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, 2019			December 31, 2018
Business lending	$	2,410,477		$	2,396,977
Consumer mortgage		2,237,430			2,235,408
Consumer indirect		1,070,840			1,083,207
Consumer direct		173,042			178,820
Home equity		374,297			386,709
Gross loans, including deferred origination costs		6,266,086			6,281,121
Allowance for loan losses		(49,107	)		(49,284	)
Loans, net of allowance for loan losses	$	6,216,979		$	6,231,837

The outstanding balance related to credit impaired acquired loans was $7.3 million and $7.4 million at March 31, 2019 and December 31, 2018, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000’s omitted)
Balance at December 31, 2018	$	437
Accretion recognized, year-to-date		(74	)
Balance at March 31, 2019	$	363

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, 2019:

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	$	6,042	$	68	$	4,147	$	10,257	$	1,652,950	$	1,663,207
Consumer mortgage		8,937		1,960		9,794		20,691		1,843,754		1,864,445
Consumer indirect		9,824		201		0		10,025		1,051,493		1,061,518
Consumer direct		985		41		0		1,026		169,334		170,360
Home equity		1,005		323		1,583		2,911		301,113		304,024
Total	$	26,793	$	2,593	$	15,524	$	44,910	$	5,018,644	$	5,063,554

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	$	2,526	$	66	$	3,254	$	5,846	$	5,342	$	736,082	$	747,270
Consumer mortgage		883		287		1,954		3,124		0		369,861		372,985
Consumer indirect		32		33		0		65		0		9,257		9,322
Consumer direct		33		25		0		58		0		2,624		2,682
Home equity		558		15		520		1,093		0		69,180		70,273
Total	$	4,032	$	426	$	5,728	$	10,186	$	5,342	$	1,187,004	$	1,202,532

(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, 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	$	5,261	$	179	$	4,872	$	10,312	$	1,608,515	$	1,618,827
Consumer mortgage		12,468		1,393		9,872		23,733		1,824,717		1,848,450
Consumer indirect		14,609		258		0		14,867		1,057,525		1,072,392
Consumer direct		1,778		48		0		1,826		173,948		175,774
Home equity		983		228		1,438		2,649		309,892		312,541
Total	$	35,099	$	2,106	$	16,182	$	53,387	$	4,974,597	$	5,027,984

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	$	974	$	0	$	3,498	$	4,472	$	5,446	$	768,232	$	778,150
Consumer mortgage		841		232		2,390		3,463		0		383,495		386,958
Consumer indirect		78		34		0		112		0		10,703		10,815
Consumer direct		115		4		0		119		0		2,927		3,046
Home equity		613		79		474		1,166		0		73,002		74,168
Total	$	2,621	$	349	$	6,362	$	9,332	$	5,446	$	1,238,359	$	1,253,137

(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, 2019						December 31, 2018
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	1,475,145	$	659,645	$	2,134,790	$	1,439,337	$	702,493	$	2,141,830
Special mention		108,129		53,562		161,691		105,065		40,107		145,172
Classified		79,933		28,721		108,654		74,425		28,525		102,950
Doubtful		0		0		0		0		1,579		1,579
Acquired impaired		0		5,342		5,342		0		5,446		5,446
Total	$	1,663,207	$	747,270	$	2,410,477	$	1,618,827	$	778,150	$	2,396,977

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, 2019:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,852,691	$	1,061,317	$	170,319	$	302,118	$	3,386,445
Nonperforming		11,754		201		41		1,906		13,902
Total	$	1,864,445	$	1,061,518	$	170,360	$	304,024	$	3,400,347

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	370,744	$	9,289	$	2,657	$	69,738	$	452,428
Nonperforming		2,241		33		25		535		2,834
Total	$	372,985	$	9,322	$	2,682	$	70,273	$	455,262

The following table details the balances in all other loan categories at December 31, 2018:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,837,185	$	1,072,134	$	175,726	$	310,875	$	3,395,920
Nonperforming		11,265		258		48		1,666		13,237
Total	$	1,848,450	$	1,072,392	$	175,774	$	312,541	$	3,409,157

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	384,336	$	10,781	$	3,042	$	73,615	$	471,774
Nonperforming		2,622		34		4		553		3,213
Total	$	386,958	$	10,815	$	3,046	$	74,168	$	474,987

All loan classes are collectively evaluated for impairment except business lending. A summary of individually evaluated impaired loans as of March 31, 2019 and December 31, 2018 follows:

(000’s omitted)	March 31, 2019		December 31, 2018
Loans with allowance allocation	$	0	$	3,956
Loans without allowance allocation		5,118		2,230
Carrying balance		5,118		6,186
Contractual balance		12,052		12,078
Specifically allocated allowance		0		956

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, 2019 and 2018 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, 2019 and December 31, 2018 is as follows:

	March 31, 2019												December 31, 2018
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Business lending		3	$	87		2	$	161		5	$	248		4	$	162		2	$	165		6	$	327
Consumer mortgage		50		2,214		50		2,027		100		4,241		46		1,986		46		1,769		92		3,755
Consumer indirect		0		0		85		916		85		916		0		0		77		857		77		857
Consumer direct		0		0		15		1		15		1		0		0		22		71		22		71
Home equity		13		233		9		270		22		503		12		240		9		275		21		515
Total		66	$	2,534		161	$	3,375		227	$	5,909		62	$	2,388		156	$	3,137		218	$	5,525

The following table presents information related to loans modified in a TDR during the three months ended March 31, 2019 and 2018. Of the loans noted in the table below, all loans for the three months ended March 31, 2019 and 2018 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial

	Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Business lending		0	$	0		1	$	93
Consumer mortgage		8		665		0		0
Consumer indirect		11		98		4		41
Consumer direct		0		0		2		2
Home equity		1		4		0		0
Total		20	$	767		7	$	136

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, 2019
(000’s omitted)	Business Lending			Consumer Mortgage			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired		Total
Beginning balance	$	18,522		$	10,124		$	14,366		$	3,095		$	2,144		$	1,000		$	33	$	49,284
Charge-offs		(1,216	)		(253	)		(1,823	)		(535	)		(74	)		0			0		(3,901	)
Recoveries		134			22			962			179			5			0			0		1,302
Provision		831			424			746			317			(8	)		(10	)		122		2,422
Ending balance	$	18,271		$	10,317		$	14,251		$	3,056		$	2,067		$	990		$	155	$	49,107

	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