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LOANS

9 Months Ended

Sep. 30, 2021

NOTE E: LOANS

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


	September 30,		December 31,
(000’s omitted)	2021		2020
Business lending	$	3,092,177	$	3,440,077
Consumer mortgage		2,470,974		2,401,499
Consumer indirect		1,168,378		1,021,885
Consumer direct		155,602		152,657
Home equity		395,451		399,834
Gross loans, including deferred origination costs		7,282,582		7,415,952
Allowance for credit losses		(49,499)		(60,869)
Loans, net of allowance for credit losses	$	7,233,083	$	7,355,083

The following table presents the aging of the amortized cost basis of the Company’s past due loans, including PCD loans, by segment as of September 30, 2021:


	Past Due		90+ Days Past
	30 – 89		Due and				Total
(000’s omitted)	Days		Still Accruing		Nonaccrual		Past Due		Current		Total Loans
Business lending	$	5,109	$	148	$	47,820	$	53,077	$	3,039,100	$	3,092,177
Consumer mortgage		8,869		1,288		15,605		25,762		2,445,212		2,470,974
Consumer indirect		8,638		131		0		8,769		1,159,609		1,168,378
Consumer direct		608		19		1		628		154,974		155,602
Home equity		1,991		288		2,541		4,820		390,631		395,451
Total	$	25,215	$	1,874	$	65,967	$	93,056	$	7,189,526	$	7,282,582

The following table presents the aging of the amortized cost basis of the Company’s past due loans, including PCD loans, by segment as of December 31, 2020:


	Past Due		90+ Days Past
	30 – 89		Due and				Total
(000’s omitted)	Days		Still Accruing		Nonaccrual		Past Due		Current		Total Loans
Business lending	$	4,896	$	59	$	55,709	$	60,664	$	3,379,413	$	3,440,077
Consumer mortgage		13,236		3,051		14,970		31,257		2,370,242		2,401,499
Consumer indirect		13,161		219		1		13,381		1,008,504		1,021,885
Consumer direct		1,170		28		3		1,201		151,456		152,657
Home equity		2,296		565		2,246		5,107		394,727		399,834
Total	$	34,759	$	3,922	$	72,929	$	111,610	$	7,304,342	$	7,415,952

The delinquency status for loans on payment deferment due to COVID-19 financial hardship were reported at September 30, 2021 based on their delinquency status at the execution date of the payment deferment, unless subsequent to the execution date of the payment deferment, the borrower made all required past due payments to bring the loan to current status. Certain loans under extended pandemic-related forbearance were reclassified to nonaccrual status.

No interest income on nonaccrual loans was recognized during the three and nine months ended September 30, 2021 and 2020. An immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income in both periods.

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 reviewed on a case-by-case basis for credit risk ratings. Loans on payment deferral 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 September 30, 2021 and December 31, 2020:


													Revolving
													Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized
September 30, 2021	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
Business lending:
Risk rating
Pass	$	418,709	$	365,951	$	339,050	$	261,444	$	179,753	$	624,089	$	501,995	$	2,690,991
Special mention		4,877		12,376		11,965		39,450		34,331		64,406		26,468		193,873
Classified		788		1,797		20,851		47,749		25,280		74,205		34,856		205,526
Doubtful		0		0		15		916		0		0		856		1,787
Total business lending	$	424,374	$	380,124	$	371,881	$	349,559	$	239,364	$	762,700	$	564,175	$	3,092,177


													Revolving
													Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized
December 31, 2020	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
Business lending:
Risk rating
Pass	$	860,178	$	351,350	$	312,087	$	217,138	$	231,453	$	543,999	$	483,018	$	2,999,223
Special mention		14,687		36,041		28,410		21,875		29,386		51,657		52,732		234,788
Classified		6,336		4,560		30,422		24,807		14,891		65,157		56,000		202,173
Doubtful		0		18		2,888		0		0		108		879		3,893
Total business lending	$	881,201	$	391,969	$	373,807	$	263,820	$	275,730	$	660,921	$	592,629	$	3,440,077

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 September 30, 2021:


													Revolving
													Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized
September 30, 2021	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
Consumer mortgage:
FICO AB⁽¹⁾
Performing	$	360,580	$	237,931	$	195,086	$	127,786	$	125,836	$	612,420	$	0	$	1,659,639
Nonperforming		0		0		0		256		475		2,851		0		3,582
Total FICO AB		360,580		237,931		195,086		128,042		126,311		615,271		0		1,663,221
FICO CDE⁽²⁾
Performing		109,400		125,742		91,312		65,967		58,841		323,974		19,206		794,442
Nonperforming		80		232		977		679		781		10,562		0		13,311
Total FICO CDE		109,480		125,974		92,289		66,646		59,622		334,536		19,206		807,753
Total consumer mortgage	$	470,060	$	363,905	$	287,375	$	194,688	$	185,933	$	949,807	$	19,206	$	2,470,974

