Loans and Leases

Loans and Leases at December 31, 2016 and December 31, 2015 were as follows:



	December 31, 2016								December 31, 2015
(in thousands)	Originated			Acquired		Total Loans and Leases			Originated			Acquired		Total Loans and Leases
Commercial and industrial
Agriculture	$	118,247		$	0	$	118,247		$	88,299		$	0	$	88,299
Commercial and industrial other	847,055			79,317		926,372			768,024			84,810		852,834
Subtotal commercial and industrial	965,302			79,317		1,044,619			856,323			84,810		941,133
Commercial real estate
Construction	135,834			8,936		144,770			103,037			4,892		107,929
Agriculture	102,509			267		102,776			86,935			2,095		89,030
Commercial real estate other	1,431,690			241,605		1,673,295			1,167,250			284,952		1,452,202
Subtotal commercial real estate	1,670,033			250,808		1,920,841			1,357,222			291,939		1,649,161
Residential real estate
Home equity	209,277			37,737		247,014			202,578			42,092		244,670
Mortgages	947,378			25,423		972,801			823,841			27,491		851,332
Subtotal residential real estate	1,156,655			63,160		1,219,815			1,026,419			69,583		1,096,002
Consumer and other
Indirect	14,835			0		14,835			17,829			0		17,829
Consumer and other	44,393			826		45,219			40,904			911		41,815
Subtotal consumer and other	59,228			826		60,054			58,733			911		59,644
Leases	16,650					16,650			14,861			0		14,861
Covered loans	0			0		0			0			14,031		14,031
Total loans and leases	3,867,868			394,111		4,261,979			3,313,558			461,274		3,774,832
Less: unearned income and deferred costs and fees	(3,946		)	0		(3,946		)	(2,790		)	0		(2,790		)
Total loans and leases, net of unearned income and deferred costs and fees	$	3,863,922		$	394,111	$	4,258,033		$	3,310,768		$	461,274	$	3,772,042

The outstanding principal balance and the related carrying amount of the Company’s loans acquired in the VIST Acquisition were as follows at December 31:



(in thousands)	2016		2015
Acquired Credit Impaired Loans
Outstanding principal balance	$	26,237	$	32,752
Carrying amount	22,517		26,507

Acquired Non-Credit Impaired Loans
Outstanding principal balance	375,471		439,389
Carrying amount	371,594		434,767

Total Acquired Loans
Outstanding principal balance	401,708		472,141
Carrying amount	394,111		461,274

The following tables present changes in accretable yield on loans acquired from VIST Bank that were considered credit impaired.



(in thousands)
Balance at January 1, 2015	$	8,604
Accretion	(2,696		)
Disposals (loans paid in full)	(331		)
Reclassifications to/from nonaccretable difference	1,215
Balance at December 31, 2015	$	6,792



(in thousands)
Balance at January 1, 2016	$	6,792
Accretion	(2,290		)
Disposals (loans paid in full)	0
Reclassifications to/from nonaccretable difference¹	1,768
Balance at December 31, 2016	$	6,270

¹Results in increased interest income as a prospective yield adjustment over the remaining life of the loans, as well as increased interest income from loan sales, modification and prepayments.

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. The Company reviewed the lending policies of Tompkins and VIST Financial, and adopted a uniform policy for the Company. There were no significant changes to the Company’s existing policies, underwriting standards and loan review. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.

Residential real estate loans

The Company’s policy is to underwrite residential real estate loans in accordance with secondary market guidelines in effect at the time of origination, including loan-to-value (“LTV”) and documentation requirements. LTVs exceeding 80% for fixed rate loans and 85% for adjustable rate loans require private mortgage insurance to reduce the exposure to 78%. The Company verifies applicants’ income, obtains credit reports and independent real estate appraisals in the underwriting process to ensure adequate collateral coverage and that loans are extended to individuals with good credit and income sufficient to repay the loan. In limited circumstances, the Company will make exceptions to secondary market underwriting standards to support community reinvestment activities.

The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/1 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate loans given the low interest rate environment. Adjustable rate residential real estate loans may be underwritten based upon an initial rate which is below the fully indexed rate; however, the initial rate is generally less than 100 basis points below the fully indexed rate. As such, the Company does not believe that this practice creates any significant credit risk. Adjustable rate mortgages comprised approximately 14.7% of the Company's residential mortgage portfolio at December 31, 2016.

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to Federal Home Loan Mortgage Corporation (“FHLMC”) or State of New York Mortgage Agency (“SONYMA”) without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loan sales are subject to customary representations and warranties, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these general representations and warranties.

During 2016, 2015, and 2014, the Company sold residential mortgage loans totaling $3.9 million, $3.2 million, and $19.9 million, respectively, and realized net gains on these sales of $95,000, $54,000, and $362,000, respectively. These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2016, 2015, and 2014, the Company recorded mortgage-servicing assets of $21,000, $18,000, and $146,000, respectively.

