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Note 7 - Loans and Related Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2014

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

NOTE 7 - LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

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

	September 30,		December 31,
	2014		2013

Commercial and industrial	$	58,874	$	54,498
Real estate - construction		29,287		25,601
Real estate - mortgage:
Residential		224,223		210,310
Commercial		149,488		141,171
Consumer installment		6,135		4,145
		468,007		435,725
Less allowance for loan and lease losses		7,288		7,046
Net loans	$	460,719	$	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, 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 and lease 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 and lease losses (in thousands):

					Real Estate- Mortgage
September 30, 2014	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	1,567	$	3,459	$	5,503	$	4,996	$	7	$	15,532
Collectively evaluated for impairment		57,307		25,828		218,720		144,492		6,128		452,475
Total loans	$	58,874	$	29,287	$	224,223	$	149,488	$	6,135	$	468,007

					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
September 30, 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	$	79	$	600	$	907	$	170	$	3	$	1,759
Collectively evaluated for impairment		607		243		3,043		1,584		52		5,529
Total ending allowance balance	$	686	$	843	$	3,950	$	1,754	$	55	$	7,288

					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 commercial real estate loans individually evaluated for impairment declined during the period ended September 30, 2014 mostly due to the payoff of a $2.1 million relationship.

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 based on Board guidance. 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 the following 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):

September 30, 2014
Impaired Loans
	Recorded		Unpaid		Related
	Investment		Principal Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	1,217	$	1,216	$	-
Real estate - construction		2,859		2,859		-
Real estate - mortgage:
Residential		2,542		2,538		-
Commercial		4,147		4,143		-
Consumer installment		-		-		-
Total	$	10,765	$	10,756	$	-

With an allowance recorded:
Commercial and industrial	$	350	$	350	$	79
Real estate - construction		600		600		600
Real estate - mortgage:
Residential		2,961		2,959		907
Commercial		849		848		170
Consumer installment		7		7		3
Total	$	4,767	$	4,764	$	1,759

Total:
Commercial and industrial	$	1,567	$	1,566	$	79
Real estate - construction		3,459		3,459		600
Real estate - mortgage:
Residential		5,503		5,497		907
Commercial		4,996		4,991		170
Consumer installment		7		7		3
Total	$	15,532	$	15,520	$	1,759

December 31, 2013
Impaired Loans
	Recorded		Unpaid		Related
	Investment		Principal 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 following tables present interest income by class, recognized on impaired loans (in thousands):

	For the Three Months Ended September 30, 2014				For the Nine Months Ended September 30, 2014

	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized


Commercial and industrial	$	1,842	$	22	$	2,107	$	71
Real estate - construction		3,556		38		3,644		119
Real estate - mortgage:
Residential		5,328		62		5,319		164
Commercial		5,192		83		5,678		241
Consumer installment		11		-		12		-

	For the Three Months Ended September 30, 2013				For the Nine Months Ended September 30, 2013

	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial and industrial	$	2,643	$	15	$	2,687	$	70
Real estate - construction		3,850		58		3,499		95
Real estate - mortgage:
Residential		5,274		69		4,937		143
Commercial		6,669		106		6,018		216
Consumer installment		14		1		18		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 loss. 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 based on Board guidance. 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 tables present 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, 2014
Commercial and industrial	$	56,619	$	718	$	1,498	$	39	$	58,874
Real estate - construction		28,687		-		-		600		29,287
Real estate - mortgage:
Residential		212,706		899		10,618		-		224,223
Commercial		145,464		163		3,861		-		149,488
Consumer installment		6,112		-		23		-		6,135
Total	$	449,588	$	1,780	$	16,000	$	639	$	468,007

			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.

