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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023
OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ______
Commission File Number 1-12709
Tompkins Financial Corporation
(Exact name of registrant as specified in its charter)

New York |  | 16-1482357
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

P.O. Box 460, Ithaca, NY
(Address of principal executive offices)
14851
(Zip Code)
Registrant’s telephone number, including area code: (888) 503-5753
Former name, former address, and former fiscal year, if changed since last report: NA
Indicate the number of shares of the Registrant’s Common Stock outstanding as of the latest practicable date:

Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common Stock, $0.10 par value | TMP | NYSE American, LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer | ☒ |  | Accelerated Filer | ☐
Non-Accelerated Filer | ☐ |  | Smaller Reporting Company | ☐
|  |  | Emerging Growth Company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒.
Indicate the number of shares of the Registrant's Common Stock outstanding as of the latest practicable date: 14,518,876 shares as of May 4, 2023.

TOMPKINS FINANCIAL CORPORATION
FORM 10-Q
INDEX

PART I -FINANCIAL INFORMATION |
|  |  | PAGE
| Item 1 – | Financial Statements Consolidated Statements of Condition as of March 31, 2023 (Unaudited) and December 31, 2022 (Audited) | 1
|  | Consolidated Statements of Income for the three months ended March 31, 2023 and 2022 (Unaudited) | 2
|  | Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022 (Unaudited) | 3
|  | Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (Unaudited) | 4
|  | Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2023 and 2022 (Unaudited) | 6
|  | Notes to Unaudited Consolidated Financial Statements | 7
| Item 2 - | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 37
| Item 3 - | Quantitative and Qualitative Disclosures About Market Risk | 55
| Item 4 - | Controls and Procedures | 57
PART II - OTHER INFORMATION |
| Item 1 – | Legal Proceedings | 57
| Item 1A – Risk Factors | 57
| Item 2 – | Unregistered Sales of Equity Securities and Use of Proceeds | 58
| Item 3 - | Defaults Upon Senior Securities | 58
| Item 4 - | Mine Safety Disclosures | 58
| Item 5 - | Other Information | 58
| Item 6 - | Exhibits | 58
SIGNATURES | 60

Item 1. Financial Statements
TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION

(In thousands, except share and per share data) | As of | As of
ASSETS | 03/31/2023 | 12/31/2022
| (unaudited) | (audited)
Cash and noninterest bearing balances due from banks | $ | 49,753 |  | $ | 18,572 |
Interest bearing balances due from banks | 20,784 |  | 59,265 |
Cash and Cash Equivalents | 70,537 |  | 77,837 |
Available-for-sale debt securities, at fair value (amortized cost of $1,795,423 at March 31, 2023 and $1,831,791 at December 31, 2022) | 1,585,854 |  | 1,594,967 |
Held-to-maturity securities, at amortized cost (fair value of $267,099 at March 31, 2023 and $261,692 at December 31, 2022) | 312,357 |  | 312,344 |
Equity securities, at fair value | 790 |  | 777 |
Total loans and leases, net of unearned income and deferred costs and fees | 5,273,671 |  | 5,268,911 |
Less: Allowance for credit losses | 46,099 |  | 45,934 |
Net Loans and Leases | 5,227,572 |  | 5,222,977 |
Federal Home Loan Bank and other stock | 19,326 |  | 17,720 |
Bank premises and equipment, net | 81,633 |  | 82,140 |
Corporate owned life insurance | 86,175 |  | 85,556 |
Goodwill | 92,602 |  | 92,602 |
Other intangible assets, net | 2,605 |  | 2,708 |
Accrued interest and other assets | 164,920 |  | 181,058 |
Total Assets | $ | 7,644,371 |  | $ | 7,670,686 |
LIABILITIES |  |
Deposits: |  |
Interest bearing: |  |
Checking, savings and money market | 3,774,092 |  | 3,820,739 |
Time | 725,338 |  | 631,411 |
Noninterest bearing | 2,009,579 |  | 2,150,145 |
Total Deposits | 6,509,009 |  | 6,602,295 |
Federal funds purchased and securities sold under agreements to repurchase | 63,491 |  | 56,278 |
Other borrowings | 327,000 |  | 291,300 |
Other liabilities | 95,106 |  | 103,423 |
Total Liabilities | $ | 6,994,606 |  | $ | 7,053,296 |
EQUITY |  |
Tompkins Financial Corporation shareholders' equity: |  |
Common Stock - par value $0.10 per share: Authorized 25,000,000 shares; Issued: 14,555,658 at March 31, 2023; and 14,555,741 at December 31, 2022 | 1,456 |  | 1,456 |
Additional paid-in capital | 303,357 |  | 302,763 |
Retained earnings | 537,331 |  | 526,727 |
Accumulated other comprehensive loss | (187,846) |  | (208,689) |
Treasury stock, at cost – 120,879 shares at March 31, 2023, and 128,749 shares at December 31, 2022 | (5,976) |  | (6,279) |
Total Tompkins Financial Corporation Shareholders’ Equity | 648,322 |  | 615,978 |
Noncontrolling interests | 1,443 |  | 1,412 |
Total Equity | $ | 649,765 |  | $ | 617,390 |
Total Liabilities and Equity | $ | 7,644,371 |  | $ | 7,670,686 |

See notes to unaudited consolidated financial statements.
1

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

| Three Months Ended |  |  |
(In thousands, except per share data) (Unaudited) | 03/31/2023 | 03/31/2022 |  |  |  |  |  |
INTEREST AND DIVIDEND INCOME |  |  |  |  |  |  |  |
Loans | $ | 60,842 |  | $ | 51,131 |  |  |  |  |  |  |
Due from banks | 139 |  | 41 |  |  |  |  |  |  |
Available-for-sale debt securities | 6,743 |  | 6,770 |  |  |  |  |  |  |
Held-to-maturity securities | 1,214 |  | 1,129 |  |  |  |  |  |  |
Federal Home Loan Bank and other stock | 300 |  | 105 |  |  |  |  |  |  |
Total Interest and Dividend Income | 69,238 |  | 59,176 |  |  |  |  |  |  |
INTEREST EXPENSE |  |  |  |  |  |  |  |
Time certificates of deposits of $250,000 or more | 1,788 |  | 426 |  |  |  |  |  |  |
Other deposits | 10,394 |  | 1,620 |  |  |  |  |  |  |
Federal funds purchased and securities sold under agreements to repurchase | 14 |  | 16 |  |  |  |  |  |  |
Other borrowings | 2,796 |  | 500 |  |  |  |  |  |  |
Total Interest Expense | 14,992 |  | 2,562 |  |  |  |  |  |  |
Net Interest Income | 54,246 |  | 56,614 |  |  |  |  |  |  |
Less: (Credit) for credit loss expense | (825) |  | (520) |  |  |  |  |  |  |
Net Interest Income After Credit for Credit Loss Expense | 55,071 |  | 57,134 |  |  |  |  |  |  |
NONINTEREST INCOME |  |  |  |  |  |  |  |
Insurance commissions and fees | 9,509 |  | 9,317 |  |  |  |  |  |  |
Wealth management fees | 4,509 |  | 4,917 |  |  |  |  |  |  |
Service charges on deposit accounts | 1,746 |  | 1,779 |  |  |  |  |  |  |
Card services income | 2,682 |  | 2,543 |  |  |  |  |  |  |
Other income | 1,941 |  | 1,476 |  |  |  |  |  |  |
Net gain (loss) on securities transactions | 13 |  | (47) |  |  |  |  |  |  |
Total Noninterest Income | 20,400 |  | 19,985 |  |  |  |  |  |  |
NONINTEREST EXPENSE |  |  |  |  |  |  |  |
Salaries and wages | 24,512 |  | 23,272 |  |  |  |  |  |  |
Other employee benefits | 6,741 |  | 5,797 |  |  |  |  |  |  |
Net occupancy expense of premises | 3,299 |  | 3,541 |  |  |  |  |  |  |
Furniture and fixture expense | 2,054 |  | 1,991 |  |  |  |  |  |  |
Amortization of intangible assets | 83 |  | 218 |  |  |  |  |  |  |
Other operating expense | 13,469 |  | 12,020 |  |  |  |  |  |  |
Total Noninterest Expenses | 50,158 |  | 46,839 |  |  |  |  |  |  |
Income Before Income Tax Expense | 25,313 |  | 30,280 |  |  |  |  |  |  |
Income Tax Expense | 5,901 |  | 6,976 |  |  |  |  |  |  |
Net Income Attributable to Noncontrolling Interests and Tompkins Financial Corporation | 19,412 |  | 23,304 |  |  |  |  |  |  |
Less: Net Income Attributable to Noncontrolling Interests | 31 |  | 31 |  |  |  |  |  |  |
Net Income Attributable to Tompkins Financial Corporation | $ | 19,381 |  | $ | 23,273 |  |  |  |  |  |  |
Basic Earnings Per Share | $ | 1.35 |  | $ | 1.61 |  |  |  |  |  |  |
Diluted Earnings Per Share | $ | 1.35 |  | $ | 1.60 |  |  |  |  |  |  |

See notes to unaudited consolidated financial statements.
2

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

| Three Months Ended
(In thousands) (Unaudited) | 03/31/2023 | 03/31/2022
Net income attributable to noncontrolling interests and Tompkins Financial Corporation | $ | 19,412 |  | $ | 23,304 |
Other comprehensive (loss) income, net of tax: |  |
Available-for-sale debt securities: |  |
Change in net unrealized gain (loss) during the period | 20,578 |  | (80,405) |
Reclassification adjustment for net realized loss on sale of available-for-sale debt securities included in net income | 0 |  | 0 |
Employee benefit plans: |  |
Amortization of net retirement plan actuarial loss | 224 |  | 464 |
Amortization of net retirement plan prior service cost | 41 |  | 42 |
Other comprehensive income (loss) | 20,843 |  | (79,899) |
Subtotal comprehensive income (loss) attributable to noncontrolling interests and Tompkins Financial Corporation | 40,255 |  | (56,595) |
Less: Net income attributable to noncontrolling interests | (31) |  | (31) |
Total comprehensive income (loss) attributable to Tompkins Financial Corporation | $ | 40,224 |  | $ | (56,626) |

See notes to unaudited consolidated financial statements.
3

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

| Three Months Ended
(In thousands) (Unaudited) | 03/31/2023 | 03/31/2022
OPERATING ACTIVITIES |  |
Net income attributable to Tompkins Financial Corporation | $ | 19,381 |  | $ | 23,273 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |
(Credit) for credit loss expense | (825) |  | (520) |
Depreciation and amortization of premises, equipment, and software | 2,678 |  | 2,650 |
Amortization of intangible assets | 83 |  | 218 |
Earnings from corporate owned life insurance | (615) |  | (423) |
Net amortization on securities | 961 |  | 1,819 |
Amortization/accretion related to purchase accounting | (213) |  | (191) |
Net (gain) loss on securities transactions | (13) |  | 47 |
Net gain on sale of loans originated for sale | (38) |  | (4) |
Proceeds from sale of loans originated for sale | 1,345 |  | 139 |
Loans originated for sale | (1,453) |  | (685) |
Net gain on sale of bank premises and equipment | (20) |  | (17) |
Net excess tax benefit from stock based compensation | 41 |  | 21 |
Stock-based compensation expense | 1,045 |  | 945 |
Decrease in accrued interest receivable | 1,236 |  | 1,047 |
Increase (decrease) in accrued interest payable | 159 |  | (106) |
Other, net | (994) |  | (4,295) |
Net Cash Provided by Operating Activities | 22,758 |  | 23,918 |
INVESTING ACTIVITIES |  |
Proceeds from maturities, calls and principal paydowns of available-for-sale debt securities | 35,646 |  | 79,753 |
Proceeds from sales of available-for-sale debt securities | 0 |  | 0 |
Purchases of available-for-sale debt securities | (252) |  | (124,668) |
Purchases of held-to-maturity securities | 0 |  | (19,534) |
Net (increase) decrease in loans | (3,218) |  | 12,662 |
Proceeds from sale/redemptions of Federal Home Loan Bank stock | 25,507 |  | 12,751 |
Purchases of Federal Home Loan Bank and other stock | (27,113) |  | (8,870) |
Proceeds from sale of bank premises and equipment | 55 |  | 42 |
Purchases of bank premises, equipment and software | (1,406) |  | (27) |
Other, net | (138) |  | 0 |
Net Cash Provided by (Used in) Investing Activities | 29,081 |  | (47,891) |
FINANCING ACTIVITIES |  |
Net (decrease) increase in demand, money market, and savings deposits | (187,213) |  | 249,042 |
Net increase (decrease) in time deposits | 94,021 |  | (23,630) |
Net increase (decrease) in Federal funds purchased and securities sold under agreements to repurchase | 7,213 |  | (9,672) |
Increase in other borrowings | 85,000 |  | 0 |
Repayment of other borrowings | (49,300) |  | (64,000) |
Cash dividends | (8,712) |  | (8,335) |
Repurchase of common stock | 0 |  | (10,370) |
Shares issued for employee stock ownership plan | 0 |  | 2,951 |
Net shares issued related to restricted stock awards | (40) |  | (3) |
Net proceeds from exercise of stock options | (108) |  | (42) |
Net Cash (Used) Provided by Financing Activities | (59,139) |  | 135,941 |
Net (Decrease) Increase in Cash and Cash Equivalents | (7,300) |  | 111,968 |
Cash and cash equivalents at beginning of period | 77,837 |  | 63,107 |
Total Cash and Cash Equivalents at End of Period | $ | 70,537 |  | $ | 175,075 |

See notes to unaudited consolidated financial statements.
4

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

| Three Months Ended
(In thousands) (Unaudited) | 03/31/2023 | 03/31/2022
Supplemental Information: |  |
Cash paid during the year for - Interest | $ | 14,927 |  | $ | 2,775 |
Cash paid during the year for - Taxes | 1,249 |  | 1,396 |
Transfer of loans to other real estate owned | 0 |  | 49 |
Initial recognition of operating lease right-of-use assets | 0 | 0 |
Initial recognition of operating lease liabilities | 0 | 0 |
Right-of-use assets obtained in exchange for new lease liabilities | 418 |  | 552 |

See notes to unaudited consolidated financial statements.
5

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands except share and per share data)(Unaudited) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Treasury Stock | Non- controlling Interests | Total
Balances at January 1, 2022 | $ | 1,470 |  | $ | 312,538 |  | $ | 475,262 |  | $ | (55,950) |  | $ | (5,791) |  | $ | 1,412 |  | $ | 728,941 |
Net income attributable to noncontrolling interests and Tompkins Financial Corporation |  |  | 23,273 |  |  |  | 31 |  | 23,304 |
Other comprehensive loss |  |  |  | (79,899) |  |  |  | (79,899) |
Total Comprehensive Loss |  |  |  |  |  |  | (56,595) |
Cash dividends ($0.57 per share) |  |  | (8,335) |  |  |  |  | (8,335) |
Net exercise of stock options (630 shares) |  | (42) |  |  |  |  |  | (42) |
Common stock repurchased and returned to unissued status (130,168 shares) | (13) |  | (10,357) |  |  |  |  |  | (10,370) |
Stock-based compensation expense |  | 945 |  |  |  |  |  | 945 |
Shares issued for employee stock ownership plan (37,454 shares) | 4 |  | 2,947 |  |  |  |  |  | 2,951 |
Directors deferred compensation plan (4,367 shares) |  | (149) |  |  |  | 149 |  |  | 0 |
Restricted stock activity (7,467 shares) | (1) |  | (2) |  |  |  |  |  | (3) |
Balances at March 31, 2022 | $ | 1,460 |  | $ | 305,880 |  | $ | 490,200 |  | $ | (135,849) |  | $ | (5,642) |  | $ | 1,443 |  | $ | 657,492 |
Balances at January 1, 2023 | $ | 1,456 |  | $ | 302,763 |  | $ | 526,727 |  | $ | (208,689) |  | $ | (6,279) |  | $ | 1,412 |  | $ | 617,390 |
Net income attributable to noncontrolling interests and Tompkins Financial Corporation |  |  | 19,381 |  |  |  | 31 |  | 19,412 |
Other comprehensive income |  |  |  | 20,843 |  |  |  | 20,843 |
Total Comprehensive Income |  |  |  |  |  |  | 40,255 |
Cash dividends ($0.60 per share) |  |  | (8,712) |  |  |  |  | (8,712) |
Net exercise of stock options (1,509 shares) |  |  | (108) |  |  |  |  |  | (108) |
Stock-based compensation expense |  | 1,045 |  |  |  |  |  | 1,045 |
Directors deferred compensation plan (7,870 shares) |  | (303) |  |  |  | 303 |  |  | 0 |
Restricted stock activity (1,592 shares) |  |  | (40) |  |  |  |  |  | (40) |
Adoption of Accounting Guidance |  |  | (65) |  |  |  |  | (65) |
Balances at March 31, 2023 | $ | 1,456 |  | $ | 303,357 |  | $ | 537,331 |  | $ | (187,846) |  | $ | (5,976) |  | $ | 1,443 |  | $ | 649,765 |

