LOANS

3 Months Ended

Mar. 31, 2020

LOANS [Abstract]

LOANS

NOTE E:  LOANS

The segments of the Company’s loan portfolio are summarized as follows:

(000's omitted)	March 31, 2020			December 31, 2019
Business lending	$	2,789,130		$	2,775,876
Consumer mortgage		2,424,656			2,430,902
Consumer indirect		1,087,879			1,113,062
Consumer direct		177,844			184,378
Home equity		386,583			386,325
Gross loans, including deferred origination costs		6,866,092			6,890,543
Allowance for credit losses		(55,652	)		(49,911	)
Loans, net of allowance for credit losses	$	6,810,440		$	6,840,632

The following table presents the aging of the amortized cost basis of the Company’s past due loans, by class as of March 31, 2020:

(000’s omitted)	Past Due 30 – 89 Days		90+ Days Past Due and Still Accruing		Nonaccrual		Total Past Due		Purchased Credit Deteriorated (“PCD”) (1)		Current		Total Loans
Business lending	$	13,157	$	10,111	$	4,394	$	27,662	$	9,781	$	2,751,687	$	2,789,130
Consumer mortgage		15,614		1,821		12,674		30,109		0		2,394,547		2,424,656
Consumer indirect		11,343		418		0		11,761		0		1,076,118		1,087,879
Consumer direct		1,197		62		52		1,311		0		176,533		177,844
Home equity		2,951		324		1,926		5,201		0		381,382		386,583
Total	$	44,262	$	12,736	$	19,046	$	76,044	$	9,781	$	6,780,267	$	6,866,092

(1) PCD loans were not classified as nonperforming assets as the loans are considered to be performing under ASC 326-10. As a result, the noncredit discount, after the adjustment for the allowance for credit losses, is being accreted into interest income on all PCD loans.

The following is an aged analysis of the Company’s past due loans by class as of December 31, 2019:

Legacy Loans (excludes loans acquired after January 1, 2009)

(000’s omitted)	Past Due 30 – 89 Days		90+ Days Past Due and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Business lending	$	3,936	$	126	$	3,840	$	7,902	$	1,848,683	$	1,856,585
Consumer mortgage		10,990		2,052		10,131		23,173		1,973,543		1,996,716
Consumer indirect		12,673		125		0		12,798		1,094,510		1,107,308
Consumer direct		1,455		76		0		1,531		174,445		175,976
Home equity		1,508		328		1,444		3,280		310,727		314,007
Total	$	30,562	$	2,707	$	15,415	$	48,684	$	5,401,908	$	5,450,592

Acquired Loans (includes loans acquired after January 1, 2009)

(000’s omitted)	Past Due 30 – 89 Days		90+ Days Past Due and Still Accruing		Nonaccrual		Total Past Due		Acquired Impaired(1)		Current		Total Loans
Business lending	$	8,518	$	2,173	$	570	$	11,261	$	11,797	$	896,233	$	919,291
Consumer mortgage		890		277		2,386		3,553		0		430,633		434,186
Consumer indirect		79		31		0		110		0		5,644		5,754
Consumer direct		59		0		52		111		0		8,291		8,402
Home equity		744		238		412		1,394		0		70,924		72,318
Total	$	10,290	$	2,719	$	3,420	$	16,429	$	11,797	$	1,411,725	$	1,439,951

(1) Acquired impaired loans were not classified as nonperforming assets as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cashflows, is being recognized on all acquired impaired loans.

The delinquency status for loans on payment deferment due to COVID-19 financial hardship were reported at March 31, 2020 based on their delinquency status as of March 20, 2020, the date most borrowers were impacted by COVID-19 due to stay at home orders in various states.

No interest income on nonaccrual loans was recognized during the three months ended March 31, 2020. An immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income.

The Company uses several credit quality indicators to assess credit risk in an ongoing manner.  The Company’s primary credit quality indicator for its business lending portfolio is an internal credit risk rating system that categorizes loans as “pass”, “special mention”,  “classified”, or “doubtful”.  Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation.  In general, the following are the definitions of the Company’s credit quality indicators:

Pass	The condition of the borrower and the performance of the loans are satisfactory or better.
Special Mention	The condition of the borrower has deteriorated although the loan performs as agreed. Loss may be incurred at some future date, if conditions deteriorate further.
Classified	The condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate and incur loss, if deficiencies are not corrected.
Doubtful	The condition of the borrower has deteriorated to the point that collection of the balance is improbable based on current facts and conditions and loss is likely.

