TOMPKINS FINANCIAL CORP – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations – InsuranceNewsNet

COMPANY

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. Effective
January 1, 2022, the Company's four wholly-owned banking subsidiaries were
combined into one bank, with the Bank of of Castile, Mahopac Bank, and VIST Bank
merging with and into Tompkins Trust Company (the "Trust Company") with the
Trust Company as the surviving institution. Immediately following the merger,
the Trust Company changed its name to Tompkins Community Bank. At June 30, 2022,
the Company had one wholly-owned banking subsidiary, Tompkins Community Bank.
The Company also has a wholly-owned insurance agency subsidiary, Tompkins
Insurance Agencies, Inc. ("Tompkins Insurance"). The trust division of 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, NY, 14850, and its
telephone number is (888) 503-5753. The Company's common stock is traded on the
NYSE American under the Symbol "TMP."

The Tompkins strategy centers around our core values and a commitment to
delivering long-term value to our clients, communities, and shareholders. A key
strategic initiative for the Company is a focus on responsible and sustainable
growth, including initiatives to grow organically through our current
businesses, as well as through possible acquisitions of financial institutions,
branches, and financial services businesses. As such, the Company has acquired,
and from time to time considers acquiring, banks, thrift institutions, branch
offices of banks or thrift institutions, or other businesses that would
complement the Company's business or its geographic reach. The Company generally
targets merger or acquisition partners that are culturally similar and have
experienced management and possess either significant market presence or have
potential for improved profitability through financial management, economies of
scale and expanded services.

Business Segments
Banking services consist primarily of attracting deposits from the areas served
by the Company's one banking subsidiary's 63 banking offices (43 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 Tompkins
Community Bank under the trade name Tompkins Financial Advisors. Tompkins
Financial Advisors offers services to customers of Tompkins Community Bank and
shares offices in each of the banking markets.

Insurance services include property and casualty insurance, employee benefit
consulting, and life, long-term care and disability insurance. Tompkins
Insurance is headquartered 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. Tompkins Insurance offers services to customers of Tompkins
Community Bank and shares offices in each of the banking markets. In addition to
these shared offices, Tompkins Insurance has five stand-alone offices in Western
New York, and one stand-alone office in Tompkins County, New York.

The main expenses of the Company are interest on deposits, interest on
borrowings and general operating and administrative costs, as well as
provisions for credit losses. Funding sources, other than deposits, include
borrowings, securities sold under repurchase agreements and cash flows
lending and investment activities.

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Competition

Competition for commercial banking and other financial services is strong in the
Company's market areas. In one or more aspects of its business, the Company's
subsidiaries compete with other commercial banks, savings and loan associations,
credit unions, finance companies, Internet-based financial services companies,
mutual funds, insurance companies, brokerage and investment banking companies,
and other financial intermediaries. Some of these competitors have substantially
greater resources and lending capabilities and may offer services that the
Company does not currently provide. In addition, many of the Company's non-bank
competitors are not subject to the same extensive Federal regulations that
govern financial holding companies and Federally-insured banks.

Competition among financial institutions is based upon interest rates offered on
deposit accounts, interest rates charged on loans and other credit and service
charges, the quality and scope of the services rendered, the convenience of
facilities and services, and, in the case of loans to commercial borrowers,
relative lending limits. Management believes that a community-based financial
organization is better positioned to establish personalized financial
relationships with both commercial customers and individual households. The
Company's community commitment and involvement in its primary market areas, as
well as its commitment to quality and personalized financial services, are
factors that contribute to the Company's competitiveness. Management believes
that each of the Company's subsidiary banks can compete successfully in its
primary market areas by making prudent lending decisions quickly and more
efficiently than its competitors, without compromising asset quality or
profitability. In addition, the Company focuses on providing unparalleled
customer service, which includes offering a strong suite of products and
services, including products that are accessible to our customers through
digital means. Although management feels that this business model has caused the
Company to grow its customer base in recent years and allows it to compete
effectively in the markets it serves, we cannot assure you that such factors
will result in future success.

Regulation

Banking, insurance services and wealth management are highly regulated. As a
financial holding company including a community bank, a registered investment
adviser, and an insurance agency subsidiary, the Company and its subsidiaries
are subject to examination and regulation by 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 six months ended June 30, 2022. It should be read in conjunction
with the Company's Audited Consolidated Financial Statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2021, and the Unaudited Consolidated Financial Statements and notes
thereto included in Part I of this Quarterly Report on Form 10-Q.

In this Report, there are comparisons of the Company's performance to that of a
peer group, which is comprised of the group of 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 March 31, 2022
(the most recent report available). Although the peer group data is presented
based upon financial information that is one fiscal quarter behind the financial
information included in this report, the Company believes that it is relevant to
include certain peer group information for comparison to current quarter
numbers.

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The
statements contained in this Report that are not statements of historical fact
may include forward-looking statements that involve a number of risks and
uncertainties. Forward-looking statements may be identified by use of such words
as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan",
or "anticipate", and other similar words. Examples of forward-looking statements
may include statements regarding the asset quality of the Company's loan
portfolios; the level of the Company's allowance for credit losses; whether,
when and how borrowers will repay deferred amounts and resume scheduled
payments; the sufficiency of liquidity sources; the Company's exposure to
changes in interest rates, and to new, changed, or extended
government/regulatory expectations; the impact of changes in accounting
standards; and trends, plans, prospects, growth and strategies. Forward-looking
statements are made based on management's expectations and beliefs concerning
future events impacting the Company and are subject to certain uncertainties and
factors relating to the Company's operations and economic environment, all of
which are difficult to predict and many of which are beyond the control of the
Company, that could cause actual results of the Company to differ materially
from those expressed and/or implied by forward-looking statements. The following
factors, in addition to those listed as Risk Factors in Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2021, are among those that
could cause actual results to differ
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materially from the forward-looking statements: changes in general economic,
market and regulatory conditions; GDP growth and inflation trends; the ongoing
dynamic nature of the COVID-19 pandemic and its impact; the impact of the
interest rate and inflationary environment on the Company' business, financial
condition and results of operations; other income or cash flow anticipated from
the Company's operations, investment and/or lending activities; changes in laws
and regulations affecting banks, bank holding companies and/or financial holding
companies, such as the Dodd-Frank Act and Basel III and the Economic Growth,
Regulatory Relief, and Consumer Protection Act; the impact of any change in the
FDIC insurance assessment rate or the rules and regulations related to the
calculation of the FDIC insurance assessment amount; legislative and regulatory
changes in response to COVID-19 with which we and our subsidiaries must comply,
including the CARES Act and the Consolidated Appropriations Act, 2021, 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 war in Ukraine, as well as 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.

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, 2021. Refer to "Recently Issued
Accounting Standards" in Management's Discussion and Analysis in this Quarterly
Report on Form 10-Q for a discussion of recent accounting updates.

Critical accounting estimates

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

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•Accounting for credit losses - The Company accounts for the allowance for
credit losses using the current expected credit loss model. Under this
accounting guidance, the allowance for credit losses represents a valuation
account that is deducted from the amortized cost basis of certain financial
assets, including loans and leases, to present the net amount expected to be
collected at the balance sheet date. A provision for credit losses is recorded
to adjust the level of the allowance as deemed necessary by management. In
estimating expected losses in the loan and lease portfolio, borrower-specific
financial data and macro-economic assumptions are utilized to project losses
over a reasonable and supportable forecast period. For certain loan pools that
share similar risk characteristics, the Company utilizes statistically developed
models to estimate amounts and timing of expected future cash flows, collateral
values and other factors used to determine the borrowers' abilities to repay
obligations. Such models consider historical correlations of credit losses with
various macroeconomic assumptions including unemployment and gross domestic
product. These forecasts may be adjusted for inherent limitations or biases of
the models. Subsequent to the forecast period, the Company utilizes longer-term
historical loss experience to estimate losses over the remaining contractual
life of the loans. Changes in the circumstances considered when determining
management's estimates and assumptions could result in changes in those
estimates and assumptions, which could result in adjustment of the allowance for
credit losses in future periods. A discussion of facts and circumstances
considered by management in determining the allowance for credit losses is
included herein in Note 4 of Notes to Financial Statements.