Nonperforming assets include nonaccrual loans, troubled debt restructurings (TDRs), loans 90 days or more past due, EMORECO assets, other real estate owned, and repossessed assets. A loan is classified as nonaccrual 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 tables present 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, 2014

Commercial and industrial	$	58,231	$	56	$	66	$	1	$	122	$	521	$	58,874
Real estate - construction		28,687		-		-		-		-		600		29,287
Real estate - mortgage:
Residential		215,999		1,128		139		24		1,292		6,932		224,223
Commercial		147,938		559		163		-		722		828		149,488
Consumer installment		6,095		21		1		-		22		17		6,135
Total	$	456,951	$	1,765	$	369	$	25	$	2,158	$	8,898	$	468,007

			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, 2013

Commercial and industrial	$	53,366	$	521	$	359	$	38	$	918	$	214	$	54,498
Real estate - construction		24,945		17		639		-		656		-		25,601
Real estate - mortgage:
Residential		200,041		2,079		481		143		2,703		7,566		210,310
Commercial		139,730		598		100		-		698		743		141,171
Consumer installment		4,083		38		16		-		54		8		4,145
Total	$	422,165	$	3,253	$	1,595	$	181	$	5,029	$	8,531	$	435,725

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 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 reserves.

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 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		(95	)		-		(481	)		-			(40	)		(616	)
Recoveries		88			60		289			40			11			488
Provision		79			207		478			(456	)		62			370
ALLL balance at September 30, 2014	$	686		$	843	$	3,950		$	1,754		$	55		$	7,288

	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		(325	)		(190	)		(432	)		-		(41	)		(988	)
Recoveries		92			33			73			46		20			264
Provision		(711	)		333			1,126			36		(18	)		766
ALLL balance at September 30, 2013	$	788		$	1,299		$	3,639		$	2,073	$	22		$	7,821

	Commercial and industrial			Real estate- construction		Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at June 30, 2014	$	596		$	423	$	4,130		$	1,925		$	55		$	7,129
Charge-offs		(3	)		-		(24	)		-			(5	)		(32	)
Recoveries		23			-		94			-			4			121
Provision		70			420		(250	)		(171	)		1			70
ALLL balance at September 30, 2014	$	686		$	843	$	3,950		$	1,754		$	55		$	7,288

	Commercial and industrial			Real estate- construction		Real estate- residential mortgage			Real estate- commercial mortgage		Consumer installment			Total
ALLL balance at June 30, 2013	$	875		$	1,191	$	3,626		$	2,005	$	52		$	7,749
Charge-offs		-			-		(87	)		-		(5	)		(92	)
Recoveries		-			-		2			-		9			11
Provision		(87	)		108		98			68		(34	)		153
ALLL balance at September 30, 2013	$	788		$	1,299	$	3,639		$	2,073	$	22		$	7,821

The year to date negative commercial real estate provision was largely driven by the payoff of a relationship with a specific reserve of $352,000.

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

	For the three months ended
	September 30, 2014								September 30, 2013
	Number of Contracts						Pre-Modification Outstanding		Number of Contracts				Pre-Modification Outstanding
Troubled Debt Restructurings	Term Modification		Other		Total		Recorded Investment		Term Modification		Total		Recorded Investment
Commercial and industrial		1		-		1	$	75		1		1	$	137
Real estate- mortgage:
Residential		2		-		2		165		-		-		-
Commercial		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-

	For the nine months ended
	September 30, 2014								September 30, 2013
	Number of Contracts						Pre-Modification Outstanding		Number of Contracts				Pre-Modification Outstanding
Troubled Debt Restructurings	Term Modification		Other		Total		Recorded Investment		Term Modification		Total		Recorded Investment
Commercial and industrial		2		-		2	$	75		6		6	$	879
Real estate- mortgage:
Residential		3		-		3		198		2		2		383
Commercial		1		-		1		55		-		-		-
Consumer		1		-		1		7		1		1		644

	Nine months ended
	September 30, 2014				September 30, 2013
Troubled Debt Restructurings subsequently defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial and industrial		-	$	-		1	$	565
Real estate- mortgage:
Commercial		-		-		1		190

There were no changes to the recorded investment post modification. No TDRs, modified in the past twelve months, subsequently defaulted in the three months ended September 30, 2014 and 2013.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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