TOMPKINS FINANCIAL: Management report and analysis of the financial situation and operating results (form 10-Q)

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COMPANY

Corporate Overview and Strategic Initiatives
Tompkins Financial Corporation ("Tompkins" or the "Company") is headquartered in
Ithaca, New York and is registered as a Financial Holding Company with the
Federal Reserve Board under the Bank Holding Company Act of 1956, as amended.
The Company is a locally oriented, community-based financial services
organization that offers a full array of products and services, including
commercial and consumer banking, leasing, trust and investment management,
financial planning and wealth management, and insurance services. At June 30,
2021, the Company had four wholly-owned banking subsidiaries: Tompkins Trust
Company (the "Trust Company"), The Bank of Castile (DBA Tompkins Bank of
Castile), Mahopac Bank (DBA Tompkins Mahopac Bank), and VIST Bank (DBA Tompkins
VIST Bank). The Company's banks have announced plans for a rebranding effort,
pursuant to which the Company's four wholly-owned banking subsidiaries will be
combined into one bank, with The Bank of Castile, Mahopac Bank, and VIST Bank
merging with and into Tompkins Trust Company. The combined bank will conduct
business under the "Tompkins" brand name, with a legal name of "Tompkins
Community Bank." The Company filed applications with applicable regulators on
July 12, 2021, with the re-branding and combination anticipated to take effect
later in 2021, subject to regulatory approval. The Company also has a
wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc.
("Tompkins Insurance"). The trust division of the Trust Company provides a full
array of investment services, including investment management, trust and estate,
financial and tax planning as well as life, disability and long-term care
insurance services. The Company's principal offices are located at 118 E. Seneca
Street, 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 the Company's four banking subsidiaries' 63 banking offices (43 offices in
New York and 20 offices in Pennsylvania) and using those deposits to originate a
variety of commercial loans, consumer loans, real estate loans (including
commercial loans collateralized by real estate), and leases. The Company's
lending function is managed within the guidelines of a comprehensive
Board-approved lending policy. Reporting systems are in place to provide
management with ongoing information related to loan production, loan quality,
concentrations of credit, loan delinquencies, and nonperforming and potential
problem loans. Banking services also include a full suite of products such as
debit cards, credit cards, remote deposit, electronic banking, mobile banking,
cash management, and safe deposit services.

Wealth management services consist of investment management, trust and estate,
financial and tax planning as well as life, disability and long-term care
insurance services. Wealth management services are provided by the Trust Company
under the trade name Tompkins Financial Advisors. Tompkins Financial Advisors
has office locations, and services are available to customers, at the Company's
four subsidiary banks.

Insurance services include property and casualty insurance, employee benefit
consulting, and life, long-term care and disability insurance. Tompkins
Insurance is headquartered in Batavia, New York. Over the years, Tompkins
Insurance has acquired smaller insurance agencies in the market areas serviced
by the Company's banking subsidiaries and successfully consolidated them into
Tompkins Insurance. Tompkins Insurance offers services to customers of the
Company's banking subsidiaries by sharing offices with The Bank of Castile,
Trust Company, and VIST Bank. In addition to these shared offices, Tompkins
Insurance has five stand-alone offices in Western New York, and one stand-alone
office in Tompkins County, New York.

The principal expenses of the Company are interest on deposits, interest on loans and operating and general administrative expenses, as well as provisions for credit losses. Sources of funding, other than deposits, include borrowings, securities sold under repurchase agreements and cash flows from lending and investing activities.

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Competetion

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

Competition among financial institutions is based upon interest rates offered on
deposit accounts, interest rates charged on loans and other credit and service
charges, the quality and scope of the services rendered, the convenience of
facilities and services, and, in the case of loans to commercial borrowers,
relative lending limits. Management believes that a community-based financial
organization is better positioned to establish personalized financial
relationships with both commercial customers and individual households. The
Company's community commitment and involvement in its primary market areas, as
well as its commitment to quality and personalized financial services, are
factors that contribute to the Company's competitiveness. Management believes
that each of the Company's subsidiary banks can compete successfully in its
primary market areas by making prudent lending decisions quickly and more
efficiently than its competitors, without compromising asset quality or
profitability. In addition, the Company focuses on providing unparalleled
customer service, which includes offering a strong suite of products and
services, including products that are accessible to our customers through
digital means. Although management feels that this business model has caused the
Company to grow its customer base in recent years and allows it to compete
effectively in the markets it serves, we cannot assure you that such factors
will result in future success.
Regulation
Banking, insurance services and wealth management are highly regulated. As a
financial holding company with four community banks, a registered investment
adviser, and an insurance agency subsidiary, the Company and its subsidiaries
are subject to examination and regulation by the Federal Reserve Board ("FRB"),
Securities and Exchange Commission ("SEC"), the Federal Deposit Insurance
Corporation ("FDIC"), the New York State Department of Financial Services,
Pennsylvania Department of Banking and Securities, the Financial Industry
Regulatory Authority, and the Pennsylvania Insurance Department.

OTHER IMPORTANT INFORMATION

The following discussion is intended to provide an understanding of the
consolidated financial condition and results of operations of the Company for
the three and six months ended June 30, 2021. 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, 2020, and the Unaudited Consolidated Financial Statements and notes
thereto included in Part I of this Quarterly Report on Form 10-Q.

In this Report, there are comparisons of the Company's performance to that of a
peer group, which is comprised of the group of 146 domestic bank holding
companies with $3 billion to $10 billion in total assets as defined in the
Federal Reserve's "Bank Holding Company Performance Report" for March 31, 2021
(the most recent report available). Although the peer group data is presented
based upon financial information that is one fiscal quarter behind the financial
information included in this report, the Company believes that it is relevant to
include certain peer group information for comparison to current quarter
numbers.

