Loans | NOTE 3 – LOANS Loans consist of the following at December 31: (Dollars in thousands) 2015 2014 Commercial $ 123,143 $ 123,813 Commercial real estate 148,775 139,695 Residential real estate 125,775 121,684 Construction & land development 15,452 17,446 Consumer 9,268 7,913 Total loans before deferred costs 422,413 410,551 Deferred loan costs 458 352 Total loans $ 422,871 $ 410,903 Loan Origination/Risk Management The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s management examines current and occasionally projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. However, the cash flows of borrowers may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31, 2015 and 2014, approximately 76% and 77%, respectively of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties. With respect to loans to developers and builders that are secured by non-owner occupied properties, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction and land development loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction and land development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. The Company originates consumer loans utilizing a judgmental underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. Concentrations of Credit Nearly all of the Company’s lending activity occurs within the State of Ohio, including the four counties of Holmes, Stark, Tuscarawas and Wayne, as well as other markets. The majority of the Company’s loan portfolio consists of commercial and industrial and commercial real estate loans. As of December 31, 2015 and 2014, there were no concentrations of loans to any single industry. Allowance for Loan Losses The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2015, 2014 and 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. During 2015, the increase in the provision for loan losses related to commercial loans was primarily due to an increase in the specific allowance related to impaired loans in this category. The decrease in the provision related to commercial real estate loans was due to the improved credit quality of loans in this category. The increase in the provision related to residential real estate loans was due to the increase in net charge-offs of loans in this category as well as the increase in loan volume. During 2014, the increase in the provision for loan losses related to commercial loans was primarily due to the increase in the historical loss rate of loans in this category. The increase in the provision related to commercial real estate loans was affected by an increase in loan balances, offset by a decrease in impaired loans. The decrease in the provision related to residential real estate loans was affected by the decrease in the specific allocation amounts related to impaired residential real estate loans, as well as a decrease in the historical loss rates of the loans in this category. The decrease in the provision related to construction and consumer loans was due to the decrease in the historical loss rates in both of these categories. Summary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Residential Construction Consumer Unallocated Total December 31, 2015 Beginning balance $ 1,289 $ 1,524 $ 1,039 $ 142 $ 60 $ 327 $ 4,381 Provision for loan losses 285 (205 ) 161 (19 ) 62 105 389 Charge-offs (109 ) (61 ) (132 ) – (46 ) (348 ) Recoveries 199 13 18 – 10 240 Net charge-offs 90 (48 ) (114 ) – (36 ) (108 ) Ending balance $ 1,664 $ 1,271 $ 1,086 $ 123 $ 86 $ 432 $ 4,662 December 31, 2014 Beginning balance $ 1,219 $ 1,872 $ 1,205 $ 178 $ 91 $ 520 $ 5,085 Provision for loan losses 1,047 23 (164 ) (36 ) (34 ) (193 ) 643 Charge-offs (1,005 ) (379 ) (27 ) – (11 ) (1,422 ) Recoveries 28 8 25 – 14 75 Net charge-offs (977 ) (371 ) (2 ) – 3 (1,347 ) Ending balance $ 1,289 $ 