Loans

6 Months Ended

Jun. 30, 2011

Loans

Loans

(4.) LOANS

The Company's loan portfolio consisted of the following as of the dates indicated (in thousands):

	Loans, Gross		Net Deferred Loan (Fees) Costs		Loans, Net
June 30, 2011
Commercial business	$	217,293	$	137	$	217,430
Commercial mortgage		357,989		(526)		357,463
Residential mortgage		120,766		23		120,789
Home equity		212,117		3,520		215,637
Consumer indirect		412,332		19,279		431,611
Other consumer		24,953		169		25,122
Total	$	1,345,450	$	22,602		1,368,052
Allowance for loan losses						(20,632)
Total loans, net					$	1,347,420
December 31, 2010
Commercial business	$	210,948	$	83	$	211,031
Commercial mortgage		353,537		(607)		352,930
Residential mortgage		129,553		27		129,580
Home equity		205,070		3,257		208,327
Consumer indirect		400,221		17,795		418,016
Other consumer		25,937		169		26,106
Total	$	1,325,266	$	20,724		1,345,990
Allowance for loan losses						(20,466)
Total loans, net					$	1,325,524

Loans held for sale (not included above) totaled $14.5 million as of June 30, 2011, comprised of $935 thousand of residential mortgage loans and $13.6 million of indirect auto loans.  During the second quarter of 2011, the Company reclassified $13.6 million of indirect auto loans from portfolio to loans held for sale pursuant to a letter of intent to sell the loans under a 90%/10% participation agreement.Loans held for sale totaled $3.1 million as of December 31, 2010, all of which were residential mortgage loans.

Past Due Loans Aging

The Company's recorded investment, by loan class, in current and nonaccrual loans, as well as an analysis of accruing delinquent loans is set forth as of the dates indicated (in thousands):

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Nonaccrual		Current		Total Loans
June 30, 2011
Commercial business	$	11	$	-	$	-	$	11	$	711	$	216,571	$	217,293
Commercial mortgage		-		-		-		-		2,863		355,126		357,989
Residential mortgage		248		-		-		248		2,262		118,256		120,766
Home equity		299		97		-		396		472		211,249		212,117
Consumer indirect		349		54		-		403		667		411,262		412,332
Other consumer		101		3		4		108		-		24,845		24,953
Total loans, gross	$	1,008	$	154	$	4	$	1,166	$	6,975	$	1,337,309	$	1,345,450
December 31, 2010
Commercial business	$	172	$	92	$	-	$	264	$	947	$	209,737	$	210,948
Commercial mortgage		163		-		-		163		3,100		350,274		353,537
Residential mortgage		492		6		-		498		2,102		126,953		129,553
Home equity		428		47		-		475		875		203,720		205,070
Consumer indirect		656		107		-		763		514		398,944		400,221
Other consumer		82		1		3		86		41		25,810		25,937
Total loans, gross	$	1,993	$	253	$	3	$	2,249	$	7,579	$	1,315,438	$	1,325,266

There were no loans past due greater than 90 days and still accruing interest as of June 30, 2011 and December 31, 2010.  There were $4 thousand and $3 thousand in consumer overdrafts which were past due greater than 90 days as of June 30, 2011 and December 31, 2010, respectively.  Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") are loans where the Company, for economic or legal reasons related to the borrower's financial condition, has granted a significant concession to the borrower that it would not otherwise consider.June 30, 2011 or December 31, 2010.June 30, 2011 and December 31, 2010, respectively.June 30, 2011 and December 31, 2010, respectively.TDRs typically migrate from the Company's criticized and classified watch list and are assigned specific reserves in accordance with the Company's standard allowance for loan loss methodology.

Impaired Loans

Management has determined that specific commercial loans on nonaccrual status and all loans that have had their terms restructured in a troubled debt restructuring are impaired loans.as of the dates indicated (in thousands):

							Quarter-to-Date				Year- to-Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
June 30, 2011
With no related allowance recorded:
Commercial business	$	157	$	335	$	-	$	208	$	-	$	283	$	-
Commercial mortgage		703		722		-		610		-		527		-
		860		1,057		-		818		-		810		-
With an allowance recorded:
Commercial business		555		555		199		681		-		648		-
Commercial mortgage		2,159		2,159		483		2,188		-		2,399		-
		2,714		2,714		682		2,869		-		3,047		-
	$	3,574	$	3,771	$	682	$	3,687		-		3,857	$	-
December 31, 2010
With no related allowance recorded:
Commercial business	$	372	$	524	$	-					$	275	$	-
Commercial mortgage		187		187		-						481		-
		559		711		-						756		-
With an allowance recorded:
Commercial business		576		576		149						1,828		-
Commercial mortgage		2,913		2,921		883						1,897		-
		3,489		3,497		1,032						3,725		-
	$	4,048	$	4,208	$	1,032					$	4,481	$	-

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors such as the fair value of collateral.  The Company analyzes commercial business and commercial mortgage loans individually by classifying the loans as to credit risk.  Risk ratings are updated any time the situation warrants.The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company's credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the process described above are considered "Uncriticized" or pass-rated loans and are included in groups of homogeneous loans with similar risk and loss characteristics.

