Loans | NOTE 3 – LOANS Loans consist of the following: (Dollars in thousands) March 31, 2016 December 31, 2015 Commercial $ 128,924 $ 123,143 Commercial real estate 153,008 148,775 Residential real estate 127,099 125,775 Construction & land development 13,571 15,452 Consumer 10,383 9,268 Total loans before deferred costs 432,985 422,413 Deferred loan costs 468 458 Total Loans $ 433,453 $ 422,871 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 non-performing 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. The cash flows of borrowers; however, 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 March 31, 2016 and December 31, 2015, approximately 76% of the outstanding principal balances 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. Loans serviced for others approximated $80.2 million and $76.3 million at March 31, 2016 and December 31, 2015, respectively. Concentrations of Credit Nearly all of the Company’s lending activity occurs within the state of Ohio, including the four (4) 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 March 31, 2016 and December 31, 2015, there were no concentrations of loans related to any single industry. Allowance for Loan Losses The following tables detail activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. The changes in the provision for loan losses for the three months ended March 31, 2016 related to commercial and industrial loans were primarily due to the increase in a specific reserve amount for one commercial relationship as well as the increase in loan volume. The decrease in the provision related to commercial real estate loans was primarily due to a recovery of a prior charge-off as well as a decrease in a specific reserve amount related to one loan relationship. The increase in the provision for loan losses for the three months ended March 31, 2015 related to commercial and industrial loans was primarily due to the increase in loan balances. The increase in the provision related to commercial real estate loans was affected by an increase in loan balances and charge-offs that occurred during the quarter. The increase in the provision related to consumer loans was due to charge-offs of loans in that category. (Dollars in thousands) Commercial Commercial Real Estate Residential Real Estate Construction & Land Development Consumer Unallocated Total Three months ended March 31, 2016 Beginning balance $ 1,664 $ 1,271 $ 1,086 $ 123 $ 86 $ 432 $ 4,662 Provision for possible loan losses 394 (228 ) (4 ) (17 ) 8 11 164 Charge-offs (9 ) — — — (1 ) (10 ) Recoveries 4 182 2 — 1 189 Net (charge-offs) recoveries (5 ) 182 2 — — 179 Ending balance $ 2,053 $ 1,225 $ 1,084 $ 106 $ 94 $ 443 $ 5,005 Three months ended March 31, 2015 Beginning balance $ 1,289 $ 1,524 $ 1,039 $ 142 $ 60 $ 327 $ 4,381 Provision for possible loan losses 101 64 8 (9 ) 36 (6 ) 194 Charge-offs (2 ) (24 ) (53 ) — (30 ) (109 ) Recoveries 6 10 9 — 3 28 Net (charge-offs) recoveries 4 (14 ) (44 ) — (27 ) (81 ) Ending balance $ 1,394 $ 1,574 $ 1,003 $ 133 $ 69 $ 321 $ 4,494 The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio segment and based on the impairment method as of March 31, 2016 and December 31, 2015: (Dollars in thousands) Commercial Commercial Residential Construction Consumer Unallocated Total March 31, 2016 Allowance for loan losses: Individually evaluated for impairment $ 583 $ — $ 26 $ — $ — $ — $ 609 Collectively evaluated for impairment 1,470 1,225 1,058 106 94 443 4,396 Total ending allowance balance $ 2,053 $ 1,225 $ 1,084 $ 106 $ 94 $ 443 $ 5,005 Loans: Loans individually evaluated for impairment $ 6,017 $ 744 $ 1,509 $ — $ — $ 8,270 Loans collectively evaluated for impairment 122,907 152,264 125,590 13,571 10,383 424,715 Total ending loans balance $ 128,924 $ 153,008 $ 127,099 $ 13,571 $ 10,383 $ 432,985 December 31, 2015 Allowance for loan losses: 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 The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2016 and December 31, 2015: (Dollars in thousands) Unpaid