Loans | Note 3 – Loans Loans consist of the following: (Dollars in thousands) September 30, 2019 December 31, 2018 Commercial $ 140,835 $ 146,875 Commercial real estate 212,677 183,605 Residential real estate 176,984 167,296 Construction & land development 14,946 31,227 Consumer 20,250 19,402 Total loans before deferred costs 565,692 548,405 Deferred loan costs 521 569 Total Loans $ 566,213 $ 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 and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. 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 occupied loans. With respect to loans to developers and builders that are secured by non-owner occupied properties, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction and land development loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. 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 permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing. 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 $97.5 million and $92.3 million at September 30, 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 September 30, 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 and nine months ended September 30, 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 increase in the provision for loan losses for the three and nine months ended September 30, 2019 related to commercial and commercial real estate loans was primarily due to the increase in special mention rated loans along with loan volume increases of commercial real estate loans. The decrease in the provision related to residential real estate loans was primarily due to declining historical losses. The decrease in the provision related to construction loans was related to volume changes as loans transferred to permanent financing. The increase in the provision for consumer loans was primarily due to increasing charge-offs partially offset by lower delinquencies. The increase in the provision for loan losses for the three months ended September 30, 2018 related to commercial loans was primarily due to the increase in specific reserves for one loan relationship. The increase in the provision related to commercial real estate loans was primarily due to the increase in substandard loans in this category. The increase in the provision for loan losses for the nine months ended September 30, 2018 related to commercial loans was primarily due to the increase in specific reserves for impaired loans, an increase in substandard loans and charge-offs of loans in this category. The increase in the provision related to consumer loans is primarily due to the increased loan volume and charge-offs of loans in this category. S ummary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Real Estate Residential Real Estate Construction & Land Development Consumer Unallocated Total Three months ended September 30, 2019 Beginning balance $ 2,267 $ 1,946 $ 1,229 $ 104 $ 341 $ 650 $ 6,537 Provision for loan losses 91 91 (74 ) 12 26 139 285 Charge-offs (20 ) — — — (55 ) (75 ) Recoveries 5 1 2 — 21 29 Net charge-offs (15 ) 1 2 — (34 ) (46 ) Ending balance $ 2,343 $ 2,038 $ 1,157 $ 116 $ 333 $ 789 $ 6,776 Nine months ended September 30, 2019 Beginning balance $ 2,178 $ 1,791 $ 1,245 $ 258 $ 306 $ 129 $ 5,907 Provision for loan losses 29 246 (93 ) (142 ) 155 660 855 Charge-offs (36 ) — — — (163 ) (199 ) Recoveries 172 1 5 — 35 213 Net recoveries 136 1 5 — (128 ) 14 Ending balance $ 2,343 $ 2,038 $ 1,157 $ 116 $ 333 $ 789 $ 6,776 Three months ended September 30, 2018 Beginning balance $ 1,849 $ 1,612 $ 1,236 $ 279 $ 259 $ 683 $ 5,918 Provision for loan losses 138 74 39 8 (13 ) 78 324 Charge-offs (12 ) (22 ) — — (9 ) (43 ) Recoveries 5 — — — — 5 Net charge-offs (7 ) (22 ) — — (9 ) (38 ) Ending balance $ 1,980 $ 1,664 $ 1,275 $ 287 $ 237 $ 761 $ 6,204 Nine months ended September 30, 2018 Beginning balance $ 1,813 $ 1,735 $ 1,273 $ 237 $ 175 $ 371 $ 5,604 Provision for loan losses 364 13 38 50 117 390 972 Charge-offs (215 ) (84 ) (37 ) — (55 ) (391 ) Recoveries 18 — 1 — — 19 Net charge-offs (197 ) (84 ) (36 ) — (55 ) (372 ) Ending balance $ 1,980 $ 1,664 $ 1,275 $ 287 $ 237 $ 761 $ 6,204 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 September 30, 2019 and December 31, 2018: (Dollars in thousands) Commercial Commercial Real Estate Residential Real Estate Construction Consumer Unallocated Total September 30, 2019 Allowance for loan losses: Individually evaluated for impairment $ 18 $ 17 $ 1 $ — $ — $ — $ 36 Collectively evaluated for impairment 2,325 2,021 1,156 116 333 789 6,740 Total ending allowance balance $ 2,343 $ 2,038 $ 1,157 $ 116 $ 333 $ 789 $ 6,776 Loans: Loans individually evaluated for impairment $ 2,441 $ 2,694 $ 865 $ — $ 14 $ 6,014 Loans collectively evaluated for impairment 138,394 209,983 176,119 14,946 20,236 559,678 Total ending loans balance $ 140,835 $ 212,677 $ 176,984 $ 14,946 $ 20,250 $ 565,692 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 September 30, 2019 and December 31, 2018: (Dollars in thousands) Unpaid Principal