COVID-19 pandemic and recent events

The COVID-19 global pandemic continued to present health and economic challenges
in the second quarter of 2022, but conditions were generally improved from 2021.
The Company's hybrid work environment for most noncustomer facing employees is
in place and travel restrictions eliminated. On March 17, 2022, the NY State
Department of Labor announced that the department ended the designation of
COVID-19 as an airborne infectious disease that presents a serious risk of harm
to public health under the HERO Act and our protocols have been updated
accordingly.

The Company's payment deferral program that was implemented in 2020 to provide
assistance to its customers that were experiencing financial hardship due to the
COVID-19 pandemic has been reduced as customers return to repayment status. As
of June 30, 2022, total loans that continued in a deferral status amounted to
approximately $1.8 million, representing 0.04% of total loans, and of those
loans approximately 4.1% were past due. In accordance with the Coronavirus Aid,
Relief and Economic Security Act (the "CARES Act") and the interagency guidance,
the Company elected to adopt the provisions to not report qualified loan
modifications as troubled debt restructurings ("TDRs"). The relief related to
TDRs under the CARES Act was extended by the Consolidated Appropriations Act,
2021. Under the Consolidated Appropriations Act, relief under the CARES Act was
extended until the earlier of (i) 60 days after the date the COVID-19 national
emergency comes to an end or (ii) January 1, 2022. Management continues to
monitor credit conditions carefully at the individual borrower level, as well as
by industry segment, in order to be responsive to changing credit conditions.

The Company funded a total of 5,140 applications for Paycheck Protection Plan
("PPP") loans totaling $694.1 million in 2020 and 2021. Out of the $694.1
million of PPP loans that the Company funded, approximately $690.8 million have
been forgiven by the SBA under the terms of the program as of June 30, 2022, or
paid back by the borrower. As of June 30, 2022, there were twenty outstanding
PPP loans totaling approximately $3.3 million. Total net deferred fees on the
remaining balance of PPP loans amounted to $106,000 at June 30, 2022.

OPERATING RESULTS

Performance Summary
Net income for the second quarter of 2022 was $20.9 million or $1.45 diluted
earnings per share, compared to $22.8 million or $1.54 diluted earnings per
share for the same period in 2021. Net income for the first six months of 2022
was $44.1 million or $3.05 diluted earnings per share compared to $48.5 million
or $3.26 diluted earnings per share for the first six months of 2021. Net income
for the second quarter of 2022 was down $2.0 million or 8.6% when compared to
the same quarter in 2021. For the year to date period ending June 30, 2022, net
income decreased by $4.3 million or 8.9%. The decrease in net income for both
the three and six month periods in 2022 compared to the same periods in 2021 was
mainly a result of the recording of a provision expense as well as increases in
noninterest expense.

Return on average assets ("ROA") for the quarter ended June 30, 2022 was 1.07%,
compared to 1.15% for the quarter ended June 30, 2021. Return on average
shareholders' equity ("ROE") for the second quarter of 2022 was 13.09%, compared
to 12.70% for the same period in 2021. For the year-to-date period ended
June 30, 2022, ROA and ROE totaled 1.13% and 13.17%, respectively, compared to
1.24% and 13.55%, for the same period in 2021.


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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 $18.8 million for the second quarter
of 2022, a decrease of $1.9 million or 9.1% from net income of $20.7 million for
the same period in 2021. For the six months ended June 30, 2022, the banking
segment reported net income of $38.8 million, a decrease of $4.2 million or 9.9%
from the same period in 2021. The year-to-date decrease in net income was mainly
due to a $5.2 million increase in provision expense over prior year, partially
offset by increased net interest income.

Net interest income of $58.3 million for the second quarter of 2022 was up $3.4
million or 6.2% from the same period in 2021. For the six months ended June 30,
2022, net interest income of $114.9 million was up $5.0 million or 4.5% compared
to the first six months of 2021, with the improvement largely driven by lower
funding costs and higher yields on earning assets. Net interest income for the
three and six months ended June 30, 2022 included net deferred loan fees
associated with PPP loans of $873,000 and $2.9 million, respectively, compared
to net deferred loan fees of $1.9 million and $4.7 million for the three and six
months ended June 30, 2021, respectively.

The provision for credit losses was an expense of $856,000 for the three months
ended June 30, 2022, compared to a credit of $3.1 million for the same period in
2021. For the six month period ended June 30, 2022, the provision for credit
losses was an expense of $336,000 compared to a credit of $4.9 million for the
same period in 2021. The increase in provision for credit losses for both the
three and six month periods is mainly driven by current economic forecasts
coupled with loan growth. For additional information, see the section titled
"The Allowance for Credit Losses" below.

Noninterest income of $6.3 million for the three months ended June 30, 2022 was
down $118,000 or 1.8% compared to the same period in 2021. The decrease was
mainly driven by reduced income on bank owned life insurance and lower gains on
sales of residential loans, which were down $399,000 and $100,000, respectively,
from the same quarter in 2021. Service charges on deposit accounts were up
$285,000 in the second quarter of 2022 over the second quarter of 2021. For the
six months ended June 30, 2022, noninterest income of $12.5 million was down
$237,000 or 1.9% compared to the six months ended June 30, 2021. The decrease
was mainly driven by the reduced income on bank owned life insurance and lower
gains on sales of residential loans, which were down $518,000 and $525,000,
respectively, from the same period in 2021. These were partially offset by
growth in service charges on deposit accounts and card services income, which
were up $594,000 and $168,000, respectively, in 2022 over 2021.

Noninterest expense of $39.4 million and $76.6 million for the three and six
months ended June 30, 2022, respectively, was up $1.5 million or 4.0% and $3.4
million or 4.6%, respectively, over the same periods in 2021. Included in the
quarter and year-to-date periods of 2022 were one-time expenses of $956,000 and
$1.2 million, respectively, related to the consolidation of the Company's four
banking charters into one charter, including the related conversion of the core
banking system, which was completed in May of this year. The other drivers were
marketing expenses being up $324,000 and $886,000, and cardholder expenses being
up $405,000 and $760,000, for the three and six months ended respectively.

Insurance Segment
The insurance segment reported net income of $1.3 million for the three months
ended June 30, 2022, which was up $264,000 or 26.3% compared to the second
quarter of 2021. Total noninterest revenue was up $410,000 or 5.0% for the
second quarter of 2022 compared to the same quarter in the prior year, primarily
due to growth in both commercial and personal lines property and casualty
commissions. The growth in property and casualty commission revenue is
attributed to new business, growth within the existing client base, and premium
increases related to change in general market conditions.

For the six months ended June 30, 2022, net income was up $202,000 or 6.3%
compared to the same period in the prior year. Total revenue was up $426,000 or
2.4% compared to the same period in the prior year. The increase in revenues and
net income for the six months ended June 30, 2022 compared to the prior year is
mainly due to growth in overall commission revenue of $652,000 or 4.3%,
primarily in commercial and personal lines, which were up 6.4% and 5.3%
respectively.

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Noninterest expenses for the three months ended June 30, 2022 were up $51,000 or
0.8% compared to the three months ended June 30, 2021. Year-to-date noninterest
expenses were up $117,000 or 0.9% compared to the six months ended June 30,
2021. The increases in noninterest expenses for the three and six months ended
June 30, 2022 were mainly the result of increases in wages and new business
commissions along with related tax and benefit expenses tied to the increase in
commission revenue.

