Loans (Tables)

9 Months Ended

Sep. 30, 2012

Summary of loan portfolio and allowance for loan losses

The Company grants loans primarily to customers throughout North Central Pennsylvania and Southern New York. Although the Company had a diversified loan portfolio at September 30, 2012 and December 31, 2011, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of September 30, 2012 and December 31, 2011 (in thousands):

September 30, 2012	Total Loans	Individually evaluated for impairment	Collectively evaluated for impairment
Real estate loans:
Residential	$ 182,999	$ 408	$ 182,591
Commercial and agricultural	187,907	7,405	180,502
Construction	12,131	-	12,131
Consumer	10,527	-	10,527
Other commercial and agricultural loans	46,654	337	46,317
State and political subdivision loans	59,008	-	59,008
Total	499,226	$ 8,150	$ 491,076
Allowance for loan losses	6,734
Net loans	$ 492,492

December 31, 2011	Total Loans	Individually evaluated for impairment	Collectively evaluated for impairment
Real estate loans:
Residential	$ 184,034	$ 94	$ 183,940
Commercial and agricultural	185,050	8,270	176,780
Construction	8,481	-	8,481
Consumer	10,746	-	10,746
Other commercial and agricultural loans	44,299	517	43,782
State and political subdivision loans	54,899	-	54,899
Total	487,509	$ 8,881	$ 478,628
Allowance for loan losses	6,487
Net loans	$ 481,022

Impaired financing receivables with associated allowance amount

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables by class, with the associated allowance amount, if applicable (in thousands):

		Recorded	Recorded
	Unpaid	Investment	Investment	Total		Average	Interest
	Principal	With No	With	Recorded	Related	Recorded	Income
September 30, 2012	Balance	Allowance	Allowance	Investment	Allowance	Investment	Recognized
Real estate loans:
Residential mortgages	$ 272	$ 116	$ 135	$ 251	$ 8	$ 139	$ 2
Home equity	156	18	139	157	14	100	3
Commercial	8,840	5,218	2,187	7,405	501	7,891	74
Agricultural	-	-	-	-	-	-	-
Construction	-	-	-	-	-	-	-
Consumer	-	-	-	-	-	-	-
Other commercial loans	384	28	309	337	1	439	-
Other agricultural loans	-	-	-	-	-	-	-
State and political
subdivision loans	-	-	-	-	-	-	-
Total	$ 9,652	$ 5,380	$ 2,770	$ 8,150	$ 524	$ 8,569	$ 79

		Recorded	Recorded
	Unpaid	Investment	Investment	Total		Average	Interest
	Principal	With No	With	Recorded	Related	Recorded	Income
December 31, 2011	Balance	Allowance	Allowance	Investment	Allowance	Investment	Recognized
Real estate loans:
Residential mortgages	$ -	$ -	$ -	$ -	$ -	$ -	$ -
Home equity	94	36	58	94	13	36	1
Commercial	9,394	5,663	2,607	8,270	433	8,585	65
Agricultural	-	-	-	-	-	371	37
Construction	-	-	-	-	-	-	-
Consumer	-	-	-	-	-	-	-
Other commercial loans	574	30	487	517	48	501	-
Other agricultural loans	-	-	-	-	-	160	20
State and political
subdivision loans	-	-	-	-	-	-	-
Total	$ 10,062	$ 5,729	$ 3,152	$ 8,881	$ 494	$ 9,653	$ 123

Summary of financing receivable credit exposures by internally assigned grades

The following tables represent credit exposures by internally assigned grades as of September 30, 2012 and December 31, 2011 (in thousands):

September 30, 2012	Pass	Special Mention	Substandard	Doubtful	Loss	Ending Balance
Real estate loans:
Commercial	$ 144,097	$ 8,356	$ 17,080	$ 74	$ -	$ 169,607
Agricultural	15,720	618	1,962	-	-	18,300
Construction	12,131	-	-	-	-	12,131
Other commercial loans	37,400	1,161	905	16	-	39,482
Other agricultural loans	6,046	270	856	-	-	7,172
State and political
subdivision loans	57,900	-	1,108	-	-	59,008
Total	$ 273,294	$ 10,405	$ 21,911	$ 90	$ -	$ 305,700

December 31, 2011	Pass	Special Mention	Substandard	Doubtful	Loss	Ending Balance
Real estate loans:
Commercial	$ 138,409	$ 10,372	$ 17,045	$ -	$ -	$ 165,826
Agricultural	14,628	2,412	2,184	-	-	19,224
Construction	8,481	-	-	-	-	8,481
Other commercial loans	34,606	2,203	921	17	-	37,747
Other agricultural loans	4,509	809	1,234	-	-	6,552
State and political
subdivision loans	53,733	-	1,166	-	-	54,899
Total	$ 254,366	$ 15,796	$ 22,550	$ 17	$ -	$ 292,729

