NOTE E:

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 properties.

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 are summarized as follows:

(000's omitted)	March 31, 2016			December 31, 2015
Consumer mortgage	$	1,777,792		$	1,769,754
Business lending		1,509,421			1,497,271
Consumer indirect		941,151			935,760
Consumer direct		189,535			195,076
Home equity		403,273			403,514
Gross loans, including deferred origination costs		4,821,172			4,801,375
Allowance for loan losses		(45,596	)		(45,401	)
Loans, net of allowance for loan losses	$	4,775,576		$	4,755,974

The outstanding balance related to credit impaired acquired loans was $8.3 million and $8.5 million at March 31, 2016 and December 31, 2015, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000’s omitted)
Balance at December 31, 2015	$	810
Accretion recognized, year-to-date		(140	)
Net reclassification to accretable from non-accretable		43
Balance at March 31, 2016	$	713

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 March 31, 2016:

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
Consumer mortgage	$	8,452	$	1,214	$	11,642	$	21,308	$	1,574,883	$	1,596,191
Business lending		2,560		46		6,417		9,023		1,245,975		1,254,998
Consumer indirect		7,793		183		0		7,976		892,160		900,136
Consumer direct		858		53		1		912		173,868		174,780
Home equity		724		341		1,985		3,050		301,148		304,198
Total	$	20,387	$	1,837	$	20,045	$	42,269	$	4,188,034	$	4,230,303

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
Consumer mortgage	$	1,098	$	342	$	1,884	$	3,324	$	0	$	178,277	$	181,601
Business lending		129		0		1,420		1,549		7,174		245,700		254,423
Consumer indirect		126		0		0		126		0		40,889		41,015
Consumer direct		122		6		13		141		0		14,614		14,755
Home equity		425		142		403		970		0		98,105		99,075
Total	$	1,900	$	490	$	3,720	$	6,110	$	7,174	$	577,585	$	590,869

(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, 2015:

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
Consumer mortgage	$	10,482	$	1,411	$	11,394	$	23,287	$	1,558,171	$	1,581,458
Business lending		4,442		126		5,381		9,949		1,223,679		1,233,628
Consumer indirect		11,575		102		0		11,677		878,662		890,339
Consumer direct		1,414		51		1		1,466		176,585		178,051
Home equity		1,093		111		2,029		3,233		297,012		300,245
Total	$	29,006	$	1,801	$	18,805	$	49,612	$	4,134,109	$	4,183,721

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
Consumer mortgage	$	1,373	$	394	$	1,396	$	3,163	$	0	$	185,133	$	188,296
Business lending		535		0		1,186		1,721		7,299		254,623		263,643
Consumer indirect		245		0		0		245		0		45,176		45,421
Consumer direct		140		0		14		154		0		16,871		17,025
Home equity		636		0		327		963		0		102,306		103,269
Total	$	2,929	$	394	$	2,923	$	6,246	$	7,299	$	604,109	$	617,654

(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”, or “classified”, or “doutful”. 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:

	March 31, 2016						December 31, 2015
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	1,049,441	$	202,571	$	1,252,012	$	1,048,364	$	219,374	$	1,267,738
Special mention		133,939		27,315		161,254		124,768		20,007		144,775
Classified		71,528		17,363		88,891		60,181		16,963		77,144
Doubtful		90		0		90		315		0		315
Acquired impaired		0		7,174		7,174		0		7,299		7,299
Total	$	1,254,998	$	254,423	$	1,509,421	$	1,233,628	$	263,643	$	1,497,271

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 March 31, 2016:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,583,335	$	899,953	$	174,726	$	301,872	$	2,959,886
Nonperforming		12,856		183		54		2,326		15,419
Total	$	1,596,191	$	900,136	$	174,780	$	304,198	$	2,975,305

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	179,375	$	41,015	$	14,736	$	98,530	$	333,656
Nonperforming		2,226		0		19		545		2,790
Total	$	181,601	$	41,015	$	14,755	$	99,075	$	336,446