Wealth Management Segment
The wealth management segment reported net income of $759,000 for the three
months ended June 30, 2022, which was down $345,000 or 31.3% compared to the
second quarter of 2021. The lower net income was a result of lower revenues and
increased expenses. Revenue for the second quarter of 2022 was down $210,000 or
4.4% compared to the second quarter of 2021. The decrease for the three months
ended June 30, 2022 was mainly in advisory revenues related to a decrease in
assets under management, largely a result of market conditions. Total expense
for the second quarter of 2022 was up $106,000 or 3.1% compared to the second
quarter of 2021. The increase in expense was mainly attributable to technology
costs, mainly related to implementation of a new core platform. For the six
months ended June 30, 2022, net income of $2.0 million was down $272,000 or
12.1% compared to the prior year, mainly due to an increase in expenses
mentioned above. Revenues for the six months ended June 30, 2022, were down
$59,000 or 0.6% from the same period in 2021.

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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 six month periods ended June 30, 2022 and 2021:

Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
                                                              Quarter Ended                                 Quarter Ended
                                                              June 30, 2022                                 June 30, 2021
                                                 Average                                       Average
                                                 Balance                      Average          Balance                      Average
(Dollar amounts in thousands)                     (QTD)       Interest       Yield/Rate         (QTD)       Interest       Yield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks      $    88,094    $     64               0.29  % $   216,679    $     45               0.08  %
Securities (1)
U.S. Government securities                      2,305,102       7,746               1.35  %   1,987,541       5,338               1.08  %

State and municipal (2)                            97,481         619               2.55  %     114,221         727               2.55  %
Other securities (2)                                3,337          28               3.40  %       3,418          23               2.70  %
Total securities                                2,405,920       8,393               1.40  %   2,105,180       6,088               1.16  %
FHLBNY and FRB stock                               12,234         120               3.92  %      17,285         199               4.62  %
Total loans and leases, net of unearned
income (2)(3)                                   5,115,340      52,733               4.14  %   5,270,648      53,909               4.10  %
Total interest-earning assets                   7,621,588      61,310               3.23  %   7,609,792      60,241               3.18  %
Other assets                                      209,057                                       340,154
Total assets                                  $ 7,830,645                                   $ 7,949,946
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings, & money
market                                          4,073,279         890               0.09  %   3,966,472         943               0.10  %
Time deposits                                     603,791       1,157               0.77  %     726,258       1,859               1.03  %
Total interest-bearing deposits                 4,677,070       2,047               0.18  %   4,692,730       2,802               0.24  %
Federal funds purchased & securities sold
under agreements to repurchase                     54,885          15               0.11  %      52,099          15               0.11  %
Other borrowings                                  169,390         629               1.49  %     272,993       1,351               1.98  %
Trust preferred debentures                              0           0               0.00  %      12,978         821              25.39  %
Total interest-bearing liabilities              4,901,345       2,691               0.22  %   5,030,800       4,989               0.40  %
Noninterest bearing deposits                    2,189,132                                     2,082,149
Accrued expenses and other liabilities            100,813                                       115,661
Total liabilities                               7,191,290                                     7,228,610
Tompkins Financial Corporation Shareholders'
equity                                            637,896                                       719,880
Noncontrolling interest                             1,459                                         1,456
Total equity                                      639,355                                       721,336

Total liabilities and equity                  $ 7,830,645                                   $ 7,949,946
Interest rate spread                                                                3.01  %                                       2.78  %
Net interest income/margin on earning assets                   58,619               3.09  %                  55,252               2.91  %

Tax Equivalent Adjustment                                        (357)                                         (406)
Net interest income per consolidated
financial statements                                         $ 58,262                                      $ 54,846




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Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
                                                           Year to Date Period Ended                            Year to Date Period Ended
                                                                 June 30, 2022                                        June 30, 2021
                                                    Average                                              Average
                                                    Balance                          Average             Balance                          Average
(Dollar amounts in thousands)                        (YTD)           Interest       Yield/Rate            (YTD)           Interest       

Yield/Rate

ASSETS

Interest-bearing assets
Interest-bearing balances due from banks $110,984 $105

               0.19  % $      312,130       $     130               0.08 

%

Securities (1)
U.S. Government securities                         2,299,389          15,108               1.32  %      1,812,315           9,950               

1.11%

State and municipal (2)                               99,602           1,267               2.57  %        117,571           1,502               2.58  %
Other securities (2)                                   3,363              51               3.06  %          3,422              46               2.72  %
Total securities                                   2,402,354          16,426               1.38  %      1,933,308          11,498               1.20  %
FHLBNY and FRB stock                                  11,172             225               4.06  %         16,836             412               4.93 

%

Total loans and leases, net of unearned
income (2)(3)                                      5,085,808         104,088               4.13  %      5,280,914         108,365               4.14  %
Total interest-earning assets                      7,610,318         120,844               3.20  %      7,543,188         120,405               3.22  %
Other assets                                         259,809                                              345,461
Total assets                                  $    7,870,127                                       $    7,888,649
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings, & money
market                                             4,116,870           1,638               0.08  %      3,957,936           2,036               0.10  %
Time deposits                                        617,616           2,455               0.80  %        737,729           3,917               1.07  %
Total interest-bearing deposits                    4,734,486           4,093               0.17  %      4,695,665           5,953               0.26  %
Federal funds purchased & securities sold
under agreements to repurchase                        59,536              31               0.11  %         55,821              31               0.11  %
Other borrowings                                     147,466           1,129               1.54  %        269,019           2,727               2.04  %
Trust preferred debentures                                 0               0               0.00  %         13,105             996              15.33  %
Total interest-bearing liabilities                 4,941,488           5,253               0.21  %      5,033,610           9,707               0.39  %
Noninterest bearing deposits                       2,149,201                                            2,016,262
Accrued expenses and other liabilities               103,451                                              117,749
Total liabilities                                  7,194,140                                            7,167,621
Tompkins Financial Corporation Shareholders'
equity                                               674,545                                              719,586
Noncontrolling interest                                1,442                                                1,442
Total equity                                         675,987                                              721,028

Total liabilities and equity                  $    7,870,127                                       $    7,888,649
Interest rate spread                                                                       2.99  %                                              2.83  %
Net interest income/margin on earning assets                         115,591               3.06  %                        110,698               

2.96%

Tax Equivalent Adjustment                                               (715)                                                (815)
Net interest income per consolidated
financial statements                                               $ 114,876                                            $ 109,883


1 Average balances and yields on available-for-sale debt securities are based on
historical amortized cost.
2 Interest income includes the tax effects of taxable-equivalent adjustments
using an effective income tax rate of 21% in 2022 and 2021 to increase tax
exempt interest income to taxable-equivalent basis.
3 Nonaccrual loans are included in the average asset totals presented
above. Payments received on nonaccrual loans have been recognized as disclosed
in Note 1 of the Company's consolidated financial statements included in Part 1
of the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2021.

Net Interest Income
Net interest income is the Company's largest source of revenue, representing
75.5% and 74.7%, respectively, of total revenues for the three and six months
ended June 30, 2022, compared to 74.4% and 73.9% for the same periods in 2021.
Net interest income is dependent on the volume and composition of interest
earning assets and interest-bearing liabilities and the level of market interest
rates. The above table shows average interest-earning assets and
interest-bearing liabilities, and the corresponding yield or cost associated
with each.
                                       52
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Taxable-equivalent net interest income for the three months ended June 30, 2022
increased $3.4 million or 6.1% from the same period in the prior year. The
increase resulted mainly from an 18 basis point decrease in the average rate
paid on interest bearing liabilities and a 5 basis point increase in the average
yield on interest earning assets. Taxable-equivalent net interest income for the
six month period ended June 30, 2022 increased $4.9 million or 4.4% from the six
month period ended June 30, 2021. Net interest income in the first six months of
2022 benefited from the growth in average securities balances and average yields
on securities, which were up 24.3% and 18 basis points over the same six month
period in 2021, and an 18 basis point decrease in the average rate paid on
interest bearing liabilities.

