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Loans and Leases

3 Months Ended

Mar. 31, 2012

Note 3. Loans and Leases

Summary of Major Loan and Lease Categories


(Dollars in thousands)	At March 31, 2012			At December 31, 2011
Commercial, financial and agricultural	$	499,536		$	484,687
Real estate-commercial		511,739			514,953
Real estate-construction		86,627			90,397
Real estate-residential secured for business purpose		32,477			32,481
Real estate-residential secured for personal purpose		134,508			125,220
Real estate-home equity secured for personal purpose		78,195			80,478
Loans to individuals		44,342			44,965
Lease financings		72,406			73,225

Total loans and leases, net of deferred income	$	1,459,830		$	1,446,406

Unearned lease income, included in the above table	$	(10,087	)	$	(9,965	)
Net deferred costs, included in the above table	$	788		$	876
Overdraft deposits included in the above table	$	91		$	123

Overdraft deposits are re-classified as loans and are included in the total loans and leases on the balance sheet.

Age Analysis of Past Due Loans and Leases

The following presents, by class of loans and leases, an aging of past due loans and leases, loans and leases which are current and the recorded investment in loans and leases greater than 90 days past due which are accruing interest at March 31, 2012 and December 31, 2011:

(Dollars in thousands)

30-59 Days
Past Due*

60-89 Days
Past Due*

Greater
Than
90 Days
Past Due*

Total
Past Due*

Current*

Total
Loans
and
Leases

Recorded
Investment
Greater than
90 Days
Past Due
and Accruing
Interest*

At March 31, 2012

Commercial, financial and agricultural

784

163

1,005

492,307

499,536

Real estate—commercial real estate and construction:

Commercial real estate

3,267

1,000

—

4,267

487,711

511,739

—

Construction

—

69,997

86,627

—

Real estate—residential and home equity:

Residential secured for business purpose

—

170

32,201

32,477

Residential secured for personal purpose

2,394

—

2,394

132,057

134,508

—

Home equity secured for personal purpose

117

278

77,917

78,195

Loans to individuals

257

242

574

43,718

44,342

242

Lease financings

1,146

518

1,717

69,946

72,406

Total

8,059

1,823

523

10,405

1,405,854

1,459,830

523

*	Excludes impaired loans and leases.


(Dollars in thousands)	30-59 Days Past Due*		60-89 Days Past Due*		Greater Than 90 Days Past Due*		Total Past Due*		Current*		Total Loans and Leases		Recorded Investment Greater than 90 Days Past Due and Accruing Interest*
At December 31, 2011
Commercial, financial and agricultural	$	3,741	$	33	$	—	$	3,774	$	476,222	$	484,687	$	—
Real estate—commercial real estate and construction:
Commercial real estate		2,212		723		—		2,935		491,498		514,953		—
Construction		—		—		—		—		74,656		90,397		—
Real estate—residential and home equity:
Residential secured for business purpose		340		—		—		340		32,026		32,481		—
Residential secured for personal purpose		1,783		—		—		1,783		123,380		125,220		—
Home equity secured for personal purpose		298		68		117		483		79,968		80,478		117
Loans to individuals		386		236		204		826		44,089		44,965		204
Lease financings		1,203		544		44		1,791		70,535		73,225		44

Total	$	9,963	$	1,604	$	365	$	11,932	$	1,392,374	$	1,446,406	$	365

*	Excludes impaired loans and leases.

Nonaccrual and Troubled Debt Restructured Loans and Lease Modifications

The following presents, by class of loans and leases, nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) and accruing troubled debt restructured loans and lease modifications at March 31, 2012 and December 31, 2011.


(Dollars in thousands)	At March 31, 2012						At December 31, 2011
	Nonaccrual Loans and Leases*		Accruing Troubled Debt Restructured Loans and Lease Modifications		Total Impaired Loans and Leases		Nonaccrual Loans and Leases*		Accruing Troubled Debt Restructured Loans and Lease Modifications		Total Impaired Loans and Leases
Commercial, financial and agricultural	$	4,622	$	1,602	$	6,224	$	4,614	$	77	$	4,691
Real estate—commercial real estate and construction:
Commercial real estate		16,858		2,903		19,761		18,085		2,435		20,520
Construction		13,928		2,702		16,630		14,479		1,262		15,741
Real estate—residential and home equity:
Residential secured for business purpose		106		—		106		107		8		115
Residential secured for personal purpose		57		—		57		57		—		57
Home equity secured for personal purpose		—		—		—		27		—		27
Loans to individuals		—		50		50		—		50		50
Lease financings		699		44		743		838		61		899

Total	$	36,270	$	7,301	$	43,571	$	38,207	$	3,893	$	42,100

*	Includes non-accrual troubled debt restructured loans and lease modifications of $8.5 million and $8.6 million at March 31, 2012 and December 31, 2011, respectively.

