LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES (Tables)

12 Months Ended

Dec. 31, 2012

Summary of loan portfolio and allowance for loan losses

The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout North central Pennsylvania and Southern New York. Although the Company has a diversified loan portfolio at December 31, 2012 and 2011, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio, as well as how those segments are analyzed within the allowance for loan losses as of December 31, 2012 and 2011 (in thousands):

2012	Total Loans		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	178,080	$	424	$	177,656
Commercial and agricultural		194,725		9,093		185,632
Construction		12,011		-		12,011
Consumer		10,559		-		10,559
Other commercial and agricultural loans		47,880		901		46,979
State and political subdivision loans		59,208		-		59,208
Total		502,463	$	10,418	$	492,045
Allowance for loan losses		6,784
Net loans	$	495,679

2011
Real estate loans:
Residential	$	184,034	$	94	$	183,940
Commercial and agricultural		185,050		8,270		176,780
Construction		8,481		-		8,481
Consumer		10,746		-		10,746
Other commercial and agricultural loans		44,299		517		43,782
State and political subdivision loans		54,899		-		54,899
Total		487,509	$	8,881	$	478,628
Allowance for loan losses		6,487
Net loans	$	481,022

Impaired financing receivables with associated allowance amount

The following table includes the recorded investment and unpaid principal balances for impaired loans by class, with the associated allowance amount as of December 31, 2012 and 2011, if applicable (in thousands):

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
	Balance		Allowance		Allowance		Investment		Allowance
2012
Real estate loans:
Mortgages	$	309	$	150	$	136	$	286	$	8
Home Equity		138		-		138		138		14
Commercial		10,669		6,476		2,617		9,093		559
Agricultural		-		-		-		-		-
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		950		592		309		901		1
Other agricultural loans		-		-		-		-		-
State and political
subdivision loans		-		-		-		-		-
Total	$	12,066	$	7,218	$	3,200	$	10,418	$	582

2011
Real estate loans:
Mortgages	$	-	$	-	$	-	$	-	$	-
Home Equity		94		36		58		94		13
Commercial		9,394		5,663		2,607		8,270		433
Agricultural		-		-		-		-		-
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		574		30		487		517		48
Other agricultural loans		-		-		-		-		-
State and political
subdivision loans		-		-		-		-		-
Total	$	10,062	$	5,729	$	3,152	$	8,881	$	494

The following table includes the average investment in impaired loans and the income recognized on impaired loans for 2012, 2011 and 2010 (in thousands):

	2012		2011		2010
Average investment in impaired loans	$	8,625	$	9,653	$	9,356
Interest income recognized on impaired loans		123		123		143
Interest income recognized on a cash basis on impaired loans		123		123		143

Summary of financing receivable credit exposures by internally assigned grades

The following tables represent credit exposures by internally assigned grades as of December 31, 2012 and 2011 (in thousands):

2012	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	149,892	$	7,616	$	19,127	$	75	$	-	$	176,710
Agricultural		13,690		2,386		1,939		-		-		18,015
Construction		12,011		-		-		-		-		12,011
Other commercial loans		39,239		826		1,555		-		-		41,620
Other agricultural loans		4,833		589		838		-		-		6,260
State and political subdivision loans		58,120		-		1,088		-		-		59,208
Total	$	277,785	$	11,417	$	24,547	$	75	$	-	$	313,824

2011	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	138,409	$	10,372	$	17,045	$	-	$	-	$	165,826
Agricultural		14,628		2,412		2,184		-		-		19,224
Construction		8,481		-		-		-		-		8,481
Other commercial loans		34,606		2,203		921		17		-		37,747
Other agricultural loans		4,509		809		1,234		-		-		6,552
State and political subdivision loans		53,733		-		1,166		-		-		54,899
Total	$	254,366	$	15,796	$	22,550	$	17	$	-	$	292,729

For residential real estate mortgages, home equities and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2012 and 2011 (in thousands):

2012	Performing		Non-performing		Total
Real estate loans:
Mortgages	$	105,822	$	726	$	106,548
Home Equity		71,263		269		71,532
Consumer		10,555		4		10,559
Total	$	187,640	$	999	$	188,639

2011	Performing		Non-performing		Total
Real estate loans:
Mortgages	$	102,238	$	473	$	102,711
Home Equity		81,143		180		81,323
Consumer		10,746		-		10,746
Total	$	194,127	$	653	$	194,780

Age analysis of past due financing receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loans as of December 31, 2012 and 2011, (in thousands):

		30-59 Days		60-89 Days		90 Days		Total Past				Total Financing		90 Days and
2012		Past Due		Past Due		Or Greater		Due		Current		Receivables		Accruing
Real estate loans:
Mortgages		$	636	$	294	$	493	$	1,423	$	105,125	$	106,548	$	244
Home Equity			267		17		222		506		71,026		71,532		88
Commercial			602		-		2,149		2,751		173,959		176,710		152
Agricultural			54		-		-		54		17,961		18,015		-
Construction			-		-		-		-		12,011		12,011		-
Consumer			45		43		4		92		10,467		10,559		4
Other commercial loans			962		-		317		1,279		40,341		41,620		18
Other agricultural loans			-		-		-		-		6,260		6,260		-
State and political subdivision loans			-		-		-		-		59,208		59,208		-
	Total	$	2,566	$	354	$	3,185	$	6,105	$	496,358	$	502,463	$	506
Loans considered non-accrual		$	73	$	69	$	2,679	$	2,821	$	5,246	$	8,067
Loans still accruing			2,493		285		506		3,284		491,112		494,396
	Total	$	2,566	$	354	$	3,185	$	6,105	$	496,358	$	502,463

