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)	September 30, 2015			December 31, 2014
Consumer mortgage	$	1,621,862		$	1,613,384
Business lending		1,288,772			1,262,484
Consumer indirect		872,988			833,968
Consumer direct		184,479			184,028
Home equity		345,446			342,342
Gross loans		4,313,547			4,236,206
Allowance for loan losses		(45,588	)		(45,341	)
Loans, net of allowance for loan losses	$	4,267,959		$	4,190,865

The outstanding balance related to credit impaired acquired loans was $5.2 million and $6.1 million at September 30, 2015 and December 31, 2014, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000’s omitted)
Balance at December 31, 2014	$	705
Accretion recognized, year-to-date		(437	)
Net reclassification to accretable from non-accretable		329
Balance at September 30, 2015	$	597

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 September 30, 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	$	10,115	$	1,351	$	12,108	$	23,574	$	1,538,515	$	1,562,089
Business lending		2,187		135		6,402		8,724		1,159,228		1,167,952
Consumer indirect		9,785		58		0		9,843		862,571		872,414
Consumer direct		1,148		41		1		1,190		179,428		180,618
Home equity		1,023		291		1,993		3,307		289,015		292,322
Total	$	24,258	$	1,876	$	20,504	$	46,638	$	4,028,757	$	4,075,395

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	$	1,271	$	130	$	1,473	$	2,874	$	0	$	56,899	$	59,773
Business lending		192		0		710		902		4,675		115,243		120,820
Consumer indirect		25		0		0		25		0		549		574
Consumer direct		126		0		14		140		0		3,721		3,861
Home equity		446		69		432		947		0		52,177		53,124
Total	$	2,060	$	199	$	2,629	$	4,888	$	4,675	$	228,589	$	238,152

(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, 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)

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:

	September 30, 2015						December 31, 2014
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	990,125	$	84,944	$	1,075,069	$	949,960	$	93,510	$	1,043,470
Special mention		111,496		15,343		126,839		103,176		18,038		121,214
Classified		65,831		15,858		81,689		71,458		21,030		92,488
Doubtful		500		0		500		0		0		0
Acquired impaired		0		4,675		4,675		0		5,312		5,312
Total	$	1,167,952	$	120,820	$	1,288,772	$	1,124,594	$	137,890	$	1,262,484

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 September 30, 2015:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,548,630	$	872,356	$	180,576	$	290,038	$	2,891,600
Nonperforming		13,459		58		42		2,284		15,843
Total	$	1,562,089	$	872,414	$	180,618	$	292,322	$	2,907,443

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	58,170	$	574	$	3,847	$	52,623	$	115,214
Nonperforming		1,603		0		14		501		2,118
Total	$	59,773	$	574	$	3,861	$	53,124	$	117,332

The following table details the balances in all other loan categories 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

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 September 30, 2015 and December 31, 2014 follows:

(000’s omitted)	September 30, 2015		December 31, 2014
Loans with allowance allocation	$	2,800	$	0
Loans without allowance allocation		1,086		0
Carrying balance		3,886		0
Contractual balance		3,986		0
Specifically allocated allowance		566		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 2015 and 2014 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 September 30, 2015 and December 31, 2014 is as follows:

	September 30, 2015												December 31, 2014
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Consumer mortgage		41	$	1,500		38	$	1,595		79	$	3,095		49	$	2,092		37	$	1,770		86	$	3,862
Business lending		3		117		4		567		7		684		6		442		3		468		9		910
Consumer indirect		0		0		74		700		74		700		0		0		79		615		79		615
Consumer direct		0		0		16		35		16		35		0		0		25		69		25		69
Home equity		7		101		12		258		19		359		13		218		13		278		26		496
Total		51	$	1,718		144	$	3,155		195	$	4,873		68	$	2,752		157	$	3,200		225	$	5,952

The following table presents information related to loans modified in a TDR during the three and nine months ended September 30, 2015 and 2014. Of the loans noted in the table below, all loans for the three and nine months ended September 30, 2015 and 2014 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.

	Three Months Ended September 30, 2015				Three Months Ended September 30, 2014
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Consumer mortgage		4	$	404		6	$	283
Business lending		0		0		0		0
Consumer indirect		12		112		16		165
Consumer direct		1		0		5		7
Home equity		0		0		0		0
Total		17	$	516		27	$	455

	Nine Months Ended September 30, 2015				Nine Months Ended September 30, 2014
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Consumer mortgage		8	$	585		22	$	1,016
Business lending		0		0		7		556
Consumer indirect		23		263		29		334
Consumer direct		2		1		7		14
Home equity		1		13		5		173
Total		34	$	862		70	$	2,093

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 September 30, 2015
(000’s omitted)	Consumer Mortgage			Business Lending			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Beginning balance	$	10,192		$	15,353		$	11,602		$	2,991		$	2,677		$	2,374		$	93		$	45,282
Charge-offs		(276	)		(234	)		(1,597	)		(427	)		(66	)		0			(59	)		(2,659	)
Recoveries		9			107			740			174			29			0			0			1,059
Provision		421			112			1,367			359			102			(461	)		6			1,906
Ending balance	$	10,346		$	15,338		$	12,112		$	3,097		$	2,742		$	1,913		$	40		$	45,588

	Three Months Ended September 30, 2014

(000’s omitted)	Consumer Mortgage			Business Lending			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Beginning balance	$	9,375		$	16,553		$	11,354		$	3,298		$	1,860		$	2,012		$	163		$	44,615
Charge-offs		(203	)		(435	)		(1,711	)		(307	)		(74	)		0			(10	)		(2,740	)
Recoveries		14			335			1,025			239			38			0			0			1,651
Provision		268			138			1,231			100			77			(65	)		(2	)		1,747
Ending balance	$	9,454		$	16,591		$	11,899		$	3,330		$	1,901		$	1,947		$	151		$	45,273

	Nine Months Ended September 30, 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		(917	)		(667	)		(4,421	)		(1,066	)		(188	)		0		(102	)		(7,361	)
Recoveries		75			715			3,077			566			55			0		0			4,488
Provision		902			(497	)		1,912			514			174			146		(31	)		3,120
Ending balance	$	10,346		$	15,338		$	12,112		$	3,097		$	2,742		$	1,913	$	40		$	45,588

	Nine Months Ended September 30, 2014
(000’s omitted)	Consumer Mortgage			Business Lending			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Beginning balance	$	8,994		$	17,507		$	10,248		$	3,181		$	1,830		$	2,029		$	530		$	44,319
Charge-offs		(734	)		(940	)		(4,573	)		(1,219	)		(450	)		0			(30	)		(7,946	)
Recoveries		67			607			2,826			677			76			0			0			4,253
Provision		1,127			(583	)		3,398			691			445			(82	)		(349	)		4,647
Ending balance	$	9,454		$	16,591		$	11,899		$	3,330		$	1,901		$	1,947		$	151		$	45,273