TOMPKINS FINANCIAL CORP

Previous wording

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, 2024. 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, 2023, and the Unaudited Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.

Current wording

The following discussion is intended to provide an understanding of the consolidated financial condition and results of operations of the Company for the three and six months ended June 30, 2024. 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, 2023, and the Unaudited Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.

Previous wording

In this Report, there are comparisons of the Company’s performance to that of a peer group, which is comprised of 180 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, 2023 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current quarter numbers.

Current wording

This Report includes comparisons of the Company’s performance to that of a peer group, which is comprised of the group of 193 domestic bank holding companies with $3 billion to $10 billion in total assets as defined in the Federal Reserve’s "Bank Holding Company Performance Report" for March 31, 2024 (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.

Previous wording

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 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, 2023, are among those that could cause actual results to differ materially from the forward-looking statements and historical performance: changes in general economic, market and regulatory conditions; our ability to attract and retain deposits and other sources of liquidity; gross domestic product growth and inflation trends; the impact of the interest rate and inflationary environment on the Company's business, financial condition and results of operations; other income or cash flow anticipated from the Company's operations, investment and/or lending activities; changes in laws and regulations affecting public companies, banks, bank holding companies and/or financial holding companies, and state and local government mandates; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; technological developments and changes; cybersecurity incidents and threats; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; the ability to acces…

Excerpt shortened here; the source contains the full paragraph.

Current wording

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; 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 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2023, are among those that could cause actual results to differ materially from the forward-looking statements and historical performance: changes in general economic, market and regulatory conditions; our ability to attract and retain deposits and other sources of liquidity; gross domestic product growth and inflation trends; the impact of the interest rate and inflationary environment on the Company's business, financial condition and results of operations; other income or cash flow anticipated from the Company's operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, including the Dodd-Frank Act, and state and local government mandates; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; technological developments and changes; cybersecurity incidents and threats; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; the ability to access financial resources in the amounts, at the times, and on the terms required to support the Company's futur…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

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

Current wording

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, 2023.

Previous wording

The Company's significant accounting policies conform with 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, 2023. 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:

Current wording

The Company's significant accounting policies conform with 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, 2023. 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 areas in which management of the Company applies critical assumptions and estimates includes the following:

Previous wording

Return on average assets ("ROA") for the quarter ended March 31, 2024 was 0.87%, compared to 1.03% for the quarter ended March 31, 2023. Return on average shareholders’ equity ("ROE") for the first quarter of 2024 was 10.18%, compared to 12.45% for the same period in 2023.

Current wording

Return on average assets ("ROA") for the quarter ended June 30, 2024 was 0.81%, compared to 0.45% for the quarter ended June 30, 2023. Return on average shareholders’ equity ("ROE") for the second quarter of 2024 was 9.51%, compared to 5.22% for the second quarter of 2023. For the year-to-date period ended June 30, 2024, ROA and ROE totaled 0.84% and 9.85%, respectively, compared to 0.74% and 8.76%, for the same period in 2023.

Previous wording

Net interest income of $50.7 million for the first quarter of 2024 was down $3.6 million or 6.6% from the same period in 2023. The decrease in net interest income was primarily due to higher funding costs, partially offset by an increase in the average yields on interest-earning assets in the first quarter of 2024 compared to the first quarter of 2023. 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 increase in funding costs reflects the impact of higher market interest rates as well as the mix of funding sources, with an increase in average time deposits and other borrowings.

Current wording

Net interest income of $51.0 million for the second quarter of 2024 was down $943,000, or 1.8% from the same period in 2023. For the six months ended June 30, 2024, net interest income of $101.6 million was down $4.5 million, or 4.3% compared to the first six months of 2023. The decrease in net interest income compared to prior year was due primarily to the increase in average interest rates on interest-bearing liabilities outpacing increases on interest earning asset yields. 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 and changes to the mix of securities. The increase in funding costs reflects the impact of higher market interest rates as well as the mix of funding sources, with an increase in average time deposits and other borrowings.