Net interest margin for the three months ended June 30, 2022 was 3.09% compared
to 2.91% in 2021. Net interest margin for the six months ended June 30, 2022 was
3.06% compared to 2.96% for the same period in 2021. The increase in net
interest margin for the three and six months ended June 30, 2022 compared to the
same periods in 2021 was mainly due to an increase in higher yielding securities
along with lower average funding costs.

Taxable-equivalent interest income for the three and six months ended June 30,
2022, was $61.3 million and $120.8 million, up 1.8% and 0.4%, respectively,
compared to the same periods in 2021. The growth in the three month period
reflects higher average asset yields and growth in average earning assets, while
the year-to-date growth reflects growth in average earning assets. Average asset
yields for the three months ended June 30, 2022 were up 5 basis points compared
to the same period in 2021 driven by growth in higher yielding securities as
excess liquidity was invested in securities and loans. For the three months
ended June 30, 2022, the average yield on securities was up 24 basis points and
the average yield on loans was up 4 basis points over the same period in 2021.
Yields in 2022 also benefited from increases in market interest rates. Average
asset yields for the six months ended June 30, 2022 were down 2 basis points
compared to the same period in 2021, resulting from a 1 basis point decrease in
the average yield on loans, partially offset by an 18 basis point increase in
the average yield on securities. As a result of its participation in the SBA's
PPP, the Company recorded net deferred loan fees of $873,000 and $2.9 million,
respectively, in the three and six months ended June 30, 2022, compared to $1.9
million and $4.7 million, respectively, for the three and six months ended June
30, 2021. These net deferred loan fees are included in interest income.

For the three and six months ended June 30, 2022, average earning assets were up
$11.8 million or 0.2% and $67.1 million or 0.9%, respectively, over the same
periods in 2021 with the majority of growth in securities. Average loan balances
for the three months ended June 30, 2022, were down $155.3 million or 3.0% from
the three months ended June 30, 2021. Average balances for the six months ended
June 30, 2022 were down $195.1 million or 3.7% from the six months ended June
30, 2021. The decrease in average loans was primarily due to a decline in
average PPP loans. Average securities balances for the three and six months
ended June 30, 2022, were up $300.7 million or 14.3% and $469.0 million or
24.3%, respectively. Average interest bearing balances for the three and six
months ended June 30, 2022, were down $128.6 million and $201.1 million,
respectively, over the same periods in 2021.

Interest expense for the three and six months ended June 30, 2022, decreased by
$2.3 million or 46.1% and $4.5 million or 45.9%, respectively, compared to the
same periods in 2021. The average cost of interest-bearing deposits during the
three and six months ended June 30, 2022 was 0.18% and 0.17%, respectively, down
6 basis points and 8 basis points, respectively, compared to the same periods in
2021. Average interest-bearing deposits were down $15.7 million or 0.3% but were
up $38.8 million or 0.8%, respectively, for the same three and six months ended
2021. Average noninterest bearing deposits were up $107.0 million or 5.14% for
the three months ended June 30, 2022 when compared to the second quarter of
2021, and for the six months ended June 30, 2022 were up $133.0 million or 6.6%
compared to the same period in 2021. Average other borrowings for the three and
six months ended June 30, 2022 were down $103.6 million or 38.0% and $121.6
million or 45.2%, respectively, compared to the same periods in 2021, mainly due
to decreases in term borrowings with the FHLB.

Provision for Credit Losses
The provision for credit losses represents management's estimate of the amount
necessary to maintain the allowance for credit losses ("ACL") at an appropriate
level. Provision for credit losses in the second quarter of 2022 was $856,000
compared to a credit of $3.1 million for the second quarter of 2021. Provision
for credit losses for the six months ended June 30, 2022 was $336,000 compared
to a credit of $4.9 million for the same period in 2021. The provision for
credit losses for the three and six months ended June 30, 2022 included a
provision expense of $76,000 and $290,000, respectively, related to off-balance
sheet credit exposures compared to a credit to provision of $353,000 and a
provision expense of $327,000, respectively, for the same periods in 2021. The
increase in provision for credit losses for both the three and six month periods
is mainly driven by current economic forecasts coupled with loan growth. The
section captioned "Financial Condition - The Allowance for Credit Losses" below
has further details on the allowance for credit losses and asset quality
metrics.

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Noninterest Income
Noninterest income was $18.9 million for the second quarter of 2022, which was
in line compared to the second quarter of 2021, and was $38.9 million for the
first six months of 2022, which was also in line with the same period prior
year. Noninterest income represented 24.5% of total revenue for the second
quarter of 2022 and 25.3% for the six months ended June 30, 2022, compared to
25.6% and 26.1%, respectively, for the same periods in 2021.

Insurance commissions and fees, the largest component of noninterest income,
were $8.4 million for the second quarter of 2022, an increase of 4.7% from the
same period prior year. The increase in insurance commissions and fees in the
second quarter of 2022 over the same period in 2021 was mainly commercial lines
and personal lines property and casualty commissions which grew by 9% and 6%,
respectively. For the first six months of 2022, insurance commissions and fees
were up $526,000 or 3.1% compared to the same period in 2021. The increase in
revenues for the six months ended June 30, 2022, compared to the prior year was
primarily due to growth in commercial lines and personal lines revenue
attributable to increased new business, growth within the existing client base,
and premium increases related to changes in general market conditions and
exposures for certain business sectors.

Investment services income of $4.6 million in the second quarter of 2022 was
down $121,000 or 2.6% compared to the second quarter of 2021. For the first six
months of 2022, investment services income was up $123,000 or 1.3% compared to
the same period in 2021. 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 $2.8 billion
at June 30, 2022. The fair value of assets managed by, or in custody of,
Tompkins was $5.0 billion at June 30, 2021, which included $1.5 billion of
Company-owned securities where Tompkins is custodian. The decline in assets from
prior year resulted in part from the outsourcing of the management of the
Tompkins Retirement Account ($95.0 million) and custody of Company-owned
securities where Tompkins was custodian ($1.5 billion); however, as these were
inter-company related items, these have had little to no impact to total income,
overall.

Service charges on deposit accounts were $1.8 million and $3.5 million for the
three and six months ended June 30, 2022, up $285,000 or 19.4% and $594,000 or
20.2%, respectively, over the same periods in 2021. The increase was in net
overdraft fees and service fees on personal and business accounts, reflective of
increased transaction activity.

Card services income in the second quarter of 2022 was in line with the same
three month period end of 2021, while the six months ended June 30, 2022, was up
$168,000 or 3.2% compared to the same period in 2021. Debit card income, the
largest component of card services income, was in line with both the three and
six month period ended June 30, 2021. Interchange income related to credit card
services was up $67,000 and $130,000, respectively, compared to the same three
and six month periods in 2021.

Other income of $1.2 million in the second quarter of 2022 was down $424,000 or
25.5% compared to the same period in 2021. For the first six months of 2022,
other income of $2.7 million was down $922,000 or 25.3% compared to the same
period in 2021. The decrease for the three and six months ended June 30, 2022
compared to the same periods in 2021, was mainly due to lower earnings on bank
owned life insurance and lower gains on sales of residential loans. Earnings on
bank owned life insurance were down $399,000 and $562,000, respectively, and
gains on sales of residential loans were down $100,000 and $525,000,
respectively, for the three and six months ended June 30, 2022, compared to the
same periods in the prior year.