Credit Quality Indicators

The following tables present by class, the recorded investment in loans and leases by credit quality indicator at March 31, 2012 and December 31, 2011.

The Corporation employs a ten (10) grade risk rating system related to the credit quality of commercial loans and residential real estate loans secured for a business purpose of which the first six categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating. Loans with risk ratings of one through five are reviewed based on the relationship dollar amount with the borrower: loans with a relationship total of $2.5 million or greater are reviewed quarterly; loans with a relationship balance of less than $2.5 million but greater than $500 thousand are reviewed annually based on the borrower’s fiscal year; loans with a relationship balance of less than $500 thousand are reviewed only if the loan becomes 60 days or more past due. Loans with risk ratings of six are also reviewed based on the relationship dollar amount with the borrower: loans with a relationship balance of $2.0 million or greater are reviewed quarterly; loans with a relationship balance of less than $2.0 million but greater than $500 thousand are reviewed annually; loans with a relationship balance of less than $500 thousand are reviewed only if the loan becomes 60 days or more past due. Loans with risk ratings of seven are reviewed at least quarterly, and as often as monthly, at management’s discretion. Loans with risk ratings of eight through ten are reviewed monthly.

Cash Secured – No credit risk

Fully Secured – Negligible credit risk

Strong – Minimal credit risk

Satisfactory – Nominal credit risk

Acceptable – Moderate credit risk

Pre-Watch – Marginal, but stable credit risk

Special Mention – Potential weakness

Substandard – Well-defined weakness

Doubtful – Collection in-full improbable

10.

Loss – Considered uncollectible

Commercial Credit Exposure Credit Risk by Internally Assigned Grades


	Commercial, Financial and Agricultural				Real Estate—Commercial				Real Estate—Construction				Real Estate—Residential Secured for Business Purpose
(Dollars in thousands)	At March 31, 2012		At December 31, 2011		At March 31, 2012		At December 31, 2011		At March 31, 2012		At December 31, 2011		At March 31, 2012		At December 31, 2011
Grade:
1. Cash secured/
2. Fully secured	$	2,536	$	2,426	$	—	$	—	$	—	$	—	$	—	$	—
3. Strong		3,845		4,441		9,382		9,365		1,126		1,124		—		—
4. Satisfactory		34,306		32,730		26,733		28,517		849		89		770		1,309
5. Acceptable		312,153		296,860		296,639		296,499		30,353		35,207		18,818		18,990
6. Pre-watch		78,005		79,402		98,442		100,581		34,882		33,993		9,649		8,853
7. Special Mention		26,680		26,162		35,008		29,055		2,266		1,715		612		663
8. Substandard		40,438		40,634		44,542		49,943		17,151		18,269		2,628		2,666
9. Doubtful		1,573		2,032		993		993		—		—		—		—
10. Loss		—		—		—		—		—		—		—		—

Total	$	499,536	$	484,687	$	511,739	$	514,953	$	86,627	$	90,397	$	32,477	$	32,481

The Corporation monitors the credit risk profile by payment activity for the following classifications of loans and leases: residential real estate loans secured for a personal purpose, home equity loans secured for a personal purpose, loans to individuals and lease financings by payment activity. Nonperforming loans and leases are loans past due 90 days or more, loans and leases on non-accrual of interest and troubled debt restructured loans and lease modifications. Performing loans and leases are reviewed only if the loan becomes 60 days or more past due. Nonperforming loans and leases are reviewed monthly. Performing loans and leases have a nominal to moderate risk of loss. Nonperforming loans and leases are loans or leases with a well-defined weakness and where collection in-full is improbable.