The following tables show the amount of business lending loans by credit quality category at March 31, 2020 and December 31, 2019:

(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year
March 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
Business lending:
Risk rating
Pass	$	81,301	$	386,281	$	333,585	$	239,020	$	276,171	$	606,390	$	593,830	$	2,516,578
Special mention		4,128		12,290		6,887		13,213		4,516		52,457		31,223		124,714
Classified		665		1,933		17,241		9,993		12,790		59,750		45,466		147,838
Doubtful		0		0		0		0		0		0		0		0
Total business lending	$	86,094	$	400,504	$	357,713	$	262,226	$	293,477	$	718,597	$	670,519	$	2,789,130

	December 31, 2019
(000’s omitted)	Legacy		Acquired		Total
Pass	$	1,655,280	$	832,693	$	2,487,973
Special mention		98,953		45,324		144,277
Classified		102,352		29,477		131,829
Doubtful		0		0		0
Acquired impaired		0		11,797		11,797
Total	$	1,856,585	$	919,291	$	2,775,876

All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis.  These are typically loans to individuals in the consumer categories and are delineated as either performing or nonperforming.   Performing loans include loans classified as current as well as those classified as 30 - 89 days past due.  Nonperforming loans include 90+ days past due and still accruing and nonaccrual loans.

The following table details the balances in all other loan categories at March 31, 2020:

(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year
March 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
Consumer mortgage:
FICO AB
Risk rating
Performing	$	47,527	$	252,841	$	194,612	$	190,316	$	187,254	$	651,314	$	0	$	1,523,864
Nonperforming		0		0		153		299		193		2,862		0		3,507
Total FICO AB		47,527		252,841		194,765		190,615		187,447		654,176		0		1,527,371
FICO CDE
Risk rating
Performing		22,589		111,126		89,451		88,630		94,419		467,433		12,649		886,297
Nonperforming		0		0		142		524		1,327		8,995		0		10,988
Total FICO CDE		22,589		111,126		89,593		89,154		95,746		476,428		12,649		897,285
Total consumer mortgage	$	70,116	$	363,967	$	284,358	$	279,769	$	283,193	$	1,130,604	$	12,649	$	2,424,656
Consumer indirect:
Risk rating
Performing	$	74,581	$	397,442	$	284,899	$	133,402	$	102,849	$	94,288	$	0	$	1,087,461
Nonperforming		0		98		78		63		99		80		0		418
Total consumer indirect	$	74,581	$	397,540	$	284,977	$	133,465	$	102,948	$	94,368		0	$	1,087,879
Consumer direct:
Risk rating
Performing	$	20,080	$	66,306	$	42,399	$	21,144	$	11,049	$	9,121	$	7,631	$	177,730
Nonperforming		0		14		1		66		3		0		30		114
Total consumer direct	$	20,080	$	66,320	$	42,400	$	21,210	$	11,052	$	9,121	$	7,661	$	177,844
Home equity:
Risk rating
Performing	$	14,521	$	51,149	$	28,687	$	23,194	$	19,318	$	35,395	$	212,069	$	384,333
Nonperforming		0		0		0		73		118		461		1,598		2,250
Total home equity	$	14,521	$	51,149	$	28,687	$	23,267	$	19,436	$	35,856	$	213,667	$	386,583

The following table details the balances in all other loan categories at December 31, 2019:

Legacy Loans (excludes loans acquired after January 1, 2009)

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,984,533	$	1,107,183	$	175,900	$	312,235	$	3,579,851
Nonperforming		12,183		125		76		1,772		14,156
Total	$	1,996,716	$	1,107,308	$	175,976	$	314,007	$	3,594,007

Acquired Loans (includes loans acquired after January 1, 2009)

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	431,523	$	5,723	$	8,350	$	71,668	$	517,264
Nonperforming		2,663		31		52		650		3,396
Total	$	434,186	$	5,754	$	8,402	$	72,318	$	520,660