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The
statements contained in this Report that are not statements of historical fact
may include forward-looking statements that involve a number of risks and
uncertainties. Forward-looking statements may be identified by use of such words
as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan",
or "anticipate", and other similar words. Examples of forward-looking statements
may include statements regarding the asset quality of the Company's loan
portfolios; the level of the Company's allowance for credit losses; whether,
when and how borrowers will repay deferred amounts and resume scheduled
payments; the sufficiency of liquidity sources; the Company's exposure to
changes in interest rates, and to new, changed, or extended
government/regulatory expectations; the impact of changes in accounting
standards; and trends, plans, prospects, growth and strategies. Forward-looking
statements are made based on management's expectations and beliefs concerning
future events impacting the Company and are subject to certain uncertainties and
factors relating to the Company's operations and economic environment, all of
which are difficult to predict and many of which are beyond the control of the
Company, that could cause actual results of the Company to differ materially
from those expressed and/or implied by forward-looking statements. The following
factors, in addition to those listed as Risk Factors in Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2020, are among those that
could cause actual results to differ
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materially from the forward-looking statements: changes in general economic,
market and regulatory conditions; the severity and duration of the COVID-19
pandemic and the impact of the pandemic (including the government's response to
the pandemic) on economic and financial markets, potential regulatory actions,
and modifications to our operations, products, and services relating thereto;
disruptions in our and our customers' operations and loss of revenue due to
pandemics, epidemics, widespread health emergencies, government-imposed
travel/business restrictions, or outbreaks of infectious diseases such as the
COVID-19, and the associated adverse impact on our financial position,
liquidity, and our customers' abilities or willingness to repay their
obligations to us or willingness to obtain financial services products from the
Company; a decision to amend or modify the terms under which our customers are
obligated to repay amounts owed to us; the development of an interest rate
environment that may adversely affect the Company's interest rate spread, other
income or cash flow anticipated from the Company's operations, investment and/or
lending activities; changes in laws and regulations affecting banks, bank
holding companies and/or financial holding companies, such as the Dodd-Frank Act
and Basel III and the Economic Growth, Regulatory Relief, and Consumer
Protection Act; legislative and regulatory changes in response to COVID-19 with
which we and our subsidiaries must comply, including the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act") and the Consolidated
Appropriations Act, 2021, and the rules and regulations promulgated thereunder,
and federal, state and local government mandates; technological developments and
changes; the ability to continue to introduce competitive new products and
services on a timely, cost-effective basis; governmental and public policy
changes, including environmental regulation; reliance on large customers;
uncertainties arising from national and global events, including the potential
impact of widespread protests, civil unrest, and political uncertainty on the
economy and the financial services industry; and financial resources in the
amounts, at the times and on the terms required to support the Company's future
businesses.

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

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

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, 2020. Refer to "Recently Issued
Accounting Standards" in Management's Discussion and Analysis in this Quarterly
Report on Form 10-Q for a discussion of recent accounting updates.

COVID-19 pandemic and recent events

The COVID-19 global pandemic continued to present health and economic challenges
on an unprecedented scale during the second quarter of 2021. During the second
quarter, the Company continued to focus on the health and well-being of its
workforce, meeting its clients' needs, and supporting its communities. The
Company has designated a Pandemic Planning Committee, which includes key
individuals across the Company as well as members of Senior Management, to
oversee the Company's response to COVID-19, and has implemented a number of risk
mitigation measures designed to protect our employees and customers while
maintaining services for our customers and community. These measures included
restrictions on business travel, establishment of a remote work environment for
most non-customer facing employees, and social distancing restrictions for those
employees working at our offices and branch locations. In July 2020, we began
initiating the reopening of our offices and reinstatement of branch services,
and the return of our workforce, but as of June 30, 2021, approximately 85% of
our noncustomer facing employees continued to work remotely. As New York State
has eased COVID-19 restrictions, we have lifted our own restrictions including
opening our facilities to employees and customers, lifting travel restrictions,
and
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discontinue other guidelines put in place following the COVID-19 pandemic. However, on-site employees who have not been vaccinated are required to wear masks and adhere to distancing requirements as per CDC guidelines.

Tompkins continues to offer, on a limited basis, assistance to its customers
affected by the COVID-19 pandemic by implementing a payment deferral program to
assist both consumer and business borrowers that may be experiencing financial
hardship due to COVID-19. Our standard program allowed for the deferral of loan
payments for up to 90 days; in certain cases we extended additional deferrals or
other accommodations. As part of this program, the Company deferred
approximately 3,843 loans totaling $1.6 billion. As of June 30, 2021, 3,709
loans totaling approximately $1.4 billion had moved out of the deferral status;
of those loans 0.9% were more than 30 days past due. As of June 30, 2021, total
loans that continued in a deferral status amounted to approximately $129.4
million, representing 2.5% of total loans. We expect that loans in the deferral
program will continue to accrue interest during the deferral period unless
otherwise classified as nonperforming. The provisions of the CARES Act and the
interagency guidance issued by Federal banking regulators provided clarification
related to modifications and deferral programs to assist borrowers who are
negatively impacted by the COVID-19 national emergency. The guidance and
clarifications detail certain provisions whereby banks are permitted to make
deferrals and modifications to the terms of a loan which would not require the
loan to be reported as a troubled debt restructuring ("TDR"). In accordance with
the CARES Act and the interagency guidance, the Company elected to adopt the
provisions to not report qualified loan modifications as TDRs. The relief
related to TDRs under the CARES Act was extended by the Consolidated
Appropriations Act, 2021. Under the Consolidated Appropriations Act, relief
under the CARES Act will continue until the earlier of (i) 60 days after the
date the COVID-19 national emergency comes to an end or (ii) January 1, 2022.

Management continues to monitor credit conditions carefully at the individual
borrower level, as well as by industry segment, in order to be responsive to
changing credit conditions. It is difficult to assess whether a customer that
continues to experience COVID-19 related financial hardship will be able to
perform under the original terms of the loan once the deferral period ends. Any
such inability to perform may result in increases in past due and nonperforming
loans. The table below list certain larger industry concentrations within our
loan portfolio and the percentage of each segment that are currently in a
deferral status.

Deferral Credit Concentrations
(in thousands)                                                             June 30, 2021
                                                                                                         Percent of Loans
                                           Portfolio                                Deferral Balance  Currently in Deferral
Description                               Balance ($)         Concentration*               ($)                Status
Lessors of Residential Buildings and
Dwellings                               $    545,615                       17.10  % $          125                   0.02  %
Hotels and Motels                            199,016                        6.20  %         56,812                  28.55  %
Dairy Cattle and Milk Production             183,790                        5.80  %              0                      0  %
Health Care and Social Assistance            154,288                        4.80  %              0                      0  %
Lessors of Other Real Estate Property        113,890                        3.60  %          6,885                   6.05  %
                                        $  1,196,598                        

$ 63,821
* Concentration is defined as outstanding loan balances as a percentage of total commercial and commercial real estate loans.



