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)	2017			2016
Consumer mortgage	$	2,220,298		$	1,819,701
Business lending		2,424,223			1,490,076
Consumer indirect		1,011,978			1,044,972
Consumer direct		179,929			191,815
Home equity		420,329			401,998
Gross loans, including deferred origination costs		6,256,757			4,948,562
Allowance for loan losses		(47,583	)		(47,233	)
Loans, net of allowance for loan losses	$	6,209,174		$	4,901,329

The Company had approximately $25.3 million and $22.8 million of net deferred loan origination costs included in gross loans as of December 31, 2017 and 2016, 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 2017 and 2016.

(000's omitted)	2017			2016
Balance at beginning of year	$	10,950		$	11,337
New loans		16,617			4,959
Payments		(5,223	)		(5,346	)
Balance at end of year	$	22,344		$	10,950

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)	2017		2016
Credit impaired acquired loans:
Outstanding principal balance	$	13,242	$	6,354
Carrying amount		10,115		5,553

Non-impaired acquired loans:
Outstanding principal balance		1,658,780		497,308
Carrying amount		1,626,979		489,807

Total acquired loans:
Outstanding principal balance		1,672,022		503,662
Carrying amount		1,637,094		495,360

The outstanding balance related to credit impaired acquired loans was $13.4 million and $6.6 million at December 31, 2017 and 2016, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000's omitted)	2017			2016
Balance at beginning of year	$	498		$	810
Merchants acquisition		793			0
Accretion recognized		(905	)		(455	)
Net reclassification to accretable from nonaccretable		590			143
Balance at end of year	$	976		$	498

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, 2017:

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	$	13,564	$	1,500	$	10,722	$	25,786	$	1,728,823	$	1,754,609
Business lending		2,283		571		3,944		6,798		1,369,801		1,376,599
Consumer indirect		14,197		295		0		14,492		977,344		991,836
Consumer direct		1,875		48		0		1,923		172,556		174,479
Home equity		1,116		94		1,354		2,564		319,576		322,140
Total	$	33,035	$	2,508	$	16,020	$	51,563	$	4,568,100	$	4,619,663

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	$	2,603	$	26	$	3,066	$	5,695	$	0	$	459,994	$	465,689
Business lending		4,661		0		4,328		8,989		10,115		1,028,520		1,047,624
Consumer indirect		245		8		0		253		0		19,889		20,142
Consumer direct		100		0		0		100		0		5,350		5,450
Home equity		634		170		1,326		2,130		0		96,059		98,189
Total	$	8,243	$	204	$	8,720	$	17,167	$	10,115	$	1,609,812	$	1,637,094

⁽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, 2016:

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	$	11,379	$	1,180	$	11,352	$	23,911	$	1,635,849	$	1,659,760
Business lending		3,921		145		3,811		7,877		1,269,789		1,277,666
Consumer indirect		13,883		166		0		14,049		1,000,776		1,014,825
Consumer direct		1,549		58		0		1,607		180,315		181,922
Home equity		1,250		414		1,437		3,101		315,928		319,029
Total	$	31,982	$	1,963	$	16,600	$	50,545	$	4,402,657	$	4,453,202

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	$	1,539	$	205	$	2,332	$	4,076	$	0	$	155,865	$	159,941
Business lending		528		0		1,252		1,780		5,553		205,077		212,410
Consumer indirect		231		3		0		234		0		29,913		30,147
Consumer direct		231		0		0		231		0		9,662		9,893
Home equity		778		905		435		2,118		0		80,851		82,969
Total	$	3,307	$	1,113	$	4,019	$	8,439	$	5,553	$	481,368	$	495,360

⁽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:

	December 31, 2017						December 31, 2016
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	1,170,156	$	963,981	$	2,134,137	$	1,051,005	$	162,165	$	1,213,170
Special mention		129,076		37,321		166,397		135,602		29,690		165,292
Classified		77,367		34,628		111,995		90,585		15,002		105,587
Doubtful		0		1,579		1,579		474		0		474
Acquired impaired		0		10,115		10,115		0		5,553		5,553
Total	$	1,376,599	$	1,047,624	$	2,424,223	$	1,277,666	$	212,410	$	1,490,076