See notes to unaudited consolidated financial statements.
6

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Tompkins Financial Corporation ("Tompkins" or the "Company") is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At March 31, 2023, the Company had one wholly-owned banking subsidiary, Tompkins Community Bank. Tompkins Community Bank provides a full array of trust and wealth management services under the Tompkins Financial Advisors brand, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company also has a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"). The Company’s principal offices are located at 118 E. Seneca Street, Ithaca, New York, 14850, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the symbol "TMP."
As a registered financial holding company, the Company is regulated under the Bank Holding Company Act of 1956 ("BHC Act"), as amended and is subject to examination and comprehensive regulation by the Federal Reserve Board ("FRB"). The Company is also subject to the jurisdiction of the Securities and Exchange Commission ("SEC") and is subject to disclosure and regulatory requirements under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Company is subject to the rules of the NYSE American for listed companies.
Tompkins Community Bank is subject to examination and comprehensive regulation by various regulatory authorities, including the Federal Deposit Insurance Corporation ("FDIC"), and the New York State Department of Financial Services ("NYSDFS"). Each of these agencies issues regulations and requires the filing of reports describing the activities and financial condition of the entities under its jurisdiction. Likewise, such agencies conduct examinations on a recurring basis to evaluate the safety and soundness of the institutions, and to test compliance with various regulatory requirements, including: consumer protection, privacy, fair lending, the Community Reinvestment Act, the Bank Secrecy Act, sales of non-deposit investments, electronic data processing, and trust department activities. These agencies also examine and regulate the trust business of Tompkins Community Bank.
Tompkins Insurance is subject to examination and regulation by the NYSDFS and the Pennsylvania Insurance Department.
2. Basis of Presentation
The unaudited consolidated financial statements included in this quarterly report do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the SEC. In the application of certain accounting policies, management is required to make assumptions regarding the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues, and expenses in the unaudited consolidated financial statements. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policies that management considers critical in this respect are the determination of the allowance for credit losses and the review of its securities portfolio for other than temporary impairment.
In management’s opinion, the unaudited consolidated financial statements reflect all adjustments of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year ended December 31, 2023. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Cash and cash equivalents in the consolidated statements of cash flow include cash and noninterest bearing balances due from banks, interest-bearing balances due from banks, and money market funds. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risk on cash and cash equivalents.
The Company has evaluated subsequent events for potential recognition and/or disclosure, and determined that no further disclosures were required.
7

The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity of the Company and its subsidiaries. Amounts in the prior periods’ unaudited consolidated financial statements are reclassified when necessary to conform to the current periods’ presentation. All significant intercompany balances and transactions are eliminated in consolidation.
3. Securities
Available-for-Sale Debt Securities
The following table summarizes available-for-sale debt securities held by the Company at March 31, 2023:

| Available-for-Sale Debt Securities
March 31, 2023 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value
(In thousands) |  |  |  |
U.S. Treasuries | $ | 190,220 |  | $ | 0 |  | $ | 19,406 |  | $ | 170,814 |
Obligations of U.S. Government sponsored entities | 670,978 |  | 0 |  | 71,216 |  | 599,762 |
Obligations of U.S. states and political subdivisions | 92,915 |  | 10 |  | 6,241 |  | 86,684 |
Mortgage-backed securities – residential, issued by |  |  |  |
U.S. Government agencies | 56,224 |  | 15 |  | 5,348 |  | 50,891 |
U.S. Government sponsored entities | 782,586 |  | 0 |  | 107,276 |  | 675,310 |
U.S. corporate debt securities | 2,500 |  | 0 |  | 107 |  | 2,393 |
Total available-for-sale debt securities | $ | 1,795,423 |  | $ | 25 |  | $ | 209,594 |  | $ | 1,585,854 |

The following table summarizes available-for-sale debt securities held by the Company at December 31, 2022:

| Available-for-Sale Debt Securities
December 31, 2022 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value
(In thousands) |  |  |  |
U.S. Treasuries | $ | 190,170 |  | $ | 0 |  | $ | 22,919 |  | $ | 167,251 |
Obligations of U.S. Government sponsored entities | 681,192 |  | 0 |  | 80,025 |  | 601,167 |
Obligations of U.S. states and political subdivisions | 93,599 |  | 8 |  | 8,326 |  | 85,281 |
Mortgage-backed securities – residential, issued by |  |  |  |
U.S. Government agencies | 58,727 |  | 12 |  | 6,071 |  | 52,668 |
U.S. Government sponsored entities | 805,603 |  | 0 |  | 119,381 |  | 686,222 |
U.S. corporate debt securities | 2,500 |  | 0 |  | 122 |  | 2,378 |
Total available-for-sale debt securities | $ | 1,831,791 |  | $ | 20 |  | $ | 236,844 |  | $ | 1,594,967 |

8

Held-to-Maturity Debt Securities
The following table summarizes held-to-maturity debt securities held by the Company at March 31, 2023:

| Held-to-Maturity Securities
March 31, 2023 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value
(In thousands) |  |  |  |
U.S. Treasuries | $ | 86,425 |  | $ | 0 |  | $ | 10,966 |  | $ | 75,459 |
Obligations of U.S. Government sponsored entities | 225,932 |  | 0 |  | 34,292 |  | 191,640 |
Total held-to-maturity debt securities | $ | 312,357 |  | $ | 0 |  | $ | 45,258 |  | $ | 267,099 |

The following table summarizes held-to-maturity debt securities held by the Company at December 31, 2022:

| Held-to-Maturity Securities
December 31, 2022 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value
(In thousands) |  |  |  |
U.S. Treasuries | $ | 86,478 |  | $ | 0 |  | $ | 12,937 |  | $ | 73,541 |
Obligations of U.S. Government sponsored entities | 225,866 |  | 0 |  | 37,715 |  | 188,151 |
Total held-to-maturity debt securities | $ | 312,344 |  | $ | 0 |  | $ | 50,652 |  | $ | 261,692 |

The Company may from time to time sell debt securities from its available-for-sale portfolio. There were no sales of available-for-sale debt securities for both the three months ended March 31, 2023 and the three months ended March 31, 2022. Realized gains (losses) on sales of available-for-sale debt securities were $0 for both the three months ended March 31, 2023 and the three months ended March 31, 2022. The Company's available-for-sale portfolio includes callable securities that may be called prior to maturity. There were no realized gains (losses) on called available-for-sale debt securities for the three months ended March 31, 2023 and the three months ended March 31, 2022. The Company also recognized net gains on equity securities of $13,000 for the three months ended March 31, 2023 and net losses of $47,000 for the same period during 2022, reflecting the change in fair value.
The following table summarizes available-for-sale debt securities that had unrealized losses at March 31, 2023:

| Less than 12 Months | 12 Months or Longer | Total
(In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses
U.S. Treasuries | $ | 0 |  | $ | 0 |  | $ | 170,814 |  | $ | 19,406 |  | $ | 170,814 |  | $ | 19,406 |
Obligations of U.S. Government sponsored entities | 95,536 |  | 1,931 |  | 504,226 |  | 69,286 |  | 599,762 |  | 71,217 |
Obligations of U.S. states and political subdivisions | 20,397 |  | 306 |  | 58,598 |  | 5,936 |  | 78,995 |  | 6,242 |
Mortgage-backed securities – residential, issued by |  |  |  |  |  |
U.S. Government agencies | 5,484 |  | 183 |  | 45,046 |  | 5,164 |  | 50,530 |  | 5,347 |
U.S. Government sponsored entities | 16,950 |  | 761 |  | 658,360 |  | 106,514 |  | 675,310 |  | 107,275 |
U.S. corporate debt securities | 0 |  | 0 |  | 2,393 |  | 107 |  | 2,393 |  | 107 |
Total available-for-sale debt securities | $ | 138,367 |  | $ | 3,181 |  | $ | 1,439,437 |  | $ | 206,413 |  | $ | 1,577,804 |  | $ | 209,594 |

9

The following table summarizes available-for-sale debt securities that had unrealized losses at December 31, 2022:

| Less than 12 Months | 12 Months or Longer | Total
(In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses
U.S. Treasuries | $ | 28,602 |  | $ | 2,132 |  | $ | 138,649 |  | $ | 20,787 |  | $ | 167,251 |  | $ | 22,919 |
Obligations of U.S. Government sponsored entities | 143,794 |  | 7,508 |  | 457,373 |  | 72,517 |  | 601,167 |  | 80,025 |
Obligations of U.S. states and political subdivisions | 46,638 |  | 2,385 |  | 33,435 |  | 5,941 |  | 80,073 |  | 8,326 |
Mortgage-backed securities – residential, issued by |  |  |  |  |  |
U.S. Government agencies | 22,945 |  | 1,258 |  | 29,356 |  | 4,813 |  | 52,301 |  | 6,071 |
U.S. Government sponsored entities | 186,690 |  | 16,869 |  | 499,532 |  | 102,512 |  | 686,222 |  | 119,381 |
U.S. corporate debt securities | 0 |  | 0 |  | 2,378 |  | 122 |  | 2,378 |  | 122 |
Total available-for-sale debt securities | $ | 428,669 |  | $ | 30,152 |  | $ | 1,160,723 |  | $ | 206,692 |  | $ | 1,589,392 |  | $ | 236,844 |

The following table summarizes held-to-maturity debt securities that had unrealized losses at March 31, 2023:

| Less than 12 Months | 12 Months or Longer | Total
(In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses
U.S. Treasuries | $ | 0 |  | $ | 0 |  | $ | 75,459 |  | $ | 10,966 |  | $ | 75,459 |  | $ | 10,966 |
Obligations of U.S. Government sponsored entities | 8,293 |  | 604 |  | 183,347 |  | 33,688 |  | 191,640 |  | 34,292 |
Total held-to-maturity debt securities | $ | 8,293 |  | $ | 604 |  | $ | 258,806 |  | $ | 44,654 |  | $ | 267,099 |  | $ | 45,258 |

The following table summarizes held-to-maturity debt securities that had unrealized losses at December 31, 2022:

| Less than 12 Months | 12 Months or Longer | Total
(In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses
U.S. Treasuries | $ | 0 |  | $ | 0 |  | $ | 73,542 |  | $ | 12,937 |  | $ | 73,542 |  | $ | 12,937 |
Obligations of U.S. Government sponsored entities | 24,543 |  | 3,903 |  | 163,607 |  | 33,812 |  | 188,150 |  | 37,715 |
Total held-to-maturity debt securities | $ | 24,543 |  | $ | 3,903 |  | $ | 237,149 |  | $ | 46,749 |  | $ | 261,692 |  | $ | 50,652 |

The Company evaluates available-for-sale debt securities for expected credit losses ("ECL") in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.
Factors that may be indicative of ECL include, but are not limited to, the following:
•Extent to which the fair value is less than the amortized cost basis.
•Adverse conditions specifically related to the security, an industry, or geographic area (changes in technology, business practice).
•Payment structure of the debt security with respect to underlying issuer or obligor.
•Failure of the issuer to make scheduled payment of principal and/or interest.
•Changes to the rating of a security or issuer by a nationally recognized statistical rating organization.
•Changes in tax or regulatory guidelines that impact a security or underlying issuer.
For available-for-sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is
10

recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses ("ACL") on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of March 31, 2023, the held-to- maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including The Federal National Mortgage Agency and the Federal Farm Credit Banks Funding Corporation. U.S. Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "low-risk," and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of March 31, 2023.
The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit-related quality of the investment securities. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost.
The Company did not recognize any net credit impairment charge to earnings on investment securities in the first quarter of 2023.
The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

March 31, 2023 |  |
(In thousands) | Amortized Cost | Fair Value
Available-for-sale debt securities: |  |
Due in one year or less | $ | 40,237 |  | $ | 39,828 |
Due after one year through five years | 554,392 |  | 506,082 |
Due after five years through ten years | 325,346 |  | 283,610 |
Due after ten years | 36,638 |  | 30,133 |
Total | 956,613 |  | 859,653 |
Mortgage-backed securities | 838,810 |  | 726,201 |
Total available-for-sale debt securities | $ | 1,795,423 |  | $ | 1,585,854 |

11

December 31, 2022 |  |
(In thousands) | Amortized Cost | Fair Value
Available-for-sale debt securities: |  |
Due in one year or less | $ | 50,922 |  | $ | 50,269 |
Due after one year through five years | 508,880 |  | 459,721 |
Due after five years through ten years | 367,743 |  | 314,408 |
Due after ten years | 39,916 |  | 31,679 |
Total | 967,461 |  | 856,077 |
Mortgage-backed securities | 864,330 |  | 738,890 |
Total available-for-sale debt securities | $ | 1,831,791 |  | $ | 1,594,967 |

March 31, 2023 |  |
(In thousands) | Amortized Cost | Fair Value
Held-to-maturity debt securities: |  |
Due after five years through ten years | $ | 312,357 |  | $ | 267,099 |
Total held-to-maturity debt securities | $ | 312,357 |  | $ | 267,099 |

December 31, 2022 |  |
(In thousands) | Amortized Cost | Fair Value
Held-to-maturity debt securities: |  |
Due after five years through ten years | $ | 312,344 |  | $ | 261,692 |
Total held-to-maturity debt securities | $ | 312,344 |  | $ | 261,692 |

The Company also holds non-marketable Federal Home Loan Bank New York ("FHLBNY") stock and non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in Federal Home Loan Bank ("FHLB") stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock and ACBB stock totaled $19.2 million and $95,000, respectively, at March 31, 2023. These securities are carried at par, which is also cost. The FHLBNY continues to pay dividends and repurchase stock. Quarterly, we evaluate our investment in the FHLB for impairment. We evaluate recent and long-term operating performance, liquidity, funding and capital positions, stock repurchase history, dividend history and impact of legislative and regulatory changes. Based on our most recent evaluation, as of March 31, 2023, we determined that no impairment write-downs were required.
12

4. Loans and Leases
Loans and Leases at March 31, 2023 and December 31, 2022 were as follows:

(In thousands) | 03/31/2023 | 12/31/2022
Commercial and industrial |  |
Agriculture | $ | 65,223 |  | $ | 85,073 |
Commercial and industrial other | 673,104 |  | 705,700 |
PPP loans* | 686 |  | 756 |
Subtotal commercial and industrial | 739,013 |  | 791,529 |
Commercial real estate |  |
Construction | 219,789 |  | 201,116 |
Agriculture | 214,014 |  | 214,963 |
Commercial real estate other | 2,476,532 |  | 2,437,339 |
Subtotal commercial real estate | 2,910,335 |  | 2,853,418 |
Residential real estate |  |
Home equity | 183,636 |  | 188,623 |
Mortgages | 1,342,214 |  | 1,346,318 |
Subtotal residential real estate | 1,525,850 |  | 1,534,941 |
Consumer and other |  |
Indirect | 1,783 |  | 2,224 |
Consumer and other | 83,775 |  | 75,412 |
Subtotal consumer and other | 85,558 |  | 77,636 |
Leases | 18,016 |  | 16,134 |
Total loans and leases | 5,278,772 |  | 5,273,658 |
Less: unearned income and deferred costs and fees | (5,101) |  | (4,747) |
Total loans and leases, net of unearned income and deferred costs and fees | $ | 5,273,671 |  | $ | 5,268,911 |
*SBA Paycheck Protection Program ("PPP") |  |

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 3 – "Loans and Leases" in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. 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 origination, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Generally loans are placed on nonaccrual status if principal or interest payments become 90 days or more contractually past due and/or management deems the collectability of the principal and/or interest to be in question as well as when required by regulatory agencies. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current, the borrower has established a payment history, and future payments are reasonably assured. When management determines that the collection of principal in full is not probable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs.
13

The below tables are an age analysis of past due loans, segregated by class of loans as of March 31, 2023 and December 31, 2022:

March 31, 2023 |
(In thousands) | 30-59 Days | 60-89 Days | 90 Days or More | Total Past Due | Current Loans | Total Loans
Loans and Leases |  |  |  |  |  |
Commercial and industrial |  |  |  |  |  |
Agriculture | $ | 152 |  | $ | 0 |  | $ | 0 |  | $ | 152 |  | $ | 65,071 |  | $ | 65,223
Commercial and industrial other | 2,586 |  | 46 |  | 371 |  | 3,003 |  | 670,101 |  | 673,104 |
PPP loans* | 0 |  | 0 |  | 0 |  | 0 |  | 686 |  | 686 |
Subtotal commercial and industrial | 2,738 |  | 46 |  | 371 |  | 3,155 |  | 735,858 |  | 739,013 |
Commercial real estate |  |  |  |  |  |
Construction | 0 |  | 0 |  | 0 |  | 0 |  | 219,789 |  | 219,789
Agriculture | 170 |  | 0 |  | 0 |  | 170 |  | 213,844 |  | 214,014
Commercial real estate other | 0 |  | 0 |  | 10,037 |  | 10,037 |  | 2,466,495 |  | 2,476,532
Subtotal commercial real estate | 170 |  | 0 |  | 10,037 |  | 10,207 |  | 2,900,128 |  | 2,910,335 |
Residential real estate |  |  |  |  |  |
Home equity | 512 |  | 400 |  | 1,426 |  | 2,338 |  | 181,298 |  | 183,636
Mortgages | 1,741 |  | 30 |  | 6,505 |  | 8,276 |  | 1,333,938 |  | 1,342,214
Subtotal residential real estate | 2,253 |  | 430 |  | 7,931 |  | 10,614 |  | 1,515,236 |  | 1,525,850 |
Consumer and other |  |  |  |  |  |
Indirect | 56 |  | 11 |  | 41 |  | 108 |  | 1,675 |  | 1,783
Consumer and other | 120 |  | 70 |  | 104 |  | 294 |  | 83,481 |  | 83,775
Subtotal consumer and other | 176 |  | 81 |  | 145 |  | 402 |  | 85,156 |  | 85,558 |
Leases | 0 |  | 0 |  | 0 |  | 0 |  | 18,016 |  | 18,016 |
Total loans and leases | 5,337 |  | 557 |  | 18,484 |  | 24,378 |  | 5,254,394 |  | 5,278,772 |
Less: unearned income and deferred costs and fees | 0 |  | 0 |  | 0 |  | 0 |  | (5,101) |  | (5,101) |
Total loans and leases, net of unearned income and deferred costs and fees | $ | 5,337 |  | $ | 557 |  | $ | 18,484 |  | $ | 24,378 |  | $ | 5,249,293 |  | $ | 5,273,671 |
*SBA Paycheck Protection Program ("PPP") |  |  |  |  |  |

