Note 7 - Loans And Related Allowance For Loan Losses

3 Months Ended

Mar. 31, 2013

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

NOTE 7 - LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

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

	March 31, 2013		December 31, 2012
Commercial and industrial	$	55,401	$	62,188
Real estate - construction		22,817		22,522
Real estate - mortgage:
Residential		199,063		203,872
Commercial		125,799		115,734
Consumer installment		3,974		4,117
		407,054		408,433
Less allowance for loan losses		7,732		7,779
Net loans	$	399,322	$	400,654

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.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan losses.  Interest income is recognized as income when earned on the accrual method.  The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful.  Interest received on nonaccrual loans is recorded as income or applied against principal according to management’s judgment as to the collectability of such principal.

Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield.  Management is amortizing these amounts over the contractual life of the related loans.

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

					Real Estate- Mortgage
March 31, 2013	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer  installment		Total
Loans:
Individually evaluated for impairment	$	2,975	$	3,772	$	5,794	$	6,832	$	18	$	19,391
Collectively evaluated for impairment		52,426		19,045		193,269		118,967		3,956		387,663
Total loans	$	55,401	$	22,817	$	199,063	$	125,799	$	3,974	$	407,054

					Real estate- Mortgage
December 31, 2012	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	4,592	$	3,993	$	5,761	$	6,914	$	28	$	21,288
Collectively evaluated for impairment		57,596		18,529		198,111		108,820		4,089		387,145
Total loans	$	62,188	$	22,522	$	203,872	$	115,734	$	4,117	$	408,433

					Real Estate- Mortgage
March 31, 2013	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	$	700	$	790	$	703	$	682	$	1	$	2,876
Collectively evaluated for impairment		530		258		2,503		1,519		46		4,856
Total ending allowance balance	$	1,230	$	1,048	$	3,206	$	2,201	$	47	$	7,732

					Real Estate- Mortgage
December 31, 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	$	1,189	$	933	$	600	$	960	$	6	$	3,688
Collectively evaluated for impairment		543		190		2,272		1,031		55		4,091
Total ending allowance balance	$	1,732	$	1,123	$	2,872	$	1,991	$	61	$	7,779

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 and is greater than 90 days past due.  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 table presents 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):

March 31, 2013
Impaired Loans
		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
	Commercial and industrial	$	1,271	$	1,271	$	-
	Real estate - construction		322		322		-
	Real estate - mortgage:
	Residential		2,617		2,730		-
	Commercial		3,772		3,772		-
	Consumer installment		10		10		-
	Total	$	7,992	$	8,105	$	-
With an allowance recorded:
	Commercial and industrial	$	1,704	$	1,704	$	700
	Real estate - construction		3,450		3,450		790
	Real estate - mortgage:				-		-
	Residential		3,025		3,064		703
	Commercial		3,060		3,060		682
	Consumer installment		8		8		1
	Total	$	11,247	$	11,286	$	2,876
Total:
	Commercial and industrial	$	2,975	$	2,975	$	700
	Real estate - construction		3,772		3,772		790
	Real estate - mortgage:
	Residential		5,642		5,794		703
	Commercial		6,832		6,832		682
	Consumer installment		18		18		1
	Total	$	19,239	$	19,391	$	2,876

December 31, 2012
Impaired Loans
		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
	Commercial and industrial	$	1,230	$	1,229	$	-
	Real estate - construction		308		308		-
	Real estate - mortgage:
	Residential		2,716		2,729		-
	Commercial		4,143		4,164		-
	Consumer installment		11		11		-
	Total	$	8,408	$	8,441	$	-
With an allowance recorded:
	Commercial and industrial	$	3,362	$	3,367	$	1,189
	Real estate - construction		3,685		3,685		933
	Real estate - mortgage:
	Residential		3,045		3,054		600
	Commercial		2,771		2,776		960
	Consumer installment		17		17		6
	Total	$	12,880	$	12,899	$	3,688
Total:
	Commercial and industrial	$	4,592	$	4,596	$	1,189
	Real estate - construction		3,993		3,993		933
	Real estate - mortgage:
	Residential		5,761		5,783		600
	Commercial		6,914		6,940		960
	Consumer installment		28		28		6
	Total	$	21,288	$	21,340	$	3,688

The following table presents interest income by class, recognized on impaired loans:

	As of March 31, 2013				As of March 31, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Total:
Commercial and industrial	$	2,975	$	55	$	1,781	$	12
Real estate - construction		3,772		37		471		1
Real estate - mortgage:
Residential		5,642		74		2,809		27
Commercial		6,832		110		1,884		26
Consumer installment		18		-		28		1

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.   Assets classified as “doubtful” have all the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses make collection of principal in full — on the basis of currently existing facts, conditions, and values — highly questionable and improbable. 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 primary risk of commercial and industrial loans is the current economic uncertainties. C & I loans are, by nature, secured by less substantial collateral than real estate secured loans. The primary risk of real estate construction loans is potential delays and /or disputes during the completion process.  The primary risk of residential real estate loans is current economic uncertainties along with the slow recovery in the housing market.  The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.

