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Loans and Leases

3 Months Ended

Mar. 31, 2013

Note 3. Loans and Leases

Summary of Major Loan and Lease Categories


(Dollars in thousands)	At March 31, 2013			At December 31, 2012
Commercial, financial and agricultural	$	468,437		$	468,421
Real estate—commercial		551,761			530,122
Real estate—construction		79,285			91,250
Real estate—residential secured for business purpose		31,755			35,179
Real estate—residential secured for personal purpose		143,487			146,526
Real estate—home equity secured for personal purpose		83,399			82,727
Loans to individuals		41,781			43,780
Lease financings		87,470			83,857

Total loans and leases held for investment, net of deferred income	$	1,487,375		$	1,481,862

Unearned lease income, included in the above table	$	(12,816	)	$	(12,355	)
Net deferred costs (fees), included in the above table	$	1,648		$	1,432
Overdraft deposits included in the above table	$	135		$	128

Overdraft deposits are re-classified as loans and are included in the total loans and leases on the balance sheet.

Age Analysis of Past Due Loans and Leases

The following presents, by class of loans and leases, an aging of past due loans and leases, loans and leases which are current and the recorded investment in loans and leases greater than 90 days past due which are accruing interest at March 31, 2013 and December 31, 2012:

(Dollars in thousands)

30-59 Days
Past Due*

60-89 Days
Past Due*

Greater
Than
90 Days
Past Due*

Total
Past Due*

Current*

Total
Loans and
Leases
Held for
Investment

Recorded
Investment
Greater than
90 Days
Past Due
and Accruing
Interest*

At March 31, 2013

Commercial, financial and agricultural

2,587

2,658

463,482

468,437

Real estate—commercial real estate and construction:

Commercial real estate

2,475

230

—

2,705

526,611

551,761

—

Construction

—

63,521

79,285

—

Real estate—residential and home equity:

Residential secured for business purpose

1,970

—

1,970

29,614

31,755

—

Residential secured for personal purpose

1,783

—

1,853

140,830

143,487

—

Home equity secured for personal purpose

395

—

459

82,917

83,399

—

Loans to individuals

366

177

223

766

40,974

41,781

223

Lease financings

998

489

1,581

85,510

87,470

Total

10,574

1,052

366

11,992

1,433,459

1,487,375

366

*	Excludes impaired loans and leases.


(Dollars in thousands)	30-59 Days Past Due*		60-89 Days Past Due*		Greater Than 90 Days Past Due*		Total Past Due*		Current*		Total Loans and Leases Held for Investment		Recorded Investment Greater than 90 Days Past Due and Accruing Interest*
At December 31, 2012
Commercial, financial and agricultural	$	416	$	95	$	—	$	511	$	464,588	$	468,421	$	—
Real estate—commercial real estate and construction:
Commercial real estate		1,173		—		—		1,173		504,086		530,122		—
Construction		306		—		—		306		74,959		91,250		—
Real estate—residential and home equity:
Residential secured for business purpose		1,663		—		—		1,663		33,344		35,179		—
Residential secured for personal purpose		1,617		152		—		1,769		143,953		146,526		—
Home equity secured for personal purpose		276		64		54		394		82,333		82,727		54
Loans to individuals		551		115		347		1,013		42,729		43,780		347
Lease financings		1,001		273		40		1,314		82,138		83,857		40

Total	$	7,003	$	699	$	441	$	8,143	$	1,428,130	$	1,481,862	$	441

*	Excludes impaired loans and leases.

Nonaccrual and Troubled Debt Restructured Loans and Lease Modifications

The following presents, by class of loans and leases, nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) and accruing troubled debt restructured loans and lease modifications at March 31, 2013 and December 31, 2012:


	At March 31, 2013						At December 31, 2012
(Dollars in thousands)	Nonaccrual Loans and Leases*		Accruing Troubled Debt Restructured Loans and Lease Modifications		Total Impaired Loans and Leases		Nonaccrual Loans and Leases*		Accruing Troubled Debt Restructured Loans and Lease Modifications		Total Impaired Loans and Leases*
Commercial, financial and agricultural	$	1,837	$	460	$	2,297	$	2,842	$	480	$	3,322
Real estate—commercial real estate and construction:
Commercial real estate		12,146		10,299		22,445		14,340		10,523		24,863
Construction		13,538		2,226		15,764		13,588		2,397		15,985
Real estate—residential and home equity:
Residential secured for business purpose		171		—		171		172		—		172
Residential secured for personal purpose		804		—		804		804		—		804
Home equity secured for personal purpose		23		—		23		—		—		—
Loans to individuals		2		39		41		—		38		38
Lease financings		366		13		379		386		19		405

Total	$	28,887	$	13,037	$	41,924	$	32,132	$	13,457	$	45,589

*	Includes non-accrual troubled debt restructured loans and lease modifications of $572 thousand and $579 thousand at March 31, 2013 and December 31, 2012, respectively.

