Loans | NOTE 3 – LOANS Loans consist of the following: (Dollars in thousands) September 30, 2017 December 31, 2016 Commercial $ 137,459 $ 134,268 Commercial real estate 177,588 159,475 Residential real estate 153,281 144,489 Construction & land development 23,915 23,428 Consumer 16,686 13,308 Total loans before deferred costs 508,929 474,968 Deferred loan costs 529 481 Total Loans $ 509,458 $ 475,449 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 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 With respect to loans to developers and builders that are secured by non-owner 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 on-site 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 $79.8 million and $85.9 million at September 30, 2017 and December 31, 2016, 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 commercial real estate loans. As of September 30, 2017 and December 31, 2016, 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 and nine months ended September 30, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. The increase in the provision for loan losses for the three months ended September 30, 2017 related to commercial loans was primarily due to the increase in historical losses of loans in this category. The decrease in the provision related to commercial real estate loans was due to the decrease in the specific impairment amount related to one loan relationship. The decrease in the provision related to residential real estate loans is due to the decrease of loan delinquencies in this category. The increase in the provision for loan losses related to commercial loans for the nine months ended September 30, 2017 was due to the increase in the historical loss rate and the increase of special mention loans in this category. The increase in the provision related to commercial real estate loans was due to the increase in nonaccrual loans in this category and the increase of adversely classified loan balances. The changes in the provision for loan losses for the three and nine months ended September 30, 2016 related to commercial loans were primarily due to charge-offs of loans in this category as well as an increase in the specific reserve for one commercial relationship. The decrease in the provision related to commercial real estate loans for the nine month period in 2016 was primarily due to a recovery of a prior charge-off. Summary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Residential Construction & Land Consumer Unallocated Total Three months ended September 30, 2017 Beginning balance $ 2,362 $ 1,718 $ 1,264 $ 222 $ 182 $ 541 $ 6,289 Provision for loan losses 881 (88 ) (53 ) 21 (5 ) (476 ) 280 Charge-offs (1,138 ) — — — — (1,138 ) Recoveries 4 — — — 1 5 Net charge-offs (1,134 ) — — — 1 (1,133 ) Ending balance $ 2,109 $ 1,630 $ 1,211 $ 243 $ 178 $ 65 $ 5,436 Nine months ended September 30, 2017 Beginning balance $ 2,207 $ 1,264 $ 1,189 $ 178 $ 141 $ 312 $ 5,291 Provision for loan losses 725 366 14 65 42 (247 ) 965 Charge-offs (1,178 ) — — — (7 ) (1,185 ) Recoveries 355 — 8 — 2 365 Net charge-offs (823 ) — 8 — (5 ) (820 ) Ending balance $ 2,109 $ 1,630 $ 1,211 $ 243 $ 178 $ 65 $ 5,436 Three months ended September 30, 2016 Beginning balance $ 2,376 $ 1,262 $ 1,095 $ 127 $ 110 $ 186 $ 5,156 Provision for loan losses 77 63 50 24 74 (124 ) 164 Charge-offs (261 ) (38 ) — — (47 ) (346 ) Recoveries 27 — 1 — — 28 Net charge-offs (234 ) (38 ) 1 — (47 ) (318 ) Ending balance $ 2,219 $ 1,287 $ 1,146 $ 151 $ 137 $ 62 $ 5,002 Nine months ended September 30, 2016 Beginning balance $ 1,664 $ 1,271 $ 1,086 $ 123 $ 86 $ 432 $ 4,662 Provision for loan losses 797 (117 ) 57 28 98 (370 ) 493 Charge-offs (276 ) (50 ) — — (48 ) (374 ) Recoveries 34 183 3 — 1 221 Net charge-offs (242 ) 133 3 — (47 ) (153 ) Ending balance $ 2,219 $ 1,287 $ 1,146 $ 151 $ 137 $ 62 $ 5,002 The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio class and based on the impairment method as of September 30, 2017 and December 31, 2016: (Dollars in thousands) Commercial Commercial Residential Construction Consumer Unallocated Total September 30, 2017 Allowance for loan losses: Individually evaluated for impairment $ 5 $ 20 $ 24 $ — $ — $ — $ 49 Collectively evaluated for impairment 2,104 1,610 1,187 243 178 65 5,387 Total ending allowance balance $ 2,109 $ 1,630 $ 1,211 $ 243 $ 178 $ 65 $ 5,436 Loans: Loans individually evaluated for impairment $ 1,241 $ 3,703 $ 1,486 $ — $ — $ 6,430 Loans collectively evaluated for impairment 136,218 173,885 151,795 23,915 16,686 502,499 Total ending loans balance $ 137,459 $ 177,588 $ 153,281 $ 23,915 $ 16,686 $ 508,929 December 31, 2016 Allowance for loan losses: Individually evaluated for impairment $ 705 $ — $ 24 $ — $ — $ — $ 729 Collectively evaluated for impairment 1,502 1,264 1,165 178 141 312 4,562 Total ending allowance balance $ 2,207 $ 1,264 $ 1,189 $ 178 $ 141 $ 312 $ 5,291 Loans: Loans individually evaluated for impairment $ 5,028 $ 621 $ 1,507 $ — $ — $ 7,156 Loans collectively evaluated for impairment 129,240 158,854 142,982 23,428 13,308 467,812 Total ending loans balance $ 134,268 $ 159,475 $ 144,489 $ 23,428 $ 13,308 $ 474,968 The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2017 