14

December 31, 2022
(In thousands) | 30-59 Days | 60-89 Days | 90 Days or More | Total Past Due | Current Loans | Total Loans
Loans and Leases |  |  |  |  |  |
Commercial and industrial |  |  |  |  |  |
Agriculture | $ | 58 |  | $ | 0 |  | $ | 0 |  | $ | 58 |  | $ | 85,015 |  | $ | 85,073 |
Commercial and industrial other | 50 |  | 381 |  | 82 |  | 513 |  | 705,187 |  | 705,700 |
PPP loans* | 0 |  | 0 |  | 0 |  | 0 |  | 756 |  | 756 |
Subtotal commercial and industrial | 108 |  | 381 |  | 82 |  | 571 |  | 790,958 |  | 791,529 |
Commercial real estate |  |  |  |  |  |
Construction | 0 |  | 0 |  | 0 |  | 0 |  | 201,116 |  | 201,116 |
Agriculture | 128 |  | 0 |  | 0 |  | 128 |  | 214,835 |  | 214,963 |
Commercial real estate other | 0 |  | 0 |  | 11,449 |  | 11,449 |  | 2,425,890 |  | 2,437,339 |
Subtotal commercial real estate | 128 |  | 0 |  | 11,449 |  | 11,577 |  | 2,841,841 |  | 2,853,418 |
Residential real estate |  |  |  |  |  |
Home equity | 435 |  | 204 |  | 1,628 |  | 2,267 |  | 186,356 |  | 188,623 |
Mortgages | 1,748 |  | 0 |  | 6,802 |  | 8,550 |  | 1,337,768 |  | 1,346,318 |
Subtotal residential real estate | 2,183 |  | 204 |  | 8,430 |  | 10,817 |  | 1,524,124 |  | 1,534,941 |
Consumer and other |  |  |  |  |  |
Indirect | 66 |  | 31 |  | 53 |  | 150 |  | 2,074 |  | 2,224 |
Consumer and other | 52 |  | 19 |  | 112 |  | 183 |  | 75,229 |  | 75,412 |
Subtotal consumer and other | 118 |  | 50 |  | 165 |  | 333 |  | 77,303 |  | 77,636 |
Leases | 0 |  | 0 |  | 0 |  | 0 |  | 16,134 |  | 16,134 |
Total loans and leases | 2,537 |  | 635 |  | 20,126 |  | 23,298 |  | 5,250,360 |  | 5,273,658 |
Less: unearned income and deferred costs and fees | 0 |  | 0 |  | 0 |  | 0 |  | (4,747) |  | (4,747) |
Total loans and leases, net of unearned income and deferred costs and fees | $ | 2,537 |  | $ | 635 |  | $ | 20,126 |  | $ | 23,298 |  | $ | 5,245,613 |  | $ | 5,268,911 |
*SBA Paycheck Protection Program ("PPP") |  |  |  |  |  |

15

The following tables present the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses. The below tables are an age analysis of nonaccrual loans segregated by class of loans, as of March 31, 2023 and December 31, 2022:

March 31, 2023
(In thousands) | Nonaccrual Loans and Leases with no ACL | Nonaccrual Loans and Leases | Loans and Leases Past Due Over 89 Days and Accruing
Loans and Leases |  |  |
Commercial and industrial |  |  |
Agriculture | $ | 0 |  | $ | 17 |  | $ | 0 |
Commercial and industrial other | 0 |  | 906 |  | 0 |
Subtotal commercial and industrial | 0 |  | 923 |  | 0 |
Commercial real estate |  |  |
Agriculture | 0 |  | 183 |  | 0 |
Commercial real estate other | 10,547 |  | 12,197 |  | 0 |
Subtotal commercial real estate | 10,547 |  | 12,380 |  | 0 |
Residential real estate |  |  |
Home equity | 0 |  | 2,547 |  | 0 |
Mortgages | 181 |  | 12,322 |  | 0 |
Subtotal residential real estate | 181 |  | 14,869 |  | 0 |
Consumer and other |  |  |
Indirect | 0 |  | 78 |  | 0 |
Consumer and other | 0 |  | 174 |  | 13 |
Subtotal consumer and other | 0 |  | 252 |  | 13 |
Total loans and leases | $ | 10,728 |  | $ | 28,424 |  | $ | 13 |

December 31, 2022 |  |  |
(In thousands) | Nonaccrual Loans and Leases with no ACL | Nonaccrual Loans and Leases | Loans and Leases Past Due Over 89 Days and Accruing
Loans and Leases |  |  |
Commercial and industrial |  |  |
Commercial and industrial other | $ | 411 |  | $ | 618 |  | $ | 25 |
Subtotal commercial and industrial | 411 |  | 618 |  | 25 |
Commercial real estate |  |  |
Agriculture | 186 |  | 186 |  | 0 |
Commercial real estate other | 13,101 |  | 13,672 |  | 0 |
Subtotal commercial real estate | 13,287 |  | 13,858 |  | 0 |
Residential real estate |  |  |
Home equity | 318 |  | 2,391 |  | 0 |
Mortgages | 1,177 |  | 11,153 |  | 0 |
Subtotal residential real estate | 1,495 |  | 13,544 |  | 0 |
Consumer and other |  |  |
Indirect | 0 |  | 94 |  | 0 |
Consumer and other | 0 |  | 175 |  | 0 |
Subtotal consumer and other | 0 |  | 269 |  | 0 |
Total loans and leases | $ | 15,193 |  | $ | 28,289 |  | $ | 25 |

16

The Company recognized $0 of interest income on nonaccrual loans during the three months ended March 31, 2023.
5. Allowance for Credit Losses
Management reviews the appropriateness of the allowance for credit losses ("allowance" or "ACL") on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated credit loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses.
The Company uses a Discounted Cash Flow ("DCF") method to estimate expected credit losses for all loan segments excluding the leasing segment. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, recovery lag, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on internal historical data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loans utilizing the DCF method, management utilizes forecasts of national unemployment and a one year percentage change in national gross domestic product as loss drivers in the model.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics.
Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses.
The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis.
Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of March 31, 2023, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance based on their judgements and information available to them at the time of their examinations.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to credit loss expense for off-balance sheet credit exposures included in provision for credit loss expense in the Company's consolidated statements of income.
17

The following table details activity in the allowance for credit losses on loans and leases for the three months ended March 31, 2023 and 2022. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Three Months Ended March 31, 2023 |  |  |  |
(In thousands) | Commercial & Industrial | Commercial Real Estate | Residential Real Estate | Consumer and Other | Finance Leases | Total
Allowance for credit losses:
Beginning balance | $ | 6,039 |  | $ | 27,287 |  | $ | 11,154 |  | $ | 1,358 |  | $ | 96 |  | $ | 45,934 |
Impact of adopting ASU 2022-22 | 2 |  | 16 |  | 46 |  | 0 |  | 0 |  | 64 |
Charge-offs | 0 |  | 0 |  | (2) |  | (106) |  | 0 |  | (108) |
Recoveries | 46 |  | 1,246 |  | 64 |  | 33 |  | 0 |  | 1,389 |
(Credit) provision for credit loss expense | 229 |  | (1,363) |  | (404) |  | 343 |  | 15 |  | (1,180) |
Ending Balance | $ | 6,316 |  | $ | 27,186 |  | $ | 10,858 |  | $ | 1,628 |  | $ | 111 |  | $ | 46,099 |

Three Months Ended March 31, 2022 |  |  |  |
(In thousands) | Commercial & Industrial | Commercial Real Estate | Residential Real Estate | Consumer and Other | Finance Leases | Total
Allowance for credit losses: |  |  |  |  |
Beginning balance | $ | 6,335 |  | $ | 24,813 |  | $ | 10,139 |  | $ | 1,492 |  | $ | 64 |  | 42,843 |
Charge-offs | (23) |  | (27) |  | 0 |  | (196) |  | 0 |  | (246) |
Recoveries | 20 |  | 42 |  | 109 |  | 92 |  | 0 |  | 263 |
(Credit) provision for credit loss expense | 695 |  | (1,846) |  | 199 |  | 200 |  | 18 |  | (734) |
Ending Balance | $ | 7,027 |  | $ | 22,982 |  | $ | 10,447 |  | $ | 1,588 |  | $ | 82 |  | $ | 42,126 |

The following table details activity in the liabilities for off-balance sheet credit exposures for the three months ended March 31, 2023 and 2022:

(In thousands) | 2023 | 2022
Liabilities for off-balance sheet credit exposures at beginning of period | $ | 2,796 |  | $ | 2,507 |
Provision for credit loss expense related to off-balance sheet credit exposures | 355 |  | 214 |
Liabilities for off-balance sheet credit exposures at end of period | $ | 3,151 |  | $ | 2,721 |

18

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

March 31, 2023 |  |  |  |  |
(In thousands) | Real Estate | Business Assets | Other | Total | ACL Allocation
Commercial Real Estate | $ | 10,547 |  | $ | 0 |  | $ | 0 |  | $ | 10,547 |  | $ | 0 |
Residential Real Estate | 181 |  | 0 |  | 0 |  | 181 |  | 0 |
Total | $ | 10,728 |  | $ | 0 |  | $ | 0 |  | $ | 10,728 |  | $ | 0 |

December 31, 2022 |  |  |  |  |
(In thousands) | Real Estate | Business Assets | Other | Total | ACL Allocation
Commercial and Industrial | $ | 642 |  | $ | 28 |  | $ | 0 |  | $ | 670 |  | $ | 0 |
Commercial Real Estate | 13,209 |  | 0 |  | 78 |  | 13,287 |  | 0 |
Commercial Real Estate - Agriculture | 1,515 |  | 0 |  | 0 |  | 1,515 |  | 0 |
Residential Real Estate | 188 |  | 0 |  | 0 |  | 188 |  | 3 |
Total | $ | 15,554 |  | $ | 28 |  | $ | 78 |  | $ | 15,660 |  | $ | 3 |

The Company adopted ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02") effective January 1, 2023. ASU 2022-02 eliminates the guidance on troubled debt restructurings (TDRs) 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, which has been incorporated in the credit quality table below.
There were no new borrowers experiencing financial difficulty in the first quarter of 2023, and no new TDRs reported in the first quarter of 2022.
The following tables present credit quality indicators by total loans on an amortized cost basis by origination year as of March 31, 2023 and December 31, 2022:
19

March 31, 2023 |  |  |  |  |  |  |  |  |
(In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans
Commercial and Industrial - Other: |  |  |  |  |  |
Internal risk grade: |  |  |  |  |  |  |  |  |
Pass | $ | 16,897 |  | $ | 113,621 |  | $ | 80,606 |  | $ | 36,432 |  | $ | 44,230 |  | $ | 167,183 |  | $ | 203,174 |  | $ | 1,170 |  | $ | 663,313 |
Special Mention | 0 |  | 0 |  | 120 |  | 338 |  | 132 |  | 1,339 |  | 800 |  | 0 |  | 2,729 |
Substandard | 0 |  | 0 |  | 102 |  | 417 |  | 65 |  | 1,562 |  | 4,916 |  | 0 |  | 7,062 |
Total Commercial and Industrial - Other | $ | 16,897 |  | $ | 113,621 |  | $ | 80,828 |  | $ | 37,187 |  | $ | 44,427 |  | $ | 170,084 |  | $ | 208,890 |  | $ | 1,170 |  | $ | 673,104 |
Current-period gross writeoffs | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |
Commercial and Industrial - PPP: |  |  |  |  |  |
Pass | $ | 0 |  | $ | 0 |  | $ | 383 |  | $ | 303 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 686 |
Special Mention | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
Substandard | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
Total Commercial and Industrial - PPP | $ | 0 |  | $ | 0 |  | $ | 383 |  | $ | 303 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 686 |
Current-period gross writeoffs | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |
Commercial and Industrial - Agriculture: |  |  |  |  |  |
Pass | $ | 2,152 |  | $ | 15,034 |  | $ | 4,399 |  | $ | 4,162 |  | $ | 3,479 |  | $ | 12,092 |  | $ | 23,745 |  | $ | 0 |  | $ | 65,063 |
Special Mention | 0 |  | 0 |  | 56 |  | 0 |  | 0 |  | 0 |  | 20 |  | 0 |  | 76 |
Substandard | 0 |  | 0 |  | 0 |  | 67 |  | 0 |  | 13 |  | 4 |  | 0 |  | 84 |
Total Commercial and Industrial - Agriculture | $ | 2,152 |  | $ | 15,034 |  | $ | 4,455 |  | $ | 4,229 |  | $ | 3,479 |  | $ | 12,105 |  | $ | 23,769 |  | $ | 0 |  | $ | 65,223 |
Current-period gross writeoffs | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |
Commercial Real Estate |  |  |  |  |  |
Pass | $ | 39,210 |  | $ | 340,604 |  | $ | 367,485 |  | $ | 317,991 |  | $ | 278,372 |  | $ | 1,021,145 |  | $ | 35,794 |  | $ | 2,056 |  | $ | 2,402,657 |
Special Mention | 0 |  | 643 |  | 0 |  | 1,682 |  | 11,380 |  | 21,234 |  | 0 |  | 0 |  | 34,939 |
Substandard | 0 |  | 74 |  | 109 |  | 0 |  | 3,147 |  | 35,482 |  | 124 |  | 0 |  | 38,936 |
Total Commercial Real Estate | $ | 39,210 |  | $ | 341,321 |  | $ | 367,594 |  | 319,673 |  | 292,899 |  | 1,077,861 |  | $ | 35,918 |  | $ | 2,056 |  | $ | 2,476,532 |
Current-period gross writeoffs | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |
Commercial Real Estate - Agriculture: |  |  |  |  |  |
Pass | $ | 2,578 |  | $ | 34,652 |  | $ | 23,976 |  | $ | 22,525 |  | $ | 24,893 |  | $ | 100,038 |  | $ | 2,158 |  | $ | 1,450 |  | $ | 212,270 |
Special Mention | 0 |  | 0 |  | 0 |  | 0 |  | 396 |  | 1,115 |  | 0 |  | 0 |  | 1,511 |
Substandard | 0 |  | 0 |  | 0 |  | 0 |  | 183 |  | 50 |  | 0 |  | 0 |  | 233 |
Total Commercial Real Estate - Agriculture | $ | 2,578 |  | $ | 34,652 |  | $ | 23,976 |  | $ | 22,525 |  | $ | 25,472 |  | $ | 101,203 |  | $ | 2,158 |  | $ | 1,450 |  | $ | 214,014 |
Current-period gross writeoffs | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |

20

(In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans
Commercial Real Estate - Construction |  |  |  |  |  |
Pass | $ | 0 |  | $ | 30,152 |  | $ | 73,446 |  | $ | 17,738 |  | $ | 11,859 |  | $ | 16,312 |  | $ | 62,168 |  | $ | 8,114 |  | $ | 219,789 |
Special Mention | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Substandard | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Total Commercial Real Estate - Construction | $ | 0 |  | $ | 30,152 |  | $ | 73,446 |  | $ | 17,738 |  | $ | 11,859 |  | $ | 16,312 |  | $ | 62,168 |  | $ | 8,114 |  | $ | 219,789 |
Current-period gross writeoffs | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |
Residential - Home Equity |  |  |  |  |  |  |
Performing | $ | 499 |  | $ | 2,357 |  | $ | 1,033 |  | $ | 610 |  | $ | 953 |  | $ | 10,589 |  | $ | 164,730 |  | $ | 317 |  | $ | 181,088 |
Nonperforming | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 288 |  | 2,260 |  | 0 |  | 2,548 |
Total Residential - Home Equity | $ | 499 |  | $ | 2,357 |  | $ | 1,033 |  | $ | 610 |  | $ | 953 |  | $ | 10,877 |  | $ | 166,990 |  | $ | 317 |  | $ | 183,636 |
Current-period gross writeoffs | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 2 |  | $ | 0 |  | $ | 0 |  | $ | 2 |
Residential - Mortgages |  |  |  |  |  |  |
Performing | $ | 15,811 |  | $ | 192,106 |  | $ | 269,413 |  | $ | 235,432 |  | $ | 116,045 |  | $ | 501,085 |  | $ | 0 |  | $ | 0 |  | $ | 1,329,892 |
Nonperforming | 0 |  | 218 |  | 330 |  | 619 |  | 670 |  | 10,485 |  | 0 |  | 0 |  | 12,322 |
Total Residential - Mortgages | $ | 15,811 |  | $ | 192,324 |  | $ | 269,743 |  | $ | 236,051 |  | $ | 116,715 |  | $ | 511,570 |  | $ | 0 |  | $ | 0 |  | $ | 1,342,214 |
Current-period gross writeoffs | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |
Consumer - Direct |  |  |  |  |  |  |
Performing | $ | 26,213 |  | $ | 16,366 |  | $ | 13,338 |  | $ | 6,844 |  | $ | 5,762 |  | $ | 11,873 |  | $ | 3,205 |  | $ | 0 |  | $ | 83,601 |
Nonperforming | 0 |  | 0 |  | 0 |  | 0 |  | 63 |  | 108 |  | 3 |  | 0 |  | 174 |
Total Consumer - Direct | $ | 26,213 |  | $ | 16,366 |  | $ | 13,338 |  | $ | 6,844 |  | $ | 5,825 |  | $ | 11,981 |  | $ | 3,208 |  | $ | 0 |  | $ | 83,775 |
Current-period gross writeoffs | $ | 33 |  | $ | 0 |  | $ | 0 |  | $ | 14 |  | $ | 20 |  | $ | 3 |  | $ | 0 |  | $ | 0 |  | $ | 70 |
Consumer - Indirect |  |  |  |  |  |  |
Performing | $ | 0 |  | $ | 0 |  | $ | 139 |  | $ | 127 |  | $ | 885 |  | $ | 554 |  | $ | 0 |  | $ | 0 |  | $ | 1,705 |
Nonperforming | 0 |  | 0 |  | 0 |  | 0 |  | 55 |  | 23 |  | 0 |  | 0 |  | 78 |
Total Consumer - Indirect | $ | 0 |  | $ | 0 |  | $ | 139 |  | $ | 127 |  | $ | 940 |  | $ | 577 |  | $ | 0 |  | $ | 0 |  | $ | 1,783 |
Current-period gross writeoffs | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 31 |  | $ | 5 |  | $ | 0 |  | $ | 0 |  | $ | 36 |

