Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2011

Loans and Allowance for Loan Losses [Abstract]

4.) Loans and Allowance for Loan Losses:

The Company, through its subsidiary bank, grants residential, consumer and commercial loans to customers located primarily in Northeast Ohio and Western Pennsylvania.

The following represents the composition of the loan portfolio for the period ending:


	September 30, 2011				December 31, 2010
	Balance		%		Balance		%
Commercial real estate	$	153,532		58.2	$	146,389		55.1
Commercial		38,534		14.7		42,349		16.0
Residential real estate		48,314		18.3		52,262		19.7
Residential real estate held for sale		215		0.1		262		0.1
Consumer		6,134		2.3		7,216		2.7
Home equity		17,001		6.4		16,963		6.4

Total loans	$	263,730			$	265,441

Residential real estate held for sale is carried, in the aggregate, at the lower of cost or estimated market value based on secondary market prices.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented loans in the portfolio by product type. Loans are segmented into the following pools: commercial loans, commercial real estate loans, residential real estate loans, and consumer loans. The Company also sub-segments the consumer loan portfolio into the following two classes: home equity loans and other consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over multiple periods for all portfolio segments. Management evaluates these results and utilizes the most reflective period in the calculation. Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor.

These factors include, but are not limited to, the following:


Factor Considered:		Risk Trend:
Levels of and trends in charge-offs, classifications and non-accruals		Increasing
Trends in volume and terms		Increasing
Changes in lending policies and procedures		Stable
Experience, depth and ability of management		Increasing
Economic trends		Increasing
Concentrations of credit		Increasing

The following factors are analyzed and applied to loans internally graded with higher risk credit in addition to the above factors for non-classified loans:


Factor Considered:		Risk Trend:
Levels and trends in classification		Increasing
Declining trends in financial performance		Stable
Structure and lack of performance measures		Stable
Migration between risk categories		Stable

The following is an analysis of changes in the allowance for loan losses for the periods ended:


	THREE MONTHS ENDED						NINE MONTHS ENDED
	September 30,						September 30,
	2011			2010			2011			2010
Balance at beginning of period	$	2,853		$	2,514		$	2,501		$	2,437
Loan charge-offs		(144	)		(70	)		(491	)		(399	)
Recoveries		25			32			176			143

Net loan charge-offs		(119	)		(38	)		(315	)		(256	)
Provision charged to operations		324			30			872			325

Balance at end of year	$	3,058		$	2,506		$	3,058		$	2,506

The total allowance of $3,058 reflects management’s estimate of loan losses inherent in the loan portfolio at the consolidated balance sheet date. The following tables present a full breakdown by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the year-to-date periods ended September 30, 2011 and December 31, 2010.


			Commercial
September 30, 2011	Commercial		Real Estate			Consumer			Residential			Total
Allowance for credit losses:
Beginning balance	$	249	$	1,611		$	223		$	418		$	2,501
Charge-offs		—		(200	)		(216	)		(75	)		(491	)
Recoveries		2		119			50			5			176
Provision and Reallocation		286		336			174			76			872

Ending Balance	$	537	$	1,866		$	231		$	424		$	3,058

Individually evaluated for impairment	$	74	$	35		$	—		$	—		$	109
Collectively evaluated for impairment		463		1,831			231			424			2,949
Loan Portfolio:
Ending Balance	$	38,534	$	153,532		$	23,135		$	48,529		$	263,730

Individually evaluated for impairment	$	74	$	2,373		$	—		$	—		$	2,447
Collectively evaluated for impairment		38,460		151,159			23,135			48,529			261,283


				Commercial
December 31, 2010	Commercial			Real Estate			Consumer			Residential			Total
Allowance for credit losses:
Beginning balance	$	209		$	1,666		$	247		$	315		$	2,437
Charge-offs		(1	)		(204	)		(182	)		(229	)		(616	)
Recoveries		—			58			99			18			175
Provision and Reallocation		41			91			59			314			505