Balance Investment with no Allowance Investment with Allowance Total recorded investment 1 Related Allowance September 30, 2019 Commercial $ 2,856 $ 2,424 $ 18 $ 2,442 $ 18 Commercial real estate 2,981 2,519 184 2,703 17 Residential real estate 1,033 474 391 865 1 Consumer 14 14 — 14 — Total impaired loans $ 6,884 $ 5,431 $ 593 $ 6,024 $ 36 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 1 includes principal, accrued interest, unearned fees, and origination costs The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated. Three months ended September 30, Nine months ended September 30, (Dollars in thousands) 2019 2018 2019 2018 Average recorded investment: Commercial $ 3,035 $ 1,648 $ 1,837 $ 1,544 Commercial real estate 2,767 3,236 2,413 3,474 Residential real estate 1,538 1,451 1,172 1,425 Consumer 15 — 11 — Average recorded investment in impaired loans $ 7,355 $ 6,335 $ 5,433 $ 6,443 Interest income recognized: Commercial $ 12 $ 10 $ 49 $ 31 Commercial real estate 3 4 9 12 Residential real estate 20 14 43 43 Consumer 1 — 1 — Interest income recognized on a cash basis on impaired loans $ 36 $ 28 $ 102 $ 86 The following table presents the aging of past due loans and nonaccrual loans as of September 30, 2019 and December 31, 2018 by class of loans: (Dollars in thousands) Current 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days + Past Due Non- Accrual Total Past Due and Non- Accrual Total Loans September 30, 2019 Commercial $ 139,361 $ 52 $ 10 $ 69 $ 1,343 $ 1,474 $ 140,835 Commercial real estate 210,171 52 — — 2,454 2,506 212,677 Residential real estate 175,768 456 223 — 537 1,216 176,984 Construction & land development 14,946 — — — — — 14,946 Consumer 20,031 193 10 — 16 219 20,250 Total Loans $ 560,277 $ 753 $ 243 $ 69 $ 4,350 $ 5,415 $ 565,692 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 $2.4 million as of September 30, 2019, and $1.5 million as of December 31, 2018, with $18 thousand, and $17 thousand of specific reserves allocated to those loans at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, $2.1 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $259 thousand, all were in nonaccrual of interest status. Other real estate owned amounted to one property at $99 thousand at September 30, 2019 and December 31, 2018, respectively. There were no consumer mortgage loans in the process of foreclosure at September 30, 2019 and $57 thousand at December 31, 2018. There were no other repossessed assets at September 30, 2019 and December 31, 2018. (Dollars in thousands) Number of loans restructured Pre- Modification Recorded Investment Post- Modification Recorded Investment For the Nine months ended September 30, 2019 Commercial 1 $ 17 $ 17 Total Restructured Loans 1 $ 17 $ 17 For the three months ended September 30, 2018 Commercial 2 $ 27 $ 27 Total Restructured Loans 2 $ 27 $ 27 For the Nine months ended September 30, 2018 Commercial Real Estate 1 $ 200 $ 200 Residential real estate 2 27 27 Total Restructured Loans 3 $ 227 $ 227 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 September 30, 2019. 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 . Loans classified as pass (Acceptable, Low Acceptable or Pass Watch) may exhibit a wide array of characteristics but at a minimum represent an acceptable risk to the Bank. Borrowers in this rating may have leveraged but acceptable balance sheet positions, satisfactory asset quality, stable to favorable sales and earnings trends, acceptable liquidity and adequate cash flow. Loans are considered fully collectible and require an average amount of administration. While generally adhering to credit policy, these loans may exhibit occasional exceptions that do not result in undue risk to the Bank. Borrowers are generally capable of absorbing setbacks, financial and otherwise, without the threat of failure. Special Mention . Loans classified as special mention have material weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan at some future date. Substandard . Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful . Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. 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, 2019 and December 31, 2018: (Dollars in thousands) Pass Special Mention Substandard Doubtful Not Rated Total September 30, 2019 Commercial $ 109,455 $ 17,264 $ 13,158 $ — $ 958 $ 140,835 Commercial real estate 188,712 11,581 11,338 — 1,046 212,677 Residential real estate 185 — 69 — 176,730 176,984 Construction & land development 11,304 — 110 — 3,532 14,946 Consumer — — 59 — 20,191 20,250 Total $ 309,656 $ 28,845 $ 24,734 $ — $ 202,457 $ 565,692 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 September 30, 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 September 30, 2019 Commercial $ 958 $ — $ 958 Commercial real estate 1,046 — 1,046 Residential real estate 176,193 537 176,730 Construction & land development 3,532 — 3,532 Consumer 20,191 — 20,191 Total $ 201,920 $ 537 $ 202,457 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 |