4. Loans

Total net loans at December 31, 2011 and 2010 are summarized as follows:


	2010			2009

Commercial, industrial, and agricultural	$	253,324		$	257,491
Commercial mortgages		242,511			212,878
Residential real estate		298,628			266,604
Consumer		54,677			53,202
Credit cards		3,206			2,870
Overdrafts		423			3,964
Less: unearned discount		(2,886	)		(2,447	)
allowance for loan losses		(12,615	)		(10,820	)

Loans, net	$	837,268		$	783,742

At December 31, 2011 and 2010, net unamortized loan costs and fees of ($7) and ($167), 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 year ended December 31, 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		(1,796	)		(175	)		(217	)		(907	)		(39	)		(222	)		(3,356	)
Recoveries		9			-			13			88			10			94			214
Provision for loan losses		2,781			1,134			279			662			4			77			4,937

Allowance for loan losses, December 31, 2011	$	4,511		$	4,470		$	1,991		$	1,404		$	71		$	168		$	12,615

Transactions in the allowance for loan losses for the years ended December 31, 2010 and 2009 were as follows:


	2010			2009
Balance, beginning of year	$	9,795		$	8,719
Charge-offs		(4,371	)		(3,611	)
Recoveries		238			222

Net charge-offs		(4,133	)		(3,389	)
Provision for loan losses		5,158			4,465

Balance, end of year	$	10,820		$	9,795

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 December 31, 2011 and 2010:


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	$	-	$	-	$	-	$	1,265
Collectively evaluated for impairment		4,182		3,325		1,972		1,404		71		168		11,122
Modified in a troubled debt restructuring		-		228		-		-		-		-		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	$	-	$	-	$	-	$	14,696
Loans collectively evaluated for impairment		247,209		226,366		298,504		54,677		3,206		423		830,385
Loans modified in a troubled debt restructuring		-		7,688		-		-		-		-		7,688

Total ending loans balance	$	253,324	$	242,511	$	298,628	$	54,677	$	3,206	$	423	$	852,769


December 31, 2010	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	$	142	$	509	$	69	$	-	$	-	$	-	$	720
Collectively evaluated for impairment		3,375		2,759		1,847		1,561		96		219		9,857
Modified in a troubled debt restructuring		-		243		-		-		-		-		243

Total ending allowance balance	$	3,517	$	3,511	$	1,916	$	1,561	$	96	$	219	$	10,820

Loans:
Loans individually evaluated for impairment	$	2,616	$	8,759	$	235	$	-	$	-	$	-	$	11,610
Loans collectively evaluated for impairment		254,875		202,405		266,369		53,202		2,870		3,964		783,685
Loans modified in a troubled debt restructuring		-		1,714		-		-		-		-		1,714

Total ending loans balance	$	257,491	$	212,878	$	266,604	$	53,202	$	2,870	$	3,964	$	797,009

The following tables present information related to loans individually evaluated for impairment by portfolio segment as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010, and 2009:


December 31, 2011	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	5,991	$	4,477	$	557
Commercial mortgage		3,062		2,403		917
Residential real estate		187		124		19
With no related allowance recorded:
Commercial, industrial, and agricultural		9,918		9,326		–
Commercial mortgage		7,813		6,054		–
Residential real estate		–		–		–

Total	$	26,971	$	22,384	$	1,493


December 31, 2010	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	4,755	$	4,330	$	385
Commercial mortgage		11,356		8,759		509
Residential real estate		339		235		69

Total	$	16,450	$	13,324	$	963

The unpaid principal balance of impaired loans includes the Corporation's recorded investment in the loan and amounts that have been charged off. There were no loans evaluated for impairment as of December 31, 2010 that had no related allowance recorded.


