BUSINESS
Corporate Overview and Strategic InitiativesTompkins Financial Corporation ("Tompkins" or the "Company") is headquartered inIthaca, New York and is registered as aFinancial Holding Company with theFederal 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. AtJune 30, 2021 , the Company had four wholly-owned banking subsidiaries:Tompkins Trust Company (the "Trust Company "), TheBank of Castile (DBA Tompkins Bank of Castile ),Mahopac Bank (DBA Tompkins Mahopac Bank ), andVIST 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 TheBank of Castile ,Mahopac Bank , andVIST Bank merging with and intoTompkins 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 onJuly 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 theTrust 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 at118 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." TheTompkins 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 inNew York and 20 offices inPennsylvania ) 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 theTrust Company under the trade nameTompkins 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 inBatavia, 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 intoTompkins Insurance .Tompkins Insurance offers services to customers of the Company's banking subsidiaries by sharing offices with TheBank of Castile ,Trust Company , andVIST Bank . In addition to these shared offices,Tompkins Insurance has five stand-alone offices inWestern New York , and one stand-alone office inTompkins County, New York .
The Company's principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for credit losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities.
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Competition
Competition for commercial banking and other financial services is strong in the Company's market areas. In one or more aspects of its business, the Company's subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Some of these competitors have substantially greater resources and lending capabilities and may offer services that the Company does not currently provide. In addition, many of the Company's non-bank competitors are not subject to the same extensive Federal regulations that govern financial holding companies and Federally-insured banks. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of facilities and services, and, in the case of loans to commercial borrowers, relative lending limits. Management believes that a community-based financial organization is better positioned to establish personalized financial relationships with both commercial customers and individual households. The Company's community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized financial services, are factors that contribute to the Company's competitiveness. Management believes that each of the Company's subsidiary banks can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability. In addition, the Company focuses on providing unparalleled customer service, which includes offering a strong suite of products and services, including products that are accessible to our customers through digital means. Although management feels that this business model has caused the Company to grow its customer base in recent years and allows it to compete effectively in the markets it serves, we cannot assure you that such factors will result in future success. Regulation Banking, insurance services and wealth management are highly regulated. As a financial holding company 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 theFederal Reserve Board ("FRB"),Securities and Exchange Commission ("SEC"), theFederal Deposit Insurance Corporation ("FDIC"), theNew York State Department of Financial Services ,Pennsylvania Department of Banking and Securities , theFinancial Industry Regulatory Authority , and thePennsylvania 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 endedJune 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 endedDecember 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 theFederal Reserve's "Bank Holding Company Performance Report" forMarch 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 endedDecember 31, 2020 , are among those that could cause actual results to differ 44 -------------------------------------------------------------------------------- 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, toU.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. OnJanuary 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 atDecember 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 endedDecember 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. InJuly 2020 , we began initiating the reopening of our offices and reinstatement of branch services, and the return of our workforce, but as ofJune 30, 2021 , approximately 85% of our noncustomer facing employees continued to work remotely. AsNew 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 45 --------------------------------------------------------------------------------
discontinuing other guidelines put in place as a result of the COVID-19 pandemic. However, on-site employees who have not been vaccinated are required to wear masks and follow distancing requirements consistent with 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 ofJune 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 ofJune 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
The Company is also participating in theU.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 onApril 3, 2020 , and had funded 2,998 loans totaling about$465.6 million when the initial program ended. OnJanuary 19, 2021 , the Company began accepting both first draw and second draw applications for the reopening of the PPP program and as ofJuly 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 throughJuly 19, 2021 , approximately$471.4 million had been forgiven by the SBA under the terms of the program. As ofJune 30, 2021 , the Company's nonperforming assets represented 0.67% of total assets, up from 0.60% atDecember 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 atJune 30, 2021 , up from$44.7 million atJune 30, 2020 . The downgrades to Special Mention were mainly in the retail, hospitality, and agriculture industries. AtJune 30, 2021 , loans rated Substandard declined to$45.4 million from$48.0 million atJune 30, 2020 . As mentioned above, the Company is working with its customers who are dealing with hardships caused by 46 -------------------------------------------------------------------------------- the pandemic, and as part of those efforts, the Company implemented a loan payment deferral program inMarch 2020 and participates in the PPP. As ofJune 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, theFederal 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 theFederal Reserve Bank's designated PPP lending facility. As ofJune 30, 2021 , the Company has not accessed this Federal Reserve Bank PPP lending facility.
