Note 6 - Loans And Related Allowance For Loan Losses

6 Months Ended

Jun. 30, 2012

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 6 - LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

Major classifications of loans are summarized as follows (in thousands):

	June 30, 2012			December 31, 2011
Commercial and industrial	$	65,651		$	59,185
Real estate - construction		20,409			21,545
Real estate - mortgage:
Residential		207,080			208,139
Commercial		113,383			108,502
Consumer installment		4,345			4,509
		410,868			401,880
Less allowance for loan losses		(7,752	)		(6,819	)
Net loans	$	403,116		$	395,061

The Company’s primary business activity is with customers located within its local trade area, eastern Geauga County, and contiguous counties to the north, east, and south.  The Company also serves the central Ohio market with offices in Dublin and Westerville, Ohio.  Commercial, residential, consumer, and agricultural loans are granted.  Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

The following tables summarize the primary segments of the loan portfolio and allowance for loan losses (in thousands):

					Real Estate- Mortgage
June 30, 2012	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	4,065	$	649	$	4,619	$	6,420	$	-	$	15,753
Collectively evaluated for impairment		61,586		19,760		202,461		106,963		4,345		395,115
Total loans	$	65,651	$	20,409	$	207,080	$	113,383	$	4,345	$	410,868

					Real estate- Mortgage
December 31, 2011	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	4,492	$	867	$	4,882	$	6,491	$	-	$	16,732
Collectively evaluated for impairment		54,693		20,678		203,257		102,011		4,509		385,148
Total loans	$	59,185	$	21,545	$	208,139	$	108,502	$	4,509	$	401,880

					Real Estate- Mortgage
June 30, 2012	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	680	$	237	$	691	$	59	$	-	$	1,667
Collectively evaluated for impairment		946		267		3,418		1,433		21		6,085
Total ending allowance balance	$	1,626	$	504	$	4,109	$	1,492	$	21	$	7,752

					Real Estate- Mortgage
December 31, 2011	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	595	$	237	$	685	$	185	$	-	$	1,702
Collectively evaluated for impairment		701		201		3,046		1,121		48		5,117
Total ending allowance balance	$	1,296	$	438	$	3,731	$	1,306	$	48	$	6,819

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance.  The portfolio is segmented into Commercial and Industrial (“C&I”), Real Estate Construction, Real Estate - Mortgage which is further segmented into Residential and Commercial real estate, and Consumer Installment Loans.  The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers.  The residential mortgage loan segment consists of loans made for the purpose of financing the activities of residential homeowners.  The commercial mortgage loan segment consists of loans made for the purposed of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $150,000 and if the loan either is in nonaccrual status, or is risk rated Special Mention or Substandard.  Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods:  (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs.  The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method.  The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.  The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands):

June 30, 2012
Impaired Loans
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and industrial	$	742	$	742	$	-
Real estate - construction		203		203		-
Real estate - mortgage:
Residential		2,667		2,668		-
Commercial		1,653		1,661		-
Consumer installment		26		26		-
With an allowance recorded:
Commercial and industrial	$	453	$	453	$	248
Real estate - construction		217		217		125
Real estate - mortgage:
Residential		267		269		266
Commercial		711		712		239
Consumer installment		-		-		-
Total:
Commercial and industrial	$	1,195	$	1,195	$	248
Real estate - construction		420		420		125
Real estate - mortgage:
Residential		2,934		2,937		266
Commercial		2,364		2,373		239
Consumer installment		26		26		-

December 31, 2011
Impaired Loans
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and industrial	$	1,172	$	1,172	$	-
Real estate - construction		4,250		4,250		-
Real estate - mortgage:
Residential		3,188		3,193		-
Commercial		2,528		2,536		-
Consumer installment		24		24		-
With an allowance recorded:
Commercial and industrial	$	465	$	465	$	196
Real estate - construction		271		271		125
Real estate - mortgage:
Residential		-		-		-
Commercial		2,555		2,560		551
Total:
Commercial and industrial	$	1,637	$	1,637	$	196
Real estate - construction		4,521		4,521		125
Real estate - mortgage:
Residential		3,188		3,193		-
Commercial		5,083		5,096		551
Consumer installment		24		24		-

The following tables present average recorded investment and related interest income recognized for impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands):

	For the Three Months Ended June 30, 2012				For the Three Months Ended June 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Total:
Commercial and industrial	$	1,488	$	21	$	4,337	$	80
Real estate - construction		446		-		616		-
Real estate - mortgage:
Residential		2,872		61		574		33
Commercial		2,124		98		3,762		35
Consumer installment		27		-		-		-

	For the Six Months Ended June 30, 2012				For the Six Months Ended June 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Total:
Commercial and industrial	$	1,440	$	33	$	3,604		-
Real estate - construction		1,796		1		617		82
Real estate - mortgage:
Residential		2,998		88		583		-
Commercial		3,190		124		3,430		45
Consumer installment		26		1		-		102

Management uses a nine point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories used by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  All loans greater than 90 days past due are considered Substandard.   Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis.  The Credit Department performs an annual review of all commercial relationships $200,000 or greater.  Confirmation of the appropriate risk grade is included in the review on an ongoing basis.  The Company has an experienced Loan Review Department that continually reviews and assesses loans within the portfolio.  The Company engages an external consultant to conduct loan reviews on a semi-annual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and/or criticized relationships greater than $125,000.  Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system (in thousands):

