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, 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)	June 30, 2017			December 31, 2016
Consumer mortgage	$	2,211,412		$	1,819,701
Business lending		2,479,152			1,490,076
Consumer indirect		1,057,664			1,044,972
Consumer direct		185,589			191,815
Home equity		427,483			401,998
Gross loans, including deferred origination costs		6,361,300			4,948,562
Allowance for loan losses		(47,451	)		(47,233	)
Loans, net of allowance for loan losses	$	6,313,849		$	4,901,329

The outstanding balance related to credit impaired acquired loans was $21.7 million and $6.6 million at June 30, 2017 and December 31, 2016, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000’s omitted)
Balance at December 31, 2016	$	498
Accretion recognized, year-to-date		(264	)
Net reclassification to accretable from non-accretable		117
Merchants acquisition		769
Balance at June 30, 2017	$	1,120

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 June 30, 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	$	9,853	$	946	$	10,291	$	21,090	$	1,677,754	$	1,698,844
Business lending		6,592		527		2,664		9,783		1,275,259		1,285,042
Consumer indirect		12,772		115		0		12,887		1,017,860		1,030,747
Consumer direct		1,491		31		0		1,522		176,192		177,714
Home equity		883		21		1,404		2,308		312,593		314,901
Total	$	31,591	$	1,640	$	14,359	$	47,590	$	4,459,658	$	4,507,248

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	$	2,002	$	195	$	3,839	$	6,036	$	0	$	506,532	$	512,568
Business lending		5,283		0		1,701		6,984		14,781		1,172,345		1,194,110
Consumer indirect		171		3		0		174		0		26,743		26,917
Consumer direct		149		0		0		149		0		7,726		7,875
Home equity		908		44		1,134		2,086		0		110,496		112,582
Total	$	8,513	$	242	$	6,674	$	15,429	$	14,781	$	1,823,842	$	1,854,052

(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:

	June 30, 2017						December 31, 2016
(000’s omitted)	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass	$	1,053,414	$	1,114,822	$	2,168,236	$	1,051,005	$	162,165	$	1,213,170
Special mention		140,514		29,799		170,313		135,602		29,690		165,292
Classified		91,114		34,708		125,822		90,585		15,002		105,587
Doubtful		0		0		0		474		0		474
Acquired impaired		0		14,781		14,781		0		5,553		5,553
Total	$	1,285,042	$	1,194,110	$	2,479,152	$	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 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 June 30, 2017:

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	1,687,607	$	1,030,632	$	177,683	$	313,476	$	3,209,398
Nonperforming		11,237		115		31		1,425		12,808
Total	$	1,698,844	$	1,030,747	$	177,714	$	314,901	$	3,222,206

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

(000’s omitted)	Consumer Mortgage		Consumer Indirect		Consumer Direct		Home Equity		Total
Performing	$	508,534	$	26,914	$	7,875	$	111,404	$	654,727
Nonperforming		4,034		3		0		1,178		5,215
Total	$	512,568	$	26,917	$	7,875	$	112,582	$	659,942

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 C. A summary of individually evaluated impaired loans as of June 30, 2017 and December 31, 2016 follows:

(000’s omitted)	June 30, 2017		December 31, 2016
Loans with allowance allocation	$	0	$	1,109
Loans without allowance allocation		580		556
Unpaid principal balance		580		1,665
Contractual balance		2,229		3,340
Allowance for loan loss allocated		0		477

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 and six months ended June 30, 2017 and 2016 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 June 30, 2017 and December 31, 2016 is as follows:

	June 30, 2017												December 31, 2016
(000’s omitted)	Nonaccrual				Accruing				Total				Nonaccrual				Accruing				Total
		#	Amount			#	Amount			#	Amount			#	Amount			#	Amount			#	Amount
Consumer mortgage		47	$	2,060		44	$	1,825		91	$	3,885		36	$	1,520		45	$	1,956		81	$	3,476
Business lending		8		416		5		392		13		808		6		91		5		690		11		781
Consumer indirect		0		0		78		774		78		774		0		0		78		771		78		771
Consumer direct		0		0		11		73		11		73		0		0		23		65		23		65
Home equity		12		239		7		210		19		449		14		221		7		216		21		437
Total		67	$	2,715		145	$	3,274		212	$	5,989		56	$	1,832		158	$	3,698		214	$	5,530

The following table presents information related to loans modified in a TDR during the three months and six months ended June 30, 2017 and 2016. Of the loans noted in the table below, all loans for the three months and six months ended June 30, 2017 and 2016 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.