RESULTS OF OPERATION
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 endingJune 30, 2021 , increased by 6.5% and 64.9%, respectively. The increase in net income for the quarter endedJune 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 endedJune 30, 2021 was 1.15%, compared to 1.16% for the quarter endedJune 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 endedJune 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 theTompkins 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2020 . The provision for credit losses was a credit of$3.1 million for the three months endedJune 30, 2021 , which was down$3.9 million compared to the same period in 2020. For the six month period endedJune 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 endedJune 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 endedJune 30, 2021 , noninterest income of$12.8 million was down$482,000 or 3.6% compared to the six months endedJune 30, 2020 . The decrease was mainly due to lower gains on sales of residential mortgage loans in 2021. 47 -------------------------------------------------------------------------------- Noninterest expense of$37.9 million and$73.2 million for the three and six months, respectively, endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2021 were up$402,000 or 6.3% compared to the three months endedJune 30, 2020 . Year-to-date noninterest expenses were up$277,000 or 2.2% compared to the six months endedJune 30, 2020 . The increases in noninterest expenses for the three and six months endedJune 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 endedJune 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 endedJune 30, 2021 , net income of$2.2 million was up$658,000 or 41.4% compared to the prior year, mainly due to an increase in advisory fee income over the same period prior year. Noninterest expense for the six months endedJune 30, 2021 , was up 3.9% over the same period in 2020, driven mainly by increases in salary and wages. Net Interest Income The following tables show average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each for the three and six month periods endedJune 30, 2021 and 2020. 48 -------------------------------------------------------------------------------- Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited) Quarter Ended Quarter Ended June 30, 2021 June 30, 2020 Average Average Balance Average Balance Average (Dollar amounts in thousands) (QTD) Interest Yield/Rate (QTD) Interest Yield/Rate ASSETS Interest-earning assets Interest-bearing balances due from banks$ 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 49
-------------------------------------------------------------------------------- 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-earning assets
Interest-bearing balances due from banks
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 endedDecember 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 endedJune 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. 50 -------------------------------------------------------------------------------- Taxable-equivalent net interest income for the three months endedJune 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 endedJune 30, 2021 was in line with the six month period endedJune 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 endedJune 30, 2021 was 2.91% compared to 3.45% in 2020. Net interest margin for the six months endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2021 , were in line with the three months endedJune 30, 2020 , and for the six months endedJune 30, 2021 were up$185.5 million or 17.4% over the six months endedJune 30, 2020 , while the average yield on loans decreased 20 and 29 basis points, respectively, for the three and six months endedJune 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 endedJune 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 endedJune 30, 2020 . These net deferred loan fees are included in interest income. Average securities balances for the three and six months endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2021 when compared to the second quarter of 2020, and for the six months endedJune 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 byTompkins , the majority of which were deposited intoTompkins checking accounts. Average other borrowings for the three and six months endedJune 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. 51 -------------------------------------------------------------------------------- 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 atJune 30, 2021 , which included$1.5 billion of Company-owned securities whereTompkins Trust Company is custodian. Card services income for the three and six months endedJune 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 endedJune 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 endedJune 30, 2021 . Salaries and wages expense for the three and six months endedJune 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 endedJune 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. 52 -------------------------------------------------------------------------------- Other expense categories, not related to compensation and benefits, for the three months endedJune 30, 2021 were in line with expenses for the three months endedJune 30, 2020 , and for the six months endedJune 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 endedJune 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 endedJune 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 theU.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 atJune 30, 2021 , up$366.0 million or 4.8% fromDecember 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 toDecember 31, 2020 . Total loan balances were$5.2 billion atJune 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 toDecember 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 atJune 30, 2021 were up$399.2 million or 6.2% fromDecember 31, 2020 . Other borrowings atJune 30, 2021 decreased$20.0 million or 7.5% fromDecember 31, 2020 , as deposit growth was used to reduce borrowings.
Securities
As of
June 30, 2021 December 31, 2020 (In thousands) Amortized Cost Fair Value Amortized Cost Fair Value U.S. Treasuries$ 129,228 $ 129,091 $ 0 $ 0 Obligations of U.S. Government sponsored entities 824,157 823,718 599,652$ 607,480
Obligations of
113,789 126,642 129,746
Mortgage-backed securities - residential, issued by
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 53
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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 ofJune 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 atDecember 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 atJune 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 atJune 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 endedJune 30, 2021 . 54 -------------------------------------------------------------------------------- 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 atJune 30, 2021 were down$85.2 million or 1.6% fromDecember 31, 2020 , mainly in the commercial portfolio and partly due to a net decline in PPP loans. As ofJune 30, 2021 , total loans and leases represented 64.8% of total assets compared to 69.0% of total assets atDecember 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 sinceDecember 31, 2020 . Residential real estate loans, including home equity loans, were$1.4 billion atJune 30, 2021 , down$2.0 million or 0.1% compared toDecember 31, 2020 , and comprised 27.7% of total loans and leases atJune 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") orState 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 atJune 30, 2021 and$981,000 atDecember 31, 2020 . 55 -------------------------------------------------------------------------------- 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 ofJune 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 ofJune 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 atDecember 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 endedDecember 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 atDecember 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 theNew York andPennsylvania communities served by its four subsidiary banks. Although operating in numerous communities inNew York State andPennsylvania , 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. AlthoughNew York andPennsylvania 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 ofJune 30, 2021 andDecember 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 ofJune 30, 2021 , the total allowance for credit losses was$47.5 million , down$4.2 million or 8.1% compared toDecember 31, 2020 . The ACL as a percentage of total loans measured 0.92% atJune 30, 2021 , compared to 0.98% atDecember 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 -------------------------------------------------------------------------------- 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 ofJune 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% atJune 30, 2021 , down from 1.04% atDecember 31, 2020 . Asset quality measures atJune 30, 2021 were generally in line withDecember 31, 2020 . Loans internally-classified Special Mention or Substandard were down$18.6 million or 9.8% compared toDecember 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 atJune 30, 2021 compared to 0.87% atDecember 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$9.1 million , which was previously reported as Substandard. The allowance for credit losses covered 88.31% of nonperforming loans and leases as ofJune 30, 2021 , compared to 112.87% atDecember 31, 2020 . Analysis of the Allowance for Credit Losses (In thousands) 6/30/2021 6/30/2020 Average loans outstanding during period$ 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
0.92 % 0.96 % Annualized net (recoveries) charge-offs on loans to average total loans and leases during the period
(0.01) % 0.05 % 57
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