.3% compared to the prior year, mainly due to an increase in advisory fee income over the same period prior year. Noninterest expense for the nine months ended September 30, 2020, was up 2.2% over the same period in 2019, driven mainly by increases in salary and wages.

Net Interest Income
The following tables show average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each for the three and nine month periods ended September 30, 2020 and 2019.

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Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
Quarter Ended Quarter Ended
September 30, 2020 September 30, 2019
Average Average
Balance Average Balance Average
(Dollar amounts in thousands) (QTD) Interest Yield/Rate (QTD) Interest Yield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks $ 326,908  $ 83  0.10  % $ 2,908  $ 11  1.50  %
Securities (1)
U.S. Government securities 1,332,240  5,362  1.60  % 1,219,318  6,822  2.22  %
State and municipal (2) 122,932  816  2.64  % 91,675  639  2.76  %
Other securities (2) 3,433  25  2.88  % 3,419  39  4.52  %
Total securities 1,458,605  6,203  1.69  % 1,314,412  7,500  2.26  %
FHLBNY and FRB stock 18,319  307  6.66  % 33,359  770  9.16  %
Total loans and leases, net of unearned income (2)(3) 5,400,217  58,507  4.31  % 4,852,399  57,904  4.73  %
Total interest-earning assets 7,204,049  65,100  3.59  % 6,203,078  66,185  4.23  %
Other assets 377,960  418,334 
Total assets $ 7,582,009  $ 6,621,412 
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings,  & money market 3,796,615  1,671  0.18  % 2,998,574  5,424  0.72  %
Time deposits 697,026  2,534  1.45  % 694,822  2,982  1.70  %
Total interest-bearing deposits 4,493,641  4,205  0.37  % 3,693,396  8,406  0.90  %
Federal funds purchased & securities sold under agreements to repurchase 47,527  19  0.16  % 57,607  34  0.23  %
Other borrowings 303,587  1,623  2.13  % 647,112  3,862  2.37  %
Trust preferred debentures 17,135  216  5.02  % 16,964  317  7.41  %
Total interest-bearing liabilities 4,861,890  6,063  0.50  % 4,415,079  12,619  1.13  %
Noninterest bearing deposits 1,897,999  1,445,051 
Accrued expenses and other liabilities 112,636  101,632 
Total liabilities 6,872,525  5,961,762 
Tompkins Financial Corporation Shareholders’ equity 707,996  658,159 
Noncontrolling interest 1,488  1,491 
Total equity 709,484  659,650 
Total liabilities and equity $ 7,582,009  $ 6,621,412 
Interest rate spread 3.10  % 3.10  %
Net interest income/margin on earning assets 59,037  3.26  % 53,566  3.43  %
Tax Equivalent Adjustment (784) (410)
Net interest income per consolidated financial statements $ 58,253  $ 53,156 


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Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
Year to Date Period Ended Year to Date Period Ended
September 30, 2020 September 30, 2019
Average Average
Balance Average Balance Average
(Dollar amounts in thousands) (YTD) Interest Yield/Rate (YTD) Interest Yield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks $ 111,775  $ 90  0.11  % $ 2,460  $ 31  1.68  %
Securities (1)
U.S. Government securities 1,242,659  18,236  1.96  % 1,338,807  22,990  2.30  %
State and municipal (2) 110,058  2,225  2.70  % 93,131  1,903  2.73  %
Other securities (2) 3,429  93  3.61  % 3,417  120  4.70  %
Total securities 1,356,146  20,554  2.02  % 1,435,355  25,013  2.33  %
FHLBNY and FRB stock 22,175  1,130  6.81  % 42,634  2,442  7.66  %
Total loans and leases, net of unearned income (2)(3) 5,197,757  170,853  4.39  % 4,816,140  170,540  4.73  %
Total interest-earning assets 6,687,853  192,627  3.85  % 6,296,589  198,026  4.21  %
Other assets 536,424  405,358 
Total assets $ 7,224,278  $ 6,701,947 
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings,  & money market 3,557,326  7,973  0.30  % 2,962,236  14,865  0.67  %
Time deposits 693,922  8,208  1.58  % 670,570  7,728  1.54  %
Total interest-bearing deposits 4,251,248  16,181  0.51  % 3,632,806  22,593  0.83  %
Federal funds purchased & securities sold under agreements to repurchase 54,481  76  0.19  % 61,482  110  0.24  %
Other borrowings 397,511  6,357  2.14  % 861,930  15,731  2.44  %
Trust preferred debentures 17,093  758  5.92  % 16,921  974  7.70  %
Total interest-bearing liabilities 4,720,332  23,372  0.66  % 4,573,139  39,408  1.15  %
Noninterest bearing deposits 1,699,317  1,380,399 
Accrued expenses and other liabilities 111,643  101,483 
Total liabilities 6,531,292  6,055,021 
Tompkins Financial Corporation Shareholders’ equity 691,530  645,466 
Noncontrolling interest 1,456  1,460 
Total equity 692,986  646,926 
Total liabilities and equity $ 7,224,278  $ 6,701,947 
Interest rate spread 3.19  % 3.05  %
Net interest income/margin on earning assets 169,255  3.38  % 158,618  3.37  %
Tax Equivalent Adjustment (1,667) (1,230)
Net interest income per consolidated financial statements $ 167,588  $ 157,388 
1 Average balances and yields on available-for-sale debt securities are based on historical amortized cost
2 Interest income includes the tax effects of taxable-equivalent adjustments using an effective income tax rate of 21% in 2020 and 2019 to increase tax exempt interest income to taxable-equivalent basis.
3 Nonaccrual loans are included in the average asset totals presented above.  Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s consolidated financial statements included in Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.    

Net Interest Income 
Net interest income is the Company’s largest source of revenue, representing 75.5% and 75.3%, respectively, of total revenues for the three and nine months ended September 30, 2020, compared to 73.1% and 73.3% for the same periods in 2019. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. The above table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.
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Taxable-equivalent net interest income for the three months ended September 30, 2020, increased $5.1 million or 9.6% from the same period in the prior year. Taxable-equivalent net interest income for the nine month period ended September 30, 2020 increased by $10.2 million or 6.5% over the nine month period ended September 30, 2019. The increase compared to the prior year was mainly due to lower interest expense in the three and nine months ended September 30, 2020 compared to the same periods in the prior year, driven by lower market interest rates and by deposit growth, which contributed to a reduction in other borrowings. Net interest income also benefited from the growth in average earning assets in 2020 over 2019. These increases were partially offset by the decrease in average asset yields resulting from lower market interest rates. Net interest margin for the three months ended September 30, 2020 was 3.26% compared to 3.43% in 2019. Net interest margin for the nine months ended September 30, 2020 was 3.38% compared to 3.37% for the same period in 2019. The decrease in net interest margin for the third quarter of 2020 compared to the third quarter of 2019 was mainly due to a shift in composition of average earnings assets, with a greater mix of lower yielding average earnings assets, mainly securities and interest bearing balances, as well as a decrease in market interest rates. In the third quarter of 2020, there was a shift from noninterest bearing cash balances to interest bearing cash balances and securities, which added to interest income during the third quarter but also contributed to the decrease in the yield on average earning assets, adding 15 basis points to the decline in net interest margin for the third quarter compared to the second quarter of 2020.
 
