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Note 4 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2020

4.) Loans and Allowance for Loan Losses:

The Company, through the Bank, grants residential, consumer and commercial loans to customers located primarily in Northeastern Ohio and Western Pennsylvania.

The following represents the composition of the loan portfolio for the period ending:

	(Amounts in thousands)
	September 30, 2020				December 31, 2019
	Balance			%	Balance			%
Commercial	$	123,403	23.1		$	99,864	19.3
Commercial real estate		303,404	56.8			302,084	58.2
Residential real estate		79,808	14.9			87,172	16.8
Consumer - home equity		23,749	4.5			25,856	5.0
Consumer - other		3,782	0.7			3,740	0.7
Total loans	$	534,146	*100.0*		$	518,716	100.0

During 2020 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the U.S. SBA. The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of September 30, 2020, the Company had outstanding principal balances of $56.4 million. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the Commercial loan category.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $2.2 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented loans in the portfolio by product type. Loans are segmented into the following pools: commercial loans, commercial real estate loans, residential real estate loans and consumer loans. The pools of commercial real estate loans and commercial loans are also broken down further by industry sectors when analyzing the related pools. Using the largest concentrations as the qualifier, these industry sectors include non-residential buildings; skilled nursing and nursing care; residential real estate lessors, agents and managers; hotel and motels, and trucking. The Company also sub-segments the consumer loan portfolio into the following two classes: home equity loans and other consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over multiple periods for all portfolio segments. Management evaluates these results and utilizes the most reflective period in the calculation. Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor.

These factors include, but are not limited to, the following:

Factor Considered:		Risk Trend:
Levels of and trends in charge-offs, classifications and non-accruals		Stable
Trends in volume and terms		Stable
Changes in lending policies and procedures		Stable
Experience, depth and ability of management, including loan review function		Stable
Economic trends, including valuation of underlying collateral		Increasing
Concentrations of credit		Increasing
Effect of COVID-19 pandemic		Increasing

The following factors are analyzed and applied to loans internally graded with higher credit risk in addition to the above factors for non-classified loans:

Factor Considered:		Risk Trend:
Levels and trends in classification		Stable
Declining trends in financial performance		Increasing
Structure and lack of performance measures		Stable
Migration between risk categories		Stable

The provision charged to operations can be allocated to a loan classification either as a positive or negative value as a result of any material changes to: net charge-offs or recovery which influence the historical allocation percentage, qualitative risk factors or loan balances.

The following is an analysis of changes in the allowance for loan losses for the periods ended:

Three Months Ended

	(Amounts in thousands)
				Commercial		Residential			Consumer -			Consumer -
September 30, 2020	Commercial			real estate		real estate			home equity			other			Total
Balance at beginning of period	$	1,832		$	3,045	$	401		$	101		$	141		$	5,520
Loan charge-offs		(1	)		—		—			—			(59	)		(60	)
Recoveries		8			—		—			—			52			60
Net loan recoveries (charge-offs)		7			—		—			—			(7	)		—
Provision charged to operations		10			548		(21	)		(1	)		(11	)		525
Balance at end of period	$	1,849		$	3,593	$	380		$	100		$	123		$	6,045

	(Amounts in thousands)
			Commercial		Residential			Consumer -		Consumer -
September 30, 2019	Commercial		real estate		real estate			home equity		other			Total
Balance at beginning of period	$	1,717	$	2,165	$	368		$	98	$	137		$	4,485
Loan charge-offs		—		—		—			—		(37	)		(37	)
Recoveries		—		—		—			1		12			13
Net loan recoveries (charge-offs)		—		—		—			1		(25	)		(24	)
Provision charged to operations		84		94		(23	)		2		23			180
Balance at end of period	$	1,801	$	2,259	$	345		$	101	$	135		$	4,641

Nine Months Ended

	(Amounts in thousands)
				Commercial		Residential		Consumer -			Consumer -
September 30, 2020	Commercial			real estate		real estate		home equity			other			Total
Balance at beginning of period	$	1,756		$	2,130	$	334	$	104		$	141		$	4,465
Loan charge-offs		(2	)		—		—		—			(154	)		(156	)
Recoveries		8			19		25		1			108			161
Net loan recoveries (charge-offs)		6			19		25		1			(46	)		5
Provision charged to operations		87			1,444		21		(5	)		28			1,575
Balance at end of period	$	1,849		$	3,593	$	380	$	100		$	123		$	6,045

	(Amounts in thousands)
			Commercial			Residential			Consumer -			Consumer -
September 30, 2019	Commercial		real estate			real estate			home equity			other			Total
Balance at beginning of period	$	1,232	$	2,414		$	314		$	115		$	123		$	4,198
Loan charge-offs		—		—			(29	)		—			(146	)		(175	)
Recoveries		28		—			—			2			53			83
Net loan recoveries (charge-offs)		28		—			(29	)		2			(93	)		(92	)
Provision charged to operations		541		(155	)		60			(16	)		105			535
Balance at end of period	$	1,801	$	2,259		$	345		$	101		$	135		$	4,641

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the consolidated balance sheet date.