Amortization of mortgage servicing assets amounted to $157,000 in 2016, $146,000 in 2015, and $149,000 in 2014. At December 31, 2016 and 2015, the Company serviced residential mortgage loans aggregating $115.3 million and $135.9 million, including loans securitized and held as available-for-sale securities. Mortgage servicing rights, at amortized basis, totaled $758,000 at December 31, 2016 and $0.9 million at December 31, 2015. These mortgage servicing rights were evaluated for impairment at year-end 2016 and 2015 and no impairment was recognized. Loans held for sale, which are included in residential real estate totaled $0 and $546,000 at December 31, 2016 and 2015, respectively.

As members of the FHLB, the Company’s subsidiary banks may use unencumbered mortgage related assets to secure borrowings from the FHLB. At December 31, 2016 and 2015, the Company had $365.0 million and $250.0 million, respectively, of term advances from the FHLB that were secured by residential mortgage loans.

Commercial and industrial loans

The Company’s Commercial Loan Policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial and industrial loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral and personal or government guarantees. The Company’s policy establishes debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial and industrial loans are generally secured by the assets being financed or other business assets such as accounts receivable or inventory. Many of the loans in the commercial portfolio have variable interest rates tied to Prime Rate, FHLBNY borrowing rates, or U.S. Treasury indices.

Commercial real estate

The Company’s Commercial Loan Policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial real estate loans are primarily made based on identified cash flows of the borrower with consideration given to underlying real estate collateral and personal or government guarantees. The Company’s policy establishes a maximum LTV of 75% and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial real estate loans may be fixed or variable rate loans with interest rates tied to Prime Rate, FHLBNY borrowing rates, or U.S. Treasury indices.

Agriculture loans

Agriculturally-related loans include loans to dairy farms and vegetable crop farms. Agriculturally-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment, or commodities/crops. The Company’s Commercial Loan Policy establishes a maximum LTV of 75% for real estate secured loans and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. The policy also establishes maximum LTV ratios for non-real estate collateral, such as livestock, commodities/crops, equipment and accounts receivable. Agriculturally-related loans may be fixed or variable rate loans with interest tied to Prime Rate, FHLBNY borrowing rates, or U.S. Treasury indices.

Consumer and other loans

The consumer loan portfolio includes personal installment loans, direct and indirect automobile financing, and overdraft lines of credit. The majority of the consumer portfolio consists of indirect and direct automobile loans. Consumer loans are generally short-term and have fixed rates of interest that are set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets. The Company's Consumer Loan Underwriting Guidelines Policy establishes maximum debt to income ratios and includes guidelines for verification of applicants’ income and receipt of credit reports.

Leases

Leases are primarily made to commercial customers and the origination criteria typically includes the value of the underlying assets being financed, the useful life of the assets being financed, and identified cash flows of the borrower. Most leases carry a fixed rate of interest that is set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets.

Covered Loans

Prior to the third quarter of 2016, the Company had certain loans acquired in the VIST Financial acquisition which were covered loans with loss share agreements with the FDIC. During 2016, the Company decided to early terminate the remaining loss share agreement with the FDIC. In the third quarter of 2016 the Company recorded pre-tax expense of $313,000 related to the termination of the remaining agreement and wrote-off the remaining book value of the FDIC indemnification asset. The remaining balances of the loans previously reported as Covered Loans are included in the current period in acquired loan balances by loan type.

Loan and Lease Customers

The Company’s loan and lease customers are located primarily in the upstate New York communities served by its three subsidiary banks and in the Pennsylvania communities served by recently acquired VIST Bank. The Trust Company operates fourteen banking offices in the counties of Tompkins, Cayuga, Cortland, and Schuyler, New York. The Bank of Castile operates seventeen banking offices in the Genesee Valley region of New York State as well as Monroe County. Mahopac Bank is located in Putnam County, New York, and operates five offices in that county, three offices in neighboring Dutchess County, New York, and six offices in Westchester County, New York. VIST Bank operates 21 offices in Southeastern Pennsylvania. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.

Nonaccrual Loans and Leases

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest (generally when past due 90 or more days) or a judgment by management that the full repayment of principal and interest is unlikely. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. When management determines that the collection of principal in full is improbable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. The Company has determined that it can reasonably estimate future cash flows on our current portfolio of acquired loans that are past due 90 days or more and on which the Company is accruing interest and expect to fully collect the carrying value of the loans net of the allowance for acquired loan losses.

The below table is an aging analysis of past due loans, segregated by originated and acquired loan and lease portfolios, and by class of loans, as of December 31, 2016 and 2015.