Credit Exposure – Real Estate—Residential Secured for Personal Purpose, Real Estate—Home Equity Secured for Personal Purpose, Loans to individuals, Lease Financing Credit Risk Profile by Payment Activity


	Real Estate—Residential Secured for Personal Purpose				Real Estate—Home Equity Secured for Personal Purpose				Loans to individuals				Lease Financing
(Dollars in thousands)	At March 31, 2012		At December 31, 2011		At March 31, 2012		At December 31, 2011		At March 31, 2012		At December 31, 2011		At March 31, 2012		At December 31, 2011
Performing	$	134,451	$	125,163	$	78,101	$	80,334	$	44,050	$	44,711	$	71,610	$	72,282
Nonperforming		57		57		94		144		292		254		796		943

Total	$	134,508	$	125,220	$	78,195	$	80,478	$	44,342	$	44,965	$	72,406	$	73,225

Risks associated with lending activities include, among other things, the impact of changes in interest rates and economic conditions, which may adversely impact the ability of borrowers to repay outstanding loans, and impact the value of the associated collateral.

Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties and factors affecting residential real estate borrowers.

Commercial, financial and agricultural business loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the collateral securing the loans often depreciates over time, is difficult to appraise and liquidate and fluctuates in value based on the success of the business.

Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest). During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral. Included in real estate-construction is track development financing. Risk factors related to track development financing include the demand for residential housing and the real estate valuation market. When projects move slower than anticipated, the properties may have significantly lower values than when the original underwriting was completed, resulting in lower collateral values to support the loan. Extended time frames also cause the interest carrying cost for a project to be higher than the builder projected, negatively impacting the builder’s profit and cash flow and, therefore, their ability to make principal and interest payments.

Commercial real estate loans and residential real estate loans with a business purpose secured by owner-occupied properties are dependent upon the successful operation of the borrower’s business. If the operating company suffers difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by properties where repayment is dependent upon payment of rent by third party tenants or the sale of the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit.

Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans secured for a business purpose are more susceptible to a risk of loss during a downturn in the business cycle. The Corporation has strict underwriting, review, and monitoring procedures in place, however, these procedures cannot eliminate all of the risks related to these loans.

The Corporation focuses on both assessing the borrower’s capacity and willingness to repay and on obtaining sufficient collateral. Commercial, financial and agricultural loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the Eastern Pennsylvania market area at conservative loan-to-value ratios and often by a guarantee of the borrowers. Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that any credit concentrations by borrower or industry are closely monitored.

The Corporation originates fixed-rate and adjustable-rate real estate-residential mortgage loans that are secured by the underlying 1- to 4-family residential properties for personal purposes. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.

In the real estate-home equity loan portfolio secured for a personal purpose, combined loan-to-value ratios at origination are generally limited to 80%. Other credit considerations may warrant higher combined loan-to-value ratios and are generally insured by private mortgage insurance.

Credit risk in the loans to individuals portfolio, which includes, direct consumer loans and credit cards, is controlled by strict adherence to conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.

The primary risks that are involved with lease financing receivables are credit underwriting and borrower industry concentrations. The Corporation has strict underwriting, review, and monitoring procedures in place to mitigate this risk. Risk also lies in the residual value of the underlying equipment. Residual values are subject to judgments as to the value of the underlying equipment that can be affected by changes in economic and market conditions and the financial viability of the residual guarantors and insurers. To the extent not guaranteed or assumed by a third party, or otherwise insured against, the Corporation bears the risk of ownership of the leased assets. This includes the risk that the actual value of the leased assets at the end of the lease term will be less than the residual value. The Corporation greatly reduces this risk by using $1.00 buyout leases, in which the entire cost of the leased equipment is included in the contractual payments, leaving no residual payment at the end of the lease terms.

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

The following presents, by portfolio segment, a summary of the activity in the reserve for loan and lease losses, the balance in the reserve for loan and lease losses disaggregated on the basis of impairment method and the recorded investment in loans and leases disaggregated on the basis of impairment method for the three months ended March 31, 2012 and 2011:


(Dollars in thousands)	Commercial, Financial and Agricultural			Real Estate— Commercial and Construction			Real Estate— Residential Secured for Business Purpose			Real Estate— Residential and Home Equity Secured for Personal Purpose			Loans to Individuals			Lease Financings			Unallocated			Total
For the Three Months Ended March 31, 2012
Reserve for loan and lease losses:
Beginning balance	$	11,262		$	13,317		$	823		$	735		$	730		$	1,344		$	1,659		$	29,870
Charge-offs		(1,707	)		(1,542	)		—			—			(121	)		(336	)					(3,706	)
Recoveries		53			96			52			2			31			99						333
Provision (recovery of provision)		2,093			1,481			73			(5	)		64			53			341			4,100