	Year Ended December 31, 2011
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized


With an allowance recorded:
Commercial, industrial, and agricultural	$	3,711	$	3	$	3
Commercial mortgage		4,836		19		19
Residential real estate		179		4		4
With no related allowance recorded:
Commercial, industrial, and agricultural		2,050		–		–
Commercial mortgage		4,631		–		–
Residential real estate		–		–		–

Total	$	15,407	$	26	$	26


	Year ended December 31,
	2010		2009
Average recorded investment in impaired loans	$	12,106	$	10,812
Interest income recognized during impairment		383		116
Cash-basis interest income recognized		383		116

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of December 31, 2011 and 2010:


	December 31, 2011				December 31, 2010
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	6,949	$	10	$	2,344	$	23
Commercial mortgages		8,359		122		8,276		321
Residential real estate		1,254		157		1,306		386
Consumer		5		125		-		154
Credit cards		–		27		–		5

Total	$	16,567	$	441	$	11,926	$	889

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 December 31, 2011 and 2010 by class of loans. The recorded investment in loans excludes accrued interest and loan origination fees, net due to their insignificance.


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		8,481		12,165		230,346		242,511
Residential real estate		1,816		682		1,411		3,909		294,719		298,628
Consumer		392		185		130		707		53,970		54,677
Credit cards		34		19		27		80		3,126		3,206
Overdrafts		–		–		–		–		423		423

Total	$	3,545	$	3,559	$	17,008	$	24,112	$	828,657	$	852,769


December 31, 2010	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	$	225	$	2,512	$	2,367	$	5,104	$	252,387	$	257,491
Commercial mortgages		129		1,184		8,597		9,910		202,968		212,878
Residential real estate		1,629		262		1,692		3,583		263,021		266,604
Consumer		455		145		154		754		52,448		53,202
Credit cards		20		10		5		35		2,835		2,870
Overdrafts		–		–		–		–		3,964		3,964

Total	$	2,458	$	4,113	$	12,815	$	19,386	$	777,623	$	797,009

Troubled Debt Restructurings

The Corporation has allocated $228 and $243 of specific reserves to one commercial mortgage customer whose loan terms have been modified in troubled debt restructurings as of December 31, 2011 and 2010, 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, resulting in an additional provision for loan losses of $253 thousand for the year ended December 31, 2010. The interest rate on this loan was further reduced to 4.07% in 2011, resulting in an additional provision for loan losses of $5 thousand for the year ended December 31, 2011. This loan had a total recorded investment of $1,662 and $1,714 as of December 31, 2011 and 2010, respectively.

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 are also currently the market rates of interest, were not reduced; therefore, no additional provision for loan losses was required to be recorded. These loans have a total recorded investment of $4,588 at December 31, 2011. 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 is also currently the market rate of interest, was not reduced; therefore, no additional provision for loan losses was required to be recorded. This loan has a recorded investment of $1,438 at December 31, 2011.

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. All loans modified in troubled debt restructurings are performing in accordance with their modified terms as of December 31, 2011 and no principal balances were forgiven in connection with the loan restructurings. The Corporation has no further loan commitments to customers whose loans are classified as 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. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $1 million bi-annually and loans with an outstanding balance of less than $1 million 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.


December 31, 2011	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	229,572	$	4,176	$	19,576	$	-	$	253,324
Commercial mortgages		225,654		3,172		13,685		-		242,511

Total	$	455,226	$	7,348	$	33,261	$	-	$	495,835


December 31, 2010	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	236,945	$	3,875	$	16,671	$	-	$	257,491
Commercial mortgages		188,457		5,332		19,051		38		212,878

Total	$	425,402	$	9,207	$	35,722	$	38	$	470,369

The Corporation's portfolio of residential real estate and consumer loans maintained within 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. The Bank does not have any subprime loans. Holiday's loan portfolio is summarized as follows at December 31, 2011 and 2010:


	2011			2010
Consumer	$	18,176		$	16,532
Residential real estate		1,056			1,149
Less: unearned discount		(2,886	)		(2,447	)

Total	$	16,346		$	15,234

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 and consumer loans based on payment activity as of December 31, 2011 and 2010:


	December 31, 2011						December 31, 2010
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	297,217	$	54,547	$	3,179	$	264,912	$	53,048	$	2,865
Non-performing		1,411		130		27		1,692		154		5

Total	$	298,628	$	54,677	$	3,206	$	266,604	$	53,202	$	2,870