The following table sets forth the Company's commercial loan portfolio, categorized by internally assigned asset classification, as of the dates indicated (in thousands):

	Commercial Business		Commercial Mortgage
June 30, 2011
Uncriticized	$	202,200	$	344,334
Special mention		8,940		4,816
Substandard		6,153		8,839
Doubtful		-		-
Total	$	217,293	$	357,989
December 31, 2010
Uncriticized	$	194,510	$	338,061
Special mention		11,479		4,931
Substandard		4,959		10,545
Doubtful		-		-
Total	$	210,948	$	353,537

The Company utilizes payment status as a means of identifying and reporting problem and potential problem retail loans.  The Company considers nonaccrual loans and loans past due greater than 90 days and still accruing interest to be non-performing.  The following table sets forth the Company's retail loan portfolio, categorized by payment status, as of the dates indicated (in thousands):

	Residential Mortgage		Home Equity		Consumer Indirect		Other Consumer
June 30, 2011
Performing	$	118,504	$	211,645	$	411,665	$	24,953
Non-performing		2,262		472		667		-
Total	$	120,766	$	212,117	$	412,332	$	24,953
December 31, 2010
Performing	$	127,451	$	204,195	$	399,707	$	25,896
Non-performing		2,102		875		514		41
Total	$	129,553	$	205,070	$	400,221	$	25,937

Allowance for Loan Losses

Loans and the related allowance for loan losses at June 30, 2011, are presented below (in thousands):

	Commercial Business				Commercial Mortgage				Residential Mortgage				Home Equity				Consumer Indirect				Other Consumer				Total
Loans:
Ending balance	$		217,293		$		357,989		$		120,766		$		212,117		$		412,332		$		24,953		$		1,345,450
Evaluated for impairment:
	$		712		$		2,862		$		-		$		-		$		-		$		-		$		3,574
	$		216,581		$		355,127		$		120,766		$		212,117		$		412,332		$		24,953		$		1,341,876
Allowance for loan losses:
Ending balance		$		4,011		$		5,763		$		957		$		1,050		$		8,319		$		532		$		20,632
Evaluated for impairment:
		$		199		$		483		$		-		$		-		$		-		$		-		$		682
		$		3,812		$		5,280		$		957		$		1,050				8,319		$		532		$		19,950

The changes in the allowance for loan losses for the three and six months ended June 30, 2011 were as follows (in thousands):

	Commercial Business		Commercial Mortgage		Residential Mortgage		Home Equity		Consumer Indirect		Other Consumer		Total
Three months ended June 30, 2011
Beginning balance	$	4,021	$	5,908	$	1,016	$	1,030	$	7,614	$	530	$	20,119
Charge-offs		225		34		10		155		1,055		268		1,747
Recoveries		110		23		3		7		653		136		932
		105		(134)		(52)		168		1,107		134		1,328
Ending balance	$	4,011	$	5,763	$	957	$	1,050	$	8,319	$	532	$	20,632
Six months ended June 30, 2011
Beginning balance	$	3,712	$	6,431	$	1,013	$	972	$	7,754	$	584	$	20,466
Charge-offs		315		378		12		262		2,345		479		3,791
Recoveries		264		39		30		17		1,205		264		1,819
		350		(329)		(74)		323		1,705		163		2,138
Ending balance	$	4,011	$	5,763	$	957	$	1,050	$	8,319	$	532	$	20,632

Activity in the allowance for loan losses during the three and six months ended June 30, 2010 was as follows (in thousands):

	Three months		Six months
	ended		ended
	June 30, 2010		June 30, 2010
Beginning balance	$	20,586	$	20,741
Charge-offs		1,476		3,089
Recoveries		610		1,650
		2,105		2,523
Ending balance	$	21,825	$	21,825

Risk Characteristics

Commercial business loans primarily consist of loans to small to mid-sized businesses in our market area in a diverse range of industries.These loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business.  Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value.  The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower's operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, inferring higher potential losses on an individual customer basis.  Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral securing the loan.  Economic events or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Company's commercial real estate loans and on the value of such properties.

Residential mortgage loans and home equities (comprised of home equity loans and home equity lines) are generally made on the basis of the borrower's ability to make repayment from his or her employment and other income, but are secured by real property whose value tends to be more easily ascertainable.  Credit risk for these types of loans is generally influenced by general economic conditions, the characteristics of individual borrowers, and the nature of the loan collateral.

Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles or boats.   In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, thus are more likely to be affected by adverse personal circumstances such as job loss, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.