Consumer indirect:
Performing	$	480,254	$	229,368	$	209,894	$	126,128	$	48,624	$	73,979	$	0	$	1,168,247
Nonperforming		0		39		74		9		9		0		0		131
Total consumer indirect	$	480,254	$	229,407	$	209,968	$	126,137	$	48,633	$	73,979	$	0	$	1,168,378

Consumer direct:
Performing	$	61,119	$	32,913	$	29,379	$	15,118	$	5,668	$	5,259	$	6,126	$	155,582
Nonperforming		0		0		1		4		0		14		1		20
Total consumer direct	$	61,119	$	32,913	$	29,380	$	15,122	$	5,668	$	5,273	$	6,127	$	155,602

Home equity:
Performing	$	56,317	$	45,314	$	39,025	$	21,292	$	17,137	$	39,052	$	174,485	$	392,622
Nonperforming		0		118		21		104		96		793		1,697		2,829
Total home equity	$	56,317	$	45,432	$	39,046	$	21,396	$	17,233	$	39,845	$	176,182	$	395,451

(1)

FICO AB refers to higher tiered loans with FICO scores greater than or equal to 720.

(2)

FICO CDE refers to loans with FICO scores less than 720 and potentially higher risk.

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


													Revolving
													Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized
December 31, 2020	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
Consumer mortgage:
FICO AB⁽¹⁾
Performing	$	260,588	$	227,027	$	166,638	$	163,653	$	160,911	$	614,976	$	321	$	1,594,114
Nonperforming		0		0		275		398		345		2,709		0		3,727
Total FICO AB		260,588		227,027		166,913		164,051		161,256		617,685		321		1,597,841
FICO CDE⁽²⁾
Performing		115,049		102,788		80,973		75,289		83,214		314,668		17,382		789,363
Nonperforming		0		1,010		582		877		1,786		10,040		0		14,295
Total FICO CDE		115,049		103,798		81,555		76,166		85,000		324,708		17,382		803,658
Total consumer mortgage	$	375,637	$	330,825	$	248,468	$	240,217	$	246,256	$	942,393	$	17,703	$	2,401,499

Consumer indirect:
Performing	$	303,471	$	305,901	$	202,373	$	86,497	$	61,449	$	61,975	$	0	$	1,021,666
Nonperforming		51		52		82		17		16		1		0		219
Total consumer indirect	$	303,522	$	305,953	$	202,455	$	86,514	$	61,465	$	61,976	$	0	$	1,021,885

Consumer direct:
Performing	$	49,181	$	46,992	$	27,872	$	12,326	$	5,232	$	4,146	$	6,878	$	152,627
Nonperforming		1		19		2		5		0		3		0		30
Total consumer direct	$	49,182	$	47,011	$	27,874	$	12,331	$	5,232	$	4,149	$	6,878	$	152,657

Home equity:
Performing	$	48,145	$	48,780	$	28,074	$	23,524	$	17,828	$	35,900	$	194,773	$	397,024
Nonperforming		0		24		73		104		183		490		1,936		2,810
Total home equity	$	48,145	$	48,804	$	28,147	$	23,628	$	18,011	$	36,390	$	196,709	$	399,834

(1)

FICO AB refers to higher tiered loans with FICO scores greater than or equal to 720.

(2)

FICO CDE refers to loans with FICO scores less than 720 and potentially higher risk.

All loan classes are collectively evaluated for credit losses except business lending. A summary of individually assessed business loans as of September 30, 2021 and December 31, 2020 follows:


	September 30,		December 31,
(000’s omitted)	2021		2020
Loans with allowance allocation	$	21,688	$	27,437
Loans without allowance allocation		9,145		8,138
Carrying balance		30,833		35,575
Contractual balance		33,357		38,362
Specifically allocated allowance		1,834		3,874

The average carrying balance of individually assessed loans was $31.5 million and $8.8 million for the three months ended September 30, 2021 and September 30, 2020, respectively. The average carrying balance of individually assessed loans was $34.1 million and $4.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. No interest income was recognized on individually assessed loans for the three or nine months ended September 30, 2021 and September 30, 2020.

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 nine months ended September 30, 2021 and 2020 was immaterial.

TDRs less than $0.5 million are collectively included in the allowance for credit loss estimate. Commercial loans greater than $0.5 million are individually assessed, and if necessary, a specific allocation of the allowance for credit losses is provided. With regard to determination of the amount of the allowance for credit losses, TDR loans are considered to be impaired. As a result, the determination of the amount of allowance for credit losses related to impaired loans for each portfolio segment within TDRs is the same as detailed previously.

