Note 4. Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2012

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

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:	June 30,		December 31,
	2012		2011
Residential real estate	$	233,130	$	238,490
Commercial real estate:
Owner-occupied		110,271		132,303
Nonowner-occupied		49,898		53,681
Construction		23,740		21,471
Commercial and industrial		45,982		45,200
Consumer:
Automobile		42,284		45,702
Home equity		19,164		20,507
Other		39,605		40,954
		564,074		598,308
Less:  Allowance for loan losses		7,527		7,344
Loans, net	$	556,547	$	590,964

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2012 and 2011:

June 30, 2012	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,491		$	3,423		$	623		$	1,310		$	6,847
Provision for loan losses		18			1,004			(319	)		(179	)		524
Loans charged off		(85	)		(62	)		----			(298	)		(445	)
Recoveries		19			4			349			229			601
Total ending allowance balance	$	1,443		$	4,369		$	653		$	1,062		$	7,527

June 30, 2011	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,337		$	4,251		$	1,140		$	1,324		$	8,052
Provision for loan losses		489			(116	)		421			(35	)		759
Loans charged off		(722	)		(1,547	)		(862	)		(330	)		(3,461	)
Recoveries		29			804			71			225			1,129
Total ending allowance balance	$	1,133		$	3,392		$	770		$	1,184		$	6,479

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2012 and 2011:

June 30, 2012	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,730		$	3,623		$	636		$	1,355		$	7,344
Provision for loan losses		295			1,896			(407	)		56			1,840
Loans charged off		(678	)		(1,158	)		(70	)		(817	)		(2,723	)
Recoveries		96			8			494			468			1,066
Total ending allowance balance	$	1,443		$	4,369		$	653		$	1,062		$	7,527

June 30, 2011	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,051		$	3,083		$	3,795		$	1,457		$	9,386
Provision for loan losses		1,014			985			1,605			99			3,703
Loans charged off		(969	)		(1,587	)		(4,701	)		(747	)		(8,004	)
Recoveries		37			911			71			375			1,394
Total ending allowance balance	$	1,133		$	3,392		$	770		$	1,184		$	6,479

The following table presents the balance in the allowance for loan losses and the recorded investment of loans by portfolio segment and based on impairment method as of June 30, 2012 and December 31, 2011:

June 30, 2012	Residential Real Estate		Commercial Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	128	$	1,845	$	----	$	----	$	1,973
Collectively evaluated for impairment		1,315		2,524		653		1,062		5,554
Total ending allowance balance	$	1,443	$	4,369	$	653	$	1,062	$	7,527
Loans:
Loans individually evaluated for impairment	$	1,454	$	13,104	$	----	$	242	$	14,800
Loans collectively evaluated for impairment		231,676		170,805		45,982		100,811		549,274
Total ending loans balance	$	233,130	$	183,909	$	45,982	$	101,053	$	564,074

December 31, 2011	Residential Real Estate		Commercial Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	130	$	525	$	----	$	----	$	655
Collectively evaluated for impairment		1,730		2,968		636		1,355		6,689
Total ending allowance balance	$	1,860	$	3,493	$	636	$	1,355	$	7,344
Loans:
Loans individually evaluated for impairment	$	1,505	$	9,733	$	334	$	----	$	11,572
Loans collectively evaluated for impairment		225,404		209,303		44,866		107,163		586,736
Total ending loans balance	$	226,909	$	219,036	$	45,200	$	107,163	$	598,308

The following table presents information related to loans individually evaluated for impairment by class of loans:

Six months ended June 30, 2012	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:
Residential real estate	$	1,174	$	1,034	$	----	$	886	$	18	$	13
Commercial real estate:
Owner-occupied		7,410		7,159		----		5,631		264		244
Nonowner-occupied		1,790		889		----		934		24		23
Construction		675		395		----		488		6		6
Consumer:
Automobile		22		22		----		15		1		1
Home equity		220		220		----		147		5		5
With an allowance recorded:
Residential real estate		420		420		128		420		17		13
Commercial real estate:
Owner-occupied		3,614		3,614		1,207		3,529		77		69
Nonowner-occupied		1,298		1,047		638		1,198		18		17
Total	$	16,623	$	14,800	$	1,973	$	13,248	$	430	$	391

