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, municipal lending, 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)	June 30, 2018			December 31, 2017
Business lending	$	2,384,629		$	2,424,223
Consumer mortgage		2,210,051			2,220,298
Consumer indirect		1,063,679			1,011,978
Consumer direct		181,217			179,929
Home equity		398,433			420,329
Gross loans, including deferred origination costs		6,238,009			6,256,757
Allowance for loan losses		(49,618	)		(47,583	)
Loans, net of allowance for loan losses	$	6,188,391		$	6,209,174

The outstanding balance related to credit impaired acquired loans was $7.9 million and $13.4 million at June 30, 2018 and December 31, 2017, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000’s omitted)
Balance at December 31, 2017	$	976
Accretion recognized, year-to-date		(688	)
Net reclassification between accretable and non-accretable		326
Balance at June 30, 2018	$	614

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 June 30, 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	$	1,185	$	3,789	$	3,830	$	8,804	$	1,483,884	$	1,492,688
Consumer mortgage		9,066		1,992		9,526		20,584		1,762,980		1,783,564
Consumer indirect		10,254		124		5		10,383		1,038,385		1,048,768
Consumer direct		1,297		20		0		1,317		175,977		177,294
Home equity		1,156		318		1,283		2,757		311,071		313,828
Total	$	22,958	$	6,243	$	14,644	$	43,845	$	4,772,297	$	4,816,142

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	$	784	$	0	$	3,821	$	4,605	$	6,004	$	881,332	$	891,941
Consumer mortgage		1,444		110		3,069		4,623		0		421,864		426,487
Consumer indirect		94		35		0		129		0		14,782		14,911
Consumer direct		80		0		0		80		0		3,843		3,923
Home equity		580		144		1,273		1,997		0		82,608		84,605
Total	$	2,982	$	289	$	8,163	$	11,434	$	6,004	$	1,404,429	$	1,421,867

(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, 2017:

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	$	2,283	$	571	$	3,944	$	6,798	$	1,369,801	$	1,376,599
Consumer mortgage		13,564		1,500		10,722		25,786		1,728,823		1,754,609
Consumer indirect		14,197		295		0		14,492		977,344		991,836
Consumer direct		1,875		48		0		1,923		172,556		174,479
Home equity		1,116		94		1,354		2,564		319,576		322,140
Total	$	33,035	$	2,508	$	16,020	$	51,563	$	4,568,100	$	4,619,663

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	$	4,661	$	0	$	4,328	$	8,989	$	10,115	$	1,028,520	$	1,047,624
Consumer mortgage		2,603		26		3,066		5,695		0		459,994		465,689
Consumer indirect		245		8		0		253		0		19,889		20,142
Consumer direct		100		0		0		100		0		5,350		5,450
Home equity		634		170		1,326		2,130		0		96,059		98,189
Total	$	8,243	$	204	$	8,720	$	17,167	$	10,115	$	1,609,812	$	1,637,094

(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:

	June 30, 2018						December 31, 2017
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	1,302,009	$	805,098	$	2,107,107	$	1,170,156	$	963,981	$	2,134,137
Special mention		114,305		47,412		161,717		129,076		37,321		166,397
Classified		76,147		31,829		107,976		77,367		34,628		111,995
Doubtful		227		1,598		1,825		0		1,579		1,579
Acquired impaired		0		6,004		6,004		0		10,115		10,115
Total	$	1,492,688	$	891,941	$	2,384,629	$	1,376,599	$	1,047,624	$	2,424,223

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 June 30, 2018:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,772,046	$	1,048,639	$	177,274	$	312,227	$	3,310,186
Nonperforming		11,518		129		20		1,601		13,268
Total	$	1,783,564	$	1,048,768	$	177,294	$	313,828	$	3,323,454

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	423,308	$	14,876	$	3,923	$	83,188	$	525,295
Nonperforming		3,179		35		0		1,417		4,631
Total	$	426,487	$	14,911	$	3,923	$	84,605	$	529,926

The following table details the balances in all other loan categories at December 31, 2017:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,742,387	$	991,541	$	174,431	$	320,692	$	3,229,051
Nonperforming		12,222		295		48		1,448		14,013
Total	$	1,754,609	$	991,836	$	174,479	$	322,140	$	3,243,064

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	462,597	$	20,134	$	5,450	$	96,693	$	584,874
Nonperforming		3,092		8		0		1,496		4,596
Total	$	465,689	$	20,142	$	5,450	$	98,189	$	589,470