Taxable-equivalent interest income for the three and nine months ended September 30, 2020, was $65.1 million and $192.6 million, respectively, down 1.6% and 2.7%, respectively, compared to the same periods in 2019. The year-over-year decrease in taxable-equivalent interest income was mainly a result of lower asset yields, partially offset by growth in average earning assets. Average asset yields for the first nine months of 2020 were down 36 basis points compared to the first nine months of 2019, which reflects the impact of reductions in market interest rates during the first nine months of 2020, and the addition of the lower yielding PPP loans originated in the second quarter of 2020. Average loan balances for the three and nine months ended September 30, 2020, were up $547.8 million or 11.3% and $381.6 million or 7.9%, respectively, while the average yield on loans decreased 42 basis points and 34 basis points, respectively, for the three and nine months ended September 30, 2020, compared to the same periods in 2019. The increase in average loans includes the benefit of $465.6 million of PPP loans originated in the second quarter of 2020. As a result of its participation in the SBA's PPP, in the three and nine months ended September 30, 2020, the Company recorded net deferred loan fees of $2.5 million and $4.8 million, respectively, which are included in interest income. Average securities balances for the three and nine months ended September 30, 2020, were up $144.2 million or 11.0% but down $79.2 million or 5.5%, respectively, and the average yield on securities was down 57 basis points and down 31 basis points, respectively, compared to the same periods in 2019.
 
Interest expense for the three and nine months ended September 30, 2020, decreased by $6.6 million or 52.0% and $16.0 million or 40.7%, respectively, compared to the same periods in 2019, driven mainly by decreases in rates paid on deposits and borrowings as a result of lower market interest rates. Growth in average deposit balances also resulted in a decrease in higher cost other borrowings. The average cost of interest-bearing deposits during the three and nine months ended September 30, 2020 was 0.37% and 0.51%, respectively, down 53 basis points and 32 basis points, compared to the same periods in 2019. Average interest-bearing deposits for the third quarter of 2020 were up $800.2 million or 21.7% compared to the same period in 2019, while year-to-date average interest-bearing deposits were up $618.4 million or 17.0% compared to the same period in 2019. Average noninterest bearing deposits were up $452.9 million or 31.3% for the three months ended September 30, 2020 when compared to the third quarter of 2019, and for the nine months ended September 30, 2020 were up $319.0 million or 23.1% with the same period in 2019. Average deposit balances continued to benefit from the $465.6 million of PPP loan originations during the second quarter of 2020, the majority of which were deposited into Tompkins checking accounts. Average other borrowings for the three and nine months ended September 30, 2020 were down $343.5 million or 53.1% and $464.4 million or 53.9%, respectively, compared to the same periods in 2019, mainly due to decreases in overnight borrowings with the FHLB as a result of deposit growth.

Provision for Credit Losses 
The provision for credit losses represents management’s estimate of the amount necessary to maintain the allowance for credit losses at an appropriate level. Provision for credit losses in the third quarter of 2020 was $199,000 compared to $1.3 million for the same period in 2019. The decrease over prior year is mainly due to lower net charge-offs in 2020. Net charge-offs in 2019 included the charge-off of one large credit of $3.3 million in the commercial real estate portfolio. Provision expense for the nine months ended September 30, 2020 was $16.1 million, compared to $2.4 million for the same period in 2019. The first quarter of 2020 included provision expense of $16.3 million related to the impact of the economic shutdown related to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance, as well as normal adjustments for loan growth, and changing loan portfolio and segment mix, and is due to the calculation of the allowance for credit losses in accordance with ASU 2016-13. 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 was $18.9 million for the third quarter of 2020, which was down 3.3% compared to the third quarter of 2019, and $55.0 million for the first nine months of 2020, down 4.2% from the same period prior year. Noninterest income represented 24.5% of total revenue for the third quarter of 2020 and 24.7% for the nine months ended September 30, 2020, compared to 26.9% and 26.7% for the same periods in 2019. The reduction in fee-based income in 2020 is largely related to pandemic-related travel and business restrictions, which reduced card services and service charge income. However, card services fees and deposit fees in the third quarter of 2020 were up over the second quarter of 2020, by 6.0% and 15.7%, respectively. In addition to the decrease in fee-based revenues when compared to the prior year, the reduction in noninterest income as a percentage of total revenues in 2020 compared to 2019 also reflects the increase in net interest income in 2020 over 2019.
 
Insurance commissions and fees, the largest component of noninterest income, were a record $8.9 million for the third quarter of 2020, an increase of 4.7% from the same period prior year. The increase in insurance commissions and fees in the third quarter of 2020 over the same period in 2019, was mainly in property and casualty commissions and contingency income. For the first nine months of 2020, insurance commissions and fees were down $98,000 or 0.4% compared to the same period in 2019. The decrease in revenues for the nine months period ended September 30, 2020 compared to the prior year is mainly due to lower contingency revenues and an increase in reserves for cancellations and policy changes as a result of economic uncertainties related to COVID-19. New business volumes have also been negatively impacted by COVID-19.
 
Investment services income of $4.3 million in the third quarter of 2020 was up $117,000 or 2.8% compared to the third quarter of 2019. For the first nine months of 2020, investment services income was up $248,000 or 2.0% compared to the same period in 2019, mainly due to an increase in advisory fee income resulting from the growth in assets under management, and higher estate and terminating trust fees earned in 2020. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $4.3 billion at September 30, 2020. The fair value of assets in custody at September 30, 2020 includes $1.2 billion of Company-owned securities where Tompkins Trust Company is custodian.
 
Card services income for the three and nine months ended September 30, 2020, was down $131,000 or 5.1% and $1.2 million or 14.9%, respectively, compared to the same periods in 2019. Debit card income, the largest component of card services income, was down $11,000 or 0.6% compared to the same quarter in the prior year, and down $346,000 or 6.6% from the first nine months of 2019. Contributing to the decrease from the prior year was a one-time incentive payment of $500,000 (pre-tax) related to our merchant card business received in the first quarter of 2019, and a decrease in transaction volume related to COVID-19. Transaction volumes did increase in the third quarter of 2020 compared to the second quarter of 2020, which resulted in a 3.6% increase in debit card income in the third quarter of 2020 over the second quarter of 2020.

The Company recognized a loss of $2,000 and gains of $446,000, respectively, on securities transactions for the three and nine months ended September 30, 2020, compared to $138,000 and $434,000, respectively, of gains for the same periods in 2019. The year-to-date 2020 gains include $178,000 of gains on the sales of available-for-sale debt securities, $251,000 of gains on securities called during the second quarter and $17,000 of realized gains from the change in the fair value of equity securities. The sales of available-for-sale debt securities are mainly the result of general portfolio maintenance and interest rate risk management.