Six months ended June 30, 2011	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:
Residential real estate	$	1,161	$	968	$	----	$	1,065	$	26	$	17
Commercial real estate:
Owner-occupied		7,713		7,008		----		7,309		239		232
Nonowner-occupied		1,361		1,361		----		1,361		22		22
Construction		679		679		----		679		19		17
Commercial and industrial		7,257		3,139		----		4,986		192		159
With an allowance recorded:
Commercial real estate:
Nonowner-occupied		2,423		2,423		424		2,423		70		60
Total	$	20,594	$	15,578	$	424	$	17,823	$	568	$	507

Year ended December  31, 2011	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:
Residential real estate	$	1,136	$	1,085	$	----	$	748	$	36	$	31
Commercial real estate:
Owner-occupied		5,713		5,470		----		5,510		325		317
Nonowner-occupied		1,192		1,192		----		1,247		56		49
Commercial and industrial		614		334		----		483		40		40
With an allowance recorded:
Residential real estate		420		420		130		84		27		22
Commercial real estate:
Nonowner-occupied		2,396		2,396		437		2,414		128		118
Construction		675		675		88		677		35		31
Total	$	12,146	$	11,572	$	655	$	11,163	$	647	$	608

The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees.

The following table presents the recorded investment of nonaccrual loans and loans past due 90 days or more and still accruing by class of loans:

June 30, 2012	Loans Past Due 90 Days And Still Accruing		Nonaccrual
Residential real estate	$	187	$	2,494
Commercial real estate:
Owner-occupied		----		38
Nonowner-occupied		----		959
Construction		----		1,574
Consumer:
Automobile		22		11
Home equity		----		5
Other		56		2
Total	$	265	$	5,083

December 31, 2011	Loans Past Due 90 Days And Still Accruing		Nonaccrual
Residential real estate	$	439	$	2,536
Commercial real estate:
Owner-occupied		----		125
Nonowner-occupied		----		----
Consumer:
Automobile		13		12
Home equity		----		5
Other		7		----
Total	$	459	$	2,678

Nonaccrual loans and loans past due 90 days or more and still accruing include both smaller balance homogenous loans that are collectively evaluated for impairment and loans individually classified as impaired.

The following table presents the aging of the recorded investment of past due loans by class of loans:

June 30, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Loans Not Past Due		Total
Residential real estate	$	1,981	$	1,382	$	2,681	$	6,044	$	227,086	$	233,130
Commercial real estate:
Owner-occupied		1,717		----		38		1,755		108,516		110,271
Nonowner-occupied		----		472		487		959		48,939		49,898
Construction		----		----		1,574		1,574		22,166		23,740
Commercial and industrial		114		----		----		114		45,868		45,982
Consumer:
Automobile		516		278		32		826		41,458		42,284
Home equity		165		----		5		170		18,994		19,164
Other		307		102		56		465		39,140		39,605
Total	$	4,800	$	2,234	$	4,873	$	11,907	$	552,167	$	564,074

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Loans Not Past Due		Total
Residential real estate	$	3,731	$	1,144	$	2,975	$	7,850	$	230,640	$	238,490
Commercial real estate:
Owner-occupied		182		----		125		307		131,996		132,303
Nonowner-occupied		----		232		----		232		53,449		53,681
Construction		204		----		----		204		21,267		21,471
Commercial and industrial		171		14		----		185		45,015		45,200
Consumer:
Automobile		864		110		13		987		44,715		45,702
Home equity		75		76		5		156		20,351		20,507
Other		506		162		7		675		40,279		40,954
Total	$	5,733	$	1,738	$	3,125	$	10,596	$	587,712	$	598,308

Troubled Debt Restructurings:

A troubled debt restructuring (“TDR”) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. All TDR's are considered to be impaired. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a reduction in the contractual principal and interest payments of the loan; or short-term interest-only payment terms.