Credit Quality Indicators

The following tables present by class, the recorded investment in loans and leases held for investment by credit quality indicator at March 31, 2013 and December 31, 2012.

The Corporation employs a ten (10) grade risk rating system related to the credit quality of commercial loans and residential real estate loans secured for a business purpose of which the first six categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating. Loans with risk ratings of one through five are reviewed based on the relationship dollar amount with the borrower: loans with a relationship total of $2.5 million or greater are reviewed quarterly; loans with a relationship balance of less than $2.5 million but greater than $500 thousand are reviewed annually based on the borrower’s fiscal year; loans with a relationship balance of less than $500 thousand are reviewed only if the loan becomes 60 days or more past due. Loans with risk ratings of six are also reviewed based on the relationship dollar amount with the borrower: loans with a relationship balance of $2.0 million or greater are reviewed quarterly; loans with a relationship balance of less than $2.0 million but greater than $500 thousand are reviewed annually; loans with a relationship balance of less than $500 thousand are reviewed only if the loan becomes 60 days or more past due. Loans with risk ratings of seven are reviewed at least quarterly, and as often as monthly, at management’s discretion. Loans with risk ratings of eight through ten are reviewed monthly.

Cash Secured – No credit risk

Fully Secured – Negligible credit risk

Strong – Minimal credit risk

Satisfactory – Nominal credit risk

Acceptable – Moderate credit risk

Pre-Watch – Marginal, but stable credit risk

Special Mention – Potential weakness

Substandard – Well-defined weakness

Doubtful – Collection in-full improbable

10.

Loss – Considered uncollectible

Commercial Credit Exposure Credit Risk by Internally Assigned Grades


	Commercial, Financial and Agricultural				Real Estate—Commercial				Real Estate—Construction				Real Estate—Residential Secured for Business Purpose
(Dollars in thousands)	At March 31, 2013		At December 31, 2012		At March 31, 2013		At December 31, 2012		At March 31, 2013		At December 31, 2012		At March 31, 2013		At December 31, 2012
Grade:
1. Cash secured/
2. Fully secured	$	2,525	$	2,263	$	—	$	—	$	—	$	—	$	—	$	—
3. Strong		7,209		5,227		9,480		9,591		6,285		3,907		—		—
4. Satisfactory		35,666		40,747		23,842		25,837		1,801		1,783		119		335
5. Acceptable		265,423		260,042		303,329		321,194		21,400		26,331		21,447		22,764
6. Pre-watch		104,615		106,436		154,423		110,476		33,017		42,190		6,486		8,458
7. Special Mention		33,447		31,825		17,993		16,187		805		548		1,084		288
8. Substandard		19,552		21,881		42,694		45,844		15,977		16,491		2,619		3,334
9. Doubtful		—		—		—		993		—		—		—		—
10. Loss		—		—		—		—		—		—		—		—

Total	$	468,437	$	468,421	$	551,761	$	530,122	$	79,285	$	91,250	$	31,755	$	35,179

The Corporation monitors the credit risk profile by payment activity for the following classifications of loans and leases: residential real estate loans secured for a personal purpose, home equity loans secured for a personal purpose, loans to individuals and lease financings. Nonperforming loans and leases are loans past due 90 days or more, loans and leases on non-accrual of interest and troubled debt restructured loans and lease modifications. Performing loans and leases are reviewed only if the loan becomes 60 days or more past due. Nonperforming loans and leases are reviewed monthly. Performing loans and leases have a nominal to moderate risk of loss. Nonperforming loans and leases are loans or leases with a well-defined weakness and where collection in-full is improbable.