Previous wording

The following tables show average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each, for each of the three month periods ended March 31, 2024 and 2023 and the prior quarter ended December 31, 2023:

Current wording

The following tables show average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with the prior quarter of 2023 and for each of the three and six month periods ended June 30, 2024 and 2023:

Previous wording

Net interest income is the Company’s largest source of revenue, representing 69.6% of total revenues for the three months ended March 31, 2024, compared to 72.7% for the same period in 2023. Net interest income is dependent on the volume and composition of interest-earning assets and interest-bearing liabilities and the level of market interest rates. The above table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.

Current wording

Net interest income is the Company’s largest source of revenue, and is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. The above tables show average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.

Previous wording

Net interest income for the three months ended March 31, 2024 of $50.7 million was down $3.6 million or 6.6% from the same period in 2023. The decrease was due to the impact of higher interest rates on funding mechanisms, including customer migration to higher yielding deposit products, as well as higher average borrowings, partially offset by higher yields on average interest-earning assets and higher average loan balances. The average rates paid on interest-bearing liabilities for the three months ended March 31, 2024 was up 125 basis points over the same period in 2023, while the average yield on interest-earning assets increased 66 basis points over the same period.

Current wording

Net interest margin for the three months ended June 30, 2024 was 2.73% compared to 2.83% for the same period in 2023. Net interest margin for the six months ended June 30, 2024 was 2.73% compared to 2.90% for the same period in 2023. The decrease in net interest margin for the three and six months ended June 30, 2024 compared to the same periods in 2023 was due to the impact of higher interest rates on funding, including customer migration to higher yielding deposit products, as well as higher average borrowings, partially offset by higher yields on average interest-earning assets and higher average loan balances.

Previous wording

The quarterly net interest margin for the first quarter of 2024 of 2.73%, which was down from a net interest margin of 2.82% for the fourth quarter of 2023. The average cost of interest-bearing liabilities for the first quarter of 2024 was up 26 basis points over the fourth quarter of 2023. For the first quarter of 2024, the average yield on interest-earning assets was up 13 basis points over the fourth quarter of 2023.

Current wording

The quarterly net interest margin of 2.73% for the second quarter of 2024 was unchanged from the quarterly net interest margin for the first quarter of 2024. The average cost of interest-bearing liabilities for the second quarter of 2024 was 2.64% compared to 2.51% for the first quarter of 2024, while the average yield on interest-earning assets was 4.56% and 4.47%, respectively, for the same periods in 2023.

Previous wording

decreased $280.5 million, or 13.2%, from the same period in 2023. The increase in securities yields was driven by market interest rate increases and the repositioning of the investment portfolio through the sale of approximately $510.5 million of available-for-sale investment securities in the second and third quarters of 2023. The securities sold had an average yield of 0.86%, while the proceeds of the sale were largely reinvested into securities with an estimated yield of approximately 5.09%.

Current wording

Interest income on securities for the three and six months ended June 30, 2024, was up $2.8 million, or 35.1%, and $5.6 million or 35.6%, respectively, as compared to the same periods in 2023. The average yield on total securities for both the three and six months ended June 30, 2024, was up 84 basis points, respectively, over the same periods in 2023, while average balances for securities were down $257.4 million, or 12.4% and $268.8 million, or 12.8%, respectively, over the same periods in 2023. The increase in securities yields was driven by market interest rate increases and the repositioning of the investment portfolio through the sale of approximately $510.5 million of available-for-sale investment securities in the second and third quarters of 2023. The securities sold had an average yield of 0.86%, while the proceeds of the sale were largely reinvested into securities with an estimated average yield of approximately 5.09%.

Previous wording

Interest expense for the three months ended March 31, 2024 increased by $17.5 million or 116.8% compared to the same period in 2023, reflecting higher average costs of funds and a shift in funding mix. The average cost of interest-bearing liabilities for the first quarter of 2024 was 2.51%, an increase of 125 basis points from the first quarter of 2023, 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. Average time deposits for the first quarter of 2024 were up $315.0 million or 46.7% compared to the same period in 2023, while the average cost of time deposits was up 169 basis points over the same period. Average other borrowings for the three months ended March 31, 2024 were up $353.2 million or 130.9% compared to the same period in 2023. The average rate paid on other borrowings for the first quarter of 2024 was up 101 basis points over the same period in 2023. The increase in the cost of average borrowings was primarily the result of the greater utilization of comparatively higher rate overnight borrowings to fund loan growth as a result of lower average deposit balances.