All loan classes are collectively evaluated for impairment except business lending.  A summary of individually evaluated impaired business loans as of March 31, 2020 and December 31, 2019 follows:

(000’s omitted)	March 31, 2020		December 31, 2019
Loans with allowance allocation	$	0	$	0
Loans without allowance allocation		1,771		1,414
Carrying balance		1,771		1,414
Contractual balance		3,305		2,944
Specifically allocated allowance		0		0

The average carrying balance of individually evaluated impaired loans was $2.2 million and $6.2 million for the three months ended March 31, 2020 and March 31, 2019, respectively.  No interest income was recognized on individually evaluated impaired loans for the three months ended March 31, 2020 and March 31, 2019.

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans.  In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan.  Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.  Terms may be modified to fit the ability of the borrower to repay in line with its current financial standing and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

In accordance with the clarified guidance issued by the Office of the Comptroller of the Currency (“OCC”), loans that have been discharged in Chapter 7 bankruptcy but not reaffirmed by the borrower, are classified as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified.  The Company’s lien position against the underlying collateral remains unchanged.  Pursuant to that guidance, the Company records a charge-off equal to any portion of the carrying value that exceeds the net realizable value of the collateral.  The amount of loss incurred in the three months ended March 31, 2020 and 2019 was immaterial.

TDRs that are less than $0.5 million are collectively included in the allowance for credit loss estimate. TDRs that are commercial loans and greater than $0.5 million are individually evaluated for impairment, and if necessary, a specific allocation of the allowance for credit losses is provided. As a result, the determination of the amount of allowance for credit losses related to TDRs is the same as detailed in the critical accounting policies.

With respect to the Company’s lending activities, the Company implemented a customer payment deferral program for deferrals up to three months during the first quarter of 2020 to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges.  Business lending, consumer direct, and consumer indirect loans in deferment status will continue to accrue interest on the deferred principal during the deferment period unless otherwise classified as nonaccrual. Consumer mortgage and home equity loans will not accrue interest on the deferred payments during the deferment period.  Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans throughout the agreed upon deferral period.  These payment deferrals were also deemed to be an insignificant borrower concession, and therefore, not classified as troubled-debt restructured loans during the first quarter.  Borrowers that were delinquent in their payments to the Bank, prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case by case basis for troubled debt restructure classification and non-performing loan status.

Information regarding TDRs as of March 31, 2020 and December 31, 2019 is as follows:

	March 31, 2020												December 31, 2019
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Business lending		8	$	644		3	$	197		11	$	841		8	$	681		3	$	201		11	$	882
Consumer mortgage		60		2,646		47		2,160		107		4,806		59		2,638		47		1,892		106		4,530
Consumer indirect		0		0		89		935		89		935		0		0		84		941		84		941
Consumer direct		0		0		23		106		23		106		0		0		23		101		23		101
Home equity		13		298		11		233		24		531		13		290		11		238		24		528
Total		81	$	3,588		173	$	3,631		254	$	7,219		80	$	3,609		168	$	3,373		248	$	6,982

The following table presents information related to loans modified in a TDR during the three months ended March 31, 2020 and 2019.  Of the loans noted in the table below, all consumer mortgage loans for the three months ended March 31, 2020 and 2019 were modified due to a Chapter 7 bankruptcy as described previously.  The financial effects of these restructurings were immaterial

	Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Business lending		0	$	0		0	$	0
Consumer mortgage		7		617		8		665
Consumer indirect		14		127		11		98
Consumer direct		1		12		0		0
Home equity		0		0		1		4
Total		22	$	756		20	$	767

Allowance for Credit Losses

The following presents by segment the activity in the allowance for credit losses:

	Three Months Ended March 31, 2020
(000’s omitted)	Beginning balance, prior to the adoption of ASC 326		Impact of ASC 326			Beginning balance, after adoption of ASC 326		Charge-offs			Recoveries		Provision			Ending balance
Business lending	$	19,426	$	288		$	19,714	$	(176	)	$	138	$	(187	)	$	19,489
Consumer mortgage		10,269		(1,051	)		9,218		(186	)		8		3,390			12,430
Consumer indirect		13,712		(997	)		12,715		(2,079	)		1,163		1,895			13,694
Consumer direct		3,255		(643	)		2,612		(533	)		182		1,476			3,737
Home equity		2,129		808			2,937		(73	)		6		(386	)		2,484
Unallocated		957		43			1,000		0			0		(228	)		772
Purchased credit deteriorated		0		3,072			3,072		0			0		(26	)		3,046
Purchased credit impaired		163		(163	)		0		0			0		0			0
Allowance for credit losses – loans		49,911		1,357			51,268		(3,047	)		1,497		5,934			55,652
Liabilities for off-balance-sheet credit exposures		0		1,185			1,185		0			0		(340	)		845
Total allowance for credit losses	$	49,911	$	2,542		$	52,453	$	(3,047	)	$	1,497	$	5,594		$	56,497

	Three Months Ended March 31, 2019
(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired		Total
Beginning balance	$	18,522		$	10,124		$	14,366		$	3,095		$	2,144		$	1,000		$	33	$	49,284
Charge-offs		(1,216	)		(253	)		(1,823	)		(535	)		(74	)		0			0		(3,901	)
Recoveries		134			22			962			179			5			0			0		1,302
Provision		831			424			746			317			(8	)		(10	)		122		2,422
Ending balance	$	18,271		$	10,317		$	14,251		$	3,056		$	2,067		$	990		$	155	$	49,107

The decline in economic conditions associated with the COVID-19 pandemic have resulted in an allowance for credit losses to total loans ratio of 0.81% at March 31, 2020, three basis points higher than the level at March 31, 2019 and nine basis points higher than the level at December 31, 2019.

Under CECL, the Company utilizes the historical loss rate on its loan portfolio as the initial basis for the estimate of credit losses using the cumulative loss, vintage loss and line loss methods which is derived from the Company’s historical loss experience from January 1, 2012 to December 31, 2019.  Adjustments to historical loss experience were made for differences in current loan-specific risk characteristics and to address current period delinquencies, charge-off rates, risk ratings, lack of loan level data through an entire economic cycle, changes in loan sizes and underwriting standards as well as the addition of acquired loans which were not underwritten by the Company. The Company considered historical losses immediately prior, through and following the Great Recession of 2008 compared to the historical period used for modeling  to adjust the historical information to account for longer-term expectations for loan credit performance.  Under CECL, the Company is required to consider future economic conditions to determine expected losses under a life of loan concept.  Management selected an eight quarter reasonable and supportable forecast period with a four quarter reversion to the historical mean to use as part of the economic forecast. Management determined that these qualitative adjustments  were needed to adjust historical information to reflect changes as a result of current conditions.

The Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that were weighted based on guidance from  the third party provider, with forecasts available as of March 31, 2020. These forecasts included the impact of COVID-19 and were factored into the qualitative portion of the calculation of the estimated credit losses.  The scenarios utilized outline an immediate and precipitous decrease in economic activity in the second quarter of 2020 with peak unemployment ranging from 8% to 13% in that quarter and a general improvement  in unemployment levels over the subsequent seven quarters. In addition to the economic forecast, the Company also considered additional qualitative adjustments  as a result of COVID-19 and the impact on all industries, loan deferrals, delinquencies and downgrades, the Paycheck Protection Program and the Federal stimulus package.

Management developed expected loss estimates considering factors for segments as outlined below:

• Business lending – non real estate:  The Company considered projected unemployment and GDP as possible indicators of forecasted losses related to business lending.  The Company also considered delinquencies, risk rating changes, recent charge-off history and acquired loans as part of the review of estimated losses.

• Business lending – real estate:  The Company considered projected real estate values as possible indicators of forecasted losses related to commercial real estate loans in addition to the factors noted in business lending – non real estate.

• Consumer mortgages and home equity:  The Company considered projected unemployment and real estate values as possible indicators of forecasted losses related to mortgage lending.  In addition, current delinquencies, charge-offs and acquired loans were considered.

• Consumer indirect:  The Company considered projected unemployment and vehicle valuation indices as possible indicators of forecasted losses related to indirect lending.  In addition, current delinquencies, charge-offs and acquired loans were considered.

• Consumer direct:  The Company considered projected unemployment as a possible indicator of forecasted losses related to direct lending.  In addition, current delinquencies, charge-offs and acquired loans were considered.