Loans | NOTE 3 – LOANS Loans consist of the following: (Dollars in thousands) June 30, 2018 December 31, 2017 Commercial $ 142,019 $ 140,273 Commercial real estate 182,034 179,663 Residential real estate 162,184 157,172 Construction & land development 30,706 22,886 Consumer 17,918 16,306 Total loans before deferred costs 534,861 516,300 Deferred loan costs 566 530 Total Loans $ 535,427 $ 516,830 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 $85.4 million and $82.7 million at June 30, 2018 and December 31, 2017, respectively. 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 commercial real estate loans. As of June 30, 2018 and December 31, 2017, 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 six months ended June 30, 2018 and 2017. 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 six months ended June 30, 2018 related to commercial loans was primarily due to the increase in substandard loans in this category. The decrease in the provision related to commercial real estate loans is due to the decrease of loan delinquencies in this category. The increase in the provision related to consumer loans is primarily due to the increase loan volume and charge-offs of loans in this category. The increase in the provision for loan losses for the three months ended June 30, 2017 related to commercial loans was primarily due to the increase in the specific allocation related to two commercial relationships. The decrease in the provision related to residential real estate is due to the improvement in the historical losses of loans in this category. The increase in the provision for loan losses related to commercial real estate was due to the increase in the specific allocation for one relationship, the increase in nonaccrual loans in this category and the increase of special mention loan balances. The decrease in the provision for loan losses for the six months ended June 30, 2017 related to commercial loans was primarily due to the recovery of prior loan charge-offs from one relationship. Summary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Residential Real Estate Construction & Land Consumer Unallocated Total Three months ended June 30, 2018 Beginning balance $ 1,884 $ 1,699 $ 1,196 $ 244 $ 188 $ 422 $ 5,633 Provision for loan losses (31 ) (87 ) 39 35 107 261 324 Charge-offs (9 ) 0 0 0 (36 ) (45 ) Recoveries 5 0 1 0 0 6 Net charge-offs (4 ) 0 1 0 (36 ) (39 ) Ending balance $ 1,849 $ 1,612 $ 1,236 $ 279 $ 259 $ 683 $ 5,918 Six months ended June 30, 2018 Beginning balance $ 1,813 $ 1,735 $ 1,273 $ 237 $ 175 $ 371 $ 5,604 Provision for loan losses 226 (61 ) (1 ) 42 130 312 648 Charge-offs (203 ) (62 ) (37 ) 0 (46 ) (348 ) Recoveries 13 0 1 0 0 14 Net charge-offs (190 ) (62 ) (36 ) 0 (46 ) (334 ) Ending balance $ 1,849 $ 1,612 $ 1,236 $ 279 $ 259 $ 683 $ 5,918 Three months ended June 30, 2017 Beginning balance $ 1,704 $ 1,538 $ 1,303 $ 184 $ 165 $ 560 $ 5,454 Provision for loan losses 675 180 (47 ) 38 18 (19 ) 845 Charge-offs (32 ) — — — (2 ) (34 ) Recoveries 15 — 8 — 1 24 Net charge-offs (17 ) — 8 — (1 ) (10 ) Ending balance $ 2,362 $ 1,718 $ 1,264 $ 222 $ 182 $ 541 $ 6,289 Six months ended June 30, 2017 Beginning balance $ 2,207 $ 1,264 $ 1,189 $ 178 $ 141 $ 312 $ 5,291 Provision for loan losses (156 ) 454 67 44 47 229 685 Charge-offs (40 ) — — — (7 ) — (47 ) Recoveries 351 — 8 — 1 — 360 Net charge-offs 311 — 8 — (6 ) — 313 Ending balance $ 2,362 $ 1,718 $ 1,264 $ 222 $ 182 $ 541 $ 6,289 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 June 30, 2018 and December 31, 2017: (Dollars in thousands) Commercial Commercial Residential Construction Consumer Unallocated Total June 30, 2018 Allowance for loan losses: Individually evaluated for impairment $ 4 $ 46 $ 16 $ — $ — $ — $ 66 Collectively evaluated for impairment 1,845 1,566 1,220 279 259 683 5,852 Total ending allowance balance $ 1,849 $ 1,612 $ 1,236 $ 279 $ 259 $ 683 $ 5,918 Loans: Loans individually evaluated for impairment $ 1,096 $ 3,458 $ 1,374 $ — $ — $ 5,928 Loans collectively evaluated for impairment 140,923 178,576 160,810 30,706 17,918 528,933 Total ending loans balance $ 142,019 $ 182,034 $ 162,184 $ 30,706 $ 17,918 $ 534,861 December 31, 2017 Allowance for