Note 4 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 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:	September 30, 2012		December 31, 2011
Residential real estate	$	229,749	$	238,490
Commercial real estate:
Owner-occupied		105,784		129,364
Nonowner-occupied		58,420		56,620
Construction		21,163		21,471
Commercial and industrial		47,229		45,200
Consumer:
Automobile		41,508		45,702
Home equity		18,859		20,507
Other		39,823		40,954
		562,535		598,308
Less:  Allowance for loan losses		8,185		7,344
Loans, net	$	554,350	$	590,964

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

September 30, 2012	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,443		$	4,369		$	653		$	1,062		$	7,527
Provision for loan losses		257			394			359			173			1,183
Loans charged off		(61	)		(54	)		(429	)		(430	)		(974	)
Recoveries		23			27			159			240			449
Total ending allowance balance	$	1,662		$	4,736		$	742		$	1,045		$	8,185

September 30, 2011	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,133		$	3,392		$	770		$	1,184		$	6,479
Provision for loan losses		904			(82	)		(74	)		404			1,152
Loans charged off		(741	)		(113	)		(26	)		(476	)		(1,356	)
Recoveries		59			----			48			129			236
Total ending allowance balance	$	1,355		$	3,197		$	718		$	1,241		$	6,511

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

September 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		552			2,290			(48	)		229			3,023
Loans charged off		(739	)		(1,212	)		(499	)		(1,247	)		(3,697	)
Recoveries		119			35			653			708			1,515
Total ending allowance balance	$	1,662		$	4,736		$	742		$	1,045		$	8,185

September 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		1,918			903			1,531			503			4,855
Loans charged off		(1,710	)		(1,700	)		(4,727	)		(1,223	)		(9,360	)
Recoveries		96			911			119			504			1,630
Total ending allowance balance	$	1,355		$	3,197		$	718		$	1,241		$	6,511

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 September 30, 2012 and December 31, 2011:

September 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	$	2,078	$	----	$	----	$	2,206
Collectively evaluated for impairment		1,534		2,658		742		1,045		5,979
Total ending allowance balance	$	1,662	$	4,736	$	742	$	1,045	$	8,185
Loans:
Loans individually evaluated for impairment	$	1,194	$	12,524	$	----	$	219	$	13,937
Loans collectively evaluated for impairment		228,555		172,843		47,229		99,971		548,598
Total ending loans balance	$	229,749	$	185,367	$	47,229	$	100,190	$	562,535

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		236,985		197,722		44,866		107,163		586,736
Total ending loans balance	$	238,490	$	207,455	$	45,200	$	107,163	$	598,308

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

Nine months ended September 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	$	914	$	774	$	----	$	662	$	22	$	22
Commercial real estate:
Owner-occupied		5,557		5,557		----		4,529		23		11
Nonowner-occupied		3,948		3,048		----		3,657		25		22
Construction		1,713		1,433		----		811		33		33
Consumer:
Home equity		219		219		----		165		7		7
With an allowance recorded:
Residential real estate		420		420		128		420		7		4
Commercial real estate:
Nonowner-occupied		2,737		2,486		2,078		1,520		26		26
Total	$	15,508	$	13,937	$	2,206	$	11,764	$	143	$	125

Nine months ended September 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	$	1,761	$	1,489	$	----	$	1,171	$	62	$	45
Commercial real estate:
Owner-occupied		5,941		5,213		----		4,510		283		279
Nonowner-occupied		5,827		5,827		----		5,840		230		209
Construction		674		674		----		678		27		26
Commercial and industrial		7,196		3,002		----		4,490		340		251
With an allowance recorded:
Commercial real estate:
Nonowner-occupied		2,405		2,405		405		2,418		100		90
Total	$	23,804	$	18,610	$	405	$	19,107	$	1,042	$	900

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		2,774		2,531		----		2,418		207		309
Nonowner-occupied		4,131		4,131		----		4,339		174		57
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:

September 30, 2012	Loans Past Due 90 Days And Still Accruing		Nonaccrual
Residential real estate	$	260	$	3,385
Commercial real estate:
Owner-occupied		----		758
Nonowner-occupied		----		959
Construction		----		1,519
Commercial and industrial		----		36
Consumer:
Automobile		59		25
Home equity		43		53
Other		9		37
Total	$	371	$	6,772