With respect to the Company’s lending activities, the Company implemented a customer forbearance program allowing for loan payment deferrals up to three months per request during 2020 to assist both consumer and business borrowers that were experiencing financial hardship due to COVID-19 related challenges. Business lending, consumer direct, and consumer indirect loans in deferment status continued to accrue interest on the deferred principal during the deferment period unless otherwise classified as nonaccrual. Consumer mortgage and home equity loans did not accrue interest on the deferred payments during the deferment period. Consistent with the Coronavirus Aid, Relief and Economic Security Act ( “CARES Act”), the Consolidated Appropriations Act of 2021 (“CAA”), and industry regulatory guidance, borrowers that were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period and were not classified as TDRs. Borrowers that were delinquent in their payments to the Company prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case-by-case basis for TDR classification and non-performing loan status.

As of September 30, 2021, the Company had 4 borrowers in forbearance due to COVID-19 related financial hardship, representing $3.9 million in outstanding loan balances, or 0.1% of total loans outstanding. These forbearances were comprised of 3 business borrowers representing $3.8 million in outstanding loan balances and 1 consumer borrower representing approximately $0.1 million in outstanding loan balances. As of December 31, 2020, the Company had 74 borrowers in forbearance due to COVID-19 related financial hardship, representing $66.5 million in outstanding loan balances, or 0.9% of total loans outstanding. These forbearances were comprised of 63 business borrowers representing $65.7 million in outstanding loan balances and 11 consumer borrowers representing approximately $0.8 million in outstanding loan balances.

Information regarding TDRs as of September 30, 2021 and December 31, 2020 is as follows:


	September 30, 2021									December 31, 2020
(000’s omitted)	Nonaccrual			Accruing			Total			Nonaccrual			Accruing			Total
	#	Amount		#	Amount		#	Amount		#	Amount		#	Amount		#	Amount
Business lending	10	$	458	5	$	175	15	$	633	6	$	529	4	$	191	10	$	720
Consumer mortgage	62		2,828	44		2,307	106		5,135	56		2,413	48		2,266	104		4,679
Consumer indirect	0		0	73		816	73		816	0		0	86		951	86		951
Consumer direct	0		0	17		10	17		10	0		0	23		85	23		85
Home equity	10		244	12		240	22		484	11		285	13		264	24		549
Total	82	$	3,530	151	$	3,548	233	$	7,078	73	$	3,227	174	$	3,757	247	$	6,984

The following table presents information related to loans modified in a TDR during the three months and nine months ended September 30, 2021 and 2020. Of the loans noted in the table below, all consumer mortgage loans for the three months and nine months ended September 30, 2021 and 2020 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.


	Three Months Ended			Three Months Ended
	September 30, 2021			September 30, 2020
	Number of	Outstanding		Number of	Outstanding
(000’s omitted)	loans modified	Balance		loans modified	Balance
Business lending	5	$	1,925	0	$	0
Consumer mortgage	9		728	8		646
Consumer indirect	5		78	14		131
Consumer direct	1		2	1		2
Home equity	0		0	2		56
Total	20	$	2,733	25	$	835


	Nine Months Ended			Nine Months Ended
	September 30, 2021			September 30, 2020
	Number of	Outstanding		Number of	Outstanding
(000’s omitted)	loans modified	Balance		loans modified	Balance
Business lending	5	$	1,925	0	$	0
Consumer mortgage	19		1,193	17		1,378
Consumer indirect	17		222	25		261
Consumer direct	2		8	2		12
Home equity	0		0	2		56
Total	43	$	3,348	46	$	1,707

Allowance for Credit Losses

The following presents by segment the activity in the allowance for credit losses during the three months and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30, 2021
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	23,417	$	(872)	$	169	$	(2,688)	$	20,026
Consumer mortgage		10,001		(127)		3		(132)		9,745
Consumer indirect		11,103		(1,365)		973		1,334		12,045
Consumer direct		2,548		(309)		163		268		2,670
Home equity		1,796		(30)		10		(56)		1,720
Unallocated		1,000		0		0		0		1,000
Purchased credit deteriorated		1,885		0		35		373		2,293
Allowance for credit losses – loans		51,750		(2,703)		1,353		(901)		49,499
Liabilities for off-balance-sheet credit exposures		762		0		0		(43)		719
Total allowance for credit losses	$	52,512	$	(2,703)	$	1,353	$	(944)	$	50,218


	Three Months Ended September 30, 2020
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	24,204	$	(736)	$	67	$	3,539	$	27,074
Consumer mortgage		13,088		(248)		23		(599)		12,264
Consumer indirect		15,866		(1,281)		1,111		(963)		14,733
Consumer direct		4,028		(340)		225		(120)		3,793
Home equity		2,690		(24)		5		(124)		2,547
Unallocated		1,000		0		0		4		1,004
Purchased credit deteriorated		3,561		(91)		32		45		3,547
Allowance for credit losses – loans		64,437		(2,720)		1,463		1,782		64,962
Liabilities for off-balance-sheet credit exposures		1,452		0		0		163		1,615
Total allowance for credit losses	$	65,889	$	(2,720)	$	1,463	$	1,945	$	66,577