For residential real estate mortgages, home equities and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of September 30, 2012 and December 31, 2011 (in thousands):

September 30, 2012	Performing	Non-performing	Total
Real estate loans:
Residential mortgages	$ 108,031	$ 564	$ 108,595
Home equity	74,132	272	74,404
Consumer	10,525	2	10,527
Total	$ 192,688	$ 838	$ 193,526

December 31, 2011	Performing	Non-performing	Total
Real estate loans:
Residential mortgages	$ 102,238	$ 473	$ 102,711
Home equity	81,143	180	81,323
Consumer	10,746	-	10,746
Total	$ 194,127	$ 653	$ 194,780

Age analysis of past due financing receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due financing receivables as of September 30, 2012 and December 31, 2011 (in thousands):

		30-59 Days	60-89 Days	90 Days	Total Past		Total Financing	90 Days and
September 30, 2012		Past Due	Past Due	Or Greater	Due	Current	Receivables	Accruing
Real estate loans:
Residential mortgages		$ 913	$ 3	$ 254	$ 1,170	$ 107,425	$ 108,595	$ 78
Home equity		275	65	197	537	73,867	74,404	64
Commercial		336	129	2,193	2,658	166,949	169,607	295
Agricultural		-	-	-	-	18,300	18,300	-
Construction		-	-	-	-	12,131	12,131	-
Consumer		8	48	2	58	10,469	10,527	2
Other commercial loans		55	110	327	492	38,990	39,482	-
Other agricultural loans		-	-	-	-	7,172	7,172	-
State and political
subdivision loans		-	-	-	-	59,008	59,008	-
	Total	$ 1,587	$ 355	$ 2,973	$ 4,915	$ 494,311	$ 499,226	$ 439

Loans considered non-accrual		$ 171	$ 65	$ 2,534	$ 2,770	$ 5,485	$ 8,255
Loans still accruing		1,416	290	439	2,145	488,826	490,971
	Total	$ 1,587	$ 355	$ 2,973	$ 4,915	$ 494,311	$ 499,226


		30-59 Days	60-89 Days	90 Days	Total Past		Total Financing	90 Days and
December 31, 2011		Past Due	Past Due	Or Greater	Due	Current	Receivables	Accruing
Real estate loans:
Residential mortgages		$ 428	$ 91	$ 398	$ 917	$ 101,794	$ 102,711	$ 60
Home equity		339	-	180	519	80,804	81,323	39
Commercial		319	412	2,794	3,525	162,301	165,826	176
Agricultural		143	-		143	19,081	19,224	-
Construction		-	-	-	-	8,481	8,481	-
Consumer		86	7	-	93	10,653	10,746	-
Other commercial loans		9	-	503	512	37,235	37,747	-
Other agricultural loans		-	-	-	-	6,552	6,552	-
State and political
subdivision loans		-	-	-	-	54,899	54,899	-
	Total	$ 1,324	$ 510	$ 3,875	$ 5,709	$ 481,800	$ 487,509	$ 275

Loans considered non-accrual		$ -	$ -	$ 3,600	$ 3,600	$ 5,565	$ 9,165
Loans still accruing		1,324	510	275	2,109	476,235	478,344
	Total	$ 1,324	$ 510	$ 3,875	$ 5,709	$ 481,800	$ 487,509

Summary of financing receivables on nonaccrual status

The following table reflects the financing receivables on nonaccrual status as of September 30, 2012 and December 31, 2011, respectively. The balances are presented by class of financing receivable (in thousands):

	September 30, 2012	December 31, 2011
Real estate loans:
Residential mortgages	$ 486	$ 413
Home equity	208	141
Commercial	7,224	8,094
Agricultural	-	-
Construction	-	-
Consumer	-	-
Other commercial loans	337	517
Other agricultural loans	-	-
State and political subdivision	-	-
	$ 8,255	$ 9,165

Summary of troubled debt restructurings on financing receivables

In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company's investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDR's, including payment history under the modified loan terms, the borrower's ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion.

