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Loans and Related Allowance for Loan Losses
9 Months Ended
Sep. 30, 2011
Loans and Related Allowance for Loan Losses [Abstract] 
LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
NOTE 7 — LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
Major classifications of net loans are summarized as follows (in thousands):
                 
    September 30,     December 31,  
    2011     2010  
 
               
Commercial and industrial
  $ 58,903     $ 57,501  
Real estate — construction
    21,619       15,845  
Real estate — mortgage:
               
Residential
    209,449       209,863  
Commercial
    93,827       84,304  
Consumer installment
    4,760       4,985  
 
           
 
    388,558       372,498  
Less allowance for loan losses
    (7,574 )     (6,221 )
 
           
 
               
Net loans
  $ 380,984     $ 366,277  
 
           
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 September 30, 2011 and 2010, 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 as of September 30, 2011 and December 31, 2010 (in thousands):
                                                 
    Commercial     Real estate-     Real Estate- Mortgage     Consumer        
September 30, 2011   and industrial     construction     Residential     Commercial     installment     Total  
 
                                               
Total loans
  $ 58,903     $ 21,619     $ 209,449     $ 93,827     $ 4,760     $ 388,558  
 
                                   
 
                                               
Individually evaluated for impairment
  $ 4,109     $ 873     $ 6,603     $ 5,722     $ —     $ 17,307  
Collectively evaluated for impairment
    54,794       20,746       202,846       88,105       4,760       371,251  
                                                 
    Commercial     Real estate-     Real estate- Mortgage     Consumer        
December 31, 2010   and industrial     construction     Residential     Commercial     installment     Total  
 
                                               
Total loans
  $ 57,501     $ 15,845     $ 209,863     $ 84,304     $ 4,985     $ 372,498  
 
                                   
 
                                               
Individually evaluated for impairment
  $ 5,477     $ 1,299     $ 4,329     $ 6,266     $ 17     $ 17,388  
Collectively evaluated for impairment
    52,024       14,546       205,534       78,038       4,968       355,110  
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 loan 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 as of September 30, 2011 and 2010 (in thousands):
                                         
                    Impaired Loans        
                    with No        
    Impaired Loans with     Specific        
    Specific Allowance     Allowance     Total Impaired Loans  
                              Unpaid  
    Recorded     Related     Recorded     Recorded     Principal  
    Investment     Allowance     Investment     Investment     Balance  
September 30, 2011
                                       
Commercial and industrial
  $ 526     $ 184     $ 1,726     $ 2,252     $ 2,253  
Real estate — construction
    276       125       367       643       643  
Real estate — mortgage:
                                       
Residential
    —       —       1,423       1,423       1,427  
Commercial
    2,858       627       3,177       6,035       6,054  
Consumer installment
    —       —       50       50       50  
 
                             
Total impaired loans
  $ 3,660     $ 936     $ 6,743     $ 10,403     $ 10,427  
 
                             
 
                                       
December 31, 2010
                                       
Commercial and industrial
  $ 655     $ 203     $ 1,874     $ 2,529     $ 2,540  
Real estate — construction
    —       —       618       618       614  
Real estate — mortgage:
                                       
Residential
    594       221       —       594       594  
Commercial
    1,879       188       1,441       3,320       3,314  
Consumer installment
    —       —       —       —       —  
 
                             
Total impaired loans
  $ 3,128     $ 612     $ 3,933     $ 7,681     $ 7,062  
 
                             
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. 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):
                                         
            Special                     Total  
    Pass     Mention     Substandard     Doubtful     Loans  
September 30, 2011
                                       
 
                                       
Commercial and industrial
  $ 53,593     $ 880     $ 4,357     $ 73     $ 58,903  
Real estate — construction
    20,950       —       669       —       21,619  
Real estate — mortgage:
                                       
Residential
    192,366       1,413       15,670       —       209,449  
Commercial
    86,626       452       6,749       —       93,827  
Consumer installment
    4,735       7       18       —       4,760  
 
                             
Total
  $ 358,270     $ 2,752     $ 27,463     $ 73     $ 388,558  
 
                             
                                         