Current wording

Interest expense for the three months ended June 30, 2024 increased $14.3 million, or 71.7%, and increased $31.8 million, or 91.0% for the six month period ended June 30, 2024 compared to the same periods in 2023. The increase reflects higher average costs of funds and a shift in funding mix. The average cost of interest-bearing deposits for the three and six months ended June 30, 2024 was 2.27% and 2.22%, respectively, up 86 and 97 basis points, respectively, as compared to the same periods in 2023. Average interest-bearing deposits for the three and six months ended June 30, 2024, were up $38.9 million, or 0.9%, and $33.4 million, or 0.8%, respectively, from the same periods in 2023. Average noninterest bearing deposits were down $167.2 million, or 8.3% for the three months ended June 30, 2024 compared to the same period in 2023, and for the six months ended June 30, 2024 were down $200.7 million, or 9.9% compared to the same period in 2023. The average rate paid on other borrowings for the three and six months ended June 30, 2024 was up 69 basis points and 82 basis points, respectively, over the same periods in 2023. The increase in the cost of average borrowings was primarily the result of the greater utilization of comparatively higher rate overnight borrowings to support loan growth. Average other borrowings for the three and six months ended June 30, 2024 were up $308.9 million, or 81.3%, and up $330.7 million, or 101.8%, respectively, compared to the same periods in 2023.

Previous wording

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, 2024 was $854,000 compared to a credit of $825,000 for the same period in 2023. Included in the provision for credit losses for both the first quarter of 2024 and 2023 were provision expenses of $506,000 and $355,000, respectively, related to off-balance sheet exposures related to growth in commercial loan pipeline. In addition to the increase in off-balance sheet exposures, the increase in provision expense for the first quarter of 2024 was due to loan growth and changes in asset quality. The provision credit in the first quarter of 2023 was largely driven by significant net recoveries. Net charge-offs for the first quarter of 2024 were $228,000 compared to net recoveries of $1.3 million reported for the same period in 2023. The section captioned "Financial Condition – The Allowance for Credit Losses" below has further details on the allowance for credit losses and asset quality metrics.

Current wording

The provision for credit losses represents management’s estimate of the amount necessary to maintain the allowance for credit losses ("ACL") at an appropriate level. Provision for credit losses in the second quarter of 2024 was $2.2 million compared to $2.3 million for the second quarter of 2023. Provision for credit losses for the six months ended June 30, 2024 was $3.0 million compared to $1.4 million for the six months ended June 30, 2023. The provision for credit losses for the three and six months ended June 30, 2024 included a provision expense of $308,000 and $814,000, respectively, related to off-balance sheet credit exposures compared to a credit of $166,000 and an expense of $189,000, respectively, for the same periods in 2023. The increase in provision for credit losses for the six month period is mainly driven by loan growth, and increases in off-balance sheet reserves as a result of increase in commercial loan pipeline. The section captioned "Financial Condition – The Allowance for Credit Losses" below has further details on the allowance for credit losses and asset quality metrics.

Previous wording

Wealth management fees of $4.9 million in the first quarter of 2024 were up $428,000 or 9.5% compared to the first quarter of 2023. The increase in investment services income for the three-month period ended March 31, 2024 was mainly a result of an increase in assets under management as of March 31, 2024 compared to March 31, 2023, which was due to market performance and new business production. Wealth management fees include trust services, financial planning, wealth management services, and brokerage related services and are generally based on the market value of assets within an account and are thus impacted by volatility in equity and bond markets. The fair value of assets managed by, or in custody of, Tompkins was $3.2 billion at March 31, 2024, up from $3.1 billion at March 31, 2023.