Other income of $1.8 million in the third quarter of 2020 was down $145,000 or 7.4% compared to the same period in 2019. For the first nine months of 2020, other income of $6.4 million was up $141,000 or 2.3% compared to the same period in 2019. The decrease over prior year for the three months ended September 30, 2020, was mainly due to a credit received on software in the third quarter of 2019. The increase in other income for the nine months ended September 30, 2020 was largely due to income related to the gains on sales of residential mortgage loans of $378,000 and $1.2 million, respectively, compared to gains of $25,000 and $139,000, respectively, for the same periods prior year.

Noninterest Expense 
Noninterest expense was $46.3 million for the third quarter of 2020 and $139.0 million for the first nine months of 2020, up 1.5% and 2.2%, respectively, compared to the same periods in 2019.
 
Expenses associated with compensation and benefits comprise the largest component of noninterest expense, representing 66.1% and 63.1% of total noninterest expense for the three and nine months ended September 30, 2020. Salaries and wages expense for the three and nine months ended September 30, 2020 increased by $991,000 or 4.3% and $3.3 million or 5.0%, respectively, compared to the same periods in 2019. The increases were mainly due to normal merit adjustments, increase in average full time equivalent employees, and premium pay for employees who were required to be on premise during early stages of the shutdown related to COVID-19. Employee benefits for the three and nine months ended September 30, 2020,
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increased by $869,000 or 14.9% and $1.2 million or 6.8% over the same periods in 2019, mainly as a result of higher medical insurance premiums.

Other expense categories, not related to compensation and benefits, for the three and nine months ended September 30, 2020 were down 6.9% and 2.8% respectively compared to the same periods in 2019. Expenses for the third quarter and year to date period ended September 30, 2020, included ($417,000) and $1.3 million, respectively, related to allowance for credit losses for off-balance sheet exposures. Marketing expenses for the three and nine months ended September 30, 2020 were up $28,000 or 3.1% and down $903,000 or 24.4%, respectively, compared to the same periods in 2019. Professional fees for the three and nine months ended September 30, 2020, were down $1.0 million or 42.4% and $2.5 million or 35.1%, respectively, compared to the same periods in 2019. Business related travel and entertainment expenses decreased $415,000 or 83.5% and $841,000 or 62.8% for the three and nine months, respectively, ended September 30, 2020 when compared to the same periods in 2019, primarily due to limitations related to the COVID-19 shutdown and social distancing guidelines.

Income Tax Expense 
The provision for income taxes was $6.3 million for an effective rate of 20.7% for the third quarter of 2020, compared to tax expense of $5.5 million and an effective rate of 21.3% for the same quarter in 2019. For the first nine months of 2020, the provision for income taxes was $13.8 million for an effective rate of 20.4% compared to tax expense of $15.8 million and an effective rate of 20.7% for the same period in 2019. The effective rates differ from the U.S. statutory rate primarily due to the effect of tax-exempt income from loans, securities and life insurance assets, and the income tax effects associated with stock based compensation.

FINANCIAL CONDITION
 
Total assets were $7.8 billion at September 30, 2020, up $1.1 billion or 15.9% from December 31, 2019. The increase in total assets was mainly due to increases in loans, securities, and cash and cash equivalents balances. Total loan balances were $5.4 billion at September 30, 2020, up $480.7 million or 9.8% compared to the $4.9 billion reported at year-end 2019, mainly due to the addition of $465.6 million of PPP loans originated and funded in the second quarter of 2020. Total cash and cash equivalents were up $236.8 million or 171.6% over December 31, 2019. The increase in securities and cash and cash equivalents from year-end 2019 is largely due to the investment of excess liquidity into securities and interest bearing balances. Total deposits were up $1.4 billion or 26.6% from December 31, 2019. Other borrowings decreased $373.1 million or 56.7% from December 31, 2019, as deposit growth was used to reduce borrowings.

Securities
As of September 30, 2020, the Company’s securities portfolio was $1.7 billion or 21.4% of total assets, compared to $1.3 billion or 19.3% of total assets at year end 2019. The following table details the composition of available-for-sale debt securities.
Available-for-Sale Debt Securities
September 30, 2020 December 31, 2019
(In thousands) Amortized Cost Fair Value Amortized Cost Fair Value
U.S. Treasuries $ 0  $ 0  $ 1,840  $ 1,840 
Obligations of U.S. Government sponsored entities 602,417  612,481  367,551  $ 372,488 
Obligations of U.S. states and political subdivisions 126,593  129,258  96,668  97,785 
Mortgage-backed securities - residential, issued by
U.S. Government agencies 205,507  207,501  164,643  164,451 
U.S. Government sponsored entities 700,238  715,160  660,037  659,590 
U.S. corporate debt securities 2,500  2,366  2,500  2,433 
Total available-for-sale debt securities $ 1,637,255  $ 1,666,766  $ 1,293,239  $ 1,298,587 
   
As of September 30, 2020, the available-for-sale debt securities portfolio had net unrealized gains of $29.5 million compared to net unrealized gains of $5.3 million at December 31, 2019. The increase in unrealized gains related to the available-for-sale debt securities portfolio, which reflects the amount that the fair value exceeds amortized cost, was due primarily to changes in market interest rates during the first nine months of 2020. Management’s policy is to purchase investment grade securities that
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on average have relatively short duration, which helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital.
 
The Company evaluates available for sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.

The Company determined that at September 30, 2020, all impaired available-for-sale debt securities was 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 worthiness of the underlying issuers. In addition, the Company maintains the ability and intent to hold these positions until the recovery of unrealized losses and does not believe that the Company would be required to sell any securities currently in an unrealized loss position. Therefore, the Company carried no ACL at September 30, 2020 and there was no credit loss expense recognized by the Company with respect to the securities portfolio during the three and nine months ended September 30, 2020.
Loans and Leases  
Loans and leases as of the end of the third quarter and prior year-end periods were as follows:
(In thousands) 9/30/2020 12/31/2019
Commercial and industrial
Agriculture $ 89,068  $ 105,786 
Commercial and industrial other 790,749  902,275 
PPP loans 464,058  0 
Subtotal commercial and industrial 1,343,875  1,008,061 
Commercial real estate
Construction 182,605  213,637 
Agriculture 198,049  184,898 
Commercial real estate other 2,161,954  2,045,030 
Subtotal commercial real estate 2,542,608  2,443,565 
Residential real estate
Home equity 206,456  219,245 
Mortgages 1,228,629  1,158,592 
Subtotal residential real estate 1,435,085  1,377,837 
Consumer and other
Indirect 9,534  12,964 
Consumer and other 64,346  61,446 
Subtotal consumer and other 73,880  74,410 
Leases 14,877  17,322 
Total loans and leases 5,410,325  4,921,195 
Less: unearned income and deferred costs and fees (12,028) (3,645)
Total loans and leases, net of unearned income and deferred costs and fees $ 5,398,297  $ 4,917,550 
 
Total loans and leases of $5.4 billion at September 30, 2020 were up $480.7 million or 9.8% from December 31, 2019. As of September 30, 2020, total loans and leases represented 69.3% of total assets compared to 73.1% of total assets at December 31, 2019. The decrease in total loans as a percentage of total assets reflects the growth in available-for-sale securities (up $368.2 million) and cash and cash equivalents (up $236.8 million) since December 31, 2019.

