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LOANS

12 Months Ended

Dec. 31, 2019

NOTE D: LOANS

The segments of the Company’s loan portfolio are disaggregated into the following classes that allow management to monitor risk and performance:

●

Consumer mortgages consist primarily of fixed rate residential instruments, typically 10 – 30 years in contractual term, secured by first liens on real property.

●

Business lending is comprised of general purpose commercial and industrial loans including, but not limited to agricultural-related and dealer floor plans, as well as mortgages on commercial property.

●

Consumer indirect consists primarily of installment loans originated through selected dealerships and are secured by automobiles, marine and other recreational vehicles.

●

Consumer direct consists of all other loans to consumers such as personal installment loans and lines of credit.

●

Home equity products are consumer purpose installment loans or lines of credit most often secured by a first or second lien position on residential real estate with terms up to 30 years.

The balances of these classes at December 31 are summarized as follows:

(000’s omitted)	2019			2018
Business lending	$	2,775,876		$	2,396,977
Consumer mortgage		2,430,902			2,235,408
Consumer indirect		1,113,062			1,083,207
Consumer direct		184,378			178,820
Home equity		386,325			386,709
Gross loans, including deferred origination costs		6,890,543			6,281,121
Allowance for loan losses		(49,911	)		(49,284	)
Loans, net of allowance for loan losses	$	6,840,632		$	6,231,837

The Company had approximately $32.3 million and $28.4 million of net deferred loan origination costs included in gross loans as of December 31, 2019 and 2018, 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 2019 and 2018.

(000’s omitted)	2019			2018
Balance at beginning of year	$	20,661		$	22,344
New loans		5,720			2,600
Payments		(8,895	)		(4,283	)
Balance at end of year	$	17,486		$	20,661

Acquired loans

Acquired loans are recorded at fair value as of the date of purchase with no allowance for loan loss. The outstanding principal balance and the related carrying amount of acquired loans included in the Consolidated Statement of Condition at December 31 are as follows:

(000’s omitted)	2019		2018
Credit impaired acquired loans:
Outstanding principal balance	$	16,200	$	6,936
Carrying amount		11,797		5,446

Non-impaired acquired loans:
Outstanding principal balance		1,448,046		1,271,584
Carrying amount		1,428,154		1,247,691

Total acquired loans:
Outstanding principal balance		1,464,246		1,278,520
Carrying amount		1,439,951		1,253,137

The outstanding balance related to credit impaired acquired loans was $17.1 million and $7.4 million at December 31, 2019 and 2018, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000’s omitted)	2019			2018
Balance at beginning of year	$	437		$	976
Kinderhook acquisition		551			0
Accretion recognized		(493	)		(783	)
Net reclassification from non-accretable to accretable		138			244
Balance at end of year	$	633		$	437

Credit Quality

Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The following is an aged analysis of the Company’s past due loans by class as of December 31, 2019:

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

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

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

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

⁽¹⁾

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

The following is an aged analysis of the Company’s past due loans by class as of December 31, 2018:

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	$	5,261	$	179	$	4,872	$	10,312	$	1,608,515	$	1,618,827
Consumer mortgage		12,468		1,393		9,872		23,733		1,824,717		1,848,450
Consumer indirect		14,609		258		0		14,867		1,057,525		1,072,392
Consumer direct		1,778		48		0		1,826		173,948		175,774
Home equity		983		228		1,438		2,649		309,892		312,541
Total	$	35,099	$	2,106	$	16,182	$	53,387	$	4,974,597	$	5,027,984

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	$	974	$	0	$	3,498	$	4,472	$	5,446	$	768,232	$	778,150
Consumer mortgage		841		232		2,390		3,463		0		383,495		386,958
Consumer indirect		78		34		0		112		0		10,703		10,815
Consumer direct		115		4		0		119		0		2,927		3,046
Home equity		613		79		474		1,166		0		73,002		74,168
Total	$	2,621	$	349	$	6,362	$	9,332	$	5,446	$	1,238,359	$	1,253,137

⁽¹⁾

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

Pass	The condition of the borrower and the performance of the loans are satisfactory or better.

Special Mention

The condition of the borrower has deteriorated although the loan performs as agreed.

Classified

The condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate 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.

