Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

4.) Loans and Allowance for Loan Losses:

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

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

	(Amounts in thousands)
	September 30, 2012				December 31, 2011
	Balance		%		Balance		%
Commercial real estate	$	184,490		63.0	$	160,319		55.5
Commercial		45,544		15.5		60,233		20.8
Residential real estate		41,187		14.0		45,780		15.8
Consumer - other		4,263		1.5		5,848		2.0
Consumer - home equity		17,710		6.0		16,916		5.9
Total loans	$	293,194			$	289,096

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, consumer loans and home equity 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	Stable
Economic trends	Stable
Concentrations of credit	Increasing

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

Factor Considered:	Risk Trend:
Levels and trends in classification	Stable
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:

NINE MONTHS ENDED	(Amounts in thousands)
September 30, 2012	Commercial			Commercial real estate			Consumer - other			Consumer - home equity			Residential real estate			Total
Balance at beginning of period	$	565		$	1,803		$	92		$	128		$	470		$	3,058
Loan charge-offs		(17	)		(36	)		(110	)		(58	)		(231	)		(452	)
Recoveries		7			17			40			8			39			111
Net loan charge-offs		(10	)		(19	)		(70	)		(50	)		(192	)		(341	)
Provision charged to operations		132			577			77			42			72			900
Balance at end of period	$	687		$	2,361		$	99		$	120		$	350		$	3,617
September 30, 2011	Commercial			Commercial real estate			Consumer - other			Consumer - home equity			Residential real estate			Total
Balance at beginning of period	$	249		$	1,611		$	112		$	111		$	418		$	2,501
Loan charge-offs		—			(200	)		(125	)		(91	)		(75	)		(491	)
Recoveries		2			119			46			4			5			176
Net loan charge-offs		2			(81	)		(79	)		(87	)		(70	)		(315	)
Provision charged to operations		286			336			68			106			76			872
Balance at end of period	$	537		$	1,866		$	101		$	130		$	424		$	3,058
THREE MONTHS ENDED	(Amounts in thousands)
September 30, 2012	Commercial			Commercial real estate			Consumer - other			Consumer - home equity			Residential real estate			Total
Balance at beginning of period	$	600		$	2,100		$	90		$	152		$	396		$	3,338
Loan charge-offs		—			(20	)		(38	)		—			(12	)		(70	)
Recoveries		2			1			11			3			32			49
Net loan charge-offs		2			(19	)		(27	)		3			20			(21	)
Provision charged to operations		85			280			36			(35	)		(66	)		300
Balance at end of period	$	687		$	2,361		$	99		$	120		$	350		$	3,617
September 30, 2011	Commercial			Commercial real estate			Consumer - other			Consumer - home equity			Residential real estate			Total
Balance at beginning of period	$	518		$	1,739		$	106		$	101		$	389		$	2,853
Loan charge-offs		—			—			(29	)		(91	)		(24	)		(144	)
Recoveries		1			7			13			2			2			25
Net loan charge-offs		1			7			(16	)		(89	)		(22	)		(119	)
Provision charged to operations		18			120			11			118			57			324
Balance at end of period	$	537		$	1,866		$	101		$	130		$	424		$	3,058

The total allowance of $3.6 million 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 of the allowance for loan losses and the recorded investment in loans for the periods ended September 30, 2012 and December 31, 2011.

	(Amounts in thousands)
September 30, 2012	Commercial		Commercial real estate		Consumer - other		Consumer - home equity		Residential real estate		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	53	$	423	$	—	$	—	$	—	$	476
Collectively evaluated for impairment		634		1,938		99		120		350		3,141
Total ending allowance balance	$	687	$	2,361	$	99	$	120	$	350	$	3,617
Loan Portfolio:
Individually evaluated for impairment	$	53	$	5,694	$	—	$	—	$	—	$	5,747
Collectively evaluated for impairment		45,491		178,796		4,263		17,710		41,187		287,447
Total ending loans balance	$	45,544	$	184,490	$	4,263	$	17,710	$	41,187	$	293,194
December 31, 2011	Commercial		Commercial real estate		Consumer - other		Consumer - home equity		Residential real estate		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	69	$	55	$	—	$	—	$	—	$	124
Collectively evaluated for impairment		496		1,748		92		128		470		2,934
Total ending allowance balance	$	565	$	1,803	$	92	$	128	$	470	$	3,058
Loan Portfolio:
Individually evaluated for impairment	$	69	$	2,618	$	—	$	—	$	—	$	2,687
Collectively evaluated for impairment		60,164		157,701		5,848		16,916		45,780		286,409
Total ending loans balance	$	60,233	$	160,319	$	5,848	$	16,916	$	45,780	$	289,096

The following tables represent credit exposures by internally assigned grades for September 30, 2012 and December 31, 2011. 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, 2012 and December 31, 2011:

	(Amounts in thousands)
September 30, 2012	Commercial		Commercial real estate		Total
Pass	$	43,521	$	166,156	$	209,677
Special Mention		1,056		8,935		9,991
Substandard		967		9,399		10,366
Doubtful/Loss		—		—		—
Ending Balance	$	45,544	$	184,490	$	230,034
December 31, 2011	Commercial		Commercial real estate		Total
Pass	$	57,545	$	142,781	$	200,326
Special Mention		503		8,269		8,772
Substandard		2,185		9,269		11,454
Doubtful/Loss		—		—		—
Ending Balance	$	60,233	$	160,319	$	220,552

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.

