Loans and Leases | NOTE 5 – LOANS AND LEASES Loans and leases at December 31, 2016 and 2015 consist of the following: (in thousands) 2016 2015 Residential real estate $ 88,869 $ 78,096 Commercial 244,097 237,299 Agriculture 39,108 34,998 Consumer 4,012 3,857 Total loans and leases $ 376,086 $ 354,250 Fixed rate loans and leases approximated $75,723,000 at December 31, 2016 and $60,131,000 at December 31, 2015. Certain commercial and agricultural loans and leases are secured by real estate. Most of the Corporation’s lending activities are with customers located in Northwestern and West Central Ohio. As of December 31, 2016 and 2015, the Corporation’s loans and leases from borrowers in the agriculture industry represent the single largest industry and amounted to $39,108,000 and $34,998,000 , respectively. Agriculture loans and leases are generally secured by property and equipment. Repayment is primarily expected from cash flow generated through the harvest and sale of crops or milk production for dairy products. Agriculture customers are subject to various risks and uncertainties which can adversely impact the cash flow generated from their operations, including weather conditions; milk production; health and stability of livestock; costs of key operating items such as fertilizer, fuel, seed, or animal feed; and market prices for crops, milk, and livestock. Credit evaluation of agricultural lending is based on an evaluation of cash flow coverage of principal and interest payments and the adequacy of collateral received. The Corporation originates 1-4 family real estate and consumer loans and leases utilizing credit reports to supplement the underwriting process. The Corporation’s underwriting standards for 1-4 family loans and leases are generally in accordance with the Federal Home Loan Mortgage Corporation (FHLMC) manual underwriting guidelines. Properties securing 1-4 family real estate loans and leases are appraised by fee appraisers, which is independent of the loan and lease origination function and has been approved by the Board of Directors and the Loan Policy Committee. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Corporation will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1-4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans and leases include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan or lease. To monitor and manage loan and lease risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan and lease amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Corporation ’s 1-4 family real estate loans and leases are secured primarily by properties located in its primary market area. Commercial and agricultural real estate loans and leases are subject to underwriting standards and processes similar to commercial and agricultural operating loans and leases, in addition to those unique to real estate loans and leases. These loans and leases are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is generally 75% of the cost or appraised value of the assets. Appraisals on properties securing these loans are performed by fee appraisers approved by the Board of Directors. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. M anagement monitors and evaluates commercial and agricultural real estate loans and leases based on collateral and risk rating criteria. The Corporation may require guarantees on these loans and leases. The Corporation ’s commercial and agricultural real estate loans and leases are secured primarily by properties located in its primary market area. Commercial and agricultural operating loans and leases are underwritten based on the Corporation ’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans and leases may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans and leases. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and/or hail insurance may be required for agricultural borrowers. Loans are generally guaranteed by the principal(s). The Corporation ’s commercial and agricultural operating lending is primarily in its primary market area. The Corporation maintains an internal audit department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the audit committee. The internal audit process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Corporation ’s policies and procedures. The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the years ended December 31, 2016, 2015 and 2014: (in thousands) Commercial Commercial and multi-family real estate Residential 1 – 4 family real estate Consumer Total Balance at December 31, 2015 $ 893 $ 2,540 $ 373 $ 28 $ 3,834 Provision (credit) for loan and lease losses 55 (969) 160 4 (750) Losses charged off (86) (12) (52) (10) (160) Recoveries 34 317 61 9 421 Balance at December 31, 2016 $ 896 $ 1,876 $ 542 $ 31 $ 3,345 Commercial Commercial and multi-family real estate Residential 1 – 4 family real estate Consumer Total