Loans

9 Months Ended

Sep. 30, 2012

Loans [Abstract]

LOANS

5. LOANS

Total net loans at September 30, 2012 and December 31, 2011 are summarized as follows:

	September 30, 2012			December 31, 2011
Commercial, industrial, and agricultural	$	259,906		$	253,324
Commercial mortgages		257,031			242,511
Residential real estate		335,796			298,628
Consumer		55,979			53,471
Credit cards		4,572			4,412
Overdrafts		330			423
Less:     unearned discount		(3,397	)		(2,886	)
allowance for loan losses		(13,649	)		(12,615	)
Loans, net	$	896,568		$	837,268

At September 30, 2012 and December 31, 2011, net unamortized loan costs and fees of $206 and ($7), respectively, have been included in the carrying value of loans.

The Corporation’s outstanding loans and related unfunded commitments are primarily concentrated within Central and Western Pennsylvania. The Bank attempts to limit concentrations within specific industries by utilizing dollar limitations to single industries or customers and by entering into participation agreements with third parties. Collateral requirements are established based on management’s assessment of the customer.

Transactions in the allowance for loan losses for the three months ended September 30, 2012 were as follows:

	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2012	$	5,115		$	4,553		$	2,225		$	1,568		$	81		$	148		$	13,690
Charge-offs		(751	)		(165	)		(7	)		(252	)		(22	)		(80	)		(1,277	)
Recoveries		6			0			1			18			1			22			48
Provision (benefit) for loan losses		103			504			113			372			19			77			1,188
Allowance for loan losses, September 30, 2012	$	4,473		$	4,892		$	2,332		$	1,706		$	79		$	167		$	13,649

Transactions in the allowance for loan losses for the nine months ended September 30, 2012 were as follows:

	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2012	$	4,511		$	4,470		$	1,991		$	1,404		$	71		$	168		$	12,615
Charge-offs		(1,398	)		(401	)		(231	)		(890	)		(55	)		(197	)		(3,172	)
Recoveries		14			0			1			67			8			78			168
Provision for loan losses		1,346			823			571			1,125			55			118			4,038
Allowance for loan losses, September 30, 2012	$	4,473		$	4,892		$	2,332		$	1,706		$	79		$	167		$	13,649

Transactions in the allowance for loan losses for the three months ended September 30, 2011 were as follows:

	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2011	$	3,770		$	4,399		$	1,900		$	1,400		$	104		$	142		$	11,715
Charge-offs		(84	)		(12	)		(55	)		(221	)		(12	)		(50	)		(434	)
Recoveries		3			—			12			31			3			18			67
Provision (benefit) for loan losses		33			467			154			202			2			46			904
Allowance for loan losses, September 30, 2011	$	3,722		$	4,854		$	2,011		$	1,412		$	97		$	156		$	12,252

Transactions in the allowance for loan losses for the nine months ended September 30, 2011 were as follows:

	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2011	$	3,517		$	3,511		$	1,916		$	1,561		$	96		$	219		$	10,820
Charge-offs		(299	)		(100	)		(132	)		(683	)		(37	)		(165	)		(1,416	)
Recoveries		7			—			12			76			8			72			175
Provision (benefit) for loan losses		497			1,443			215			458			30			30			2,673
Allowance for loan losses, September 30, 2011	$	3,722		$	4,854		$	2,011		$	1,412		$	97		$	156		$	12,252

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on the Corporation’s impairment method as of September 30, 2012 and December 31, 2011:

September 30, 2012

	Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	498	$	229	$	68	$	0	$	0	$	0	$	795
Collectively evaluated for impairment		3,975		3,392		2,264		1,706		79		167		11,583
Modified in a troubled debt restructuring		0		1,271		0		0		0		0		1,271
Total ending allowance balance	$	4,473	$	4,892	$	2,332	$	1,706	$	79	$	167	$	13,649
Loans:
Loans individually evaluated for impairment	$	6,927	$	7,698	$	624	$	0	$	0	$	0	$	15,249
Loans collectively evaluated for impairment		252,694		239,235		335,172		55,979		4,572		330		887,982
Loans modified in a troubled debt restructuring		285		10,098		0		0		0		0		10,383
Total ending loans balance	$	259,906	$	257,031	$	335,796	$	55,979	$	4,572	$	330	$	913,614

December 31, 2011

	Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	329	$	917	$	19	$	0	$	0	$	0	$	1,265
Collectively evaluated for impairment		4,182		3,325		1,972		1,404		71		168		11,122
Modified in a troubled debt restructuring		0		228		0		0		0		0		228
Total ending allowance balance	$	4,511	$	4,470	$	1,991	$	1,404	$	71	$	168	$	12,615
Loans:
Loans individually evaluated for impairment	$	6,115	$	8,457	$	124	$	0	$	0	$	0	$	14,696
Loans collectively evaluated for impairment		247,209		226,366		298,504		53,471		4,412		423		830,385
Loans modified in a troubled debt restructuring		0		7,688		0		0		0		0		7,688
Total ending loans balance	$	253,324	$	242,511	$	298,628	$	53,471	$	4,412	$	423	$	852,769

