Allowance for Loan and Lease Losses and Credit Quality of Loans and Leases (Tables)

12 Months Ended

Dec. 31, 2011

Allowance for Loan and Lease Losses and Credit Quality of Loans and Leases [Abstract]

Allowance for loan and lease losses by portfolio

The following table illustrates the changes in the allowance for loan and lease losses by portfolio segment for the years ended December 31, 2011 and 2010:

Allowance for Loan and Lease Losses

(in thousands)

Years ended December 31							Residential
	Commercial			Consumer			Real Estate
	Loans			Loans			Mortgages			Unallocated			Total
Balance as of December 31, 2010	$	40,101		$	26,126		$	4,627		$	380		$	71,234
Charge-offs		(8,969	)		(14,209	)		(1,310	)		-			(24,488	)
Recoveries		1,438			2,406			7			-			3,851
Provision		6,261			11,726			2,925			(175	)		20,737
Ending Balance as of December 31, 2011	$	38,831		$	26,049		$	6,249		$	205		$	71,334
Balance as of December 31, 2009	$	36,599		$	26,664		$	3,002		$	285		$	66,550
Charge-offs		(12,969	)		(15,692	)		(1,176	)		-			(29,837	)
Recoveries		1,922			2,747			43			-			4,712
Provision		14,549			12,407			2,758			95			29,809
Ending Balance as of December 31, 2010	$	40,101		$	26,126		$	4,627		$	380		$	71,234

The following table illustrates the allowance for loan and lease losses and the recorded investment by portfolio segment as of December 31, 2011 and 2010:

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

(in thousands)

					Residential
	Commercial		Consumer		Real Estate
	Loans		Loans		Mortgages		Unallocated		Total
As of December 31, 2011
Allowance for loan and lease losses	$	38,831	$	26,049	$	6,249	$	205	$	71,334
Allowance for loans and leases individually evaluated for impairment	$	175	$	-	$	-			$	175
Allowance for loans and leases collectively evaluated for impairment	$	38,656	$	26,049	$	6,249	$	205	$	71,159
Ending balance of loans and leases	$	1,702,577	$	1,516,115	$	581,511			$	3,800,203
Ending balance of loans and leases individually evaluated for impairment	$	6,219	$	-	$	-			$	6,219
Ending balance of loans and leases collectively evaluated for impairment	$	1,696,358	$	1,516,115	$	581,511			$	3,793,984
As of December 31, 2010
Allowance for loan and lease losses	$	40,101	$	26,126	$	4,627	$	380	$	71,234
Allowance for loans and leases individually evaluated for impairment	$	2,211	$	-	$	-			$	2,211
Allowance for loans and leases collectively evaluated for impairment	$	37,890	$	26,126	$	4,627	$	380	$	69,023
Ending balance of loans and leases	$	1,580,371	$	1,481,241	$	548,394			$	3,610,006
Ending balance of loans and leases individually evaluated for impairment	$	11,419	$	-	$	-			$	11,419
Ending balance of loans and leases collectively evaluated for impairment	$	1,568,952	$	1,481,241	$	548,394			$	3,598,587

Credit Quality of Loans and Leases

For all loan classes within the Company's loan portfolio, loans and leases are placed on nonaccrual status when timely collection of principal and interest in accordance with contractual terms is doubtful. Loans and leases are transferred to nonaccrual status generally when principal or interest payments become ninety days delinquent, unless the loan is well secured and in the process of collection, or sooner when management concludes or circumstances indicate that borrowers may be unable to meet contractual principal or interest payments.  When a loan or lease is transferred to a nonaccrual status, all interest previously accrued in the current period but not collected is reversed against interest income in that period. Interest accrued in a prior period and not collected is charged-off against the allowance for loan and lease losses.

If ultimate repayment of a nonaccrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment of principal is not expected, any payment received on a nonaccrual loan is applied to principal until ultimate repayment becomes expected.  For all loan classes within the Company's loan portfolio, nonaccrual loans are returned to accrual status when they become current as to principal and interest and demonstrate a period of performance under the contractual terms and, in the opinion of management, are fully collectible as to principal and interest.  For loans in all portfolios, the principal amount is charged off in full or in part as soon as management determines, based on available facts, that the collection of principal in full is improbable.  For commercial loans, management considers specific facts and circumstances relative to individual credits in making such a determination.  For consumer and residential loan classes, management uses specific guidance and thresholds from the Federal Financial Institutions Examination Council's Uniform Retail Credit Classification and Account Management Policy.