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Residential real estate loans, including home equity loans, were $1.4 billion at September 30, 2020, up $57.2 million or 4.2% compared to December 31, 2019, and comprised 26.6% of total loans and leases at September 30, 2020. Changes in residential loan balances are impacted by the Company’s decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.
 
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to Federal Home Loan Mortgage Corporation (“FHLMC”) or State of New York Mortgage Agency (“SONYMA”) without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these representations and warranties.
 
During the first nine months of 2020 and 2019, the Company retained the vast majority of residential mortgage loans originated, selling $35.3 million and $11.4 million, respectively, and recognizing gains of $1.2 million and $139,000, respectively, on these sales. These residential real estate loans were sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. Mortgage servicing rights totaled $922,000 at September 30, 2020 and $805,000 at December 31, 2019. 

Commercial real estate loans and commercial and industrial loans totaled $2.5 billion and $1.3 billion, respectively, and represented 47.1% and 24.9%, respectively of total loans as of September 30, 2020. The commercial real estate portfolio was up $99.1 million or 4.1% over year-end 2019, while commercial and industrial loans were up $425.7 million or 33.3%. The increase in commercial and industrial loans over year-end included $464.1 million of PPP loans. As of September 30, 2020, agriculturally-related loans totaled $287.1 million or 5.3% of total loans and leases, compared to $290.7 million or 5.9% of total loans and leases at December 31, 2019. Agriculturally-related loans include loans to dairy farms and 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 Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 3 – “Loans and Leases” in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in these policies and guidelines since the date of that report. Therefore, both new originations as well as those balances held at September 30, 2020, reflect these policies and guidelines. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. 

The Company's loan and lease customers are located primarily in the New York and Pennsylvania communities served by its four subsidiary banks. Although operating in numerous communities in New York State and Pennsylvania, the Company is still dependent on the general economic conditions of these states and the local economic conditions of the communities within those states in which the Company does business. The suspension of business activities in our market area has led to a significant increase in unemployment rates and has had a negative effect on our customers. There continues to be a great deal of uncertainty regarding how long those conditions will continue to exist. 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.

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The Allowance for Credit Losses
 
During the first quarter of 2020, the Company adopted ASU No. 2016-13 - Financial Instruments - Credit Losses, also known as CECL. The below tables represents the allowance for credit losses calculated under the new accounting guidance as of September 30, 2020, and the prior period tables use the incurred loss methodology calculation used prior to adoption. The tables provide, as of the dates indicated, an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category.
 
(In thousands) 9/30/2020
Allowance for credit losses
Commercial and industrial $ 7,284 
Commercial real estate 28,559 
Residential real estate 14,933 
Consumer and other 1,449 
   Finance leases 68 
Total $ 52,293 
(In thousands) 12/31/2019
Allowance for originated loans and leases
Commercial and industrial $ 10,541 
Commercial real estate 21,557 
Residential real estate 6,360 
Consumer and other 1,356 
Total $ 39,814 
Allowance for acquired loans
Commercial real estate $ 51 
Residential real estate 21 
Consumer and other 6 
Total $ 78 
 
As a result of the adoption of ASC 326, 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. As of September 30, 2020, the total allowance for credit losses was $52.3 million. The $14.9 million increase in the allowance at September 30, 2020, compared to January 1, 2020 was mainly due to a $14.9 million increase in the provision expense driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. The majority of the increase in the allowance and provision expense in 2020 was in the first quarter of 2020. The allowance was relatively flat between June 30, 2020 and September 30, 2020, as lower estimated reserves driven by improvements in forecasts for unemployment and the gross domestic product used in our model were offset by increases in qualitative reserves for loans within certain industries that may have an elevated level of risk due to the adverse economic impact of the COVID-19 pandemic, as well as loans that remain in the Company's payment deferral program implemented in response to the COVID-19 pandemic. The estimated reserves for the latter included an amount for accrued interest receivable. The qualitative reserves were added to all portfolio segments with the majority in commercial real estate and then residential real estate.

Total loans were $5.4 billion at September 30, 2020, which were flat compared to September 30, 2019 and up $480.7 million or 9.8% from December 31, 2019. The increase from year-end 2019 included $465.6 million of PPP loans. Since the PPP loans are guaranteed by the SBA, there are no reserves allocated to these loans. Credit quality metrics at September 30, 2020, were mixed compared to year-end 2019. Nonperforming assets represented 0.44% of total assets at September 30, 2020, compared to 0.47% at December 31, 2019. Nonperforming loans and leases were up $2.4 million or 7.6% from year end 2019 and represented 0.63% of total loans at September 30, 2020 compared to 0.64% at December 31, 2019. Loans internally-classified Special Mention or Substandard were up $77.7 million or 86.1% compared to December 31, 2019. The increase over
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December 31, 2019, was mainly a result of the downgrade of loans in the hospitality industry to Special Mention, reflecting cash flow stress related to the pandemic-related business and travel restrictions and social distancing guidelines. Many of these hospitality loans are in the Company's payment deferral program and are included in the estimate of qualitative reserves. The allowance for credit losses covered 154.68% of nonperforming loans and leases as of September 30, 2020, compared to 126.90% at December 31, 2019.

The Company’s allowance for credit losses totaled $52.3 million at September 30, 2020, which represented 0.97% of total loans, up from 0.81% at December 31, 2019, and 0.84% at September 30, 2019.

Activity in the Company’s allowance for credit losses during the first nine months of 2020 and 2019 is illustrated in the table below. 
Analysis of the Allowance for Credit Losses
(In thousands) 9/30/2020 9/30/2019
Average loans outstanding during period $ 5,197,757  $ 4,816,140 
Allowance at December 31, 2019 39,892  0 
Impact of adopting ASC 326 (2,534) 0 
Balance of allowance at beginning of year 37,358  43,410 
LOANS CHARGED-OFF:
Commercial and industrial 1  489 
Commercial real estate 1,305  3,949 
Residential real estate 33  131 
Consumer and other 409  571 
Finance leases 0  0 
Total loans charged-off $ 1,748  $ 5,140 
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial and industrial 125  92 
Commercial real estate 40  107 
Residential real estate 178  319 
Consumer and other 195  217 
Finance Leases 0  0 
Total loans recoveries $ 538  $ 735 
Net loans charged-off 1,210  4,405 
Additions to allowance for credit losses charged to operations 16,145  2,366 
Balance of allowance at end of period $ 52,293  $ 41,371 
Allowance for credit losses as a percentage of total loans and leases 0.97  % 0.84  %
Annualized net charge-offs on loans to average total loans and leases during the period 0.00  % 0.06  %
  
Net loan and lease charge-offs totaled $1.2 million for the nine months ended September 30, 2020, compared to net charge-offs of $4.4 million for the same period in 2019. The first nine months of 2019 included a $3.1 million write-down of one relationship in the commercial real estate portfolio. Annualized net charge-offs as a percentage of average loans and leases were 0.00% at September 30, 2020, compared to 0.06% at September 30, 2019.