Credit Exposure—Real Estate—Residential Secured for Personal Purpose, Real Estate—Home Equity Secured for Personal Purpose, Loans to individuals, Lease Financing Credit Risk Profile by Payment Activity


	Real Estate—Residential Secured for Personal Purpose				Real Estate—Home Equity Secured for Personal Purpose				Loans to individuals				Lease Financing
(Dollars in thousands)	At March 31, 2013		At December 31, 2012		At March 31, 2013		At December 31, 2012		At March 31, 2013		At December 31, 2012		At March 31, 2013		At December 31, 2012
Performing	$	142,683	$	145,722	$	83,376	$	82,673	$	41,517	$	43,395	$	86,997	$	83,412
Nonperforming		804		804		23		54		264		385		473		445

Total	$	143,487	$	146,526	$	83,399	$	82,727	$	41,781	$	43,780	$	87,470	$	83,857

Risks associated with lending activities include, among other things, the impact of changes in interest rates and economic conditions, which may adversely impact the ability of borrowers to repay outstanding loans, and impact the value of the associated collateral.

Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties and factors affecting residential real estate borrowers.

Commercial, financial and agricultural business loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the collateral securing the loans often depreciates over time, is difficult to appraise and liquidate and fluctuates in value based on the success of the business.

Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest). During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral. Included in real estate-construction is track development financing. Risk factors related to track development financing include the demand for residential housing and the real estate valuation market. When projects move slower than anticipated, the properties may have significantly lower values than when the original underwriting was completed, resulting in lower collateral values to support the loan. Extended time frames also cause the interest carrying cost for a project to be higher than the builder projected, negatively impacting the builder’s profit and cash flow and, therefore, their ability to make principal and interest payments.

Commercial real estate loans and residential real estate loans with a business purpose secured by owner-occupied properties are dependent upon the successful operation of the borrower’s business. If the operating company suffers difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by properties where repayment is dependent upon payment of rent by third party tenants or the sale of the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit.

Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans secured for a business purpose are more susceptible to a risk of loss during a downturn in the business cycle. The Corporation has strict underwriting, review, and monitoring procedures in place, however, these procedures cannot eliminate all of the risks related to these loans.

The Corporation focuses on both assessing the borrower’s capacity and willingness to repay and on obtaining sufficient collateral. Commercial, financial and agricultural loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the Eastern Pennsylvania market area at conservative loan-to-value ratios and often by a guarantee of the borrowers. Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that any credit concentrations by borrower or industry are closely monitored.

The Corporation originates fixed-rate and adjustable-rate real estate-residential mortgage loans that are secured by the underlying 1- to 4-family residential properties for personal purposes. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.

In the real estate-home equity loan portfolio secured for a personal purpose, credit exposure is minimized by the evaluation of the creditworthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to the Corporation’s underwriting policies. Combined loan-to-value ratios are generally limited to 80%, but increased to 85% for the Corporation’s strongest profile borrower. Other credit considerations and compensating factors may warrant higher combined loan-to-value ratios.

Credit risk for direct consumer loans is controlled by strict adherence to conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values. These loans are included within the portfolio of loans to individuals.

The primary risks that are involved with lease financing receivables are credit underwriting and borrower industry concentrations. The Corporation has strict underwriting, review, and monitoring procedures in place to mitigate this risk. Risk also lies in the residual value of the underlying equipment. Residual values are subject to judgments as to the value of the underlying equipment that can be affected by changes in economic and market conditions and the financial viability of the residual guarantors and insurers. To the extent not guaranteed or assumed by a third party, or otherwise insured against, the Corporation bears the risk of ownership of the leased assets. This includes the risk that the actual value of the leased assets at the end of the lease term will be less than the residual value. The Corporation greatly reduces this risk primarily by using $1.00 buyout leases, in which the entire cost of the leased equipment is included in the contractual payments, leaving no residual payment at the end of the lease terms.

Reserve for Loan and Lease Losses and Recorded Investment in Loans and Leases

The following presents, by portfolio segment, a summary of the activity in the reserve for loan and lease losses, the balance in the reserve for loan and lease losses disaggregated on the basis of impairment method and the recorded investment in loans and leases disaggregated on the basis of impairment method for the three months ended March 31, 2013 and 2012:


(Dollars in thousands)	Commercial, Financial and Agricultural			Real Estate— Commercial and Construction			Real Estate— Residential Secured for Business Purpose			Real Estate— Residential and Home Equity Secured for Personal Purpose			Loans to Individuals			Lease Financings			Unallocated			Total
Three Months Ended March 31, 2013
Reserve for loan and lease losses:
Beginning balance	$	11,594		$	7,507		$	639		$	980		$	679		$	1,326		$	2,021		$	24,746
Charge-offs		(1,071	)		(382	)		(50	)		(4	)		(180	)		(159	)		N/A			(1,846	)
Recoveries		48			6			8			2			34			150			N/A			248
Provision (recovery of provision)		1,312			892			(18	)		(186	)		95			41			(62	)		2,074