The Company is also participating in the U.S. Small Business Administration
("SBA") Paycheck Protection Program ("PPP"). This program provides borrower
guarantees for lenders, and envisions a certain amount of loan forgiveness for
loan recipients who properly utilize funds, all in accordance with the rules and
regulations established by the SBA for the PPP. The Company began accepting
applications for PPP loans on April 3, 2020, and had funded 2,998 loans totaling
about $465.6 million when the initial program ended. On January 19, 2021, the
Company began accepting both first draw and second draw applications for the
reopening of the PPP program and as of July 19, 2021, the Company had funded an
additional 2,481 applications totaling $261.2 million.

Out of the total $695.2 million of PPP loans that the Company had funded through
July 19, 2021, approximately $471.4 million had been forgiven by the SBA under
the terms of the program.

As of June 30, 2021, the Company's nonperforming assets represented 0.67% of
total assets, up from 0.60% at December 31, 2020. Despite relatively stable
trends in nonperforming assets and other delinquency, some customers have
experienced continued cash flow stress related to the pandemic, resulting in an
increase in loans rated Special Mention, which totaled $108.3 million at June
30, 2021, up from $44.7 million at June 30, 2020. The downgrades to Special
Mention were mainly in the retail, hospitality, and agriculture industries. At
June 30, 2021, loans rated Substandard declined to $45.4 million from $48.0
million at June 30, 2020. As mentioned above, the Company is working with its
customers who are dealing with hardships caused by
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the pandemic, and as part of those efforts, the Company implemented a loan
payment deferral program in March 2020 and participates in the PPP. As of June
30, 2021, the Company had not experienced any significant impact to our
liquidity or funding capabilities as a result of COVID-19. The Company's
participation as a lender in the PPP has been a use of liquidity; however, the
Federal Reserve Bank has provided a lending facility that may be used by banks
to obtain funding specifically for PPP loans. PPP loans would be pledged as
collateral on a bank's borrowings under the Federal Reserve Bank's designated
PPP lending facility. As of June 30, 2021, the Company has not accessed this
Federal Reserve Bank PPP lending facility.

OPERATING RESULTS

Performance Summary
Net income for the second quarter of 2021 was $22.8 million or $1.54 diluted
earnings per share, compared to $21.4 million or $1.44 diluted earnings per
share for the same period in 2020. Net income for the first six months of 2021
was $48.5 million or $3.26 diluted earnings per share compared to $29.4 million
or $1.97 diluted earnings per share for the first six months of 2020. Net income
for the quarter and year-to-date periods ending June 30, 2021, increased by 6.5%
and 64.9%, respectively. The increase in net income for the quarter ended June
30, 2021, when compared to the second quarter of 2020 was primarily a result of
a $3.1 million credit to provision for credit loss expense and increases in all
fee income categories, partially offset by a decrease in net interest income and
an increase in noninterest expense.

Return on average assets ("ROA") for the quarter ended June 30, 2021 was 1.15%,
compared to 1.16% for the quarter ended June 30, 2020. Return on average
shareholders' equity ("ROE") for the second quarter of 2021 was 12.70%, compared
to 12.48% for the same period in 2020. For the year-to-date period ended
June 30, 2021, ROA and ROE totaled 1.24% and 13.55%, respectively, compared to
0.84% and 8.63%, for the same period in 2020.

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 $20.7 million for the second quarter
of 2021, an increase of $618,000 or 3.1% from net income of $20.1 million for
the same period in 2020. For the six months ended June 30, 2021, the banking
segment reported net income of $43.0 million, an increase of $17.1 million or
66.2% from the same period in 2020.

Net interest income of $54.8 million for the second quarter of 2021 was down
$1.5 million or 2.7% over the same period in 2020, mainly due to lower net
deferred loan fees in 2021. For the six months ended June 30, 2021, net interest
income of $109.9 million was up $548,000 or 0.5% compared to the first six
months of 2020. The increase in net interest income for the six month period was
mainly a result of a decrease in interest expense driven by lower market
interest rates and growth in average noninterest bearing deposits. Net interest
income for the three and six months ended June 30, 2021 included net deferred
loan fees associated with PPP loans of $1.9 million and $4.7 million,
respectively, compared to net deferred loan fees of $2.3 million for both the
three and six months ended June 30, 2020.

The provision for credit losses was a credit of $3.1 million for the three
months ended June 30, 2021, which was down $3.9 million compared to the same
period in 2020. For the six month period ended June 30, 2021, the provision for
credit losses was a credit of $4.9 million compared to provision expense of
$17.6 million for the same period in 2020. The first quarter of 2020 included a
provision expense of $16.8 million related to the impact of the economic
conditions due to COVID-19 on economic forecasts and other model assumptions
relied upon by management in determining the allowance, and reflects the
calculation of the allowance for credit losses in accordance with ASU 2016-13.
For additional information, see the section titled "The Allowance for Credit
Losses" below.

Noninterest income of $6.4 million for the three months ended June 30, 2021 was
up $199,000 or 3.2% compared to the same period in 2020, mainly due to increases
in fee income categories which in total were up $3.8 million . For the six
months ended June 30, 2021, noninterest income of $12.8 million was down
$482,000 or 3.6% compared to the six months ended June 30, 2020. The decrease
was mainly due to lower gains on sales of residential mortgage loans in 2021.

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Noninterest expense of $37.9 million and $73.2 million for the three and six
months, respectively, ended June 30, 2021, was up $1.4 million or 3.8% and
$497,000 or 0.7%, respectively, from the same periods in 2020. The increases
were mainly attributed to increases in salary and wages and employee benefits
reflecting normal annual merit increases, and increase in health insurance
expense over the comparable periods in the prior year.