Current wording

Wealth management fees of $4.8 million in the second quarter of 2024 were up $171,000 or 3.7% compared to the second quarter of 2023. For the first six months of 2024, wealth management fees were up $599,000, or 6.5% compared to the same period in 2023. Wealth management fees include trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $3.1 billion at June 30, 2024, up $61.4 million or 2.0% from June 30, 2023. The increase in assets from prior year was mainly a result of positive market performance.

Previous wording

Card services income of $2.9 million in the first quarter of 2024 was up $257,000 or 9.6% compared to the same period in 2023. The first quarter of 2024 included a $255,000 sign-on bonus related to the renewal of a card services contract.

Current wording

Card services income in the second quarter of 2024 was up $191,000, or 6.2% over the same three month period in 2023, and up $448,000, or 7.8% for the six months ended June 30, 2024 compared to the same period in 2023. The increase in the first six months of 2024 included a $255,000 sign-on bonus related to the renewal of a card services contract.

Previous wording

Noninterest expense was $49.9 million for the first quarter of 2024, down 0.6% compared to the same period in 2023. Noninterest expense as a percentage of total revenue for the first quarter of 2024 was 68.5% compared to 67.2% for the same period in 2023.

Current wording

Noninterest expense of $49.9 million for the second quarter of 2024 and $99.8 million for the first six months of 2024 were down $2.0 million or 3.9% and $2.3 million, or 2.3%, respectively, compared to the same periods in 2023. Noninterest expense as a percentage of total revenue for the three and six months ended June 30, 2024 were 68.7% and 68.6% compared to 80.6% and 73.4% for the same period in 2023.

Previous wording

Expenses associated with salaries and wages and employee benefits are the largest component of noninterest expense, representing 62.4% of total noninterest expense for the first quarter of 2024, compared to 62.3% for the first quarter of 2023. Salaries and wages and employee benefit expense for the three months ended March 31, 2024 were in line with the same period in 2023, as normal merit adjustments were offset by a decrease in average full time equivalents as well as decreases in healthcare and incentive expense in the first quarter of 2024 compared to the same period in 2023.

Current wording

Expenses associated with compensation and benefits comprise the largest component of noninterest expense, representing 63.0% and 62.7% of total noninterest expense for the three and six months ended June 30, 2024, respectively. Total salaries, wages and benefits for the three and six months ended June 30, 2024, were down $520,000, or 1.6% and $665,000 or 1.1% from the same periods in 2023. The decrease was driven by a decrease in average full time equivalents as well as decreases in healthcare and incentive expense in the second quarter of 2024, partially offset by normal merit adjustments.

Previous wording

The provision for income taxes was $5.2 million for an effective rate of 23.52% for the first quarter of 2024, compared to tax expense of $5.9 million and an effective rate of 23.31% for the same quarter in 2023. 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 for both periods presented 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 end of 2023 and 2024 tax years.

Current wording

The provision for income taxes was $4.9 million for an effective rate of 23.8% for the second quarter of 2024, compared to tax expense of $1.8 million and an effective rate of 17.3% for the same quarter in 2023. For the first six months of 2024, the provision for income taxes was $10.1 million for an effective rate of 23.6% compared to tax expense of $7.7 million and an effective rate of 21.6% for the same period in 2023. The increase in the effective tax rate for the three and six months ended June 30, 2024, compared to the same periods in 2023 is largely due to an increase in pre-tax income, driven primarily by the realized losses on the sale of certain available-for-sale debt securities recognized in the second quarter of 2023 and the anticipated retention of certain New York State tax benefits in 2023. The effective rates differ from the U.S. and state statutory rates primarily due to the effect of tax-exempt income from loans, securities and life insurance assets, and the income tax effects associated with stock based compensation.

Previous wording

Total assets were $7.8 billion at March 31, 2024, down $41.7 million or 0.5% from December 31, 2023. Total loans were up $34.6 million or 0.6% compared to December 31, 2023. Total securities were down $50.3 million or 2.9% compared to year-end 2023, the decrease was mainly in available-for-sale securities. Total deposits were down $49.8 million or 0.8% from December 31, 2023, and total borrowings were down $79.5 million or 13.2% from December 31, 2023.

