Loans

9 Months Ended

Sep. 30, 2011

Loans [Abstract]

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
September 30, 2011
Commercial business	$	223,708	$	88	$	223,796
Commercial mortgage		382,267		(726)		381,541
Residential mortgage		116,399		33		116,432
Home equity		218,936		3,704		222,640
Consumer indirect		445,296		20,614		465,910
Other consumer		24,639		169		24,808
Total	$	1,411,245	$	23,882		1,435,127
Allowance for loan losses						(22,977)
Total loans, net					$	1,412,150
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), all of which were residential mortgage loans, totaled $2.4 million and $3.1 million as of September 30, 2011 and December 31, 2010, respectively.

During the third quarter of 2011, the Company sold $13.0 million of indirect auto loans under a 90%/10% participation agreement, recognizing a gain of $153 thousand. The Company will continue to service the loans for a fee in accordance with the participation agreement. The Company reclassified those indirect auto loans from portfolio to loans held for sale during the second quarter of 2011.

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
September 30, 2011
Commercial business	$	56	$	-	$	-	$	56	$	2,380	$	221,272	$	223,708
Commercial mortgage		125		-		-		125		2,330		379,812		382,267
Residential mortgage		190		3		-		193		1,996		114,210		116,399
Home equity		368		169		-		537		501		217,898		218,936
Consumer indirect		512		136		-		648		586		444,062		445,296
Other consumer		77		6		4		87		-		24,552		24,639
Total loans, gross	$	1,328	$	314	$	4	$	1,646	$	7,793	$	1,401,806	$	1,411,245
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 September 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 September 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

A modification of a loan constitutes a troubled debt restructuring ("TDR") when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying loans, however, forgiveness of principal is rarely granted. Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, or substituting or adding a new borrower or guarantor.The following presents, by loan class, information related to loans modified in a TDR during the three and nine months ended September 30, 2011 (in thousands).

	Three Months Ended September 30, 2011					Nine Months Ended September 30, 2011
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial business	4	$	75	$	75	6	$	142	$	142
Commercial mortgage	-		-		-	1		280		280
Total	4	$	75	$	75	7	$	422	$	422

All of the loans identified as TDRs by the Company were previously on nonaccrual status and reported as impaired loans prior to restructuring. The modifications primarily related to extending the amortization periods of the loans.All loans restructured during the nine months ended September 30, 2011 are on nonaccrual status as of September 30, 2011. Nonaccrual loans that are restructured remain on nonaccrual status, but may move to accrual status after they have performed according to the restructured terms for a period of time. The TDR classification did not have a material impact on the Company's determination of the allowance for loan losses because the modified loans were impaired and evaluated for a specific reserve both before and after restructuring.

There were no loans modified as a TDR within the previous 12 months that defaulted during the three and nine months ended September 30, 2011. For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due.

Impaired Loans

Management has determined that specific commercial loans on nonaccrual status and all TDRs are impaired loans.The following table presents data on 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
September 30, 2011
With no related allowance recorded:
Commercial business	$	170	$	280	$	-	$	642	$	-	$	404	$	-
Commercial mortgage		590		608		-		596		-		550		-
		760		888		-		1,238		-		954		-
With an allowance recorded:
Commercial business		2,210		2,210		1,039		950		-		750		-
Commercial mortgage		1,740		1,740		393		2,024		-		2,272		-
		3,950		3,950		1,432		2,974		-		3,022		-
	$	4,710	$	4,838	$	1,432	$	4,212	$	-	$	3,976	$	-
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
September 30, 2011
Uncriticized	$	211,005	$	369,865
Special mention		6,501		3,261
Substandard		6,202		9,141
Doubtful		-		-
Total	$	223,708	$	382,267
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
September 30, 2011
Performing	$	114,403	$	218,435	$	444,710	$	24,639
Non-performing		1,996		501		586		-
Total	$	116,399	$	218,936	$	445,296	$	24,639
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 September 30, 2011, are presented below (in thousands):

	Commercial Business		Commercial Mortgage		Residential Mortgage		Home Equity		Consumer Indirect		Other Consumer		Total
Loans:
Ending balance	$	223,708	$	382,267	$	116,399	$	218,936	$	445,296	$	24,639	$	1,411,245
Evaluated for impairment:
Individually	$	2,380	$	2,330	$	-	$	-	$	-	$	-	$	4,710
Collectively	$	221,328	$	379,937	$	116,399	$	218,936	$	445,296	$	24,639	$	1,406,535
Allowance for loan losses:
Ending balance	$	4,578	$	6,263	$	887	$	1,150	$	9,569	$	530	$	22,977
Evaluated for impairment:
Individually	$	1,039	$	393	$	-	$	-	$	-	$	-	$	1,432
Collectively	$	3,539	$	5,870	$	887	$	1,150	$	9,569	$	530	$	21,545

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

	Commercial Business		Commercial Mortgage		Residential Mortgage		Home Equity		Consumer Indirect		Other Consumer		Total
Three months ended September 30, 2011
Beginning balance	$	4,011	$	5,763	$	957	$	1,050	$	8,319	$	532	$	20,632
Charge-offs		75		194		36		142		1,226		208		1,881
Recoveries		61		158		45		21		371		90		746
Provision (credit)		581		536		(79)		221		2,105		116		3,480
Ending balance	$	4,578	$	6,263	$	887	$	1,150	$	9,569	$	530	$	22,977
Nine months ended September 30, 2011
Beginning balance	$	3,712	$	6,431	$	1,013	$	972	$	7,754	$	584	$	20,466
Charge-offs		390		572		48		404		3,571		687		5,672
Recoveries		325		197		75		38		1,576		354		2,565
Provision (credit)		931		207		(153)		544		3,810		279		5,618
Ending balance	$	4,578	$	6,263	$	887	$	1,150	$	9,569	$	530	$	22,977

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

	Three months		Nine months
	ended		ended
	September 30, 2010		September 30, 2010
Beginning balance	$	21,825	$	20,741
Charge-offs		4,872		7,961
Recoveries		595		2,245
Provision		2,184		4,707
Ending balance	$	19,732	$	19,732

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.