1,524 $ 1,039 $ 142 $ 60 $ 327 $ 4,381 December 31, 2013 Beginning balance $ 933 $ 1,902 $ 1,096 $ 253 $ 76 $ 320 $ 4,580 Provision for loan losses 451 78 173 (75 ) 13 200 840 Charge-offs (190 ) (108 ) (82 ) – (48 ) (428 ) Recoveries 25 – 18 – 50 93 Net charge-offs (165 ) (108 ) (64 ) – 2 (335 ) Ending balance $ 1,219 $ 1,872 $ 1,205 $ 178 $ 91 $ 520 $ The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio segment and impairment method as of December 31: (Dollars in thousands) Commercial Commercial Real Estate Residential Construction & Land Development Consumer Unallocated Total 2015 Allowance for loan losses: Ending allowance balances attributable to loans: Individually evaluated for impairment $ 299 $ 64 $ 26 $ – $ – $ – $ 389 Collectively evaluated for impairment 1,365 1,207 1,060 123 86 432 4,273 Total ending allowance balance $ 1,664 $ 1,271 $ 1,086 $ 123 $ 86 $ 432 $ 4,662 Loans: Loans individually evaluated for impairment $ 6,127 $ 1,064 $ 1,533 $ – $ – $ 8,724 Loans collectively evaluated for impairment 117,016 147,711 124,242 15,452 9,268 413,689 Total ending loans balance $ 123,143 $ 148,775 $ 125,775 $ 15,452 $ 9,268 $ 422,413 2014 Allowance for loan losses: Ending allowance balances attributable to loans: Individually evaluated for impairment $ – $ 109 $ 75 $ – $ – $ – $ 184 Collectively evaluated for impairment 1,289 1,415 964 142 60 327 4,197 Total ending allowance balance $ 1,289 $ 1,524 $ 1,039 $ 142 $ 60 $ 327 $ 4,381 Loans: Loans individually evaluated for impairment $ 5,922 $ 1,679 $ 1,612 $ – $ – $ 9,213 Loans collectively evaluated for impairment 117,891 138,016 120,072 17,446 7,913 401,338 Total ending loans balance $ 123,813 $ 139,695 $ 121,684 $ 17,446 $ 7,913 $ 410,551 The following table presents loans individually evaluated for impairment by class of loans as of December 31: (Dollars in thousands) Unpaid Recorded Recorded Total Related Average Interest 2015 Commercial $ 6,541 $ 5,832 $ 301 $ 6,133 $ 299 $ 5,972 $ 230 Commercial real estate 1,265 670 393 1,063 64 1,420 18 Residential real estate 1,689 967 568 1,535 26 1,671 61 Construction & land development – – – – – – – Total impaired loans $ 9,495 $ 7,469 $ 1,262 $ 8,731 $ 389 $ 9,063 $ 309 2014 Commercial $ 7,011 $ 5,889 $ 37 $ 5,926 $ – $ 6,739 $ 208 Commercial real estate 1,836 950 728 1,678 109 2,723 90 Residential real estate 1,721 885 730 1,615 75 1,796 61 Construction & land development – – – – – – – Total impaired loans $ 10,568 $ 7,724 $ 1,495 $ 9,219 $ 184 $ 11,258 $ 359 2013 Commercial $ 5,595 $ 7 $ 5,580 $ 5,587 $ 241 $ 4,185 $ 182 Commercial real estate 3,540 563 2,658 3,221 331 3,650 163 Residential real estate 2,001 337 1,510 1,847 212 1,315 41 Construction & land development – – – – – 21 2 Total impaired loans $ 11,136 $ 907 $ 9,748 $ 10,655 $ 784 $ 9,171 $ 388 The following table presents the aging of past due and nonaccrual loans by class of loans as of December 31: (Dollars in thousands) Current 30-59 Days 60-89 Days 90 Days + Nonaccrual Total Past Total 2015 Commercial $ 122,760 $ 34 $ 172 $ – $ 177 $ 383 $ 123,143 Commercial real estate 147,920 – 59 – 796 855 148,775 Residential real estate 124,408 486 173 105 603 1,367 125,775 Construction & land development 15,452 – – – – – 15,452 Consumer 9,105 163 – – – 163 9,268 Total loans $ 419,645 $ 683 $ 404 $ 105 $ 1,576 $ 2,768 $ 422,413 2014 Commercial $ 122,283 $ 362 $ 96 $ 1 $ 1,071 $ 1,530 $ 123,813 Commercial real estate 137,683 174 104 – 1,734 2,012 139,695 Residential real estate 120,025 424 92 280 863 1,659 121,684 Construction & land development 17,431 – 15 – – 15 17,446 Consumer 7,798 73 42 – – 115 7,913 Total loans $ 405,220 $ 1,033 $ 349 $ 281 $ 3,668 $ 5,331 $ 410,551 Troubled Debt Restructurings The Company had troubled debt restructurings (“TDRs”) of $7.6 million as of