Note 4 - Loans and Related Allowance for Loan Losses

12 Months Ended

Dec. 31, 2014

Receivables [Abstract]

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

4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

Major classifications of loans at December 31 are summarized as follows (in thousands):

	2014			2013
Commercial and industrial	$	60,744		$	54,498
Real estate - construction		30,296			25,601
Real estate - mortgage:
Residential		227,552			210,310
Commercial		147,413			141,171
Consumer installment		4,579			4,145
		470,584			435,725
Less allowance for loan and lease losses		(6,846	)		(7,046	)
Net loans	$	463,738		$	428,679

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 at December 31, 2014 and 2013, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

The following tables summarize the primary segments of the loan portfolio and the allowance for loan and lease losses as of December 31, 2014 and 2013 (in thousands):

					Real Estate- Mortgage
December 31, 2014	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	1,393	$	3,296	$	5,183	$	4,490	$	6	$	14,368
Collectively evaluated for impairment		59,351		27,000		222,369		142,923		4,573		456,216
Total loans	$	60,744	$	30,296	$	227,552	$	147,413	$	4,579	$	470,584

					Real estate- Mortgage
December 31, 2013	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	1,891	$	4,011	$	5,882	$	7,175	$	6	$	18,965
Collectively evaluated for impairment		52,607		21,590		204,428		133,996		4,139		416,760
Total loans	$	54,498	$	25,601	$	210,310	$	141,171	$	4,145	$	435,725

					Real Estate- Mortgage
December 31, 2014	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	83	$	589	$	892	$	30	$	2	$	1,596
Collectively evaluated for impairment		559		279		2,811		1,546		55		5,250
Total ending allowance balance	$	642	$	868	$	3,703	$	1,576	$	57	$	6,846

					Real Estate- Mortgage
December 31, 2013	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	179	$	210	$	855	$	563	$	-	$	1,807
Collectively evaluated for impairment		435		366		2,809		1,607		22		5,239
Total ending allowance balance	$	614	$	576	$	3,664	$	2,170	$	22	$	7,046

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 purpose 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 Substandard or Doubtful 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 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):

December 31, 2014
Impaired Loans
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	1,146	$	1,145	$	-
Real estate - construction		2,707		2,705		-
Real estate - mortgage:
Residential		2,202		2,197		-
Commercial		4,064		4,060		-
Total	$	10,119	$	10,107	$	-
With an allowance recorded:
Commercial and industrial	$	247	$	247	$	83
Real estate - construction		589		589		589
Real estate - mortgage:
Residential		2,981		2,978		892
Commercial		426		426		30
Consumer installment		6		6		2
Total	$	4,249	$	4,246	$	1,596
Total:
Commercial and industrial	$	1,393	$	1,392	$	83
Real estate - construction		3,296		3,294		589
Real estate - mortgage:
Residential		5,183		5,175		892
Commercial		4,490		4,486		30
Consumer installment		6		6		2
Total	$	14,368	$	14,353	$	1,596

December 31, 2013
Impaired Loans
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	1,357	$	1,357	$	-
Real estate - construction		124		124		-
Real estate - mortgage:
Residential		2,704		2,892		-
Commercial		5,093		5,093		-
Consumer installment		6		6		-
Total	$	9,284	$	9,472	$	-
With an allowance recorded:
Commercial and industrial	$	534	$	534	$	179
Real estate - construction		3,887		3,887		210
Real estate - mortgage:
Residential		3,178		3,217		855
Commercial		2,082		2,082		563
Consumer installment		-		-		-
Total	$	9,681	$	9,720	$	1,807
Total:
Commercial and industrial	$	1,891	$	1,891	$	179
Real estate - construction		4,011		4,011		210
Real estate - mortgage:
Residential		5,882		6,109		855
Commercial		7,175		7,175		563
Consumer installment		6		6		-
Total	$	18,965	$	19,192	$	1,807

The tables above include troubled debt restructuring totaling $2.9 million and $5.5 million as of December 31, 2014 and 2013, respectively.

