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, municipal lending, 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)	March 31, 2018			December 31, 2017
Business lending	$	2,426,086		$	2,424,223
Consumer mortgage		2,211,882			2,220,298
Consumer indirect		1,008,198			1,011,978
Consumer direct		173,032			179,929
Home equity		407,832			420,329
Gross loans, including deferred origination costs		6,227,030			6,256,757
Allowance for loan losses		(48,103	)		(47,583	)
Loans, net of allowance for loan losses	$	6,178,927		$	6,209,174

The outstanding balance related to credit impaired acquired loans was $11.1 million and $13.4 million at March 31, 2018 and December 31, 2017, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000’s omitted)
Balance at December 31, 2017	$	976
Accretion recognized, year-to-date		(278	)
Net reclassification between accretable and non-accretable		300
Balance at March 31, 2018	$	998

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 March 31, 2018:

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
Business lending	$	5,062	$	4,069	$	3,831	$	12,962	$	1,437,044	$	1,450,006
Consumer mortgage		10,236		1,437		10,086		21,759		1,744,105		1,765,864
Consumer indirect		8,664		182		5		8,851		981,915		990,766
Consumer direct		1,091		30		0		1,121		167,396		168,517
Home equity		1,404		176		1,239		2,819		313,908		316,727
Total	$	26,457	$	5,894	$	15,161	$	47,512	$	4,644,368	$	4,691,880

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
Business lending	$	4,119	$	0	$	3,967	$	8,086	$	8,496	$	959,498	$	976,080
Consumer mortgage		1,991		282		2,855		5,128		0		440,890		446,018
Consumer indirect		106		35		0		141		0		17,291		17,432
Consumer direct		105		0		0		105		0		4,410		4,515
Home equity		522		214		1,256		1,992		0		89,113		91,105
Total	$	6,843	$	531	$	8,078	$	15,452	$	8,496	$	1,511,202	$	1,535,150

(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, 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
Business lending	$	2,283	$	571	$	3,944	$	6,798	$	1,369,801	$	1,376,599
Consumer mortgage		13,564		1,500		10,722		25,786		1,728,823		1,754,609
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
Business lending	$	4,661	$	0	$	4,328	$	8,989	$	10,115	$	1,028,520	$	1,047,624
Consumer mortgage		2,603		26		3,066		5,695		0		459,994		465,689
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)

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:

	March 31, 2018						December 31, 2017
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	1,253,688	$	891,639	$	2,145,327	$	1,170,156	$	963,981	$	2,134,137
Special mention		120,881		43,034		163,915		129,076		37,321		166,397
Classified		75,283		31,313		106,596		77,367		34,628		111,995
Doubtful		154		1,598		1,752		0		1,579		1,579
Acquired impaired		0		8,496		8,496		0		10,115		10,115
Total	$	1,450,006	$	976,080	$	2,426,086	$	1,376,599	$	1,047,624	$	2,424,223

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 March 31, 2018:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,754,341	$	990,579	$	168,487	$	315,312	$	3,228,719
Nonperforming		11,523		187		30		1,415		13,155
Total	$	1,765,864	$	990,766	$	168,517	$	316,727	$	3,241,874

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	442,881	$	17,397	$	4,515	$	89,635	$	554,428
Nonperforming		3,137		35		0		1,470		4,642
Total	$	446,018	$	17,432	$	4,515	$	91,105	$	559,070

The following table details the balances in all other loan categories 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

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 March 31, 2018 and December 31, 2017 follows:

(000’s omitted)	March 31, 2018		December 31, 2017
Loans with allowance allocation	$	4,510	$	5,125
Loans without allowance allocation		1,422		884
Carrying balance		5,932		6,009
Contractual balance		10,146		9,165
Specifically allocated allowance		878		804

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 months ended March 31, 2018 and 2017 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 March 31, 2018 and December 31, 2017 is as follows:

	March 31, 2018												December 31, 2017
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Business lending		8	$	312		3	$	280		11	$	592		8	$	218		7	$	501		15	$	719
Consumer mortgage		48		1,976		43		1,651		91		3,627		51		2,265		44		1,750		95		4,015
Consumer indirect		0		0		68		847		68		847		0		0		71		883		71		883
Consumer direct		0		0		23		65		23		65		0		0		25		69		25		69
Home equity		11		234		7		201		18		435		13		245		7		204		20		449
Total		67	$	2,522		144	$	3,044		211	$	5,566		72	$	2,728		154	$	3,407		226	$	6,135

The following table presents information related to loans modified in a TDR during the three months ended March 31, 2018 and 2017. Of the loans noted in the table below, all loans for the three months ended March 31, 2018 and 2017 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.

	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Business lending		1	$	93		0	$	0
Consumer mortgage		0		0		7		502
Consumer indirect		4		41		8		106
Consumer direct		2		2		4		15
Home equity		0		0		2		98
Total		7	$	136		21	$	721

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 March 31, 2018
(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Beginning balance	$	17,257		$	10,465		$	13,468		$	3,039		$	2,107		$	1,100		$	147		$	47,583
Charge-offs		(1,669	)		(199	)		(2,284	)		(496	)		(56	)		0			(43	)		(4,747	)
Recoveries		198			8			1,151			222			9			0			0			1,588
Provision		1,821			108			1,363			219			(20	)		(16	)		204			3,679
Ending balance	$	17,607		$	10,382		$	13,698		$	2,984		$	2,040		$	1,084		$	308		$	48,103

	Three Months Ended March 31, 2017
(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated		Acquired Impaired		Total
Beginning balance	$	17,220		$	10,094		$	13,782		$	2,979		$	2,399		$	651	$	108	$	47,233
Charge-offs		(695	)		(85	)		(1,947	)		(417	)		(38	)		0		0		(3,182	)
Recoveries		71			7			869			245			25			0		0		1,217
Provision		261			133			1,292			45			(27	)		122		2		1,828
Ending balance	$	16,857		$	10,149		$	13,996		$	2,852		$	2,359		$	773	$	110	$	47,096