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Note 4 - Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2013

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, 2013		December 31, 2012
Residential real estate	$	220,290	$	226,022
Commercial real estate:
Owner-occupied		99,232		104,842
Nonowner-occupied		53,759		52,792
Construction		21,308		17,376
Commercial and industrial		58,299		57,239
Consumer:
Automobile		40,104		41,168
Home equity		18,223		18,332
Other		40,230		40,517
		551,445		558,288
Less: Allowance for loan losses		6,468		6,905

Loans, net	$	544,977	$	551,383

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2013 and 2012:

June 30, 2013	Residential Real Estate			Commercial Real Estate			Commercial and Industrial		Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,314		$	3,744		$	761	$	853		$	6,672
Provision for loan losses		(182	)		(715	)		565		143			(189	)
Loans charged off		(100	)		----			----		(284	)		(384	)
Recoveries		160			5			16		188			369
Total ending allowance balance	$	1,192		$	3,034		$	1,342	$	900		$	6,468

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2013 and 2012:

June 30, 2013	Residential Real Estate			Commercial Real Estate			Commercial and Industrial		Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,329		$	3,946		$	783	$	847		$	6,905
Provision for loan losses		145			(1,193	)		532		358			(158	)
Loans charged off		(457	)		(2	)		----		(721	)		(1,180	)
Recoveries		175			283			27		416			901
Total ending allowance balance	$	1,192		$	3,034		$	1,342	$	900		$	6,468

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

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, 2013 and December 31, 2012:

June 30, 2013	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	$	123	$	1,476	$	878	$	----	$	2,477
Collectively evaluated for impairment		1,069		1,558		464		900		3,991
Total ending allowance balance	$	1,192	$	3,034	$	1,342	$	900	$	6,468

Loans:
Loans individually evaluated for impairment	$	916	$	10,968	$	3,518	$	----	$	15,402
Loans collectively evaluated for impairment		219,374		163,331		54,781		98,557		536,043
Total ending loans balance	$	220,290	$	174,299	$	58,299	$	98,557	$	551,445

December 31, 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	$	1,979	$	----	$	----	$	2,107
Collectively evaluated for impairment		1,201		1,967		783		847		4,798
Total ending allowance balance	$	1,329	$	3,946	$	783	$	847	$	6,905

Loans:
Loans individually evaluated for impairment	$	827	$	16,354	$	----	$	220	$	17,401
Loans collectively evaluated for impairment		225,195		158,656		57,239		99,797		540,887
Total ending loans balance	$	226,022	$	175,010	$	57,239	$	100,017	$	558,288

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

Six months ended June 30, 2013	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	$	490	$	490	$	----	$	481	$	13	$	13
Commercial real estate:
Owner-occupied		1,485		1,483		----		1,362		22		22
Nonowner-occupied		6,849		6,049		----		6,717		186		186
Commercial and industrial		2,376		2,376		----		792		23		23
With an allowance recorded:
Residential real estate		426		426		123		424		8		8
Commercial real estate:
Nonowner-occupied		3,436		3,436		1,476		3,450		53		53
Commercial and industrial		1,142		1,142		878		381		45		45
Total	$	16,204	$	15,402	$	2,477	$	13,607	$	350	$	350

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

Year ended December 31, 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	$	619	$	407	$	----	$	493	$	----	$	----
Commercial real estate:
Owner-occupied		5,528		5,528		----		4,729		338		338
Nonowner-occupied		10,085		8,847		----		4,767		456		456
Commercial and industrial		426		----		----		----		----		----
Consumer:
Home equity		220		220		----		176		9		9
With an allowance recorded:
Residential real estate		420		420		128		420		23		23
Commercial real estate:
Nonowner-occupied		1,979		1,979		1,979		1,132		38		38
Total	$	19,277	$	17,401	$	2,107	$	11,717	$	864	$	864

The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees, as these amounts are immaterial.

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, 2013	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	381	$	2,632
Commercial real estate:
Owner-occupied		----		1,085
Nonowner-occupied		----		52
Consumer:
Automobile		8		4
Home equity		58		----
Other		1		3
Total	$	448	$	3,776

December 31, 2012	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	341	$	2,533
Commercial real estate:
Owner-occupied		----		675
Nonowner-occupied		----		352
Consumer:
Automobile		11		4
Home equity		----		62
Other		7		----
Total	$	359	$	3,626

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 individually classified as impaired loans.

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

June 30, 2013	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	$	4,420	$	1,179	$	3,003	$	8,602	$	211,688	$	220,290
Commercial real estate:
Owner-occupied		38		----		1,085		1,123		98,109		99,232
Nonowner-occupied		----		----		52		52		53,707		53,759
Construction		----		----		----		----		21,308		21,308
Commercial and industrial		61		----		----		61		58,238		58,299
Consumer:
Automobile		540		139		9		688		39,416		40,104
Home equity		116		33		58		207		18,016		18,223
Other		491		61		4		556		39,674		40,230
Total	$	5,666	$	1,412	$	4,211	$	11,289	$	540,156	$	551,445