The following table presents interest income by class, recognized on impaired loans (in thousands):

	As of December 31, 2014				As of December 31, 2013				As of December 31, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	1,989	$	85	$	2,187	$	119	$	2,776	$	348
Real estate - construction		3,631		154		3,743		183		2,798		156
Real estate - mortgage:
Residential		5,331		171		5,380		293		4,263		338
Commercial		5,998		229		6,500		493		4,717		543
Consumer installment		11		1		13		1		27		3
Total	$	16,960	$	640	$	17,824	$	1,090	$	14,582	$	1,388

Troubled Debt Restructuring (TDR) describes loans on which the bank has granted concessions for reasons related to the customer’s financial difficulties. Such concessions may include one or more of the following:

● reduction in the interest rate to below market rates

● extension of repayment requirements beyond normal terms

● reduction of the principal amount owed

● reduction of accrued interest due

● acceptance of other assets in full or partial payment of a debt

In each case the concession is made due to deterioration in the borrower’s financial condition, and the new terms are less stringent than those required on a new loan with similar risk.

The following tables present the number of loan modifications by class, the corresponding recorded investment, and the subsequently defaulted modifications (in thousands):

Modifications

For the year ended of December 31, 2014

	Number of Contracts
Troubled Debt Restructurings	Rate Forgiveness		Other		Total		Pre-Modification Outstanding Recorded Investment
Real estate- mortgage:
Residential		-		3		3	$	140
Commercial		-		1		1		48
Consumer Installment		1		-		1		6

Troubled Debt Restructurings subsequently defaulted	Number of Contracts		Recorded Investment
Real estate- mortgage:
Residential		1	$	15

Modifications

For the year ended of December 31, 2013

	Number of Contracts
Troubled Debt Restructurings	Rate Forgiveness		Other		Total		Pre-Modification Outstanding Recorded Investment
Commercial and industrial		6		1		7	$	1,264
Real estate- mortgage:
Residential		7		-		7		784
Commercial		2		-		2		834

Troubled Debt Restructurings subsequently defaulted	Number of  Contracts		Recorded Investment
Commercial and industrial		5	$	574
Real estate- mortgage:
Commercial		1		190

Modifications

For the year ended of December 31, 2012

	Number of Contracts
Troubled Debt Restructurings	Rate Forgiveness		Other		Total		Pre-Modification Outstanding Recorded Investment
Commercial and industrial		1		12		13	$	489
Real estate- mortgage:
Residential		2		7		9		921
Commercial		-		1		1		156
Consumer Installment		-		2		2		11

Troubled Debt Restructurings subsequently defaulted	Number of Contracts		Recorded Investment
Commercial and industrial		6	$	256
Real estate- construction		1		3,622
Real estate- mortgage:
Residential		2		89
Consumer Installment		1		5

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.

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 utilized 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 with the Chief Credit Officer ultimately responsible for accurate and timely risk ratings.  The Credit Department performs an annual review of all commercial relationships $1,000,000 or greater.  Confirmation of the appropriate risk grade is included in the review on an ongoing basis.  The Company engages an external consultant to conduct loan reviews on a semiannual 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 tables present the classes of the loan portfolio summarized by the aggregate Pass rating and the criticized categories of Special Mention, Substandard, and Doubtful within the internal risk rating system as of December 31, 2014 and 2013 (in thousands):

			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
December 31, 2014
Commercial and industrial	$	58,976	$	-	$	1,730	$	38	$	60,744
Real estate - construction		29,212		495		-		589		30,296
Real estate - mortgage:
Residential		218,244		584		8,724		-		227,552
Commercial		137,755		3,908		5,750		-		147,413
Consumer installment		4,572		-		7		-		4,579
Total	$	448,759	$	4,987	$	16,211	$	627	$	470,584

			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
December 31, 2013
Commercial and industrial	$	52,078	$	772	$	1,605	$	43	$	54,498
Real estate - construction		24,052		907		642		-		25,601
Real estate - mortgage:
Residential		198,479		774		11,057		-		210,310
Commercial		132,931		2,232		6,008		-		141,171
Consumer installment		4,129		-		16		-		4,145
Total	$	411,669	$	4,685	$	19,328	$	43	$	435,725