The provision for credit losses in the third quarter of 2020 was $199,000, down compared to the $1.3 million reported for the same period in 2019. Provision expense for the nine months ended September 30, 2020 was $16.1 million, compared to $2.4 million for the same period in 2019. The first quarter of 2020 included provision expense of $16.3 million related to the impact of the economic conditions related to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance. Net recoveries for the three months ended September 30, 2020, were $11,000 compared to net charge-offs of $739,000 reported for the same period in 2019.

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Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to the provision for credit loss expense on off-balance sheet credit exposures included in other noninterest expense in the Company’s consolidated statements of income. The allowance for credit losses for off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using similar methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s statements of condition. As of September 30, 2020, the Company's reserve for off-balance sheet credit exposures was $2.1 million, compared to $2.5 million at June 30, 2020 and $477,000 at December 31, 2019. As a result of the adoption of ASC 326, the Company recorded a net cumulative-effect adjustment increasing the allowance for credit losses on off-balance sheet credit exposures by $381,000 from $477,000 at December 31, 2019, to $858,000 at January 1, 2020.

Analysis of Past Due and Nonperforming Loans    
(In thousands) 9/30/2020 12/31/2019 9/30/2019
Loans 90 days past due and accruing
Total loans 90 days past due and accruing $ 0  $ 0  $ 0 
Nonaccrual loans
Commercial and industrial $ 1,636  $ 2,335  $ 1,752 
Commercial real estate 12,777  10,789  10,618 
Residential real estate 12,203  10,882  10,949 
Consumer and other 328  275  249 
Total nonaccrual loans $ 26,944  $ 24,281  $ 23,568 
Troubled debt restructurings not included above 6,864  7,154  6,528 
Total nonperforming loans and leases $ 33,808  $ 31,435  $ 30,096 
Other real estate owned 196  428  888 
Total nonperforming assets $ 34,004  $ 31,863  $ 30,984 
Allowance as a percentage of nonperforming loans and leases 154.68  % 126.90  % 137.46  %
Total nonperforming loans and leases as percentage of total loans and leases 0.63  % 0.64  % 0.62  %
Total nonperforming assets as percentage of total assets 0.44  % 0.47  % 0.47  %
1 The December 31, 2019, and September 30, 2019 columns in the above table exclude $794,000, and $1.2 million, respectively, of acquired loans that were 90 days past due and accruing interest.  At December 31, 2019 and September 30, 2019, purchased credit-impaired ("PCI") loans were excluded from past due and non-accrual loans reported because they continued to earn interest income from the accretable yield at the pool level. The PCI loan pools are accounted for as PCD loans (on a loan level basis with a related allowance for credit losses) under the CECL standard adopted at January 1, 2020 and reported in the past due loans and non-accrual loans in the table above at September 30, 2020.
 
Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate/other real estate owned. Total nonperforming assets of $34.0 million at September 30, 2020 were up $2.1 million or 6.7% compared to December 31, 2019, and up $3.0 million or 9.8% compared to September 30, 2019. Nonperforming assets represented 0.44% of total assets at September 30, 2020, down from 0.47% at December 31, 2019 and September 30, 2019. The Company’s ratio of nonperforming assets to total assets continues to compare favorably to our peer group’s most recent ratio of 0.58% at June 30, 2020.

Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider and the borrower could not obtain elsewhere. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the following categories: “loans 90 days past due and accruing”, “nonaccrual loans”, or “troubled debt restructurings not included above”. Loans in the latter category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and therefore classified as accruing loans. At September 30, 2020, the Company had $8.5 million in TDRs, and of that total $1.6 million was reported as nonaccrual and $6.9 million was considered performing and included in the table above.
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As previously noted, the Company participated in the SBA PPP. This program provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related expenses and certain other eligible business operating costs, all in accordance with the rules and regulations established by the SBA. The Company began accepting applications for PPP loans on April 3, 2020, and funded 2,998 PPP loans during the second quarter of 2020. Outstanding PPP loans totaled $464.1 million as of September 30, 2020.

In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by applicable regulations. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal, and interest income is recorded only after principal recovery is reasonably assured. 

The ratio of the allowance to nonperforming loans and leases (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 154.68% at September 30, 2020, compared to 126.9% at December 31, 2019, and 137.46% at September 30, 2019. The Company’s nonperforming loans and leases are mostly made up of collateral dependent impaired loans with limited exposure or loans that require limited specific reserves due to the level of collateral available with respect to these loans and/or previous charge-offs.
 
The Company, through its internal loan review function, identified 37 commercial relationships from the loan portfolio totaling $28.5 million at September 30, 2020, that were potential problem loans. At December 31, 2019, the Company had identified 41 relationships totaling $44.0 million in the loan portfolio that were potential problem loans. Of the 37 relationships at September 30, 2020, that were Substandard, there were 10 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $22.3 million, the largest of which was $4.8 million. The Company continues to monitor these potential problem relationships; however, management cannot predict the extent to which continued weak economic conditions or other factors may further impact borrowers. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis.

Capital
Total equity was $713.6 million at September 30, 2020, an increase of $50.6 million or 7.6% from December 31, 2019. The increase reflects growth in retained earnings and a decrease in accumulated other comprehensive losses.
 
Additional paid-in capital decreased by $1.2 million, from $338.5 million at December 31, 2019, to $337.3 million at September 30, 2020. The decrease was primarily attributable to the Company's repurchase of 71,288 shares of its common stock with an aggregate purchase price of $5.6 million pursuant to the Company's stock repurchase plan, and $540,000 related to the exercise of stock options, and grants of restricted stock. This was partially offset by $3.4 million attributed to stock-based compensation, $1.5 million related to shares issued in connection with the Company's dividend reinvestment program and $76,000 related to Director deferred compensation. The 71,288 shares repurchased were purchased in the first quarter of 2020; on March 19, 2020, following the announcement of the national emergency related to the COVID-19 pandemic, the Company suspended the repurchase of shares under the Company's share repurchase program. Management has not yet determined when it will resume repurchases under the share repurchase program. Any such decision will be based on, among other factors, the Company's financial and capital position.

Retained earnings increased by $32.0 million from $370.5 million at December 31, 2019, to $402.5 million at September 30, 2020, mainly reflecting net income of $53.6 million for the year-to-date period, less dividends paid of $23.3 million and the net cumulative effect adjustment related to the adoption of ASU 2016-13 of $1.7 million. Accumulated other comprehensive loss decreased from a net loss of $43.6 million at December 31, 2019, to a net loss of $23.9 million at September 30, 2020, reflecting an $18.2 million increase in unrealized gains on available-for-sale debt securities mainly due to changes in market rates and a $1.5 million decrease related to post-retirement benefit plans.

