Loans | NOTE 3 – LOANS Loans consisted of the following at December 31: (Dollars in thousands) 2017 2016 Commercial $ 140,273 $ 134,268 Commercial real estate 179,663 159,475 Residential real estate 157,172 144,489 Construction & land development 22,886 23,428 Consumer 16,306 13,308 Total loans before deferred costs 516,300 474,968 Deferred loan costs 530 481 Total loans $ 516,830 $ 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 the Board of Directors 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 their 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. With respect to loans to developers and builders that are secured by non-owner pre-committed on-site The Company originates consumer loans utilizing a judgmental underwriting process. Policies and procedures are developed and modified, as needed, by management to monitor and manage consumer loan risk. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. The Company engages an independent loan review vendor 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 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. See concentration of credit discussion included in the 2017 Financial Review. Allowance for Loan Losses The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2017, 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. During 2017, the increase in the provision for loan losses related to commercial loans was primarily due to the net charge-offs of loans in this category. The increase related to commercial real estate loans was due to the increase of nonperforming loans in this category, as well as the increase in the specific allocation to one commercial real estate loan. The increase in the provision amounts allocated to the remaining loan categories, primarily relate to loan growth. During 2016, the largest increase in the provision for loan losses occurred in the commercial loan category. The increase was primarily due to the specific allocation related to one loan relationship along with charge-offs of loans in this category. The increase in the provision amounts allocated to the remaining loan categories, primarily relate to loan growth. The decrease in the provision amount allocated to the commercial real estate category is primarily due to the recovery of prior loan charge-offs. 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. Summary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Residential Real Estate Construction & Land Consumer Unallocated Total December 31, 2017 Beginning balance $ 2,207 $ 1,264 $ 1,189 $ 178 $ 141 $ 312 $ 5,291 Provision for loan losses 429 471 76 59 51 59 1,145 Charge-offs (1,184) – – – (20) (1,204) Recoveries 361 – 8 – 3 372 Net charge-offs (823) – 8 – (17) (832) Ending balance $ 1,813 $ 1,735 $ 1,273 $ 237 $ 175 $ 371 $ 5,604 December 31, 2016 Beginning balance $ 1,664 $ 1,271 $ 1,086 $ 123 $ 86 $ 432 $ 4,662 Provision for loan losses 626 (291) 110 55 113 (120) 493 Charge-offs (297) (50) (12) – (59) (418) Recoveries 214 334 5 – 1 554 Net charge-offs (83) 284 (7) – (58) 136 Ending balance $ 2,207 $ 1,264 $ 1,189 $ 178 $ 141 $ 312 $ 5,291 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 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 Residential Construction & Land Consumer Unallocated Total 2017 Allowance for loan losses: Ending allowance balances attributable to loans: Individually evaluated for impairment $ 74 $ 151 $ 19 $ – $ – $ – $ 244 Collectively evaluated for impairment 1,739 1,584 1,254 237 175 371 5,360 Total ending allowance balance $ 1,813 $ 1,735 $ 1,273 $ 237 $ 175 $ 371 $ 5,604 Loans: Loans individually evaluated for impairment $ 1,726 $ 4,686 $ 1,470 $ – $ – $ 7,882 Loans collectively evaluated for impairment 138,547 174,977 155,702 22,886 16,306 508,418 Total ending loans balance $ 140,273 $ 179,663 $ 157,172 $ 22,886 $ 16,306 $ 516,300 2016 Allowance for loan losses: Ending allowance balances attributable to loans: 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 December 31: (Dollars in thousands) Unpaid Recorded Recorded Total 1 Related Average Interest 2017 Commercial $ 3,352 $ 1,329 $ 399 $ 1,728 $ 74 $ 2,884 $ 52 Commercial real estate 4,826 3,117 1,566 4,683 151 3,213 14 Residential real estate 1,654 1,119 352 1,471 19 1,476 57 Construction & land development – – – – – – – Total impaired loans $ 9,832 $ 5,565 $ 2,317 $ 7,882 $ 244 $ 7,573 $ 123 2016 Commercial $ 5,476 $ 1,690 $ 3,354 $ 5,044 $ 705 $ 6,609 $ 241 Commercial real estate 796 600 21 621 – 786 10 Residential real estate 1,681 1,036 472 1,508 24 1,507 61 Construction & land development – – – – – – – Total impaired loans $ 7,953 $ 3,326 $ 3,847 $ 7,173 $ 729 $ 8,902 $ 312 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 1 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 Past Due 60-89 Days Past Due 90 Days + Past Due Nonaccrual Total Past Due and Nonaccrual Total Loans 2017 Commercial $ 138,908 $ 148 $ 65 $ – $ 1,152 $ 1,365 $ 140,273 Commercial real estate 175,062 177 – 40 4,384 4,601 179,663 Residential real estate 155,488 757 38 401 488 1,684 157,172 Construction & land development 22,886 – – – – – 22,886 Consumer 16,048 193 8 – 57 258 16,306 Total loans $ 508,392 $ 1,275 $ 111 $ 441 $ 6,081 $ 7,908 $ 516,300 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 The Company had troubled debt restructurings (“TDRs”) of $2.9 million as of December 31, 2017, with $38 thousand of specific reserves allocated to customers whose loan terms have been modified in TDRs. As of December 31, 2016, the Company had TDRs of $6.4 million, with $711 thousand of specific reserves allocated. At December 31, 2017, $2 million of the loans classified as TDRs were performing in accordance with their modified terms. The remaining $900 thousand were classified as nonaccrual. Loan modifications that are considered TDRs completed during the year ended December 31 were as follows: (Dollars in thousands) Number Of Loans Restructured Pre-Modification Recorded Investment Post-Modification Recorded Investment 2017 Commercial 2 $ 150 $ 150 Commercial real estate 4 288 288 Residential real estate 2 52 52 Total restructured loans 8 $ 490 $ 490 2016 Commercial 4 $ 3,607 $ 3,607 Residential real estate 1 101 101 Total restructured loans 5 $ 3,708 $ 3,708 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 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 restructured in 2015 subsequently defaulted in 2016. Real Estate Loans in Foreclosure The Company held no foreclosed real estate as of December 31, 2017, or December 31, 2016. Mortgage loans in the process of foreclosure were $114 thousand at December 31, 2017, and $448 thousand at December 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 was as follows at December 31: (Dollars in thousands) Pass Special Mention Substandard Doubtful Not Rated Total 2017 Commercial $ 116,833 $ 13,685 $ 8,841 $ – $ 914 $ 140,273 Commercial real estate 162,012 8,220 8,620 – 811 179,663 Residential real estate 205 – 470 – 156,497 157,172 Construction & land development 18,493 880 – – 3,513 22,886 Consumer – – 57 – 16,249 16,306 Total $ 297,543 $ 22,785 $ 17,988 $ – $ 177,984 $ 516,300 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 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 2017 Commercial $ 914 $ – $ 914 Commercial real estate 811 – 811 Residential real estate 155,608 889 156,497 Construction & land development 3,513 – 3,513 Consumer 16,249 57 16,306 Total $ 177,095 $ 946 $ 178,041 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 Mortgage Servicing Rights For the years ended December 31, 2017 and 2016, the Company had outstanding MSRs of $270 thousand and $261 thousand, respectively. No valuation allowance was recorded at December 31, 2017 or 2016, as the fair value of the MSRs exceeded their carrying value. On December 31, 2017, the Company had $64.7 million residential mortgage loans with servicing retained as compared to $61.8 million with servicing retained at December 31, 2016. Total loans serviced for others approximated $82.7 million and $85.9 million at December 31, 2017 and 2016, respectively. |