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 tables present the classes of the loan portfolio summarized by the aging categories of loans as of December 31, 2014 and 2013 (in thousands):

			30-59 Days		60-89 Days		90 Days+		Total		Total
	Current		Past Due		Past Due		Past Due		Past Due		Loans
December 31, 2014
Commercial and industrial	$	60,296	$	349	$	68	$	31	$	448	$	60,744
Real estate - construction		30,296		-		-		-		-		30,296
Real estate - mortgage:
Residential		223,209		2,065		363		1,915		4,343		227,552
Commercial		146,816		30		-		567		597		147,413
Consumer installment		4,547		27		3		2		32		4,579
Total	$	465,164	$	2,471	$	434	$	2,515	$	5,420	$	470,584

			30-59 Days		60-89 Days		90 Days+		Total		Total
	Current		Past Due		Past Due		Past Due		Past Due		Loans
December 31, 2013
Commercial and industrial	$	53,440	$	529	$	359	$	170	$	1,058	$	54,498
Real estate - construction		24,945		17		639		-		656		25,601
Real estate - mortgage:
Residential		203,747		3,082		481		3,000		6,563		210,310
Commercial		140,251		645		100		175		920		141,171
Consumer installment		4,083		43		19		-		62		4,145
Total	$	426,466	$	4,316	$	1,598	$	3,345	$	9,259	$	435,725

The following tables present the classes of the loan portfolio summarized by nonaccrual loans and loans 90 days or more past due and still accruing as of December 31, 2014 and 2013 (in thousands):

			90+ Days Past
	Nonaccrual		Due and Accruing
December 31, 2014
Commercial and industrial	$	365	$	-
Real estate - construction		587		-
Real estate - mortgage:
Residential		5,438		165
Commercial		955		-
Consumer installment		2		-
Total	$	7,347	$	165

			90+ Days Past
	Nonaccrual		Due and Accruing
December 31, 2013
Commercial and industrial	$	176	$	38
Real estate - construction		-		-
Real estate - mortgage:
Residential		7,411		143
Commercial		743		-
Consumer installment		8		-
Total	$	8,338	$	181

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $207,000 in 2014; $439,000 in 2013; and $756,000 in 2012.

An allowance for loan and lease 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 Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance.   The total of the two components represents the Company’s ALLL.

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 utilizing the last twelve consecutive 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 tables summarize 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
ALLL balance at December 31, 2013	$	614		$	576	$	3,664		$	2,170		$	22		$	7,046
Charge-offs		(237	)		-		(671	)		(260	)		(44	)		(1,212	)
Recoveries		121			60		267			40			154			642
Provision		144			232		443			(374	)		(75	)		370
ALLL balance at December 31, 2014	$	642		$	868	$	3,703		$	1,576		$	57		$	6,846

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage		Consumer installment			Total
ALLL balance at December 31, 2012	$	1,732		$	1,123		$	2,872		$	1,991	$	61		$	7,779
Charge-offs		(419	)		(191	)		(675	)		-		(45	)		(1,330	)
Recoveries		191			33			107			46		24			401
Provision		(890	)		(389	)		1,360			133		(18	)		196
ALLL balance at December 31, 2013	$	614		$	576		$	3,664		$	2,170	$	22		$	7,046

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2011	$	1,296		$	438		$	3,731		$	1,306		$	48		$	6,819
Charge-offs		(230	)		(135	)		(785	)		(123	)		(64	)		(1,337	)
Recoveries		71			-			31			-			27			129
Provision		595			820			(105	)		808			50			2,168
ALLL balance at December 31, 2012	$	1,732		$	1,123		$	2,872		$	1,991		$	61		$	7,779

The real estate construction balance increased from $0.6 million at December 31, 2013 to $0.9 million at December 31, 2014. This is entirely the result of one construction loan. Commercial real estate ALLL decreased from $2.2 million to $1.6 million during the year ended December 31, 2014. This was largely the result of payoff of a loan with $0.5 million of ALLL. 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.