(5.) LOANS

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


		Principal		Net Deferred
		Amount		Loan (Fees)
		Outstanding		Costs			Loans, Net
March 31, 2013
Commercial business	$	259,054	$	8		$	259,062
Commercial mortgage		425,586		(951	)		424,635
Residential mortgage		126,058		170			126,228
Home equity		287,844		4,381			292,225
Consumer indirect		563,428		27,012			590,440
Other consumer		24,581		119			24,700
Total	$	1,686,551	$	30,739			1,717,290
Allowance for loan losses							(25,827	)
Total loans, net						$	1,691,463


December 31, 2012
Commercial business	$	258,706	$	(31	)	$	258,675
Commercial mortgage		414,282		(958	)		413,324
Residential mortgage		133,341		179			133,520
Home equity		282,503		4,146			286,649
Consumer indirect		559,964		26,830			586,794
Other consumer		26,657		107			26,764
Total	$	1,675,453	$	30,273			1,705,726
Allowance for loan losses							(24,714	)
Total loans, net						$	1,681,012

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $2.1 million and $1.5 million as of March 31, 2013 and December 31, 2012, respectively.

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):


					Greater
		30-59 Days		60-89 Days	Than 90			Total Past						Total
		Past Due		Past Due	Days			Due		Nonaccrual		Current		Loans
March 31, 2013
Commercial business	$	208	$	-	$	-	$	208	$	5,616	$	253,230	$	259,054
Commercial mortgage		523		-		-		523		2,767		422,296		425,586
Residential mortgage		293		-		-		293		1,759		124,006		126,058
Home equity		388		86		-		474		598		286,772		287,844
Consumer indirect		1,084		95		-		1,179		1,007		561,242		563,428
Other consumer		79		19		5		103		14		24,464		24,581
Total loans, gross	$	2,575	$	200	$	5	$	2,780	$	11,761	$	1,672,010	$	1,686,551


December 31, 2012
Commercial business	$	160	$	-	$	-	$	160	$	3,413	$	255,133	$	258,706
Commercial mortgage		331		-		-		331		1,799		412,152		414,282
Residential mortgage		376		-		-		376		2,040		130,925		133,341
Home equity		675		10		-		685		939		280,879		282,503
Consumer indirect		1,661		163		-		1,824		891		557,249		559,964
Other consumer		127		35		18		180		25		26,452		26,657
Total loans, gross	$	3,330	$	208	$	18	$	3,556	$	9,107	$	1,662,790	$	1,675,453

There were no loans past due greater than 90 days and still accruing interest as of March 31, 2013 and December 31, 2012. There were $5 thousand and $18 thousand in consumer overdrafts which were past due greater than 90 days as of March 31, 2013 and December 31, 2012, 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 may 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 table presents information related to loans modified in a TDR during the three month periods indicated (dollars in thousands).


			Pre-		Post-
			Modification Modification
			Outstanding	Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
March 31, 2013
Commercial business	2	$	189	$	181
Commercial mortgage	-		-		-
Total	2	$	189	$	181

March 31, 2012
Commercial business	2	$	433	$	433
Commercial mortgage	1		46		46
Total	3	$	479	$	479

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 three months ended March 31, 2013 were classified as nonaccrual as of March 31, 2013. 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 months ended March 31, 2013 or 2012. 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 loans that have had their terms restructured in a troubled debt restructuring are impaired loans. The following table presents the recorded investment, unpaid principal balance and related allowance of impaired loans as of the dates indicated and average recorded investment and interest income recognized on impaired loans for the three month periods ended as of the dates indicated (in thousands):


				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
		Investment⁽¹⁾		Balance⁽¹⁾		Allowance		Investment		Recognized
March 31, 2013
With no related allowance recorded:
Commercial business	$	1,076	$	1,484	$	-	$	960	$	-
Commercial mortgage		827		918		-		885		-
		1,903		2,402		-		1,845		-
With an allowance recorded:
Commercial business		4,540		4,540		1,335		2,957		-
Commercial mortgage		1,940		1,940		657		1,145		-
		6,480		6,480		1,992		4,102		-
	$	8,383	$	8,882	$	1,992	$	5,947	$	-