	Three Months Ended June 30, 2017				Three Months Ended June 30, 2016
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Consumer mortgage		1	$	43		5	$	437
Business lending		3		363		2		51
Consumer indirect		8		80		9		118
Consumer direct		1		0		1		52
Home equity		0		0		3		73
Total		13	$	486		20	$	731

	Six Months Ended June 30, 2017				Six Months Ended June 30, 2016
(000’s omitted)	Number of loans modified		Outstanding Balance		Number of loans modified		Outstanding Balance
Consumer mortgage		8	$	545		8	$	652
Business lending		3		363		2		51
Consumer indirect		14		156		20		331
Consumer direct		4		14		1		52
Home equity		2		98		4		73
Total		31	$	1,176		35	$	1,159

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 June 30, 2017
(000’s omitted)	Consumer Mortgage			Business Lending			Consumer Indirect			Consumer Direct			Home Equity			Unallocated		Acquired Impaired			Total
Beginning balance	$	10,149		$	16,857		$	13,996		$	2,852		$	2,359		$	773	$	110		$	47,096
Charge-offs		(258	)		(245	)		(1,695	)		(470	)		(190	)		0		(183	)		(3,041	)
Recoveries		11			283			1,452			182			7			0		0			1,935
Provision		295			335			165			381			66			83		136			1,461
Ending balance	$	10,197		$	17,230		$	13,918		$	2,945		$	2,242		$	856	$	63		$	47,451

	Three Months Ended June 30, 2016
(000’s omitted)	Consumer Mortgage			Business Lending			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Beginning balance	$	10,148		$	16,695		$	12,334		$	2,875		$	2,580		$	879		$	85		$	45,596
Charge-offs		(156	)		(770	)		(1,545	)		(389	)		(80	)		0			(26	)		(2,966	)
Recoveries		38			156			1,140			238			19			0			0			1,591
Provision		(177	)		868			1,286			296			(19	)		(29	)		80			2,305
Ending balance	$	9,853		$	16,949		$	13,215		$	3,020		$	2,500		$	850		$	139		$	46,526

	Six Months Ended June 30, 2017
(000’s omitted)	Consumer Mortgage			Business Lending			Consumer Indirect			Consumer Direct			Home Equity			Unallocated		Acquired Impaired			Total
Beginning balance	$	10,094		$	17,220		$	13,782		$	2,979		$	2,399		$	651	$	108		$	47,233
Charge-offs		(343	)		(938	)		(3,642	)		(888	)		(228	)		0		(184	)		(6,223	)
Recoveries		18			354			2,321			427			32			0		0			3,152
Provision		428			594			1,457			427			39			205		139			3,289
Ending balance	$	10,197		$	17,230		$	13,918		$	2,945		$	2,242		$	856	$	63		$	47,451

	Six Months Ended June 30, 2016
(000’s omitted)	Consumer Mortgage			Business Lending			Consumer Indirect			Consumer Direct			Home Equity			Unallocated			Acquired Impaired			Total
Beginning balance	$	10,198		$	15,749		$	12,422		$	2,997		$	2,666		$	1,201		$	168		$	45,401
Charge-offs		(243	)		(979	)		(3,401	)		(852	)		(137	)		0			(26	)		(5,638	)
Recoveries		83			291			2,255			460			28			0			0			3,117
Provision		(185	)		1,888			1,939			415			(57	)		(351	)		(3	)		3,646
Ending balance	$	9,853		$	16,949		$	13,215		$	3,020		$	2,500		$	850		$	139		$	46,526