Noninterest Expense
Noninterest expense of $49.1 million for the second quarter of 2022 and $96.0
million for the first six months of 2022, was up 3.5% and 4.4%, respectively,
compared to the same periods in 2021.

Expenses associated with compensation and benefits comprise the largest
component of noninterest expense, representing 62.6% and 62.3% of total
noninterest expense for the three and six months ended June 30, 2022. Salaries
and wages expense for the three and six months ended June 30, 2022 increased by
$404,000 or 1.7%, and $1.0 million or 2.2%, respectively, compared to the same
periods in 2021. The increases were mainly due to normal merit adjustments.
Employee benefits for the three months ended June 30, 2022 decreased by $285,000
or 4.3%, from the same three month period end in 2021, mainly as a result of
lower health care expense. Employee benefits for the six months ended June 30,
2022, was in line with the same six month period end in 2021.

Other expense categories, not related to compensation and benefits, for the
three and six months ended June 30, 2022 were up $1.6 million or 9.3% and $3.0
million or 8.9%, respectively. For the three and six months ended June 30, 2022,
compared to the same periods in 2021, marketing expenses were up $324,000 or
28.6% and $886,000 or 54.4%, respectively, cardholder expense was up $405,000 or
46.3% and $760,000 or 45.7%, respectively, printing and supplies were up
$210,000 or 238.5% and $277,000 or 160.4%, respectively, and technology expense
was up $713,000 or 23.9% and $1.5 million or 24.9%,
                                       54
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respectively. Contributing to the growth in these expenses for the three months
ended and year-to-date periods ended June 30, 2022, were one-time expenses of
$956,000 and $1.2 million, respectively, related to the consolidation of the
Company's four banking charters into one charter, including the related
conversion of the core banking system, which was completed in May of this year.

Income Tax Expense
The provision for income taxes was $6.3 million for an effective rate of 23.2%
for the second quarter of 2022, compared to tax expense of $6.5 million and an
effective rate of 22.1% for the same quarter in 2021. For the first six months
of 2022, the provision for income taxes was $13.3 million for an effective rate
of 23.1% compared to tax expense of $13.2 million and an effective rate of 21.3%
for the same period in 2021. The effective rates differ from the U.S. and state
statutory rates primarily due to the effect of tax-exempt income from loans,
securities and life insurance assets, and the income tax effects associated with
stock based compensation. The increase in the effective tax rate for the three
and six months ended June 30, 2022, over the same period in 2021, is largely due
to the anticipated loss of certain New York State tax benefits due to the
expectation that average assets will exceed $8.0 billion for the 2022 tax year.

The Company's banking subsidiary has an investment in a real estate investment
trust that provides certain benefits on its New York State tax return for
qualifying entities. A condition to claim the benefit is that the consolidated
company has average assets of no more than $8.0 billion for the taxable year.
The Company expects average assets to exceed the $8.0 billion threshold for the
2022 tax year. As of June 30, 2022, the Company's consolidated average assets,
as defined by New York tax law, were slightly under the $8.0 billion threshold.
The Company will continue to monitor the consolidated average assets during 2022
to determine future eligibility.

FINANCIAL CONDITION

Total assets were $7.8 billion at June 30, 2022, up $22.5 million or 0.3% from
December 31, 2021. The increase in total assets over year-end 2021 was mainly
due to loan growth, which increased $87.0 million or 1.7% compared to December
31, 2021. Total securities were $2.2 billion at June 30, 2022, down $124.6
million or 5.4% compared to the $2.3 billion reported at year-end 2021. The
decrease was the result of an increase in unrealized losses on the
available-for-sale portfolio from $19.3 million at year-end 2021 to $183.3
million at June 30, 2022, as a result of the increase in market interest rates
in 2022. Total cash and cash equivalents were down $17.3 million or 27.4%
compared to December 31, 2021. Total deposits at June 30, 2022 were down $21.9
million or 0.3% from December 31, 2021. Other borrowings at June 30, 2022
increased $171.6 million or 138.4% from December 31, 2021, as loan growth
outpaced deposit growth.

Securities

From June 30, 2022the Company’s securities portfolio has been $2.2 billion Where
28.1% of total assets, compared to $2.3 billion i.e. 29.8% of total assets at the financial year
end of 2021. The following table details the composition of the securities
wallet:

Debt securities available for sale

                                                                 June 30, 2022                   December 31, 2021
(In thousands)                                           Amortized Cost     Fair Value     Amortized Cost     Fair Value
U.S. Treasuries                                        $       191,051    $   174,102    $       160,291    $   157,834
Obligations of U.S. Government sponsored entities              863,235        793,493            843,218        832,373
Obligations of U.S. states and political subdivisions           95,661         88,078            102,177        104,169

Mortgage-backed securities – residential, issued by
United States Government agencies

                                        63,185         59,114             76,502         77,157
U.S. Government sponsored entities                             859,388        774,571            879,102        870,556

U.S. corporate debt securities                                   2,500          2,360              2,500          2,424
Total available-for-sale debt securities               $     2,075,020    $ 1,891,718    $     2,063,790    $ 2,044,513



                                       55
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Debt securities held to maturity

                                                                June 30, 2022                  December 31, 2021
(In thousands)                                           Amortized Cost    Fair Value     Amortized Cost    Fair Value
U.S. Treasuries                                        $        86,582    $   77,345    $        86,689    $   86,368
Obligations of U.S. Government sponsored entities              225,733       197,315            197,320       195,920

Total held-to-maturity debt securities                 $       312,315    $ 

274,660 $284,009 $282,288


As of June 30, 2022, the available-for-sale debt securities portfolio had net
unrealized losses of $183.3 million compared to net unrealized losses of $19.3
million at December 31, 2021. The increase in unrealized losses related to the
available-for-sale debt securities portfolio, which reflects the amount that the
amortized cost exceeds fair value, was due primarily to increases in market
interest rates during the first six months of 2022. Management's policy is to
purchase investment grade securities that on average have relatively short
duration, which helps mitigate interest rate risk and provides sources of
liquidity without significant risk to capital.

The Company evaluates available-for-sale and held-to-maturity debt securities in
an unrealized loss position to determine whether the decline in the fair value
below the amortized cost basis (impairment) is the result of changes in interest
rates or reflects a fundamental change in the credit worthiness of the
underlying issuer. Any impairment that is not credit related is recognized in
other comprehensive income, 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 June 30, 2022, all impaired available-for-sale
and held-to-maturity debt securities 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 worthiness of the
underlying issuers. The Company does not have the intent to sell these
securities and does not believe it is more likely than not that the Company will
be required to sell these securities before a recovery of amortized cost.
Therefore, the Company carried no ACL at June 30, 2022 and there was no credit
loss expense recognized by the Company with respect to the securities portfolio
during the three and six months ended June 30, 2022.