Balance at December 31, 2014 $ 199 $ 3,255 $ 363 $ 23 $ 3,840 Provision (credit) for loan and lease losses 971 (767) 166 12 382 Losses charged off (349) (98) (176) (16) (639) Recoveries 72 150 20 9 251 Balance at December 31, 2015 $ 893 $ 2,540 $ 373 $ 28 $ 3,834 Commercial Commercial and multi-family real estate Residential 1 – 4 family real estate Consumer Total Balance at December 31, 2013 $ 305 $ 3,346 $ 345 $ 18 $ 4,014 Provision (credit) for loan and lease losses (564) (4) 126 12 (430) Losses charged off (98) (270) (117) (12) (497) Recoveries 556 183 9 5 753 Balance at December 31, 2014 $ 199 $ 3,255 $ 363 $ 23 $ 3,840 The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and leases by portfolio segment and based on impairment method as of December 31, 2016 and 2015: (in thousands) Commercial Commercial and multi-family real estate Residential 1 – 4 family real estate Consumer Total 2016 Allowance for loan and lease losses: Attributable to loans and leases individually evaluated for impairment $ 399 $ 619 $ - $ - $ 1,018 Collectively evaluated for impairment 497 1,257 542 31 2,327 Total allowance for loan and lease losses $ 896 $ 1,876 $ 542 $ 31 $ 3,345 Loans and leases: Individually evaluated for impairment $ 937 $ 1,980 $ - $ - $ 2,917 Acquired with deteriorated credit quality - 573 51 - 624 Collectively evaluated for impairment 62,782 216,933 88,818 4,012 372,545 Total ending loans and leases balance $ 63,719 $ 219,486 $ 88,869 $ 4,012 $ 376,086 Commercial Commercial and multi-family real estate Residential 1 – 4 family real estate Consumer Total 2015 Allowance for loan and lease losses: Attributable to loans and leases individually evaluated for impairment $ 528 $ 843 $ - $ - $ 1,371 Collectively evaluated for impairment 365 1,697 373 28 2,463 Total allowance for loan and lease losses $ 893 $ 2,540 $ 373 $ 28 $ 3,834 Loans and leases: Individually evaluated for impairment $ 2,192 $ 3,820 $ - $ - $ 6,012 Acquired with deteriorated credit quality 43 669 74 - 786 Collectively evaluated for impairment 64,092 201,481 78,022 3,857 347,452 Total ending loans and leases balance $ 66,327 $ 205,970 $ 78,096 $ 3,857 $ 354,250 The following is a summary of the activity in the allowance for loan and lease losses of impaired loans, which is a part of the Corporation’s overall allowance for loan and lease losses for the years ended December 31, 2016, 2015, and 2014: (in thousands) 2016 2015 2014 Balance at beginning of year $ 1,371 $ 807 $ 179 Provision (credit) for loan and lease losses (1,155) 852 263 Loans charged off - (326) (231) Recoveries 802 38 596 Balance at end of year $ 1,018 $ 1,371 $ 807 No additional funds are committed to be advanced in connection with impaired loans and leases. The average balance of impaired loans and leases (excluding loans and leases acquired with deteriora ted credit quality) amounted to $3,691,000, $5,579,000 and $3,851,000 during 2016, 2015 and 2014, respectively. There was $245,000 , 393,000 and $197,000 in interest income recognized by the Corporation on impaired loans and leases on an accrual or cash basis during 2016, 2015 and 2014, respectively. The following table presents loans and leases individually evaluated for impairment by class of loans as of December 31, 2016 and 2015: (in thousands) 2016 2015 Recorded investment Allowance for loan and lease losses allocated Recorded investment Allowance for loan and lease losses allocated With no related allowance recorded: Commercial $ - $ - $ - $ - Commercial and multi-family real estate - - - - Agriculture - - - - Agricultural real estate - - - - Consumer - - - - Residential 1-4 family real estate - - - - With an allowance recorded: Commercial 937 399 2,192 528 Commercial and multi-family real estate 1,980 619 3,820 843 Agriculture - - - - Agricultural real estate - - - - Consumer - - - - Residential 1-4 family real estate - - - - Total $ 2,917 $ 1,018 $ 6,012 $ 1,371 The following table presents the recorded investment in nonaccrual loans and leases, loans and leases past due over 90 days still on accrual and troubled debt restructurings by class of loans as of December 31, 2016 and 2015: (in thousands) 2016 2015 Nonaccrual Loans and leases past due over 90 days still accruing Troubled Debt Restructurings Nonaccrual Loans and leases past due over 90 days still accruing Troubled Debt Restructurings Commercial $ 1,295 $ - $ 29 $ 355 $ - $ - Commercial real estate 3,462 - 722 4,113 - 1,403 Agricultural real estate 277 - - 52 260 - Agriculture - 73 - 19 - - Consumer 3 - - 12 - - Residential: 1 – 4 family 966 81 457 1,394 - 392 Home equity - - - - - - Total $ 6,003 $ 154 $ 1,208 $ 5,945 $ 260 $ 1,795 The nonaccrual balances in the table above include troubled debt restructurings that have been classified as nonaccrual. The following table presents the aging of the recorded investment in past due loans and leases as of December 31, 2016 and 2015 by