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LOANS AND ALLOWANCE FOR CREDIT LOSSES

9 Months Ended

Sep. 30, 2023

LOANS AND ALLOWANCE FOR CREDIT LOSSES

NOTE E: LOANS AND ALLOWANCE FOR CREDIT LOSSES

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


	September 30,		December 31,
(000’s omitted)	2023		2022
Business lending	$	3,914,935	$	3,645,665
Consumer mortgage		3,196,764		3,012,475
Consumer indirect		1,708,302		1,539,653
Consumer direct		185,301		177,605
Home equity		444,764		433,996
Gross loans, including deferred origination costs		9,450,066		8,809,394
Allowance for credit losses		(64,945)		(61,059)
Loans, net of allowance for credit losses	$	9,385,121	$	8,748,335

The following table presents the aging of the amortized cost basis of the Company’s past due loans by segment as of September 30, 2023:


	Past Due		90+ Days Past
	30 – 89		Due and				Total
(000’s omitted)	Days		Still Accruing		Nonaccrual		Past Due		Current		Total Loans
Business lending	$	13,545	$	0	$	5,638	$	19,183	$	3,895,752	$	3,914,935
Consumer mortgage		15,282		2,908		25,205		43,395		3,153,369		3,196,764
Consumer indirect		15,175		290		0		15,465		1,692,837		1,708,302
Consumer direct		1,313		29		24		1,366		183,935		185,301
Home equity		3,331		504		2,255		6,090		438,674		444,764
Total	$	48,646	$	3,731	$	33,122	$	85,499	$	9,364,567	$	9,450,066

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:


	Past Due		90+ Days Past
	30 – 89		Due and				Total
(000’s omitted)	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

No interest income on nonaccrual loans was recognized during the three and nine months ended September 30, 2023. 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 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 September 30, 2023 and December 31, 2022:


													Revolving		Revolving
													Loans		Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized		Converted
September 30, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Business lending:
Risk rating
Pass	$	290,903	$	659,190	$	325,480	$	205,591	$	224,256	$	710,607	$	721,951	$	526,358	$	3,664,336
Special mention		19,647		3,463		18,359		2,655		3,523		58,407		22,473		43,473		172,000
Classified		459		2,746		2,657		5,146		2,863		21,488		14,428		28,324		78,111
Doubtful		0		0		0		488		0		0		0		0		488
Total business lending	$	311,009	$	665,399	$	346,496	$	213,880	$	230,642	$	790,502	$	758,852	$	598,155	$	3,914,935

Current period gross charge-offs	$	0	$	160	$	0	$	0	$	0	$	0	$	458	$	0	$	618


													Revolving		Revolving
													Loans		Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized		Converted
December 31, 2022	2022		2021		2020		2019		2018		Prior		Cost Basis		to Term		Total
Business lending:
Risk rating
Pass	$	747,573	$	373,913	$	232,591	$	246,820	$	168,468	$	604,745	$	646,771	$	401,531	$	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	$	752,160	$	379,524	$	237,510	$	253,692	$	195,296	$	688,510	$	686,761	$	452,212	$	3,645,665

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 September 30, 2023:


													Revolving		Revolving
													Loans		Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized		Converted
September 30, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Consumer mortgage:
FICO AB⁽¹⁾
Performing	$	274,173	$	358,296	$	466,228	$	203,702	$	160,654	$	629,208	$	0	$	79,618	$	2,171,879
Nonperforming		0		415		707		566		175		5,207		0		198		7,268
Total FICO AB		274,173		358,711		466,935		204,268		160,829		634,415		0		79,816		2,179,147
FICO CDE⁽²⁾
Performing		93,988		153,636		169,225		105,444		73,939		343,507		28,997		28,036		996,772
Nonperforming		0		1,592		1,362		1,250		1,476		13,909		0		1,256		20,845
Total FICO CDE		93,988		155,228		170,587		106,694		75,415		357,416		28,997		29,292		1,017,617
Total consumer mortgage	$	368,161	$	513,939	$	637,522	$	310,962	$	236,244	$	991,831	$	28,997	$	109,108	$	3,196,764

Current period gross charge-offs	$	0	$	0	$	0	$	0	$	85	$	281	$	0	$	0	$	366

Consumer indirect:
Performing	$	573,832	$	622,019	$	306,229	$	83,299	$	55,759	$	66,874	$	0	$	0	$	1,708,012
Nonperforming		46		154		19		33		6		32		0		0		290
Total consumer indirect	$	573,878	$	622,173	$	306,248	$	83,332	$	55,765	$	66,906	$	0	$	0	$	1,708,302

