LOANS AND ALLOWANCE FOR LOAN LOSSES

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



	March 31, 2017		December 31, 2016
Commercial and agricultural:
Commercial and industrial	$	177,575	$	176,201
Agricultural	500		360
Commercial mortgages:
Construction	51,706		46,387
Commercial mortgages, other	550,906		522,269
Residential mortgages	198,020		198,493
Consumer loans:
Credit cards	1,409		1,476
Home equity lines and loans	99,032		98,590
Indirect consumer loans	138,273		139,572
Direct consumer loans	16,830		16,942
Total loans, net of deferred origination fees and costs	$	1,234,251	$	1,200,290
Interest receivable on loans	3,136		3,192
Total recorded investment in loans	$	1,237,387	$	1,203,482

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, 2017 and 2016 (in thousands):



	Three Months Ended March 31, 2017
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages		Residential Mortgages			Consumer Loans			Total
Beginning balance	$	1,589		$	7,270	$	1,523		$	3,871		$	14,253
Charge-offs	(5		)	—		(12		)	(427		)	(444		)
Recoveries	24			1		17			69			111
Net recoveries (charge-offs)	19			1		5			(358		)	(333		)
Provision	42			478		(16		)	536			1,040
Ending balance	$	1,650		$	7,749	$	1,512		$	4,049		$	14,960



	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

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, 2017 and December 31, 2016 (in thousands):



	March 31, 2017
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	845	$	—	$	153	$	998
Collectively evaluated for impairment	1,650		6,845		1,487		3,896		13,878
Loans acquired with deteriorated credit quality	—		59		25		—		84
Total ending allowance balance	$	1,650	$	7,749	$	1,512	$	4,049	$	14,960



	December 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	$	—	$	735	$	—	$	141	$	876
Collectively evaluated for impairment	1,589		6,476		1,498		3,730		13,293
Loans acquired with deteriorated credit quality	—		59		25		—		84
Total ending allowance balance	$	1,589	$	7,270	$	1,523	$	3,871	$	14,253



	March 31, 2017
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	649	$	11,969	$	390	$	432	$	13,440
Loans collectively evaluated for impairment	177,885		590,922		198,007		255,763		1,222,577
Loans acquired with deteriorated credit quality	—		1,275		95		—		1,370
Total ending loans balance	$	178,534	$	604,166	$	198,492	$	256,195	$	1,237,387



	December 31, 2016
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	693	$	10,382	$	396	$	455	$	11,926
Loans collectively evaluated for impairment	176,334		558,451		198,474		256,879		1,190,138
Loans acquired with deteriorated credit quality	—		1,323		95		—		1,418
Total ending loans balance	$	177,027	$	570,156	$	198,965	$	257,334	$	1,203,482

The following table presents loans individually evaluated for impairment recognized by class of loans as of March 31, 2017 and December 31, 2016 (in thousands):



	March 31, 2017						December 31, 2016
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	$	646	$	649	$	—	$	690	$	693	$	—
Commercial mortgages:
Construction	1,558		1,559		—		277		278		—
Commercial mortgages, other	6,133		6,144		—		8,792		7,857		—
Residential mortgages	389		390		—		395		396		—
Consumer loans:
Home equity lines and loans	72		72		—		93		95		—
With an allowance recorded:
Commercial mortgages:
Commercial mortgages, other	5,206		4,266		845		2,245		2,247		735
Consumer loans:
Home equity lines and loans	360		360		153		360		360		141
Total	$	14,364	$	13,440	$	998	$	12,852	$	11,926	$	876

The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans as of the three-month periods ended March 31, 2017 and 2016 (in thousands):



	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
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	$	671	$	9	$	1,266	$	13
Commercial mortgages:
Construction	919		3		348		4
Commercial mortgages, other	7,000		59		7,395		68
Residential mortgages	393		2		273		—
Consumer loans:
Home equity lines & loans	84		1		107		1
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	—		—		9		—
Commercial mortgages:
Commercial mortgages, other	3,257		1		4,845		1
Consumer loans:
Home equity lines and loans	360		—		364		—
Total	$	12,684	$	75	$	14,607	$	87

(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, 2017 and December 31, 2016 (in thousands):



	Non-accrual				Loans Past Due 90 Days or More and Still Accruing
	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016
Commercial and agricultural:
Commercial and industrial	$	—	$	—	$	9	$	2
Commercial mortgages:
Construction	1,308		19		—		—
Commercial mortgages, other	5,639		5,454		—		—
Residential mortgages	3,524		4,201		—		—
Consumer loans:
Credit cards	—		—		18		11
Home equity lines and loans	1,647		1,670		—		—
Indirect consumer loans	765		654		—		—
Direct consumer loans	31		45		—		—
Total	$	12,914	$	12,043	$	27	$	13

The following tables present the aging of the recorded investment in loans as of March 31, 2017 and December 31, 2016 (in thousands):



	March 31, 2017
	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	$	155	$	1	$	9	$	165	$	—	$	177,868	$	178,033
Agricultural	—		—		—		—		—		501		501
Commercial mortgages:
Construction	—		—		1,289		1,289		—		50,551		51,840
Commercial mortgages, other	941		3,361		2,522		6,824		1,275		544,227		552,326
Residential mortgages	2,276		254		1,758		4,288		95		194,109		198,492
Consumer loans:
Credit cards	17		13		18		48		—		1,361		1,409
Home equity lines and loans	289		209		1,102		1,600		—		97,691		99,291
Indirect consumer loans	1,538		313		488		2,339		—		136,264		138,603
Direct consumer loans	68		2		8		78		—		16,814		16,892
Total	$	5,284	$	4,153	$	7,194	$	16,631	$	1,370	$	1,219,386	$	1,237,387