December 31, 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	$	5,525	$	1,033	$	2,797	$	9,355	$	216,667	$	226,022
Commercial real estate:
Owner-occupied		753		111		675		1,539		103,303		104,842
Nonowner-occupied		----		----		352		352		52,440		52,792
Construction		----		----		----		----		17,376		17,376
Commercial and industrial		202		----		----		202		57,037		57,239
Consumer:
Automobile		905		138		13		1,056		40,112		41,168
Home equity		112		37		62		211		18,121		18,332
Other		1,066		162		7		1,235		39,282		40,517
Total	$	8,563	$	1,481	$	3,906	$	13,950	$	544,338	$	558,288

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, 2013 and December 31, 2012:

	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total TDR’s
June 30, 2013
Residential real estate
Interest only payments	$	249	$	----	$	249
Rate reduction		----		426		426
Commercial real estate:
Owner-occupied
Interest only payments		----		580		580
Rate reduction		----		262		262
Maturity extension at lower stated rate than market rate		176		----		176
Nonowner-occupied
Interest only payments		8,825		----		8,825
Reduction of principal and interest payments		660		----		660
Total TDR’s	$	9,910	$	1,268	$	11,178

	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total TDR’s
December 31, 2012
Residential real estate
Interest only payments	$	----	$	180	$	180
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		191		----		191
Reduction of principal and interest payments		4,222		----		4,222
Nonowner-occupied
Interest only payments		9,856		300		10,156
Reduction of principal and interest payments		670		----		670
Total TDR’s	$	15,799	$	1,155	$	16,954

During the three and six months ended June 30, 2013, the TDR’s described above decreased the provision expense and the allowance for loan losses by $513 and $233, respectively, with no corresponding charge-offs. This was largely due to a $503 reduction in specific reserves on a commercial real estate loan based on an updated impairment analysis of collateral during the second quarter of 2013. This decrease in reserves was partially offset by a $275 recovery during the first quarter of 2013 on a previously charged-off commercial real estate loan that had been classified as a TDR at December 31, 2012. During the year ended December 31, 2012, the TDR’s described above increased the allowance for loan losses by $2,169, resulting in charge-offs of $536.

At June 30, 2013, the balance in TDR loans decreased $5,776, or 34.1%, from year-end 2012. The decrease was largely due to the removal of one commercial real estate loan from TDR status during the second quarter of 2013. This previously reported TDR loan, for which there was no principal forgiveness, totaled $4,222 at December 31, 2012. The loan paid as agreed under the modified terms through maturity in April, 2013. During the three months ended June 30, 2013, the Bank re-underwrote and re-modified the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance and the overall cash flows of the borrower. Based on the terms of the re-modification, the loan no longer meets the criteria for a troubled debt restructuring and, as such, was removed from TDR status at June 30, 2013 and is no longer evaluated individually for impairment. During the three and six months ended June 30, 2013 and 2012, no other loans were removed from TDR status as a result of a re-modification. Further reducing the TDR balance from year-end 2012 were principal payments of $995 received on one commercial real estate loan during the first half of 2013 and a $300 payoff of another commercial real estate loan during the first quarter of 2013. At June 30, 2013 and December 31, 2012, a total of 89% and 93% of the Company’s TDR’s were performing according to their modified terms, respectively. The Company allocated $1,599 and $2,107 in reserves to customers whose loan terms have been modified in TDR’s as of June 30, 2013 and December 31, 2012, respectively. At June 30, 2013, the Company had $724 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDR’s, as compared to $109 at December 31, 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, 2013:

	TDR’s Performing to Modified Terms				TDR’s Not Performing to Modified Terms
Six months ended June 30, 2013	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Pre- Modification Recorded Investment		Post- Modification Recorded Investment

Residential real estate
Interest only payments	$	249	$	249	$	----	$	----
Total TDR’s	$	249	$	249	$	----	$	----

As of June 30, 2013, all of the Company’s loans that were restructured during the six months ended June 30, 2013 were performing in accordance with their modified terms. Furthermore, there were no TDR’s described above at June 30, 2013 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 loans modified during the six months ended June 30, 2013 had no impact on the allowance for loan losses or charge-offs during those six months. As of June, 2013, the Company had no allocation of reserves to customers whose loan terms have been modified during the first six months of 2013.

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, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of commercial loans by class of loans is as follows:

June 30, 2013
	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	88,357	$	7,981	$	2,894	$	99,232
Nonowner-occupied		43,530		601		9,628		53,759
Construction		20,273		----		1,035		21,308
Commercial and industrial		53,539		557		4,203		58,299
Total	$	205,699	$	9,139	$	17,760	$	232,598

December 31, 2012
	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	87,614	$	14,057	$	3,171	$	104,842
Nonowner-occupied		39,627		2,171		10,994		52,792
Construction		16,276		----		1,100		17,376
Commercial and industrial		47,226		4,793		5,220		57,239
Total	$	190,743	$	21,021	$	20,485	$	232,249

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, 2013 and December 31, 2012:

June 30, 2013	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	40,092	$	18,165	$	40,226	$	217,277	$	315,760
Nonperforming		12		58		4		3,013		3,087
Total	$	40,104	$	18,223	$	40,230	$	220,290	$	318,847

December 31, 2012	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	41,153	$	18,270	$	40,510	$	223,148	$	323,081
Nonperforming		15		62		7		2,874		2,958
Total	$	41,168	$	18,332	$	40,517	$	226,022	$	326,039

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 5.14% of total loans were unsecured at June 30, 2013, up from 4.87% at December 31, 2012.

- 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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