Ending balance	$	11,701		$	13,352		$	948		$	732		$	704		$	1,160		$	2,000		$	30,597

For the Three Months Ended March 31, 2011
Reserve for loan and lease losses:
Beginning balance	$	9,630		$	15,288		$	1,333		$	544		$	734		$	1,950		$	1,419		$	30,898
Charge-offs		(1,130	)		(1,688	)		(58	)		(3	)		(201	)		(468	)					(3,548	)
Recoveries		132			63			3			2			44			76						320
Provision (recovery of provision)		2,466			2,801			(283	)		51			124			388			(413	)		5,134

Ending balance	$	11,098		$	16,464		$	995		$	594		$	701		$	1,946		$	1,006		$	32,804


(Dollars in thousands)	Commercial, Financial and Agricultural			Real Estate— Commercial and Construction			Real Estate— Residential Secured for Business Purpose			Real Estate— Residential and Home Equity Secured for Personal Purpose			Loans to Individuals			Lease Financings			Unallocated			Total
At March 31, 2012
Reserve for loan and lease losses:
Ending balance: individually evaluated for impairment	$	860		$	52		$	—		$	—		$	—		$	N/A		$	N/A		$	912
Ending balance: collectively evaluated for impairment		10,841			13,300			948			732			704			1,160			2,000			29,685

Total ending balance	$	11,701		$	13,352		$	948		$	732		$	704		$	1,160		$	2,000		$	30,597

Loans and leases:
Ending balance: individually evaluated for impairment	$	6,224		$	36,391		$	106		$	57		$	50		$	N/A					$	42,828
Ending balance: collectively evaluated for impairment		493,312			561,975			32,371			212,646			44,292			72,406						1,417,002

Total ending balance	$	499,536		$	598,366		$	32,477		$	212,703		$	44,342		$	72,406					$	1,459,830


(Dollars in thousands)	Commercial, Financial and Agricultural		Real Estate— Commercial and Construction		Real Estate— Residential Secured for Business Purpose		Real Estate— Residential and Home Equity Secured for Personal Purpose		Loans to Individuals		Lease Financings		Unallocated		Total
At March 31, 2011
Reserve for loan and lease losses:
Ending balance: individually evaluated for impairment	$	661	$	1,176	$	48	$	—	$	9	$	N/A	$	N/A	$	1,894
Ending balance: collectively evaluated for impairment		10,437		15,288		947		594		692		1,946		1,006		30,910

Total ending balance	$	11,098	$	16,464	$	995	$	594	$	701	$	1,946	$	1,006	$	32,804

Loans and leases:
Ending balance: individually evaluated for impairment	$	6,906	$	34,395	$	393	$	900	$	60	$	N/A			$	42,654
Ending balance: collectively evaluated for impairment		450,557		588,585		36,360		204,714		42,089		77,178				1,399,483

Total ending balance	$	457,463	$	622,980	$	36,753	$	205,614	$	42,149	$	77,178			$	1,442,137

Impaired Loans

The following presents, by class of loans, the recorded investment and unpaid principal balance of impaired loans, the amounts of the impaired loans for which there is not an allowance for credit losses and the amounts for which there is an allowance for credit losses at March 31, 2012 and December 31, 2011:


	At March 31, 2012						At December 31, 2011
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance recorded:
Commercial, financial and agricultural	$	3,450	$	3,887			$	3,384	$	4,422
Real estate—commercial real estate		19,173		27,607				19,453		27,146
Real estate—construction		16,341		18,315				15,741		17,268
Real estate—residential secured for business purpose		106		115				115		631
Real estate—residential secured for personal purpose		57		57				57		57
Real estate—home equity secured for personal purpose		—		—				27		27
Loans to individuals		50		58				50		58

Total impaired loans with no related allowance recorded:	$	39,177	$	50,039			$	38,827	$	49,609

Impaired loans with an allowance recorded:
Commercial, financial and agricultural	$	2,774	$	3,555	$	860	$	1,307	$	1,700	$	510
Real estate—commercial real estate		588		596		36		1,067		1,067		743
Real estate—construction		289		343		16		—		—		—