Ending Balance	$	249		$	1,611		$	223		$	418		$	2,501

Individually evaluated for impairment	$	103		$	94		$	—		$	—		$	197
Collectively evaluated for impairment		146			1,517			223			418			2,304
Loan Portfolio:
Ending Balance	$	42,349		$	146,389		$	24,179		$	52,524		$	265,441

Individually evaluated for impairment	$	155		$	1,738		$	—		$	—		$	1,893
Collectively evaluated for impairment		42,194			144,651			24,179			52,524			263,548

The following tables represent credit exposures by internally assigned grades for September 30, 2011 and December 31, 2010. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

•

Pass — loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Within this category, there are grades of exceptional, quality, acceptable and pass monitor.

•

Special Mention — loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard — loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•

Doubtful — loans classified as doubtful have all the weaknesses inherent in a substandard asset but with the severity which make collection in full highly questionable and improbable, based on existing circumstances.

•

Loss — loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. This rating does not mean that the assets have no recovery or salvage value but rather that the assets should be charged off now, even though partial or full recovery may be possible in the future.

The following is a summary of credit quality indicators by internally assigned grade as of September 30, 2011 and December 31, 2010:

Commercial

September 30, 2011

Commercial

Real Estate

Total

Pass

35,943

132,455

168,398

Special Mention

1,596

11,787

13,383

Substandard

995

9,290

10,285

Doubtful/Loss

—

Ending Balance

38,534

153,532

192,066


			Commercial
December 31, 2010	Commercial		Real Estate		Total
Pass	$	41,159	$	125,904	$	167,063
Special Mention		873		12,257		13,130
Substandard		317		8,228		8,545
Doubtful/Loss		—		—		—

Ending Balance	$	42,349	$	146,389	$	188,738

The Company evaluates the classification of consumer, home equity and residential loans primarily on a pooled basis. If the Company becomes aware that adverse or distressed conditions exist that may affect a particular loan, the loan is downgraded following the above definitions of special mention and substandard. If the above conditions exist, the loan is considered nonperforming. If not, the pooled loan is not graded.

Loans are considered to be nonperforming when they become 90 days past due, though the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in non-accrual status, previously accrued but unpaid interest is deducted from interest income. Loans in foreclosure are considered nonperforming.

Troubled Debt Restructuring

Nonperforming loans also include certain loans that have been modified in trouble debt restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There were $1,231 in TDRs at September 30, 2011 and $1,334 at December 31, 2010. The total interest recognized on these loans was $52 and $90 at September 30, 2011 and December 31, 2010, respectively. Had the loans at September 30, 2011 not been restructured, interest would have increased pretax income by $12, at both Septermber 30, 2011 and December 31, 2010.

The following presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2011:


	Loans Modified as a TDR for the Three Months Ended						Loans Modified as a TDR for the Nine Months Ended
	September 30, 2011 (1)						September 30, 2011 (1)
			Recorded		Increase in the				Recorded		Increase in the
Troubled Debt Restructurings	Number of		Investment		Allowance		Number of		Investment		Allowance
(amounts in thousands)	Contracts		(as of period end)		(as of period end)		Contracts		(as of period end)		(as of period end)
Commercial Real Estate		—	$	—	$	—		1	$	1,157	$	23

Total		—	$	—	$	—		1	$	1,157	$	23


(1)		The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

There were no loans modified in a TDR from October 1, 2010 through September 30, 2011 that subsequently defaulted (i.e., 60 days or more past due following a modification) during the three and nine months ended September 30, 2011.

The following is a summary of consumer credit exposure as of September 30, 2011 and December 31, 2010.


			Consumer -		Consumer-
	Residential		home equity		other
September 30, 2011
Performing	$	47,165	$	16,643	$	5,056
Nonperforming		1,364		358		1,078

Total	$	48,529	$	17,001	$	6,134


December 31, 2010
Performing	$	51,395	$	16,762	$	6,130
Nonperforming		1,129		201		1,086

Total	$	52,524	$	16,963	$	7,216

The following is an aging analysis of the recorded investment of past due loans as of September 30, 2011 and December 31, 2010.


