Loans | NOTE 3 – LOANS Loans consist of the following: (Dollars in thousands) March 31, December 31, Commercial $ 144,793 $ 146,875 Commercial real estate 192,663 183,605 Residential real estate 170,303 167,296 Construction & land development 20,792 31,227 Consumer 19,083 19,402 Total loans before deferred costs 547,634 548,405 Deferred loan costs 586 569 Total Loans $ 548,220 $ 548,974 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, mitigates 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 $94.5 million and $92.3 million at March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018, 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, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. The decrease in the provision for loan losses for the three months ended March 31, 2019 related to commercial loans was primarily due to a recovery related to one loan relationship which contributed to declining historical losses of loans in this category. The decrease in the provision related to construction and land development loans was primarily due to the decrease in loan balances as construction projects were completed and transferred to permanent financing. The increase in the provision for consumer loans was related to increasing charge-offs as well as an increase in historical losses partially offset by lower delinquencies. The increase in the provision for loan losses for the three months ended March 31, 2018 related to commercial loans was primarily due to the increase in substandard loans and the increase in loan volume of loans in this category. The decrease in the provision related to residential real estate loans is due to the decrease of loan delinquencies in this category. Summary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Residential Construction & Consumer Unallocated Total Three months ended March 31, 2019 Beginning balance $ 2,178 $ 1,791 $ 1,245 $ 258 $ 306 $ 129 $ 5,907 Provision for loan losses (339 ) 17 (24 ) (88 ) 83 636 285 Charge-offs (5 ) — — — (65 ) (70 ) Recoveries 163 — 1 — 1 165 Net charge-offs 158 — 1 — (64 ) 95 Ending balance $ 1,997 $ 1,808 $ 1,222 $ 170 $ 325 $ 765 $ 6,287 Three months ended March 31, 2018 Beginning balance $ 1,813 $ 1,735 $ 1,273 $ 237 $ 175 $ 371 $ 5,604 Provision for loan losses 257 26 (40 ) 7 23 51 324 Charge-offs (194 ) (62 ) (37 ) — (10 ) (303 ) Recoveries 8 — — — — 8 Net charge-offs (186 ) (62 ) (37 ) — (10 ) (295 ) Ending balance $ 1,884 $ 1,699 $ 1,196 $ 244 $ 188 $ 422 $ 5,633 The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio class, based on the impairment method as of March 31, 2019 and December 31, 2018: (Dollars in thousands) Commercial Commercial Residential Construction Consumer Unallocated Total March 31, 2019 Allowance for loan losses: Individually evaluated for impairment $ 35 $ 16 $ 1 $ — $ — $ — $ 52 Collectively evaluated for impairment 1,962 1,792 1,221 170 325 765 6,235 Total ending allowance balance $ 1,997 $ 1,808 $ 1,222 $ 170 $ 325 $ 765 $ 6,287 Loans: Loans individually evaluated for impairment $ 1,139 $ 2,186 $ 975 $ — $ 17 $ 4,317 Loans collectively evaluated for impairment 143,654 190,477 169,328 20,792 19,066 543,317 Total ending loans balance $ 144,793 $ 192,663 $ 170,303 $ 20,792 $ 19,083 $ 547,634 December 31, 2018 Allowance for loan losses: 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 The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2019 and December 31, 2018: (Dollars in thousands) Unpaid Recorded Recorded Total Related March 31, 2019 Commercial $ 1,536 $ 1,107 $ 35 $ 1,142 $ 35 Commercial real estate 2,412 1,985 211 2,196 16 Residential real estate 1,136 710 266 976 1 Consumer 17 17 — 17 — Total impaired loans $ 5,101 $ 3,819 $ 512 $ 4,331 $ 52 December 31, 2018 Commercial $ 815 $ 383 $ 36 $ 419 $ 36 Commercial real estate 2,616 1,976 433 2,409 64 Residential real estate 1,190 763 269 1,032 1 Total impaired loans $ 4,621 $ 3,122 $ 738 $ 3,860 $ 101 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) 2019 2018 Average recorded investment: Commercial $ 861 $ 1,792 Commercial real estate 2,289 4,490 Residential real estate 1,018 1,443 Consumer 3 — Average recorded investment in impaired loans $ 4,171 $ 7,725 Interest income recognized: Commercial $ 13 $ 11 Commercial real estate 3 4 Residential real estate 12 14 Consumer — — Interest income recognized on a cash basis on impaired loans $ 28 $ 29 The following table presents the aging of past due loans and nonaccrual loans as of March 31, 2019 and December 31, 2018 by class of loans: (Dollars in thousands) Current 30 - 59 60 - 89 90 Days + Non-Accrual Total Past Due and Non-Accrual Total Loans March 31, 2019 Commercial $ 144,376 $ 80 $ 41 $ — $ 296 $ 417 $ 144,793 Commercial real estate 190,656 85 — — 1,922 2,007 192,663 Residential real estate 169,122 253 — 73 855 1,181 170,303 Construction & land development 20,792 — — — — — 20,792 Consumer 18,833 190 18 — 42 250 19,083 Total Loans $ 543,779 $ 608 $ 59 $ 73 $ 3,115 $ 3,855 $ 547,634 December 31, 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 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 $2.2 million as of March 31, 2019, and $1.5 million as of December 31, 2018, with $17 thousand of specific reserves allocated to those loans at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019, $1.9 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $271 thousand, all were in nonaccrual of interest status. Other real estate owned amounted to one property at $99 thousand at March 31, 2019 and December 31, 2018, respectively. Consumer mortgage loans in the process of foreclosure were $56 thousand at March 31, 2019 and $57 thousand at December 31, 2018. Other repossessed assets were $15 thousand at March 31, 2019. There were no other repossessed assets at December 31, 2018. (Dollars in thousands) Number of Pre- Modification Post- For the three months ended March 31, 2019 Consumer 1 $ 17 $ 17 Total Restructured Loans 1 $ 17 $ 17 The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. There were no new TDR’s for the three month period ended March 31, 2018. There was one loan in the amount of $200 thousand restructured in 2018 that has subsequently defaulted in the first quarter of 2019. None of the loans restructured in 2017 defaulted in 2018. 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, 2019 and December 31, 2018: (Dollars in thousands) Pass Special Substandard Doubtful Not Rated Total March 31, 2019 Commercial $ 121,489 $ 4,730 $ 17,617 $ — $ 957 $ 144,793 Commercial real estate 172,041 5,272 14,027 — 1,323 192,663 Residential real estate 191 — 401 — 169,711 170,303 Construction & land development 17,852 — 121 — 2,819 20,792 Consumer — — 42 — 19,041 19,083 Total $ 311,573 $ 10,002 $ 32,208 $ — $ 193,851 $ 547,634 December 31, 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 The following table presents loans that are not rated by class of loans as of March 31, 2019 and December 31, 2019. 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, 2019 Commercial $ 957 $ — $ 957 Commercial real estate 1,323 — 1,323 Residential real estate 169,185 526 169,711 Construction & land development 2,819 — 2,819 Consumer 19,041 — 19,041 Total $ 193,325 $ 526 $ 193,851 December 31, 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 |