NOTE E: LOANS

The segments of the Company's loan portfolio are disaggregated into classes that allow management to monitor risk and performance. Consumer mortgages consist primarily of fixed rate residential instruments, typically 15 - 30 years in contractual term, secured by first liens on real property. Business lending is comprised of general purpose commercial and industrial loans including agricultural-related and dealer floor plans, as well as mortgages on commercial property. Consumer installment - indirect consists primarily of loans originated through selected dealerships and are secured by automobiles, marine and other recreational vehicles. Consumer installment - direct are 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 of 15 years or less. Loans are summarized as follows:

	June 30,			December 31,
(000's omitted)	2012			2011
Consumer mortgage	$	1,289,155		$	1,214,621
Business lending		1,216,309			1,226,439
Consumer installment - indirect		591,249			556,955
Consumer installment - direct		154,402			149,170
Home equity		310,555			323,840
Gross loans, including deferred origination costs		3,561,670			3,471,025
Allowance for loan losses		(41,828	)		(42,213	)
Loans, net of allowance for loan losses	$	3,519,842		$	3,428,812

The outstanding balance related to credit impaired acquired loans was $23.9 million and $25.9 million at June 30, 2012 and December 31, 2011, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

Balance at December 31, 2011	$	2,610
Accretion recognized, to-date		(860	)
Net reclassification to accretable from nonaccretable		261
Balance at June 30, 2012	$	2,011

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, 2012:

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

(000's omitted)	30 - 89 Days		90+ Days Past Due and Still Accruing		Nonaccrual		Troubled Debt Restructure		Total Past Due		Current		Total Loans
Consumer mortgage	$	12,174	$	2,516	$	6,484	$	0	$	21,174	$	1,197,920	$	1,219,094
Business lending		4,473		138		12,965		1,986		19,562		962,886		982,448
Consumer installment - indirect		6,798		38		0		0		6,836		570,213		577,049
Consumer installment - direct		1,414		36		0		0		1,450		146,099		147,549
Home equity		1,578		342		960		0		2,880		277,880		280,760
Total	$	26,437	$	3,070	$	20,409	$	1,986	$	51,902	$	3,154,998	$	3,206,900

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

(000's omitted)	30 - 89 Days		90+ Days Past Due and Still Accruing		Nonaccrual		Total Past Due		Acquired Impaired(1)		Current		Total Loans
Consumer mortgage	$	479	$	367	$	997	$	1,843	$	-	$	68,218	$	70,061
Business lending		782		-		4,795		5,577		15,168		213,116		233,861
Consumer installment - indirect		527		-		1		528		-		13,672		14,200
Consumer installment - direct		167		-		-		167		-		6,686		6,853
Home equity		335		-		383		718		-		29,077		29,795
Total	$	2,290	$	367	$	6,176	$	8,833	$	15,168	$	330,769	$	354,770

(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, 2011:

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

(000's omitted)	30 - 89 Days		90+ Days Past Due and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Consumer mortgage	$	16,026	$	2,144	$	5,755	$	23,925	$	1,111,795	$	1,135,720
Business lending		4,799		389		10,966		16,154		953,745		969,899
Consumer installment - indirect		8,847		32		0		8,879		527,030		535,909
Consumer installment - direct		1,912		95		0		2,007		138,500		140,507
Home equity		2,269		218		864		3,351		290,093		293,444
Total	$	33,853	$	2,878	$	17,585	$	54,316	$	3,021,163	$	3,075,479

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

(000's omitted)	30 - 89 Days		90+ Days Past Due and Still Accruing		Nonaccrual		Total Past Due		Acquired Impaired(1)		Current		Total Loans
Consumer mortgage	$	985	$	27	$	765	$	1,777	$	0	$	77,124	$	78,901
Business lending		3,473		10		9,592		13,075		17,428		226,037		256,540
Consumer installment - indirect		737		0		2		739		0		20,307		21,046
Consumer installment - direct		167		0		0		167		0		8,496		8,663
Home equity		465		175		341		981		0		29,415		30,396
Total	$	5,827	$	212	$	10,700	$	16,739	$	17,428	$	361,379	$	395,546

(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". 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. The following are the definitions of the Company's credit quality indicators:

Pass	In general, the condition of the borrower and the performance of the loans are satisfactory or better.

Special Mention

In general, the condition of the borrower has deteriorated although the loan performs as agreed.

Classified

In general, the condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate, if deficiencies are not corrected.

Doubtful

In general, the condition of the borrower has deteriorated to the point that collection of the balance is improbable based on currently facts and conditions.

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

	June 30, 2012						December 31, 2011
(000's omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	760,690	$	141,785	$	902,475	$	732,873	$	157,494	$	890,367
Special mention		108,703		34,065		142,768		118,800		47,890		166,690
Classified		112,678		42,843		155,521		118,226		33,728		151,954
Doubtful		377		-		377		0		0		0
Acquired impaired		-		15,168		15,168		0		17,428		17,428
Total	$	982,448	$	233,861	$	1,216,309	$	969,899	$	256,540	$	1,226,439

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 non-accrual loans.