Insurance Segment
The insurance segment reported net income of $1.0 million for the three months
ended June 30, 2021, which was up $259,000 or 34.9% compared to the second
quarter of 2020. Total revenue was up $803,000 or 10.9% for the second quarter
of 2021 compared to the same quarter in the prior year. The increase in
insurance commissions and fees in the second quarter of 2021 over the same
period in 2020; was mainly in property and casualty commissions and contingency
income.

For the six months ended June 30, 2021, net income was up $1.3 million or 67.4%
compared to the same period in the prior year. Total revenue was up $2.1 million
or 13.4% compared to the same period in the prior year. The increase in revenues
and net income for the six months ended June 30, 2021 compared to the prior year
is mainly due to growth in overall commission revenue of $762,000 or 5.25% and
contingency income, which was up $760,000 or 49.6%. In addition, revenue for the
prior year was reduced by an increase in reserves for cancellations and policy
changes as a result of economic uncertainties related to COVID-19.

Noninterest expenses for the three months ended June 30, 2021 were up $402,000
or 6.3% compared to the three months ended June 30, 2020. Year-to-date
noninterest expenses were up $277,000 or 2.2% compared to the six months ended
June 30, 2020. The increases in noninterest expenses for the three and six
months ended June 30, 2021 were mainly the result of increases in new business
commissions tied to the increase in commission revenue, related payroll taxes
and employee benefits. The increase for the second quarter of 2021 was also
attributable to increased health insurance premiums. Certain expenses continue
to be below average as a result of pandemic-related travel and business
restrictions.

Wealth Management Segment
The wealth management segment reported net income of $1.1 million for the three
months ended June 30, 2021, which was up $523,000 or 90.0% compared to the
second quarter of 2020. Revenue for the second quarter of 2021 was up $713,000
or 17.4% compared to the second quarter of 2020. The increase for both the three
and six month periods in 2021 was mainly due to an increase in advisory fee
income resulting from the growth in assets under management. Total expense for
the second quarter of 2021 was in line with the second quarter of 2020. For the
six months ended June 30, 2021, net income of $2.2 million was up $658,000 or
41.4% compared to the prior year, mainly due to an increase in advisory fee
income over the same period prior year. Noninterest expense for the six months
ended June 30, 2021, was up 3.9% over the same period in 2020, driven mainly by
increases in salary and wages.

Net Interest Income
The following tables show average interest-earning assets and interest-bearing
liabilities, and the corresponding yield or cost associated with each for the
three and six month periods ended June 30, 2021 and 2020.

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Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
                                                              Quarter Ended                                 Quarter Ended
                                                              June 30, 2021                                 June 30, 2020
                                                 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      $   216,679    $     45               0.08  % $     4,541    $      1               0.09  %
Securities (1)
U.S. Government securities                      1,987,541       5,338               1.08  %   1,199,999       6,298               2.11  %

State and municipal (2)                           114,221         727               2.55  %     109,621         743               2.73  %
Other securities (2)                                3,418          23               2.70  %       3,433          32               3.75  %
Total securities                                2,105,180       6,088               1.16  %   1,313,053       7,073               2.17  %
FHLBNY and FRB stock                               17,285         199               4.62  %      21,691         389               7.21  %
Total loans and leases, net of unearned
income (2)(3)                                   5,270,648      53,909               4.10  %   5,276,794      56,441               4.30  %
Total interest-earning assets                   7,609,792      60,241               3.18  %   6,616,079      63,904               3.89  %
Other assets                                      340,154                                       797,866
Total assets                                  $ 7,949,946                                   $ 7,413,945
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings, & money
market                                          3,966,472         943               0.10  %   3,660,190       1,935               0.21  %
Time deposits                                     726,258       1,859               1.03  %     704,460       2,842               1.62  %
Total interest-bearing deposits                 4,692,730       2,802               0.24  %   4,364,650       4,777               0.44  %
Federal funds purchased & securities sold
under agreements to repurchase                     52,099          15               0.11  %      52,464          21               0.16  %
Other borrowings                                  272,993       1,351               1.98  %     391,547       2,028               2.08  %
Trust preferred debentures                         12,978         821              25.39  %      17,092         253               5.95  %
Total interest-bearing liabilities              5,030,800       4,989               0.40  %   4,825,753       7,079               0.59  %
Noninterest bearing deposits                    2,082,149                                     1,788,108
Accrued expenses and other liabilities            115,661                                       109,609
Total liabilities                               7,228,610                                     6,723,470
Tompkins Financial Corporation Shareholders'
equity                                            719,880                                       689,018
Noncontrolling interest                             1,456                                         1,457
Total equity                                      721,336                                       690,475

Total liabilities and equity                  $ 7,949,946                                   $ 7,413,945
Interest rate spread                                                                2.78  %                                       3.30  %
Net interest income/margin on earning assets                   55,252               2.91  %                  56,825               3.45  %

Tax Equivalent Adjustment                                        (406)                                         (459)
Net interest income per consolidated
financial statements                                         $ 54,846                                      $ 56,366




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Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
                                                           Year to Date Period Ended                            Year to Date Period Ended
                                                                 June 30, 2021                                        June 30, 2020
                                                    Average                                              Average
                                                    Balance                          Average             Balance                          Average
(Dollar amounts in thousands)                        (YTD)           Interest       Yield/Rate            (YTD)           Interest       

Yield / Rate

ASSETS

Interest-bearing assets Interest-bearing balances owed by banks $ 312,130 $ 130

               0.08  % $        3,033       $       7               0.46 

%

Securities (1)
U.S. Government securities                         1,812,315           9,950               1.11  %      1,197,376          12,874               

2.16%

State and municipal (2)                              117,571           1,502               2.58  %        103,550           1,409               2.74  %
Other securities (2)                                   3,422              46               2.72  %          3,428              68               3.99  %
Total securities                                   1,933,308          11,498               1.20  %      1,304,354          14,351               2.21  %
FHLBNY and FRB stock                                  16,836             412               4.93  %         24,124             824               6.87 