Principal Balance Recorded Recorded Total Related March 31, 2016 Commercial $ 6,435 $ 5,142 $ 894 $ 6,036 $ 583 Commercial real estate 952 719 25 744 — Residential real estate 1,671 849 661 1,510 26 Total impaired loans $ 9,058 $ 6,710 $ 1,580 $ 8,290 $ 609 December 31, 2015 Commercial $ 6,541 $ 5,832 $ 301 $ 6,133 $ 299 Commercial real estate 1,265 670 393 1,063 64 Residential real estate 1,689 967 568 1,535 26 Total impaired loans $ 9,495 $ 7,469 $ 1,262 $ 8,731 $ 389 The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated. Three months ended March 31, (Dollars in thousands) 2016 2015 Average recorded investment: Commercial $ 6,016 $ 5,857 Commercial real estate 984 1,704 Residential real estate 1,530 1,618 Average recorded investment in impaired loans $ 8,530 $ 9,179 Interest income recognized: Commercial $ 65 $ 51 Commercial real estate 4 5 Residential real estate 15 16 Interest income recognized on a cash basis on impaired loans $ 84 $ 72 The following table presents the aging of past due loans and nonaccrual loans as of March 31, 2016 and December 31, 2015 by class of loans: (Dollars in thousands) Current 30 - 59 Days Past Due 60 - 89 90 Days + Non- Accrual Total Past Total Loans March 31, 2016 Commercial $ 128,225 $ 86 $ 169 $ — $ 444 $ 699 $ 128,924 Commercial real estate 152,192 — 108 39 669 816 153,008 Residential real estate 126,063 180 93 189 574 1,036 127,099 Construction & land development 13,558 13 — — — 13 13,571 Consumer 10,284 62 37 — — 99 10,383 Total Loans $ 430,322 $ 341 $ 407 $ 228 $ 1,687 $ 2,663 $ 432,985 December 31, 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 Troubled Debt Restructurings All troubled debt restructurings (“TDR’s) are individually evaluated for impairment and a related allowance is recorded, as needed. Loans whose terms have been modified as TDR’s totaled $6.7 million as of March 31, 2016, and $7.6 million as of December 31, 2015, with $26 thousand of specific reserves allocated to those loans for both periods. At March 31, 2016, $6.3 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $409 thousand, all were in nonaccrual of interest status. The Company held no foreclosed real estate as of March 31, 2016 or December 31, 2015. Consumer mortgage loans in the process of foreclosure were $360 thousand at March 31, 2016 and $89 thousand at December 31, 2015. The following table presents loans restructured during the three month period ended March 31, 2015. (Dollars in thousands) Number of Pre- Modification Post- For the Three Months Ended March 31, 2015 Residential Real Estate 1 $ 29 $ 29 Total Restructured Loans 1 $ 29 $ 29 The restructured loan was modified by changing the monthly payment to interest only. No principal reduction was made. None of the loans that were restructured in 2014 or 2015 have subsequently defaulted in the three month periods ended March 31, 2016 and 2015. There were no new TDR’s during the three month period ended March 31, 2016. 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 as of March 31, 2016 and December 31, 2015: (Dollars in thousands) Pass Special Substandard Doubtful Not Rated Total March 31, 2016 Commercial $ 118,269 $ 2,776 $ 6,990 $ — $ 889 $ 128,924 Commercial real estate 146,445 2,664 2,976 — 923 153,008 Residential real estate 223 — 202 — 126,674 127,099 Construction & land development 11,678 724 — — 1,169 13,571 Consumer — — — 10,383 10,383 Total $ 276,615 $ 6,164 $ 10,168 $ — $ 140,038 $ 432,985 December 31, 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 The following table presents loans that are not rated by class of loans as of March 31, 2016 and December 31, 2015. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status. (Dollars in thousands) Performing Non-Performing Total March 31, 2016 Commercial $ 889 $ — $ 889 Commercial real estate 923 — 923 Residential real estate 125,941 733 126,674 Construction & land development 1,169 — 1,169 Consumer 10,383 — 10,383 Total $ 139,305 $ 733 $ 140,038 December 31, 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 |