In connection with the effectiveness of the Basel III Capital Rules on January 1, 2015, the Company elected to opt-out of the requirement to include most components of other comprehensive income in regulatory capital. Accordingly, 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 ratios.
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Cash dividends paid in the first nine months of 2020 totaled approximately $23.3 million, representing 43.5% of year to date 2020 earnings. Dividends per common share of $1.56, for the first nine months of 2020 represents a 4.0% increase over cash dividends of $1.50 per common share paid in the first nine months of 2019. On October 23, 2020, the Tompkins Financial Corporation Board of Directors approved a fourth quarter cash dividend of $0.54 per share, an increase of 3.8% compared to the fourth quarter of 2019.
 
The Company and its subsidiary banks are subject to various regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary banks 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%.

The following table provides a summary of the Company’s capital ratios as of September 30, 2020: 
REGULATORY CAPITAL ANALYSIS
September 30, 2020 Actual Minimum Capital Required - Basel III Fully Phased-In Well Capitalized Requirement
(dollar amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $ 712,880  14.26  % $ 524,766  10.50  % $ 499,777  10.00  %
Tier 1 Capital (to risk weighted assets) $ 658,768  13.18  % $ 424,810  8.50  % $ 399,821  8.00  %
Tier 1 Common Equity (to risk weighted assets) $ 641,605  12.84  % $ 349,844  7.00  % $ 324,855  6.50  %
Tier 1 Capital (to average assets) $ 658,768  8.85  % $ 297,872  4.00  % $ 372,340  5.00  %
 
As of September 30, 2020, the Company’s capital ratios exceeded the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions. The capital levels required to be considered well capitalized, presented in the above table, are based upon prompt corrective action regulations, as amended to reflect the changes under Basel III Capital Rules.

Total capital as a percent of risk weighted assets increased to 14.3% at September 30, 2020, compared with 13.5% as of December 31, 2019. Tier 1 capital as a percent of risk weighted assets increased from 12.7% at the end of 2019 to 13.2% as of September 30, 2020. Tier 1 capital as a percent of average assets was 8.9% at September 30, 2020, which is down from 9.6% at December 31, 2019. The Tier 1 capital to average assets ratio at September 30, 2020 was negatively impacted, due to the large increase in average assets, by $465.6 million of PPP loans originated in the second quarter of 2020. Common equity Tier 1 capital was 12.8% at the end of the third quarter of 2020, up from 12.3% at the end of 2019.

As of September 30, 2020, the capital ratios for the Company’s subsidiary banks also exceeded the minimum required capital ratios plus the required conservation buffer, the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions.

In the first quarter of 2020, U.S. Federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition.
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Deposits and Other Liabilities
Total deposits of $6.6 billion at September 30, 2020 were up $1.4 billion or 26.6% from December 31, 2019. The increase from year-end 2019 was primarily in non-interest bearing deposits, money market and savings balances and time deposits, which were up $458.4 million or 31.5%, $898.6 million or 29.2% and $31.4 million or 4.6% respectively from year-end 2019. Deposit balances benefited from the $465.6 million of PPP loan originations during the second quarter of 2020, the majority of which were deposited in Tompkins checking accounts. The growth also included $295.0 million of short-term brokered deposits. In April 2020, the Company obtained these short-term brokered deposits and actively increased liquid assets to further strengthen the Company's liquidity position in order to guard against the economic uncertainty related to the COVID-19 pandemic. Of the $295.0 million in brokered deposits, $95.0 million mature in December 2020 and $200.0 million mature in April 2021.
 
The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of $250,000 or more, brokered deposits, municipal money market deposits, and reciprocal deposit relationships with municipalities. Core deposits grew by $979.6 million or 22.8% to $5.3 billion at September 30, 2020, from year-end 2019. Core deposits represented 79.8% of total deposits at September 30, 2020, compared to 82.3% of total deposits at December 31, 2019. Core deposit balances at September 30, 2020, continued to benefit from $464.1 million of PPP loans, as the majority of these funds were deposited into the borrowers' accounts at Tompkins.
 
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 $63.6 million at September 30, 2020, and $60.3 million at December 31, 2019. Management generally views local repurchase agreements as an alternative to large time deposits.
 
The Company’s other borrowings totaled $285.0 million at September 30, 2020, down $373.1 million or 56.7% from $658.1 million at December 31, 2019. The decrease in borrowings was due to the seasonal growth in public deposits, core deposit growth and an increase in brokered deposits from year-end. Borrowings at September 30, 2020 included $285.0 million of FHLB term advances. Borrowings at year-end 2019 included $239.1 million in overnight advances from FHLB, $415.0 million of FHLB term advances, and a $4.0 million advance from a bank. Of the $285.0 million in FHLB term advances at September 30, 2020, $245.0 million is due in over one year. Maturities of advances due in over one year include: $70.0 million due over one year to two years; $105.0 million over two years to three years, and $70.0 million over three years to four years.
 
Liquidity
As of September 30, 2020, the Company had not experienced any significant impact to our liquidity or funding capabilities as a result of the COVID-19 pandemic. As previously noted, the Company participated in the SBA's PPP program. The Company began accepting applications for PPP loans on April 3, 2020, and funded 2,998 PPP loans during the second quarter of 2020. Outstanding PPP loans totaled $464.1 million as of September 30, 2020. The majority of the PPP loan proceeds were deposited into accounts at Tompkins, which contributed to the deposit growth in the second quarter. In April 2020, the Company obtained $295.0 million of short-term brokered deposits and actively increased liquid assets to further strengthen the Company's position so that the Company can continue to guard against economic uncertainty related to the COVID-19 pandemic. The Company has a long-standing liquidity plan in place that is designed to ensure that appropriate liquidity resources are available to fund the balance sheet. Additionally, given the uncertainties related to the impact of the COVID-19 crisis on liquidity, the Company has confirmed the availability of funds at the FHLB of NY and FHLB of Pittsburgh, completed actions required to activate participation in the Federal Reserve Bank PPP lending facility, and confirmed availability of Federal Fund lines with correspondent bank partners.

The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company’s Asset/Liability Management Committee monitors asset and liability positions of the Company’s subsidiary banks individually and on a combined basis. The Committee reviews periodic reports on liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur.
 
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Core deposits, discussed above under “Deposits and Other Liabilities”, are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, brokered time deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase and overnight and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources of $1.7 billion at September 30, 2020 increased $38.8 million or 2.4% as compared to year-end 2019. Increases in brokered money market deposits and municipal money market deposits more than offset the decrease in overnight borrowings with the FHLB. Non-core funding sources, as a percentage of total liabilities, were 23.7% at September 30, 2020, compared to 27.1% at December 31, 2019. 
 