class of loans and leases: (in thousands) 30 – 59 days past due 60 – 89 days past due Greater than 90 days past due Total past due Loans and leases not past due Total 2016 Commercial $ 326 $ 71 $ 79 $ 476 $ 49,988 $ 50,464 Commercial real estate 103 147 553 803 192,830 193,633 Agriculture 227 - - 227 13,026 13,253 Agricultural real estate - - 5 5 25,850 25,855 Consumer 10 2 - 12 4,000 4,012 Residential real estate 1,770 484 462 2,716 86,153 88,869 Total $ 2,436 $ 704 $ 1,099 $ 4,239 $ 371,847 $ 376,086 30 – 59 days past due 60 – 89 days past due Greater than 90 days past due Total past due Loans and leases not past due Total 2015 Commercial $ 81 $ 50 $ 121 $ 252 $ 53,210 $ 53,462 Commercial real estate 644 15 1,225 1,884 181,953 183,837 Agriculture 150 - 19 169 12,696 12,865 Agricultural real estate 94 - 260 354 21,779 22,133 Consumer 49 1 5 55 3,802 3,857 Residential real estate 2,147 244 389 2,780 75,316 78,096 Total $ 3,165 $ 310 $ 2,019 $ 5,494 $ 348,756 $ 354,250 Credit Quality Indicators: The Corporation categorizes loans and leases 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. The Corporation analyzes loans and leases individually by classifying the loans and leases as to the credit risk. This analysis generally includes loans and leases with an outstanding balance greater than $500,000 (increased from $250,000 in 2015 ) and non-homogenous loans and leases, such as commercial and commercial real estate loans and leases. This analysis is performed on a quarterly basis. The Corporation uses the following definitions for risk ratings: · Special Mention: Loans and leases which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans and leases pose unwarranted financial risk that, if not corrected, could weaken the loan and lease and increase risk in the future. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered "potential", versus "defined", impairments to the primary source of loan repayment. · Substandard: These loans and leases are inadequately protected by the current sound net worth and paying ability of the borrower. Loans and leases of this type will generally display negative financial trends such as poor or negative net worth, earnings or cash flow. These loans and leases may also have historic and/or severe delinquency problems, and Corporation management may depend on secondary repayment sources to liquidate these loans and leases. The Corporation could sustain some degree of loss in these loans and leases if the weaknesses remain uncorrected. · Doubtful: Loans and leases in this category display a high degree of loss, although the amount of actual loss at the time of classification is undeterminable. 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. Loans and leases not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans and leases. Loans and leases listed as not rated are generally either less than $500,000 (increased from $250,000 in 2015 ) or are included in groups of homogenous loans and leases. As of December 31, 2016 and 2015, and based on the most recent analysis performed, the risk category of loans by class of loans and leases is as follows: (in thousands) Pass Special Mention Substandard Doubtful Not rated 2016 Commercial $ 41,233 $ - $ 3,666 $ - $ 18,819 Commercial and multi- family real estate 162,399 4,239 3,850 - 48,999 Residential 1 - 4 family 210 - - - 88,659 Consumer - - - - 4,012 Total $ 203,842 $ 4,239 $ 7,516 $ - $ 160,489 Pass Special Mention Substandard Doubtful Not rated 2015 Commercial $ 41,184 $ 2,806 $ 2,656 $ - $ 19,680 Commercial and multi- family real estate 139,351 7,563 5,976 - 53,081 Residential 1 - 4 family 223 - - - 77,873 Consumer - - - - 3,857 Total $ 180,758 $ 10,369 $ 8,632 $ - $ 154,491 The Corporation considers the performance of the loan and lease portfolio and its impact on the allowance for loan and lease losses. For all loan classes that are not rated, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. Generally, all loans not rated that are 90 days past due or are classified as nonaccrual and collectively evaluated for impairment, are considered nonperforming. The following table presents the recorded investment in all loans that are not risk rated, based on payment activity as of December 31, 2016 and 2015: (in thousands) Commercial Commercial and multi-family real estate Residential 1-4 family Consumer 2016 Performing $ 18,740 $ 48,441 $ 88,197 $ 4,012 Nonperforming 79 558 462 - Total $ 18,819 $ 48,999 $ 88,659 $ 4,012 Commercial Commercial and multi-family real estate Residential 1-4 family Consumer 2015 Performing $ 19,540 $ 52,249 $ 77,484 $ 3,852 Nonperforming 140 832 389 5 Total $ 19,680 $ 53,081 $ 77,873 $ 3,857 Modifications: The Corporation’s loan and lease portfolio also includes certain loans and leases that have been modified in a TDR, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Corporation’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. All