%

Total loans and leases, net of unearned
income (2)(3)                                      5,280,914         108,365               4.14  %      5,095,414         112,348               4.43  %
Total interest-earning assets                      7,543,188         120,405               3.22  %      6,426,925         127,530               3.99  %
Other assets                                         345,461                                              616,521
Total assets                                  $    7,888,649                                       $    7,043,446
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings, & money
market                                             3,957,936           2,036               0.10  %      3,436,366           6,301               0.37  %
Time deposits                                        737,729           3,917               1.07  %        692,354           5,674               1.65  %
Total interest-bearing deposits                    4,695,665           5,953               0.26  %      4,128,720          11,975               0.58  %
Federal funds purchased & securities sold
under agreements to repurchase                        55,821              31               0.11  %         57,996              57               0.20  %
Other borrowings                                     269,019           2,727               2.04  %        444,988           4,735               2.14  %
Trust preferred debentures                            13,105             996              15.33  %         17,071             542               6.38  %
Total interest-bearing liabilities                 5,033,610           9,707               0.39  %      4,648,775          17,309               0.75  %
Noninterest bearing deposits                       2,016,262                                            1,598,884
Accrued expenses and other liabilities               117,749                                              111,141
Total liabilities                                  7,167,621                                            6,358,800
Tompkins Financial Corporation Shareholders'
equity                                               719,586                                              683,206
Noncontrolling interest                                1,442                                                1,440
Total equity                                         721,028                                              684,646

Total liabilities and equity                  $    7,888,649                                       $    7,043,446
Interest rate spread                                                                       2.83  %                                              3.24  %
Net interest income/margin on earning assets                         110,698               2.96  %                        110,221               

3.45%

Tax Equivalent Adjustment                                               (815)                                                (886)
Net interest income per consolidated
financial statements                                               $ 109,883                                            $ 109,335


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 2021 and 2020 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, 2020.

Net Interest Income
Net interest income is the Company's largest source of revenue, representing
74.4% and 73.9%, respectively, of total revenues for the three and six months
ended June 30, 2021, compared to 76.6% and 75.2% for the same periods in 2020.
Net interest income is dependent on the volume and composition of interest
earning assets and interest-bearing liabilities and the level of market interest
rates. The above table shows average interest-earning assets and
interest-bearing liabilities, and the corresponding yield or cost associated
with each.
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Taxable-equivalent net interest income for the three months ended June 30, 2021,
decreased $1.6 million or 2.8% from the same period in the prior year. The
decrease resulted mainly from the decrease in average asset yields exceeding the
decrease in average funding costs. Taxable-equivalent net interest income for
the six month period ended June 30, 2021 was in line with the six month period
ended June 30, 2020. Net interest income in the first six months of 2021
benefited from the growth in average earning assets, which were up 12.0% over
the same six month period in 2020. The growth in average earning assets was
partially offset by the decrease in average asset yields resulting from lower
market interest rates over the trailing twelve month period as well as a greater
percentage of earning assets being comprised of lower yielding securities and
interest bearing balances due from banks, when compared to the same period in
2020.

Net interest margin for the three months ended June 30, 2021 was 2.91% compared
to 3.45% in 2020. Net interest margin for the six months ended June 30, 2021 was
2.96% compared to 3.45% for the same period in 2020. The decrease in net
interest margin for three and six months ended June 30, 2021 compared to the
same periods in 2020 was mainly due the effect of declining market interest
rates on earning asset yields and a shift in composition of average earning
assets, with a greater mix of lower yielding average earning assets, mainly
securities and interest bearing balances, partially offset by lower funding
costs.

Taxable-equivalent interest income for the three and six months ended June 30,
2021, was $60.2 million and $120.4 million, respectively, down 5.7% and 5.6%,
respectively, compared to the same periods in 2020. The year-over-year decrease
in taxable-equivalent interest income was mainly a result of lower average asset
yields, partially offset by growth in average earning assets. Average asset
yields for the three and six months ended June 30, 2021 were down 71 and 77
basis points, respectively, compared to the same periods in 2020, mainly driven
by the decrease in market interest rates as well as the growth in lower yielding
securities and interest bearing balances. For the three and six months ended
June 30, 2021, average earning assets were up $993.7 million or 15.0% and $1.1
billion or 17.4%, respectively, over the same periods in 2020, with the majority
of growth in securities and interest bearing balances due from banks. Average
loan balances for the three months ended June 30, 2021, were in line with the
three months ended June 30, 2020, and for the six months ended June 30, 2021
were up $185.5 million or 17.4% over the six months ended June 30, 2020, while
the average yield on loans decreased 20 and 29 basis points, respectively, for
the three and six months ended June 30, 2021, compared to the same periods in
2020. As a result of its participation in the SBA's PPP, in the three and six
months ended June 30, 2021, the Company recorded net deferred loan fees of $1.9
million and $4.7 million, respectively, compared to $3.2 million for the three
and six months ended June 30, 2020. These net deferred loan fees are included in
interest income. Average securities balances for the three and six months ended
June 30, 2021, were up $792,000 or 60.3% and $629,000 or 48.2%, respectively,
and the average yield on securities was down 101 basis points and down 29 basis
points, respectively, compared to the same periods in 2020. Average interest
bearing balances for the three and six months ended June 30, 2021, were up
$212.1 million and $309.1 million, respectively, over the same periods in 2020.

Interest expense for the three and six months ended June 30, 2021, decreased by
$2.1 million or 29.5% and $7.6 million or 43.9%, respectively, compared to the
same periods in 2020, driven mainly by decreases in rates paid on deposits and
borrowings as a result of lower market interest rates, partially offset by
growth in average balances over prior year. Interest expense for the second
quarter of 2021 included an accelerated noncash purchase accounting discount of
$650,000 related to the redemption of $5.2 million in trust preferred
securities. Growth in average deposit balances also resulted in a decrease in
higher cost other borrowings. The average cost of interest-bearing deposits
during the three and six months ended June 30, 2021 was 0.24% and 0.26%,
respectively, down 20 basis points and 32 basis points, compared to the same
periods in 2020. Average interest-bearing deposits for the second quarter of
2021 were up $328.1 million or 7.5% compared to the same period in 2020, while
year-to-date average interest-bearing deposits were up $566.9 million or 13.7%
compared to the same period in 2020. Average noninterest bearing deposits were
up $294.0 million or 16.4% for the three months ended June 30, 2021 when
compared to the second quarter of 2020, and for the six months ended June 30,
2021 were up $417.4 million or 26.1% with the same period in 2020. Average
deposit balances continued to benefit from the inflows of government
stimulus-related deposit funding, including PPP loans originated by Tompkins,
the majority of which were deposited into Tompkins checking accounts. Average
other borrowings for the three and six months ended June 30, 2021 were down
$118.6 million or 30.3% and $176.0 million or 39.5%, respectively, compared to
the same periods in 2020, mainly due to decreases in overnight borrowings with
the FHLB as a result of deposit growth.

