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LOANS AND ALLOWANCE FOR CREDIT LOSSES

12 Months Ended

Dec. 31, 2022

LOANS AND ALLOWANCE FOR CREDIT LOSSES

NOTE D: LOANS AND ALLOWANCE FOR CREDIT LOSSES

The segments of the Company’s loan portfolio at December 31 are summarized as follows:



(000’s omitted)	2022		2021
Business lending	$	3,645,665	$	3,075,904
Consumer mortgage		3,012,475		2,556,114
Consumer indirect		1,539,653		1,189,749
Consumer direct		177,605		153,811
Home equity		433,996		398,061
Gross loans, including deferred origination costs		8,809,394		7,373,639
Allowance for credit losses		(61,059)		(49,869)
Loans, net of allowance for credit losses	$	8,748,335	$	7,323,770

The Company had approximately $73.8 million and $34.9 million of net deferred loan origination costs included in gross loans as of December 31, 2022 and 2021, respectively.

Certain directors and executive officers of the Company, as well as associates of such persons, are loan customers. Loans to these individuals were made in the ordinary course of business under normal credit terms and do not have more than a normal risk of collection. Following is a summary of the aggregate amount of such loans during 2022 and 2021.


(000’s omitted)	2022		2021
Balance at beginning of year	$	13,773	$	15,549
New loans		2,025		2,500
Payments		(3,425)		(4,276)
Balance at end of year	$	12,373	$	13,773

The following table presents the aging of the amortized cost basis of the Company’s past due loans by segment as of December 31, 2022 and 2021:


	Past Due		90+ Days Past
(000’s omitted)	30 – 89		Due and				Total
December 31, 2022	Days		Still Accruing		Nonaccrual		Past Due		Current		Total Loans
Business lending	$	9,818	$	0	$	4,689	$	14,507	$	3,631,158	$	3,645,665
Consumer mortgage		13,757		3,510		22,583		39,850		2,972,625		3,012,475
Consumer indirect		16,767		178		0		16,945		1,522,708		1,539,653
Consumer direct		1,307		132		28		1,467		176,138		177,605
Home equity		3,595		299		1,945		5,839		428,157		433,996
Total	$	45,244	$	4,119	$	29,245	$	78,608	$	8,730,786	$	8,809,394


	Past Due		90+ Days Past
(000’s omitted)	30 – 89		Due and				Total
December 31, 2021	Days		Still Accruing		Nonaccrual		Past Due		Current		Total Loans
Business lending	$	5,540	$	99	$	24,105	$	29,744	$	3,046,160	$	3,075,904
Consumer mortgage		10,297		3,328		15,027		28,652		2,527,462		2,556,114
Consumer indirect		9,611		87		0		9,698		1,180,051		1,189,749
Consumer direct		796		22		1		819		152,992		153,811
Home equity		1,778		272		2,532		4,582		393,479		398,061
Total	$	28,022	$	3,808	$	41,665	$	73,495	$	7,300,144	$	7,373,639

No interest income on nonaccrual loans was recognized during the years ended December 31, 2022 or 2021. For the years ended December 31, 2022 and 2021, an immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income. Approximately $1.9 million of interest income on loans that returned to accrual status in 2022 was recognized for the year ended December 31, 2022.

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 to loans individually based on 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 and the loan has potential weaknesses, 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 loan has a well-defined weakness or weaknesses. 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 December 31, 2022 and 2021:


	Term Loans Amortized Cost Basis by Origination Year
													Revolving		Revolving
													Loans		Loans
(000’s omitted)													Amortized		Converted to
December 31, 2022	2022		2021		2020		2019		2018		Prior		Cost Basis		Term		Total
Business lending:
Risk rating
Pass	$	747,570	$	373,914	$	232,591	$	246,817	$	168,423	$	604,746	$	711,629	$	336,722	$	3,422,412
Special mention		2,787		4,836		3,781		3,676		14,593		45,627		29,403		29,975		134,678
Classified		1,800		775		1,138		3,196		12,235		38,138		10,587		20,706		88,575
Doubtful		0		0		0		0		0		0		0		0		0
Total business lending	$	752,157	$	379,525	$	237,510	$	253,689	$	195,251	$	688,511	$	751,619	$	387,403	$	3,645,665