Ending balance	$	11,883		$	8,023		$	579		$	792		$	628		$	1,358		$	1,959		$	25,222

Three Months Ended March 31, 2012
Reserve for loan and lease losses:
Beginning balance	$	11,262		$	13,317		$	823		$	735		$	730		$	1,344		$	1,659		$	29,870
Charge-offs		(1,707	)		(1,542	)		—			—			(121	)		(336	)		N/A			(3,706	)
Recoveries		53			96			52			2			31			99			N/A			333
Provision (recovery of provision)		2,093			1,481			73			(5	)		64			53			341			4,100

Ending balance	$	11,701		$	13,352		$	948		$	732		$	704		$	1,160		$	2,000		$	30,597

N/A – Not applicable

(Dollars in thousands)

Commercial,
Financial
and
Agricultural

Real Estate—
Commercial
and
Construction

Real Estate—
Residential
Secured for
Business
Purpose

Real Estate—
Residential
and Home
Equity
Secured for
Personal
Purpose

Loans to
Individuals

Lease
Financings

Unallocated

Total

At March 31, 2013

Reserve for loan and lease losses:

Ending balance: individually evaluated for impairment

252

—

N/A

252

Ending balance: collectively evaluated for impairment

11,631

8,023

579

792

628

1,358

1,959

24,970

Total ending balance

11,883

8,023

579

792

628

1,358

1,959

25,222

Loans and leases held for investment:

Ending balance: individually evaluated for impairment

2,297

38,209

171

827

—

41,545

Ending balance: collectively evaluated for impairment

466,140

592,837

31,584

226,059

41,740

87,470

1,445,830

Total ending balance

468,437

631,046

31,755

226,886

41,781

87,470

1,487,375


(Dollars in thousands)	Commercial, Financial and Agricultural		Real Estate— Commercial and Construction		Real Estate— Residential Secured for Business Purpose		Real Estate— Residential and Home Equity Secured for Personal Purpose		Loans to Individuals		Lease Financings		Unallocated		Total
At March 31, 2012
Reserve for loan and lease losses:
Ending balance: individually evaluated for impairment	$	860	$	52	$	—	$	—	$	—	$	—	$	N/A	$	912
Ending balance: collectively evaluated for impairment		10,841		13,300		948		732		704		1,160		2,000		29,685

Total ending balance	$	11,701	$	13,352	$	948	$	732	$	704	$	1,160	$	2,000	$	30,597

Loans and leases held for investment:
Ending balance: individually evaluated for impairment	$	6,224	$	36,391	$	106	$	57	$	50	$	—			$	42,828
Ending balance: collectively evaluated for impairment		493,312		561,975		32,371		212,646		44,292		72,406				1,417,002

Total ending balance	$	499,536	$	598,366	$	32,477	$	212,703	$	44,342	$	72,406			$	1,459,830

N/A – Not applicable

Impaired Loans

The following presents, by class of loans, the recorded investment and unpaid principal balance of impaired loans, the amounts of the impaired loans for which there is not an allowance for credit losses and the amounts for which there is an allowance for credit losses at March 31, 2013 and December 31, 2012:


	At March 31, 2013						At December 31, 2012
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance recorded:
Commercial, financial and agricultural	$	1,637	$	3,222			$	2,646	$	4,504
Real estate—commercial real estate		22,445		28,217				24,863		30,991
Real estate—construction		15,764		17,785				15,985		17,959
Real estate—residential secured for business purpose		171		182				172		184
Real estate—residential secured for personal purpose		804		804				804		804
Real estate—home equity secured for personal purpose		23		23				—		—
Loans to individuals		41		57				38		55

Total impaired loans with no related allowance recorded	$	40,885	$	50,290			$	44,508	$	54,497

Impaired loans with an allowance recorded:
Commercial, financial and agricultural	$	660	$	713	$	252	$	676	$	717	$	208

Total impaired loans with an allowance recorded	$	660	$	713	$	252	$	676	$	717	$	208

Total impaired loans:
Commercial, financial and agricultural	$	2,297	$	3,935	$	252	$	3,322	$	5,221	$	208
Real estate—commercial real estate		22,445		28,217		—		24,863		30,991		—
Real estate—construction		15,764		17,785		—		15,985		17,959		—
Real estate—residential secured for business purpose		171		182		—		172		184		—
Real estate—residential secured for personal purpose		804		804		—		804		804		—
Real estate—home equity secured for personal purpose		23		23		—		—		—		—
Loans to individuals		41		57		—		38		55		—