            Special                     Total  
    Pass     Mention     Substandard     Doubtful     Loans  
December 31, 2010
                                       
 
                                       
Commercial and industrial
  $ 52,008     $ 903     $ 4,366     $ 224     $ 57,501  
Real estate — construction
    14,481       —       1,364       —       15,845  
Real estate — mortgage:
                                       
Residential
    192,823       1,601       15,439       —       209,863  
Commercial
    76,979       353       6,972       —       84,304  
Consumer installment
    4,937       11       37       —       4,985  
 
                             
Total
  $ 341,228     $ 2,868     $ 28,178     $ 224     $ 372,498  
 
                             
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              
            30-59 Days     60-89 Days     90 Days+     Total     Non-     Total  
    Current     Past Due     Past Due     Past Due     Past Due     Accrual     Loans  
September 30, 2011
                                                       
 
                                                       
Commercial and industrial
  $ 56,521     $ 321     $ 19     $ —     $ 340     $ 2,042     $ 58,903  
Real estate — construction
    21,226       —       —       —       —       393       21,619  
Real estate — mortgage:
                                                    —  
Residential
    192,684       3,739       1,562       583       5,884       10,881       209,449  
Commercial
    89,468       91       57       —       148       4,211       93,827  
Consumer installment
    4,659       101       —       —       101       —       4,760  
 
                                         
Total
  $ 364,558     $ 4,252     $ 1,638     $ 583     $ 6,473     $ 17,527     $ 388,558  
 
                                         
                                                         
            Still Accruing              
            30-59 Days     60-89 Days     90 Days+     Total     Non-     Total  
    Current     Past Due     Past Due     Past Due     Past Due     Accrual     Loans  
December 31, 2010
                                                       
 
                                                       
Commercial and industrial
  $ 53,712     $ 473     $ 776     $ —     $ 1,249     $ 2,540     $ 57,501  
Real estate — construction
    15,197       —       —       —       —       648       15,845  
Real estate — mortgage:
                                                       
Residential
    193,647       2,950       1,580       —       4,530       11,686       209,863  
Commercial
    78,361       1,607       824       —       2,431       3,513       84,304  
Consumer installment
    4,841       120       12       —       132       12       4,985  
 
                                         
Total
  $ 345,757     $ 5,150     $ 3,192     $ —     $ 8,342     $ 18,399     $ 372,498  
 
                                         
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 non-performing 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.
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 a defined number of consecutive historical quarters. Consumer and Commercial pools currently utilize 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 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 as of September 30, 2011 (in thousands):
                                                 
                    Real estate-     Real estate-              
    Commercial     Real estate-     residential     commercial     Consumer        
    and industrial     construction     mortgage     mortgage     installment     Total  
ALL balance at December 31, 2010
    962     $ 188     $ 3,434     $ 1,543       94     $ 6,221  
Charge-offs
    (503 )     (6 )     (461 )     (266 )     (11 )     (1,247 )
Recoveries
    75       —       18       —       22       115  
Provision
    384       75       1,372       616       38       2,485  
 
                                   
ALL balance at September 30, 2011
  $ 918     $ 257     $ 4,363     $ 1,893       143     $ 7,574  
 
                                   
The following table summarizes the troubled debt restructurings as of September 30, 2011 (in thousands):
Modifications
As of September 30, 2011
                         
            Pre-Modification     Post-Modification  
    Number of     Outstanding     Outstanding  
Troubled Debt Restructurings   Contracts     Recorded Investment     Recorded Investment  
Commercial and industrial
    7       668       668  
Real estate- construction
    —       —       —  
Real estate- mortgage:
                       
Residential
    8       1,230       1,230  
Commercial
    3       2,025       2,025  
Consumer Installment
    3       43       43  
                 
Troubled Debt Restructurings   Number of        
subsequently defaulted   Contracts     Recorded Investment  
Commercial and industrial
    1       15  
Real estate- construction
    —       —  
Real estate- mortgage:
               
Residential
    1       98