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)	2014			2013
Consumer mortgage	$	1,613,384		$	1,582,058
Business lending		1,262,484			1,260,364
Consumer indirect		833,968			740,002
Consumer direct		184,028			180,139
Home equity		342,342			346,520
Gross loans, including deferred origination costs		4,236,206			4,109,083
Allowance for loan losses		(45,341	)		(44,319	)
Loans, net of allowance for loan losses	$	4,190,865		$	4,064,764

The Company had approximately $18.7 million and $18.5 million of net deferred loan origination costs included in gross loans as of December 31, 2014 and 2013, 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 2014 and 2013.

(000's omitted)	2014			2013
Balance at beginning of year	$	9,448		$	8,292
New loans		1,647			3,643
Payments		(2,167	)		(2,487	)
Balance at end of year	$	8,928		$	9,448

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)	2014		2013
Credit impaired acquired loans:
Outstanding principal balance	$	5,957	$	11,457
Carrying amount		5,312		7,090

Non-impaired acquired loans:
Outstanding principal balance		276,584		342,542
Carrying amount		267,496		330,118

Total acquired loans:
Outstanding principal balance		282,541		353,999
Carrying amount		272,808		337,208

The outstanding balance related to credit impaired acquired loans was $6.1 million and $13.1 million at December 31, 2014 and 2013, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000's omitted)	2014			2013
Balance at beginning of year	$	997		$	1,770
Accretion recognized		(707	)		(1,025	)
Net reclassification to accretable from nonaccretable		415			252
Balance at end of year	$	705		$	997

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, 2014:

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	$	13,978	$	2,165	$	13,201	$	29,344	$	1,515,057	$	1,544,401
Business lending		6,738		350		2,291		9,379		1,115,215		1,124,594
Consumer indirect		10,529		82		10		10,621		822,124		832,745
Consumer direct		1,389		36		2		1,427		177,158		178,585
Home equity		1,802		195		2,172		4,169		278,904		283,073
Total	$	34,436	$	2,828	$	17,676	$	54,940	$	3,908,458	$	3,963,398

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	$	1,892	$	232	$	2,122	$	4,246	$	0	$	64,737	$	68,983
Business lending		608		0		489		1,097		5,312		131,481		137,890
Consumer indirect		40		0		0		40		0		1,183		1,223
Consumer direct		174		0		18		192		0		5,251		5,443
Home equity		674		46		426		1,146		0		58,123		59,269
Total	$	3,388	$	278	$	3,055	$	6,721	$	5,312	$	260,775	$	272,808

⁽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)

(000’s omitted)	Past Due 30 - 89 days		90+ Days Past Due and Still Accruing		Nonaccrual		Total 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)

(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	$	1,857	$	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:

	December 31, 2014						December 31, 2013
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	949,960	$	93,510	$	1,043,470	$	908,885	$	116,271	$	1,025,156
Special mention		103,176		18,038		121,214		93,600		24,264		117,864
Classified		71,458		21,030		92,488		83,379		26,714		110,093
Doubtful		0		0		0		161		0		161
Acquired impaired		0		5,312		5,312		0		7,090		7,090
Total	$	1,124,594	$	137,890	$	1,262,484	$	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 tables detail the balances in all loan categories except for business lending at December 31, 2014:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,529,035		832,653		178,547		280,706	$	2,820,941
Nonperforming		15,366		92		38		2,367		17,863
Total	$	1,544,401	$	832,745	$	178,585	$	283,073	$	2,838,804

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	66,629		1,223		5,425		58,797	$	132,074
Nonperforming		2,354		0		18		472		2,844
Total	$	68,983	$	1,223	$	5,443	$	59,269	$	134,918

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

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home 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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home 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 A. A summary of individually evaluated impaired loans as of December 31, 2014 and 2013 is as follows:

(000’s omitted)	2014		2013
Loans with allowance allocation	$	0	$	945
Loans without allowance allocation		0		600
Carrying balance		0		1,545
Contractual balance		0		1,852
Specifically allocated allowance		0		50
Average impaired loans		0		10,729
Interest income recognized		0		18

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 TDRs is the same as detailed previously.

In accordance with clarified guidance issued by the OCC in 2012, 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 2012, 2013 and 2014 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, 2014 and December 31, 2013 is as follows

	December 31, 2014												December 31, 2013
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Consumer mortgage		49	$	2,092		37	$	1,770		86	$	3,862		31	$	1,682		48	$	2,171		79	$	3,853
Business lending		6		442		3		468		9		910		4		162		1		47		5		209
Consumer indirect		0		0		79		615		79		615		0		0		98		692		98		692
Consumer direct		0		0		25		69		25		69		0		0		46		116		46		116
Home equity		13		218		13		278		26		496		12		202		20		363		32		565
Total		68	$	2,752		157	$	3,200		225	$	5,952		47	$	2,046		213	$	3,389		260	$	5,435

The following table presents information related to loans modified in a TDR during the years ended December 31, 2014 and 2013. Of the loans noted in the table below, all but three loans for the year ended December 31, 2014 and all but two loans for the year ended December 31, 2013, were modified due to a Chapter 7 bankruptcy as described previously. Of the three non-Chapter 7 bankruptcy TDRs in 2014 two relate to business loans restructured via granting a waiver of payments for a period of time and one was a business loan that was restructured via an extension of term. The 2013 non-Chapter 7 bankruptcy TDRs relate to 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.

	December 31, 2014				December 31, 2013
(000’s omitted)		#	Amount			#	Amount
Consumer mortgage		22	$	949		31	$	1,758
Business lending		7		769		3		183
Consumer indirect		33		312		36		327
Consumer direct		14		26		22		75
Home equity		6		145		14		298
Total		82	$	2,201		106	$	2,641

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:

	Consumer			Business			Home			Consumer			Consumer						Acquired
(000’s omitted)	Mortgage			Lending			Equity			Indirect			Direct			Unallocated			Impaired			Total
Balance at December 31, 2012	$	7,070		$	18,013		$	1,451		$	9,606		$	3,303		$	2,666		$	779		$	42,888
Charge-offs		(1,012	)		(2,788	)		(650	)		(4,544	)		(1,954	)		0			(883	)		(11,831	)
Recoveries		36			692			20			3,488			1,034			0			0			5,270
Provision		2,900			1,590			1,009			1,698			798			(637	)		634			7,992
Balance at December 31, 2013		8,994			17,507			1,830			10,248			3,181			2,029			530			44,319
Charge-offs		(1,075	)		(1,558	)		(765	)		(6,784	)		(1,595	)		0			(38	)		(11,815	)
Recoveries		205			750			85			3,773			846			0			0			5,659
Provision		2,162			(912	)		1,551			4,307			651			(262	)		(319	)		7,178
Balance at December 31, 2014	$	10,286		$	15,787		$	2,701		$	11,544		$	3,083		$	1,767		$	173		$	45,341