Current period gross charge-offs	$	277	$	2,551	$	1,435	$	890	$	482	$	855	$	0	$	0	$	6,490

Consumer direct:
Performing	$	66,421	$	59,136	$	30,516	$	10,059	$	6,088	$	6,337	$	6,690	$	1	$	185,248
Nonperforming		0		0		0		5		5		30		13		0		53
Total consumer direct	$	66,421	$	59,136	$	30,516	$	10,064	$	6,093	$	6,367	$	6,703	$	1	$	185,301

Current period gross charge-offs	$	70	$	524	$	378	$	48	$	73	$	154	$	119	$	0	$	1,366

Home equity:
Performing	$	49,059	$	64,935	$	65,262	$	32,797	$	26,802	$	47,484	$	126,958	$	28,708	$	442,005
Nonperforming		0		140		10		244		280		611		942		532		2,759
Total home equity	$	49,059	$	65,075	$	65,272	$	33,041	$	27,082	$	48,095	$	127,900	$	29,240	$	444,764

Current period gross charge-offs	$	0	$	0	$	0	$	64	$	0	$	9	$	17	$	0	$	90

(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.

The following table details the balances in all other loan categories at December 31, 2022:


													Revolving		Revolving
													Loans		Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized		Converted
December 31, 2022	2022		2021		2020		2019		2018		Prior		Cost Basis		to 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.

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 loans as of September 30, 2023 and December 31, 2022 follows:


	September 30,		December 31,
(000’s omitted)	2023		2022
Loans with allowance allocation	$	3,484	$	0
Loans without allowance allocation		1,055		3,163
Carrying balance		4,539		3,163
Contractual balance		4,555		4,201
Specifically allocated allowance		470		0

The average carrying balance of individually assessed loans was $4.5 million and $3.2 million for the three months ended September 30, 2023 and 2022, respectively. The average carrying balance of individually assessed loans was $6.6 million and $12.2 million for the nine months ended September 30, 2023 and 2022, respectively. No interest income was recognized on individually assessed loans for the three or nine months ended September 30, 2023 and 2022.

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, payment delay, interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

In some cases, the Company provides multiple types of modifications on one loan. Typically, one type of modification, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another modification, such as principal forgiveness, may be granted. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. The estimate of allowance for credit losses includes historical losses from loans that were modified due to borrower financial difficulty, therefore a change to the allowance for credit losses is generally not recorded upon modification.

The following tables present the amortized cost basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below.


	Three Months Ended
	September 30, 2023
			Total Class of
	Term		Financing
(000s omitted except for percentages)	Extension		Receivable
Business lending	$	1,401	0.04	%
Total	$	1,401	0.01	%


	Nine Months Ended
	September 30, 2023
			Total Class of
	Term		Financing
(000s omitted except for percentages)	Extension		Receivable
Business lending	$	2,150	0.05	%
Consumer mortgage		198	0.01	%
Home equity		29	0.01	%
Total	$	2,377	0.03	%

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified at September 30, 2023.


					90+ Days Past
			Past Due 30 –		Due and Still		Non-
(000s omitted)	Current		89 Days		Accruing		Accrual		Total
Business lending	$	2,150	$	0	$	0	$	0	$	2,150
Consumer mortgage		0		0		0		198		198
Home equity		29		0		0		0		29
Total	$	2,179	$	0	$	0	$	198	$	2,377

The following tables present the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three and nine months ended September 30, 2023:


		Three Months Ended
		September 30, 2023
		Weighted-Average
		Term Extension (Years)
Business lending		10.0
Total		10.0


		Nine Months Ended
		September 30, 2023
		Weighted-Average
		Term Extension (Years)
Business lending		8.3
Consumer mortgage		3.1
Home equity		9.9
Total		7.8

There were no loans modified to borrowers with financial difficulty that had a payment default subsequent to modification during the three and nine months ended September 30, 2023.

Prior to the adoption of ASU 2022-02 on January 1, 2023, modified loans were reviewed by the Company to identify if a troubled debt restructuring (“TDR”) had 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. The amount of TDRs as of December 31, 2022 are presented below.


	December 31, 2022
(000’s omitted)	Nonaccrual			Accruing			Total
	#	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

The following table presents information related to loans modified in a TDR during the three months and nine months ended September 30, 2022. Of the loans noted in the table below, all consumer mortgage loans for the three months and nine months ended September 30, 2022 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.