Non-core funding sources may require securities to be pledged against the underlying liability. Securities held at fair value were $1.4 billion at September 30, 2020 and $1.2 billion December 31, 2019, and were either pledged or sold under agreements to repurchase. Pledged securities represented 84.4% of total securities at September 30, 2020, compared to 89.7% of total securities at December 31, 2019.
 
Cash and cash equivalents totaled $374.7 million as of September 30, 2020 which increased from $138.0 million at December 31, 2019. Short-term investments, consisting of securities due in one year or less, decreased from $108.1 million at December 31, 2019, to $54.1 million on September 30, 2020.
 
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 $922.7 million at September 30, 2020 compared with $824.0 million at December 31, 2019. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.5 billion at September 30, 2020, up $54.3 million or 3.7% compared with year-end 2019. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.

The Company's liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At September 30, 2020, the unused borrowing capacity on established lines with the FHLB was $2.1 billion.

As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets and securities to secure additional borrowings from the FHLB. At September 30, 2020, total unencumbered residential mortgage loans and securities were $1.6 billion. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB.

Non-GAAP Disclosure
The following table summarizes the Company's results of operations on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. The non-GAAP financial measures adjust GAAP measures to exclude the effects of non-operating items, such as acquisition related intangible amortization expense, and significant nonrecurring income or expense on earnings, equity, and capital. In 2020, the Company had a nonrecurring write-down on a piece of real estate that was pending a sale.

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. 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. Non-GAAP financial measures have limitations since they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP.

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Reconciliation of Net Income Available to Common Shareholders/Diluted Earnings Per Share (GAAP) to Net Operating Income Available to Common Shareholders/Adjusted Diluted Earnings Per Share (Non-GAAP) and Adjusted Operating Return on Average Tangible Common Equity (Non-GAAP)
Nine Months Ended
September 30,
(In thousands, except per share data) 2020 2019
Net income available to common shareholders $ 53,610  $ 60,638 
  Less: income attributable to unvested stock-based compensation awards (628) (972)
Net income available to common shareholders (GAAP) 52,982  59,666 
Diluted earnings per share (GAAP) $ 3.59  $ 3.97 
Adjustments for non-operating income and expense:
Write-down of real estate pending sale $ 673  $ 0 
Total adjustments 673  0 
Tax (benefit) expense (165) 0 
Total adjustments, net of tax $ 508  $ 0 
Net operating income available to common shareholders (Non-GAAP) $ 53,490  $ 59,666 
Weighted average shares outstanding (diluted) 14,738,921  15,035,780 
Adjusted diluted earnings per share (Non-GAAP) $ 3.63  $ 3.97 
Net income available to common shareholders (GAAP) $ 52,982  $ 59,666 
Average Tompkins Financial Corporation shareholders' equity (GAAP) 692,986  646,926 
Return on average shareholders' equity (GAAP) 15.37  % 18.60  %
Net operating income available to common shareholders (Non-GAAP) $ 53,490  $ 59,666 
Amortization of intangibles 1,120  1,251 
Tax expense 278  311 
Amortization of intangibles, net of tax 842  940 
Adjusted net operating income available to common shareholders (Non-GAAP) $ 54,332  $ 60,606 
Average Tompkins Financial Corporation shareholders' common equity 691,530  645,466 
Average goodwill and intangibles 97,323  98,733 
Average Tompkins Financial Corporation shareholders' tangible common equity (Non-GAAP) $ 594,207  $ 546,733 
Adjusted operating return on average shareholders' tangible common equity (Non-GAAP) 9.14  % 11.09  %


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Newly Adopted Accounting Standards

ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was effective for the Company on January 1, 2020. Upon adoption, a cumulative effect adjustment for the change in the allowance for credit losses was recognized in retained earnings.  The cumulative-effect adjustment to retained earnings, net of taxes, is comprised of the impact to the allowance for credit losses on outstanding loans and leases and the impact to the liability for off-balance sheet commitments. The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326, while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net increase to retained earnings of $1.7 million, upon adoption. The transition adjustment includes a decrease in the allowance for credit losses on loans of $2.5 million, and an increase in the allowance for credit losses on off-balance sheet credit exposures of $0.4 million, net of the corresponding decrease in deferred tax assets of $0.4 million.

The Company adopted ASU 2016-13 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 was determined to be related to noncredit factors and will be accreted into interest income on a level-yield method over the life of the loans.

ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on our consolidated financial statements.

ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 was effective for the Company on January 1, 2020, and did not have a significant impact on our consolidated financial statements.

ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 was effective for the Company on January 1, 2020, and did not have a significant impact on our consolidated financial statements.

ASU 2020-03 "Codification Improvements to Financial Instruments." ASU 2020-03 revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release in March 2020 and did not have a significant impact on our consolidated financial statements.

Accounting Standards Pending Adoption

ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).” ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our consolidated financial statements.
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ASU No 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. Tompkins is currently evaluating the potential impact of ASU 2019-12 on our consolidated financial statements.

ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. Tompkins is currently evaluating the potential impact of ASU 2020-04 on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosure About Market Risk
 
Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter, the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within levels approved by the Company’s Board of Directors. The Committee also considers strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company. The Company does not currently use derivatives, such as interest rate swaps, to manage its interest rate risk exposure, but may consider such instruments in the future.

The Company’s Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 100 basis point parallel change in rates. Based upon the simulation analysis performed as of August 31, 2020, a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decrease in net interest income from the base case of approximately 2.5%, while a 100 basis point parallel decline in interest rates over a one-year period would result in an increase in one-year net interest income from the base case of 0.1%. The simulation assumes no balance sheet growth and no management action to address balance sheet mismatches.

The decrease in net interest income in the rising rate scenario is a result of the balance sheet showing a more liability sensitive position over a one year time horizon. As such, in the short-term net interest income is expected to trend slightly below the base assumption, as upward adjustments to rate sensitive deposits and short-term funding outpace increases to asset yields which are concentrated in intermediate to longer-term products. As intermediate and longer-term assets continue to reprice/adjust into higher rate environment and funding costs stabilize, net interest income is expected to trend upwards.

The down 100 basis point scenario increases net income slightly in the first year as a result of the Company's assets repricing downward to a lesser degree than the rates on the Company's interest bearing liabilities, mainly deposits and overnight borrowings. Rates on savings and money market accounts have moved down in the last 3 months, approaching historically low levels allowing little interest expense relief in the first year of a declining rate scenario. In addition, the model assumes that prepayments accelerate in the down interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates.

The most recent simulation of a base case scenario, which assumes interest rates remain unchanged from the date of the simulation, reflects a net interest margin that is declining slightly over the next 12 to 18 months.

Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage the Company’s interest rate risk exposure. The Company’s current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company.
 