The following is a summary of consumer credit exposure as of September 30, 2012 and December 31, 2011.

	(Amounts in thousands)
	Consumer- other		Consumer - home equity		Residential real estate
September 30, 2012
Performing	$	4,207	$	17,637	$	40,586
Nonperforming		56		73		601
Total	$	4,263	$	17,710	$	41,187
	Consumer- other		Consumer - home equity		Residential real estate
December 31, 2011
Performing	$	4,775	$	16,805	$	44,938
Nonperforming		1,073		111		842
Total	$	5,848	$	16,916	$	45,780

Loans are considered to be nonperforming when they become 90 days past due or on nonaccrual status, 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 nine months.

There were $2.9 million in TDRs at September 30, 2012 and $1.2 million at December 31, 2011 and September 30, 2011. The total interest recognized on these loans was $117,000, $69,000 and $52,000 for the periods ending September 30, 2012, December 31, 2011 and September 30, 2011, respectively. Had the loans not been restructured, interest would have increased pretax income by $4,000 at both December 31, 2011 and September 30, 2011 and at September 30, 2012 there was no impact on pretax income.

The following presents by class, information related to loans modified in a TDR during the periods ended (1):

	(Amounts in thousands)
	Three Months Ended						Nine Months Ended
	September 30, 2012						September 30, 2012
Troubled Debt Restructurings (amounts in thousands)	Number of Contracts		Recorded Investment (as of period end)		Increase in  the Allowance (as of period end)		Number of Contracts		Recorded Investment (as of period end)		Increase in  the Allowance (as of period end)
Commercial Real Estate		1	$	159	$	—		4	$	1,736	$	148
Total		1	$	159	$	—		4	$	1,736	$	148

(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 July 1, 2011 through June 30, 2012 that subsequently defaulted (i.e., 60 days or more past due following a modification) during the three months ended September 30, 2012.

There were no loans modified in a TDR from January 1, 2011 through December 31, 2011 that subsequently defaulted (i.e., 60 days or more past due following a modification) during the nine months ended September 30, 2012.

The following is an aging analysis of the recorded investment of past due loans as of September 30, 2012 and December 31, 2011.

	(Amounts in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
September 30, 2012
Commercial real estate	$	568	$	—	$	2,821	$	3,389	$	181,101	$	184,490	$	—
Commercial		—		—		53		53		45,491		45,544		—
Residential real estate		292		—		406		698		40,489		41,187		—
Consumer:
Consumer - home equity		—		28		62		90		17,620		17,710		—
Consumer - other		20		—		56		76		4,187		4,263		—
Total	$	880	$	28	$	3,398	$	4,306	$	288,888	$	293,194	$	—
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
December 31, 2011
Commercial real estate	$	50	$	—	$	515	$	565	$	159,754	$	160,319	$	—
Commercial		1		—		69		70		60,163		60,233		—
Residential real estate		296		112		667		1,075		44,705		45,780		—
Consumer:
Consumer - home equity		—		3		90		93		16,823		16,916		—
Consumer - other		54		33		1,039		1,126		4,722		5,848		—
Total	$	401	$	148	$	2,380	$	2,929	$	286,167	$	289,096	$	—

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, 2012 and December 31, 2011. Also presented are the average recorded investments in the impaired balances and interest income recognized after impairment for the three and nine months ended September 30, 2012 and September 30, 2011.

	(Amounts in thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
September 30, 2012
With no related allowance recorded:
Commercial real estate	$	1,435	$	1,435	$	—
With an allowance recorded:
Commercial real estate	$	4,259	$	4,259	$	423
Commercial		53		53		53
Total:
Commercial real estate	$	5,694	$	5,694	$	423
Commercial		53		53		53
	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2011
With no related allowance recorded:
Commercial real estate	$	1,218	$	1,218	$	—
With an allowance recorded:
Commercial real estate	$	1,400	$	1,400	$	55
Commercial		69		69		69
Total:
Commercial real estate	$	2,618	$	2,618	$	55
Commercial		69		69		69

	(Amounts in thousands)
	THREE MONTHS ENDED				NINE MONTHS ENDED
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2012
With no related allowance recorded:
Commercial real estate	$	1,512	$	—	$	1,171	$	—
Commercial		—		—		23		—
With an allowance recorded:
Commercial real estate	$	4,272	$	29	$	2,819	$	73
Commercial		54		—		60		—
Total:
Commercial real estate	$	5,784	$	29	$	3,990	$	73
Commercial		54		—		83		—
	THREE MONTHS ENDED				NINE MONTHS ENDED
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2011
With no related allowance recorded:
Commercial real estate	$	887	$	31	$	858	$	37
Commercial		168		—		56		—
With an allowance recorded:
Commercial real estate	$	1,412	$	39	$	1,293	$	57
Commercial		76		—		88		—
Total:
Commercial real estate	$	2,299	$	70	$	2,151	$	94
Commercial		244		—		144		—

The following is a summary of classes of loans on non-accrual status as of September 30, 2012 and December 31, 2011:

	(Amounts in thousands)
	September 30, 2012		December 31, 2011
Commercial real estate	$	2,980	$	1,470
Commercial		53		70
Residential real estate		601		842
Consumer:
Consumer - home equity		73		111
Consumer - other		56		1,073
Total	$	3,763	$	3,566

As of September 30, 2012 and December 31, 2011, there were $4.7 million and $8.9 million, respectively, in loans that were neither classified as non-accrual nor considered impaired, but which can be considered potential problem loans.