The Company has allocated reserves for a portion of its TDR's to reflect the fair values of the underlying collateral or the present value of the concessionary terms granted to the customer.

The following table presents the types of TDR loan modifications by class of loans as of June 30, 2012 and December 31, 2011:

	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total  TDR’s
June 30, 2012
Residential real estate
Interest only payments	$	----	$	252	$	252
Rate reduction		420		----		420
Commercial real estate:
Owner-occupied
Interest only payments		2,939		674		3,613
Rate reduction		442		----		442
Maturity extension at lower stated rate           than market rate		206		----		206
Reduction of principal and interest payments		4,266		----		4,266
Nonowner-occupied
Interest only payments		961		959		1,920
Construction
Interest only payments		----		395		395
Total TDR’s	$	9,234	$	2,280	$	11,514

	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total  TDR’s
December 31, 2011
Residential real estate
Interest only payments	$	----	$	283	$	283
Rate reduction		420		----		420
Commercial real estate:
Owner-occupied
Interest only payments		3,619		----		3,619
Rate reduction		449		----		449
Maturity extension at lower stated rate           than market rate		219		----		219
Nonowner-occupied
Interest only payments		3,357		----		3,357
Construction
Interest only payments		674		----		674
Commercial and industrial
Interest only payments		334		----		334
Total TDR’s	$	9,072	$	283	$	9,355

At June 30, 2012, the balance in TDR loans increased $2,159, or 23.1%, from year-end 2011.  The increase was largely due to the modification of one commercial real estate loan totaling $4,266 during the first quarter of 2012.  The loan’s contractual principal and interest payments were reduced, which created a concession to the borrower.  At June 30, 2012 and December 31, 2011, 80% and 97% of the Company’s TDR’s were performing according to their modified terms.  The Company allocated $1,553 and $655 in reserves to customers whose loan terms have been modified in TDR’s as of June 30, 2012 and December 31, 2011, respectively.  At June 30, 2012, the Company had $94 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDR’s, as compared to $81 at December 31, 2011.

There was no TDR loan modifications that occurred during the three months ended June 30, 2012.  The following table presents the pre- and post-modification balances of TDR loan modifications by class of loans that occurred during the six months ended June 30, 2012:

	TDR’s Performing to Modified Terms				TDR’s Not Performing to Modified Terms
Six months ended June 30, 2012	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial real estate:
Owner-occupied
Reduction of principal and interest payments	$	4,308	$	4,266	$	----	$	----
Total TDR’s	$	4,308	$	4,266	$	----	$	----

All of the Company’s TDR’s that occurred during the six months ended June 30, 2012 were performing in accordance with their modified terms.  Furthermore, there were no TDR’s described above at June 30, 2012 that experienced any payment defaults within twelve months following their loan modification.  A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.  TDR loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  The TDR’s described above had no impact on the allowance for loan losses or charge-offs during the six months ended June 30, 2012.  As of June 30, 2012, the Company had no allocation of reserves to customers whose loan terms have been modified during the first six months of 2012.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. These risk categories are represented by a loan grading scale from 1 through 10. The Company analyzes loans individually with a higher credit risk rating and groups these loans into categories called “criticized” and “classified" assets. The Company considers its criticized assets to be loans that are graded 8 and its classified assets to be loans that are graded 9 through 10. The Company's risk categories are reviewed at least annually on loans that have aggregate borrowing amounts that meet or exceed $500.