loan losses: 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 The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2018 and December 31, 2017: (Dollars in thousands) Unpaid Recorded Recorded Total Related June 30, 2018 Commercial $ 2,722 $ 1,093 $ 4 $ 1,097 $ 4 Commercial real estate 3,656 3,145 319 3,464 46 Residential real estate 1,525 1,019 359 1,378 16 Total impaired loans $ 7,903 $ 5,257 $ 682 $ 5,939 $ 66 December 31, 2017 Commercial $ 3,352 $ 1,329 $ 399 $ 1,728 $ 74 Commercial real estate 4,826 3,117 1,566 4,683 151 Residential real estate 1,654 1,119 352 1,471 19 Total impaired loans $ 9,832 $ 5,565 $ 2,317 $ 7,882 $ 244 The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated. Three months Six months ended June 30, ended June 30, (Dollars in thousands) 2018 2017 2018 2017 Average recorded investment: Commercial $ 1,190 $ 2,794 $ 1,491 $ 3,505 Commercial real estate 2,700 3,600 3,595 2,019 Residential real estate 1,131 1,540 1,287 1,514 Average recorded investment in impaired loans $ 5,021 $ 7,934 $ 6,373 $ 7,038 Interest income recognized: Commercial $ 10 $ 17 $ 21 $ 31 Commercial real estate 4 2 8 2 Residential real estate 12 15 26 30 Interest income recognized on a cash basis on impaired loans $ 26 $ 34 $ 55 $ 63 The following table presents the aging of past due loans and nonaccrual loans as of June 30, 2018 and December 31, 2017 by class of loans: (Dollars in thousands) Current 30 - 59 60 - 89 90 Days + Non-Accrual Total Past Non-Accrual Total June 30, 2018 Commercial $ 141,180 $ 43 $ 75 $ — $ 721 $ 839 $ 142,019 Commercial real estate 178,927 55 — — 3,052 3,107 182,034 Residential real estate 160,667 585 326 82 524 1,517 162,184 Construction & land development 30,706 — — — — — 30,706 Consumer 17,706 111 81 — 20 212 17,918 Total Loans $ 529,186 $ 794 $ 482 $ 82 $ 4,317 $ 5,675 $ 534,861 December 31, 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 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 $2.8 million as of June 30, 2018, and $2.9 million as of December 31, 2017, with $38 thousand of specific reserves allocated to those loans for both periods. At June 30, 2018, $1.9 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $833 thousand, all were in nonaccrual of interest status. The Company held no other real estate at June 30, 2018 or December 31, 2017. Consumer mortgage loans in the process of foreclosure were $35 thousand at June 30, 2018 and $114 thousand at December 31, 2017. (Dollars in thousands) Number of Pre-Modification Post-Modification For the three months ended June 30, 2018 Commercial 1 $ 200 $ 200 Total Restructured Loans 1 $ 200 $ 200 For the six months ended June 30, 2018 Commercial 1 $ 200 $ 200 Total Restructured Loans 1 $ 200 $ 200 For the three months ended June 30, 2017 Commercial Real Estate 4 $ 288 $ 288 Residential Real Estate 1 14 14 Total Restructured Loans 5 $ 302 $ 302 For the six months ended June 30, 2017 Commercial Real Estate 4 $ 288 $ 288 Residential Real Estate 1 14 14 Total Restructured Loans 5 $ 302 $ 302 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 defaulted in the second quarter of 2017. 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 June 30, 2018 and December 31, 2017: (Dollars in thousands) Pass Special Substandard Doubtful Not Rated Total June 30, 2018 Commercial $ 119,590 $ 4,850 $ 16,564 $ — $ 1,015 $ 142,019 Commercial real estate 164,149 8,834 7,858 — 1,193 182,034 Residential real estate 200 — 266 — 161,718 162,184 Construction & land development 26,614 — — — 4,092 30,706 Consumer — — 21 — 17,897 17,918 Total $ 310,553 $ 13,684 $ 24,709 $ — $ 185,915 $ 534,861 December 31, 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 The following table presents loans that are not rated by class of loans as of June 30, 2018 and December 31, 2017. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status. (Dollars in thousands) Performing Non-Performing Total June 30, 2018 Commercial $ 1,015 $ — $ 1,015 Commercial real estate 1,193 — 1,193 Residential real estate 161,112 606 161,718 Construction & land development 4,092 — 4,092 Consumer 17,877 20 17,897 Total $ 185,289 $ 626 $ 185,915 December 31, 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 |