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
March 31, 2013
	Commercial and industrial	$	51,789	$	929	$	2,640	$	43	$	55,401
	Real estate - construction		18,105		923		3,790		-		22,817
	Real estate - mortgage:
	Residential		185,856		967		12,240		-		199,063
	Commercial		117,462		3,149		5,189		-		125,799
	Consumer installment		3,953		-		21		-		3,974
	Total	$	377,165	$	5,967	$	23,880	$	43	$	407,054

December 31, 2012		Pass		Special Mention		Substandard		Doubtful		Total Loans
	Commercial and industrial	$	59,390	$	678	$	2,061	$	59	$	62,188
	Real estate - construction		17,601		-		4,921		-		22,522
	Real estate - mortgage:
	Residential		190,967		758		12,147		-		203,872
	Commercial		106,509		1,928		7,297		-		115,734
	Consumer installment		4,084		-		33		-		4,117
	Total	$	378,551	$	3,364	$	26,459	$	59	$	408,433

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.

Non-performing assets includes non-accrual loans, troubled debt restructurings (TDRs), loans 90 days or more past due, assets purchased by EMORECO from EB, OREO, and repossessed assets. A loan is classified as non-accrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful.  Payments received on nonaccrual loans are applied against principal according to management’s shadow accounting system.

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
March 31, 2013
Commercial and industrial	$	53,319	$	1,545	$	156	$	-	$	1,701	$	381	$	55,401
Real estate - construction		22,669		-		-		-		-		148		22,817
Real estate - mortgage:
Residential		185,879		3,976		613		361		4,950		8,234		199,063
Commercial		123,720		650		115		-		765		1,314		125,799
Consumer installment		3,890		66		4		-		70		14		3,974
Total	$	389,477	$	6,237	$	888	$	361	$	7,486	$	10,091	$	407,054

				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, 2012
	Commercial and industrial	$	60,428	$	441	$	63	$	348	$	852	$	908	$	62,188
	Real estate - construction		22,158		-		-		-		-		364		22,522
	Real estate - mortgage:
	Residential		191,349		2,614		1,401		90		4,105		8,418		203,872
	Commercial		113,023		509		97		-		606		2,105		115,734
	Consumer installment		4,074		25		-		-		25		18		4,117
	Total	$	391,032	$	3,589	$	1,561	$	438	$	5,588	$	11,813	$	408,433

An allowance for loan losses (“ALLL”) is maintained to absorb losses from the loan portfolio.  The ALLL 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 ALLL 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 ALLL.  Management also performs impairment analyses on TDRs, which may result in specific reserve.

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 ALLL analysis.  Management tracks the historical net charge-off activity at the purpose code level.  A historical charge-off factor is calculated using the last four consecutive historical 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 nonaccrual 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 ALLL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.

The following table summarizes the primary segments of the loan portfolio (in thousands):

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage		Consumer installment			Total
ALL balance at December 31, 2012	$	1,732		$	1,123		$	2,872		$	1,991	$	61		$	7,779
Charge-offs		(325	)		(61	)		(67	)		-		(17	)		(470	)
Recoveries		1			33			24			46		6			110
Provision		(178	)		(47	)		377			164		(3	)		313
ALL balance at March 31, 2013	$	1,230		$	1,048		$	3,206		$	2,201	$	47		$	7,732

	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		(1	)		-		(98	)		(53	)		(14	)		(166	)
Recoveries		3			-		3			-			8			14
Provision		114			39		328			115			4			600
ALL balance at March 31, 2012	$	1,412		$	477	$	3,964		$	1,368		$	46		$	7,267

A provision in any loan portfolio is not necessarily related to current charge-offs, but is a result of the evaluation of the loans in that category.

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

	Modifications As of March 31, 2013
	Number of Contracts						Pre-Modification
Troubled Debt Restructurings	Term Modification		Other		Total		Outstanding Recorded Investment
Commercial and industrial		4		-		4	$	735
Real estate- mortgage:
Residential		2		1		3		383
Commercial		1		-		1		644

Troubled Debt Restructurings subsequently defaulted	Number of Contracts		Recorded Investment
Commercial and industrial		6	$	248
Real estate- mortgage:
Residential		1		68
Consumer Installment		1		5

	Modifications As of March 31, 2012
	Number of Contracts						Pre-Modification
Troubled Debt Restructurings	Term Modification		Other		Total		Outstanding Recorded Investment
Commercial and industrial		3		3		6	$	178
Real estate- mortgage:
Residential		2		2		4		94
Consumer Installment		1		-		1		5

Troubled Debt Restructurings subsequently defaulted	Number of Contracts		Recorded Investment
Commercial and industrial		2	$	90
Consumer Installment		2		28