Current wording

Total assets were $7.9 billion at June 30, 2024, up $49.8 million, or 0.6% from December 31, 2023. Total loans were up $155.9 million, or 2.8%, cash and cash equivalents were down $8.6 million, or 10.8% and total securities were down $99.2 million or 5.7% compared to December 31, 2023. Total deposits at June 30, 2024 were down $114.0 million, or 1.8% from December 31, 2023.

Previous wording

As of March 31, 2024, the Company’s securities portfolio was $1.7 billion or 21.6% of total assets, compared to $1.7 billion or 22.1% of total assets at year-end 2023. The following table details the composition of the securities portfolio:

Current wording

As of June 30, 2024, the Company’s securities portfolio was $1.6 billion, or 20.7% of total assets compared to $1.7 billion, or 22.1% of total assets at year end 2023. The decrease in total securities was mainly due to principal runoff and maturities of debt securities during the first six months of 2024. The following tables detail the composition of the securities portfolio:

Previous wording

The increase 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 2024. 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.

Current wording

As of June 30, 2024, the available-for-sale debt securities portfolio had net unrealized losses, which reflects the amount that the amortized cost exceeds fair value, of $146.5 million compared to net unrealized losses of $131.8 million at December 31, 2023. The increase in unrealized losses related to the available-for-sale debt securities portfolio reflects interest rate volatility in the market, the volume and rates associated with the securities purchases and maturities in 2024. 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.

Previous wording

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.

Current wording

The Company evaluates available-for-sale and held-to-maturity debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an 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.

Previous wording

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.

Current wording

The Company determined that at June 30, 2024, all impaired available-for-sale and held-to-maturity debt securities were impaired because of changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit worthiness of the underlying issuers. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. Therefore, the Company carried no ACL at June 30, 2024 and there was no credit loss expense recognized by the Company with respect to the securities portfolio during the three and six months ended June 30, 2024.

Previous wording

The below table shows a more detailed break-out of CRE loans as of March 31, 2024 and December 31, 2023.

Current wording

The below table shows a more detailed break-out of commercial real estate ("CRE") loans as of June 30, 2024 and December 31, 2023:

Previous wording

Total loans and leases of $5.6 billion at March 31, 2024 were up $34.6 million or 0.6% from December 31, 2023. The increase was mainly in commercial real estate loans, which were up $33.7 million or 1.1%, to $3.1 billion at March 31, 2024. As of March 31, 2024, total loans and leases represented 72.5% of total assets compared to 71.7% of total assets at December 31, 2023.

Current wording

Total loans and leases of $5.8 billion at June 30, 2024 were up $155.9 million, or 2.8% from December 31, 2023, mainly in the commercial real estate and commercial and industrial loan portfolios. As of June 30, 2024, total loans and leases represented 73.2% of total assets compared to 71.7% of total assets at December 31, 2023.

Previous wording

Residential real estate loans, including home equity loans, were $1.6 billion at March 31, 2024, down $2.5 million or 0.2% compared to December 31, 2023, and comprised 27.6% of total loans and leases at March 31, 2024. 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.

Current wording

Residential real estate loans, including home equity loans, were $1.6 billion at June 30, 2024, up $9.9 million, or 0.6% compared to December 31, 2023, and comprised 27.3% of total loans and leases at June 30, 2024.

Previous wording

During the first three months of 2024 and 2023, the Company sold residential loans totaling $1.1 million and $1.3 million, respectively, recognizing gains on these sales of $73,000 and $38,000, 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 $923,000 at March 31, 2024 and $927,000 December 31, 2023.

Current wording

During the first six months of 2024 and 2023, the Company sold residential loans totaling $8.2 million and $2.1 million, respectively, recognizing gains of $314,000 and $65,000, 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 $949,000 at June 30, 2024, and $927,000 at December 31, 2023.