21

December 31, 2022 |  |  |  |  |  |  |  |  |
(In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans
Commercial and Industrial - Other: |  |  |  |  |  |
Internal risk grade: |  |  |  |  |  |  |  |  |
Pass | $ | 124,190 |  | $ | 79,861 |  | $ | 38,158 |  | $ | 41,391 |  | $ | 33,238 |  | $ | 156,038 |  | $ | 215,890 |  | $ | 6,466 |  | $ | 695,232 |
Special Mention | 0 |  | 127 |  | 421 |  | 285 |  | 271 |  | 1,380 |  | 501 |  | 0 |  | 2,985 |
Substandard | 0 |  | 111 |  | 442 |  | 35 |  | 733 |  | 503 |  | 5,659 |  | 0 |  | 7,483 |
Total Commercial and Industrial - Other | $ | 124,190 |  | $ | 80,099 |  | $ | 39,021 |  | $ | 41,711 |  | $ | 34,242 |  | $ | 157,921 |  | $ | 222,050 |  | $ | 6,466 |  | $ | 705,700 |
Commercial and Industrial - Agriculture: |  |  |  |  |  |
Pass | $ | 16,694 |  | $ | 4,120 |  | $ | 4,944 |  | $ | 4,186 |  | $ | 7,734 |  | $ | 4,883 |  | $ | 42,097 |  | $ | 215 |  | $ | 84,873 |
Special Mention | 0 | 58 | 0 | 0 | 0 | 0 | 50 | 0 | 108
Substandard | 0 | 0 | 71 | 0 | 0 | 16 | 5 | 0 | 92
Total Commercial and Industrial - Agriculture | $ | 16,694 |  | $ | 4,178 |  | $ | 5,015 |  | $ | 4,186 |  | $ | 7,734 |  | $ | 4,899 |  | $ | 42,152 |  | $ | 215 |  | $ | 85,073 |
Commercial and Industrial - PPP: |  |  |  |  |  |
Pass | $ | 0 |  | $ | 416 |  | $ | 340 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 756 |
Special Mention | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Substandard | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Total Commercial and Industrial - PPP | $ | 0 |  | $ | 416 |  | $ | 340 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 756 |
Commercial Real Estate |  |  |  |  |  |
Pass | $ | 342,311 |  | $ | 367,104 |  | $ | 311,607 |  | $ | 279,587 |  | $ | 203,016 |  | $ | 812,563 |  | $ | 10,906 |  | $ | 24,503 |  | $ | 2,351,597 |
Special Mention | 643 |  | 3,406 |  | 1,688 |  | 11,462 |  | 2,555 |  | 25,361 |  | 0 |  | 0 |  | 45,115 |
Substandard | 78 |  | 110 |  | 0 |  | 3,394 |  | 1,692 |  | 35,221 |  | 132 |  | 0 |  | 40,627 |
Total Commercial Real Estate | $ | 343,032 |  | $ | 370,620 |  | $ | 313,295 |  | $ | 294,443 |  | $ | 207,263 |  | $ | 873,145 |  | $ | 11,038 |  | $ | 24,503 |  | $ | 2,437,339 |
Commercial Real Estate - Agriculture: |  |  |  |  |  |
Pass | $ | 33,241 |  | $ | 24,125 |  | $ | 22,831 |  | $ | 25,576 |  | $ | 37,835 |  | $ | 65,112 |  | $ | 3,131 |  | $ | 1,235 |  | $ | 213,086 |
Special Mention | 0 |  | 0 |  | 0 |  | 401 |  | 0 |  | 1,142 |  | 0 |  | 0 |  | 1,543 |
Substandard | 0 |  | 0 |  | 0 |  | 186 |  | 38 |  | 110 |  | 0 |  | 0 |  | 334 |
Total Commercial Real Estate - Agriculture | $ | 33,241 |  | $ | 24,125 |  | $ | 22,831 |  | $ | 26,163 |  | $ | 37,873 |  | $ | 66,364 |  | $ | 3,131 |  | $ | 1,235 |  | $ | 214,963 |
Commercial Real Estate - Construction |  |  |  |  |  |
Pass | $ | 23,105 |  | $ | 75,245 |  | $ | 27,584 |  | $ | 14,842 |  | $ | 9,083 |  | $ | 7,268 |  | $ | 42,701 |  | $ | 1,288 |  | $ | 201,116 |
Special Mention | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Substandard | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Total Commercial Real Estate - Construction | $ | 23,105 |  | $ | 75,245 |  | $ | 27,584 |  | $ | 14,842 |  | $ | 9,083 |  | $ | 7,268 |  | $ | 42,701 |  | $ | 1,288 |  | $ | 201,116 |

22

The following tables present credit quality indicators by total loans on an amortized cost basis by origination year as of December 31, 2022, continued:

December 31, 2022 |  |  |  |  |  |  |  |  |
(In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans
Residential - Home Equity |  |  |  |  |  |  |
Performing | $ | 3,030 |  | $ | 1,062 |  | $ | 637 |  | $ | 992 |  | $ | 792 |  | $ | 3,183 |  | $ | 175,451 |  | $ | 1,085 |  | $ | 186,232 |
Nonperforming | 0 |  | 0 |  | 0 |  | 14 |  | 0 |  | 25 |  | 2,352 |  | 0 |  | 2,391 |
Total Residential - Home Equity | $ | 3,030 |  | $ | 1,062 |  | $ | 637 |  | $ | 1,006 |  | $ | 792 |  | $ | 3,208 |  | $ | 177,803 |  | $ | 1,085 |  | $ | 188,623 |
Residential - Mortgages |  |  |  |  |  |  |
Performing | $ | 187,129 |  | $ | 272,235 |  | $ | 239,584 |  | $ | 117,391 |  | $ | 66,605 |  | $ | 452,221 |  | $ | 0 |  | $ | 0 |  | $ | 1,335,165 |
Nonperforming | 218 |  | 335 |  | 628 |  | 682 |  | 1,552 |  | 7,738 |  | 0 |  | 0 |  | 11,153 |
Total Residential - Mortgages | $ | 187,347 |  | $ | 272,570 |  | $ | 240,212 |  | $ | 118,073 |  | $ | 68,157 |  | $ | 459,959 |  | $ | 0 |  | $ | 0 |  | $ | 1,346,318 |
Consumer - Direct |  |  |  |  |  |  |
Performing | $ | 31,243 |  | $ | 13,999 |  | $ | 7,372 |  | $ | 6,138 |  | $ | 4,386 |  | $ | 8,029 |  | $ | 4,070 |  | $ | 0 |  | $ | 75,237 |
Nonperforming | 0 |  | 0 |  | 3 |  | 93 |  | 76 |  | 0 |  | 3 |  | 0 |  | 175 |
Total Consumer - Direct | $ | 31,243 |  | $ | 13,999 |  | $ | 7,375 |  | $ | 6,231 |  | $ | 4,462 |  | $ | 8,029 |  | $ | 4,073 |  | $ | 0 |  | $ | 75,412 |
Consumer - Indirect |  |  |  |  |  |  |
Performing | $ | 0 |  | $ | 156 |  | $ | 146 |  | $ | 1,092 |  | $ | 635 |  | $ | 101 |  | $ | 0 |  | $ | 0 |  | $ | 2,130 |
Nonperforming | 0 |  | 0 |  | 0 |  | 76 |  | 10 |  | 8 |  | 0 |  | 0 |  | 94 |
Total Consumer - Indirect | $ | 0 |  | $ | 156 |  | $ | 146 |  | $ | 1,168 |  | $ | 645 |  | $ | 109 |  | $ | 0 |  | $ | 0 |  | $ | 2,224 |

6. Earnings Per Share
Earnings per share in the table below, for the three month periods ended March 31, 2023 and 2022 are calculated under the two-class method as required by ASC Topic 260, Earnings Per Share (ASC 260). ASC 260 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company has issued restricted stock awards that contain such rights and are therefore considered participating securities. Basic earnings per common share are calculated by dividing net income allocable to common stock by the weighted average number of common shares, excluding participating securities, during the period. Diluted earnings per common share include the dilutive effect of participating securities.
23

| Three Months Ended
(In thousands, except share and per share data) | 03/31/2023 | 03/31/2022
Basic |  |
Net income available to common shareholders | $ | 19,381 |  | $ | 23,273 |
Less: income attributable to unvested stock-based compensation awards | (18) |  | (76) |
Net earnings allocated to common shareholders | 19,363 |  | 23,197 |
Weighted average shares outstanding, including unvested stock-based compensation awards | 14,520,092 |  | 14,611,709 |
Less: average unvested stock-based compensation awards | (193,497) |  | (211,706) |
Weighted average shares outstanding - Basic | 14,326,595 |  | 14,400,003 |
Diluted |  |
Net earnings allocated to common shareholders | 19,363 |  | 23,197 |
Weighted average shares outstanding - Basic | 14,326,595 |  | 14,400,003 |
Plus: incremental shares from assumed conversion of stock-based compensation awards | 63,078 |  | 78,180 |
Weighted average shares outstanding - Diluted | 14,389,673 |  | 14,478,183 |
Basic EPS | $ | 1.35 |  | $ | 1.61 |
Diluted EPS | $ | 1.35 |  | $ | 1.60 |

Stock-based compensation awards representing 2,860 and 1,848 of common shares during the three months ended March 31, 2023 and 2022, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been anti-dilutive.
7. Other Comprehensive Income (Loss)
The following tables present reclassifications out of the accumulated other comprehensive income (loss) for the three month periods ended March 31, 2023 and 2022:

| Three Months Ended March 31, 2023
(In thousands) | Before-Tax Amount | Tax (Expense) Benefit | Net of Tax
Available-for-sale debt securities: |  |  |
Change in net unrealized gain (loss) during the period | $ | 27,255 |  | $ | (6,677) |  | $ | 20,578 |
Net unrealized gains/losses | 27,255 |  | (6,677) |  | 20,578 |
Employee benefit plans: |  |  |
Amortization of net retirement plan actuarial gain | 297 |  | (73) |  | 224 |
Amortization of net retirement plan prior service cost | 55 |  | (14) |  | 41 |
Employee benefit plans | 352 |  | (87) |  | 265 |
Other comprehensive (loss) income | $ | 27,607 |  | $ | (6,764) |  | $ | 20,843 |

24

| Three Months Ended March 31, 2022
(In thousands) | Before-Tax Amount | Tax (Expense) Benefit | Net of Tax
Available-for-sale debt securities: |  |  |
Change in net unrealized (loss) gain during the period | $ | (106,481) |  | $ | 26,076 |  | $ | (80,405) |
Net unrealized gains/losses | (106,481) |  | 26,076 |  | (80,405) |
Employee benefit plans: |  |  |
Amortization of net retirement plan actuarial gain | 615 |  | (151) |  | 464 |
Amortization of net retirement plan prior service cost | 56 |  | (14) |  | 42 |
Employee benefit plans | 671 |  | (165) |  | 506 |
Other comprehensive (loss) income | $ | (105,810) |  | $ | 25,911 |  | $ | (79,899) |

The following table presents the activity in our accumulated other comprehensive income (loss) for the periods indicated:

(In thousands) | Available-for- Sale Debt Securities | Employee Benefit Plans | Accumulated Other Comprehensive (Loss) Income
Balance at January 1, 2023 | $ | (178,803) |  | $ | (29,886) |  | $ | (208,689) |
Other comprehensive income before reclassifications | 20,578 |  | 0 |  | 20,578 |
Amounts reclassified from accumulated other comprehensive (loss) income | 0 |  | 265 |  | 265 |
Net current-period other comprehensive income (loss) | 20,578 |  | 265 |  | 20,843 |
Balance at March 31, 2023 | $ | (158,225) |  | $ | (29,621) |  | $ | (187,846) |
Balance at January 1, 2022 | $ | (14,560) |  | $ | (41,390) |  | $ | (55,950) |
Other comprehensive loss before reclassifications | (80,405) |  | 0 |  | (80,405) |
Amounts reclassified from accumulated other comprehensive (loss) income | 0 |  | 506 |  | 506 |
Net current-period other comprehensive income (loss) | (80,405) |  | 506 |  | (79,899) |
March 31, 2022 | $ | (94,965) |  | $ | (40,884) |  | $ | (135,849) |

25

The following tables present the amounts reclassified out of each component of accumulated other comprehensive (loss) income for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31, 2023 |  |
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands) | Amount Reclassified from Accumulated Other Comprehensive (Loss) Income 1 | Affected Line Item in the Statement Where Net Income is Presented
Available-for-sale debt securities: |  |
Unrealized gains and losses on available-for-sale debt securities | $ | 0 |  | Net (loss) gain on securities transactions
| 0 |  | Tax expense
| 0 |  | Net of tax
Employee benefit plans: |  |
Amortization of the following 2 |  |
Net retirement plan actuarial loss | (297) |  | Other operating expense
Net retirement plan prior service cost | (55) |  | Other operating expense
| (352) |  | Total before tax
| 87 |  | Tax benefit
| $ | (265) |  | Net of tax

Three Months Ended March 31, 2022 |  |
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands) | Amount Reclassified from Accumulated Other Comprehensive (Loss) Income 1 | Affected Line Item in the Statement Where Net Income is Presented
Available-for-sale debt securities: |  |
Unrealized gains and losses on available-for-sale debt securities | $ | 0 |  | Net (loss) gain on securities transactions
| 0 |  | Tax expense
| 0 |  | Net of tax
Employee benefit plans: |  |
Amortization of the following 2 |  |
Net retirement plan actuarial loss | (615) |  | Other operating expense
Net retirement plan prior service cost | (56) |  | Other operating expense
| (671) |  | Total before tax
| 165 |  | Tax benefit
| $ | (506) |  | Net of tax

1 Amounts in parentheses indicated debits in income statement.
2 The accumulated other comprehensive (loss) income components are included in the computation of net periodic benefit cost (See Note 8 - "Employee Benefit Plan").
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8. Employee Benefit Plan
The following table sets forth the amount of the net periodic benefit cost recognized by the Company for the Company’s pension plan, post-retirement plan (Life and Health), and supplemental employee retirement plans ("SERP") including the following components: service cost, interest cost, expected return on plan assets for the period, amortization of net retirement plan actuarial loss, and prior service cost recognized.
Components of Net Periodic Benefit Cost:

| Pension Benefits | Life and Health | SERP Benefits
| Three Months Ended | Three Months Ended | Three Months Ended
(In thousands) | 03/31/2023 | 03/31/2022 | 03/31/2023 | 03/31/2022 | 03/31/2023 | 03/31/2022
Service cost | $ | 0 |  | $ | 0 |  | $ | 15 |  | $ | 44 |  | $ | 14 |  | $ | 52 |
Interest cost | 823 |  | 463 |  | 89 |  | 52 |  | 299 |  | 201 |
Expected return on plan assets | (1,199) |  | (1,468) |  | 0 |  | 0 |  | 0 |  | 0 |
Amortization of net retirement plan actuarial loss | 304 |  | 323 |  | (7) |  | 52 |  | 0 |  | 240 |
Amortization of net retirement plan prior service (credit) cost | 0 |  | 0 |  | (15) |  | (15) |  | 70 |  | 71 |
Net periodic benefit (income) cost | $ | (72) |  | $ | (682) |  | $ | 82 |  | $ | 133 |  | $ | 383 |  | $ | 564 |

The service component of net periodic benefit cost for the Company's benefit plans is recorded as a part of salaries and wages in the consolidated statements of income. All other components are recorded as part of other operating expenses in the consolidated statements of income.
The Company realized approximately $266,000 and $506,000, net of tax, as amortization of amounts previously recognized in accumulated other comprehensive (loss) income, for the three months ended March 31, 2023 and 2022, respectively.
The Company is not required to contribute to the pension plan in 2023, but it may make voluntary contributions. The Company did not contribute to the pension plan in the first three months of 2023 and 2022.
9. Other Income and Operating Expense
Other income and operating expense totals are presented in the table below. Components of these totals exceeding 1% of the aggregate of total noninterest income and total noninterest expenses for any periods presented below are stated separately.

| Three Months Ended
(In thousands) | 03/31/2023 | 03/31/2022
Noninterest Income |  |
Other service charges | $ | 615 |  | $ | 627 |
Earnings from corporate owned life insurance | 615 |  | 423 |
Net gains on the sale of loans originated for sale | 38 |  | 4 |
Other income | 673 |  | 422 |
Total other income | $ | 1,941 |  | $ | 1,476 |
Noninterest Expenses |  |
Marketing expense | $ | 1,105 |  | $ | 1,056 |
Professional fees | 1,804 |  | 1,606 |
Legal fees | 419 |  | 210 |
Technology expense | 4,007 |  | 3,683 |
FDIC insurance | 1,054 |  | 701 |
Cardholder expense | 1,016 |  | 1,141 |
Other expenses | 4,064 |  | 3,623 |
Total other operating expense | $ | 13,469 |  | $ | 12,020 |