Total impaired loans	$	41,545	$	51,003	$	252	$	45,184	$	55,214	$	208

The following presents by class of loans, the average recorded investment in impaired loans and an analysis of interest on impaired loans:


	Three Months Ended March 31, 2013						Three Months Ended March 31, 2012
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized*		Interest Income That Would Have Been Recognized Under Original Terms		Average Recorded Investment		Interest Income Recognized*		Interest Income That Would Have Been Recognized Under Original Terms
Commercial, financial and agricultural	$	2,884	$	8	$	39	$	5,337	$	2	$	92
Real estate—commercial real estate		23,958		155		225		20,814		43		269
Real estate—construction		15,844		28		184		15,956		17		195
Real estate—residential secured for business purpose		184		—		3		110		—		1
Real estate—residential secured for personal purpose		803		—		12		57		—		1
Real estate—home equity secured for personal purpose		6		—		—		7		—		—
Loans to individuals		46		1		—		50		1		—

Total	$	43,725	$	192	$	463	$	42,331	$	63	$	558

*	Includes interest income recognized on accruing troubled debt restructured loans of $186 thousand and $58 thousand for the three months ended March 31, 2013 and 2012, respectively.

Troubled Debt Restructured Loans

The following presents, by class of loans, information regarding accruing and non-accrual loans that were restructured:


	Three Months Ended March 31, 2013								Three Months Ended March 31 , 2012
(Dollars in thousands)	Number Of Loans		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment		Related Allowance		Number Of Loans		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment		Related Allowance
Accruing Troubled Debt Restructured Loans
Commercial, financial and agricultural		—	$	—	$	—	$	—		7	$	1,537	$	1,537	$	—
Real estate—commercial real estate		—		—		—		—		3		834		834		—
Real estate—construction		—		—		—		—		2		1,330		1,330		—

Total		—	$	—	$	—	$	—		12	$	3,701	$	3,701	$	—

Nonaccrual Troubled Debt Restructured Loans
Commercial, financial and agricultural		—	$	—	$	—	$	—		2	$	448	$	448	$	—
Real estate—commercial real estate		—		—		—		—		1		124		124		—

Total		—	$	—	$	—	$	—		3	$	572	$	572	$	—

The Corporation grants concessions primarily related to extensions of interest-only payment periods and an occasional payment modification. These modifications typically are on a short-term basis up to one year. Our goal when restructuring a credit is to afford the customer a reasonable period of time to provide cash flow relief to customers experiencing cash flow difficulties. Accruing troubled debt restructured loans were primarily comprised of loans on which interest is being accrued under the restructured terms, and the loans were current or less than ninety days past due.

The following presents, by class of loans, information regarding the types of concessions granted on accruing and non-accrual loans that were restructured during the three months ended March 31, 2012. There were no troubled debt loan restructurings during the three months ended March 31, 2013.


	Three Months Ended March 31, 2012
	Interest Only Terms Extension				Temporary Payment Reduction				Temporary Payment Suspension				Total Concessions Granted
(Dollars in thousands)	No. of Loans		Amount		No. of Loans		Amount		No. of Loans		Amount		No. of Loans		Amount
Accruing Troubled Debt Restructured Loans:
Commercial, financial and agricultural		4	$	1,316		3	$	221		—	$	—		7	$	1,537
Real estate—commercial real estate		2		647		1		187		—		—		3		834
Real estate—construction		2		1,330		—		—		—		—		2		1,330

Total		8	$	3,293		4	$	408		—	$	—		12	$	3,701

Nonaccrual Troubled Debt Restructured Loans:
Commercial, financial and agricultural		—	$	—		—	$	—		2	$	448		2	$	448
Real estate—commercial real estate		—		—		—		—		1		124		1		124

Total		—	$	—		—	$	—		3	$	572		3	$	572

The following presents, by class of loans, information regarding accruing and nonaccrual troubled debt restructured loans, for which there was a payment default during the three month periods ended March 31, 2013 and 2012 and within twelve months of the restructuring date:


	Three Months Ended				Three Months Ended
	March 31, 2013				March 31, 2012
(Dollars in thousands)	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Accruing Troubled Debt Restructured Loans:
Commercial, financial and agricultural		3	$	230		—	$	—

Total		3	$	230		—	$	—

Nonaccrual Troubled Debt Restructured Loans:

Total		—	$	—		—	$	—