TDRs are also classified as impaired loans and leases. When the Corporation modifies a loan or lease, management evaluates any possible concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, except when the sole (remaining) source of repayment for the loan or lease is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan or lease is less than the recorded investment in the loan or lease (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), an impairment is recognized through a specific reserve in the allowance or a direct write down of the loan or lease balance if collection is not expected. The following table includes the recorded investment and number of modifications for TDR loans and leases during the years ended December 31, 2016 and December 31, 2015. There were no other subsequent defaults relating to TDR loans and leases during the years ended December 31, 2016 and 2015. (dollars in thousands) Number of modifications Recorded investment Allowance for loan and lease losses allocated Troubled Debt Restructurings: 2016 Residential Real Estate 1 $ 72 $ - Commercial 1 30 - Commercial Real Estate 4 256 - Total 6 $ 358 $ - 2015 Residential Real Estate 8 $ 245 $ - Commercial Real Estate 8 416 - Total 16 $ 661 $ - The concessions granted during 2016 included the following: the bank renewed two loans for another one year term, granted an interest only period on one loan, lowered payments and extended the maturity on one loan, modified payments on one loan and brought interest payments current and liquidating inventory of one loan. The concessions granted during 2015 included the following: the bank extended the current due dates and payments on seven loans, extended the maturity and re-amortized the payments on two loans, re-amortized the payments on five loans, granted an interest only period on one loan and converted a line of credit to a term loan on one loan. The following is additional information with respect to loans and leases acquired with The OSB acquisition as of December 31, 2016 and December 31, 2015: (in thousands) Contractual Principal Accretable Carrying 2016 Receivable Difference Amount Purchased Performing Loans and Leases Balance at December 31, 2015 $ 41,873 $ (1,809) $ 40,064 Accretion of loan discounts (7,457) 333 (7,124) Transfer to foreclosed real estate - - - Change due to loan charge-off - - - Balance at December 31, 2016 $ 34,416 $ (1,476) $ 32,940 Contractual Non Principal Accretable Carrying Receivable Difference Amount Purchased Impaired Loans and Leases Balance at December 31, 2015 $ 1,959 $ (1,194) $ 765 Change due to payments received (238) 108 (130) Transfer to foreclosed real estate - - - Change due to loan charge-off (201) 190 (11) Balance at December 31, 2016 $ 1,520 $ (896) $ 624 Contractual Principal Accretable Carrying 2015 Receivable Difference Amount Purchased Performing Loans and Leases Balance at December 31, 2014 $ 58,437 $ (3,144) $ 55,293 Accretion of loan discounts (16,557) 1,334 (15,223) Transfer to foreclosed real estate - - - Change due to loan charge-off (7) 1 (6) Balance at December 31, 2015 $ 41,873 $ (1,809) $ 40,064 Contractual Non Principal Accretable Carrying Receivable Difference Amount Purchased Impaired Loans and Leases Balance at December 31, 2014 $ 2,689 $ (1,788) $ 901 Change due to payments received (368) 241 (127) Transfer to foreclosed real estate (214) 207 (7) Change due to loan charge-off (148) 146 (2) Balance at December 31, 2015 $ 1,959 $ (1,194) $ 765 As a result of The OSB acquisition, the Corporation has loans, for which there was at acquisition, evidence of deterioration of credit quality since origination and for which it was probable at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of December 31, 2016, December 31, 2015 as well as the date of acquisition, November 14, 2014 was $624,000 , $765,000 and $959,000 , respectively. No provision for loan and lease losses was recognized during the year s ended December 31, 2016 and 2015 related to the acquired loans as there has been no significant change to the valuation of loans acquired subsequent to the date of acquisition . Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are loan and lease customers of the Corporation. Such loans and leases are made in the ordinary course of business in accordance with the normal lending policies of the Corporation, including the interest rate charged and collateralization. Such loans amounted to $ 3 70 ,000 , $ 63, 000 and $ 34,000 at December 31, 2016, 2015 and 2014, respectively. The following is a summary of activity during 2016, 2015 and 2014 for such loans: (in thousands) 2016 2015 2014 Beginning of year $ 63 $ 34 $ 45 Additions 630 160 4 Repayments (323) (131) (15) End of year $ 370 $ 63 $ 34 Additions and repayments include loan and lease renewals, as well as net borrowings and repayments under revolving lines-of-credit. |