The following tables present information related to loans individually evaluated for impairment by portfolio segment as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011:

September 30, 2012

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	6,616	$	3,752	$	498
Commercial mortgage		6,614		6,063		1,500
Residential real estate		551		459		68
With no related allowance recorded:
Commercial, industrial, and agricultural		4,217		3,460		0
Commercial mortgage		13,511		11,733		0
Residential real estate		183		165		0
Total	$	31,692	$	25,632	$	2,066

December 31, 2011

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	4,329	$	2,815	$	462
Commercial mortgage		4,724		4,065		1,012
Residential real estate		187		124		19
With no related allowance recorded:
Commercial, industrial, and agricultural		3,892		3,300		0
Commercial mortgage		13,839		12,080		0
Residential real estate		0		0		0
Total	$	26,971	$	22,384	$	1,493

	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	4,140	$	0	$	0	$	3,406	$	3	$	3
Commercial mortgage		6,180		3		3		5,549		3		3
Residential real estate		476		3		3		322		11		11
With no related allowance recorded:
Commercial, industrial, and agricultural		3,506		0		0		3,459		0		0
Commercial mortgage		11,971		0		0		12,016		0		0
Residential real estate		151		0		0		75		0		0
Total	$	26,424	$	6	$	6	$	24,827	$	17	$	17

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,097	$	0	$	0	$	1,330	$	0	$	0
Commercial mortgage		6,554		0		0		8,050		16		16
Residential real estate		175		3		3		193		3		3
With no related allowance recorded:
Commercial, industrial, and agricultural		1,525		0		0		1,738		0		0
Commercial mortgage		7,831		0		0		4,275		0		0
Residential real estate		0		0		0		0		0		0
Total	$	17,182	$	3	$	3	$	15,586	$	19	$	19

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still accruing interest by class of loans as of September 30, 2012 and December 31, 2011:

	September 30, 2012				December 31, 2011
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	6,669	$	47	$	6,949	$	10
Commercial mortgages		9,353		0		8,359		122
Residential real estate		2,532		136		1,254		157
Consumer		3		250		5		125
Credit cards		0		21		0		27
Total	$	18,557	$	454	$	16,567	$	441

Nonaccrual loans and loans past due over 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the aging of the recorded investment in past due loans as of September 30, 2012 and December 31, 2011 by class of loans. The recorded investment in loans excludes accrued interest and loan origination fees, net due to their insignificance.

September 30, 2012

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, industrial, and agricultural	$	396	$	87	$	6,716	$	7,199	$	252,707	$	259,906
Commercial mortgages		2,093		1,681		7,693		11,467		245,564		257,031
Residential real estate		1,299		383		2,668		4,350		331,446		335,796
Consumer		576		234		253		1,063		54,916		55,979
Credit cards		17		21		21		59		4,513		4,572
Overdrafts		0		0		0		0		330		330
Total	$	4,381	$	2,406	$	17,351	$	24,138	$	889,476	$	913,614

December 31, 2011

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, industrial, and agricultural	$	239	$	53	$	6,959	$	7,251	$	246,073	$	253,324
Commercial mortgages		1,064		2,620		7,043		10,727		231,784		242,511
Residential real estate		1,816		682		1,411		3,909		294,719		298,628
Consumer		392		185		130		707		52,764		53,471
Credit cards		34		19		27		80		4,332		4,412
Overdrafts		0		0		0		0		423		423
Total	$	3,545	$	3,559	$	15,570	$	22,674	$	830,095	$	852,769

Troubled Debt Restructurings

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. This evaluation is performed using the Corporation’s internal underwriting policies.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. Except as discussed in the following paragraph, all loans modified in troubled debt restructurings are performing in accordance with their modified terms as of September 30, 2012. No principal balances were forgiven in connection with the loan restructurings that are discussed in the following paragraphs.

The Corporation has allocated $712 and $228 of specific reserves to one commercial mortgage customer whose loan terms have been modified in troubled debt restructurings as of September 30, 2012 and December 31, 2011, respectively. The interest rate on the original loan was 6.60%. Due to financial difficulties experienced by the customer, the interest rate was reduced to 4.19% in the third quarter of 2010 and further reduced to 4.07% in the third quarter of 2011. In the first quarter of 2012, the customer was granted interest-only terms for six months, and in the third quarter of 2012, the customer defaulted on the loan, resulting in an additional provision for loan losses of $503 for the three and nine months ended September 30, 2012. The loan was placed on nonaccrual status effective September 30, 2012 since collection of principal and interest was considered doubtful. This loan had a total recorded investment of $1,657 and $1,662 as of September 30, 2012 and December 31, 2011, respectively.