Previous wording

Commercial real estate loans and commercial and industrial loans totaled $3.1 billion and $826.8 million, respectively, and represented 55.8% and 14.7%, respectively, of total loans at March 31, 2024. The commercial real estate loans and commercial and industrial loans as of March 31, 2024 were up $33.7 million or 1.1% and $3.3 million or 0.4% over year-end 2023, respectively.

Current wording

Commercial real estate loans and commercial and industrial loans totaled $3.2 billion and $867.0 million, respectively, and represented 55.7% and 15.0%, respectively, of total loans and leases as of June 30, 2024. The commercial real estate portfolio was up $99.1 million, or 3.2% compared to December 31, 2023, while commercial and industrial loans were up $43.5 million, or 5.3% compared to December 31, 2023.

Previous wording

As of March 31, 2024, agriculturally-related loans totaled $311.4 million or 5.5% of total loans and leases, compared to $322.9 million or 5.8% of total loans and leases at December 31, 2023. 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.

Current wording

As of June 30, 2024, agriculturally-related loans totaled $303.1 million, or 5.3% of total loans and leases, compared to $322.9 million, or 5.8% of total loans and leases at December 31, 2023. Agriculturally-related loans include loans to dairy farms and crop farms. Agriculturally-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops.

Previous wording

The below tables represent the allowance for credit losses as of March 31, 2024 and December 31, 2023. 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.

Current wording

The below table represents the allowance for credit losses as of June 30, 2024 and December 31, 2023. The table provides, as of the dates indicated, an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category.

Previous wording

Asset quality measures at March 31, 2024 were generally consistent with December 31, 2023. Loans internally-classified Special Mention or Substandard were down $4.4 million or 3.6% compared to December 31, 2023. Nonperforming loans and leases were flat compared to year end 2023 and represented 1.11% of total loans at March 31, 2024 and December 31, 2023. The allowance for credit losses covered 82.47% of nonperforming loans and leases as of March 31, 2024, compared to 82.84% at December 31, 2023. The Company had net charge-offs of $228,000 in the first quarter of 2024, compared to net recoveries of $1.3 million for the same period in 2023.

Current wording

Asset quality measures at June 30, 2024 were generally favorable compared with December 31, 2023. Loans internally-classified Special Mention or Substandard were down $6.9 million, or 5.6% compared to December 31, 2023. Nonperforming loans and leases were in line with year end 2023 and represented 1.08% of total loans at June 30, 2024 compared to 1.11% at December 31, 2023. The allowance for credit losses covered 84.94% of nonperforming loans and leases at June 30, 2024, compared to 82.84% at December 31, 2023.

Previous wording

Activity in the Company’s allowance for credit losses during the first three months of 2024 and 2023 is illustrated in the table below:

Current wording

Activity in the Company’s allowance for credit losses during the first six months of 2024 and 2023 is illustrated in the table below:

Previous wording

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.

Current wording

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.

Previous wording

Nonperforming assets include loans past due 90 days and accruing, nonaccrual loans, and foreclosed real estate/other real estate owned. Total nonperforming assets of $62.7 million at March 31, 2024 were flat compared to December 31, 2023, and up $34.2 million or 120.2%% compared to March 31, 2023. The increase in nonperforming loans at quarter-end March 31, 2024 compared to the same period in 2023 was mainly due to the addition of one relationship with two commercial real estate properties totaling approximately $33.8 million included in the office space and mixed use properties portion of the commercial real estate portfolio during the fourth quarter of 2023. The Company believes that the existing collateral securing the loans is sufficient to cover the exposure as of March 31, 2024. Nonperforming assets represented 0.81% of total assets at March 31, 2024, up from 0.80% at December 31, 2023, and 0.37% at March 31, 2023. Our peer group's average ratio of nonperforming assets to total assets was 0.40% at December 31, 2023.