27

10. Revenue Recognition
As stated in Note 1 - "Summary of Significant Accounting Policies," in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, the Company adopted ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers on January 1, 2022. The update relates to the previous adoption of ASC 606, "Revenue from Contracts with Customers" and all subsequent ASUs that modified ASC 606, and will be applied to future acquisitions. As there were no acquisitions during the current year, the adoption of ASU No. 2021-08 had no effect on the financial statements for the current fiscal year.
Generally, this new guidance strives to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity and inconsistency amongst entities in measuring contract assets and liabilities. The update requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contract. Changes in the acquiree’s balance of contract asset and contract liabilities identified as necessary to conform to the acquirer’s accounting policies would result in a reallocation of the purchase price.
ASC 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of ASC 606. ASC 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of ASC 606.
Insurance Commissions and Fees
Insurance commissions and fees from insurance product sales are typically earned upon the effective date of bound coverage, as no significant performance obligation remains after coverage is bound. Commission revenue on policies billed in installments is now accrued based upon the completion of the performance obligation creating a current asset for the unbilled revenue until such time as an invoice is generated, typically not to exceed twelve months. The impact of these changes was not significant, but it will result in slight variances from quarter to quarter. Contingent commissions are estimated based upon management’s expectations for the year with an appropriate constraint applied and accrued relative to the recognition of the corresponding core commissions.
Trust & Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Mutual Fund & Investment Income
Mutual fund and investment income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, investment advisory fees from the Company’s Strategic Asset Management Services (SAM) wealth management product. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value, recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from the wealth management product is earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. The Company does engage a third party, LPL Financial, LLC (LPL), to satisfy part of this performance obligation, and therefore this income is reported net of any corresponding expenses paid to LPL.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at a point in time. Payment for
28

service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Card Services Income
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for fees and exchange are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Other
Other service charges include revenue from processing wire and ACH transfers, lock box service and safe deposit box rental. Payment on these revenue streams is received primarily through a direct charge to the customer’s account, immediately or in the following month, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.
The following table presents noninterest income, segregated by revenue streams, for the three months ended March 31, 2023 and 2022:

| Three Months Ended
(In thousands) | 03/31/2023 | 03/31/2022
Noninterest Income |  |
In-scope of Topic 606: |  |
Commissions and Fees | $ | 8,517 |  | $ | 7,964 |
Installment Billing | 1 |  | 44 |
Refund of Commissions | 59 |  | (28) |
Contract Liabilities/Deferred Revenue | (3) |  | (1) |
Contingent Commissions | 935 |  | 1,338 |
Subtotal Insurance Revenues | 9,509 |  | 9,317 |
Trust and Asset Management | 3,435 |  | 3,503 |
Mutual Fund & Investment Income | 1,074 |  | 1,414 |
Subtotal Investment Service Income | 4,509 |  | 4,917 |
Service Charges on Deposit Accounts | 1,746 |  | 1,779 |
Card Services Income | 2,682 |  | 2,543 |
Other | 351 |  | 316 |
Noninterest Income (in-scope of ASC 606) | 18,797 |  | 18,872 |
Noninterest Income (out-of-scope of ASC 606) | 1,603 |  | 1,113 |
Total Noninterest Income | $ | 20,400 |  | $ | 19,985 |

29

Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration or before payment is due, which would result in contract receivables or assets, respectively. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment or for which payment is due from the customer. The Company’s noninterest revenue streams, excluding some insurance commissions and fees, are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Receivables primarily consist of amounts due for insurance and wealth management services performed for which the Company's performance obligations have been fully satisfied. Receivables for the insurance and wealth management services amounted to $4.3 million and $2.8 million, respectively, at March 31, 2023, compared to $6.1 million and $2.5 million, respectively, at December 31, 2022. Additionally, the Company had contract assets related to contingent income of $0.7 million and $2.9 million, respectively, at March 31, 2023 and December 31, 2022, and contract liabilities of $0.8 million and $1.6 million, respectively at March 31, 2023 and December 31, 2022.
Contract Acquisition Costs
In connection with the adoption of ASC 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of ASC 606, the Company did not capitalize any contract acquisition costs.
11. Financial Guarantees
The Company currently does not issue any guarantees that would require liability recognition or disclosure, other than standby letters of credit. The Company extends standby letters of credit to its customers in the normal course of business. The standby letters of credit are generally short-term. As of March 31, 2023, the Company’s maximum potential obligation under standby letters of credit was $34.9 million compared to $35.8 million at December 31, 2022. Management uses the same credit policies to extend standby letters of credit that it uses for on-balance sheet lending decisions and may require collateral to support standby letters of credit based upon its evaluation of the counterparty. Management does not anticipate any significant losses as a result of these transactions, and has determined that the fair value of standby letters of credit is not significant.
12. Segment and Related Information
The Company manages its operations through three reportable business segments in accordance with the standards set forth in FASB ASC 280, "Segment Reporting": (i) banking ("Banking"), (ii) insurance ("Tompkins Insurance") and (iii) wealth management ("Tompkins Financial Advisors"). The Company’s insurance services and wealth management services, other than trust services, are managed separately from the Banking segment.
Banking
Tompkins Community Bank has twelve banking offices located in Ithaca, NY and surrounding communities; sixteen banking offices located in the Genesee Valley region of New York State, which includes Monroe County; thirteen banking offices located in the counties north of New York City; and nineteen banking offices headquartered and operating in the areas surrounding southeastern Pennsylvania.
Insurance
The Company provides property and casualty insurance services and employee benefits consulting through Tompkins Insurance Agencies, Inc., a 100% wholly-owned subsidiary of the Company, headquartered in Batavia, New York. Tompkins Insurance is an independent insurance agency, representing many major insurance carriers and provides employee benefit consulting to employers in Western and Central New York and Southeastern Pennsylvania, assisting them with their medical, group life insurance and group disability insurance. Tompkins Insurance has five stand-alone offices in Western New York.
Wealth Management
The Wealth Management segment is generally organized under the Tompkins Financial Advisors brand. Tompkins Financial Advisors offers a comprehensive suite of financial services to customers, including trust and estate services, investment management and financial and insurance planning for individuals, corporate executives, small business owners and high net worth individuals. Tompkins Financial Advisors has offices in each of the Company’s regional markets.
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Summarized financial information concerning the Company’s reportable segments and the reconciliation to the Company’s consolidated results is shown in the following table. Investment in subsidiaries is netted out of the presentations below. The “Intercompany” column identifies the intercompany activities of revenues, expenses and other assets between the banking, insurance and wealth management services segments. The Company accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the services provided. Intercompany items relate primarily to the use of human resources, information systems, accounting and marketing services provided by the bank and the holding company. All other accounting policies are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

Three months ended March 31, 2023
(In thousands) | Banking | Insurance | Wealth Management | Intercompany | Consolidated
Interest income | $ | 69,238 |  | $ | 1 |  | $ | 0 |  | $ | (1) |  | $ | 69,238 |
Interest expense | 14,993 |  | 0 |  | 0 |  | (1) |  | 14,992 |
Net interest income | 54,245 |  | 1 |  | 0 |  | 0 |  | 54,246 |
Credit for credit loss expense | (825) |  | 0 |  | 0 |  | 0 |  | (825) |
Noninterest income | 6,698 |  | 9,636 |  | 4,621 |  | (555) |  | 20,400 |
Noninterest expense | 39,848 |  | 7,215 |  | 3,650 |  | (555) |  | 50,158 |
Income before income tax expense | 21,920 |  | 2,422 |  | 971 |  | 0 |  | 25,313 |
Income tax expense | 4,989 |  | 673 |  | 239 |  | 0 |  | 5,901 |
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation | 16,931 |  | 1,749 |  | 732 |  | 0 |  | 19,412 |
Less: Net income attributable to noncontrolling interests | 31 |  | 0 |  | 0 |  | 0 |  | 31 |
Net Income attributable to Tompkins Financial Corporation | $ | 16,900 |  | $ | 1,749 |  | $ | 732 |  | $ | 0 |  | $ | 19,381 |
Depreciation and amortization | $ | 2,589 |  | $ | 44 |  | $ | 45 |  | $ | 0 |  | $ | 2,678 |
Assets | 7,586,753 |  | 43,779 |  | 29,013 |  | (15,174) |  | 7,644,371 |
Goodwill | 64,655 |  | 19,866 |  | 8,081 |  | 0 |  | 92,602 |
Other intangibles, net | 984 |  | 1,576 |  | 45 |  | 0 |  | 2,605 |
Net loans and leases | 5,227,572 |  | 0 |  | 0 |  | 0 |  | 5,227,572 |
Deposits | 6,527,953 |  | 0 |  | (4,245) |  | (14,699) |  | 6,509,009 |
Total Equity | $ | 584,650 |  | $ | 35,625 |  | $ | 29,490 |  | $ | 0 |  | $ | 649,765 |

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Three months ended March 31, 2022
(In thousands) | Banking | Insurance | Wealth Management | Intercompany | Consolidated
Interest income | $ | 59,176 |  | $ | 1 |  | $ | 0 |  | $ | (1) |  | $ | 59,176 |
Interest expense | 2,563 |  | 0 |  | 0 |  | (1) |  | 2,562 |
Net interest income | 56,613 |  | 1 |  | 0 |  | 0 |  | 56,614 |
Credit for credit loss expense | (520) |  | 0 |  | 0 |  | 0 |  | (520) |
Noninterest income | 6,193 |  | 9,434 |  | 4,934 |  | (576) |  | 19,985 |
Noninterest expense | 37,190 |  | 6,501 |  | 3,724 |  | (576) |  | 46,839 |
Income before income tax expense | 26,136 |  | 2,934 |  | 1,210 |  | 0 |  | 30,280 |
Income tax expense | 5,791 |  | 815 |  | 370 |  | 0 |  | 6,976 |
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation | 20,345 |  | 2,119 |  | 840 |  | 0 |  | 23,304 |
Less: Net income attributable to noncontrolling interests | 31 |  | 0 |  | 0 |  | 0 |  | 31 |
Net Income attributable to Tompkins Financial Corporation | $ | 20,314 |  | $ | 2,119 |  | $ | 840 |  | $ | 0 |  | $ | 23,273 |
Depreciation and amortization | $ | 2,578 |  | $ | 44 |  | $ | 28 |  | $ | 0 |  | $ | 2,650 |
Assets | 7,835,767 |  | 44,247 |  | 26,684 |  | (15,587) |  | 7,891,111 |
Goodwill | 64,500 |  | 19,866 |  | 8,081 |  | 0 |  | 92,447 |
Other intangibles, net | 1,402 |  | 1,917 |  | 63 |  | 0 |  | 3,382 |
Net loans and leases | 5,021,325 |  | 0 |  | 0 |  | 0 |  | 5,021,325 |
Deposits | 7,031,223 |  | 0 |  | (10) |  | (14,474) |  | 7,016,739 |
Total Equity | $ | 598,707 |  | $ | 34,128 |  | $ | 24,657 |  | $ | 0 |  | $ | 657,492 |

13. Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC Topic 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Transfers between levels, when determined to be appropriate, are recognized at the end of each reporting period.
The three levels of the fair value hierarchy under FASB ASC Topic 820 are:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
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The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value:

Recurring Fair Value Measurements |  |  |  |
March 31, 2023 |  |  |  |
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3)
Available-for-sale debt securities |  |  |  |
U.S. Treasuries | $ | 170,814 |  | $ | 0 |  | $ | 170,814 |  | $ | 0 |
Obligations of U.S. Government sponsored entities | 599,762 |  | 0 |  | 599,762 |  | 0 |
Obligations of U.S. states and political subdivisions | 86,684 |  | 0 |  | 86,684 |  | 0 |
Mortgage-backed securities – residential, issued by: |  |  |  |
U.S. Government agencies | 50,891 |  | 0 |  | 50,891 |  | 0 |
U.S. Government sponsored entities | 675,310 |  | 0 |  | 675,310 |  | 0 |
U.S. corporate debt securities | 2,393 |  | 0 |  | 2,393 |  | 0 |
Total Available-for-sale debt securities | $ | 1,585,854 |  | $ | 0 |  | $ | 1,585,854 |  | $ | 0 |
Equity securities, at fair value | $ | 790 |  | $ | 0 |  | $ | 0 |  | $ | 790 |

Recurring Fair Value Measurements |  |  |  |
December 31, 2022 |  |  |  |
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3)
Available-for-sale debt securities |  |  |  |
U.S. Treasuries | $ | 167,251 |  | $ | 0 |  | $ | 167,251 |  | $ | 0 |
Obligations of U.S. Government sponsored entities | 601,167 |  | 0 |  | 601,167 |  | 0 |
Obligations of U.S. states and political subdivisions | 85,281 |  | 0 |  | 85,281 |  | 0 |
Mortgage-backed securities – residential, issued by: |  |  |  |
U.S. Government agencies | 52,668 |  | 0 |  | 52,668 |  | 0 |
U.S. Government sponsored entities | 686,222 |  | 0 |  | 686,222 |  | 0 |
U.S. corporate debt securities | 2,378 |  | 0 |  | 2,378 |  | 0 |
Total Available-for-sale debt securities | $ | 1,594,967 |  | $ | 0 |  | $ | 1,594,967 |  | $ | 0 |
Equity securities, at fair value | $ | 777 |  | $ | 0 |  | $ | 0 |  | $ | 777 |

Securities: Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon a matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.
The change in the fair value of equity securities valued using significant unobservable inputs (level 3), between December 31, 2022 and March 31, 2023, was immaterial.
There were no transfers between Levels 1, 2 and 3 for the three months ended March 31, 2023.
The Company determines fair value for its available-for-sale debt securities using an independent bond pricing service for identical assets or very similar securities. The Company determines fair value for its equity securities based on the underlying equity fund’s pricing and valuation procedures which consider recent sales price, market quotations from a pricing service, or market quotes from an independent broker-dealer. The Company has reviewed the pricing sources, including methodologies used, and finds them to be fairly stated.
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Certain assets are measured at fair value on a nonrecurring basis. For the Company, these include loans held for sale, collateral dependent individually evaluated loans, and other real estate owned ("OREO"). As of March 31, 2023 and 2022, certain collateral dependent evaluated loans were remeasured and reported at fair value through a specific valuation allowance and/or partial charge-offs for credit losses based upon the fair value of the underlying collateral. Collateral values are estimated using Level 3 inputs. Upon initial recognition, fair value write-downs are taken through a charge-off to the allowance for credit losses. Subsequent fair value write-downs on other real estate owned are reported in other noninterest expense.
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at March 31, 2023 and 2022. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions:

Three months ended March 31, 2023
(In thousands) |  | Fair value measurements at reporting date using: | Gain (losses) from fair value changes
Assets: | As of 03/31/2023 | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Three months ended 03/31/2023
Individually evaluated loans | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 826 |
Other real estate owned | 36 |  | 0 |  |  | 36 |  | 22 |

December 31, 2022
(In thousands) |  | Fair value measurements at reporting date using: | Gain (losses) from fair value changes
Assets: | As of 12/31/2022 | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Three months ended 12/31/2022
Individually evaluated loans | $ | 9,460 |  | $ | 0 |  | $ | 0 |  | $ | 9,460 |  | $ | 59 |
Other real estate owned | 152 |  | 0 |  | 0 |  | 152 |  | 15 |

The fair value estimates, methods and assumptions set forth below for the Company's financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by U.S. GAAP and should be read in conjunction with the financial statements and notes included herein.
For loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For real estate loans, fair value of the loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.
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Estimated Fair Value of Financial Instruments |
March 31, 2023 |  |  |  |  |
(In thousands) | Carrying Amount | Fair Value | (Level 1) | (Level 2) | (Level 3)
Financial Assets: |  |  |  |  |
Cash and cash equivalents | $ | 70,537 |  | $ | 70,537 |  | $ | 70,537 |  | $ | 0 |  | $ | 0 |
Securities - held-to-maturity | 312,357 |  | 267,099 |  | 0 |  | 267,099 |  | 0 |
FHLB and other stock | 19,326 |  | 19,326 |  | 0 |  | 19,326 |  | 0 |
Accrued interest receivable | 23,629 |  | 23,629 |  | 0 |  | 23,629 |  | 0 |
Loans/leases, net 1 | 5,227,572 |  | 4,911,105 |  | 0 |  | 0 |  | 4,911,105 |
Financial Liabilities: |  |  |  |  |
Time deposits | $ | 725,338 |  | $ | 713,125 |  | $ | 0 |  | $ | 713,125 |  | $ | 0 |
Other deposits | 5,783,671 |  | 5,783,671 |  | 0 |  | 5,783,671 |  | 0 |
Fed funds purchased and securities sold |  |  |  |  |
under agreements to repurchase | 63,491 |  | 63,491 |  | 0 |  | 63,491 |  | 0 |
Other borrowings | 327,000 |  | 324,849 |  | 0 |  | 324,849 |  | 0 |
Accrued interest payable | 1,579 |  | 1,579 |  | 0 |  | 1,579 |  | 0 |

Estimated Fair Value of Financial Instruments
December 31, 2022 |  |  |  |  |
(In thousands) | Carrying Amount | Fair Value | (Level 1) | (Level 2) | (Level 3)
Financial Assets: |  |  |  |  |
Cash and cash equivalents | $ | 77,837 |  | $ | 77,837 |  | $ | 77,837 |  | $ | 0 |  | $ | 0 |
Securities - held to maturity | 312,344 |  | 261,692 |  | 0 |  | 261,692 |  | 0 |
FHLB and other stock | 17,720 |  | 17,720 |  | 0 |  | 17,720 |  | 0 |
Accrued interest receivable | 24,865 |  | 24,865 |  | 0 |  | 24,865 |  | 0 |
Loans/leases, net 1 | 5,222,977 |  | 4,939,246 |  | 0 |  | 0 |  | 4,939,246 |
Financial Liabilities: |  |  |  |  |
Time deposits | $ | 631,411 |  | $ | 616,488 |  | $ | 0 |  | $ | 616,488 |  | $ | 0 |
Other deposits | 5,970,884 |  | 5,970,884 |  | 0 |  | 5,970,884 |  | 0 |
Fed funds purchased and securities |  |  |  |  |
sold under agreements to repurchase | 56,278 |  | 56,278 |  | 0 |  | 56,278 |  | 0 |
Other borrowings | 291,300 |  | 289,234 |  | 0 |  | 289,234 |  | 0 |
Accrued interest payable | 1,420 |  | 1,420 |  | 0 |  | 1,420 |  | 0 |

1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.
The following methods and assumptions were used in estimating fair value disclosures for financial instruments.
Cash and Cash Equivalents: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.
FHLB Stock: The carrying amount of FHLB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock. For other stock reported above, carrying value is cost.
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Loans and Leases: Fair value for loans are calculated using an exit price notion. The Company's valuation methodology takes into account factors such as estimated cash flows, including contractual cash flow and assumptions for prepayments; liquidity risk; and credit risk. The fair values of residential loans were estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans were estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair values of loans held for sale were determined based upon contractual prices for loans with similar characteristics.
Accrued Interest Receivable and Accrued Interest Payable: The carrying amount of these short term instruments approximate fair value.
Deposits: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.
Other borrowings: The fair value of other borrowings is based upon discounted cash flow analyses using current rates offered for FHLB advances, with similar terms.
14. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Management of economic risks, by the Company, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. Existing credit derivatives result from participation in loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.
Non-designated Hedges
The Company’s existing credit derivatives result from participation in or out of interest rate swaps provided by or to external lenders as part of loan participation arrangements, and therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans.
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of condition as of March 31, 2023 and December 31, 2022. The Company began entering into derivative transactions in the second quarter of 2022.