All loan classes are collectively evaluated for impairment except business lending. A summary of individually evaluated impaired loans as of June 30, 2018 and December 31, 2017 follows:

(000’s omitted)	June 30, 2018		December 31, 2017
Loans with allowance allocation	$	4,496	$	5,125
Loans without allowance allocation		1,173		884
Carrying balance		5,669		6,009
Contractual balance		10,225		9,165
Specifically allocated allowance		1,094		804

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 six months ended June 30, 2018 and 2017 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 June 30, 2018 and December 31, 2017 is as follows:

	June 30, 2018												December 31, 2017
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Business lending		5	$	210		4	$	346		9	$	556		8	$	218		7	$	501		15	$	719
Consumer mortgage		47		2,264		43		1,689		90		3,953		51		2,265		44		1,750		95		4,015
Consumer indirect		0		0		70		796		70		796		0		0		71		883		71		883
Consumer direct		0		0		26		73		26		73		0		0		25		69		25		69
Home equity		11		226		8		284		19		510		13		245		7		204		20		449
Total		63	$	2,700		151	$	3,188		214	$	5,888		72	$	2,728		154	$	3,407		226	$	6,135

The following table presents information related to loans modified in a TDR during the three months and six months ended June 30, 2018 and 2017. Of the loans noted in the table below, all loans for the three months and six months ended June 30, 2018 and 2017 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.

	Three Months Ended June 30, 2018				Three Months Ended June 30, 2017
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Business lending		0	$	0		3	$	363
Consumer mortgage		4		452		1		43
Consumer indirect		8		70		8		80
Consumer direct		3		12		1		0
Home equity		1		86		0		0
Total		16	$	620		13	$	486

	Six Months Ended June 30, 2018				Six Months Ended June 30, 2017
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Business lending		1	$	93		3	$	363
Consumer mortgage		4		452		8		545
Consumer indirect		11		92		14		156
Consumer direct		5		14		4		14
Home equity		1		86		2		98
Total		22	$	737		31	$	1,176

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 June 30, 2018
(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Beginning balance	$	17,607		$	10,382		$	13,698		$	2,984		$	2,040		$	1,084		$	308		$	48,103
Charge-offs		(260	)		(245	)		(1,383	)		(364	)		(47	)		0			(323	)		(2,622	)
Recoveries		114			54			1,347			167			7			0			0			1,689
Provision		978			282			762			377			15			(14	)		48			2,448
Ending balance	$	18,439		$	10,473		$	14,424		$	3,164		$	2,015		$	1,070		$	33		$	49,618

	Three Months Ended June 30, 2017
(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated		Acquired Impaired			Total
Beginning balance	$	16,857		$	10,149		$	13,996		$	2,852		$	2,359		$	773	$	110		$	47,096
Charge-offs		(245	)		(258	)		(1,695	)		(470	)		(190	)		0		(183	)		(3,041	)
Recoveries		283			11			1,452			182			7			0		0			1,935
Provision		335			295			165			381			66			83		136			1,461
Ending balance	$	17,230		$	10,197		$	13,918		$	2,945		$	2,242		$	856	$	63		$	47,451

	Six Months Ended June 30, 2018
(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Beginning balance	$	17,257		$	10,465		$	13,468		$	3,039		$	2,107		$	1,100		$	147		$	47,583
Charge-offs		(1,928	)		(444	)		(3,667	)		(860	)		(103	)		0			(367	)		(7,369	)
Recoveries		312			62			2,498			389			16			0			0			3,277
Provision		2,798			390			2,125			596			(5	)		(30	)		253			6,127
Ending balance	$	18,439		$	10,473		$	14,424		$	3,164		$	2,015		$	1,070		$	33		$	49,618

	Six Months Ended June 30, 2017
(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated		Acquired Impaired			Total
Beginning balance	$	17,220		$	10,094		$	13,782		$	2,979		$	2,399		$	651	$	108		$	47,233
Charge-offs		(938	)		(343	)		(3,642	)		(888	)		(228	)		0		(184	)		(6,223	)
Recoveries		354			18			2,321			427			32			0		0			3,152
Provision		594			428			1,457			427			39			205		139			3,289
Ending balance	$	17,230		$	10,197		$	13,918		$	2,945		$	2,242		$	856	$	63		$	47,451