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Loans and Leases
Loans and leases as of the end of the second quarter and prior year-end period were as follows:

(In thousands)                                                           06/30/2022        12/31/2021
Commercial and industrial
Agriculture                                                           $      69,291    $    99,172
Commercial and industrial other                                             717,837        699,121
PPP loans                                                                     3,499         71,260
Subtotal commercial and industrial                                          790,627        869,553
Commercial real estate
Construction                                                                208,695        178,582
Agriculture                                                                 200,089        195,973
Commercial real estate other                                              2,361,790      2,278,599
Subtotal commercial real estate                                           2,770,574      2,653,154
Residential real estate
Home equity                                                                 181,672        182,671
Mortgages                                                                 1,341,663      1,290,911
Subtotal residential real estate                                          1,523,335      1,473,582
Consumer and other
Indirect                                                                      3,196          4,655
Consumer and other                                                           65,033         67,396
Subtotal consumer and other                                                  68,229         72,051
Leases                                                                       14,019         13,948
Total loans and leases                                                    5,166,784      5,082,288
Less: unearned income and deferred costs and fees                            (4,281)        (6,821)
Total loans and leases, net of unearned income and deferred costs and
fees                                                                  $   5,162,503    $ 5,075,467



Total loans and leases of $5.2 billion at June 30, 2022 were up $87.0 million or
1.7% from December 31, 2021, mainly in the commercial real estate and
residential real estate portfolios, and partially offset by the decline in PPP
loan balances. PPP loans decreased $67.8 million from $71.3 million at year-end
2021, to $3.5 million at June 30, 2022. Excluding PPP loans, total loans at June
30, 2022 were up $154.8 million or 3.1% from December 31, 2021. As of June 30,
2022, total loans and leases represented 65.8% of total assets compared to 64.9%
of total assets at December 31, 2021.

Residential real estate loans, including home equity loans, were $1.5 billion at
June 30, 2022, up $49.8 million or 3.4% compared to December 31, 2021, and
comprised 29.5% of total loans and leases at June 30, 2022. Changes in
residential loan balances reflect the Company's decision to retain these loans
or sell them in the secondary market due to interest rate considerations. The
Company's Asset/Liability Committee meets regularly and establishes standards
for selling and retaining residential real estate mortgage originations.

The Company may sell residential real estate loans in the secondary market based
on interest rate considerations. These residential real estate loans are
generally sold to Federal Home Loan Mortgage Corporation ("FHLMC") 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 six months of 2022 and 2021, the Company sold residential loans
totaling $305,000 and $16.8 million, respectively, recognizing gains of $57,000
and $582,000, respectively. These residential real estate loans were sold
without recourse in accordance with standard secondary market loan sale
agreements. When residential mortgage loans are sold, the Company typically
retains all servicing rights, which provides the Company with a source of fee
income. Mortgage servicing rights totaled $1.0 million at June 30, 2022 and
$1.0 million at December 31, 2021.

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Commercial real estate loans and commercial and industrial loans totaled $2.8
billion and $790.6 million, respectively, and represented 53.7% and 15.3%,
respectively, of total loans and leases as of June 30, 2022. The commercial real
estate portfolio was up $117.4 million or 4.4% over year-end 2021, while
commercial and industrial loans were down $78.9 million or 9.1%. The decrease in
commercial and industrial loans over year-end 2021 was mainly in PPP loans,
which were down $67.8 million or 95.1% to $3.5 million at June 30, 2022.

As of June 30, 2022, agriculturally-related loans totaled $269.4 million or 5.2%
of total loans and leases, compared to $295.1 million or 5.8% of total loans and
leases at December 31, 2021. Agriculturally-related loans include loans to dairy
farms and crop farms. Agricultural-related loans are primarily made based on
identified cash flows of the borrower with consideration given to underlying
collateral, personal guarantees, and government related guarantees.
Agriculturally-related loans are generally secured by the assets or property
being financed or other business assets such as accounts receivable, livestock,
equipment or commodities/crops.

The Company has adopted comprehensive lending policies, underwriting standards
and loan review procedures. Management reviews these policies and procedures on
a regular basis. The Company discussed its lending policies and underwriting
guidelines for its various lending portfolios in Note 4 - "Loans and Leases" in
the Notes to Consolidated Financial Statements contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2021. There have been no
significant changes in these policies and guidelines since the date of that
report. The Company's Board of Directors approves the lending policies at least
annually. The Company recognizes that exceptions to policy guidelines may
occasionally occur and has established procedures for approving exceptions to
these policy guidelines. Management has also implemented reporting systems to
monitor loan originations, loan quality, concentrations of credit, loan
delinquencies and nonperforming loans and potential problem loans.

The Company's loan and lease customers are located primarily in the New York and
Pennsylvania communities served by its subsidiary bank. Although operating in
numerous communities in New York State and Pennsylvania, the Company is still
dependent on the general economic conditions of these states and the local
economic conditions of the communities within those states in which the Company
does business.

The Allowance for Credit Losses
The below table represents the allowance for credit losses as of June 30, 2022
and December 31, 2021. The table provides, as of the dates indicated, an
allocation of the allowance for credit losses for inherent loan losses by type.
The allocation is neither indicative of the specific amounts or the loan
categories in which future charge-offs may occur, nor is it an indicator of
future loss trends. The allocation of the allowance for credit losses to each
category does not restrict the use of the allowance to absorb losses in any
category.

(In thousands)                 6/30/2022   12/31/2021
Allowance for credit losses
Commercial and industrial     $   7,814   $     6,335
Commercial real estate           23,227        24,813
Residential real estate          11,082        10,139
Consumer and other                1,591         1,492
Finance leases                       79            64
Total                         $  43,793   $    42,843



As of June 30, 2022, the total allowance for credit losses was $43.8 million, up
$950,000 or 2.2% compared to December 31, 2021. The ACL as a percentage of total
loans measured 0.85% at June 30, 2022, compared to 0.84% at December 31, 2021.

The increase in the ACL from year-end 2021 reflects updated gross domestic
product ("GDP") forecasts coupled with loan growth, mainly in the real estate
portfolios. Forecasts related to GDP have slowed and are more in line with
historical levels. Qualitative reserves established as a result of the COVID-19
pandemic to address specific portfolios with increased risk characteristics,
including loans in our hotel portfolio, and loans in our deferral program,
continue to move lower as a result of improved conditions in the hotel industry
and payment performance of loans coming out of the deferral program. Although we
have seen improved occupancy rates in the hospitality industry in recent months,
we continue to closely monitor this industry.

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Asset quality measures at June 30, 2022 were generally favorable compared with
December 31, 2021. Loans internally-classified Special Mention or Substandard
were down $22.6 million or 16.4% compared to December 31, 2021. Nonperforming
loans and leases were down $1.6 million or 5.1% from year end 2021 and
represented 0.57% of total loans at June 30, 2022 compared to 0.61% at December
31, 2021. The allowance for credit losses covered 147.95% of nonperforming loans
and leases as of June 30, 2022, compared to 137.51% at December 31, 2021.

Activity in the Company’s provision for credit losses during the six months of
2022 and 2021 is illustrated in the table below:

Analysis of the Allowance for Credit Losses
(In thousands)                                                           6/30/2022      6/30/2021
Average loans outstanding during period                             $ 5,085,808    $ 5,280,914
Allowance at beginning of year, prior to adoption of ASU 2016-13         42,843         51,669

LOANS CHARGED-OFF:
Commercial and industrial                                                    23            118
Commercial real estate                                                       50              0
Residential real estate                                                      51             46
Consumer and other                                                          278            152
Finance leases                                                                0              0
Total loans charged-off                                             $       402    $       316
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial and industrial                                                    26            101
Commercial real estate                                                      805          1,039
Residential real estate                                                     307            158
Consumer and other                                                          168             82
Finance Leases                                                                0              0
Total loans recovered                                               $     1,306    $     1,380
Net loans recovered                                                        (904)        (1,064)
Provision (credit) for credit losses related to loans                        46         (5,228)
Balance of allowance at end of period                               $    

43,793 $47,505
Allowance for credit losses as a percentage of total loans and
leases

0.85% 0.92%
(Recoveries) annualized net loan write-offs in average total
borrowings and leasing during the period

(0.04)% (0.04)%


The provision for credit losses for loans was $780,000 for the three months
ended June 30, 2022, compared to a credit of $2.7 million for the same period in
2021. For the six month period ended June 30, 2022, the provision for credit
losses was $46,000 compared to credit of $5.2 million for the same period in
2021. The provision expense for credit losses for loans is based upon the
Company's quarterly evaluation of the appropriateness of the allowance for
credit losses. As discussed above, the ACL model estimated higher reserves at
June 30, 2022 due to lower GDP forecasts coupled with loan growth. Net loan and
lease recoveries for the six months ended June 30, 2022 were $904,000 compared
to net recoveries of $1.1 million for the same period in 2021.