Derivative Liabilities |  |  |
| March 31, 2023 | December 31, 2022
| Notional | Balance Sheet | Fair | Balance Sheet | Fair
(In thousands) | Amount | Location | Value | Location | Value
Derivatives not designated as hedging instruments |  |  |
Interest Rate Products | $ | 0 |  | Other Liabilities | $ | 0 |  | Other Liabilities | $ | 0 |
Risk Participation Agreement | 7,499 |  | Other Liabilities | 26 |  | Other Liabilities | 21 |
Total derivatives not designated as hedging instruments | $ | 26 |  |  | $ | 21 |

Tabular Disclosure of the Effect of Derivatives Not Designated as Hedging Instruments on the Income Statement
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income for the three months ended March 31, 2023:
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Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance |  |
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative |  |
(In thousands) |  | Three Months Ended March 31, 2023 |  |
Interest Rate Products | Other income / (expense) | $ | 0 |  |  |
Risk Participation Agreement | Other income / (expense) | (6) |  |  |
Total |  | $ | (6) |  |  |

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS
Overview
Tompkins Financial Corporation ("Tompkins" or the "Company") is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At March 31, 2023, the Company had one wholly-owned banking subsidiary, Tompkins Community Bank. Tompkins Community Bank provides a full array of wealth management services under the Tompkins Financial Advisors brand, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company also has a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"). The Company’s principal offices are located at 118 E. Seneca Street, P.O. Box 460, 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 Tompkins Community Bank, which has 60 banking offices (41 offices in New York and 19 offices in Pennsylvania) and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans, 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 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.
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The Company’s principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for credit losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities.
Competition
Competition for commercial banking and other financial services is strong in the Company’s market areas. In one or more aspects of its 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 the Company’s subsidiary bank 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, 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 months ended March 31, 2023. 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, 2022, 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 167 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 December 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 need to sell securities before recovery of amortized cost; 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
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and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those expressed and/or implied by forward-looking statements and historical performance. The following factors, in addition to those listed as Risk Factors in Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022, are among those that could cause actual results to differ materially from the forward-looking statements and historical performance: changes in general economic, market and regulatory conditions; our ability to attract and retain deposits and other sources of liquidity; GDP growth and inflation trends; 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 f rom 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 state and local government mandates, 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; 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; the impact of national and global events, including the response to recent bank failures, the war in Ukraine, widespread protests, civil unrest, political uncertainty, and pandemics or other public health crises, including the COVID-19 pandemic on the economy and the financial services industry; and access to financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses.
Critical Accounting Policies
The accounting and reporting policies followed by the Company conform, in all material respects, to U.S. generally accepted accounting principles ("GAAP") and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position.
Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for credit losses ("allowance", or "ACL"), and the review of the securities portfolio for other-than-temporary impairment to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations.
The Company’s methodology for estimating the allowance considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to "Allowance for Credit Losses" below, Note 5 - "Allowance for Credit Losses", and 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, 2022.
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, 2022. 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 "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, 2022. 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 los ses in the loan and lease portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. For certain loan pools that share similar risk characteristics, the Company utilizes statistically developed models to estimate amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers' abilities to repay obligations. Such models consider historical correlations of credit losses with various macroeconomic assumptions including unemployment and gross domestic product. These forecasts may be adjusted for inherent limitations or biases of the models. Subsequent to the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for credit losses in future periods. A discussion of facts and circumstances considered by management in determining the allowance for credit losses is included herein in Note 5 - "Allowance for Credit Losses" in the Note to the Unaudited Consolidated Financial Statements.
Recent Events
During the first quarter of 2023, the banking industry experienced significant volatility with the recent high-profile bank failures, which resulted in industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. In response to these recent developments, the Company took a number of preemptive actions, which included proactive outreach to clients and actions to maximize its funding sources such as establishing the ability to borrow through the newly established Federal Reserve borrowing program called the Bank Term Funding Program. The Company maintains ready access liquidity of $1.7 billion through its membership with the FHLB and FRB. As of March 31, 2023, the Company’s liquidity and balance sheet remain well positioned and stable. The Company’s total deposits of $6.5 billion at March 31, 2023 were down $93.3 million or 1.4% from December 31, 2022, reflecting minimal deposit outflow. At March 31, 2023, the Company estimates total uninsured deposits of $2.6 billion, which is unchanged from December 31, 2022, including $1.1 billion of collateralized government deposits and $1.5 billion of uninsured customer deposits without liquid collateral pledged. Total insured deposits and collateralized government deposits represent 76.9% of the Company's total deposits of $6.5 billion at March 31, 2023. Furthermore, the Company’s regulatory capital ratios at March 31, 2023, were up over December 31, 2022. At March 31, 2023, Tier 1 leverage and Total Capital ratios were 9.63% and 14.62%, respectively, compared to 9.34% and 14.42% at December 31, 2022.
RESULTS OF OPERATIONS
Performance Summary
Net income for the first quarter of 2023 was $19.4 million or $1.35 diluted earnings per share, compared to $23.3 million or $1.60 diluted earnings per share for the same period in 2022. The decrease in net income for the first quarter of 2023 compared to the first quarter of 2022 was mainly a result of increased interest expense and increases in other operating expenses.
Return on average assets ("ROA") for the quarter ended March 31, 2023 was 1.03%, compared to 1.19% for the quarter ended March 31, 2022. Return on average shareholders’ equity ("ROE") for the first quarter of 2023 was 12.45%, compared to 13.24% for the same period in 2022.
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 $16.9 million for the first quarter of 2023, a decrease of $3.4 million or 16.8% from net income of $20.3 million for the same period in 2022. The decrease in net income for the first quarter of 2023 compared to the first quarter of 2022 was primarily due to increased funding costs coupled with increases in operating expenses.
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Net interest income of $54.2 million for the first quarter of 2023 was down $2.4 million or 4.2% from the same period in 2022. The decrease in net interest income was primarily due to higher funding costs and a decrease in average earnings assets, partially offset by an increase in the average yield on interest-earning assets in the first quarter of 2023 compared to the first quarter of 2022. The average yield on interest-earning assets benefited from higher market interest rates as well as a shift in the composition of average earning assets with growth in average loan balances.
The provision for credit losses was a credit of $825,000 for the three months ended March 31, 2023, compared to a credit of $520,000 for the same period in 2022. For additional information, see the section titled "The Allowance for Credit Losses" below.
Noninterest income of $6.7 million for the three months ended March 31, 2023 was up $505,000 or 8.2% compared to the same period in 2022. The increase in the three months ended March 31, 2023, from the same period in 2022 included an increase in earnings on bank-owned life insurance ("BOLI") and incentive fees related to renewal of our debit card services contract.
Noninterest expense of $39.8 million for the first quarter of 2023 was up $2.7 million or 7.2% from the same period in 2022. Salaries and employee benefits were up compared to the same period in 2022 mainly due to yearly merit increases and higher healthcare expense. Higher FDIC insurance expense and technology expenses in the first quarter of 2023 also contributed to increases in noninterest expense as compared to same period in 2022. Higher FDIC insurance expense was mainly due to an increase in assessment rates in 2023.
Insurance Segment
The insurance segment reported net income of $1.7 million for the three months ended March 31, 2023, which was down $370,000 or 17.5% compared to the first quarter of 2022. Noninterest income in the first quarter of 2023 increased by $202,000 or 2.1% compared to the same period in 2022. Insurance commissions were up $617,000 or 7.6%, partially offset by lower contingency revenue, which was down $402,000 or 30.1% from the first quarter of 2022.
Noninterest expenses were up $714,000 or 11.0% compared to the first quarter of 2022. The increase was mainly in salaries and wages, reflecting annual merit increases; incentive commissions related to new business and growth in revenues; and employee benefits, including increases in health insurance.
Wealth Management Segment
The wealth management segment reported net income of $732,000 for the three months ended March 31, 2023, which was down $108,000 or 12.9% compared to the first quarter of 2022. The decrease in net income for the three month period ended March 31, 2023, compared to the same period in 2022, was mainly attributable to a decrease in revenue, driven by a decrease in assets under management; which was primarily a result of volatile market conditions. Noninterest expense for the first quarter of 2023 decreased $74,000 or 2.0% compared to the same period of 2022. The decrease was mainly in salaries, wages and benefits, which were down $141,000 or 5.7% for the first three months of 2023 compared to the same period prior year.
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Net Interest Income
The following table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each for the three month periods ended March 31, 2023 and 2022:

Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
| Quarter Ended | Quarter Ended
| March 31, 2023 | March 31, 2022
| 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 | $ | 12,733 |  | $ | 139 |  | 4.42 | % | $ | 134,129 |  | $ | 41 |  | 0.12 | %
Securities (1) |  |  |  |  |  |
U.S. Government securities | 2,033,307 |  | 7,424 |  | 1.48 | % | 2,293,611 |  | 7,362 |  | 1.30 | %
State and municipal (2) | 93,201 |  | 599 |  | 2.60 | % | 101,746 |  | 649 |  | 2.59 | %
Other securities (2) | 3,284 |  | 53 |  | 6.55 | % | 3,390 |  | 23 |  | 2.73 | %
Total securities | 2,129,792 |  | 8,076 |  | 1.54 | % | 2,398,747 |  | 8,034 |  | 1.36 | %
FHLBNY and FRB stock | 16,750 |  | 300 |  | 7.26 | % | 10,098 |  | 105 |  | 4.23 | %
Total loans and leases, net of unearned income (2)(3) | 5,251,278 |  | 61,034 |  | 4.71 | % | 5,055,948 |  | 51,355 |  | 4.12 | %
Total interest-earning assets | 7,410,553 |  | 69,549 |  | 3.81 | % | 7,598,922 |  | 59,535 |  | 3.18 | %
Other assets | 223,240 |  |  |  | 311,125 |  |  |
Total assets | $ | 7,633,793 |  |  |  | $ | 7,910,047 |  |  |
LIABILITIES & EQUITY |  |  |  |  |  |
Deposits |  |  |  |  |  |
Interest-bearing deposits |  |  |  |  |  |
Interest bearing checking, savings, & money market | 3,833,566 |  | 8,641 |  | 0.91 | % | 4,160,946 |  | 750 |  | 0.07 | %
Time deposits | 673,871 |  | 3,541 |  | 2.13 | % | 631,594 |  | 1,296 |  | 0.83 | %
Total interest-bearing deposits | 4,507,437 |  | 12,182 |  | 1.10 | % | 4,792,540 |  | 2,046 |  | 0.17 | %
Federal funds purchased & securities sold under agreements to repurchase | 57,523 |  | 14 |  | 0.10 | % | 64,237 |  | 16 |  | 0.10 | %
Other borrowings | 269,752 |  | 2,796 |  | 4.20 | % | 125,298 |  | 500 |  | 1.62 | %
Total interest-bearing liabilities | 4,834,712 |  | 14,992 |  | 1.26 | % | 4,982,075 |  | 2,562 |  | 0.21 | %
Noninterest bearing deposits | 2,065,701 |  |  |  | 2,108,825 |  |  |
Accrued expenses and other liabilities | 102,172 |  |  |  | 106,120 |  |  |
Total liabilities | 7,002,585 |  |  |  | 7,197,020 |  |  |
Tompkins Financial Corporation Shareholders’ equity | 629,784 |  |  |  | 711,601 |  |  |
Noncontrolling interest | 1,424 |  |  |  | 1,426 |  |  |
Total equity | 631,208 |  |  |  | 713,027 |  |  |
Total liabilities and equity | $ | 7,633,793 |  |  |  | $ | 7,910,047 |  |  |
Interest rate spread |  |  | 2.55 | % |  |  | 2.97 | %
Net interest income/margin on earning assets |  | 54,557 |  | 2.99 | % |  | 56,973 |  | 3.04 | %
Tax Equivalent Adjustment |  | (311) |  |  |  | (359) |  |
Net interest income per consolidated financial statements |  | $ | 54,246 |  |  |  | $ | 56,614 |  |