	Pass		Special Mention		Substandard		Doubtful		Total Loans
June 30, 2012
Commercial and industrial	$	61,224	$	634	$	3,793	$	-	$	65,651
Real estate - construction		19,734		-		675		-		20,409
Real estate - mortgage:
Residential		192,198		910		13,972		-		207,080
Commercial		104,925		2,165		6,293		-		113,383
Consumer installment		4,318		3		24		-		4,345
Total	$	382,399	$	3,712	$	24,757	$	-	$	410,868

	Pass		Special Mention		Substandard		Doubtful		Total Loans
December 31, 2011
Commercial and industrial	$	53,645	$	1,104	$	4,363	$	73	$	59,185
Real estate - construction		20,883		-		662		-		21,545
Real estate - mortgage:
Residential		192,534		1,100		14,505		-		208,139
Commercial		100,536		443		7,523		-		108,502
Consumer installment		4,495		6		8		-		4,509
Total	$	372,093	$	2,653	$	27,061	$	73	$	401,880

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 presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans (in thousands):

			Still Accruing
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days+ Past Due		Total Past Due		Non- Accrual		Total Loans
June 30, 2012
Commercial and industrial	$	62,581	$	1,173	$	284	$	20	$	1,477	$	1,593	$	65,651
Real estate - construction		19,963		-		-		-		-		446		20,409
Real estate - mortgage:
Residential		193,798		2,147		621		109		2,877		10,405		207,080
Commercial		110,103		251		178		-		429		2,851		113,383
Consumer installment		4,289		41		-		-		41		15		4,345
Total	$	390,734	$	3,612	$	1,083	$	129	$	4,824	$	15,310	$	410,868

			Still Accruing
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days+ Past Due		Total Past Due		Non- Accrual		Total Loans
December 31, 2011
Commercial and industrial	$	57,291	$	258	$	16	$	44	$	318	$	1,576	$	59,185
Real estate - construction		20,862		20		-		-		20		663		21,545
Real estate - mortgage:
Residential		193,732		2,624		863		275		3,762		10,645		208,139
Commercial		104,086		83		412		-		495		3,921		108,502
Consumer installment		4,408		60		41		-		101		-		4,509
Total	$	380,379	$	3,045	$	1,332	$	319	$	4,696	$	16,805	$	401,880

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.

The Company’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.   The total of the two components represents the Company’s ALL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate.  For general allowances, historical loss trends are used in the estimation of losses in the current portfolio.  These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALL analysis.  Management tracks the historical net charge-off activity at the purpose code level.  A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer and Commercial pools currently use a rolling 8 quarters.

Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The following tables summarize the primary segments of the loan portfolio as of the three and six months ended June 30, 2012 and 2011 (in thousands):

	Commercial and industrial			Real estate- construction		Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALL balance at December 31, 2011	$	1,296		$	438	$	3,731		$	1,306		$	48		$	6,819
Charge-offs		(29	)		-		(98	)		(53	)		(22	)		(202	)
Recoveries		70			-		3			-			12			85
Provision		289			66		473			239			(17	)		1,050
ALL balance at June 30, 2012	$	1,626		$	504	$	4,109		$	1,492		$	21		$	7,752

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALL balance at December 31, 2010	$	962		$	188		$	3,434		$	1,543		$	94		$	6,221
Charge-offs		(273	)		(6	)		(510	)		(10	)		(10	)		(809	)
Recoveries		26			-			3			-			21			50
Provision		242			47			864			388			24			1,565
ALL balance at June 30, 2011	$	957		$	229		$	3,791		$	1,921		$	129		$	7,027

	Commercial and industrial			Real estate- construction		Real estate- residential mortgage		Real estate- commercial mortgage		Consumer installment			Total
ALL balance at March 31, 2012	$	1,510		$	504	$	3,868	$	1,360	$	25		$	7,267
Charge-offs		(28	)		-		-		-		(8	)		(36	)
Recoveries		67			-		-		-		4			71
Provision		77			-		241		132		(21	)		450
ALL balance at June 30, 2012	$	1,626		$	504	$	4,109	$	1,492	$	21		$	7,752

	Commercial and industrial			Real estate- construction		Real estate- residential mortgage			Real estate- commercial mortgage		Consumer installment			Total
ALL balance at March 31, 2011	$	1,039		$	208	$	3,571		$	1,748	$	119		$	6,685
Charge-offs		(203	)		-		(170	)		-		(4	)		(377	)
Recoveries		13			-		3			-		3			19
Provision		108			21		387			173		11			700
ALL balance at June 30, 2011	$	957		$	229	$	3,791		$	1,921	$	129		$	7,027

The following tables summarize troubled debt restructurings (in thousands):

Modifications

Three Months Ended June 30, 2012

Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment
Commercial and industrial		1	$	51
Real estate- mortgage:
Residential		4		233

Modifications

Six Months Ended June 30, 2012

Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment
Commercial and industrial		7	$	229
Real estate- mortgage:
Residential		7		327
Consumer Installment		1		5

Troubled Debt Restructurings subsequently defaulted	Number of Contracts		Recorded Investment
Commercial and industrial		1	$	30

The Company does not forgive principal upon troubled debt restructuring.  Therefore, the post-modification outstanding recorded investment equals pre-modification outstanding recorded investment for each timeframe and category.  There were no troubled debt restructurings that subsequently defaulted for the three months ended June 30, 2012.