Allowance for credit losses on off-balance sheet credit positions

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

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For the three months ended June 30, 2022, the provision for credit losses for
off-balance sheet credit exposures was $76,000 compared to a credit of $353,000
for the same period in 2021. For the six month period ended June 30, 2022, the
provision for credit losses for off-balance sheet credit exposures was $290,000
compared to $327,000 for the same six month period in 2021. The provision in
2022 was driven by an increase in off-balance sheet exposures, specifically
commercial real estate loan commitments.

Analysis of Past Due and Nonperforming Loans
(In thousands)                                                  6/30/2022    12/31/2021    6/30/2021
Loans 90 days past due and accruing

Commercial and industrial                                    $      62    $        0    $       0
Total loans 90 days past due and accruing                    $      62    $        0    $       0
Nonaccrual loans
Commercial and industrial                                    $     293    $      533    $     708
Commercial real estate                                          12,545        13,893       35,401
Residential real estate                                         11,536        11,178       11,556
Consumer and other                                                 291           429          354
Total nonaccrual loans                                       $  24,665    $   26,033    $  48,019
Troubled debt restructurings not included above                  4,872         5,124        5,776
Total nonperforming loans and leases                         $  29,599    $   31,157    $  53,795
Other real estate owned                                            122           135           88
Total nonperforming assets                                   $  29,721    $   31,292    $  53,883
Allowance as a percentage of nonperforming loans and leases     147.95  %   

137.51% 88.31%
Total non-performing loans and leases as a percentage of total
loans and leases

                                                  0.57  %       0.61  %      1.04  %
Total nonperforming assets as percentage of total assets          0.38  %   

0.40% 0.67%


Nonperforming assets include loans past due 90 days and accruing, nonaccrual
loans, TDRs, and foreclosed real estate/other real estate owned. Total
nonperforming assets of $29.7 million at June 30, 2022 were down $1.6 million or
5.0% compared to December 31, 2021, and $24.2 million or 44.8% compared to
June 30, 2021. The decrease in nonperforming assets from June 30, 2021, was
mainly in the commercial real estate portfolio and included the payoff of one
relationship totaling $11.8 million in the hospitality industry and a $7.0
million charge-off of another relationship that included two loans in the
hospitality industry during the fourth quarter of 2021. Nonperforming assets
represented 0.38% of total assets at June 30, 2022, down from 0.40% at December
31, 2021, and 0.67% reported for June 30, 2021. The Company's ratio of
nonperforming assets to total assets is well below the peer groups's most recent
percentile ranking for March 31, 2022.

Loans are considered modified in a TDR when, due to a borrower's financial
difficulties, the Company makes a concession(s) to the borrower that it would
not otherwise consider and the borrower could not obtain elsewhere. These
modifications may include, among others, an extension of the term of the loan,
and granting a period when interest-only payments can be made, with the
principal payments made over the remaining term of the loan or at maturity. TDRs
are included in the above table within the following categories: "loans 90 days
past due and accruing", "nonaccrual loans", or "troubled debt restructurings not
included above". Loans in the latter category include loans that meet the
definition of a TDR but are performing in accordance with the modified terms and
therefore classified as accruing loans. At June 30, 2022, the Company had $6.1
million in TDRs, and of that total $1.2 million was reported as nonaccrual and
$4.9 million was considered performing and included in the table above.

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

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The ratio of the allowance to nonperforming loans and leases (loans past due 90
days and accruing, nonaccrual loans and restructured troubled debt) was 147.95%
at June 30, 2022, compared to 137.51% at December 31, 2021, and 88.31% at
June 30, 2021. The Company's nonperforming loans and leases are mostly made up
of individually evaluated loans with limited exposure or loans that require
limited specific reserves due to the level of collateral available with respect
to these loans and/or previous charge-offs.

The Company, through its internal loan review function, identified 20 commercial
relationships from the loan portfolio totaling $29.7 million at June 30, 2022,
that were potential problem loans. At December 31, 2021, the Company had
identified 25 relationships totaling $36.5 million that were potential problem
loans. Of the 20 relationships at June 30, 2022, that were Substandard, there
were 8 relationships that equaled or exceeded $1.0 million, which in aggregate
totaled $25.8 million, the largest of which was $7.4 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 $624.3 million at June 30, 2022, a decrease of $104.6 million
or 14.4% from December 31, 2021. The decrease was the result of an increase in
unrealized losses on the available-for-sale portfolio from $19.3 million at
year-end 2021 to $183.3 million at June 30, 2022, as a result of the increase in
market interest rates in 2022. The decrease was partially offset by an increase
in retained earnings.

Additional paid-in capital decreased by $9.2 million, from $312.5 million at
December 31, 2021, to $303.3 million at June 30, 2022. The decrease was
primarily attributable to a $14.1 million aggregate purchase price related to
the Company's repurchase and retirement of 179,797 shares of its common stock
during the first six months of 2022 pursuant to its publicly announced stock
repurchase plan; partially offset by $2.9 million related shares issued for the
employee stock ownership program and $1.9 million attributed to stock-based
compensation.

Retained earnings increased by $27.5 million or 5.8% from $475.3 million at
December 31, 2021, to $502.8 million at June 30, 2022, mainly reflecting net
income of $44.1 million for the year-to-date period, less dividends of $16.6
million.

Accumulated other comprehensive loss increased from a net loss of $56.0 million
at December 31, 2021, to a net loss of $178.9 million at June 30, 2022,
reflecting a $122.9 million increase in unrealized losses on available-for-sale
debt securities mainly due to changes in market rates, partially offset by a
$900,000 decrease related to post-retirement benefit plan losses.

Cash dividends paid in the first six months of 2022 totaled approximately $16.6
million or $1.14 per common share, representing 37.7% of year to date 2022
earnings through June 30, 2022, compared to cash dividends of $16.1 million or
$1.08 per common share paid in the first six months of 2021. Cash dividends per
share during the first six months of 2022 were up 5.6% over the same period in
2021.

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



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The following table presents a summary of the Company’s capital ratios as at
June 30, 2022:

Regulatory capital analysis

                                                                    Minimum Capital Required - Basel
June 30, 2022                                     Actual                   

III Fully progressive well-funded requirement
(amounts in thousands of dollars)

             Amount         Ratio           Amount            Ratio          Amount          Ratio
Total Capital (to risk weighted
assets)                                $ 755,159           14.07  % $      563,544           10.50  % $   536,709           10.00  %
Tier 1 Capital (to risk weighted
assets)                                $ 707,095           13.17  % $      456,203            8.50  % $   429,367            8.00  %
Tier 1 Common Equity (to risk weighted
assets)                                $ 707,095           13.17  % $      375,696            7.00  % $   348,861            6.50  %
Tier 1 Capital (to average assets)     $ 707,095            9.02  % $      313,597            4.00  % $   391,996            5.00  %



As of June 30, 2022, the Company's capital ratios exceeded the minimum required
capital ratios plus the fully phased-in capital conservation buffer, and the
minimum required capital ratios for well capitalized institutions. The capital
levels required to be considered well capitalized, presented in the above table,
are based upon prompt corrective action regulations, as amended to reflect the
changes under Basel III Capital Rules.

