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Note 4 - Loans and Related Allowance for Loan Losses

12 Months Ended

Dec. 31, 2015

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):

		2015				2014

Commercial and industrial		$	42,536			$	34,928
Real estate - construction			22,137				30,296
Real estate - mortgage:
Residential			232,478				210,096
Commercial			231,701				190,685
Consumer installment			4,858				4,579
			533,710				470,584
Less allowance for loan and lease losses			(6,385	)			(6,846	)

Net loans		$	527,325			$	463,738

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, 2015 and 2014, 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, 2015 and 2014 (in thousands):

										Real Estate- Mortgage
December 31, 2015		Commercial and industrial				Real estate- construction				Residential				Commercial				Consumer installment				Total
Loans:
Individually evaluated for impairment		$	1,808			$	1,787			$	3,881			$	6,199			$	6			$	13,681
Collectively evaluated for impairment			40,728				20,350				228,597				225,502				4,852				520,029
Total loans		$	42,536			$	22,137			$	232,478			$	231,701			$	4,858			$	533,710

										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			33,535				27,000				204,913				186,195				4,573				456,216
Total loans		$	34,928			$	30,296			$	210,096			$	190,685			$	4,579			$	470,584

										Real Estate- Mortgage
December 31, 2015		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		$	388			$	130			$	276			$	39			$	-			$	833
Collectively evaluated for impairment			479				146				2,863				2,039				25				5,552
Total ending allowance balance		$	867			$	276			$	3,139			$	2,078			$	25			$	6,385

										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

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, 2015
Impaired Loans
		Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Commercial and industrial		$	1,027			$	1,025			$	-
Real estate - construction			1,657				1,651				-
Real estate - mortgage:
Residential			2,445				2,443				-
Commercial			2,337				2,335				-
Total		$	7,466			$	7,454			$	-

With an allowance recorded:
Commercial and industrial		$	781			$	781			$	388
Real estate - construction			130				130				130
Real estate - mortgage:
Residential			1,436				1,436				276
Commercial			3,862				3,846				39
Consumer installment			6				6				-
Total		$	6,215			$	6,199			$	833

Total:
Commercial and industrial		$	1,808			$	1,806			$	388
Real estate - construction			1,787				1,781				130
Real estate - mortgage:
Residential			3,881				3,879				276
Commercial			6,199				6,181				39
Consumer installment			6				6				-
Total		$	13,681			$	13,653			$	833

December 31, 2014
Impaired Loans
		Recorded Investment				Unpaid Principal Balance				Related 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

The tables above include troubled debt restructuring totaling $3.1 million and $2.9 million as of December 31, 2015 and 2014, respectively.

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

		As of December 31, 2015								As of December 31, 2014								As of December 31, 2013

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

Commercial and industrial		$	1,468			$	100			$	1,989			$	85			$	2,187			$	119
Real estate - construction			2,407				115				3,631				154				3,743				183
Real estate - mortgage:
Residential			4,356				160				5,331				171				5,380				293
Commercial			5,203				350				5,998				229				6,500				493
Consumer installment			6				-				11				1				13				1
Total		$	13,440			$	725			$	16,960			$	640			$	17,824			$	1,090

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):

		December 31, 2015
		Number of Contracts												Pre-Modification				Post-Modification
Troubled Debt Restructurings		Term Modification				Other				Total				Outstanding Recorded Investment				Outstanding Recorded Investment
Commercial and industrial			6				-				6			$	434			$	434
Real estate construction			1				-				1				181				181
Residential real estate			5				1				6				515				535
Commercial real estate			1				-				1				270				270

		December 31, 2015
Troubled Debt Restructurings subsequently defaulted		Number of Contracts				Recorded Investment
Commercial and industrial			2			$	14
Real estate construction			1				130

		December 31, 2014
		Number of Contracts												Pre-Modification				Post-Modification
Troubled Debt Restructurings		Term Modification				Other				Total				Outstanding Recorded Investment				Outstanding Recorded Investment
Residential real estate			3				-				3			$	140			$	140
Commercial real estate			1				-				1				48				48
Consumer			1				-				1				6				6

