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 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, 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 are summarized as follows:

	March 31,	December 31,
(000's omitted)	2014	2013
Consumer mortgage	$1,579,322	$1,582,058
Business lending	1,246,070	1,260,364
Consumer indirect	755,849	740,002
Consumer direct	174,357	180,139
Home equity	340,760	346,520
Gross loans, including deferred origination costs	4,096,358	4,109,083
Allowance for loan losses	(44,197)	(44,319)
Loans, net of allowance for loan losses	$4,052,161	$4,064,764

The outstanding balance related to credit impaired acquired loans was $14.2 million and $15.5 million at March 31, 2014 and December 31, 2013, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000’s omitted)
Balance at December 31, 2013	$997
Accretion recognized, year-to-date	(203)
Net reclassification to accretable from nonaccretable	90
Balance at March 31, 2014	$884

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, 2014:

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

	Past Due	90+ Days Past
	30 – 89	Due and		Total
(000’s omitted)	Days	Still Accruing	Nonaccrual	Past Due	Current	Total Loans
Consumer mortgage	$8,924	$953	$12,605	$22,482	$1,479,605	$1,502,087
Business lending	5,440	54	3,119	8,613	1,070,832	1,079,445
Consumer indirect	7,550	680	13	8,243	744,818	753,061
Consumer direct	1,196	53	3	1,252	165,332	166,584
Home equity	1,359	86	2,015	3,460	269,469	272,929
Total	$24,469	$1,826	$17,755	$44,050	$3,730,056	$3,774,106

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

	Past Due	90+ Days Past
	30 – 89	Due and		Total	Acquired
(000’s omitted)	Days	Still Accruing	Nonaccrual	Past Due	Impaired(1)	Current	Total Loans
Consumer mortgage	$891	$143	$1,828	$2,862	$0	$74,373	$77,235
Business lending	1,278	0	1,618	2,896	6,143	157,586	166,625
Consumer indirect	130	2	0	132	0	2,656	2,788
Consumer direct	283	6	0	289	0	7,484	7,773
Home equity	539	0	468	1,007	0	66,824	67,831
Total	$3,121	$151	$3,914	$7,186	$6,143	$308,923	$322,252

(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, 2013:

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

	Past Due	90+ Days Past
	30 – 89	Due and		Total
(000’s omitted)	Days	Still Accruing	Nonaccrual	Past Due	Current	Total Loans
Consumer mortgage	$16,589	$1,253	$11,097	$28,939	$1,473,320	$1,502,259
Business lending	2,960	164	3,083	6,207	1,079,818	1,086,025
Consumer indirect	11,647	738	14	12,399	723,878	736,277
Consumer direct	1,858	90	4	1,952	169,452	171,404
Home equity	2,635	173	1,867	4,675	271,235	275,910
Total	$35,689	$2,418	$16,065	$54,172	$3,717,703	$3,771,875

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

	Past Due	90+ Days Past
	30 – 89	Due and		Total	Acquired
(000’s omitted)	Days	Still Accruing	Nonaccrual	Past Due	Impaired(1)	Current	Total Loans
Consumer mortgage	$1,857	$85	$1,463	$3,405	$0	$76,394	$79,799
Business lending	531	0	1,472	2,003	7,090	165,246	174,339
Consumer indirect	157	17	0	174	0	3,551	3,725
Consumer direct	385	27	0	412	0	8,323	8,735
Home equity	592	8	473	1,073	0	69,537	70,610
Total	$3,522	$137	$3,408	$7,067	$7,090	$323,051	$337,208

(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. 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, 2014			December 31, 2013
(000’s omitted)	Legacy	Acquired	Total	Legacy	Acquired	Total
Pass	$900,083	$109,175	$1,009,258	$908,885	$116,271	$1,025,156
Special mention	98,874	24,672	123,546	93,600	24,264	117,864
Classified	80,362	26,635	106,997	83,379	26,714	110,093
Doubtful	126	0	126	161	0	161
Acquired impaired	0	6,143	6,143	0	7,090	7,090
Total	$1,079,445	$166,625	$1,246,070	$1,086,025	$174,339	$1,260,364

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 table details the balances in all other loan categories at March 31, 2014:

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

	Consumer	Consumer	Consumer	Home
(000’s omitted)	Mortgage	Indirect	Direct	Equity	Total
Performing	$1,488,529	752,368	166,528	270,828	$2,678,253
Nonperforming	13,558	693	56	2,101	16,408
Total	$1,502,087	$753,061	$166,584	$272,929	$2,694,661