December 31, 2012
With no related allowance recorded:
Commercial business	$	963	$	1,425	$	-	$	755	$	-
Commercial mortgage		911		1,002		-		1,310		-
		1,874		2,427		-		2,065		-
With an allowance recorded:
Commercial business		2,450		2,450		664		2,114		-
Commercial mortgage		888		888		310		1,858		-
		3,338		3,338		974		3,972		-

	$	5,212	$	5,765	$	974	$	6,037	$	-

(1) Difference between recorded investment and unpaid principal balance represents partial charge-offs.

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 that do not meet 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		Commercial
		Business		Mortgage
March 31, 2013
Uncriticized	$	241,849	$	410,673
Special mention		5,538		7,697
Substandard		11,667		7,216
Doubtful		-		-
Total	$	259,054	$	425,586


December 31, 2012
Uncriticized	$	240,291	$	400,576
Special mention		6,591		6,495
Substandard		11,824		7,211
Doubtful		-		-
Total	$	258,706	$	414,282

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		Home		Consumer		Other
		Mortgage		Equity		Indirect		Consumer
March 31, 2013
Performing	$	124,299	$	287,246	$	562,421	$	24,567
Non-performing		1,759		598		1,007		14
Total	$	126,058	$	287,844	$	563,428	$	24,581


December 31, 2012
Performing	$	131,301	$	281,564	$	559,073	$	26,632
Non-performing		2,040		939		891		25
Total	$	133,341	$	282,503	$	559,964	$	26,657

Allowance for Loan Losses

The following table sets forth, by loan class, loans and the related allowance for loan losses as of the dates indicated and the changes in the allowance for loan losses for the three month periods ended as of the dates indicated (in thousands):


		Commercial		Commercial		Residential		Home		Consumer		Other
		Business		Mortgage		Mortgage		Equity		Indirect		Consumer		Total
March 31, 2013
Allowance for loan losses:
Beginning balance	$	4,884	$	6,581	$	740	$	1,282	$	10,715	$	512	$	24,714
Charge-offs		239		3		162		269		1,718		252		2,643
Recoveries		37		14		17		37		805		137		1,047
Provision		485		379		73		233		1,510		29		2,709
Ending balance	$	5,167	$	6,971	$	668	$	1,283	$	11,312	$	426	$	25,827
Evaluated for impairment:
Individually	$	1,335	$	657	$	-	$	-	$	-	$	-	$	1,992
Collectively	$	3,832	$	6,314	$	668	$	1,283	$	11,312	$	426	$	23,835

Loans:
Ending balance	$	259,054	$	425,586	$	126,058	$	287,844	$	563,428	$	24,581	$	1,686,551
Evaluated for impairment:
Individually	$	5,616	$	2,767	$	-	$	-	$	-	$	-	$	8,383
Collectively	$	253,438	$	422,819	$	126,058	$	287,844	$	563,428	$	24,581	$	1,678,168


March 31, 2012
Allowance for loan losses:
Beginning balance	$	4,036	$	6,418	$	858	$	1,242	$	10,189	$	517	$	23,260
Charge-offs		55		120		106		4		1,395		314		1,994
Recoveries		77		15		70		9		727		214		1,112
Provision (credit)		328		475		-		34		478		70		1,385
Ending balance	$	4,386	$	6,788	$	822	$	1,281	$	9,999	$	487	$	23,763
Evaluated for impairment:
Individually	$	554	$	672	$	-	$	-	$	-	$	-	$	1,226
Collectively	$	3,832	$	6,116	$	822	$	1,281	$	9,999	$	487	$	22,537

Loans:
Ending balance	$	233,690	$	407,293	$	112,096	$	232,928	$	485,244	$	23,328	$	1,494,579
Evaluated for impairment:
Individually	$	1,863	$	3,040	$	-	$	-	$	-	$	-	$	4,903
Collectively	$	231,827	$	404,253	$	112,096	$	232,928	$	485,244	$	23,328	$	1,489,676

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, and 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.