December 31, 2014

Troubled Debt Restructurings

subsequently defaulted

Number of

Contracts

Recorded

Investment

Residential real estate

1

$

15

		December 31, 2013
		Number of Contracts												Pre-Modification				Post-Modification
Troubled Debt Restructurings		Term Modification				Other				Total				Outstanding Recorded Investment				Outstanding Recorded Investment
Commercial and industrial			6				1				7			$	1,264			$	1,264
Residential real estate			7				-				7				784				784
Commercial real estate			2				-				2				834				834

		December 31, 2013
Troubled Debt Restructurings subsequently defaulted		Number of Contracts				Recorded Investment
Commercial and industrial			5			$	574
Commercial real estate			1				190

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, 2015 and 2014 (in thousands):

		Pass				Special Mention				Substandard				Doubtful				Total Loans
December 31, 2015
Commercial and industrial		$	40,560			$	242			$	1,734			$	-			$	42,536
Real estate - construction			22,007				-				-				130				22,137
Real estate - mortgage:
Residential			225,945				728				5,805				-				232,478
Commercial			219,331				4,327				8,043				-				231,701
Consumer installment			4,854				-				4				-				4,858
Total		$	512,697			$	5,297			$	15,586			$	130			$	533,710

		Pass				Special Mention				Substandard				Doubtful				Total Loans
December 31, 2014
Commercial and industrial		$	33,160			$	-			$	1,730			$	38			$	34,928
Real estate - construction			29,212				495				-				589				30,296
Real estate - mortgage:
Residential			200,928				584				8,584				-				210,096
Commercial			180,899				3,908				5,878				-				190,685
Consumer installment			4,572				-				7				-				4,579
Total		$	448,759			$	4,987			$	16,211			$	627			$	470,584

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 and nonaccrual loans as of December 31, 2015 and 2014 (in thousands):

		Current				30-59 Days Past Due				60-89 Days Past Due				90 Days+ Past Due				Total Past Due				Total Loans
December 31, 2015

Commercial and industrial		$	41,544			$	225			$	26			$	741			$	992			$	42,536
Real estate - construction			22,137				-				-				-				-				22,137
Real estate - mortgage:
Residential			229,725				1,482				92				1,179				2,753				232,478
Commercial			230,903				189				-				609				798				231,701
Consumer installment			4,837				16				3				2				21				4,858
Total		$	529,146			$	1,912			$	121			$	2,531			$	4,564			$	533,710

		Current				30-59 Days Past Due				60-89 Days Past Due				90 Days+ Past Due				Total Past Due				Total Loans
December 31, 2014

Commercial and industrial		$	34,480			$	349			$	68			$	31			$	448			$	34,928
Real estate - construction			30,296				-				-				-				-				30,296
Real estate - mortgage:
Residential			205,753				2,065				363				1,915				4,343				210,096
Commercial			190,088				30				-				567				597				190,685
Consumer installment			4,547				27				3				2				32				4,579
Total		$	465,164			$	2,471			$	434			$	2,515			$	5,420			$	470,584

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, 2015 and 2014 (in thousands):

		Nonaccrual					90+ Days Past Due and Accruing
December 31, 2015

Commercial and industrial		$	1,450			$	-
Real estate - construction			130				-
Real estate - mortgage:
Residential			4,122				-
Commercial			1,842				-
Consumer installment			1				2
Total		$	7,545			$	2

		Nonaccrual					90+ Days Past Due and Accruing
December 31, 2014

Commercial and industrial		$	365			$	-
Real estate - construction			587				-
Real estate - mortgage:
Residential			5,310				165
Commercial			1,083				-
Consumer installment			2				-
Total		$	7,347			$	165

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $259,000 in 2015, $207,000 in 2014, and $439,000 in 2013.

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, 2014		$	642			$	868			$	3,703			$	1,576			$	57			$	6,846
Charge-offs			(280	)			(385	)			(425	)			(92	)			(15	)			(1,197	)
Recoveries			207				-				186				5				23				421
Provision			298				(207	)			(325	)			589				(40	)			315
ALLL balance at December 31, 2015		$	867			$	276			$	3,139			$	2,078			$	25			$	6,385

		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

The decrease in the ALLL balance for real estate construction was largely due to a $0.4 million charge off. The decrease in the ALLL balance for residential real estate was largely due to aggregate charge offs of $0.3 million of loans secured by first liens. The increase in the ALLL balance for commercial real estate is mostly due to the 21.5% growth in the portfolio.