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In addition to the simulation analysis, management uses an interest rate gap measure. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of September 30, 2020. The Company’s one-year net interest rate gap was a positive $12.6 million or 0.16% of total assets at September 30, 2020, compared with a negative $173.6 million or 2.58% of total assets at December 31, 2019. A positive gap position exists when the amount of interest-bearing assets maturing or repricing exceeds the amount of interest-earning liabilities maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income is equally at risk in both an increasing and decreasing rate environment over the next 12 months. An interest rate gap measure could be significantly affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.
Condensed Static Gap - September 30, 2020     Repricing Interval  
(In thousands) Total 0-3 months 3-6 months 6-12 months Cumulative 12 months
Interest-earning assets1
$ 7,407,145  $ 1,474,808  $ 483,478  $ 1,054,511  $ 3,012,797 
Interest-bearing liabilities 5,051,390  1,954,544  355,324  690,350  3,000,218 
Net gap position (479,736) 128,154  364,161  12,579 
Net gap position as a percentage of total assets (6.15) % 1.64  % 4.67  % 0.16  %
 1 Balances of available securities are shown at amortized cost 

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2020.

Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report on Form 10-Q, the Company's disclosure controls and procedures were effective.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings 
The Company is subject to various claims and legal actions that arise in the ordinary course of conducting business. As of September 30, 2020, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company's consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. Although the Company does not believe that the outcome of pending litigation will be material to the Company's consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
 
Item 1A. Risk Factors
 
Except as set forth below, there have been no material changes in the risk factors previously disclosed under Item 1A. of the Company’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2019:
 
The ongoing COVID-19 pandemic and measures intended to prevent its spread have had, and likely will continue to have, a material adverse effect on our business, financial condition, liquidity, and results of operations. The nature and extent of such effects will depend on future developments, which are highly uncertain and are difficult to predict.

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic stress in the United States and in the geographic markets that we serve. While the transmission rates of COVID-19 have slowed and business and travel restrictions have partially eased within the primary geographic markets we serve, national rates of transmission have continued to climb, and we may experience a resurgence in our geographic market. The extent to which COVID-19 and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments,
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which are highly uncertain and are difficult to predict. COVID-19, and governmental/regulatory measures taken in response thereto, have had and are likely to continue to have a material adverse impact on our results of operations and financial condition. Moreover, COVID-19 is likely to heighten or make more likely to occur many of our known risks, which are previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The COVID-19 pandemic, and the actions taken by federal, state and local authorities in response thereto, have resulted, and will likely continue to result in, an unprecedented slow-down in economic activity, including the following:

•As a result of the COVID-19 pandemic, the national unemployment rate and unemployment rates in our geographic markets dramatically increased during the first half of 2020, and while they have decreased from their peak levels, they are expected to remain elevated typical levels for the foreseeable future.
•Stock markets generally, and bank stocks in particular, have significantly fluctuated in value.
•The Federal Reserve Board has reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes remain at historic lows.
•Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees).
•Business and travel restrictions, including within the geographic markets that we serve.

Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interest of our employees, customers and business partners.

As a result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•demand for our products and services has declined and may continue to decline, making it difficult to grow assets and income;
•if the economy is unable to fully reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
•collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase;
•we may face a decline in the value of our goodwill and other intangible assets;
•our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
•our profitability could be negatively impacted if borrowers repay deferred amounts and/or resume scheduled payments under terms which are less profitable than originally agreed, all of which may be further impacted by new, changed, or extended government/regulatory expectations or requirements;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
•the decline in the Federal Reserve Board’s target federal funds rate may cause the yield on our assets to decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and thereby reducing our net income;
•a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
•our wealth management and trust revenues may decline with continuing market turmoil;
•a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;
•our cybersecurity and fraud risks may increase due to our transition of a large portion of our workforce to a remote work environment;
•the unavailability of a third party vendor, whom we rely on for certain services, could cause a lapse in a critical service; and
•Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
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Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and the successfulness of efforts to abate it; the continued effectiveness of our business continuity plan; the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants; and actions taken by governmental authorities and other third parties in response to the pandemic, including when, how and to what extent the economy may be fully reopened.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities
 
Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number  of Shares that May Yet Be Purchased Under the Plans or Programs
(a) (b) (c) (d)
July 1, 2020 through July 31, 2020 2,140  $ 58.12  0  328,712 
August 1, 2020 through August 31, 2020 636  69.73  0  328,712 
September 1, 2020 through September 30, 2020 0  0.00  0  328,712 
Total 2,776  $ 60.78  0  328,712 

Included in the table above are 2,140 shares purchased in July 2020, at an average cost of $58.12, and 636 shares purchased in August 2020, at an average cost of $69.73, by the trustee of the rabbi trust established by the Company under the Company’s Stock Retainer Plan For Eligible Directors of Tompkins Financial Corporation and Participating Subsidiaries, which were part of the director deferred compensation under that plan.

On July 19, 2018, the Company's Board of Directors authorized a share repurchase plan (the "2018 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company's common stock over the 24 months following the adoption of the plan. The 2018 Repurchase Plan could be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2018 Repurchase Plan, the Company repurchased 393,004 shares through December 31, 2019, at an average price of $79.15.

On January 30, 2020, the Company’s Board of Directors authorized a new share repurchase plan (the “2020 Repurchase Plan”) to replace the 2018 Repurchase Plan. The 2020 Repurchase Plan provides for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. As with the 2018 Repurchase Plan, shares may be repurchased from time to time under the 2020 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2020 Repurchase Plan, the Company repurchased 71,288 shares during the first quarter of 2020, at an average cost of $76.13. On March 19, 2020, following the announcement of the national emergency related to the COVID-19 pandemic, the Company suspended the purchase of shares under the 2020 Repurchase Plan. The Company did not purchase any shares under the 2020 Repurchase Plan during the second or third quarters of 2020.

Recent Sales of Unregistered Securities
 
None
 
Item 3. Defaults Upon Senior Securities
 
None 
74

Item 4. Mine Safety Disclosures
 
Not applicable
 
Item 5. Other Information
 
None
        
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Item 6.     Exhibits
 
EXHIBIT INDEX
 
Exhibit Number Description
31.1
31.2
32.1
32.2
101 INS** The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document
101 SCH** Inline XBRL Taxonomy Extension Schema Document
101 CAL** Inline XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF** Inline XBRL Taxonomy Extension Definition Linkbase Document
101 LAB** Inline XBRL Taxonomy Extension Label Linkbase Document
101 PRE** Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File - the cover page interactive data file does not appear in the interactive date file because its XBRL tags are embedded with the inline XBRL document.
** Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Condition as of September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019; (v) Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2020 and 2019; and (vi Notes to Unaudited Consolidated Financial Statements.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: November 09, 2020
 
TOMPKINS FINANCIAL CORPORATION
 
By: /s/ Stephen S. Romaine  
  Stephen S. Romaine  
  President and Chief Executive Officer  
  (Principal Executive Officer)  
 
By: /s/ Francis M. Fetsko  
  Francis M. Fetsko  
  Executive Vice President, Chief Financial Officer, and Chief Operating Officer
  (Principal Financial Officer)  
(Principal Accounting Officer)  
 

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