The following table details the balances in all other loan categories at June 30, 2012:

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

(000's omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,210,094	$	577,011	$	147,513	$	279,458	$	2,214,076
Nonperforming		9,000		38		36		1,302		10,376
Total	$	1,219,094	$	577,049	$	147,549	$	280,760	$	2,224,452

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

(000's omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	68,697	$	14,199	$	6,853	$	29,412	$	119,161
Nonperforming		1,364		1		0		383		1,748
Total	$	70,061	$	14,200	$	6,853	$	29,795	$	120,909

The following table details the balances in all other loan categories at December 31, 2011:

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

(000's omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,127,821	$	535,877	$	140,412	$	292,362	$	2,096,472
Nonperforming		7,899		32		95		1,082		9,108
Total	$	1,135,720	$	535,909	$	140,507	$	293,444	$	2,105,580

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

(000's omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	78,109	$	21,044	$	8,663	$	29,880	$	137,696
Nonperforming		792		2		0		516		1,310
Total	$	78,901	$	21,046	$	8,663	$	30,396	$	139,006

All loan classes are collectively evaluated for impairment except business lending, as described in Note B. A summary of individually evaluated impaired loans as of June 30, 2012 and December 31, 2011 follows:

	June 30,		December 31,
(000's omitted)	2012		2011
Loans with allowance allocation	$	2,424	$	4,118
Loans without allowance allocation		13,245		2,308
Carrying balance		15,669		6,426
Contractual balance		20,818		8,527
Specifically allocated allowance		604		895

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. 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 impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.

During the three months ended June 30, 2012 the Company modified business lending agreement that was on nonaccrual, via an increase in the term without a change in interest rate or forgiveness of principal or accrued interest, which it considers to be a TDR. The balance of the modified loan arrangement is included in the loans without reserve above. There were no TDRs that subsequently defaulted during the three and six months ended June 30, 2012. There were no commitments as of June 30, 2012 to borrowers who have terms modified in a TDR.

Allowance for Loan Losses

The following presents by class the activity in the allowance for loan losses:

				Three Months Ended June 30, 2012
	Consumer			Business			Consumer			Consumer			Home					Acquired
(000's omitted)	Mortgage			Lending			Indirect			Direct			Equity			Unallocated		Impaired		Total
Beginning balance	$	4,885		$	21,413		$	7,938		$	3,066		$	1,281		$	2,770	$	456	$	41,809
Charge-offs		(150	)		(1,662	)		(1,134	)		(273	)		(65	)		0		0		(3,284	)
Recoveries		4			178			782			182			2			0		0		1,148
Provision		1,574			(1,458	)		1,084			248			174			342		191		2,155
Ending balance	$	6,313		$	18,471		$	8,670		$	3,223		$	1,392		$	3,112	$	647	$	41,828

				Three Months Ended June 30, 2011
	Consumer			Business			Consumer			Consumer			Home					Acquired
(000's omitted)	Mortgage			Lending			Indirect			Direct			Equity			Unallocated		Impaired		Total
Beginning balance	$	3,099		$	21,559		$	9,639		$	3,794		$	860		$	3,196	$	0	$	42,147
Charge-offs		(108	)		(727	)		(930	)		(203	)		(95	)		0		0		(2,063	)
Recoveries		7			232			976			178			4			0		0		1,397
Provision		288			(115	)		592			109			142			34		0		1,050
Ending balance	$	3,286		$	20,949		$	10,277		$	3,878		$	911		$	3,230	$	0	$	42,531

				Six Months Ended June 30, 2012
	Consumer			Business			Consumer			Consumer			Home						Acquired
(000's omitted)	Mortgage			Lending			Indirect			Direct			Equity			Unallocated			Impaired		Total
Beginning balance	$	4,651		$	20,574		$	8,960		$	3,290		$	1,130		$	3,222		$	386	$	42,213
Charge-offs		(419	)		(3,227	)		(2,173	)		(730	)		(181	)		0			0		(6,730	)
Recoveries		17			333			1,824			354			18			0			0		2,546
Provision		2,064			791			59			309			425			(110	)		261		3,799
Ending balance	$	6,313		$	18,471		$	8,670		$	3,223		$	1,392		$	3,112		$	647	$	41,828

				Six Months Ended June 30, 2011
	Consumer			Business			Consumer			Consumer			Home						Acquired
(000's omitted)	Mortgage			Lending			Indirect			Direct			Equity			Unallocated			Impaired		Total
Beginning balance	$	2,451		$	22,326		$	9,922		$	3,977		$	689		$	3,145		$	0	$	42,510
Charge-offs		(344	)		(1,570	)		(1,956	)		(620	)		(131	)		0			0		(4,621	)
Recoveries		26			318			1,793			394			11			0			0		2,542
Provision		1,153			(125	)		518			127			342			85			0		2,100
Ending balance	$	3,286		$	20,949		$	10,277		$	3,878		$	911		$	3,230		$	0	$	42,531

Despite the above allocation, the allowance for loan losses is general in nature and is available to absorb losses from any loan type.