LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio, net of deferred origination fees and cost, and unearned income is summarized as follows (in thousands):



	March 31, 2016		December 31, 2015
Commercial and agricultural:
Commercial and industrial	$	189,725	$	192,197
Agricultural	841		1,036
Commercial mortgages:
Construction	40,702		41,131
Commercial mortgages, other	494,327		465,347
Residential mortgages	196,751		195,778
Consumer loans:
Credit cards	1,293		1,483
Home equity lines and loans	99,035		101,726
Indirect consumer loans	146,601		151,327
Direct consumer loans	17,618		18,608
Total loans, net of deferred loan fees	$	1,186,893	$	1,168,633
Interest receivable on loans	2,928		2,870
Total recorded investment in loans	$	1,189,821	$	1,171,503

The Corporation's concentrations of credit risk by loan type are reflected in the preceding table. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan classifications in the table above.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended March 31, 2016 and 2015 (in thousands):



	Three Months Ended March 31, 2016
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages		Residential Mortgages		Consumer Loans			Total
Beginning balance	$	1,831		$	7,112	$	1,464	$	3,853		$	14,260
Charge-offs	(8		)	—		—		(443		)	(451		)
Recoveries	32			7		—		84			123
Net recoveries (charge-offs)	24			7		—		(359		)	(328		)
Provision	(60		)	413		18		224			595
Ending balance	$	1,795		$	7,532	$	1,482	$	3,718		$	14,527



	Three Months Ended March 31, 2015
Allowance for loan losses	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages			Consumer Loans			Total
Beginning balance	$	1,460	$	6,326	$	1,572		$	4,328		$	13,686
Charge-offs	—		—		(21		)	(369		)	(390		)
Recoveries	15		67		—			124			206
Net recoveries (charge-offs)	15		67		(21		)	(245		)	(184		)
Provision	196		137		43			14			390
Ending balance	$	1,671	$	6,530	$	1,594		$	4,097		$	13,892

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2016 and December 31, 2015 (in thousands):



	March 31, 2016
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	9	$	1,577	$	—	$	163	$	1,749
Collectively evaluated for impairment	1,786		5,896		1,442		3,555		12,679
Loans acquired with deteriorated credit quality	—		59		40		—		99
Total ending allowance balance	$	1,795	$	7,532	$	1,482	$	3,718	$	14,527



	December 31, 2015
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	8	$	1,481	$	—	$	77	$	1,566
Collectively evaluated for impairment	1,823		5,572		1,424		3,776		12,595
Loans acquired with deteriorated credit quality	—		59		40		—		99
Total ending allowance balance	$	1,831	$	7,112	$	1,464	$	3,853	$	14,260



	March 31, 2016
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	1,051	$	12,404	$	311	$	468	$	14,234
Loans collectively evaluated for impairment	189,987		522,147		196,646		264,729		1,173,509
Loans acquired with deteriorated credit quality	—		1,804		274		—		2,078
Total ending loans balance	$	191,038	$	536,355	$	197,231	$	265,197	$	1,189,821



	December 31, 2015
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	1,498	$	12,773	$	235	$	474	$	14,980
Loans collectively evaluated for impairment	192,202		493,102		195,731		273,393		1,154,428
Loans acquired with deteriorated credit quality	—		1,825		270		—		2,095
Total ending loans balance	$	193,700	$	507,700	$	196,236	$	273,867	$	1,171,503

The following tables present loans individually evaluated for impairment recognized by class of loans as of March 31, 2016 and December 31, 2015, the average recorded investment and interest income recognized by class of loans as of the three month periods ended March 31, 2016 and 2015 (in thousands):



	March 31, 2016						December 31, 2015
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
Commercial and agricultural:
Commercial and industrial	$	1,039	$	1,042	$	—	$	1,487	$	1,489	$	—
Commercial mortgages:
Construction	343		345		—		349		350		—
Commercial mortgages, other	7,185		7,215		—		7,551		7,577		—
Residential mortgages	311		311		—		234		235		—
Consumer loans:
Home equity lines and loans	104		105		—		107		108		—
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	9		9		9		9		9		8
Commercial mortgages:
Commercial mortgages, other	4,910		4,844		1,577		4,913		4,846		1,481
Consumer loans:
Home equity lines and loans	363		363		163		364		366		77
Total	$	14,264	$	14,234	$	1,749	$	15,014	$	14,980	$	1,566



	Three Months Ended March 31, 2016				Three Months Ended March 31, 2015
With no related allowance recorded:	Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)
Commercial and agricultural:
Commercial and industrial	$	1,266	$	13	$	1,517	$	15
Commercial mortgages:
Construction	348		4		1,904		25
Commercial mortgages, other	7,395		68		7,674		63
Residential mortgages	273		—		252		1
Consumer loans:
Home equity lines & loans	107		1		458		6
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	9		—		196		3
Commercial mortgages:
Commercial mortgages, other	4,845		1		4,184		23
Consumer loans:
Home equity lines and loans	364		—		27		—
Total	$	14,607	$	87	$	16,212	$	136

(1)Cash basis interest income approximates interest income recognized.