	30-59 Days		60-89 Days		90 Days		Total Past				Total Financing		90 Days and
2011	Past Due		Past Due		Or Greater		Due		Current		Receivables		Accruing
Real estate loans:
Mortgages	$	428	$	91	$	398	$	917	$	101,794	$	102,711	$	60
Home Equity		339		-		180		519		80,804		81,323		39
Commercial		319		412		2,794		3,525		162,301		165,826		176
Agricultural		143		-		-		143		19,081		19,224		-
Construction		-		-		-		-		8,481		8,481		-
Consumer		86		7		-		93		10,653		10,746		-
Other commercial loans		9		-		503		512		37,235		37,747		-
Other agricultural loans		-		-		-		-		6,552		6,552		-
State and political subdivision loans		-		-		-		-		54,899		54,899		-
Total	$	1,324	$	510	$	3,875	$	5,709	$	481,800	$	487,509	$	275
Loans considered non-accrual	$	-	$	-	$	3,600	$	3,600	$	5,565	$	9,165
Loans still accruing		1,324		510		275		2,109		476,235		478,344
Total	$	1,324	$	510	$	3,875	$	5,709	$	481,800	$	487,509

Summary of financing receivables on nonaccrual status

The following table reflects the loans on nonaccrual status as of December 31, 2012 and 2011, respectively. The balances are presented by class of loan (in thousands):

	2012		2011
Real estate loans:
Mortgages	$	482	$	413
Home Equity		181		141
Commercial		7,042		8,094
Agricultural		-		-
Construction		-		-
Consumer		-		-
Other commercial loans		362		517
Other agricultural loans		-		-
State and political subdivision		-		-
	$	8,067	$	9,165

Summary of troubled debt restructurings on financing receivables

Loan modifications that are considered TDR's completed during the years ended December 31, 2012 and 2011 were as follows (dollars in thousands):

2012	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Residential mortgage		1		1	$	48	$	71	$	48	$	71
Commercial		-		3		-		160		-		160
Other commercial loans		-		1		-		25		-		25
Total		1		5	$	48	$	256	$	48	$	256
2011	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Residential		2		-	$	76	$	-	$	76	$	-
Commercial		5		1		5,912		47		5,912		47
Other commercial loans		1		-		15		-		15		-
Total		8		1	$	6,003	$	47	$	6,003	$	47

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. Loan modifications during the previous twelve months considered TDR's that defaulted during the twelve month periods ended December 31, 2012 and 2011 were as follows (dollars in thousands):

	2012				2011
	Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Commercial		1	$	50		3	$	150
Total recidivism		1	$	50		3	$	150

Roll forward of allowance for loan losses by portfolio segment

The following tables roll forward the balance of the allowance for loan and lease losses for the years ended December 31, 2012, 2011 and 2010 and is segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2012, 2011 and 2010 (in thousands):

	Balance at December 31, 2011		Charge-offs			Recoveries		Provision			Balance at December 31, 2011		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	805	$	(95	)	$	-	$	165		$	875	$	22	$	853
Commercial and agricultural		4,132		(2	)		9		298			4,437		559		3,878
Construction		15		-			-		23			38		-		38
Consumer		111		(54	)		33		29			119		-		119
Other commercial and agricultural loans		674		(21	)		7		68			728		1		727
State and political subdivision loans		235		-			-		36			271		-		271
Unallocated		515		-			-		(199	)		316		-		316
Total	$	6,487	$	(172	)	$	49	$	420		$	6,784	$	582	$	6,202
	Balance at December 31, 2010		Charge-offs			Recoveries		Provision			Balance at December 31, 2011		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	969	$	(101	)	$	-	$	(63	)	$	805	$	13	$	792
Commercial and agricultural		3,380		(29	)		15		766			4,132		433		3,699
Construction		22		-			-		(7	)		15		-		15
Consumer		108		(71	)		57		17			111		-		111
Other commercial and agricultural loans		983		(6	)		32		(335	)		674		48		626
State and political subdivision loans		137		-			-		98			235		-		235
Unallocated		316		-			-		199			515		-		515
Total	$	5,915	$	(207	)	$	104	$	675		$	6,487	$	494	$	5,993
	Balance at December 31, 2009		Charge-offs			Recoveries		Provision			Balance at December 31, 2010		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	801	$	(76	)	$	4	$	240		$	969	$	21	$	948
Commercial and agricultural		2,864		(124	)		21		619			3,380		167		3,213
Construction		20		-			-		2			22		-		22
Consumer		131		(88	)		79		(14	)		108		-		108
Other commercial and agricultural loans		918		(120	)		76		109			983		-		983
State and political subdivision loans		93		-			-		44			137		-		137
Unallocated		61		-			-		255			316		-		316
Total	$	4,888	$	(408	)	$	180	$	1,255		$	5,915	$	188	$	5,727