Total capital as a percent of risk weighted assets decreased to 14.1% at June
30, 2022, compared with 14.2% as of December 31, 2021. Tier 1 capital as a
percent of risk weighted assets decreased from 13.3% at the end of 2021 to 13.2%
as of June 30, 2022. Tier 1 capital as a percent of average assets was 9.0% at
June 30, 2022, up from 8.8% as of December 31, 2021. Common equity Tier 1
capital was 13.2% at the end of the second quarter of 2022, down from 13.3% at
the end of 2021.

As of June 30, 2022, the capital ratios for the Company's subsidiary bank also
exceeded the minimum required capital ratios for well capitalized institutions,
plus the fully phased-in capital conservation buffer.

In the first quarter of 2020, U.S. Federal regulatory authorities issued an
interim final rule that provides banking organizations that adopt CECL during
the 2020 calendar year with the option to delay for two years the estimated
impact of CECL on regulatory capital relative to regulatory capital determined
under the prior incurred loss methodology, followed by a three-year transition
period to phase out the aggregate amount of the capital benefit provided during
the initial two-year delay (i.e., a five-year transition in total). In
connection with our adoption of CECL on January 1, 2020, we elected to utilize
the five-year CECL transition.

Deposits and Other Liabilities
Total deposits of $6.8 billion at June 30, 2022 were down $21.9 million or 0.3%
from December 31, 2021. The decrease from year-end 2021 was primarily in
checking, money market and savings balances, which collectively were down $49.1
million or 1.2%, and time deposits, which were down $44.8 million or 7.0%.
Noninterest bearing deposits were up $72.0 million or 3.4% , from year-end 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 $22.0 million
or 0.4% from year-end 2021, to $5.8 billion at June 30, 2022. Core deposits
represented 85.7% of total deposits at June 30, 2022, compared to 85.1% of total
deposits at December 31, 2021.

The Company uses both retail and wholesale repurchase agreements. Retail
repurchase agreements are arrangements with local customers of the Company, in
which the Company agrees to sell securities to the customer with an agreement to
repurchase those securities at a specified later date. Retail repurchase
agreements totaled $50.1 million at June 30, 2022, and $66.8 million at December
31, 2021. Management generally views retail repurchase agreements as an
alternative to large time deposits.

The Company's other borrowings totaled $295.6 million at June 30, 2022, up
$171.6 million or 138.4% from $124.0 million at December 31, 2021. Borrowings at
June 30, 2022 consisted of $235.6 million in overnight FHLB advances and $60.0
million of FHLB term advances, compared to $14.0 million in FHLB overnight
advances and $110.0 million of FHLB term advances at year end 2021. Of the $60.0
million in FHLB term advances at June 30, 2022, $10 million is due to mature in
less than one year and $50 million are due to mature in over one year.



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Liquidity

The objective of liquidity management is to ensure the availability of adequate
funding sources to satisfy the demand for credit, deposit withdrawals, and
business investment opportunities. The Company's large, stable core deposit base
and strong capital position are the foundation for the Company's liquidity
position. The Company uses a variety of resources to meet its liquidity needs,
which include deposits, cash and cash equivalents, short-term investments, cash
flow from lending and investing activities, repurchase agreements, and
borrowings. The Company's Asset/Liability Management Committee monitors asset
and liability positions of the Company's subsidiary banks individually and on a
combined basis. The Committee reviews periodic reports on liquidity and interest
rate sensitivity positions. Comparisons with industry and peer groups are also
monitored. The Company's strong reputation in the communities it serves, along
with its strong financial condition, provides access to numerous sources of
liquidity as described below. Management believes these diverse liquidity
sources provide sufficient means to meet all demands on the Company's liquidity
that are reasonably likely to occur.

Core deposits, discussed above under "Deposits and Other Liabilities", are a
primary and low cost funding source obtained primarily through the Company's
branch network. In addition to core deposits, the Company uses non-core funding
sources to support asset growth. These non-core funding sources include time
deposits of $250,000 or more, brokered time deposits, municipal money market
deposits, reciprocal deposits, bank borrowings, securities sold under agreements
to repurchase and overnight and term advances from the FHLB. Rates and terms are
the primary determinants of the mix of these funding sources. Non-core funding
sources of $1.3 billion at June 30, 2022 increased $111.1 million or 9.2% as
compared to year-end 2021. Non-core funding sources, as a percentage of total
liabilities, were 18.2% at June 30, 2022, compared to 17.0% at December 31,
2021.

Non-core funding sources may require securities to be pledged against the
underlying liability. Securities held at fair value were $1.5 billion at
June 30, 2022 and $1.4 billion at December 31, 2021, and were either pledged or
sold under agreements to repurchase. Pledged securities represented 63.7% of
total securities at June 30, 2022, compared to 59.4% of total securities at
December 31, 2021.

Total cash and cash equivalents $80.4 million of the June 30, 2022 who
increases by $63.1 million at December 31, 2021. Short term investments,
composed of securities with a maturity of less than or equal to one year, went from $77.9 million
at December 31, 2021at $61.9 million on June 30, 2022.

Cash flow from the loan and investment portfolios provides a significant source
of liquidity. These assets may have stated maturities in excess of one year, but
have monthly principal reductions. Total mortgage-backed securities, at fair
value, were $833.7 million at June 30, 2022 compared with $947.7 million at
December 31, 2021. Outstanding principal balances of residential mortgage loans,
consumer loans, and leases totaled approximately $1.6 billion at June 30, 2022,
up $46.0 million or 2.9% compared with year-end 2021. Aggregate amortization
from monthly payments on these assets provides significant additional cash flow
to the Company.

The Company's liquidity is enhanced by ready access to national and regional
wholesale funding sources including Federal funds purchased, repurchase
agreements, brokered deposits, and FHLB advances. Through its subsidiary bank,
the Company has borrowing relationships with the FHLB and correspondent banks,
which provide secured and unsecured borrowing capacity. As members of the FHLB,
the Company can use certain unencumbered mortgage-related assets and securities
to secure borrowings from the FHLB. At June 30, 2022, the established borrowing
capacity with the FHLB was $1.51 billion, with available unencumbered
mortgage-related assets of $1.21 billion. Additional assets may also qualify as
collateral for FHLB advances, upon approval of the FHLB.

Accounting standards awaiting adoption

ASU No. 2020-06, "Fair Value Measurements (Topic 820): Fair Value Measurement of
Equity Securities Subject to Contractual Sale Restrictions." The amendments in
this update provides clarification on guidance in Topic 820, Fair Value
Measurement, when measuring the fair value of an equity security subject to
contractual restrictions that prohibit the sale of an equity security and
provides new disclosure requirements for equity securities subject to
contractual sale restrictions, that are measured at fair value. ASU 2022-06 is
effective December 15, 2023 and is not expected to have a significant impact on
our consolidated financial statements.

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

ASU 2022-01, "Derivatives and Hedging (Topic 815)" ("ASU 2022-01") clarifies the
guidance in ASC 815 on fair value hedge accounting of interest rate risk for
portfolios and financial assets. Among other things, the amended guidance
established the "last-of-layer" method for making the fair value hedge
accounting for these portfolios more accessible and renamed that method the
"portfolio layer" method. ASU 2022-01 is effective January 1, 2023 and is not
expected to have a significant impact on our consolidated financial statements.

ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02")
eliminates the guidance on troubled debt restructurings and requires entities to
evaluate all loan modifications to determine if they result in a new loan or a
continuation of the existing loan. ASU 2022-02 also requires that entities
disclose current-period gross charge-offs by year of origination for loans and
leases. ASU 2022-02 is effective January 1, 2023, with early adoption permitted.
Tompkins is currently assessing the impact that ASU 2022-02 will have on our
consolidated financial statements.

Melissa C. Keyes