The following tables present the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of March 31, 2016 and December 31, 2015 (in thousands):



	Non-accrual				Loans Past Due 90 Days or More and Still Accruing
	March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
Commercial and agricultural:
Commercial and industrial	$	69	$	13	$	5	$	3
Agricultural	—		—		—		—
Commercial mortgages:
Construction	62		63		—		—
Commercial mortgages	6,886		7,203		2,242		—
Residential mortgages	4,159		3,610		—		—
Consumer loans:
Credit cards	—		—		13		15
Home equity lines and loans	1,156		758		—		—
Indirect consumer loans	390		542		—		—
Direct consumer loans	52		43		—		—
Total	$	12,774	$	12,232	$	2,260	$	18

The following tables present the aging of the recorded investment in loans as of March 31, 2016 and December 31, 2015 (in thousands):



	March 31, 2016
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Acquired with Deteriorated Credit Quality		Loans Not Past Due		Total
Commercial and agricultural:
Commercial and industrial	$	46	$	1	$	74	$	121	$	—	$	190,074	$	190,195
Agricultural	—		—		—		—		—		843		843
Commercial mortgages:
Construction	—		—		—		—		—		40,803		40,803
Commercial mortgages, other	5,902		199		5,490		11,591		1,804		482,157		495,552
Residential mortgages	1,908		783		1,287		3,978		274		192,979		197,231
Consumer loans:
Credit cards	39		12		13		64		—		1,229		1,293
Home equity lines and loans	371		—		232		603		—		98,684		99,287
Indirect consumer loans	859		162		347		1,368		—		145,565		146,933
Direct consumer loans	44		31		30		105		—		17,579		17,684
Total	$	9,169	$	1,188	$	7,473	$	17,830	$	2,078	$	1,169,913	$	1,189,821



	December 31, 2015
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Acquired with Deteriorated Credit Quality		Loans Not Past Due		Total
Commercial and agricultural:
Commercial and industrial	$	398	$	3	$	12	$	413	$	—	$	192,248	$	192,661
Agricultural	—		—		—		—		—		1,039		1,039
Commercial mortgages:
Construction	—		—		—		—		—		41,231		41,231
Commercial mortgages, other	4,197		199		5,239		9,635		1,825		455,009		466,469
Residential mortgages	2,983		725		1,703		5,411		270		190,555		196,236
Consumer loans:
Credit cards	30		4		15		49		—		1,434		1,483
Home equity lines and loans	233		77		239		549		—		101,427		101,976
Indirect consumer loans	1,744		4		447		2,195		—		149,531		151,726
Direct consumer loans	208		—		19		227		—		18,455		18,682
Total	$	9,793	$	1,012	$	7,674	$	18,479	$	2,095	$	1,150,929	$	1,171,503

Troubled Debt Restructurings:

A modification of a loan may result in classification as a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of modifications which may involve a change in the schedule of payments, a reduction in the interest rate, an extension of the maturity date, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, substituting or adding a new borrower or guarantor, a permanent reduction of the recorded investment in the loan or a permanent reduction of the interest on the loan.

As of March 31, 2016 and December 31, 2015, the Corporation has a recorded investment in TDRs of $11.2 million and $12.0 million, respectively. There were specific reserves of $1.5 million and $1.4 million allocated for TDRs at March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, TDRs totaling $6.6 million were accruing interest under the modified terms and $4.6 million were on non-accrual status. As of December 31, 2015, TDRs totaling $7.6 million were accruing interest under the modified terms and $4.4 million were on non-accrual status. The Corporation had committed additional amounts up to $0.1 million as of both March 31, 2016 and December 31, 2015, to customers with outstanding loans that are classified as TDRs.

During the three months ended March 31, 2016 and 2015, the terms of certain loans were modified as TDRs. The modification of the terms of a residential mortgage loan performed during the three months ended March 31, 2016 included a reduction in the stated interest rate for three years and a corresponding reduction of the schedule amortized payments of the loan due to the lower interest rate. Additionally, $4 thousand of interest and past due escrow payments were capitalized on the restructured loan. The modification of the terms of a commercial loan performed during the three months ended March 31, 2015 included renewing a line of credit and extending the maturity date at a rate lower than the current market rate.

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2016 and 2015 (in thousands):



March 31, 2016	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Residential mortgage	1	$	121	$	125
Total	1	$	121	$	125



March 31, 2015	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial	1	$	477	$	477
Total	1	$	477	$	477

The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2016 and 2015, respectively.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three months ended March 31, 2016:

The TDRs that subsequently defaulted described above did not increase the allowance for loan losses and resulted in no charge offs during the three months ended March 31, 2016.

There were no payment defaults on any loans previously modified as TDRs within twelve months following the modification during the three months ended March 31, 2015.

Credit Quality Indicators

The Corporation establishes a risk rating at origination for all commercial loans. The main factors considered in assigning risk ratings include, but are not limited to: historic and future debt service coverage, collateral position, operating performance, liquidity, leverage, payment history, management ability, and the customer’s industry. Commercial relationship managers monitor all loans in their respective portfolios for any changes in the borrower’s ability to service their debt and affirm the risk ratings for the loans at least annually.