December 31, 2016
(in thousands)	30-89 days		90 days or more		Current Loans			Total Loans			90 days and accruing¹		Nonaccrual
Originated Loans and Leases
Commercial and industrial
Agriculture	$	0	$	0	$	118,247		$	118,247		$	0	$	0
Commercial and industrial other	1,312		281		845,462			847,055			0		526
Subtotal commercial and industrial	1,312		281		963,709			965,302			0		526
Commercial real estate
Construction	0		0		135,834			135,834			0		0
Agriculture	17		0		102,492			102,509			0		162
Commercial real estate other	2,546		3,071		1,426,073			1,431,690			0		5,988
Subtotal commercial real estate	2,563		3,071		1,664,399			1,670,033			0		6,150
Residential real estate
Home equity	433		1,954		206,890			209,277			0		2,016
Mortgages	1,749		3,244		942,385			947,378			0		5,442
Subtotal residential real estate	2,182		5,198		1,149,275			1,156,655			0		7,458
Consumer and other
Indirect	444		376		14,015			14,835			0		166
Consumer and other	193		8		44,192			44,393			0		0
Subtotal consumer and other	637		384		58,207			59,228			0		166
Leases	0		0		16,650			16,650			0		0
Total loans and leases	6,694		8,934		3,852,240			3,867,868			0		14,300
Less: unearned income and deferred costs and fees	0		0		(3,946		)	(3,946		)	0		0
Total originated loans and leases, net of unearned income and deferred costs and fees	$	6,694	$	8,934	$	3,848,294		$	3,863,922		$	0	$	14,300
Acquired Loans and Leases
Commercial and industrial
Commercial and industrial other	$	12	$	87	$	79,218		$	79,317		$	40	$	212
Subtotal commercial and industrial	12		87		79,218			79,317			40		212
Commercial real estate
Construction	0		0		8,936			8,936			0		0
Agriculture	0		0		267			267			0		0
Commercial real estate other	1,461		3,952		236,192			241,605			1,402		2,926
Subtotal commercial real estate	1,461		3,952		245,395			250,808			1,402		2,926
Residential real estate
Home equity	251		637		36,849			37,737			185		663
Mortgages	829		1,651		22,943			25,423			930		940
Subtotal residential real estate	1,080		2,288		59,792			63,160			1,115		1,603
Consumer and other
Consumer and other	0		0		826			826			0		0
Subtotal consumer and other	0		0		826			826			0		0
Total acquired loans and leases, net of unearned income and deferred costs and fees	$	2,553	$	6,327	$	385,231		$	394,111		$	2,557	$	4,741

¹ Includes acquired loans that were recorded at fair value at the acquisition date.



December 31, 2015
(in thousands)	30-89 days		90 days or more		Current Loans			Total Loans			90 days and accruing¹		Nonaccrual
Originated loans and leases
Commercial and industrial
Agriculture	$	0	$	0	$	88,299		$	88,299		$	0	$	0
Commercial and industrial other	507		867		766,650			768,024			0		1,091
Subtotal commercial and industrial	507		867		854,949			856,323			0		1,091
Commercial real estate
Construction	0		0		103,037			103,037			0		0
Agriculture	0		0		86,935			86,935			0		106
Commercial real estate other	225		3,580		1,163,445			1,167,250			0		4,365
Subtotal commercial real estate	225		3,580		1,353,417			1,357,222			0		4,471
Residential real estate
Home equity	729		1,868		199,981			202,578			58		1,873
Mortgages	1,161		5,140		817,540			823,841			0		5,889
Subtotal residential real estate	1,890		7,008		1,017,521			1,026,419			58		7,762
Consumer and other
Indirect	494		250		17,085			17,829			0		107
Consumer and other	164		0		40,740			40,904			0		75
Subtotal consumer and other	658		250		57,825			58,733			0		182
Leases	0		0		14,861			14,861			0		0
Total loans and leases	3,280		11,705		3,298,573			3,313,558			58		13,506
Less: unearned income and deferred costs and fees	0		0		(2,790		)	(2,790		)	0		0
Total originated loans and leases, net of unearned income and deferred costs and fees	$	3,280	$	11,705	$	3,295,783		$	3,310,768		$	58	$	13,506
Acquired loans and leases
Commercial and industrial
Commercial and industrial other	$	20	$	936	$	83,854		$	84,810		$	338	$	647
Subtotal commercial and industrial	20		936		83,854			84,810			338		647
Commercial real estate
Construction	0		359		4,533			4,892			0		359
Agriculture	0		0		2,095			2,095			0		0
Commercial real estate other	150		1,671		283,131			284,952			550		1,224
Subtotal commercial real estate	150		2,030		289,759			291,939			550		1,583
Residential real estate
Home equity	426		364		41,302			42,092			0		712
Mortgages	336		1,926		25,229			27,491			1,103		1,389
Subtotal residential real estate	762		2,290		66,531			69,583			1,103		2,101
Consumer and other
Consumer and other	1		0		910			911			0		0
Subtotal consumer and other	1		0		910			911			0		0
Covered loans	276		524		13,231			14,031			524		0
Total acquired loans and leases, net of unearned income and deferred costs and fees	$	1,209	$	5,780	$	454,285		$	461,274		$	2,515	$	4,331

¹Includes acquired loans that were recorded at fair value at the acquisition date.

The difference between the interest income that would have been recorded if nonaccrual loans and leases had paid in accordance with their original terms and the interest income that was recorded for the year ended December 31, 2016, 2015 and 2014 was $1.0 million, $1.2 million and $1.7 million, respectively. The Company had no material commitments to make additional advances to borrowers with nonperforming loans.