													Recorded
													Investment >
	31-59 Days		60-89 Days		90 Days Or		Total Past						90 Days and
	Past Due		Past Due		Greater		Due		Current		Total Loans		Accruing
September 30, 2011
Commercial real estate	$	51	$	2,273	$	527	$	2,851	$	150,681	$	153,532	$	—
Commercial		—		—		74		74		38,460		38,534		—
Residential		148		608		432		1,188		47,341		48,529		—
Consumer:
Consumer — home equity		2		11		78		91		16,910		17,001		—
Consumer — other		47		—		1,033		1,080		5,054		6,134		—

Total	$	248	$	2,892	$	2,144	$	5,284	$	258,446	$	263,730	$	—


December 31, 2010
Commercial real estate	$	418	$	55	$	102	$	575	$	145,814	$	146,389	$	—
Commercial		—		—		132		132		42,217		42,349		—
Residential		41		282		902		1,225		51,299		52,524		—
Consumer:
Consumer — home equity		169		—		47		216		16,747		16,963		—
Consumer — other		69		4		1,047		1,120		6,096		7,216		—

Total	$	697	$	341	$	2,230	$	3,268	$	262,173	$	265,441	$	—

An impaired loan is a loan on which, based on current information and events, it is probable that a creditor will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. However, an insignificant delay or insignificant shortfall in amount of payments on a loan does not indicate that the loan is impaired.

When a loan is determined to be impaired, impairment should be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, the Company will measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

The following are the criteria for selecting individual loans / relationships for impairment analysis. Non-homogenous loans which meet the criteria below are evaluated quarterly.

•

All borrowers whose loans are classified doubtful by examiners and internal loan review

•

All loans on non-accrual status

•

Any loan in foreclosure

•

Any loan with a specific reserve

•

Any loan determined to be collateral dependent for repayment

•

Loans classified as troubled debt restructuring

Any loan evaluated for impairment is excluded from the general pool of loans in the ALLL calculation regardless if a specific reserve was determined. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following table presents the recorded investment and unpaid principal balances for impaired loans, excluding homogenous loans for which impaired analyses are not necessarily performed, with the associated allowance amount, if applicable, at September 30, 2011 and December 31, 2010. Also presented are the average recorded investments in the impaired balances and interest income recognized after impairment.


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
September 30, 2011
With no related allowance recorded:
Commercial real estate	$	964	$	964	$	—	$	858	$	37
Commercial		—		—		—		56		—
With an allowance recorded:
Commercial real estate	$	1,409	$	1,409	$	35	$	1,293	$	57
Commercial		74		74		74		88		—

Total:
Commercial real estate	$	2,373	$	2,373	$	35	$	2,151	$	94
Commercial		74		74		74		144		—

December 31, 2010
With no related allowance recorded:
Commercial real estate	$	501	$	501	$	—	$	233	$	2
Commercial		45		45		—		18		—
With an allowance recorded:
Commercial real estate	$	1,237	$	1,237	$	94	$	364	$	2
Commercial		110		110		103		128		3

Total:
Commercial real estate	$	1,738	$	1,738	$	94	$	597	$	4
Commercial		155		155		103		146		3

The following is a summary of classes of loans on non-accrual status as of September 30, 2011 and December 31, 2010:


	September 30,		December 31,
	2011		2010
Commercial real estate	$	1,217	$	307
Commercial		74		132
Residential		874		1,040
Consumer
Consumer — home equity		112		47
Consumer — other		1,067		1,085

Total	$	3,344	$	2,611

As of September 30, 2011 and December 31, 2010, there were $7,837 and $6,845, respectively, in loans that were neither classified as non-accrual nor considered impaired, but which can be considered potential problem loans.