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Provision for Credit Losses
The provision for credit losses represents management's estimate of the amount
necessary to maintain the allowance for credit losses ("ACL") at an appropriate
level. Provision for credit losses in the second quarter of 2021 was a credit of
$3.1 million, compared to a provision expense of $877,000 for the second quarter
of 2020. Provision for credit losses for the six months ended June 30, 2021 was
a credit of $4.9 million, compared to an expense of $17.6 million for the same
period in 2020. The provision for credit losses for the three and six months
ended June 30, 2021 included a $353,000 reversal of credit losses and a
provision expense of $1.2 million related to off-balance sheet credit exposures
compared to provision expense of $1.2 million and $1.7 million, respectively,
for the same periods in 2020. The changes compared to prior year were mainly due
to adjustments made in the Company's ACL model to reflect improvements in the
economic forecasts relied on by management for unemployment and GDP. 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 $18.9 million for the second quarter of 2021, which was
up 9.8% compared to the second quarter of 2020, and $38.8 million for the first
six months of 2021, up 7.5% from the same period prior year. Noninterest income
represented 25.6% of total revenue for the second quarter of 2021 and 26.1% for
the six months ended June 30, 2021, compared to 23.4% and 24.8%, respectively,
for the same periods in 2020.

Insurance commissions and fees, the largest component of noninterest income,
were a $8.1 million for the second quarter of 2021, an increase of 11.0% from
the same period prior year. The increase in insurance commissions and fees in
the second quarter of 2021 over the same period in 2020, was mainly in property
and casualty commissions and contingency income. For the first six months of
2021, insurance commissions and fees were up $1.9 million or 12.5% compared to
the same period in 2020. The increase in revenues for the six month period ended
June 30, 2021 compared to the prior year is mainly due to growth in overall
commission revenue and contingency income. In addition, revenues for the prior
year were reduced by an increase in reserves for cancellations and policy
changes as a result of economic uncertainties related to the COVID-19 pandemic.

Investment services income of $4.7 million in the second quarter of 2021 was up
$797,000 or 20.3% compared to the second quarter of 2020. For the first six
months of 2021, investment services income was up $1.3 million or 15.6% compared
to the same period in 2020. The increase for both the three and six month
periods in 2021 was mainly due to an increase in advisory fee income resulting
from the growth in assets under management. Investment services income includes
trust services, financial planning, wealth management services, and brokerage
related services. The fair value of assets managed by, or in custody of,
Tompkins was $5.0 billion at June 30, 2021, which included $1.5 billion of
Company-owned securities where Tompkins Trust Company is custodian.

Card services income for the three and six months ended June 30, 2021, was up
$668,000 or 29.3% and $868,000 or 19.4%, respectively, compared to the same
periods in 2020. Debit card income, the largest component of card services
income, was up $532,000 or 31.5% compared to the same quarter in the prior year,
and up $772,000 or 24.3% from the first six months of 2020. Contributing to the
increase from the prior year was an increase in transaction volumes. During the
first six months of 2020, transaction volumes were down due to the COVID-19
pandemic, but during the second quarter of 2021 transaction volumes returned to
normal levels.

Other income of $1.7 million in the second quarter of 2021 was down $801,000 or
32.5% compared to the same period in 2020. For the first six months of 2021,
other income of $3.6 million was down $931,000 or 20.4% compared to the same
period in 2020. The decrease from prior year for the three and six months ended
June 30, 2021, was mainly due to the gains on sales of residential mortgage
loans in the second quarter of 2020 of $691,000 and $867,000 respectively,
compared to $153,000 and $582,000 for the same periods in 2021. Higher volume of
loans sold and higher premiums paid on loans sold in 2020 were the main drivers
for the year-over-year change.

Noninterest Expense
Noninterest expense of $47.4 million for the second quarter of 2021 and $92.0
million for the first six months of 2021, was up 3.9% and 1.1%, respectively,
compared to the same periods in 2020.

Expenses associated with compensation and benefits comprise the largest
component of noninterest expense, representing 64.5% and 63.9% of total
noninterest expense for the three and six months ended June 30, 2021. Salaries
and wages expense for the three and six months ended June 30, 2021 increased by
$956,000 or 4.1% and $1.1 million or 2.5%, respectively, compared to the same
periods in 2020. The increases were mainly due to normal merit adjustments.
Employee benefits for the three and six months ended June 30, 2021, increased by
$740,000 or 12.6% and $540,000 or 4.7%, respectively, over the same periods in
2020, mainly as a result of higher health care expense.
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Other expense categories, not related to compensation and benefits, for the
three months ended June 30, 2021 were in line with expenses for the three months
ended June 30, 2020, and for the six months ended June 30, 2021 were $646,000 or
1.9% below the same period in 2020. Other expenses for the second quarter of
2021 included a $410,000 net occupancy expense of premises related to the
termination of a lease. Marketing expenses for the three and six months ended
June 30, 2021 were up $196,000 or 21.0% and down $250,000 or 13.3%,
respectively, compared to the same periods in 2020. FDIC expense for the three
and six months ended June 30, 2021 were up $150,000 or 30.4% and $401,000 or
40.6%, respectively, when compared to the same periods in 2020, mainly a result
of asset growth. Other expense in the second quarter of 2020 also included a
loss of $675,000 related to the pending sale of real estate.

Income Tax Expense
The provision for income taxes was $6.5 million for an effective rate of 22.1%
for the second quarter of 2021, compared to tax expense of $5.5 million and an
effective rate of 20.5% for the same quarter in 2020. For the first six months
of 2021, the provision for income taxes was $13.2 million for an effective rate
of 21.3% compared to tax expense of $7.4 million and an effective rate of 20.2%
for the same period in 2020. The effective rates differ from the U.S. statutory
rate primarily due to the effect of tax-exempt income from loans, securities and
life insurance assets, and the income tax effects associated with stock based
compensation.


