Loans | NOTE 3 – LOANS Loans consisted of the following at December 31: (Dollars in thousands) 2018 2017 Commercial $ 146,875 $ 140,273 Commercial real estate 183,605 179,663 Residential real estate 167,296 157,172 Construction & land development 31,227 22,886 Consumer 19,402 16,306 Total loans before deferred costs 548,405 516,300 Deferred loan costs 569 530 Total loans $ 548,974 $ 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 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 2018 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, 2018, 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. During 2018, the increase in the provision for loan losses related to commercial loans was predominantly due to the $5.9 million increase of loans classified as substandard, as well as charge-offs, and loan volume increases. The increase in the provision related to consumer loans was due to an increase in charge-offs and delinquencies. The increase related to commercial real estate loans was primarily related to the $5 million increase of loans classified as substandard. 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. Summary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Residential Construction Consumer Unallocated Total December 31, 2018 Beginning balance $ 1,813 $ 1,735 $ 1,273 $ 237 $ 175 $ 371 $ 5,604 Provision for loan losses 1,127 158 6 21 246 (242 ) 1,316 Charge-offs (823 ) (103 ) (37 ) – (119 ) (1,082 ) Recoveries 61 1 3 – 4 69 Net charge-offs (762 ) (102 ) (34 ) – (115 ) (1,013 ) Ending balance $ 2,178 $ 1,791 $ 1,245 $ 258 $ 306 $ 129 $ 5,907 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 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 Consumer Unallocated Total 2018 Allowance for loan losses: Ending allowance balances attributable to loans: Individually evaluated for impairment $ 36 $ 64 $ 1 $ – $ – $ – $ 101 Collectively evaluated for impairment 2,142 1,727 1,244 258 306 129 5,806 Total ending allowance balance $ 2,178 $ 1,791 $ 1,245 $ 258 $ 306 $ 129 $ 5,907 Loans: Loans individually evaluated for impairment $ 419 $ 2,403 $ 1,030 $ – $ – $ 3,852 Loans collectively evaluated for impairment 146,456 181,202 166,266 31,227 19,402 544,553 Total ending loans balance $ 146,875 $ 183,605 $ 167,296 $ 31,227 $ 19,402 $ 548,405 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 The following table presents loans individually evaluated for impairment by class of loans as of December 31: (Dollars in thousands) Unpaid Recorded Recorded Total Investment 1 Related Average Investment Interest 2018 Commercial $ 815 $ 383 $ 36 $ 419 $ 36 $ 1,511 $ 37 Commercial real estate 2,616 1,976 433 2,409 64 3,531 19 Residential real estate 1,190 763 269 1,032 1 1,327 57 Construction & land development – – – – – – – Total impaired loans $ 4,621 $ 3,122 $ 738 $ 3,860 $ 101 $ 6,369 $ 113 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 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 60-89 Days 90 Days + Nonaccrual Total Past Total 2018 Commercial $ 146,431 $ 253 $ 34 $ – $ 157 $ 444 $ 146,875 Commercial real estate 181,388 86 – – 2,131 2,217 183,605 Residential real estate 165,837 265 213 174 807 1,459 167,296 Construction & land development 31,169 58 – – – 58 31,227 Consumer 18,965 291 86 – 60 437 19,402 Total loans $ 543,790 $ 953 $ 333 $ 174 $ 3,155 $ 4,615 $ 548,405 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 The Company had troubled debt restructurings (“TDRs”) of $1.5 million as of December 31, 2018, with $17 thousand of specific reserves allocated to customers whose loan terms have been modified in TDRs. As of December 31, 2017, the Company had TDRs of $2.9 million, with $38 thousand of specific reserves allocated. At December 31, 2018, $1.4 million of the loans classified as TDRs were performing in accordance with their modified terms. The remaining $117 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 Pre-Modification Post-Modification 2018 Commercial 1 $ 200 $ 200 Residential real estate 2 27 27 Total restructured loans 3 $ 227 $ 227 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. None of the loans restructured in 2017 have subsequently defaulted in 2018. There was one commercial loan in the amount of $3.3 million that was restructured in the fourth quarter of 2016 that defaulted in 2017. Real Estate Loans in Foreclosure Other real estate owned amounted to one property at $99 thousand as of December 31, 2018. There was no other real estate owned at December 31, 2017. Mortgage loans in the process of foreclosure were $57 thousand at December 31, 2018, and $114 thousand at December 31, 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 was as follows at December 31: (Dollars in thousands) Pass Special Substandard Doubtful Not Total 2018 Commercial $ 125,840 $ 5,383 $ 14,775 $ – $ 877 $ 146,875 Commercial real estate 163,261 5,582 13,578 – 1,184 183,605 Residential real estate 194 – 637 – 166,465 167,296 Construction & land development 27,540 – – – 3,687 31,227 Consumer – – 60 – 19,342 19,402 Total $ 316,835 $ 10,965 $ 29,050 $ – $ 191,555 $ 548,405 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 Nonperforming loans include loans past due 90 days and greater and loans on nonaccrual of interest status that have not been risk rated. The following table presents loans that are not rated, by class of loans as of December 31: (Dollars in thousands) Performing Nonperforming Total 2018 Commercial $ 877 $ – $ 877 Commercial real estate 1,184 – 1,184 Residential real estate 166,122 343 166,465 Construction & land development 3,687 – 3,687 Consumer 19,342 – 19,342 Total $ 191,212 $ 343 $ 191,555 2017 Commercial $ 914 $ – $ 914 Commercial real estate 811 – 811 Residential real estate 155,608 419 156,497 Construction & land development 3,513 – 3,513 Consumer 16,249 – 16,249 Total $ 177,095 $ 419 $ 177,984 Mortgage Servicing Rights For the years ended December 31, 2018 and 2017, the Company had outstanding MSRs of $281 thousand and $270 thousand, respectively. No valuation allowance was recorded at December 31, 2018 or 2017, as the fair value of the MSRs exceeded their carrying value. On December 31, 2018, the Company had $66.8 million residential mortgage loans with servicing retained as compared to $64.7 million with servicing retained at December 31, 2017. Total loans serviced for others approximated $92.3 million and $82.7 million at December 31, 2018 and 2017, respectively. |