The following table illustrates the Company's nonaccrual loans by loan class as of December 31, 2011 and 2010:

Loans on Nonaccrual Status

(In thousands)	December 31, 2011		December 31, 2010
Commercial Loans
Commercial	$	1,699	$	5,837
Commercial Real Estate		4,868		5,687
Agricultural		3,307		4,065
Agricultural Real Estate		2,067		2,429
Business Banking		7,446		7,033
		19,387		25,051
Consumer Loans
Indirect		1,550		1,971
Home Equity		7,931		6,395
Direct		378		399
		9,859		8,765
Residential Real Estate Mortgages		9,044		8,651
Total Nonaccrual	$	38,290	$	42,467

Past Due Financing Receivables

The following table sets forth information with regard to past due and nonperforming loans by loan class:

Age Analysis of Past Due Financing Receivables

As of December 31, 2011

(in thousands)

					Greater Than								Recorded
	31-60 Days		61-90 Days		90 Days		Total						Total
	Past Due		Past Due		Past Due		Past Due						Loans and
	Accruing		Accruing		Accruing		Accruing		Non-Accrual		Current		Leases
Commercial Loans
Commercial	$	663	$	50	$	-	$	713	$	1,699	$	508,662	$	511,074
Commercial Real Estate		1,942		-		-		1,942		4,868		828,089		834,899
Agricultural		77		13		-		90		3,307		63,140		66,537
Agricultural Real Estate		-		-		50		50		2,067		31,809		33,926
Business Banking		1,871		1,024		-		2,895		7,446		245,800		256,141
		4,553		1,087		50		5,690		19,387		1,677,500		1,702,577
Consumer Loans
Indirect		12,141		2,584		1,283		16,008		1,550		855,545		873,103
Home Equity		5,823		1,277		954		8,054		7,931		553,660		569,645
Direct		831		191		140		1,162		378		71,827		73,367
		18,795		4,052		2,377		25,224		9,859		1,481,032		1,516,115
Residential Real Estate Mortgages		2,003		139		763		2,905		9,044		569,562		581,511
	$	25,351	$	5,278	$	3,190	$	33,819	$	38,290	$	3,728,094	$	3,800,203

Age Analysis of Past Due Loans and Leases

As of December 31, 2010

(in thousands)

					Greater Than								Recorded
	31-60 Days		61-90 Days		91 Days		Total						Total
	Past Due		Past Due		Past Due		Past Due						Loans and
	Accruing		Accruing		Accruing		Accruing		Non-Accrual		Current		Leases
Commercial
Commercial	$	136	$	55	$	94	$	285	$	5,837	$	461,633	$	467,755
Commercial Real Estate		1,263		-		-		1,263		5,687		730,285		737,235
Agricultural		63		92		-		155		4,065		63,336		67,556
Agricultural Real Estate		108		-		-		108		2,429		33,400		35,937
Business Banking		2,570		1,183		-		3,753		7,033		261,102		271,888
		4,140		1,330		94		5,564		25,051		1,549,756		1,580,371
Consumer
Indirect		9,307		2,193		862		12,362		1,971		814,594		828,927
Home Equity		5,740		1,756		396		7,892		6,395		561,391		575,678
Direct		927		158		54		1,139		399		75,098		76,636
		15,974		4,107		1,312		21,393		8,765		1,451,083		1,481,241
Residential Real  Estate Mortgages		3,002		126		919		4,047		8,651		535,696		548,394
	$	23,116	$	5,563	$	2,325	$	31,004	$	42,467	$	3,536,535	$	3,610,006

Impaired loans and specific reserve allocations

The following provides additional information on impaired loans for the years ended December 31, 2011 and 2010:

Impaired Loans
	December 31, 2011						December 31, 2010
	Recorded		Unpaid				Recorded		Unpaid
	Investment		Principal				Investment		Principal
	Balance		Balance		Related		Balance		Balance		Related
(in thousands)	(Book)		(Legal)		Allowance		(Book)		(Legal)		Allowance
With no related allowance recorded:
Commercial Loans
Commercial	$	1,243	$	2,723			$	2,112	$	2,459
Commercial Real Estate		4,868		7,165				5,687		6,654
Agricultural		3,307		4,166				2,394		2,865
Agricultural Real Estate		2,067		2,288				1,701		1,883
Business Banking		7,446		9,976				7,033		9,395
Total Commercial Loans		18,931		26,318				18,927		23,256
Consumer Loans
Home Equity		2,000		2,103				-		-
Residential Real Estate Mortgages		1,040		1,125				313		339
		21,971		29,546				19,240		23,595
With an allowance recorded:
Commercial Loans
Commercial	$	456	$	808	$	175	$	3,725	$	4,762	$	1,907
Commercial Real Estate		-		-		-		-		-		-
Agricultural		-		-		-		1,671		1,918		281
Agricultural Real Estate		-		-		-		728		784		23
		456		808		175		6,124		7,464		2,211
Total:	$	22,427	$	30,354	$	175	$	25,364	$	31,059	$	2,211

Financing Receivable Credit Quality by Loan Class

The following table summarizes the average recorded investments on impaired loans and the interest income recognized for the years ended December 31, 2011, 2010 and 2009:

	December 31, 2011						December 31, 2010						December 31, 2009
	Average		Interest Income				Average		Interest Income				Average		Interest Income
	Recorded		Recognized				Recorded		Recognized				Recorded		Recognized
(in thousands)	Investment		Accrual		Cash		Investment		Accrual		Cash		Investment		Accrual		Cash
With no related allowance recorded:
Commercial Loans
Commercial	$	2,322	$	94	$	94	$	1,898	$	113	$	113	$	1,118	$	1,429	$	1,429
Commercial Real Estate		4,794		163		163		4,219		317		317		5,702		2,744		2,744
Agricultural		3,013		133		133		2,990		82		82		1,606		531		531
Agricultural Real Estate		1,719		109		109		1,929		150		150		1,853		589		589
Business Banking		6,121		266		266		4,959		234		234		6,231		917		917
Consumer Loans
Home Equity		1,904		91		91		-		-		-		-		-		-
Res Real Estate Mortgages		926		58		58		132		6		6		-		-		-
	$	20,798	$	914	$	914	$	16,127	$	902	$	902	$	16,509	$	6,210	$	6,210
With an allowance recorded:
Commercial Loans
Commercial	$	861	$	86	$	86	$	2,366	$	118	$	118	$	2,984	$	57	$	57
Commercial Real Estate		287		-		-		1,234		-		-		1,551		-		-
Agricultural		791		68		68		1,386		150		150		2,046		63		63
Agricultural Real Estate		357		18		18		816		67		67		560		5		5
	$	2,295	$	172	$	172	$	5,802	$	335	$	335	$	7,141	$	125	$	125
Total:	$	23,094	$	1,086	$	1,086	$	21,929	$	1,237	$	1,237	$	23,650	$	6,335	$	6,335

There has been significant disruption and volatility in the financial and capital markets since the second half of 2008.  Turmoil in the mortgage market adversely impacted both domestic and global markets and led to a significant credit and liquidity crisis in many domestic markets.  These market conditions were attributable to a variety of factors, in particular the fallout associated with subprime mortgage loans (a type of lending we have never actively pursued).  The disruption was exacerbated by the decline of the real estate and housing market.  However, in the markets in which the Company does business, the disruption has been less significant than in the national market.  For example, our real estate market has not suffered the extreme declines seen nationally and our unemployment rate, while notably higher than in prior periods, is still below the national average.

While we continue to adhere to prudent underwriting standards, as a lender we may be adversely impacted by general economic weaknesses and, in particular, a sharp downturn in the housing market nationally.  Decreases in real estate values could adversely affect the value of property used as collateral for our loans.  Adverse changes in the economy may have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings.  A further increase in loan delinquencies would decrease our net interest income and adversely impact our loan loss experience, causing increases in our provision and allowance for loan and lease losses.

The Company has developed an internal loan grading system to evaluate and quantify the Bank's loan portfolio with respect to quality and risk.  The system focuses on, among other things, financial strength of borrowers, experience and depth of management, primary and secondary sources of repayment, payment history, nature of the business, outlook on particular industries.  The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a continuous basis and provide management with an early warning system, enabling recognition and response to problem loans and potential problem loans.

Commercial Grading System

For commercial and agricultural loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available.  This would include comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy, and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment, and management.  The grading system for commercial and agricultural loans is as follows:

· 4 – Doubtful

A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Because of high probability of loss, nonaccrual treatment is required for doubtful assets.