	For the Three Months Ended September 30, 2012
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	Interest Modification	Term Modification	Interest Modification	Term Modification	Interest Modification	Term Modification
Real estate loans:
Commercial	-	1	$ -	$ 62	$ -	$ 62
Total	-	1	$ -	$ 62	$ -	$ 62

	For the Nine months ended September 30, 2012
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	Interest Modification	Term Modification	Interest Modification	Term Modification	Interest Modification	Term Modification
Real estate loans:
Residential mortgage	1	1	$ 48	$ 71	$ 48	$ 71
Commercial	-	3	-	160	-	160
Total	1	4	$ 48	$ 231	$ 48	$ 231

	For the Three Months Ended September 30, 2011
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	Interest Modification	Term Modification	Interest Modification	Term Modification	Interest Modification	Term Modification
Real estate loans:
Commercial	-	1	$ -	$ 47	$ -	$ 47
Total	-	1	$ -	$ 47	$ -	$ 47

	For the Nine months ended September 30, 2011
	Number of contracts		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	Interest Modification	Term Modification	Interest Modification	Term Modification	Interest Modification	Term Modification
Real estate loans:
Commercial	5	1	$ 5,912	$ 47	$ 5,912	$ 47
Total	5	1	$ 5,912	$ 47	$ 5,912	$ 47

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. Loan modifications considered TDR's made during the twelve months ended September 30, 2012, that defaulted during the three and nine month periods ended September 30, 2012 were as follows (dollars in thousands):

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
	Number of contracts	Recorded investment	Number of contracts	Recorded investment	Number of contracts	Recorded investment	Number of contracts	Recorded investment
Real estate loans:
Commercial	-	$ -	-	$ -	1	$ 50	2	$ 109
Commercial and other loans	-	-	-	-	-	-	1	2
Total recidivism	-	$ -	-	$ -	1	$ 50	3	$ 111

Allowance for loan losses by impairment method

The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2012 and December 31, 2011, respectively (in thousands):

	September 30, 2012			December 31, 2011
	Individually evaluated for impairment	Collectively evaluated for impairment	Total	Individually evaluated for impairment	Collectively evaluated for impairment	Total
Real estate loans:
Residential	$ 22	$ 843	$ 865	$ 13	$ 792	$ 805
Commercial and agricultural	501	3,730	4,231	433	3,699	4,132
Construction	-	26	26	-	15	15
Consumer	-	104	104	-	111	111
Other commercial and agricultural loans	1	665	666	48	626	674
State and political
subdivision loans	-	274	274	-	235	235
Unallocated	-	568	568	-	515	515
Total	$ 524	$ 6,210	$ 6,734	$ 494	$ 5,993	$ 6,487

Roll forward of allowance for loan losses by portfolio segment

The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine month periods ended September 30, 2012 and 2011, respectively (in thousands):

	Balance at June 30, 2012	Charge-offs	Recoveries	Provision	Balance at September 30, 2012
Real estate loans:
Residential	$ 786	$ -	$ -	$ 79	$ 865
Commercial and agricultural	4,405	-	1	(175)	4,231
Construction	19	-	-	7	26
Consumer	108	(12)	9	(1)	104
Other commercial and agricultural loans	685	(20)	1	-	666
State and political
subdivision loans	246	-	-	28	274
Unallocated	401	-	-	167	568
Total	$ 6,650	$ (32)	$ 11	$ 105	$ 6,734

	Balance at December 31, 2011	Charge-offs	Recoveries	Provision	Balance at September 30, 2012
Real estate loans:
Residential	$ 805	$ (49)	$ -	$ 109	$ 865
Commercial and agricultural	4,132	(2)	7	94	4,231
Construction	15	-	-	11	26
Consumer	111	(36)	25	4	104
Other commercial and agricultural loans	674	(20)	7	5	666
State and political
subdivision loans	235	-	-	39	274
Unallocated	515	-	-	53	568
Total	$ 6,487	$ (107)	$ 39	$ 315	$ 6,734

	Balance at June 30, 2011	Charge-offs	Recoveries	Provision	Balance at September 30, 2011
Real estate loans:
Residential	$ 678	$ -	$ -	$ 147	$ 825
Commercial and agricultural	3,912	-	-	250	4,162
Construction	13	-	-	1	14
Consumer	109	(23)	16	12	114
Other commercial and agricultural loans	712	(6)	23	(40)	689
State and political
subdivision loans	119	-	-	1	120
Unallocated	620	-	-	(221)	399
Total	$ 6,163	$ (29)	$ 39	$ 150	$ 6,323

	Balance at December 31, 2010	Charge-offs	Recoveries	Provision	Balance at September 30, 2011
Real estate loans:
Residential	$ 969	$ (101)	$ -	$ (43)	$ 825
Commercial and agricultural	3,380	(29)	-	811	4,162
Construction	22	-	-	(8)	14
Consumer	108	(56)	45	17	114
Other commercial and agricultural loans	983	(6)	30	(318)	689
State and political
subdivision loans	137	-	-	(17)	120
Unallocated	316	-	-	83	399
Total	$ 5,915	$ (192)	$ 75	$ 525	$ 6,323