	Term Loans Amortized Cost Basis by Origination Year
													Revolving		Revolving
													Loans		Loans
(000’s omitted)													Amortized		Converted to
December 31, 2021	2021		2020		2019		2018		2017		Prior		Cost Basis		Term		Total
Business lending:
Risk rating
Pass	$	517,302	$	286,386	$	265,551	$	204,376	$	152,440	$	544,577	$	460,461	$	286,446	$	2,717,539
Special mention		5,969		10,638		9,738		18,702		7,972		54,367		26,609		46,518		180,513
Classified		1,870		1,414		3,571		16,729		18,982		56,538		26,780		51,403		177,287
Doubtful		0		0		0		62		0		0		503		0		565
Total business lending	$	525,141	$	298,438	$	278,860	$	239,869	$	179,394	$	655,482	$	514,353	$	384,367	$	3,075,904

All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are 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 December 31, 2022 and 2021:


	Term Loans Amortized Cost Basis by Origination Year
													Revolving		Revolving
													Loans		Loans
(000’s omitted)													Amortized		Converted to
December 31, 2022	2022		2021		2020		2019		2018		Prior		Cost Basis		Term		Total
Consumer mortgage:
FICO AB⁽¹⁾
Performing	$	379,171	$	492,731	$	217,889	$	173,942	$	100,161	$	604,258	$	954	$	58,639	$	2,027,745
Nonperforming		0		75		573		184		399		4,347		0		449		6,027
Total FICO AB		379,171		492,806		218,462		174,126		100,560		608,605		954		59,088		2,033,772
FICO CDE⁽²⁾
Performing		160,388		178,262		112,640		79,357		54,861		323,189		27,884		22,056		958,637
Nonperforming		120		974		1,250		1,606		2,127		13,177		151		661		20,066
Total FICO CDE		160,508		179,236		113,890		80,963		56,988		336,366		28,035		22,717		978,703
Total consumer mortgage	$	539,679	$	672,042	$	332,352	$	255,089	$	157,548	$	944,971	$	28,989	$	81,805	$	3,012,475

Consumer indirect:
Performing	$	777,513	$	422,594	$	129,449	$	99,593	$	52,298	$	58,028	$	0	$	0	$	1,539,475
Nonperforming		18		1		53		67		15		24		0		0		178
Total consumer indirect	$	777,531	$	422,595	$	129,502	$	99,660	$	52,313	$	58,052	$	0	$	0	$	1,539,653

Consumer direct:
Performing	$	84,111	$	46,381	$	17,066	$	12,729	$	5,573	$	5,020	$	6,563	$	2	$	177,445
Nonperforming		6		51		1		1		29		50		22		0		160
Total consumer direct	$	84,117	$	46,432	$	17,067	$	12,730	$	5,602	$	5,070	$	6,585	$	2	$	177,605

Home equity:
Performing	$	69,575	$	72,270	$	37,964	$	31,506	$	16,068	$	41,097	$	132,703	$	30,569	$	431,752
Nonperforming		0		10		114		169		105		606		563		677		2,244
Total home equity	$	69,575	$	72,280	$	38,078	$	31,675	$	16,173	$	41,703	$	133,266	$	31,246	$	433,996

(1) FICO AB refers to higher tiered loans with FICO scores greater than or equal to 720 at origination.

(2) FICO CDE refers to loans with FICO scores less than 720 at origination and potentially higher risk.


	Term Loans Amortized Cost Basis by Origination Year
													Revolving		Revolving
													Loans		Loans
(000’s omitted)													Amortized		Converted to
December 31, 2021	2021		2020		2019		2018		2017		Prior		Cost Basis		Term		Total
Consumer mortgage:
FICO AB⁽¹⁾
Performing	$	496,372	$	220,171	$	178,589	$	113,505	$	116,417	$	566,123	$	0	$	32,175	$	1,723,352
Nonperforming		0		266		0		131		435		3,236		0		0		4,068
Total FICO AB		496,372		220,437		178,589		113,636		116,852		569,359		0		32,175		1,727,420
FICO CDE⁽²⁾
Performing		162,995		117,566		81,377		57,973		54,396		300,350		25,028		14,722		814,407
Nonperforming		0		522		972		1,465		939		10,389		0		0		14,287
Total FICO CDE		162,995		118,088		82,349		59,438		55,335		310,739		25,028		14,722		828,694
Total consumer mortgage	$	659,367	$	338,525	$	260,938	$	173,074	$	172,187	$	880,098	$	25,028	$	46,897	$	2,556,114

Consumer indirect:
Performing	$	590,857	$	204,529	$	182,458	$	107,683	$	39,385	$	64,750	$	0	$	0	$	1,189,662
Nonperforming		0		34		0		24		17		12		0		0		87
Total consumer indirect	$	590,857	$	204,563	$	182,458	$	107,707	$	39,402	$	64,762	$	0	$	0	$	1,189,749

