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:

	September 30,			December 31,
(000's omitted)	2016			2015
Consumer mortgage	$	1,798,748		$	1,769,754
Business lending		1,506,878			1,497,271
Consumer indirect		1,037,077			935,760
Consumer direct		196,134			195,076
Home equity		401,784			403,514
Gross loans, including deferred origination costs		4,940,621			4,801,375
Allowance for loan losses		(46,789	)		(45,401	)
Loans, net of allowance for loan losses	$	4,893,832		$	4,755,974

The outstanding balance related to credit impaired acquired loans was $8.0 million and $8.5 million at September 30, 2016 and December 31, 2015, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000's omitted)
Balance at December 31, 2015	$	810
Accretion recognized, year-to-date		(359	)
Net reclassification to accretable from non-accretable		129
Balance at September 30, 2016	$	580

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, 2016:

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	$	9,672	$	927	$	11,663	$	22,262	$	1,608,451	$	1,630,713
Business lending		2,995		390		3,774		7,159		1,267,092		1,274,251
Consumer indirect		10,657		162		0		10,819		993,023		1,003,842
Consumer direct		1,318		86		0		1,404		183,576		184,980
Home equity		1,205		304		1,529		3,038		310,262		313,300
Total	$	25,847	$	1,869	$	16,966	$	44,682	$	4,362,404	$	4,407,086

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	$	1,237	$	61	$	2,464	$	3,762	$	0	$	164,273	$	168,035
Business lending		226		0		1,460		1,686		6,863		224,078		232,627
Consumer indirect		208		15		0		223		0		33,012		33,235
Consumer direct		166		0		0		166		0		10,988		11,154
Home equity		1,474		70		411		1,955		0		86,529		88,484
Total	$	3,311	$	146	$	4,335	$	7,792	$	6,863	$	518,880	$	533,535

⁽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, 2015:

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	$	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)

	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	$	1,373	$	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⁾

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", "classified", or "doubtful". 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, 2016						December 31, 2015
(000's omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	1,053,914	$	173,950	$	1,227,864	$	1,048,364	$	219,374	$	1,267,738
Special mention		137,855		32,820		170,675		124,768		20,007		144,775
Classified		82,466		18,994		101,460		60,181		16,963		77,144
Doubtful		16		0		16		315		0		315
Acquired impaired		0		6,863		6,863		0		7,299		7,299
Total	$	1,274,251	$	232,627	$	1,506,878	$	1,233,628	$	263,643	$	1,497,271

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, 2016:

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

	Consumer		Consumer		Consumer		Home
(000's omitted)	Mortgage		Indirect		Direct		Equity		Total
Performing	$	1,618,123	$	1,003,680	$	184,894	$	311,467	$	3,118,164
Nonperforming		12,590		162		86		1,833		14,671
Total	$	1,630,713	$	1,003,842	$	184,980	$	313,300	$	3,132,835

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

	Consumer		Consumer		Consumer		Home
(000's omitted)	Mortgage		Indirect		Direct		Equity		Total
Performing	$	165,510	$	33,220	$	11,154	$	88,003	$	297,887
Nonperforming		2,525		15		0		481		3,021
Total	$	168,035	$	33,235	$	11,154	$	88,484	$	300,908

The following table details the balances in all other loan categories at December 31, 2015:

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

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

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

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, 2016 and December 31, 2015 follows:

	September 30,		December 31,
(000's omitted)	2016		2015
Loans with allowance allocation	$	786	$	0
Loans without allowance allocation		591		2,376
Unpaid principal balance		1,377		2,376
Contractual balance		3,009		3,419
Allowance for loan loss allocated		17		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 the three and nine months ended September 30, 2016 and 2015 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, 2016 and December 31, 2015 is as follows:

	September 30, 2016												December 31, 2015
(000's omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Consumer mortgage		41	$	1,951		40	$	1,760		81	$	3,711		37	$	1,472		54	$	2,486		91	$	3,958
Business lending		8		180		5		699		13		879		8		217		6		737		14		954
Consumer indirect		0		0		76		762		76		762		0		0		77		691		77		691
Consumer direct		0		0		9		68		9		68		0		0		32		37		32		37
Home equity		14		229		7		219		21		448		10		203		14		301		24		504
Total		63	$	2,360		137	$	3,508		200	$	5,868		55	$	1,892		183	$	4,252		238	$	6,144

The following table presents information related to loans modified in a TDR during the three months and nine months ended September 30, 2016 and 2015. Of the loans noted in the table below, all loans for the three months and nine months ended September 30, 2016 and 2015 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.

	Three Months Ended September 30, 2016				Three Months Ended September 30, 2015
(000's omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Consumer mortgage		2	$	206		4	$	404
Business lending		0		0		0		0
Consumer indirect		9		89		12		112
Consumer direct		0		0		1		0
Home equity		0		0		0		0
Total		11	$	295		17	$	516

	Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
(000's omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Consumer mortgage		9	$	787		8	$	585
Business lending		1		29		0		0
Consumer indirect		27		392		23		263
Consumer direct		1		51		2		1
Home equity		3		48		1		13
Total		41	$	1,307		34	$	862

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, 2016
	Consumer			Business			Consumer			Consumer			Home						Acquired
(000's omitted)	Mortgage			Lending			Indirect			Direct			Equity			Unallocated			Impaired			Total
Beginning balance	$	9,853		$	16,949		$	13,215		$	3,020		$	2,500		$	850		$	139		$	46,526
Charge-offs		(202	)		(284	)		(2,037	)		(395	)		(6	)		0			0			(2,924	)
Recoveries		12			220			892			246			27			0			0			1,397
Provision		305			(283	)		1,503			170			10			85			0			1,790
Ending balance	$	9,968		$	16,602		$	13,573		$	3,041		$	2,531		$	935		$	139		$	46,789

	Three Months Ended September 30, 2015
	Consumer			Business			Consumer			Consumer			Home						Acquired
(000's omitted)	Mortgage			Lending			Indirect			Direct			Equity			Unallocated			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

	Nine Months Ended September 30, 2016
	Consumer			Business			Consumer			Consumer			Home						Acquired
(000's omitted)	Mortgage			Lending			Indirect			Direct			Equity			Unallocated			Impaired			Total
Beginning balance	$	10,198		$	15,749		$	12,422		$	2,997		$	2,666		$	1,201		$	168		$	45,401
Charge-offs		(445	)		(1,263	)		(5,439	)		(1,246	)		(142	)		0			(26	)		(8,561	)
Recoveries		96			511			3,146			705			55			0			0			4,513
Provision		119			1,605			3,444			585			(48	)		(266	)		(3	)		5,436
Ending balance	$	9,968		$	16,602		$	13,573		$	3,041		$	2,531		$	935		$	139		$	46,789

	Nine Months Ended September 30, 2015
	Consumer			Business			Consumer			Consumer			Home						Acquired
(000's omitted)	Mortgage			Lending			Indirect			Direct			Equity			Unallocated			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