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)	2015			2014
Consumer mortgage	$	1,769,754		$	1,613,384
Business lending		1,497,271			1,262,484
Consumer indirect		935,760			833,968
Consumer direct		195,076			184,028
Home equity		403,514			342,342
Gross loans, including deferred origination costs		4,801,375			4,236,206
Allowance for loan losses		(45,401	)		(45,341	)
Loans, net of allowance for loan losses	$	4,755,974		$	4,190,865

The Company had approximately $20.0 million and $18.7 million of net deferred loan origination costs included in gross loans as of December 31, 2015 and 2014, 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 2015 and 2014.

(000's omitted)	2015			2014
Balance at beginning of year	$	8,928		$	9,448
New loans		5,138			1,647
Payments		(2,729	)		(2,167	)
Balance at end of year	$	11,337		$	8,928

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)	2015		2014
Credit impaired acquired loans:
Outstanding principal balance	$	8,339	$	5,957
Carrying amount		7,299		5,312

Non-impaired acquired loans:
Outstanding principal balance		620,942		276,584
Carrying amount		610,355		267,496

Total acquired loans:
Outstanding principal balance		629,281		282,541
Carrying amount		617,654		272,808

The outstanding balance related to credit impaired acquired loans was $8.5 million and $6.1 million at December 31, 2015 and 2014, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000's omitted)	2015			2014
Balance at beginning of year	$	705		$	997
Oneida acquisition		341			0
Accretion recognized		(552	)		(707	)
Net reclassification to accretable from nonaccretable		316			415
Balance at end of year	$	810		$	705

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, 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	$	10,482	$	1,411	$	11,394	$	23,287	$	1,558,171	$	1,581,458
Business lending		4,442		126		5,381		9,949		1,223,679		1,233,628
Consumer indirect		11,575		102		0		11,677		878,662		890,339
Consumer direct		1,414		51		1		1,466		176,585		178,051
Home equity		1,093		111		2,029		3,233		297,012		300,245
Total	$	29,006	$	1,801	$	18,805	$	49,612	$	4,134,109	$	4,183,721

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	$	1,373	$	394	$	1,396	$	3,163	$	0	$	185,133	$	188,296
Business lending		535		0		1,186		1,721		7,299		254,623		263,643
Consumer indirect		245		0		0		245		0		45,176		45,421
Consumer direct		140		0		14		154		0		16,871		17,025
Home equity		636		0		327		963		0		102,306		103,269
Total	$	2,929	$	394	$	2,923	$	6,246	$	7,299	$	604,109	$	617,654

⁽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:

	December 31, 2015						December 31, 2014
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	1,048,364	$	219,374	$	1,267,738	$	949,960	$	93,510	$	1,043,470
Special mention		124,768		20,007		144,775		103,176		18,038		121,214
Classified		60,181		16,963		77,144		71,458		21,030		92,488
Doubtful		315		0		315		0		0		0
Acquired impaired		0		7,299		7,299		0		5,312		5,312
Total	$	1,233,628	$	263,643	$	1,497,271	$	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 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, 2015:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,568,653	$	890,237	$	177,999	$	298,105	$	2,934,994
Nonperforming		12,805		102		52		2,140		15,099
Total	$	1,581,458	$	890,339	$	178,051	$	300,245	$	2,950,093

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	186,506	$	45,421	$	17,011	$	102,942	$	351,880
Nonperforming		1,790		0		14		327		2,131
Total	$	188,296	$	45,421	$	17,025	$	103,269	$	354,011

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 A. A summary of individually evaluated impaired loans as of December 31, 2015 and 2014 is as follows:

(000’s omitted)	2015		2014
Loans with allowance allocation	$	0	$	0
Loans without allowance allocation		2,376		0
Carrying balance		2,376		0
Contractual balance		3,419		0
Specifically allocated allowance		0		0
Average impaired loans		2,922		0
Interest income recognized		0		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. 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, 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, 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.

Information regarding TDRs as of December 31, 2015 and December 31, 2014 is as follows

	December 31, 2015												December 31, 2014
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Consumer mortgage		37	$	1,472		54	$	2,486		91	$	3,958		49	$	2,092		37	$	1,770		86	$	3,862
Business lending		8		217		6		737		14		954		6		442		3		468		9		910
Consumer indirect		0		0		77		691		77		691		0		0		79		615		79		615
Consumer direct		0		0		32		37		32		37		0		0		25		69		25		69
Home equity		10		203		14		301		24		504		13		218		13		278		26		496
Total		55	$	1,892		183	$	4,252		238	$	6,144		68	$	2,752		157	$	3,200		225	$	5,952

The following table presents information related to loans modified in a TDR during the years ended December 31, 2015 and 2014. Of the loans noted in the table below, all loans for the year ended December 31, 2015 and all but three loans for the year ended December 31, 2014, 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 financial effects of these restructurings were immaterial.

	December 31, 2015				December 31, 2014
(000’s omitted)		#	Amount			#	Amount
Consumer mortgage		21	$	1,374		22	$	949
Business lending		3		67		7		769
Consumer indirect		35		349		33		312
Consumer direct		6		11		14		26
Home equity		6		63		6		145
Total		71	$	1,864		82	$	2,201

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:

(000’s omitted)	Consumer Mortgage			Business Lending			Home Equity			Consumer Indirect			Consumer Direct			Unallocated			Acquired Impaired			Total
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
Charge-offs		(1,374	)		(2,146	)		(244	)		(6,714	)		(1,490	)		0			(103	)		(12,071	)
Recoveries		80			877			62			3,943			722			0			0			5,684
Provision		1,206			1,231			147			3,649			682			(566	)		98			6,447
Balance at December 31, 2015	$	10,198		$	15,749		$	2,666		$	12,422		$	2,997		$	1,201		$	168		$	45,401