December 31, 2011	Loans Past Due 90 Days And Still Accruing		Nonaccrual
Residential real estate	$	439	$	2,536
Commercial real estate:
Owner-occupied		----		125
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:

September 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	$	3,946	$	1,007	$	3,645	$	8,598	$	221,151	$	229,749
Commercial real estate:
Owner-occupied		1,144		----		758		1,902		103,882		105,784
Nonowner-occupied		52		----		959		1,011		57,409		58,420
Construction		80		----		1,519		1,599		19,564		21,163
Commercial and industrial		90		----		36		126		47,103		47,229
Consumer:
Automobile		593		187		59		839		40,669		41,508
Home equity		182		----		96		278		18,581		18,859
Other		646		98		46		790		39,033		39,823
Total	$	6,733	$	1,292	$	7,118	$	15,143	$	547,392	$	562,535

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		129,057		129,364
Nonowner-occupied		----		232		----		232		56,388		56,620
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 September 30, 2012 and December 31, 2011:

	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total TDR’s
September 30, 2012
Residential real estate
Interest only payments	$	----	$	252	$	252
Rate reduction		420		----		420
Commercial real estate:
Owner-occupied
Interest only payments		----		675		675
Rate reduction		----		440		440
Maturity extension at lower stated rate than market rate		199		----		199
Reduction of principal and interest payments		4,244		----		4,244
Nonowner-occupied
Interest only payments		3,899		958		4,857
Reduction of principal and interest payments		676		----		676
Construction
Interest only payments		----		395		395
Total TDR’s	$	9,438	$	2,720	$	12,158

	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		680		----		680
Rate reduction		449		----		449
Maturity extension at lower stated rate than market rate		219		----		219
Nonowner-occupied
Interest only payments		6,296		----		6,296
Construction
Interest only payments		674		----		674
Commercial and industrial
Interest only payments		334		----		334
Total TDR’s	$	9,072	$	283	$	9,355

At September 30, 2012, the balance in TDR loans increased $2,803, or 30.0%, from year-end 2011.  The increase was largely due to the modification of one commercial real estate loan totaling $4,244 during the first quarter of 2012.  The loan’s contractual principal and interest payments were reduced, which created a concession to the borrower.  At September 30, 2012 and December 31, 2011, 78% and 97% of the Company’s TDR’s were performing according to their modified terms.  The Company allocated $2,206 and $655 in reserves to customers whose loan terms have been modified in TDR’s as of September 30, 2012 and December 31, 2011, respectively.  At September 30, 2012, the Company had $101 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.

During the three months ended September 30, 2012, there was one $676 loan whose terms were modified that resulted in a TDR classification.  The following table presents the pre- and post-modification balances of TDR loan modifications by class of loans that occurred during the nine months ended September 30, 2012:

	TDR’s Performing to Modified Terms				TDR’s Not Performing to Modified Terms
Nine months ended September 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	$	----	$	----
Nonowner-occupied
Reduction of principal and interest payments		686		676		----		----
Total TDR’s	$	4,994	$	4,942	$	----	$	----

All of the Company’s TDR’s that occurred during the nine months ended September 30, 2012 were performing in accordance with their modified terms.  Furthermore, there were no TDR’s described above at September 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 nine months ended September 30, 2012.  As of September 30, 2012, the Company had no allocation of reserves to customers whose loan terms have been modified during the first nine 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 September 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:

September 30, 2012

	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	87,329	$	12,992	$	5,463	$	105,784
Nonowner-occupied		39,088		8,960		10,372		58,420
Construction		19,644		----		1,519		21,163
Commercial and industrial		39,456		427		7,346		47,229
Total	$	185,517	$	22,379	$	24,700	$	232,596

December 31, 2011

	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	103,743	$	15,030	$	10,591	$	129,364
Nonowner-occupied		30,375		12,815		13,430		56,620
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 September 30, 2012 and December 31, 2011:

September 30, 2012	Consumer
	Automobile		Home  Equity		Other		Residential Real Estate		Total
Performing	$	41,424	$	18,763	$	39,777	$	226,104	$	326,068
Nonperforming		84		96		46		3,645		3,871
Total	$	41,508	$	18,859	$	39,823	$	229,749	$	329,939

December 31, 2011	Consumer
	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 4.20% of total loans were unsecured at September 30, 2012, up from 3.98% at December 31, 2011.