	December 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	$	160	$	7	$	2	$	169	$	—	$	176,497	$	176,666
Agricultural	—		—		—		—		—		361		361
Commercial mortgages:
Construction	—		1,177		—		1,177		—		45,333		46,510
Commercial mortgages, other	652		4,460		2,412		7,524		1,323		514,799		523,646
Residential mortgages	2,100		436		2,383		4,919		95		193,951		198,965
Consumer loans:
Credit cards	3		9		11		23		—		1,453		1,476
Home equity lines and loans	227		—		1,149		1,376		—		97,477		98,853
Indirect consumer loans	1,773		287		542		2,602		—		137,391		139,993
Direct consumer loans	54		7		22		83		—		16,929		17,012
Total	$	4,969	$	6,383	$	6,521	$	17,873	$	1,418	$	1,184,191	$	1,203,482

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, 2017 and December 31, 2016, the Corporation has a recorded investment in TDRs of $10.3 million and $10.2 million, respectively. There were specific reserves of $0.9 million allocated for TDRs at both March 31, 2017 and December 31, 2016. As of March 31, 2017, TDRs totaling $5.9 million were accruing interest under the modified terms and $4.4 million were on non-accrual status. As of December 31, 2016, TDRs totaling $5.8 million were accruing interest under the modified terms and $4.4 million were on non-accrual status. The Corporation had committed no additional amounts as of both March 31, 2017 and December 31, 2016, to customers with outstanding loans that are classified as TDRs.

During the three-month periods ended March 31, 2017 and 2016, the terms of certain loans were modified as TDRs. The modification of the terms of a commercial mortgage loan during the three months ended March 31, 2017 included a reduction of the scheduled amortized payments of the loan for greater than a three month period. The modification of the terms of a residential mortgage loan performed during the three-month period 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 following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2017 and March 31, 2016 (dollars in thousands):



March 31, 2017	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial mortgages:
Commercial mortgages, other	1	$	166	$	166
Total	1	$	166	$	166



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

The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the three-month periods ended March 31, 2017 and March 31, 2016.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no payment defaults on any loans previously modified as TDRs within twelve months following the modification during the three- month period ended March 31, 2017.

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-month periods ended March 31, 2016.

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 its 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, 2017 and December 31, 2016, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):



	March 31, 2017
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Loans acquired with deteriorated credit quality		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	172,307	$	4,203	$	1,523	$	—	$	—	$	178,033
Agricultural	—		501		—				—		—		501
Commercial mortgages:
Construction	—		50,281		252		1,307		—		—		51,840
Commercial mortgages	—		525,745		8,283		15,584		1,439		1,275		552,326
Residential mortgages	194,873		—		—		3,524		—		95		198,492
Consumer loans:
Credit cards	1,409		—		—		—		—		—		1,409
Home equity lines and loans	97,644		—		—		1,647		—		—		99,291
Indirect consumer loans	137,838		—		—		765		—		—		138,603
Direct consumer loans	16,861		—		—		31		—		—		16,892
Total	$	448,625	$	748,834	$	12,738	$	24,381	$	1,439	$	1,370	$	1,237,387



	December 31, 2016
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Loans acquired with deteriorated credit quality		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	172,873	$	2,277	$	1,516	$	—	$	—	$	176,666
Agricultural	—		361		—		—		—		—		361
Commercial mortgages:
Construction	—		45,055		259		1,196		—		—		46,510
Commercial mortgages	—		496,723		8,574		15,566		1,460		1,323		523,646
Residential mortgages	194,669		—		—		4,201		—		95		198,965
Consumer loans:
Credit cards	1,476		—		—		—		—		—		1,476
Home equity lines and loans	97,183		—		—		1,670		—		—		98,853
Indirect consumer loans	139,339		—		—		654		—		—		139,993
Direct consumer loans	16,967		—		—		45		—		—		17,012
Total	$	449,634	$	715,012	$	11,110	$	24,848	$	1,460	$	1,418	$	1,203,482

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, 2017 and December 31, 2016 (in thousands):



	March 31, 2017
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	194,968	$	1,409	$	97,644	$	137,838	$	16,861
Non-Performing	3,524		—		1,647		765		31
	$	198,492	$	1,409	$	99,291	$	138,603	$	16,892



	December 31, 2016
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	194,764	$	1,476	$	97,183	$	139,339	$	16,967
Non-Performing	4,201		—		1,670		654		45
	$	198,965	$	1,476	$	98,853	$	139,993	$	17,012

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 table 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 from January 1, 2017 to March 31, 2017 and January 1, 2016 to March 31, 2016 (in thousands):



Three Months Ended March 31, 2017	Balance at December 31, 2016			Income Accretion		All Other Adjustments			Balance at March 31, 2017
Contractually required principal and interest	$	1,940		$	—	$	(63	)	$	1,877
Contractual cash flows not expected to be collected (nonaccretable discount)	(352		)	—		—			(352		)
Cash flows expected to be collected	1,588			—		(63		)	1,525
Interest component of expected cash flows (accretable yield)	(170		)	15		—			(155		)
Fair value of loans acquired with deteriorating credit quality	$	1,418		$	15	$	(63	)	$	1,370



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

For those purchased credit impaired loans disclosed above, the Corporation did not increase the allowance for loan losses during the three months ended March 31, 2017 or 2016. The Corporation did not reverse any allowance for loan losses during the three months ended March 31, 2017 or 2016.

Number of Loans

Recorded Investment

Commercial mortgages:

Commercial mortgages, other