December 31, 2015, with $26 thousand of specific reserves allocated to customers whose loan terms have been modified in TDRs. As of December 31, 2014, the Company had TDRs of $6.8 million, with $88 thousand of specific reserves allocated. At December 31, 2015, $7.2 million of the loans classified as TDRs were performing in accordance with their modified terms. The remaining $425 thousand were classified as nonaccrual. Loan modifications that are considered TDRs completed during the year ended December 31: (Dollars in thousands) Number Of Pre-Modification Post-Modification 2015 Commercial 1 $ 148 $ 148 Residential real estate 5 307 307 Total restructured loans 6 $ 455 $ 455 2014 Residential real estate 1 $ 84 $ 84 Total restructured loans 1 $ 84 $ 84 The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. No principal reductions were made. There was one residential real estate loan of $55 thousand that was restructured in 2014 that has subsequently defaulted in 2015. None of the loans that were restructured in 2013 have subsequently defaulted in the year ended December 31, 2014. Real Estate Loans in Foreclosure The Company held no foreclosed real estate as of December 31, 2015 or December 31, 2014. Mortgage loans in the process of foreclosure were $89 thousand at December 31, 2015 and $139 thousand at December 31, 2014. 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. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis includes commercial loans with an outstanding balance greater than $300 thousand. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings: Pass. Special Mention. Substandard. Doubtful. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $300 thousand or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class is as follows at December 31: (Dollars in thousands) Pass Special Substandard Doubtful Not Rated Total 2015 Commercial $ 112,229 $ 3,100 $ 7,044 $ – $ 770 $ 123,143 Commercial real estate 141,621 2,742 3,150 – 1,262 148,775 Residential real estate 190 – 213 – 125,372 125,775 Construction & land development 11,015 944 – – 3,493 15,452 Consumer – – – – 9,268 9,268 Total $ 265,055 $ 6,786 $ 10,407 $ – $ 140,165 $ 422,413 2014 Commercial $ 112,467 $ 3,809 $ 6,690 $ – $ 847 $ 123,813 Commercial real estate 129,792 4,898 3,634 – 1,371 139,695 Residential real estate 209 – 39 – 121,436 121,684 Construction & land development 13,889 1,579 – – 1,978 17,446 Consumer – – – – 7,913 7,913 Total $ 256,357 $ 10,286 $ 10,363 $ – $ 133,545 $ 410,551 Nonperforming loans include loans past due 90 days and greater and loans on nonaccrual of interest status. The following table presents loans that are not rated, by class of loans as of December 31: (Dollars in thousands) Performing Nonperforming Total 2015 Commercial $ 770 $ – $ 770 Commercial real estate 1,262 – 1,262 Residential real estate 124,700 672 125,372 Construction & land development 3,493 – 3,493 Consumer 9,268 – 9,268 Total $ 139,493 $ 672 $ 140,165 2014 Commercial $ 847 $ – $ 847 Commercial real estate 1,371 – 1,371 Residential real estate 120,332 1,104 121,436 Construction & land development 1,978 – 1,978 Consumer 7,913 – 7,913 Total $ 132,441 $ 1,104 $ 133,545 Mortgage Servicing Rights For the years ended December 31, 2015 and 2014, the Company had outstanding mortgage servicing rights (“MSRs”) of $246 thousand and $222 thousand, respectively. No valuation allowance was recorded at December 31, 2015 or 2014 as the fair value of the MSRs exceeded their carrying value. On December 31, 2015, the Company had $59.9 million residential mortgage loans with servicing retained as compared to $55.5 million with servicing retained at December 31, 2014. Total loans serviced for others approximated $76.3 million and $70.6 million at December 31, 2015 and 2014, respectively. |