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, 2017:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,742,387	$	991,541	$	174,431	$	320,692	$	3,229,051
Nonperforming		12,222		295		48		1,448		14,013
Total	$	1,754,609	$	991,836	$	174,479	$	322,140	$	3,243,064

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	462,597	$	20,134	$	5,450	$	96,693	$	584,874
Nonperforming		3,092		8		0		1,496		4,596
Total	$	465,689	$	20,142	$	5,450	$	98,189	$	589,470

The following table details the balances in all other loan categories at December 31, 2016:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,647,228	$	1,014,659	$	181,864	$	317,178	$	3,160,929
Nonperforming		12,532		166		58		1,851		14,607
Total	$	1,659,760	$	1,014,825	$	181,922	$	319,029	$	3,175,536

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	157,404	$	30,144	$	9,893	$	81,629	$	279,070
Nonperforming		2,537		3		0		1,340		3,880
Total	$	159,941	$	30,147	$	9,893	$	82,969	$	282,950

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, 2017 and 2016 is as follows:

(000’s omitted)	2017		2016
Loans with allowance allocation	$	5,125	$	1,109
Loans without allowance allocation		884		556
Carrying balance		6,009		1,665
Contractual balance		9,165		3,340
Specifically allocated allowance		804		477
Average impaired loans		9,517		4,683
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 2017, 2016 and 2015 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, 2017 and December 31, 2016 is as follows

	December 31, 2017												December 31, 2016
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Consumer mortgage		51	$	2,265		44	$	1,750		95	$	4,015		36	$	1,520		45	$	1,956		81	$	3,476
Business lending		8		218		7		501		15		719		6		91		5		690		11		781
Consumer indirect		0		0		71		883		71		883		0		0		78		771		78		771
Consumer direct		0		0		25		69		25		69		0		0		23		65		23		65
Home equity		13		245		7		204		20		449		14		221		7		216		21		437
Total		72	$	2,728		154	$	3,407		226	$	6,135		56	$	1,832		158	$	3,698		214	$	5,530

The following table presents information related to loans modified in a TDR during the years ended December 31, 2017 and 2016. Of the loans noted in the table below, all loans for the years ended December 31, 2017 and December 31, 2016, were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.

	December 31, 2017				December 31, 2016
(000’s omitted)		#	Amount			#	Amount
Consumer mortgage		23	$	1,254		9	$	597
Business lending		8		412		0		0
Consumer indirect		33		490		33		459
Consumer direct		6		17		3		51
Home equity		4		95		3		50
Total		74	$	2,268		48	$	1,157

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			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Balance at December 31, 2014	$	10,286		$	15,787		$	11,544		$	3,083		$	2,701		$	1,767		$	173		$	45,341
Charge-offs		(1,374	)		(2,146	)		(6,714	)		(1,490	)		(244	)		0			(103	)		(12,071	)
Recoveries		80			877			3,943			722			62			0			0			5,684
Provision		1,206			1,231			3,649			682			147			(566	)		98			6,447
Balance at December 31, 2015		10,198			15,749			12,422			2,997			2,666			1,201			168			45,401
Charge-offs		(647	)		(1,872	)		(7,643	)		(1,706	)		(218	)		0			(97	)		(12,183	)
Recoveries		115			616			4,168			901			139			0			0			5,939
Provision		428			2,727			4,835			787			(188	)		(550	)		37			8,076
Balance at December 31, 2016		10,094			17,220			13,782			2,979			2,399			651			108			47,233
Charge-offs		(707	)		(4,959	)		(8,456	)		(2,081	)		(284	)		0			(270	)		(16,757	)
Recoveries		50			656			4,516			849			52			0			0			6,123
Provision		1,028			4,340			3,626			1,292			(60	)		449			309			10,984
Balance at December 31, 2017	$	10,465		$	17,257		$	13,468		$	3,039		$	2,107		$	1,100		$	147		$	47,583