and December 31, 2016: (Dollars in thousands) Unpaid Recorded Recorded Total Related September 30, 2017 Commercial $ 2,868 $ 1,238 $ 5 $ 1,243 $ 5 Commercial real estate 3,901 3,653 51 3,704 20 Residential real estate 1,667 1,095 392 1,487 24 Total impaired loans $ 8,436 $ 5,986 $ 448 $ 6,434 $ 49 December 31, 2016 Commercial $ 5,476 $ 1,690 $ 3,354 $ 5,044 $ 705 Commercial real estate 796 600 21 621 — Residential real estate 1,681 1,036 472 1,508 24 Total impaired loans $ 7,953 $ 3,326 $ 3,847 $ 7,173 $ 729 The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated. Three months Nine months (Dollars in thousands) 2017 2016 2017 2016 Average recorded investment: Commercial $ 3,084 $ 6,389 $ 3,376 $ 6,393 Commercial real estate 4,712 660 2,934 799 Residential real estate 1,370 1,460 1,471 1,504 Average recorded investment in impaired loans $ 9,166 $ 8,509 $ 7,781 $ 8,696 Interest income recognized: Commercial $ 10 $ 54 $ 41 $ 176 Commercial real estate 7 3 9 9 Residential real estate 13 15 43 44 Interest income recognized on a cash basis on impaired loans $ 30 $ 72 $ 93 $ 229 The following table presents the aging of past due loans and nonaccrual loans as of September 30, 2017 and December 31, 2016 by class of loans: (Dollars in thousands) Current 30 - 59 60 - 89 90 Days + Non- Total Past Non- Total Loans September 30, 2017 Commercial $ 136,544 $ 28 $ — $ 144 $ 743 $ 915 $ 137,459 Commercial real estate 173,989 160 — 40 3,399 3,599 177,588 Residential real estate 151,684 914 108 68 507 1,597 153,281 Construction & land development 23,915 — — — — — 23,915 Consumer 16,561 87 9 1 28 125 16,686 Total Loans $ 502,693 $ 1,189 $ 117 $ 253 $ 4,677 $ 6,236 $ 508,929 December 31, 2016 Commercial $ 133,630 $ 151 $ 62 $ — $ 425 $ 638 $ 134,268 Commercial real estate 158,504 435 — 39 497 971 159,475 Residential real estate 142,926 816 61 196 490 1,563 144,489 Construction & land development 23,428 — — — — — 23,428 Consumer 13,234 21 16 — 37 74 13,308 Total Loans $ 471,722 $ 1,423 $ 139 $ 235 $ 1,449 $ 3,246 $ 474,968 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 $3.1 million as of September 30, 2017, and $6.4 million as of December 31, 2016, with $24 thousand and $711 thousand of specific reserves allocated to those loans, respectively. At September 30, 2017, $2.0 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $1.1 million, all were in nonaccrual of interest status. The Company held no foreclosed real estate as of September 30, 2017, or December 31, 2016. Consumer mortgage loans in the process of foreclosure were $154 thousand at September 30, 2017 and $448 thousand at December 31, 2016. The following table presents loans restructured during the three and nine month periods ended September 30, 2017 and 2016. (Dollars in thousands) Number of Pre- Post- For the three months ended September 30, 2017 Residential Real Estate 1 $ 38 $ 38 Total Restructured Loans 1 $ 38 $ 38 For the nine months ended September 30, 2017 Commercial Real Estate 4 $ 288 $ 288 Residential Real Estate 2 52 52 Total Restructured Loans 6 $ 340 $ 340 For the three months ended September 30, 2016 Residential Real Estate — $ — $ — Total Restructured Loans — $ — $ — For the nine months ended September 30, 2016 Residential Real Estate 3 $ 327 $ 327 Total Restructured Loans 3 $ 327 $ 327 The restructured loans were modified by changing the monthly payment to interest only. No principal reductions were made. There was one commercial loan in the amount of $3.3 million that was restructured in the fourth quarter of 2016 that has defaulted in 2017. None of the loans that were restructured in 2015 have subsequently defaulted in the nine month period ended September 30, 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 September 30, 2017 and December 31, 2016: (Dollars in thousands) Pass Special Substandard Doubtful Not Rated Total September 30, 2017 Commercial $ 115,301 $ 16,167 $ 5,130 $ — $ 861 $ 137,459 Commercial real estate 160,677 9,933 6,744 — 234 177,588 Residential real estate 208 — 183 — 152,890 153,281 Construction & land development 18,171 1,410 — — 4,334 23,915 Consumer — — — — 16,686 16,686 Total $ 294,357 $ 27,510 $ 12,057 $ — $ 175,005 $ 508,929 December 31, 2016 Commercial $ 116,739 $ 6,874 $ 9,704 $ — $ 951 $ 134,268 Commercial real estate 149,630 4,168 4,766 — 911 159,475 Residential real estate 216 — 175 — 144,098 144,489 Construction & land development 17,183 981 504 — 4,760 23,428 Consumer — — — — 13,308 13,308 Total $ 283,768 $ 12,023 $ 15,149 $ — $ 164,028 $ 474,968 The following table presents loans that are not rated by class of loans as of September 30, 2017 and December 31, 2016. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status. (Dollars in thousands) Performing Non-Performing Total September 30, 2017 Commercial $ 861 $ — $ 861 Commercial real estate 234 — 234 Residential real estate 152,315 575 152,890 Construction & land development 4,334 — 4,334 Consumer 16,657 29 16,686 Total $ 174,401 $ 604 $ 175,005 December 31, 2016 Commercial $ 951 $ — $ 951 Commercial real estate 911 — 911 Residential real estate 143,440 658 144,098 Construction & land development 4,760 — 4,760 Consumer 13,271 37 13,308 Total $ 163,333 $ 695 $ 164,028 |