Consumer direct:
Performing	$	72,584	$	28,905	$	24,768	$	12,340	$	4,396	$	4,577	$	6,214	$	4	$	153,788
Nonperforming		0		4		18		1		0		0		0		0		23
Total consumer direct	$	72,584	$	28,909	$	24,786	$	12,341	$	4,396	$	4,577	$	6,214	$	4	$	153,811

Home equity:
Performing	$	76,041	$	43,106	$	35,990	$	18,824	$	15,134	$	35,740	$	131,817	$	38,605	$	395,257
Nonperforming		0		64		47		102		131		679		953		828		2,804
Total home equity	$	76,041	$	43,170	$	36,037	$	18,926	$	15,265	$	36,419	$	132,770	$	39,433	$	398,061

(1) FICO AB refers to higher tiered loans with FICO scores greater than or equal to 720 at origination.

(2) FICO CDE refers to loans with FICO scores less than 720 at origination and potentially higher risk.

Business lending loans greater than $0.5 million that are on nonaccrual are individually assessed and, if necessary, a specific allocation of the allowance for credit losses is provided. A summary of individually assessed business lending loans as of December 31, 2022 and 2021 follows:


	December 31,		December 31,
(000’s omitted)	2022		2021
Loans with allowance allocation	$	0	$	7,102
Loans without allowance allocation		3,163		7,417
Carrying balance		3,163		14,519
Contractual balance		4,201		16,963
Specifically allocated allowance		0		566

The average carrying balance of individually assessed loans was $12.2 million, and $33.4 million for the years ended December 31, 2022 and 2021, respectively. No interest income was recognized on individually assessed loans for the years ended December 31, 2022 and 2021.

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 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 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 2022, 2021 and 2020 was immaterial.

Information regarding TDRs as of December 31, 2022, 2021 and 2020 is as follows:


	December 31, 2022
	Nonaccrual			Accruing			Total
(000’s omitted)	#	Amount		#	Amount		#	Amount
Business lending	1	$	135	3	$	271	4	$	406
Consumer mortgage	52		2,218	46		2,114	98		4,332
Consumer indirect	0		0	56		600	56		600
Consumer direct	0		0	18		5	18		5
Home equity	9		108	9		178	18		286
Total	62	$	2,461	132	$	3,168	194	$	5,629


	December 31, 2021
	Nonaccrual			Accruing			Total
(000’s omitted)	#	Amount		#	Amount		#	Amount
Business lending	10	$	1,011	4	$	811	14	$	1,822
Consumer mortgage	61		2,694	47		2,420	108		5,114
Consumer indirect	0		0	72		829	72		829
Consumer direct	0		0	16		7	16		7
Home equity	10		235	12		232	22		467
Total	81	$	3,940	151	$	4,299	232	$	8,239


	December 31, 2020
	Nonaccrual			Accruing			Total
(000’s omitted)	#	Amount		#	Amount		#	Amount
Business lending	6	$	529	4	$	191	10	$	720
Consumer mortgage	56		2,413	48		2,266	104		4,679
Consumer indirect	0		0	86		951	86		951
Consumer direct	0		0	23		85	23		85
Home equity	11		285	13		264	24		549
Total	73	$	3,227	174	$	3,757	247	$	6,984

The following table presents information related to loans modified in a TDR during the years ended December 31, 2022, 2021 and 2020. Of the loans noted in the table below, all consumer mortgage loans for the years ended December 31, 2022, 2021 and 2020 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.


	December 31, 2022			December 31, 2021			December 31, 2020
(000’s omitted)	#	Amount		#	Amount		#	Amount
Business lending	0	$	0	5	$	1,371	1	$	4
Consumer mortgage	7		597	24		1,425	17		1,339
Consumer indirect	13		178	23		284	31		333
Consumer direct	3		5	2		7	3		10
Home equity	1		4	0		0	3		70
Total	24	$	784	54	$	3,087	55	$	1,756

Allowance for Credit Losses

The following presents by loan segment the activity in the allowance for credit losses during 2022, 2021 and 2020:


	Year Ended December 31, 2022
							PCD
	Beginning		Charge-				Allowance at				Ending
(000’s omitted)	balance		offs		Recoveries		Acquisition		Provision		balance
Business lending	$	22,995	$	(824)	$	1,374	$	71	$	(319)	$	23,297
Consumer mortgage		10,017		(313)		62		0		4,577		14,343
Consumer indirect		11,737		(7,986)		4,756		0		9,345		17,852
Consumer direct		2,306		(1,252)		772		0		1,147		2,973
Home equity		1,814		(86)		163		0		(297)		1,594
Unallocated		1,000		0		0		0		0		1,000
Allowance for credit losses – loans		49,869		(10,461)		7,127		71		14,453		61,059
Liabilities for off-balance-sheet credit exposures		803		0		0		0		320		1,123
Total allowance for credit losses	$	50,672	$	(10,461)	$	7,127	$	71	$	14,773	$	62,182


	Year Ended December 31, 2021
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	30,072	$	(1,922)	$	796	$	(5,951)	$	22,995
Consumer mortgage		10,672		(426)		91		(320)		10,017
Consumer indirect		13,696		(5,160)		4,346		(1,145)		11,737
Consumer direct		3,207		(1,232)		793		(462)		2,306
Home equity		2,222		(225)		92		(275)		1,814
Unallocated		1,000		0		0		0		1,000
Allowance for credit losses – loans		60,869		(8,965)		6,118		(8,153)		49,869
Liabilities for off-balance-sheet credit exposures		1,489		0		0		(686)		803
Total allowance for credit losses	$	62,358	$	(8,965)	$	6,118	$	(8,839)	$	50,672


	Year Ended December 31, 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	$	3,360	$	22,786	$	(1,588)	$	796	$	3,011	$	5,067	$	30,072
Consumer mortgage		10,269		(1,051)		9,218		(862)		130		146		2,040		10,672
Consumer indirect		13,712		(997)		12,715		(6,382)		3,992		183		3,188		13,696
Consumer direct		3,255		(643)		2,612		(1,633)		743		87		1,398		3,207
Home equity		2,129		808		2,937		(199)		28		235		(779)		2,222
Unallocated		957		43		1,000		0		0		0		0		1,000
Acquired impaired		163		(163)		0		0		0		0		0		0
Allowance for credit losses – loans		49,911		1,357		51,268		(10,664)		5,689		3,662		10,914		60,869
Liabilities for off-balance-sheet credit exposures		0		1,185		1,185		0		0		67		237		1,489
Total allowance for credit losses	$	49,911	$	2,542	$	52,453	$	(10,664)	$	5,689	$	3,729	$	11,151	$	62,358

The allowance for credit losses increased to $61.1 million at December 31, 2022 compared to $49.9 million at December 31, 2021, driven by organic loan growth and the Elmira acquisition, as well as weakening economic forecasts.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $25.1 million and $16.7 million at December 31, 2022 and 2021, respectively, 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, as adopted by the Company on January 1, 2020, 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. 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 for economic factors that are not dependent on collateral values, and no lag adjustment for factors that utilize collateral values, 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 are weighted, with forecasts available as of December 31, 2022. These forecasts were factored into the qualitative portion of the calculation of the estimated credit losses and include the impact of a decline in residential real estate and vehicle prices as well as inflation. The scenarios utilized forecast stable unemployment levels offset by deterioration in GDP growth, auto values, residential real estate and median household income, a result of inflationary pressures.

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

●

Business lending – non real estate: The Company selected projected unemployment and GDP as indicators of forecasted losses related to business lending and utilize both factors in an even weight for the calculation. The Company also considered delinquencies, the level of loan deferrals, risk rating changes, recent charge-off history and acquired loans as part of the estimation of credit losses.

●

Business lending – real estate: The Company selected projected unemployment and commercial real estate values as indicators of forecasted losses related to commercial real estate loans and utilize both factors in an even weight for the calculation. The Company also considered the factors noted in business lending – non real estate.

●

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

●

Consumer indirect: The Company selected projected unemployment and vehicle valuation indices as indicators of forecasted losses related to indirect lending and utilize both factors in an even weight for the calculation. In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered.

●

Consumer direct: The Company selected projected unemployment and inflation-adjusted household income as indicators of forecasted losses related to consumer direct lending and utilize both factors in an even weight for the calculation. 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 year ended December 31, 2022 by portfolio segment:


(000’s	Business		Consumer		Consumer		Consumer		Home
omitted)	lending		mortgage		indirect		direct		equity		Total
Purchases	$	125,288	$	271,408	$	9,383	$	12,511	$	18,429	$	437,019
Sales		0		5,309		0		0		0		5,309

All purchases of loans were from the acquisition of Elmira. All sales of consumer mortgages during the year ended December 31, 2022 were sales of secondary market eligible residential mortgage loans.