The following table shows the amount of business lending loans by credit quality category:

	December 31, 2019						December 31, 2018
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	1,655,280	$	832,693	$	2,487,973	$	1,439,337	$	702,493	$	2,141,830
Special mention		98,953		45,324		144,277		105,065		40,107		145,172
Classified		102,352		29,477		131,829		74,425		28,525		102,950
Doubtful		0		0		0		0		1,579		1,579
Acquired impaired		0		11,797		11,797		0		5,446		5,446
Total	$	1,856,585	$	919,291	$	2,775,876	$	1,618,827	$	778,150	$	2,396,977

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 current, 30 – 89 days past due and acquired impaired loans. Nonperforming loans include 90+ days past due and still accruing and nonaccrual loans. The following tables detail the balances in all loan categories except for business lending 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

The following table details the balances in all other loan categories at December 31, 2018:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,837,185	$	1,072,134	$	175,726	$	310,875	$	3,395,920
Nonperforming		11,265		258		48		1,666		13,237
Total	$	1,848,450	$	1,072,392	$	175,774	$	312,541	$	3,409,157

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	384,336	$	10,781	$	3,042	$	73,615	$	471,774
Nonperforming		2,622		34		4		553		3,213
Total	$	386,958	$	10,815	$	3,046	$	74,168	$	474,987

All loan classes are collectively evaluated for impairment except business lending, as described in Note A. A summary of individually evaluated impaired loans as of December 31, 2019 and 2018 is as follows:

(000’s omitted)	2019		2018
Loans with allowance allocation	$	0	$	3,956
Loans without allowance allocation		1,414		2,230
Carrying balance		1,414		6,186
Contractual balance		2,944		12,078
Specifically allocated allowance		0		956
Average impaired loans		5,078		7,618
Interest income recognized		0		0

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. With regard to determination of the amount of the allowance for loan losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of allowance for loan losses related to impaired loans for each portfolio segment within TDRs is the same as detailed previously.

In accordance with clarified guidance issued by the 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 2019, 2018 and 2017 was immaterial.

TDRs less than $0.5 million are collectively included in the general loan loss allocation and the qualitative review, if necessary. Commercial loans greater than $0.5 million are individually evaluated for impairment, and if necessary, a specific allocation of the allowance for loan losses is provided.

Information regarding TDRs as of December 31, 2019 and December 31, 2018 is as follows

	December 31, 2019												December 31, 2018
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Business lending		8	$	681		3	$	201		11	$	882		4	$	162		2	$	165		6	$	327
Consumer mortgage		59		2,638		47		1,892		106		4,530		46		1,986		46		1,769		92		3,755
Consumer indirect		0		0		84		941		84		941		0		0		77		857		77		857
Consumer direct		0		0		23		101		23		101		0		0		22		71		22		71
Home equity		13		290		11		238		24		528		12		240		9		275		21		515
Total		80	$	3,609		168	$	3,373		248	$	6,982		62	$	2,388		156	$	3,137		218	$	5,525

The following table presents information related to loans modified in a TDR during the years ended December 31, 2019 and 2018. Of the loans noted in the table below, all consumer mortgage loans for the years ended December 31, 2019 and December 31, 2018, were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.

	December 31, 2019				December 31, 2018
(000’s omitted)		#	Amount			#	Amount
Business lending		6	$	685		2	$	103
Consumer mortgage		22		1,519		9		470
Consumer indirect		33		364		32		320
Consumer direct		6		49		6		24
Home equity		6		181		3		118
Total		73	$	2,798		52	$	1,035

Allowance for Loan Losses

The allowance for loan losses is general in nature and is available to absorb losses from any loan type despite the analysis below. The following presents by class the activity in the allowance for loan losses:

(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Balance at December 31, 2016	$	17,220		$	10,094		$	13,782		$	2,979		$	2,399		$	651		$	108		$	47,233
Charge-offs		(4,959	)		(707	)		(8,456	)		(2,081	)		(284	)		0			(270	)		(16,757	)
Recoveries		656			50			4,516			849			52			0			0			6,123
Provision		4,340			1,028			3,626			1,292			(60	)		449			309			10,984
Balance at December 31, 2017		17,257			10,465			13,468			3,039			2,107			1,100			147			47,583
Charge-offs		(3,566	)		(836	)		(8,382	)		(1,777	)		(544	)		0			(381	)		(15,486	)
Recoveries		485			136			4,874			807			48			0			0			6,350
Provision		4,346			359			4,406			1,026			533			(100	)		267			10,837
Balance at December 31, 2018		18,522			10,124			14,366			3,095			2,144			1,000			33			49,284
Charge-offs		(2,334	)		(1,372	)		(7,631	)		(1,945	)		(445	)		0			0			(13,727	)
Recoveries		826			60			4,180			710			148			0			0			5,924
Provision		2,412			1,457			2,797			1,395			282			(43	)		130			8,430
Balance at December 31, 2019	$	19,426		$	10,269		$	13,712		$	3,255		$	2,129		$	957		$	163		$	49,911