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 2023 and 2022 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, 2022.
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Net Interest Income
Net interest income is the Company’s largest source of revenue, representing 72.7% of total revenues for the three months ended March 31, 2023, compared to 73.9% for the same period in 2022. 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.
Net interest income for the three months ended March 31, 2023, was down $2.4 million or 4.2% from the same period in 2022. The decrease was primarily due to higher funding costs and a decrease in average earnings assets, partially offset by an increase in the average yield on interest-earning assets in the quarter ended March 31, 2023 compared to the same period in 2022. For the three months ended March 31, 2023, average total deposits represented 93.9% of average total liabilities compared to 95.9% for the same period in 2022, while total average borrowings represented 3.9% of average total liabilities for the period ended March 31, 2023 compared to 1.7% in 2022. Average earnings assets for the three months ended March 31, 2023 were down $188.4 million or 2.5% over the same period in 2022, while average asset yields for the first quarter of 2023 were up 63 basis points from the first quarter of 2022.
Net interest margin for the three months ended March 31, 2023 was 2.99% compared to 3.04% for the same period in 2022. The decrease in net interest margin for 2023 compared to 2022 was due to an increase in interest rates on interest-bearing liabilities outpacing increases on interest earning asset yields due to the higher interest rate environment, as well as increases in higher rate borrowings due to lower deposit balances.
Interest income for the three months ended March 31, 2023, was $69.5 million, up 17.0% compared to the same period in 2022, reflecting higher average yields, partially offset by lower average balances of interest-earning assets. The average yield on interest-earning assets increased 63 basis points, while average interest earning assets decreased $188.4 million or 2.5%. The increase in interest income was mainly in interest and fees on loans, driven by higher yields and higher average balances for the three months ended March 31, 2023, compared to the same period in 2022. Average loan balances for the first quarter of 2023 were up $195.3 million or 3.9% from the first quarter of 2022, while the average yield on loans of 4.71% for the first quarter of 2023 was up 59 basis points from the average loan yield in the first quarter of 2022. Interest income in the first quarter of 2023 included $2,000 of net deferred loan fees related to PPP loans compared to net deferred loan fees of $2.0 million in the first quarter of 2022. For the three months ended March 31, 2023, average balances for securities were down $269.0 million or 11.2% over the first quarter of 2022, while the average yield on securities of 1.54% for the first quarter of 2023 was up 18 basis points. For the three months ended March 31, 2023, average interest-bearing balances were down $121.4 million or 90.5%, while the average yield on interest-bearing balances of 4.42% was up 330 basis points.
Interest expense for the three months ended March 31, 2023 increased by $12.4 million or 485.2% compared to the same period in 2022, reflecting higher average costs of funds and a shift in funding mix, partially offset by a decrease in average interest-bearing liabilities. The average cost of interest-bearing liabilities for the first quarter of 2023 increased 105 basis points from the first quarter of 2022 as a result of higher market interest rates and a change in the mix of interest-bearing liabilities, with an increase in average time deposits and average other borrowings. The average cost of interest bearing liabilities was 1.26% for the first quarter of 2023, compared to 0.21% for the first quarter of 2022. Average interest bearing deposits for the first quarter of 2023 were down $285.1 million or 6.0% compared to the same period in 2022. Average other borrowings for the three months ended March 31, 2023 were up $144.5 million or 115.3% compared to the same period in 2022.
Provision for Credit Losses
The provision for credit losses represents management’s estimate of the amount necessary to maintain the allowance for credit losses at an appropriate level. The provision for credit losses for the three months ended March 31, 2023 was a credit of $825,000 compared to a credit of $520,000 for the same period in 2022. Included in the credits for both the first quarter of 2023 and 2022 were provision expenses of $355,000 and $214,000, respectively, related to off-balance sheet credit exposures. The provision credit in the first quarter of 2023 was mainly driven by improvement in the macroeconomic factor assumptions utilized in the allowance calculation as well as net loan recoveries during the quarter and stable asset quality. The section captioned "Financial Condition – The Allowance for Credit Losses" below has further details on the allowance for credit losses and asset quality metrics.
Noninterest Income
Noninterest income was $20.4 million for the first quarter of 2023, up 2.1% compared to the first quarter of 2022. Noninterest income represented 27.3% of total revenue for the three months ended March 31, 2023, compared to 26.1% for the same period in 2022.
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Insurance commissions and fees of $9.5 million in the first quarter of 2023 were up $192,000 or 2.1% compared to the same period prior year. Insurance commissions were up $617,000 or 7.6%, while contingency and other revenue was down $416,000 compared to the first quarter of 2022.
Investment services income of $4.5 million in the first quarter of 2023 was down $408,000 or 8.3% compared to the first quarter of 2022. The decrease in investment services income for the three-month period ended March 31, 2023, was mainly attributable to a decrease in advisory fees related to a decrease in period end assets compared to the same quarter prior year, primarily due to volatile market conditions throughout 2022. Investment services income includes investment management, trust and estate, financial and tax planning, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $3.1 billion at March 31, 2023, compared to $4.4 billion at March 31, 2022. The fair value of assets at March 31, 2022, includes $1.3 billion of Company-owned securities where Tompkins is custodian. The Company outsourced the custody of Company-owned securities to a third party in 2022.
Card services income of $2.7 million in the first quarter of 2023 was up $139,000 or 5.6% compared to the same period in 2022. Debit card income, the largest component of card services income, was in line compared to the same period in 2022.
Other income of $1.9 million in the first quarter of 2023 was up $465,000 or 31.5% compared to the same period in 2022. The increase in the first quarter of 2023 compared to the same period in 2022, included an increase in earnings on bank owned life insurance (up $192,000) and recognition of incentives related to card services contract ($450,000).
Noninterest Expense
Noninterest expense was $50.1 million for the first quarter of 2023, up 7.1% compared to the same period in 2022. Noninterest expense as a percentage of total revenue for the first quarter of 2023 was 67.2% compared to 61.2% for the same period in 2022.
Expenses associated with salaries and wages and employee benefits are the largest component of noninterest expense, representing 62.3% of total noninterest expense for the first quarter of 2023, compared to 62.1% for the first quarter of 2022. Salaries and wages and employee benefit expense for the three months ended March 31, 2023 were up $2.2 million or 7.5% from the same period in 2022, resulting from normal merit adjustments and an increase in healthcare expense in the first quarter of 2023 over the same period prior year.
Other expense categories not related to compensation and benefits, such as technology, FDIC insurance, and professional fee expenses, for the three months ended March 31, 2023, were up $1.4 million or 12.1% compared to the same period in 2022. Technology expenses for the first quarter of 2023 were up $324,000 or 8.8% over the same period in 2022, driven mainly by annual software increases. FDIC insurance expense for the first quarter of 2023 was up $353,000 or 50.4% over the same period in 2022, driven by an increase in assessment rates.
Income Tax Expense
The provision for income taxes was $5.9 million for an effective rate of 23.3% for the first quarter of 2023, compared to tax expense of $7.0 million and an effective rate of 23.0% for the same quarter in 2022. The effective rates differ from the U.S. statutory rate primarily due to the effect of tax-exempt income from loans, securities and life insurance assets, and the income tax effects associated with stock based compensation. The effective tax rate assumes the anticipated loss of certain New York State tax benefits due to the expectation that average assets will exceed $8.0 billion for the 2023 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 billion for the taxable year. The Company expects average assets to exceed the $8.0 billion threshold for the 2023 tax year. As of March 31, 2023, 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 2023 to determine future eligibility.
FINANCIAL CONDITION
Total assets were $7.6 billion at March 31, 2023, down $26.3 million or 0.3% from December 31, 2022. Total securities and total loans at March 31, 2023 were in line with year-end 2022. Total deposits were down $93.3 million or 1.4% from December 31, 2022, and total borrowings were up $35.7 million or 12.3% from December 31, 2022. The decrease in deposits at March 31, 2023 was in noninterest bearing deposits, which were down $140.6 million or 6.5%, and checking, savings and money market account, which were down $46.6 million or 1.2%. Time deposits at March 31, 2023, were up $93.9 million or 14.9% from December 31, 2022.
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Securities
As of March 31, 2023, the Company’s securities portfolio was $1.9 billion or 24.8% of total assets, compared to $1.9 billion or 24.9% of total assets at year-end 2022. The following table details the composition of the securities portfolio:

Available-for-Sale Debt Securities |  |
| March 31, 2023 | December 31, 2022
(In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value
U.S. Treasuries | $ | 190,220 |  | $ | 170,814 |  | $ | 190,170 |  | $ | 167,251 |
Obligations of U.S. Government sponsored entities | 670,978 |  | 599,762 |  | 681,192 |  | 601,167 |
Obligations of U.S. states and political subdivisions | 92,915 |  | 86,684 |  | 93,599 |  | 85,281 |
Mortgage-backed securities - residential, issued by |  |  |  |
U.S. Government agencies | 56,224 |  | 50,891 |  | 58,727 |  | 52,668 |
U.S. Government sponsored entities | 782,586 |  | 675,310 |  | 805,603 |  | 686,222 |
U.S. corporate debt securities | 2,500 |  | 2,393 |  | 2,500 |  | 2,378 |
Total available-for-sale debt securities | $ | 1,795,423 |  | $ | 1,585,854 |  | $ | 1,831,791 |  | $ | 1,594,967 |

Held-to-Maturity Debt Securities |  |
| March 31, 2023 | December 31, 2022
(In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value
U.S. Treasuries | $ | 86,425 |  | $ | 75,459 |  | $ | 86,478 |  | $ | 73,541 |
Obligations of U.S. Government sponsored entities | 225,932 |  | 191,640 |  | 225,866 |  | 188,151 |
Total held-to-maturity debt securities | $ | 312,357 |  | $ | 267,099 |  | $ | 312,344 |  | $ | 261,692 |

The decrease in unrealized losses, which reflects the amount that amortized cost exceeds fair value, related to the available-for-sale debt and held-to-maturity debt portfolios was due primarily to changes in market interest rates during the first three months of 2023. 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.
For available-for-sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses ("ACL") on the Statements of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.
The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit-related quality of the investment securities. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of March 31, 2023, the held-to- maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including The Federal National Mortgage Agency, the FHLB and the Federal Farm Credit Banks Funding Corporation. U.S.
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Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk-free," and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of March 31, 2023. Net unrealized losses on held-to-maturity securities, tax effected, at March 31, 2023, totaled 5.3% of total common equity capital and 6.2% of tangible common equity compared to 6.2% of total equity capital and 7.3% of tangible common equity capital at December 31, 2022.
The Company did not recognize any net credit impairment charge to earnings on investment securities in the first quarter of 2023.

Loans and Leases
Loans and leases as of the end of the first quarter and prior year-end period were as follows:
(In thousands) | 03/31/2023 | 12/31/2022
Commercial and industrial |  |
Agriculture | $ | 65,223 |  | $ | 85,073 |
Commercial and industrial other | 673,104 |  | 705,700 |
PPP loans* | 686 |  | 756 |
Subtotal commercial and industrial | 739,013 |  | 791,529 |
Commercial real estate |  |
Construction | 219,789 |  | 201,116 |
Agriculture | 214,014 |  | 214,963 |
Commercial real estate other | 2,476,532 |  | 2,437,339 |
Subtotal commercial real estate | 2,910,335 |  | 2,853,418 |
Residential real estate |  |
Home equity | 183,636 |  | 188,623 |
Mortgages | 1,342,214 |  | 1,346,318 |
Subtotal residential real estate | 1,525,850 |  | 1,534,941 |
Consumer and other |  |
Indirect | 1,783 |  | 2,224 |
Consumer and other | 83,775 |  | 75,412 |
Subtotal consumer and other | 85,558 |  | 77,636 |
Leases | 18,016 |  | 16,134 |
Total loans and leases | 5,278,772 |  | 5,273,658 |
Less: unearned income and deferred costs and fees | (5,101) |  | (4,747) |
Total loans and leases, net of unearned income and deferred costs and fees | $ | 5,273,671 |  | $ | 5,268,911 |
*SBA Paycheck Protection Program ("PPP") |  |

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The below table shows a more detailed break-out of CRE loans as of March 31, 2023 and December 31, 2022.

| 03/31/2023 | 12/31/2022
CRE Concentration | Balance | % CRE | Balance | % CRE
Construction | $ | 219,789 |  | 7.55 | % | $ | 201,031 |  | 7.05 | %
Multi-family/Single family real estate | 600,816 |  | 20.64 | % | 587,467 |  | 20.59 | %
Agriculture | 215,038 |  | 7.39 | % | 211,231 |  | 7.40 | %
Retail 1 | 432,076 |  | 14.85 | % | 434,998 |  | 15.25 | %
Hotels/motels | 151,517 |  | 5.21 | % | 144,710 |  | 5.07 | %
Office space 2 | 242,585 |  | 8.34 | % | 236,281 |  | 8.28 | %
Mixed/Other | 1,048,515 |  | 36.03 | % | 1,037,614 |  | 36.36 | %
Total CRE | $ | 2,910,336 |  | 100.00 | % | $ | 2,853,332 |  | 100.00 | %
1 Reatail includes 3.1% and 3.2% of owner occupied real estate at March 31, 2023 and December 31, 2022.
2 Office space includes 1.5% of owner occupied real estate at both March 31, 2023 and December 31, 2022.

Total loans and leases of $5.3 billion at March 31, 2023 were up $4.8 million or 0.1% from December 31, 2022. The increase was mainly in commercial real estate loans, which were up $56.9 million or 2.0%, to $2.9 billion at March 31, 2023. As of March 31, 2023, total loans and leases represented 69.0% of total assets compared to 68.7% of total assets at December 31, 2022.
Residential real estate loans, including home equity loans were $1.5 billion at March 31, 2023, down $9.1 million or 0.6% compared to December 31, 2022, and comprised 28.9% of total loans and leases at March 31, 2023. Changes in residential loan balances are impacted by the Company’s decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to Federal Home Loan Mortgage Corporation ("FHLMC") or State of New York Mortgage Agency ("SONYMA") without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these representations and warranties.
During the first three months of 2023 and 2022, the Company sold residential loans totaling $1.3 million and $135,000, respectively, recognizing gains on these sales of $38,000 and $4,000, 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 both March 31, 2023 and December 31, 2022.
Commercial real estate loans and commercial and industrial loans totaled $2.9 billion and $739.0 million, respectively, and represented 55.2% and 14.0%, respectively of total loans as of March 31, 2023. The commercial real estate portfolio was up $56.9 million or 2.0% over year-end 2022, while commercial and industrial loans were down $52.5 million or 6.6% from year-end 2022.
As of March 31, 2023, agriculturally-related loans totaled $279.2 million or 5.3% of total loans and leases, compared to $300.0 million or 5.7% of total loans and leases at December 31, 2022. Agriculturally-related loans include loans to dairy farms and 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.
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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, 2022. 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.
Allowance for Credit Losses
The below tables represents the allowance for credit losses as of March 31, 2023 and December 31, 2022. The tables provide, as of the dates indicated, an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category.

(In thousands) | 03/31/2023 | 12/31/2022
Allowance for credit losses |  |
Commercial and industrial | $ | 6,316 |  | $ | 6,039 |
Commercial real estate | 27,186 |  | 27,287 |
Residential real estate | 10,858 |  | 11,154 |
Consumer and other | 1,628 |  | 1,358 |
Finance leases | 111 |  | 96 |
Total | $ | 46,099 |  | $ | 45,934 |

As of March 31, 2023, the total allowance for credit losses for loans was $46.1 million, and was in line with December 31, 2022. The allowance for credit losses as a percentage of total loans measured 0.87% at both March 31, 2023 and December 31, 2022.
Asset quality measures at March 31, 2023 were generally favorable compared to December 31, 2022. Loans internally-classified Special Mention or Substandard were down $12.7 million or 12.9% compared to December 31, 2022. Nonperforming loans and leases were down $4.4 million or 13.4% from year end 2022 and represented 0.54% of total loans at March 31, 2023 compared to 0.62% at December 31, 2022. The allowance for credit losses covered 162.11% of nonperforming loans and leases as of March 31, 2023, compared to 139.86% at December 31, 2022. The Company had net recoveries of $1.3 million in the first quarter of 2023, compared to net recoveries of $17,000 for the same period in 2022.
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Activity in the Company’s allowance for credit losses during the first three months of 2023 and 2022 is illustrated in the table below:

Analysis of the Allowance for Credit Losses
(In thousands) | 03/31/2023 | 03/31/2022
Average loans outstanding during period | $ | 5,251,278 |  | $ | 5,055,948 |
Allowance at beginning of year, prior to adoption of ASU 2022-02 | 45,934 |  | 42,843 |
Impact of adopting ASU 2022-02 | 64 |  | 0 |
Balance of allowance at beginning of year | 45,998 |  | 42,843 |
LOANS CHARGED-OFF: |  |
Commercial and industrial | 0 |  | 23 |
Commercial real estate | 0 |  | 27 |
Residential real estate | 2 |  | 0 |
Consumer and other | 106 |  | 196 |
Total loans charged-off | $ | 108 |  | $ | 246 |
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF: |  |
Commercial and industrial | 46 |  | 20 |
Commercial real estate | 1,246 |  | 42 |
Residential real estate | 64 |  | 109 |
Consumer and other | 33 |  | 92 |
Total loans recovered | $ | 1,389 |  | $ | 263 |
Net loans recovered | (1,281) |  | (17) |
(Credit) for credit losses related to loans | (1,180) |  | (734) |
Balance of allowance at end of period | $ | 46,099 |  | $ | 42,126 |
Allowance for credit losses as a percentage of total loans and leases | 0.87 | % | 0.83 | %
Annualized net (recoveries) charge-offs on loans to average total loans and leases during the period | (0.10) | % | 0.00 | %

The provision for credit losses for loans was a credit of $1.2 million for the three months ended March 31, 2023, compared to a credit of $734,000 for the same period in 2022. The provision for credit losses for loans is based upon the Company's quarterly evaluation of the appropriateness of the allowance for credit losses. The March 31, 2023, allowance for credit losses model estimated a modest increase in reserves compared to year-end 2022. Increases in qualitative and large loan reserves were mainly offset by lower quantitative reserves as forecasts for economic growth and unemployment were slightly improved as compared to December 31, 2022.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in provision for credit loss expense in the Company's consolidated statements of income.
For the three months ended March 31, 2023, the provision for credit losses for off-balance sheet credit exposures was $355,000 compared to $214,000 for the same period in 2022. The provision in 2023 was driven by an increase in off-balance sheet exposures, specifically commercial real estate loan commitments.
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Analysis of Past Due and Nonperforming Loans |  |  |
(In thousands) | 03/31/2023 | 12/31/2022 | 03/31/2022
Loans 90 days past due and accruing |  |  |
Commercial and industrial | $ | 0 |  | $ | 25 |  | $ | 0 |
Consumer and other | 13 |  | 0 |  | 0 |
Total loans 90 days past due and accruing | $ | 13 |  | $ | 25 |  | $ | 0 |
Nonaccrual loans |  |  |
Commercial and industrial | 923 |  | 618 |  | 806 |
Commercial real estate | 12,380 |  | 13,858 |  | 13,623 |
Residential real estate | 14,869 |  | 13,544 |  | 10,200 |
Consumer and other | 252 |  | 269 |  | 571 |
Total nonaccrual loans | $ | 28,424 |  | $ | 28,289 |  | $ | 25,200 |
Performing troubled debt restructuring* | 0 |  | 4,530 |  | 5,064 |
Total nonperforming loans and leases | $ | 28,437 |  | $ | 32,844 |  | $ | 30,264 |
Other real estate owned | 36 |  | 152 |  | 88 |
Total nonperforming assets | $ | 28,473 |  | $ | 32,996 |  | $ | 30,352 |
Allowance as a percentage of nonperforming loans and leases | 162.11 | % | 139.86 | % | 139.20 | %
Total nonperforming loans and leases as percentage of total loans and leases | 0.54 | % | 0.62 | % | 0.60 | %
Total nonperforming assets as percentage of total assets | 0.37 | % | 0.43 | % | 0.38 | %