· 3 – Substandard

Substandard loans have a high probability of payment default, or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and should be placed on nonaccrual. Although substandard assets in the aggregate will have a distinct potential for loss, an individual asset's loss potential does not have to be distinct for the asset to be rated substandard.

· 2 – Special Mention

Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company's position at some future date. These loans pose elevated risk, but their weakness does not yet justify a substandard classification. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Although a Special Mention loan has a higher probability of default than a pass asset, its default is not imminent.

· 1 – Pass

Loans graded as Pass encompass all loans not graded as Doubtful, Substandard, or Special Mention.  Pass loans are in compliance with loan covenants, and payments are generally made as agreed.  Pass loans range from superior quality to fair quality.

Business Banking Grading System

Business Banking loans are graded as either Classified or Non-classified:

· Classified

Classified loans are inadequately protected by the current worth and paying capacity of the obligor or, if applicable, the collateral pledged.   These loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt, or in some cases make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.   Classified loans have a high probability of payment default, or a high probability of total or substantial loss.  These loans require more intensive supervision by management and are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization.  Repayment may depend on collateral or other credit risk mitigants.  When the likelihood of full collection of interest and principal may be in doubt; classified loans are considered to have a nonaccrual status.   In some cases, classified loans are considered uncollectible and of such little value that their continuance as assets is not warranted.

· Non-classified

Loans graded as Non-classified encompass all loans not graded as Classified.  Non-classified loans are in compliance with loan covenants, and payments are generally made as agreed.

Consumer and Residential Mortgage Grading System

Consumer and Residential Mortgage loans are graded as either Performing or Nonperforming.   Nonperforming loans are loans that are 1) over 90 days past due and interest is still accruing or 2) on nonaccrual status.  All loans not meeting any of these three criteria are considered Performing.

The following tables illustrates the Company's credit quality by loan class for the years ended December 31, 2011 and 2010:

Credit Quality Indicators

As of December 31, 2011

Commercial Credit Exposure			Commercial				Agricultural
By Internally Assigned Grade:	Commercial		Real Estate		Agricultural		Real Estate		Total
Pass	$	470,332	$	758,673	$	58,481	$	28,927	$	1,316,413
Special Mention		10,346		24,478		42		10		34,876
Substandard		29,940		51,748		7,945		4,989		94,622
Doubtful		456		-		69		-		525
Total		511,074		834,899		66,537		33,926		1,446,436
Business Banking Credit Exposure	Business
By Internally Assigned Grade:	Banking								Total
Non-classified		237,887								237,887
Classified		18,254								18,254
Total		256,141								256,141
Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct				Total
Performing	$	870,270	$	560,760	$	72,849			$	1,503,879
Nonperforming		2,833		8,885		518				12,236
Total	$	873,103	$	569,645	$	73,367			$	1,516,115
Residential Mortgage Credit Exposure	Residential
By Payment Activity:	Mortgage								Total
Performing	$	571,704							$	571,704
Nonperforming		9,807								9,807
Total	$	581,511							$	581,511

Credit Quality Indicators

As of December 31, 2010

(in thousands)

Commercial Credit Exposure			Commercial				Agricultural
By Internally Assigned Grade:	Commercial		Real Estate		Agricultural		Real Estate		Total
1 - Pass	$	441,834	$	654,974	$	61,195	$	30,483	$	1,188,486
2 - Special Mention		4,830		35,461		660		936		41,887
3 - Substandard		21,091		46,800		5,606		4,518		78,015
4 - Doubtful		-		-		95		-		95
Total	$	467,755	$	737,235	$	67,556	$	35,937	$	1,308,483
Business Banking Credit Exposure	Business
By Internally Assigned Grade:	Banking								Total
Non-classified	$	253,120							$	253,120
Classified		18,768								18,768
Total	$	271,888							$	271,888
Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct				Total
Performing	$	826,956	$	569,283	$	76,237			$	1,472,476
Nonperforming		1,971		6,395		399				8,765
Total	$	828,927	$	575,678	$	76,636			$	1,481,241
Residential Mortgage Credit Exposure	Residential
By Payment Activity:	Mortgage								Total
Performing	$	539,743							$	539,743
Nonperforming		8,651								8,651
Total	$	548,394							$	548,394