The following table details the balances in all other loan categories at December 31, 2015:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,568,653	$	890,237	$	177,999	$	298,105	$	2,934,994
Nonperforming		12,805		102		52		2,140		15,099
Total	$	1,581,458	$	890,339	$	178,051	$	300,245	$	2,950,093

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	186,506	$	45,421	$	17,011	$	102,942	$	351,880
Nonperforming		1,790		0		14		327		2,131
Total	$	188,296	$	45,421	$	17,025	$	103,269	$	354,011

All loan classes are collectively evaluated for impairment except business lending, as described in Note C. A summary of individually evaluated impaired loans as of March 31, 2016 and December 31, 2015 follows:

(000’s omitted)	March 31, 2016		December 31, 2015
Loans with allowance allocation	$	1,765	$	0
Loans without allowance allocation		2,068		2,376
Carrying balance		3,833		2,376
Contractual balance		5,094		3,419
Specifically allocated allowance		340		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 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 months ended March 31, 2016 and 2015 was immaterial.

TDRs that are less than $0.5 million are collectively included in the general loan loss allocation and the qualitative review. 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 loan losses is provided. As a result, the determination of the amount of allowance for loan losses related to TDRs is the same as detailed in the critical accounting policies.

Information regarding TDRs as of March 31, 2016 and December 31, 2015 is as follows:

	March 31, 2016												December 31, 2015
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Consumer mortgage		40	$	1,796		45	$	2,162		85	$	3,958		37	$	1,472		54	$	2,486		91	$	3,958
Business lending		8		202		5		718		13		920		8		217		6		737		14		954
Consumer indirect		0		0		78		789		78		789		0		0		77		691		77		691
Consumer direct		0		0		12		26		12		26		0		0		32		37		32		37
Home equity		13		200		12		244		25		444		10		203		14		301		24		504
Total		61	$	2,198		152	$	3,939		213	$	6,137		55	$	1,892		183	$	4,252		238	$	6,144

The following table presents information related to loans modified in a TDR during the three months ended March 31, 2016 and 2015. Of the loans noted in the table below, all loans for the three months ended March 31, 2016 and 2015 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.

	Three Months Ended March 31, 2016				Three Months Ended March 31, 2015
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Consumer mortgage		4	$	266		4	$	213
Business lending		0		0		0		0
Consumer indirect		12		238		7		101
Consumer direct		0		0		1		4
Home equity		1		0		1		15
Total		17	$	504		13	$	333

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:

	Three Months Ended March 31, 2016
(000’s omitted)	Consumer Mortgage			Business Lending			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Beginning balance	$	10,198		$	15,749		$	12,422		$	2,997		$	2,666		$	1,201		$	168		$	45,401
Charge-offs		(88	)		(210	)		(1,854	)		(462	)		(57	)		0			0			(2,671	)
Recoveries		45			136			1,114			221			9			0			0			1,525
Provision		(7	)		1,020			652			119			(38	)		(322	)		(83	)		1,341
Ending balance	$	10,148		$	16,695		$	12,334		$	2,875		$	2,580		$	879		$	85		$	45,596

	Three Months Ended March 31, 2015
(000’s omitted)	Consumer Mortgage			Business Lending			Consumer Indirect			Consumer Direct			Home Equity			Unallocated		Acquired Impaired		Total
Beginning balance	$	10,286		$	15,787		$	11,544		$	3,083		$	2,701		$	1,767	$	173	$	45,341
Charge-offs		(443	)		(133	)		(1,427	)		(345	)		(66	)		0		0		(2,414	)
Recoveries		21			82			1,152			193			7			0		0		1,455
Provision		369			(331	)		(23	)		(52	)		21			616		23		623
Ending balance	$	10,233		$	15,405		$	11,246		$	2,879		$	2,663		$	2,383	$	196	$	45,005