FINANCIAL CONDITION

Total assets were $8.0 billion at June 30, 2021, up $366.0 million or 4.8% from
December 31, 2020. The increase in total assets over year-end 2020 was mainly
due to an increase in securities balances, which increased $538.7 million or
33.1% compared to December 31, 2020. Total loan balances were $5.2 billion at
June 30, 2021, down $85.2 million or 1.6% compared to the $5.3 billion reported
at year-end 2020. Total cash and cash equivalents were down $97.4 million or
25.1% compared to December 31, 2020. The increase in securities from year-end
2020 was largely due to the investment of excess liquidity into the securities
portfolio. Total deposits at June 30, 2021 were up $399.2 million or 6.2% from
December 31, 2020. Other borrowings at June 30, 2021 decreased $20.0 million or
7.5% from December 31, 2020, as deposit growth was used to reduce borrowings.

Securities

From June 30, 2021, the Company’s securities portfolio was $ 2.2 billion or 27.1% of total assets, against $ 1.6 billion ie 21.4% of total assets at the end of 2020. The following table details the composition of the securities portfolio.

Debt securities available for sale

                                                                 June 30, 2021                   December 31, 2020
(In thousands)                                           Amortized Cost     Fair Value     Amortized Cost     Fair Value
U.S. Treasuries                                        $       129,228    $   129,091    $             0    $         0
Obligations of U.S. Government sponsored entities              824,157        823,718            599,652    $   607,480

Obligations of we States and political subdivisions 111,269

   113,789            126,642        129,746

Mortgage Backed Securities – Residential, Issued by
Government of the United States agencies

                                       113,357        114,422            179,538        182,108
U.S. Government sponsored entities                             828,806        830,656            691,562        705,480

U.S. corporate debt securities                                   2,500          2,413              2,500          2,379
Total available-for-sale debt securities               $     2,009,317    $ 2,014,089    $     1,599,894    $ 1,627,193



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Debt securities held to maturity

                                                                June 30, 2021                  December 31, 2020
(In thousands)                                           Amortized Cost    Fair Value   Amortized Cost    Fair Value
U.S. Treasuries                                        $        50,856    $   51,459    $          0    $          0
Obligations of U.S. Government sponsored entities              100,992       102,840               0               0
Obligations of U.S. states and political subdivisions                0             0               0               0
Total held-to-maturity debt securities                 $       151,848    $ 

$ 154,299 $ 0 0



As of June 30, 2021, the available-for-sale debt securities portfolio had net
unrealized gains of $4.7 million compared to net unrealized gains of $27.3
million at December 31, 2020. The decrease in unrealized gains related to the
available-for-sale debt securities portfolio, which reflects the amount that the
fair value exceeds amortized cost, was due primarily to decreases in market
interest rates during the first six months of 2021. Management's policy is to
purchase investment grade securities that on average have relatively short
duration, which helps mitigate interest rate risk and provides sources of
liquidity without significant risk to capital.

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

The Company determined that at June 30, 2021, all impaired available-for-sale
debt securities were primarily attributable to changes in interest rates and
levels of market liquidity, relative to when the investment securities were
purchased, and not due to the credit worthiness of the underlying issuers. In
addition, the Company maintains the ability and intent to hold these positions
until the recovery of unrealized losses and does not believe that the Company
would be required to sell any securities currently in an unrealized loss
position. Therefore, the Company carried no ACL at June 30, 2021 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, 2021.


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

(In thousands)                                                           06/30/2021        12/31/2020
Commercial and industrial
Agriculture                                                           $      79,351    $    94,489
Commercial and industrial other                                             755,885        792,987
PPP loans                                                                   258,964        291,252
Subtotal commercial and industrial                                        1,094,200      1,178,728
Commercial real estate
Construction                                                                158,654        163,016
Agriculture                                                                 201,863        201,866
Commercial real estate other                                              2,213,798      2,204,310
Subtotal commercial real estate                                           2,574,315      2,569,192
Residential real estate
Home equity                                                                 187,581        200,827
Mortgages                                                                 1,246,450      1,235,160
Subtotal residential real estate                                          1,434,031      1,435,987
Consumer and other
Indirect                                                                      6,497          8,401
Consumer and other                                                           64,371         61,399
Subtotal consumer and other                                                  70,868         69,800
Leases                                                                       14,728         14,203
Total loans and leases                                                    5,188,142      5,267,910
Less: unearned income and deferred costs and fees                           (13,013)        (7,583)
Total loans and leases, net of unearned income and deferred costs and
fees                                                                  $   5,175,129    $ 5,260,327



Total loans and leases of $5.2 billion at June 30, 2021 were down $85.2 million
or 1.6% from December 31, 2020, mainly in the commercial portfolio and partly
due to a net decline in PPP loans. As of June 30, 2021, total loans and leases
represented 64.8% of total assets compared to 69.0% of total assets at December
31, 2020. The decrease in total loans as a percentage of total assets reflects a
decrease in the pace of loan growth, and growth in the securities portfolio
since December 31, 2020.

Residential real estate loans, including home equity loans, were $1.4 billion at
June 30, 2021, down $2.0 million or 0.1% compared to December 31, 2020, and
comprised 27.7% of total loans and leases at June 30, 2021. Changes in
residential loan balances reflect the Company's decision to retain these loans
or sell them in the secondary market due to interest rate considerations. The
Company's Asset/Liability Committee meets regularly and establishes standards
for selling and retaining residential real estate mortgage originations.

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

During the first six months of 2021 and 2020, the Company sold residential loans
totaling $16.8 million and $15.9 million, respectively, recognizing gains of
$582,000 and $867,000, respectively. These residential real estate loans were
sold without recourse in accordance with standard secondary market loan sale
agreements. When residential mortgage loans are sold, the Company typically
retains all servicing rights, which provides the Company with a source of fee
income. Mortgage servicing rights totaled $1.0 million at June 30, 2021 and
$981,000 at December 31, 2020.