The Company uses the following definitions for its criticized loan risk ratings:

Special Mention (Loan Grade 8).Loans classified as special mention indicate considerable risk due to deterioration of repayment (in the earliest stages) due to potential weak primary repayment source, or payment delinquency. These loans will be under constant supervision, are not classified and do not expose the institution to sufficient risks to warrant classification. These deficiencies should be correctable within the normal course of business, although significant changes in company structure or policy may be necessary to correct the deficiencies. These loans are considered bankable assets with no apparent loss of principal or interest envisioned. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. Credits that are defined as a troubled debt restructuring should be graded no higher than special mention until they have been reported as performing over one year after restructuring.

The Company uses the following definitions for its classified loan risk ratings:

Substandard (Loan Grade 9). Loans classified as substandard represent very high risk, serious delinquency, nonaccrual, or unacceptable credit. Repayment through the primary source of repayment is in jeopardy due to the existence of one or more well defined weaknesses and the collateral pledged may inadequately protect collection of the loans. Loss of principal is not likely if weaknesses are corrected, although financial statements normally reveal significant weakness. Loans are still considered collectible, although loss of principal is more likely than with special mention loan grade 8 loans. Collateral liquidation is considered likely to satisfy debt.

Doubtful (Loan Grade 10). Loans classified as doubtful display a high probability of loss, although the amount of actual loss at the time of classification is undetermined. This should be a temporary category until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification. These loans exhibit all substandard characteristics with the addition that weaknesses make collection or liquidation in full highly questionable and improbable. This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain important and reasonable specific pending factors which may strengthen the credit can be more accurately determined. These factors may include proposed acquisitions, liquidation procedures, capital injection, receipt of additional collateral, mergers, or refinancing plans. A doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded substandard.

Criticized and classified loans will mostly consist of commercial and industrial and commercial real estate loans. The Company considers its loans that do not meet the criteria for a criticized and classified asset rating as pass rated loans, which will include loans graded from 1 (Prime) to 7 (Watch). All commercial loans are categorized into a risk category either at the time of origination or reevaluation date. As of June 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of commercial loans by class of loans is as follows:

June 30, 2012	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	85,829	$	13,152	$	11,290	$	110,271
Nonowner-occupied		33,931		8,448		7,519		49,898
Construction		22,166		----		1,574		23,740
Commercial and industrial		38,809		75		7,098		45,982
Total	$	180,735	$	21,675	$	27,481	$	229,891

December 31, 2011	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	103,743	$	15,030	$	13,530	$	132,303
Nonowner-occupied		30,375		12,815		10,491		53,681
Construction		19,519		----		1,952		21,471
Commercial and industrial		36,633		3,250		5,317		45,200
Total	$	190,270	$	31,095	$	31,290	$	252,655

The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau), but the scores are not updated. The Company focuses mostly on the performance and repayment ability of the borrower as an indicator of credit risk and does not consider a borrower's credit score to be a significant influence in the determination of a loan's credit risk grading.

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. Nonperforming loans are defined as loans that are past due 90 days and still accruing or loans that have been placed on nonaccrual.  For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment of residential and consumer loans by class of loans based on repayment activity as of June 30, 2012 and December 31, 2011:

	Consumer
June 30, 2012	Automobile		Home Equity		Other		Residential Real Estate		Total
Performing	$	42,251	$	19,159	$	39,547	$	230,449	$	331,406
Nonperforming		33		5		58		2,681		2,777
Total	$	42,284	$	19,164	$	39,605	$	233,130	$	334,183

	Consumer
December 31, 2011	Automobile		Home Equity		Other		Residential Real Estate		Total
Performing	$	45,677	$	20,502	$	40,947	$	235,515	$	342,641
Nonperforming		25		5		7		2,975		3,012
Total	$	45,702	$	20,507	$	40,954	$	238,490	$	345,653

The Company, through its subsidiaries, grants residential, consumer, and commercial loans to customers located primarily in the southeastern areas of Ohio as well as the western counties of West Virginia.  Approximately 4.12% of total loans were unsecured at June 30, 2012, up from 3.98% at December 31, 2011.