Current wording

Nonperforming assets include loans past due 90 days and accruing, nonaccrual loans, and foreclosed real estate/other real estate owned. Total nonperforming assets of $62.5 million at June 30, 2024 were down $151,000, or 0.2% compared to December 31, 2023, and up $31.1 million, or 99.2% compared to June 30, 2023. The increase in nonperforming loans for the six month period in 2024 compared to the same period in 2023 was mainly due to the addition of one relationship with two commercial real estate properties totaling approximately $33.3 million included in the office space and mixed use properties portion of the commercial real estate portfolio during the fourth quarter of 2023. Nonperforming assets represented 0.79% of total assets at June 30, 2024, down from 0.80% at December 31, 2023, and up from 0.41% at June 30, 2023. Our peer group's average ratio of nonperforming assets to total assets was 0.42% at March 31, 2024.

Previous wording

The Company adopted ASU 2022-02 Financial Instruments - Credit Losses (Topic 326), effective January 1, 2023. This standard eliminated the previous trouble debt restructuring accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. At March 31, 2024, the Company had $3.5 million of modifications to borrowers experiencing financial difficulty.

Current wording

The Company adopted ASU 2022-02 Financial Instruments - Credit Losses (Topic 326), effective January 1, 2023. This standard eliminated the previous trouble debt restructuring accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. At June 30, 2024, the Company had $4.1 million of modifications to borrowers experiencing financial difficulty.

Previous wording

The ratio of the allowance to nonperforming loans and leases (loans past due 90 days and accruing, nonaccrual loans) was 82.47% at March 31, 2024, compared to 82.84% at December 31, 2023, and 162.11% at March 31, 2023. 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.

Current wording

The ratio of the allowance to nonperforming loans and leases (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 84.94% at June 30, 2024, compared to 82.84% at December 31, 2023, and 154.76% at June 30, 2023. 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.

Previous wording

The Company, through its internal loan review function, identified 17 commercial relationships totaling $25.6 million at March 31, 2024 that were potential problem loans. At December 31, 2023, the Company had identified 17 relationships totaling $26.0 million that were potential problem loans. Of the 17 commercial relationships at March 31, 2024 that were Substandard, there were 4 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $22.0 million, the largest of which was $18.3 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.

Current wording

The Company, through its internal loan review function, identified 15 commercial relationships from the loan portfolio totaling $23.3 million at June 30, 2024, that were potential problem loans. At December 31, 2023, the Company had identified 17 relationships totaling $26.0 million that were potential problem loans. Of the 15 relationships at June 30, 2024 that were Substandard, there were 3 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $19.9 million, the largest of which was $16.4 million. The Company continues to monitor these potential problem relationships; however, management cannot predict the extent to which changing economic conditions or other factors may further impact borrowers. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis.

Previous wording

Additional paid-in capital increased from $297.2 million at December 31, 2023 to $297.8 million at March 31, 2024. The increase was primarily attributable to $1.0 million related to stock based compensation; partially offset by $418,000 of deferred director compensation. Retained earnings increased by $8.2 million from $501.5 million at December 31, 2023 to $509.7 million at March 31, 2024, reflecting net income of $16.9 million less dividends of $8.6 million. Accumulated other comprehensive loss increased from a net loss of $125.0 million at December 31, 2023 to a net loss of $134.8 million at March 31, 2024, reflecting a $10.0 million increase in unrealized losses on available-for-sale debt securities due to changes in market rates coupled with a $217,000 decrease related to post-retirement benefit plans.

Current wording

Additional paid-in capital increased by $1.5 million, or 0.5%, from $297.2 million at December 31, 2023, to $298.6 million at June 30, 2024. The increase was primarily attributable to $1.7 million related to stock-based compensation; partially offset by $228,000 of deferred director compensation.

Previous wording

Cash dividends paid in the first three months of 2024 totaled approximately $8.6 million or $0.60 per common share, representing 51.2% of year to date 2024 earnings through March 31, 2024, and were flat compared to cash dividends of $8.7 million or $0.60 per common share paid in the first three months of 2023.

Current wording

Cash dividends paid in the first six months of 2024 totaled approximately $17.4 million, or $1.21 per common share, representing 53.5% of year to date 2024 earnings through June 30, 2024, flat compared to cash dividends of $17.4 million, or $1.20 per common share paid in the first six months of 2023. Cash dividends per share during the first six months of 2024 were up 0.8% over the same period in 2023.