                                       55
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Commercial real estate loans and commercial and industrial loans totaled $2.6
billion and $1.1 billion, respectively, and represented 49.7% and 21.1%,
respectively of total loans as of June 30, 2021. The commercial real estate
portfolio was up $5.1 million or 0.2% over year-end 2020, while commercial and
industrial loans were down $84.5 million or 7.2%. The decrease in commercial and
industrial loans over year-end included a net decline of $32.3 million of PPP
loans that had been forgiven by the SBA under the terms of the program. As of
June 30, 2021, agriculturally-related loans totaled $281.2 million or 5.4% of
total loans and leases, compared to $296.4 million or 5.6% of total loans and
leases at December 31, 2020. 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 (commercial real estate) or other business assets such as
accounts receivable, livestock, equipment or commodities/crops (commercial).

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, 2020. There have been no
significant changes in these policies and guidelines since the date of that
report. Therefore, both new originations as well as those balances held at
December 31, 2020, reflect these policies and guidelines. The Company's Board of
Directors approves the lending policies at least annually. The Company
recognizes that exceptions to policy guidelines may occasionally occur and has
established procedures for approving exceptions to these policy guidelines.
Management has also implemented reporting systems to monitor loan originations,
loan quality, concentrations of credit, loan delinquencies and nonperforming
loans and potential problem loans.

The Company's loan and lease customers are located primarily in the New York and
Pennsylvania communities served by its four subsidiary banks. Although operating
in numerous communities in New York State and Pennsylvania, the Company is still
dependent on the general economic conditions of these states and the local
economic conditions of the communities within those states in which the Company
does business. The suspension of business activities in our market area related
to the COVID-19 pandemic has led to a significant increase in unemployment rates
as compared to pre-pandemic levels and has had a negative effect on our
customers. Although New York and Pennsylvania unemployment rates have improved
since their peak in the second quarter of 2020, there continues to be a great
deal of uncertainty regarding how long those conditions will continue to exist
and whether increased restrictions will cause a further increase in unemployment
rates or other worsening of economic conditions. As a result, the economic
consequences of the pandemic on our market area generally and on the Company in
particular continue to be difficult to quantify.

The allowance for credit losses

The below tables represents the allowance for credit losses as of June 30, 2021
and December 31, 2020. 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)                 6/30/2021   12/31/2020
Allowance for credit losses
Commercial and industrial     $   7,113   $     9,239
Commercial real estate           29,201        30,546
Residential real estate           9,534        10,257
Consumer and other                1,590         1,562
Finance leases                       67            65
Total                         $  47,505   $    51,669



As of June 30, 2021, the total allowance for credit losses was $47.5 million,
down $4.2 million or 8.1% compared to December 31, 2020. The ACL as a percentage
of total loans measured 0.92% at June 30, 2021, compared to 0.98% at December
31, 2020.

The decrease in the ACL from year-end 2020 reflects lower estimated reserves
driven primarily by improvements in forecasts for unemployment and the gross
domestic product used in the model relied upon by management. The decrease in
the ACL resulting from the improved forecast during the second quarter of 2021,
was partially offset by increases in reserves for specific loans within the
hospitality and certain other industries that have an elevated level of risk due
to the adverse economic impact of
                                       56
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the COVID-19 pandemic. Although we have seen improved occupancy rates in the
hospitality industry in recent months, we continue to closely monitor this
industry. Further, although we continue to see a decrease in amount of loans in
the deferral program; compared to the first quarter of 2021, as loans returned
to repayment status and the delinquency rate for customers who returned to
repayment status remained low as of June 30, 2021, at 0.87%, we continue to have
qualitative reserves related to loans that remain in the Company's payment
deferral program implemented in response to the COVID-19 pandemic. The
qualitative reserves were added to all portfolio segments, with the majority in
commercial real estate, followed by commercial and residential real estate. The
Company had net recoveries of $1.1 million in the first six months of 2021,
compared to net charge-offs of $1.2 million for the same period in 2020.

The ratio of ACL to total loans is also impacted by the inclusion of PPP loans
in our loan portfolio. Since PPP loans are guaranteed by the SBA, there are no
reserves allocated to these loans. Excluding PPP loans from total loans results
in an ACL to total loan ratio of 0.97% at June 30, 2021, down from 1.04% at
December 31, 2020.

Asset quality measures at June 30, 2021 were generally in line with December 31,
2020. Loans internally-classified Special Mention or Substandard were down $18.6
million or 9.8% compared to December 31, 2020. Nonperforming loans and leases
were up $8.0 million or 17.5% from year end 2020 and represented 1.04% of total
loans at June 30, 2021 compared to 0.87% at December 31, 2020. The decrease in
Special Mention or Substandard loans and the increase in nonperforming loans and
leases compared to prior year-end was mainly related to one commercial real
estate relationship totaling $9.1 million, which was previously reported as
Substandard. The allowance for credit losses covered 88.31% of nonperforming
loans and leases as of June 30, 2021, compared to 112.87% at December 31, 2020.

Analysis of the Allowance for Credit Losses
(In thousands)                                                           6/30/2021      6/30/2020
Average loans outstanding during period                             $ 5,280,914    $ 5,095,414
Allowance at beginning of year, prior to adoption of ASU 2016-13         51,669         39,892
Impact of adopting ASU 2016-13                                                0         (2,534)
Balance of allowance at beginning of year                                51,669         43,410
LOANS CHARGED-OFF:
Commercial and industrial                                                   118              1
Commercial real estate                                                        0          1,305
Residential real estate                                                      46              3
Consumer and other                                                          152            264
Finance leases                                                                0              0
Total loans charged-off                                             $       316    $     1,573
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial and industrial                                                   101             37
Commercial real estate                                                    1,039             30
Residential real estate                                                     158            163
Consumer and other                                                           82            121
Finance Leases                                                                0              0
Total loans recovered                                               $     1,380    $       351
Net loans (recovered) charged-off                                        (1,064)         1,222
Provision (credit) for credit losses related to loans                    (5,228)        15,946
Balance of allowance at end of period                               $    

47,505 $ 52,082
Provision for credit losses as a percentage of total loans and leases

0.92% 0.96% Annualized net amortizations (recoveries) on loans compared to average total loans and leases during the period

(0.01) %        0.05  %



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