*No amount shown for periods subsequent to the Company's adoption of ASU 2022-02 effective January 1, 2023.
Nonperforming assets include nonaccrual loans, TDRs, and foreclosed real estate/other real estate owned. Total nonperforming assets of $28.5 million at March 31, 2023 were down $4.5 million or 13.7% compared to December 31, 2022, and down $1.9 million or 6.2% compared to March 31, 2022. The decrease in nonperforming assets from March 31, 2022, was mainly due to the adoption of ASU 2022-02, which eliminates the TDR designation and requires entities to evaluate all loan modifications under the same guidance and report on modifications where the borrower is experiencing financial difficulty at the time of the modification. Nonperforming assets represented 0.37% of total assets at March 31, 2023, down from 0.43% at December 31, 2022, and 0.38% at March 31, 2022. Our peer group's average ratio of nonperforming assets to total assets was 0.35% at December 31, 2022.
The Company adopted ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02") effective January 1, 2023. ASU 2022-02 eliminates the guidance on TDRs and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. Loans in the current period are reported using ASU 2022-02, while loans for prior periods are reported using the previous TDR guidance. Loans are considered modified if the Company makes a concession(s) to a borrower experiencing financial difficulty 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. Modified loans and TDRs reported for prior periods are included in the above table within the following categories: "loans 90 days past due and accruing", "nonaccrual loans", or "borrowers experiencing financial difficulty not included above". Loans in the latter category include loans that meet the definition of a modified loan but are performing in accordance with the modified terms and have shown a satisfactory period of repayment (generally six consecutive months) and where full collection of all is reasonably assured. At March 31, 2023, the Company had no modified loans under the new guidance.
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 162.11% at March 31, 2023, compared to 139.86% at December 31, 2022, and 139.20% at March 31, 2022. The Company’s nonperforming loans and leases are mostly comprised of collateral dependent loans with limited exposure or loans that require limited specific reserve 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 17 commercial relationships totaling $32.8 million at March 31, 2023 that were potential problem loans. At December 31, 2022, the Company had identified 17 relationships totaling $33.3 million that were potential problem loans. Of the 17 commercial relationships at March 31, 2023 that were Substandard, there were 5 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $28.8 million, the largest of which was $16.9 million. The potential problem loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management’s attention is focused on these credits, which are reviewed on at least a quarterly basis.
Capital
Total equity was $649.8 million at March 31, 2023, an increase of $32.4 million or 5.2% from December 31, 2022. The increase was mainly a result of the decrease in accumulated other comprehensive loss, reflecting the change in unrealized gains/loss on available-for-sale securities from an unrealized loss of $178.8 million at December 31, 2022 to an unrealized loss of $158.2 million at March 31, 2023. During the first quarter of 2023, retained earnings increased $10.7 million.
Additional paid-in capital increased from $302.8 million at December 31, 2022, to $303.4 million at March 31, 2023. The increase was primarily attributable to $1.0 million related to stock based compensation; partially offset by $303,000 of deferred director compensation. Retained earnings increased by $10.6 million from $526.7 million at December 31, 2022, to $537.3 million at March 31, 2023, reflecting net income of $19.4 million less dividends of $8.7 million. Accumulated other comprehensive loss decreased from a net loss of $208.7 million at December 31, 2022, to a net loss of $187.8 million at March 31, 2023, reflecting a $20.6 million decrease in unrealized losses on available-for-sale debt securities due to changes in market rates coupled with a $265,000 decrease related to post-retirement benefit plans.
Cash dividends paid in the first three months of 2023 totaled approximately $8.7 million or $0.60 per common share, representing 45.0% of year to date 2023 earnings through March 31, 2023, and were up 5.3% over cash dividends of $8.3 million or $0.57 per common share paid in the first three months of 2022.
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 meet all capital adequacy requirements to which they are subject.
In addition to setting higher minimum capital ratios, the Basel III Capital Rules introduced a 2.5% capital conservation buffer, which has been fully phased in and must be added to each of the minimum capital ratios and is designed to absorb losses during periods of economic stress.
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The following table provides a summary of the Company’s capital ratios as of March 31, 2023:

Regulatory Capital Analysis
March 31, 2023 | Actual | Minimum Capital Required - Basel III Fully Phased-In | Well Capitalized Requirement
(dollar amounts in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio
Total Capital (to risk weighted assets) | $ | 792,609 |  | 14.62 | % | $ | 569,163 |  | 10.50 | % | $ | 542,060 |  | 10.00 | %
Tier 1 Capital (to risk weighted assets) | 741,915 |  | 13.69 | % | 460,751 |  | 8.50 | % | 433,648 |  | 8.00 | %
Tier 1 Common Equity (to risk weighted assets) | 741,915 |  | 13.69 | % | 379,442 |  | 7.00 | % | 352,339 |  | 6.50 | %
Tier 1 Capital (to average assets) | 741,915 |  | 9.63 | % | 308,123 |  | 4.00 | % | 385,153 |  | 5.00 | %

As of March 31, 2023, the Company’s capital ratios exceeded the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions. The capital levels required to be considered well capitalized, presented in the above table, are based upon prompt corrective action regulations, as amended to reflect the changes under Basel III Capital Rules.
Total capital as a percent of risk weighted assets increased to 14.6% at March 31, 2023, compared with 14.4% as of December 31, 2022. Tier 1 capital as a percent of risk weighted assets increased from 13.5% at the end of 2022 to 13.7% as of March 31, 2023. Tier 1 capital as a percent of average assets was 9.6% at March 31, 2023, which is up from 9.3% at December 31, 2022. Common equity Tier 1 capital was 13.7% at the end of the first quarter of 2023, up from 13.5% at the end of 2022.
As of March 31, 2023, the capital ratios for the Company’s subsidiary banks also exceeded the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions.
In the first quarter of 2020, U.S. Federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we have elected to utilize the five-year CECL transition.
Deposits and Other Liabilities
Total deposits of $6.5 billion at March 31, 2023 were down $93.3 million or 1.4% from December 31, 2022. The decrease from year-end was primarily in checking, money market and savings balances, which collectively were down $46.6 million or 1.2% and in non-interest bearing deposits, down $140.6 million or 6.5% from year end 2022. The decrease was partially offset by an increase in time deposits of $93.9 million or 14.9%. The decline in elevated customer deposit balances was largely driven by stimulus funding and tightening monetary policy that has led to a declining trend in bank deposits on a national level, as reported by the Federal Reserve.
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 and municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits were down by $181.1 million or 3.2% from year-end 2022, to $5.4 billion at March 31, 2023. Core deposits represented 82.9% of total deposits at March 31, 2023, compared to 84.5% of total deposits at December 31, 2022.
The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $63.5 million at March 31, 2023, and $56.3 million at December 31, 2022. Management generally views local repurchase agreements as an alternative to large time deposits.
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The Company’s other borrowings totaled $327.0 million at March 31, 2023, compared to $291.3 at December 31, 2022. Lower deposit balances compared to year-end 2022 contributed to the increase in other borrowings. Other borrowings at March 31, 2023 represented $192.0 million in overnight advances from the FHLB and $135.0 million of FHLB term advances. The $291.3 million in other borrowings at December 31, 2022, represented $241.3 million in overnight advances from the FHLB and $50.0 million in term advances from the FHLB. Of the $135.0 million in FHLB term advances at March 31, 2023, $115.0 million was due in over one year.
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 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 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 deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase, overnight and term advances from the FHLB and other funding sources. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources of $1.5 billion at March 31, 2023 increased $130.8 million or 9.5% as compared to year end 2022. Non-core funding sources, as a percentage of total liabilities, were 21.5% at March 31, 2023, compared to 19.4% at December 31, 2022.
Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.8 billion at both March 31, 2023 and December 31, 2022, were either pledged or sold under agreements to repurchase. Pledged securities represented 85.6% of total securities at March 31, 2023, compared to 82.4% of total securities at December 31, 2022.
Cash and cash equivalents totaled $70.5 million as of March 31, 2023 which decreased from $77.8 million at December 31, 2022. Short-term investments, consisting of securities due in one year or less, decreased from $50.3 million at December 31, 2022, to $39.8 million at March 31, 2023.
Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities, at fair value, were $726.2 million at March 31, 2023 compared with $738.9 million at December 31, 2022. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.6 billion at March 31, 2023, unchanged compared with year end 2022. 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, Federal Reserve Bank Discount Window advances and FHLB advances. Through its subsidiary bank, the Company has borrowing relationships with the FHLB, the Federal Reserve Bank 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 March 31, 2023, the established borrowing capacity with the FHLB was $1.6 billion, with available unencumbered mortgage-related assets of $1.31 billion. Additional assets may also qualify as collateral for FHLB advances, upon approval of the FHLB. Through various programs at the Federal Reserve Bank, the Company has the ability to use certain unencumbered mortgage-related assets and securities to secure borrowings from the Federal Reserve Bank's Discount Window. At March 31, 2023 the available borrowing capacity with the Federal Reserve Bank was $157 million, secured by investment securities. In addition to the available borrowing lines at the FHLB and Federal Reserve Bank, the Company maintains $265 million of unencumbered securities which could be pledged to further enhance secured borrowing capacity.
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Non-GAAP Financial Information
The following table includes disclosure of non-GAAP financial measures. Tangible common equity, a non-GAAP financial measure, is total stockholders' equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. These measures adjust common equity per share to exclude the effects of goodwill and intangible amortization expense on earnings, equity, and capital. The Company believes the non-GAAP measures provide meaningful comparisons of our underlying operational performance and facilitate management's and investors' assessments of business and performance trends in comparison to others in the financial services industry. These non-GAAP financial measures should be considered as supplemental in nature and not as a substitute for our superior to the related financial information prepared in accordance with GAAP. Tangible book value per share as presented herein may be different from non-GAAP financial measures used by other companies, and may not be comparable to similarly titled measures reported by other companies.

Reconciliation of Tangible Book Value Per Share (non-GAAP) to Common Equity Book Value Per Share (GAAP)
| Quarter-Ended | Year-ended
| 03/31/2023 | 12/31/2022
Total common equity | $ | 648,322 |  | $ | 615,978 |
Less: Goodwill and intangibles | 94,253 |  | 94,336 |
Tangible common equity (Non-GAAP) | 554,069 |  | 521,642 |
Ending shares outstanding | 14,519,748 |  | 14,519,831 |
Common equity per share | $ | 44.65 |  | $ | 42.42 |
Tangible book value per share (Non-GAAP) | $ | 38.16 |  | $ | 35.93 |

Newly Adopted Accounting Standards
ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying U.S. generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
ASU 2022-01, "Derivatives and Hedging (Topic 815)" ("ASU 2022-01") 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 became effective for the Company on January 1, 2023. As there are no securities in our portfolio that are subject to this pronouncement in the current or prior year of adoption, the adoption of ASU 2022-01 had no effect on the financial statements for the current fiscal year, and the Company will apply the guidance prospectively, where applicable.
ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02") eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 became effective for the Company on January 1, 2023. The Company elected to apply the ASU on a modified retrospective basis to recognize any change in the allowance for credit losses that had been recognized for receivables previously modified (or reasonably expected to be modified) in a TDR. This election resulted in cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amount of the adjustment to retained earnings was a decrease of $64,000. See Note 5 in the Consolidated Financial Statements for changes in disclosures related to this adoption. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
ASU No. 2022-03, "Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." The amendments in this update provides clarification on guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and provides new disclosure requirements for equity securities subject to contractual sale restrictions, that are
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measured at fair value. ASU 2022-03 became effective for the Company on January 1, 2023. As there are no equity securities subject to contract sales during the current or prior year, the adoption of ASU 2022-03 had no effect on the financial statements for the current fiscal year, and the Company will apply the guidance prospectively to future acquisitions.
Accounting Standards Pending Adoption
ASU No. 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." This update will allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits or other income tax benefits. This update applies this to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC specific guidance removed from Subtopic 323-740 has been applied. Additionally, the disclosure requirements apply to investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method (including investments within that elected program that do not meet the conditions to apply the proportional amortization method). The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years beginning after December 15, 2023 and interim periods in those years. Tompkins is currently evaluating the potential impact of ASU 2023-02 on our consolidated financial statements.
The Company reviewed new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within Board-approved levels. The Committee also considers strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company. The Company does not currently use derivatives, such as interest rate swaps, to manage its interest rate risk exposure, but may consider such instruments in the future.
The Company’s Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 100 basis point parallel change in rates. Based upon the most recent simulation analysis performed as of February 28, 2023, a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decrease in net interest income from the base case of approximately 4.3%, while a 200 basis point parallel decline in interest rates over a one-year period would result in a one year increase in net interest income of 2.6% from the base case. This simulation assumes no balance sheet growth, no changes in balance sheet mix, deposit rates move in a manner that reflects the historical relationship between deposit rate movement and changes in Federal funds rate, and no management action to address balance sheet mismatches.
The decrease in net interest income in the rising rate scenario is a result of the balance sheet showing a more liability sensitive position over a one year time horizon. As such, in the short-term net interest income is expected to trend slightly below the base assumption, as upward adjustments to rate sensitive deposits and short-term funding outpace increases to asset yields which are concentrated in intermediate to longer-term products. As intermediate and longer-term assets continue to reprice/adjust into higher rate environment and funding costs stabilize, the simulation shows net interest income is expected to trend upwards.
The down 200 basis point scenario increases net income slightly in the first year as a result of the Company's assets repricing downward to a lesser degree than the rates on the Company's interest-bearing liabilities, mainly deposits and overnight borrowings. The model assumes that prepayments accelerate in the down interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates.
The most recent simulation of a base case scenario, which in addition to the above assumptions, also assumes interest rates remain unchanged from the date of the simulation, reflects a net interest margin that is increasing slightly over the next 12 to 18 months.
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Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, balance sheet mix, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage the Company's interest rate risk exposure. The Company’s current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company.
In addition to the simulation analysis, management uses an interest rate gap measure. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of March 31, 2023. The Company’s one-year net interest rate gap was a negative $738.8 million or 9.67% of total assets at March 31, 2023, compared with a negative $656.5 million or 8.56% of total assets at December 31, 2022. A negative gap position exists when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income contains a higher degree of risk in a rising rate environment over the next 12 months. An interest rate gap measure could be significantly affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.

Condensed Static Gap - March 31, 2023 |  |  | Repricing Interval |
(In thousands) | Total | 0-3 months | 3-6 months | 6-12 months | Cumulative 12 months
Interest-earning assets 1 | $ | 7,422,351 |  | $ | 950,893 |  | $ | 309,368 |  | $ | 529,553 |  | $ | 1,789,814 |
Interest-bearing liabilities | 4,889,921 |  | 2,133,366 |  | 142,679 |  | 252,614 |  | 2,528,659 |
Net gap position |  | (1,182,473) |  | 166,689 |  | 276,939 |  | (738,845) |
Net gap position as a percentage of total assets |  | (15.47) | % | 2.18 | % | 3.62 | % | (9.67) | %

1 Balances of available securities are shown at amortized cost
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2023.
Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report on Form 10-Q, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reportin g
There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2023, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various claims and legal actions that arise in the ordinary course of conducting business. As of March 31, 2023, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company's consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. Although the Company does not believe that the outcome of pending litigation will be material to the Company's consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
Item 1A. Risk Factors
The following risk factors supplement the risk factors previously disclosed under Item 1A in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and should be read in conjunction therewith.
Adverse developments affecting the banking industry, and resulting media coverage, have contributed to market volatility and eroded confidence in the banking system and could have a material effect on the Company's results of operations and/or stock price.
Recent events impacting the financial services industry, including bank failures, have resulted in decreased confidence in banks among investors, customers and counterparties, which has generated significant market volatility among publicly traded bank holding companies. As a result, customers may choose to maintain deposits with other financial institutions or invest in higher yielding short term fixed income securities, which could adversely impact our liquidity and results of operations. Uncertainty and concern regarding soundness or creditworthiness of other financial institutions has been, and may be in the future, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns and market disruption within the financial services industry, and may increase the risk of a wider economic recession. These recent events have, and could continue to, adversely impact the market price and volatility of the Company's common stock.
These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements. The cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments. Any of these changes could have a material impact on our business, financial condition and results of operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities

| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
| (a) | (b) | (c) | (d)
January 1, 2023 through January 31, 2023 | 1,487 |  | $ | 75.83 |  | 0 |  | 169,818 |
February 1, 2023 through February 28, 2023 | 1,186 |  | 77.51 |  | 0 |  | 169,818 |
March 1, 2023 through March 31, 2023 | 0 |  | 0 |  | 0 |  | 169,818 |
Total | 2,673 |  | $ | 76.58 |  | 0 |  | 169,818 |

Included above are 1,487 shares purchased in January 2023, at an average cost of $75.83, and 663 shares purchased in February 2023, at an average cost of $77.46, by the trustee of the rabbi trust established by the Company under the Company’s Stock Retainer Plan For Eligible Directors of Tompkins Financial Corporation and Participating Subsidiaries, which were part of the director deferred compensation under that plan. In addition, the table includes 523 shares delivered to the Company in February 2023 at an average cost of $77.51 to satisfy mandatory tax withholding requirements upon vesting of restricted stock under the Company's 2009 Equity Plan.
On October 22, 2021, the Company’s Board of Directors authorized a share repurchase plan (the "2021 Repurchase Plan") for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. Shares may be repurchased from time to time under the 2021 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2021 Repurchase Plan, the Company has repurchased a total of 230,182 shares through March 31, 2023, at an average cost of $78.31.
Recent Sales of Unregistered Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
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Item 6. Exhibits
EXHIBIT INDEX

Exhibit Number | Description
3.1 | Amended and Restated Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3(i) to the Company’s Form 10-Q, filed with the Commission on August 11, 2008.
3.2 | Second Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the Commission on January 31, 2011.
4.1 | Form of Specimen Common Stock Certificate of the Company, incorporated herein by reference to Exhibit 4 to the Company’s Registration Statement on Form 8-A (No. 0-27514), filed with the Commission on December 29, 1995.
31.1 | Certification of Principal Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 | Certification of Principal Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 | Certification of Principal Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350
32.2 | Certification of Principal Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350
101 INS** | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document
101 SCH** | Inline XBRL Taxonomy Extension Schema Document
101 CAL** | Inline XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document
101 LAB** | Inline XBRL Taxonomy Extension Label Linkbase Document
101 PRE** | Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the interactive date file because its XBRL tags are embedded with the inline XBRL document.

** Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Condition as of March 31, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three months ended March 31, 2023 and 2022; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022; (v) Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2023 and 2022; and (vi) Notes to Unaudited Consolidated Financial Statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 10, 2023
TOMPKINS FINANCIAL CORPORATION

By: | /s/ Stephen S. Romaine |
| Stephen S. Romaine |
| President and Chief Executive Officer |
| (Principal Executive Officer) |

By: | /s/ Francis M. Fetsko |
| Francis M. Fetsko |
| Executive Vice President, Chief Financial Officer, and Chief Operating Officer
| (Principal Financial Officer) |
| (Principal Accounting Officer) |

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