The Corporation has allocated $100 of specific reserves to one commercial mortgage customer with two loans whose terms have been modified in a troubled debt restructuring as of September 30, 2012. The interest rates on the original loans were 6.45% and 6.47%. Due to financial difficulties experienced by the customer, the interest rates on both loans were reduced to 5.75% in the first quarter of 2012, and the maturity dates were extended to 2020 and 2024, resulting in an additional provision for loan losses of $101 for the three and nine months ended September 30, 2012. These loans had a total recorded investment of $1,825 as of September 30, 2012. This commercial customer has two additional mortgage loans that were deemed to be impaired as of December 31, 2011 and whose terms were modified in a troubled debt restructuring in the first quarter of 2012. The loan payments were modified to reflect a twenty year amortization with a balloon payment due after five years. These loans had a total recorded investment of $706 and $728 and specific reserves of $459 and $465 as of September 30, 2012 and December 31, 2011, respectively. No additional provision for loan losses was required to be recorded during the three and nine months ended September 30, 2012 in connection with the loan modifications.

The Corporation has a commercial mortgage customer whose loan relationships have interest-only terms that were extended during 2011. The original interest rates on the loans, which were also the market rates of interest at the time of the loan modification, were not reduced; therefore, no additional provision for loan losses was required to be recorded. These loans have a total recorded investment of $4,520 and $4,588 at September 30, 2012 and December 31, 2011, respectively.

In addition, the Corporation has a commercial mortgage customer whose loan relationship was restructured due to the forgiveness of accrued interest and late charges. The original interest rate on the loan, which was also the market rate of interest at the time of the loan modification, was not reduced; therefore, no additional provision for loan losses was required to be recorded. This loan has a recorded investment of $1,390 and $1,438 at September 30, 2012 and December 31, 2011.

The Corporation has a commercial customer with five loans whose terms were modified in a troubled debt restructuring in the first quarter of 2012 due to financial difficulties experienced by the customer. The outstanding balances on the five loans, which ranged in maturity from 2012 to 2014, were combined into one new loan with a five year term. The blended original interest rates on the loans, which were also the market rates of interest at the time of the loan modification, were not reduced; therefore no additional provision for loan losses was required to be recorded. This loan has a total recorded investment of $285 at September 30, 2012.

The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring, and, except as disclosed on the previous page, there have been no payment defaults on loans modified in a troubled debt restructuring.

Credit Quality Indicators

The Corporation classifies commercial, industrial, and agricultural loans and commercial mortgage 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. Loans with an outstanding balance greater than $1 million are analyzed at least semiannually and loans with an outstanding balance of less than $1 million are analyzed at least annually.

The Corporation 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 Corporation’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 Corporation 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 rated as special mention, substandard, or doubtful are considered to be pass rated loans. All loans included in the following tables have been assigned a risk rating within 12 months of the balance sheet date.

September 30, 2012

	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	239,052	$	1,624	$	19,067	$	163	$	259,906
Commercial mortgages		232,522		2,844		20,959		706		257,031
Total	$	471,574	$	4,468	$	40,026	$	869	$	516,937

December 31, 2011

	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	223,457	$	4,176	$	25,490	$	201	$	253,324
Commercial mortgages		214,098		3,172		24,513		728		242,511
Total	$	437,555	$	7,348	$	50,003	$	929	$	495,835

The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”), a subsidiary that offers small balance unsecured and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics than are typical in the Bank’s consumer loan portfolio, are considered to be subprime loans.

Holiday’s loan portfolio is summarized as follows at September 30, 2012 and December 31, 2011:

	September 30, 2012			December 31, 2011
Consumer	$	21,031		$	18,176
Residential real estate		987			1,056
Less: unearned discount		(3,397	)		(2,886	)
Total	$	18,621		$	16,346

During the three months ended September 30, 2012, Holiday purchased the loans and other assets of a consumer discount company in Ebensburg, Pennsylvania. The purchase price was $1,248 for the performing loans and customers of the business. The purchase price resulted in Holiday recording a $75 customer relationship intangible asset which is being amortized using the straight-line method over three years. This amount is included in accrued interest receivable and other assets on the consolidated balance sheet. Goodwill of $125 was also recorded in connection with the acquisition. Due to the insignificance of the assets acquired in relation to the consolidated financial statements as a whole, no further business combination disclosures are included in the notes to consolidated financial statements.

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate, consumer, and credit card loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential, consumer, and credit card loans based on payment activity as of September 30, 2012 and December 31, 2011:

	September 30, 2012						December 31, 2011
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	333,128	$	55,726	$	4,551	$	297,217	$	53,341	$	4,385
Non-performing		2,668		253		21		1,411		130		27
Total	$	335,796	$	55,979	$	4,572	$	298,628	$	53,471	$	4,412

The Corporation considers all overdraft loans to be performing loans given their short-term duration.