Total impaired loan with an allowance recorded	$	3,651	$	4,494	$	912	$	2,374	$	2,767	$	1,253

Total impaired loans:
Commercial, financial and agricultural	$	6,224	$	7,442	$	860	$	4,691	$	6,122	$	510
Real estate—commercial real estate		19,761		28,203		36		20,520		28,213		743
Real estate—construction		16,630		18,658		16		15,741		17,268		—
Real estate—residential secured for business purpose		106		115		—		115		631		—
Real estate—residential secured for personal purpose		57		57		—		57		57		—
Real estate—home equity secured for personal purpose		—		—		—		27		27		—
Loans to individuals		50		58		—		50		58		—

Total impaired loans:	$	42,828	$	54,533	$	912	$	41,201	$	52,376	$	1,253

The following presents by class of loans, the average recorded investment in impaired loans and an analysis of interest on impaired loans:


	Three Months Ended March 31, 2012						Three Months Ended March 31, 2011
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized*		Interest Income That Would Have Been Recognized Under Original Terms		Average Recorded Investment		Interest Income Recognized*		Interest Income That Would Have Been Recognized Under Original Terms
Commercial, financial and agricultural	$	5,337	$	2	$	92	$	7,157	$	2	$	88
Real estate—commercial real estate		20,814		43		269		17,564		4		251
Real estate—construction		15,956		17		195		15,279		—		228
Real estate—residential secured for business purpose		110		—		1		437		2		6
Real estate—residential secured for personal purpose		57		—		1		992		17		15
Real estate—home equity secured for personal purpose		7		—		—		—		—		—
Loans to individuals		50		1		—		66		1		1

Total	$	42,331	$	63	$	558	$	41,495	$	26	$	589

*	Includes interest income recognized on accruing troubled debt restructured loans of $58 thousand and $6 thousand for the three months ended March 31, 2012 and 2011, respectively.

Troubled Debt Restructured Loans

The following presents, by class of loans, information regarding accruing and non-accrual loans that were restructured during the three months ended March 31, 2012 and 2011:


	Three Months Ended March 31, 2012								Three Months Ended March 31, 2011
(Dollars in thousands)	Number Of Loans		Pre- Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment		Related Allowance		Number Of Loans		Pre- Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment		Related Allowance
Accruing Troubled Debt Restructured Loans
Commercial, financial and agricultural		7	$	1,537	$	1,537	$	—		—	$	—	$	—	$	—
Real estate—commercial real estate		3		834		834		—		5		2,438		2,435		—
Real estate—construction		2		1,330		1,330		—		5		2,182		2,182		—

Total		12	$	3,701	$	3,701	$	—		10	$	4,620	$	4,617	$	—

Nonaccrual Troubled Debt Restructured Loans
Commercial, financial and agricultural		2	$	448	$	448	$	—		—	$	—	$	—	$	—
Real estate—commercial real estate		1		124		124		—		1		2,765		2,765		—

Total		3	$	572	$	572	$	—		1	$	2,765	$	2,765	$	—

The Corporation grants concessions primarily related to extensions of interest-only payment periods and an occasional payment modification. These modifications typically are on a short-term basis up to one year. Our goal when restructuring a credit is to afford the customer a reasonable period of time to provide cash flow relief to customers experiencing cash flow difficulties.

Accruing loans totaling $3.7 million were restructured during the first three months of 2012. Accruing troubled debt restructured loans were primarily comprised of two categories of loans on which interest is being accrued under the restructured terms, and the loans were current or less than ninety days past due. The first category primarily consisted of four commercial business loans for one borrower totaling $1.3 million, which had their interest only payment terms extended due to reduced cash flows. The second category primarily consisted of one construction loan totaling $1.2 million, which had interest only payment terms extended until projected cash flows from rental property income are received. Accruing troubled debt restructured loans charged-off during the three months ended March 31, 2012 subsequent to the restructuring totaled approximately $358 thousand, primarily due to declines in collateral values for two commercial real estate loans for one borrower.

Nonaccrual loans totaling $572 thousand were restructured during the first three months of 2012. Nonaccrual troubled debt restructured loans were comprised of two commercial business loans for one borrower, which were granted principal and interest deferrals for a three month period.

There were no accruing or nonaccrual troubled debt restructured loans which had payment defaults within twelve months following restructuring during the three month periods ending March 31, 2012 and 2011.