(4.) LOANS

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


				Net Deferred
				Loan (Fees)
		Loans, Gross		Costs			Loans, Net
March 31, 2012
Commercial business	$	233,690	$	74		$	233,764
Commercial mortgage		407,293		(772	)		406,521
Residential mortgage		112,096		52			112,148
Home equity		232,928		4,091			237,019
Consumer indirect		485,244		22,841			508,085
Other consumer		23,328		163			23,491
Total	$	1,494,579	$	26,449			1,521,028
Allowance for loan losses							(23,763	)
Total loans, net						$	1,497,265

December 31, 2011
Commercial business	$	233,727	$	109		$	233,836
Commercial mortgage		394,034		(790	)		393,244
Residential mortgage		113,865		46			113,911
Home equity		227,853		3,913			231,766
Consumer indirect		465,807		21,906			487,713
Other consumer		24,138		168			24,306
Total	$	1,459,424	$	25,352			1,484,776
Allowance for loan losses							(23,260	)
Total loans, net						$	1,461,516

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $2.1 million and $2.4 million as of March 31, 2012 and December 31, 2011, 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, 2012
Commercial business	$	185	$	-	$	-	$	185	$	1,863	$	231,642	$	233,690
Commercial mortgage		236		-		-		236		3,040		404,017		407,293
Residential mortgage		379		-		-		379		1,929		109,788		112,096
Home equity		250		40		-		290		934		231,704		232,928
Consumer indirect		293		119		-		412		444		484,388		485,244
Other consumer		69		10		5		84		7		23,237		23,328
Total loans, gross	$	1,412	$	169	$	5	$	1,586	$	8,217	$	1,484,776	$	1,494,579

December 31, 2011
Commercial business	$	35	$	-	$	-	$	35	$	1,259	$	232,433	$	233,727
Commercial mortgage		165		-		-		165		2,928		390,941		394,034
Residential mortgage		517		-		-		517		1,644		111,704		113,865
Home equity		749		68		-		817		682		226,354		227,853
Consumer indirect		984		92		-		1,076		558		464,173		465,807
Other consumer		106		10		5		121		-		24,017		24,138
Total loans, gross	$	2,556	$	170	$	5	$	2,731	$	7,071	$	1,449,622	$	1,459,424

There were no loans past due greater than 90 days and still accruing interest as of March 31, 2012 and December 31, 2011. There were $5 thousand in consumer overdrafts which were past due greater than 90 days as of March 31, 2012 and December 31, 2011. 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 presents, by loan class, information related to loans modified in a TDR during the three months ended March 31, 2012 (dollars in thousands).


			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Commercial business	2	$	433	$	433
Commercial mortgage	1		46		46
Total	3	$	479	$	479

There were no loans modified in a TDR during the three months ended March 31, 2011.

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, 2012 are on nonaccrual status as of March 31, 2012. 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, 2012 or 2011. 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 of impaired loans for the three months ended on the dates indicated (in thousands):


				Unpaid				Average	Interest
		Recorded		Principal		Related		Recorded	Income
		Investment		Balance		Allowance		Investment	Recognized
March 31, 2012
With no related allowance recorded:
Commercial business	$	543	$	1,457	$	-	$	509	$	-
Commercial mortgage		1,260		1,352		-		759		-
		1,803		2,809		-		1,268		-
With an allowance recorded:
Commercial business		1,320		1,320		554		1,010		-
Commercial mortgage		1,780		1,780		672		2,171		-
		3,100		3,100		1,226		3,181		-
	$	4,903	$	5,909	$	1,226	$	4,449	$	-

December 31, 2011
With no related allowance recorded:
Commercial business	$	342	$	1,266	$	-	$	361	$	-
Commercial mortgage		605		696		-		583		-
		947		1,962		-		944		-
With an allowance recorded:
Commercial business		917		917		436		1,033		-
Commercial mortgage		2,323		2,323		644		2,172		-
		3,240		3,240		1,080		3,205		-
	$	4,187	$	5,202	$	1,080	$	4,149	$	-

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 not meeting 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, 2012
Uncriticized	$	218,308	$	395,029
Special mention		6,998		2,939
Substandard		8,384		9,325
Doubtful		-		-
Total	$	233,690	$	407,293

December 31, 2011
Uncriticized	$	221,477	$	383,700
Special mention		7,445		2,388
Substandard		4,805		7,946
Doubtful		-		-
Total	$	233,727	$	394,034

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, 2012
Performing	$	110,167	$	231,994	$	484,800	$	23,321
Non-performing		1,929		934		444		7
Total	$	112,096	$	232,928	$	485,244	$	23,328

December 31, 2011
Performing	$	112,221	$	227,171	$	465,249	$	24,138
Non-performing		1,644		682		558		-
Total	$	113,865	$	227,853	$	465,807	$	24,138

Allowance for Loan Losses

The following table sets forth the changes in the allowance for loan losses for the three months ended March 31, 2012 and 2011 (in thousands):


		Commercial		Commercial			Residential			Home		Consumer		Other
		Business		Mortgage			Mortgage			Equity		Indirect		Consumer		Total
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		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


March 31, 2011
Allowance for loan losses:
Beginning balance	$	3,712	$	6,431		$	1,013		$	972	$	7,754	$	584	$	20,466
Charge-offs		90		344			2			107		1,290		211		2,044
Recoveries		154		16			27			10		552		128		887
Provision (credit)		245		(195	)		(22	)		155		598		29		810
Ending balance	$	4,021	$	5,908		$	1,016		$	1,030	$	7,614	$	530	$	20,119
Evaluated for impairment:
Individually	$	261	$	522		$	-		$	-	$	-	$	-	$	783
Collectively	$	3,760	$	5,386		$	1,016		$	1,030	$	7,614	$	530	$	19,336

Loans:
Ending balance	$	209,259	$	362,282		$	123,572		$	206,608	$	404,806	$	24,888	$	1,331,415
Evaluated for impairment:
Individually	$	902	$	2,735		$	-		$	-	$	-	$	-	$	3,637
Collectively	$	208,357	$	359,547		$	123,572		$	206,608	$	404,806	$	24,888	$	1,327,778

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. 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, 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.