	Three Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2022
	Number of	Outstanding		Number of	Outstanding
(000’s omitted)	loans modified	Balance		loans modified	Balance
Business lending	0	$	0	0	$	0
Consumer mortgage	1		184	5		459
Consumer indirect	6		71	12		127
Consumer direct	2		3	2		3
Home equity	0		0	1		6
Total	9	$	258	20	$	595

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, 2023 and 2022:


	Three Months Ended September 30, 2023
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	25,291	$	(139)	$	152	$	740	$	26,044
Consumer mortgage		14,553		(143)		3		558		14,971
Consumer indirect		17,808		(2,100)		1,319		1,263		18,290
Consumer direct		3,032		(554)		217		351		3,046
Home equity		1,600		(6)		2		(2)		1,594
Unallocated		1,000		0		0		0		1,000
Allowance for credit losses – loans		63,284		(2,942)		1,693		2,910		64,945
Liabilities for off-balance-sheet credit exposures		933		0		0		(32)		901
Total allowance for credit losses	$	64,217	$	(2,942)	$	1,693	$	2,878	$	65,846


	Three Months Ended September 30, 2022

	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	23,241	$	(495)	$	755	$	430	$	23,931
Consumer mortgage		12,631		(113)		4		1,296		13,818
Consumer indirect		14,378		(1,706)		1,386		2,960		17,018
Consumer direct		2,822		(342)		174		361		3,015
Home equity		1,470		(32)		11		132		1,581
Unallocated		1,000		0		0		0		1,000
Allowance for credit losses – loans		55,542		(2,688)		2,330		5,179		60,363
Liabilities for off-balance-sheet credit exposures		1,223		0		0		(118)		1,105
Total allowance for credit losses	$	56,765	$	(2,688)	$	2,330	$	5,061	$	61,468


	Nine Months Ended September 30, 2023
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	23,297	$	(618)	$	437	$	2,928	$	26,044
Consumer mortgage		14,343		(366)		35		959		14,971
Consumer indirect		17,852		(6,490)		4,342		2,586		18,290
Consumer direct		2,973		(1,366)		637		802		3,046
Home equity		1,594		(90)		13		77		1,594
Unallocated		1,000		0		0		0		1,000
Allowance for credit losses – loans		61,059		(8,930)		5,464		7,352		64,945
Liabilities for off-balance-sheet credit exposures		1,123		0		0		(222)		901
Total allowance for credit losses	$	62,182	$	(8,930)	$	5,464	$	7,130	$	65,846


	Nine Months Ended September 30, 2022
							PCD
	Beginning		Charge-				Allowance at				Ending
(000’s omitted)	balance		offs		Recoveries		Acquisition		Provision		balance
Business lending	$	22,995	$	(650)	$	1,249	$	71	$	266	$	23,931
Consumer mortgage		10,017		(230)		21		0		4,010		13,818
Consumer indirect		11,737		(5,183)		3,732		0		6,732		17,018
Consumer direct		2,306		(859)		577		0		991		3,015
Home equity		1,814		(69)		132		0		(296)		1,581
Unallocated		1,000		0		0		0		0		1,000
Allowance for credit losses – loans		49,869		(6,991)		5,711		71		11,703		60,363
Liabilities for off-balance-sheet credit exposures		803		0		0		0		302		1,105
Total allowance for credit losses	$	50,672	$	(6,991)	$	5,711	$	71	$	12,005	$	61,468

The allowance for credit losses for loans increased to $64.9 million at September 30, 2023 compared to $61.1 million at December 31, 2022 and $60.4 million at September 30, 2022, reflective of a stable economic forecast and an increase in loans outstanding.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $28.4 million at September 30, 2023 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. 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 with a four-quarter reversion to the historical mean to use as part of the economic forecast, and utilizes a two-quarter lag adjustment for economic factors that are not dependent on collateral values and no lag for factors that do utilize collateral values. 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 September 30, 2023. 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 modest GDP and household income growth and continued deterioration in residential real estate, commercial real estate and used auto prices.

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, risk rating changes, recent charge-off history and acquired loans as part of the review of estimated 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, 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, 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, charge-offs and acquired loans were considered.

At September 30, 2023, loans with a carrying amount of approximately $4.30 billion were pledged to secure certain borrowings with the FHLB and FRB. There were $315.8 million of borrowings outstanding under these arrangements at September 30, 2023.

During the nine months ended September 30, 2023, the Company did not purchase any loans, while the Company sold $4.6 million of secondary market eligible residential consumer mortgage loans during the period. During the nine months ended September 30, 2022, the Company purchased $436.9 million of loans in connection with the acquisition of Elmira, consisting of $125.3 million of business lending loans, $271.4 million of consumer mortgage loans, $9.4 million of consumer indirect loans, $12.5 million of consumer direct loans and $18.3 million of home equity loans. The Company sold $4.5 million of secondary market eligible residential consumer mortgage loans during the nine months ended September 30, 2022.