	Nine Months Ended September 30, 2021
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	28,190	$	(925)	$	491	$	(7,730)	$	20,026
Consumer mortgage		10,672		(369)		22		(580)		9,745
Consumer indirect		13,696		(3,514)		3,402		(1,539)		12,045
Consumer direct		3,207		(822)		607		(322)		2,670
Home equity		2,222		(145)		19		(376)		1,720
Unallocated		1,000		0		0		0		1,000
Purchased credit deteriorated		1,882		0		95		316		2,293
Allowance for credit losses – loans		60,869		(5,775)		4,636		(10,231)		49,499
Liabilities for off-balance-sheet credit exposures		1,489		0		0		(770)		719
Total allowance for credit losses	$	62,358	$	(5,775)	$	4,636	$	(11,001)	$	50,218


	Nine Months Ended September 30, 2020
	Beginning				Beginning
	balance,				balance,
	prior to the				after
	adoption of		Impact of		adoption of						Steuben				Ending
(000’s omitted)	ASC 326		ASC 326		ASC 326		Charge-offs		Recoveries		acquisition		Provision		balance
Business lending	$	19,426	$	288	$	19,714	$	(919)	$	289	$	2,483	$	5,507	$	27,074
Consumer mortgage		10,269		(1,051)		9,218		(668)		67		146		3,501		12,264
Consumer indirect		13,712		(997)		12,715		(4,791)		3,107		183		3,519		14,733
Consumer direct		3,255		(643)		2,612		(1,214)		578		87		1,730		3,793
Home equity		2,129		808		2,937		(178)		23		235		(470)		2,547
Unallocated		957		43		1,000		0		0		0		4		1,004
Purchased credit deteriorated		0		3,072		3,072		(91)		80		528		(42)		3,547
Purchased credit impaired		163		(163)		0		0		0		0		0		0
Allowance for credit losses – loans		49,911		1,357		51,268		(7,861)		4,144		3,662		13,749		64,962
Liabilities for off-balance-sheet credit exposures		0		1,185		1,185		0		0		67		363		1,615
Total allowance for credit losses	$	49,911	$	2,542	$	52,453	$	(7,861)	$	4,144	$	3,729	$	14,112	$	66,577

Improvements in economic forecasts have resulted in an allowance for credit losses to total loans ratio of 0.68% at September 30, 2021, 19 basis points lower than the level at September 30, 2020 and 14 basis points lower than the level at December 31, 2020.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $18.2 million at September 30, 2021 and is excluded from the estimate of credit losses and amortized cost basis of loans.

Under ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), also referred to as 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, 2020. 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 current expected credit losses. Management selected an eight quarter reasonable and supportable forecast period using a two quarter lag adjustment 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 for expected losses and to reflect changes as a result of current conditions.

For qualitative macroeconomic adjustments, 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 September 30, 2021. These forecasts were factored into the qualitative portion of the calculation of the estimated credit losses and included the impact of COVID-19, including forecasted vaccine distribution progress and current and future Federal stimulus packages. The scenarios utilized outline a significant improvement in economic conditions with peak unemployment ranging from 2.9% to 9.1% in the third quarter of 2022, a general improvement in unemployment levels over the subsequent three quarters, and an improvement in real estate and vehicle collateral values. 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, and the risk that Paycheck Protection Program (“PPP”) loans will not be forgiven.

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

●

Business lending – non real estate: The Company considered and selected projected unemployment and GDP as possible indicators of forecasted losses related to business lending. The Company also considered delinquencies, the level of loan deferrals, 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 and selected projected unemployment and commercial and multi-family real estate values as possible indicators of forecasted losses related to commercial real estate loans. The Company also considered the factors noted in business lending – non real estate.

●

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

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

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Consumer direct: The Company considered and selected projected unemployment and median household income as possible indicator of forecasted losses related to direct lending. In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered.

The following table presents the carrying amounts of loans purchased and sold during the nine months ended September 30, 2021 by portfolio segment:


	Business		Consumer		Consumer		Consumer		Home
(000’s omitted)	lending		mortgage		indirect		direct		equity		Total
Purchases	$	0	$	0	$	0	$	0	$	0	$	0
Sales		848		16,955		0		0		0		17,803

All the sales of consumer mortgages during the nine months ended September 30, 2021 were sales of secondary market eligible residential mortgage loans. The sales of business loans during the nine months ended September 30, 2021 includes two business lending loans under one relationship.