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

	Consumer	Consumer	Consumer	Home
(000’s omitted)	Mortgage	Indirect	Direct	Equity	Total
Performing	$75,264	2,786	7,767	67,363	$153,180
Nonperforming	1,971	2	6	468	2,447
Total	$77,235	$2,788	$7,773	$67,831	$155,627

The following table details the balances in all other loan categories at December 31, 2013:

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

	Consumer	Consumer	Consumer	Home
(000’s omitted)	Mortgage	Indirect	Direct	Equity	Total
Performing	$1,489,909	$735,525	$171,310	$273,870	$2,670,614
Nonperforming	12,350	752	94	2,040	15,236
Total	$1,502,259	$736,277	$171,404	$275,910	$2,685,850

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

	Consumer	Consumer	Consumer	Home
(000’s omitted)	Mortgage	Indirect	Direct	Equity	Total
Performing	$78,251	$3,708	$8,708	$70,129	$160,796
Nonperforming	1,548	17	27	481	2,073
Total	$79,799	$3,725	$8,735	$70,610	$162,869

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, 2014 and December 31, 2013 follows:

	March 31,	December 31,
(000’s omitted)	2014	2013
Loans with allowance allocation	$1,543	$945
Loans without allowance allocation	0	600
Carrying balance	1,543	1,545
Contractual balance	1,851	1,852
Specifically allocated allowance	176	50

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 allowance for loan losses related to impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.

During 2012, clarified guidance was issued by the OCC addressing the accounting for certain loans that have been discharged in Chapter 7 bankruptcy. In accordance with this clarified guidance, 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 2014 and 2013 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. At March 31, 2014, there were no impaired loans that were considered a TDR.

Information regarding troubled debt restructurings as of March 31, 2014 and December 31, 2013 is as follows:

	March 31, 2014						December 31, 2013
(000’s omitted)	Nonaccrual		Accruing		Total		Nonaccrual		Accruing		Total
	#	Amount	#	Amount	#	Amount	#	Amount	#	Amount	#	Amount
Consumer mortgage	37	$1,918	43	$1,878	80	$3,796	31	$1,682	48	$2,171	79	$3,853
Business lending	5	300	1	46	6	346	4	162	1	47	5	209
Consumer indirect	0	0	91	651	91	651	0	0	98	692	98	692
Consumer direct	0	0	42	113	42	113	0	0	46	116	46	116
Home equity	10	226	16	316	26	542	12	202	20	363	32	565
Total	52	$2,444	193	$3,004	245	$5,448	47	$2,046	213	$3,389	260	$5,435

The following table presents information related to loans modified in a TDR during the three months ended March 31, 2014 and 2013. Of the loans noted in the table below, all but two loans for the three months ended March 31, 2014, and no loans for the three months ended March 31 2013, were modified due to a Chapter 7 bankruptcy as described previously. The two exceptions were a business loan restructured via an extension of term and a consumer mortgage restructured via an extension of term and a rate concession. The financial effects of these restructurings were immaterial.

	Three Month Ended March 31, 2014		Three Month Ended March 31, 2013
(000’s omitted)	Number of loans modified	Outstanding Balance	Number of loans modified	Outstanding Balance
Consumer mortgage	11	$533	13	$1,002
Business lending	4	192	3	72
Consumer indirect	12	112	11	107
Consumer direct	2	10	9	31
Home equity	1	30	5	97
Total	30	$877	41	$1,309

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, 2014
	Consumer	Business	Consumer	Consumer	Home		Acquired
(000’s omitted)	Mortgage	Lending	Indirect	Direct	Equity	Unallocated	Impaired	Total
Beginning balance	$8,994	$17,507	$10,248	$3,181	$1,830	$2,029	$530	$44,319
Charge-offs	(167)	(120)	(1,427)	(492)	(129)	0	(13)	(2,348)
Recoveries	41	171	796	212	6	0	0	1,226
Provision	413	(512)	969	186	111	149	(316)	1,000
Ending balance	$9,281	$17,046	$10,586	$3,087	$1,818	$2,178	$201	$44,197

	Three Months Ended March 31, 2013
	Consumer	Business	Consumer	Consumer	Home		Acquired
(000’s omitted)	Mortgage	Lending	Indirect	Direct	Equity	Unallocated	Impaired	Total
Beginning balance	$7,070	$18,013	$9,606	$3,303	$1,451	$2,666	$779	$42,888
Charge-offs	(371)	(784)	(891)	(545)	(185)	0	0	(2,776)
Recoveries	6	142	958	298	4	0	0	1,408
Provision	587	186	(225)	28	413	261	143	1,393
Ending balance	$7,292	$17,557	$9,448	$3,084	$1,683	$2,927	$922	$42,913