For the retail loans, which include residential mortgages, indirect and direct consumer loans, home equity lines and loans, and credit cards, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment.

The Corporation uses the risk rating system to identify criticized and classified loans. Commercial relationships within the criticized and classified risk ratings are analyzed quarterly. The Corporation uses the following definitions for criticized and classified loans (which are consistent with regulatory guidelines):

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capability of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Commercial loans not meeting the criteria above to be considered criticized or classified are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans performing under terms of the loan notes. Based on the analyses performed as of March 31, 2016 and December 31, 2015, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):



	March 31, 2016
	Not Rated		Pass		Loans acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	185,438	$	—	$	2,956	$	1,792	$	9	$	190,195
Agricultural	—		843		—		—		—		—		843
Commercial mortgages:
Construction	—		39,257		—		1,484		62		—		40,803
Commercial mortgages	—		467,198		1,804		8,388		13,956		4,206		495,552
Residential mortgages	192,798		—		274		—		4,159		—		197,231
Consumer loans:
Credit cards	1,293		—		—		—		—		—		1,293
Home equity lines and loans	98,132		—		—		—		1,155		—		99,287
Indirect consumer loans	146,543		—		—		—		390		—		146,933
Direct consumer loans	17,632		—		—		—		52		—		17,684
Total	$	456,398	$	692,736	$	2,078	$	12,828	$	21,566	$	4,215	$	1,189,821



	December 31, 2015
	Not Rated		Pass		Loans acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	186,359	$	—	$	3,772	$	2,521	$	9	$	192,661
Agricultural	—		1,039		—		—		—		—		1,039
Commercial mortgages:
Construction	—		40,881		—		287		63		—		41,231
Commercial mortgages	—		437,549		1,825		8,437		14,454		4,204		466,469
Residential mortgages	192,245		—		270		—		3,721		—		196,236
Consumer loans:
Credit cards	1,483		—		—		—		—		—		1,483
Home equity lines and loans	101,218		—		—		—		758		—		101,976
Indirect consumer loans	151,184		—		—		—		542		—		151,726
Direct consumer loans	18,639		—		—		—		43		—		18,682
Total	$	464,769	$	665,828	$	2,095	$	12,496	$	22,102	$	4,213	$	1,171,503

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2016 and December 31, 2015 (in thousands):



	March 31, 2016
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	193,072	$	1,293	$	98,132	$	146,543	$	17,632
Non-Performing	4,159		—		1,155		390		52
	$	197,231	$	1,293	$	99,287	$	146,933	$	17,684



	December 31, 2015
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	192,626	$	1,483	$	101,218	$	151,184	$	18,639
Non-Performing	3,610		—		758		542		43
	$	196,236	$	1,483	$	101,976	$	151,726	$	18,682

At the time of the merger with Fort Orange Financial Corp., the Corporation identified certain loans with evidence of deteriorated credit quality, and the probability that the Corporation would be unable to collect all contractually required payments from the borrower. These loans are classified as PCI loans. The Corporation adjusted its estimates of future expected losses, cash flows, and renewal assumptions on the PCI loans during the current year. These adjustments were made for changes in expected cash flows due to loans refinanced beyond original maturity dates, impairments recognized subsequent to the acquisition, advances made for taxes or insurance to protect collateral held and payments received in excess of amounts originally expected.

The tables below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the PCI loans from January 1, 2016 to March 31, 2016 and January 1, 2015 to March 31, 2015 (in thousands):



Three Months Ended March 31, 2016	Balance at December 31, 2015			Income Accretion		All Other Adjustments			Balance at March 31, 2016
Contractually required principal and interest	$	2,912		$	—	$	(54	)	$	2,858
Contractual cash flows not expected to be collected (nonaccretable discount)	(506		)	—		1			(505		)
Cash flows expected to be collected	2,406			—		(53		)	2,353
Interest component of expected cash flows (accretable yield)	(311		)	37		(1		)	(275		)
Fair value of loans acquired with deteriorating credit quality	$	2,095		$	37	$	(54	)	$	2,078



Three Months Ended March 31, 2015	Balance at December 31, 2014			Income Accretion		All Other Adjustments			Balance at March 31, 2015
Contractually required principal and interest	$	3,621		$	—	$	(676	)	$	2,945
Contractual cash flows not expected to be collected (nonaccretable discount)	(570		)	—		(25		)	(595		)
Cash flows expected to be collected	3,051			—		(701		)	2,350
Interest component of expected cash flows (accretable yield)	(420		)	63		24			(333		)
Fair value of loans acquired with deteriorating credit quality	$	2,631		$	63	$	(677	)	$	2,017

For those purchased credit impaired loans disclosed above, the Corporation did not increase the allowance for loan losses during either of the three months ended March 31, 2016 or 2015, respectively. The Corporation recorded a negative provision for loan losses by $14 thousand and $50 thousand during the three months ended March 31, 2016 and 2015, respectively, due to recoveries received from loans previously charged off.

Number of Loans

Recorded Investment

Commercial mortgages:

Commercial mortgages