LOANS

6 Months Ended

Jun. 30, 2020

LOANS [Abstract]

LOANS

NOTE E:  LOANS

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

(000’s omitted)	June 30, 2020			December 31, 2019
Business lending	$	3,455,343		$	2,775,876
Consumer mortgage		2,428,060			2,430,902
Consumer indirect		1,056,865			1,113,062
Consumer direct		169,228			184,378
Home equity		418,543			386,325
Gross loans, including deferred origination costs		7,528,039			6,890,543
Allowance for credit losses		(64,437	)		(49,911	)
Loans, net of allowance for credit losses	$	7,463,602		$	6,840,632

The following table presents the aging of the amortized cost basis of the Company’s past due loans, including purchased credit deteriorated (“PCD”) loans, by segment as of June 30, 2020:

(000’s omitted)	Past Due 30 – 89 Days		90+ Days Past Due and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Business lending	$	2,495	$	1,186	$	5,001	$	8,682	$	3,446,661	$	3,455,343
Consumer mortgage		13,539		3,651		13,544		30,734		2,397,326		2,428,060
Consumer indirect		8,116		744		2		8,862		1,048,003		1,056,865
Consumer direct		875		72		54		1,001		168,227		169,228
Home equity		2,562		410		2,096		5,068		413,475		418,543
Total	$	27,587	$	6,063	$	20,697	$	54,347	$	7,473,692	$	7,528,039

The following is an aged analysis of the Company’s past due loans by segment 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 June 30, 2020 based on their delinquency status at the end of the first quarter, unless subsequent to March 31, 2020, the borrower made all required past due payments to bring the loan to current status.

No interest income on nonaccrual loans was recognized during the three and six months ended June 30, 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. Loans that were granted COVID-19 related financial hardship payment deferrals were not automatically downgraded into lower credit risk ratings but will continue to be monitored for indications of deterioration that could result in future downgrades.  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 June 30, 2020 and December 31, 2019:

(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized
June 30, 2020	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
Business lending:
Risk rating
Pass	$	661,019	$	390,621	$	371,073	$	273,598	$	274,860	$	634,379	$	567,034	$	3,172,584
Special mention		6,026		12,045		6,641		12,701		18,005		56,168		30,485		142,071
Classified		3,334		3,056		17,362		8,151		15,286		55,677		37,822		140,688
Doubtful		0		0		0		0		0		0		0		0
Total business lending	$	670,379	$	405,722	$	395,076	$	294,450	$	308,151	$	746,224	$	635,341	$	3,455,343

	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 June 30, 2020:

(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized
June 30, 2020	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
Consumer mortgage:
FICO AB
Performing	$	111,491	$	247,646	$	186,686	$	185,064	$	178,459	$	712,049	$	454	$	1,621,849
Nonperforming		0		155		151		408		317		3,449		0		4,480
Total FICO AB		111,491		247,801		186,837		185,472		178,776		715,498		454		1,626,329
FICO CDE
Performing		47,370		108,296		85,917		83,641		91,733		362,287		9,772		789,016
Nonperforming		0		360		732		674		1,456		9,493		0		12,715
Total FICO CDE		47,370		108,656		86,649		84,315		93,189		371,780		9,772		801,731
Total consumer mortgage	$	158,861	$	356,457	$	273,486	$	269,787	$	271,965	$	1,087,278	$	10,226	$	2,428,060
Consumer indirect:
Performing	$	135,333	$	372,290	$	260,629	$	118,119	$	88,554	$	81,194	$	0	$	1,056,119
Nonperforming		9		170		176		175		137		79		0		746
Total consumer indirect	$	135,342	$	372,460	$	260,805	$	118,294	$	88,691	$	81,273		0	$	1,056,865
Consumer direct:
Performing	$	27,668	$	60,954	$	38,348	$	18,528	$	8,888	$	7,892	$	6,824	$	169,102
Nonperforming		0		35		23		66		0		0		2		126
Total consumer direct	$	27,668	$	60,989	$	38,371	$	18,594	$	8,888	$	7,892	$	6,826	$	169,228
Home equity:
Performing	$	31,060	$	53,585	$	31,703	$	26,694	$	21,831	$	40,438	$	210,726	$	416,037
Nonperforming		0		0		0		65		165		644		1,632		2,506
Total home equity	$	31,060	$	53,585	$	31,703	$	26,759	$	21,996	$	41,082	$	212,358	$	418,543

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 loans as of June 30, 2020 and December 31, 2019 follows:

(000’s omitted)	June 30, 2020		December 31, 2019
Loans with allowance allocation	$	0	$	0
Loans without allowance allocation		1,414		1,414
Carrying balance		1,414		1,414
Contractual balance		2,943		2,944
Specifically allocated allowance		0		0

The average carrying balance of individually evaluated impaired loans was $1.4 million and $5.1 million for the three months ended June 30, 2020 and June 30, 2019, respectively.  The average carrying balance of individually evaluated impaired loans was $1.8 million and $5.6 million for the six months ended June 30, 2020 and June 30, 2019, respectively. No interest income was recognized on individually evaluated impaired loans for the three or six months ended June 30, 2020 and June 30, 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 and six months ended June 30, 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 six months 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 six months of 2020.  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 June 30, 2020 and December 31, 2019 is as follows:

	June 30, 2020												December 31, 2019
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Business lending		8	$	602		3	$	195		11	$	797		8	$	681		3	$	201		11	$	882
Consumer mortgage		58		2,491		47		2,230		105		4,721		59		2,638		47		1,892		106		4,530
Consumer indirect		0		0		79		878		79		878		0		0		84		941		84		941
Consumer direct		0		0		23		99		23		99		0		0		23		101		23		101
Home equity		11		285		10		250		21		535		13		290		11		238		24		528
Total		77	$	3,378		162	$	3,652		239	$	7,030		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 and six months ended June 30, 2020 and 2019.  Of the loans noted in the table below, all consumer mortgage loans for the three months and six months ended June 30, 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 June 30, 2020				Three Months Ended June 30, 2019
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Business lending		0	$	0		2	$	250
Consumer mortgage		3		174		4		283
Consumer indirect		3		47		4		33
Consumer direct		0		0		2		6
Home equity		1		28		3		71
Total		7	$	249		15	$	643

	Six Months Ended June 30, 2020				Six Months Ended June 30, 2019
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Business lending		0	$	0		2	$	250
Consumer mortgage		9		738		11		861
Consumer indirect		14		151		12		98
Consumer direct		1		11		3		12
Home equity		1		28		4		75
Total		25	$	928		32	$	1,296

Allowance for Credit Losses

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

	Three Months Ended June 30, 2020
(000’s omitted)	Beginning balance		Charge-offs			Recoveries		Steuben acquisition		Provision			Ending balance
Business lending	$	19,489	$	(7	)	$	84	$	2,483	$	2,155		$	24,204
Consumer mortgage		12,430		(234	)		36		146		710			13,088
Consumer indirect		13,694		(1,431	)		833		183		2,587			15,866
Consumer direct		3,737		(341	)		171		87		374			4,028
Home equity		2,484		(81	)		12		235		40			2,690
Unallocated		772		0			0		0		228			1,000
Purchased credit deteriorated		3,046		0			48		528		(61	)		3,561
Allowance for credit losses – loans		55,652		(2,094	)		1,184		3,662		6,033			64,437
Liabilities for off-balance-sheet credit exposures		845		0			0		67		540			1,452
Total allowance for credit losses	$	56,497	$	(2,094	)	$	1,184	$	3,729	$	6,573		$	65,889

	Three Months Ended June 30, 2019
(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated		Acquired Impaired		Total
Beginning balance	$	18,271		$	10,317		$	14,251		$	3,056		$	2,067		$	990	$	155	$	49,107
Charge-offs		(253	)		(587	)		(1,482	)		(445	)		(104	)		0		0		(2,871	)
Recoveries		169			14			1,239			221			31			0		0		1,674
Provision		(418	)		1,019			337			352			109			1		0		1,400
Ending balance	$	17,769		$	10,763		$	14,345		$	3,184		$	2,103		$	991	$	155	$	49,310

	Six Months Ended June 30, 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		Steuben acquisition		Provision			Ending balance
Business lending	$	19,426	$	288		$	19,714	$	(183	)	$	222	$	2,483	$	1,968		$	24,204
Consumer mortgage		10,269		(1,051	)		9,218		(420	)		44		146		4,100			13,088
Consumer indirect		13,712		(997	)		12,715		(3,510	)		1,996		183		4,482			15,866
Consumer direct		3,255		(643	)		2,612		(874	)		353		87		1,850			4,028
Home equity		2,129		808			2,937		(154	)		18		235		(346	)		2,690
Unallocated		957		43			1,000		0			0		0		0			1,000
Purchased credit deteriorated		0		3,072			3,072		0			48		528		(87	)		3,561
Purchased credit impaired		163		(163	)		0		0			0		0		0			0
Allowance for credit losses – loans		49,911		1,357			51,268		(5,141	)		2,681		3,662		11,967			64,437
Liabilities for off-balance-sheet credit exposures		0		1,185			1,185		0			0		67		200			1,452
Total allowance for credit losses	$	49,911	$	2,542		$	52,453	$	(5,141	)	$	2,681	$	3,729	$	12,167		$	65,889

	Six Months Ended June 30, 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		(1,469	)		(840	)		(3,305	)		(980	)		(178	)		0			0		(6,772	)
Recoveries		303			36			2,201			400			36			0			0		2,976
Provision		413			1,443			1,083			669			101			(9	)		122		3,822
Ending balance	$	17,769		$	10,763		$	14,345		$	3,184		$	2,103		$	991		$	155	$	49,310

The decline in economic conditions associated with the COVID-19 pandemic have resulted in an allowance for credit losses to total loans ratio of 0.86% at June 30, 2020, eight basis points higher than the level at June 30, 2019 and 14 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 July 10, 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 a continued weakness in economic activity with peak unemployment ranging from 9% to 12% in the third quarter of 2021 and a general improvement in unemployment levels over the subsequent three 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 unemployment and 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.

The following table presents the carrying amounts of loans purchased and sold during the six months ended June 30, 2020 by portfolio segment:

(000’s omitted)	Business lending		Consumer mortgage		Consumer indirect		Consumer direct		Home equity		Total
Purchases	$	253,469	$	26,733	$	13,926	$	6,022	$	39,542	$	339,692
Sales		0		15,599		0		0		0		15,599

All the purchases during the six months ended June 30, 2020 were associated with the Steuben acquisition on June 12, 2020 and all the sales during the six months ended June 30, 2020 were sales of secondary market eligible residential mortgage loans.