The following tables present a full breakdown by portfolio classification of the allowance for loan losses and the recorded investment in loans at September 30, 2020 and December 31, 2019:

(Amounts in thousands)

Commercial

Residential

Consumer -

September 30, 2020

Commercial

real estate

home equity

other

Total

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment

579

—

579

Collectively evaluated for impairment

1,270

3,593

380

100

123

5,466

Total ending allowance balance

1,849

3,593

380

100

123

6,045

Loan Portfolio:

Individually evaluated for impairment

4,645

2,473

—

7,118

Collectively evaluated for impairment

118,758

300,931

79,808

23,749

3,782

527,028

Total ending loans balance

123,403

303,404

79,808

23,749

3,782

534,146

	(Amounts in thousands)
			Commercial		Residential		Consumer -		Consumer -
December 31, 2019	Commercial		real estate		real estate		home equity		other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	579	$	—	$	—	$	—	$	—	$	579
Collectively evaluated for impairment		1,177		2,130		334		104		141		3,886
Total ending allowance balance	$	1,756	$	2,130	$	334	$	104	$	141	$	4,465
Loan Portfolio:
Individually evaluated for impairment	$	4,909	$	2,940	$	—	$	—	$	—	$	7,849
Collectively evaluated for impairment		94,955		299,144		87,172		25,856		3,740		510,867
Total ending loans balance	$	99,864	$	302,084	$	87,172	$	25,856	$	3,740	$	518,716

The change in commercial loan balances from year-end was affected by two sets of transactions in opposing directions. Decreasing the balances in 2020 were 60-day or less term commercial loans for a total of $25.2 million that closed in December 2019 and were fully secured by segregated deposit accounts with the Bank. The loans matured in the first quarter of 2020. Increasing the commercial loans by $56.4 million were loans granted under the PPP as indicated previously.

The increase in the allowance is a result of stress on our loan portfolio from the increase in unemployment and other negative effects of the coronavirus pandemic. Based on current economic indicators, the Company increased the economic qualitative factors within the allowance for loan losses evaluation. Relative to the number of requests for modifications and deferrals from commercial borrowers, additional COVID-19 factors were applied to these loans after segmenting into industry classifications. Such requests from consumers were insignificant. The amount of net charge-offs also impacts the provision charged to operations for any category of loans. Charge-offs affect the historical rate applied to each category, and the amount needed to replenish the amount charged-off, which primarily impacted consumer loans.

The following tables represent credit exposures by internally assigned grades for September 30, 2020 and December 31, 2019. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

•

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Within this category, there are grades of exceptional, quality, acceptable and pass monitor.

•

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset but with the severity which makes collection in full highly questionable and improbable, based on existing circumstances.

•

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. This rating does not mean that the assets have no recovery or salvage value but rather that the assets should be charged off now, even though partial or full recovery may be possible in the future.

The following table is a summary of credit quality indicators by internally assigned grades as of September 30, 2020 and December 31, 2019:

	(Amounts in thousands)
	Commercial		Commercial real estate
September 30, 2020
Pass	$	110,811	$	266,770
Special Mention		2,570		22,000
Substandard		10,022		14,634
Ending Balance	$	123,403	$	303,404

	(Amounts in thousands)
	Commercial		Commercial real estate
December 31, 2019
Pass	$	83,114	$	275,763
Special Mention		6,273		21,995
Substandard		10,477		4,326
Ending Balance	$	99,864	$	302,084

The Company evaluates the classification of consumer, home equity and residential loans primarily on a pooled basis. If the Company becomes aware that adverse or distressed conditions exist that may affect a particular loan, the loan is downgraded following the above definitions of special mention and substandard. Nonaccrual loans in these categories are evaluated for charge off or charge down, and the remaining balance has the same allowance factor as pooled loans.

The following table is a summary of consumer credit exposure as of September 30, 2020 and December 31, 2019:

(Amounts in thousands)

Residential real estate

Consumer - home equity

Consumer - other

September 30, 2020

Performing

79,316

23,614

3,782

Nonperforming

492

135

—

Total

79,808

23,749

3,782

	(Amounts in thousands)
	Residential real estate		Consumer - home equity		Consumer - other
December 31, 2019
Performing	$	86,703	$	25,709	$	3,740
Nonperforming		469		147		—
Total	$	87,172	$	25,856	$	3,740

Loans are considered to be nonperforming when they become 90 days past due or on nonaccrual status, though the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in non-accrual status, previously accrued but unpaid interest is deducted from interest income.

The following table is a summary of classes of loans on non-accrual status as of September 30, 2020 and December 31, 2019:

	(Amounts in thousands)
	September 30,		December 31,
	2020		2019
Commercial	$	890	$	1,152
Commercial real estate		418		566
Residential real estate		492		469
Consumer:
Consumer - home equity		135		147
Consumer - other		—		—
Total	$	1,935	$	2,334

Troubled Debt Restructuring

Nonperforming loans also include certain loans that have been modified in troubled debt restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the Coronavirus Disease 2019 (COVID-19) pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments as of December 31, 2019. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

There were no loans modified as TDR’s during the three and nine month periods ended September 30, 2020 and September 30, 2019.

As of September 30, 2020, we had 40 commercial loans aggregating $61 million, deferring principal and/or interest for periods ranging from 90 to 180 days. All of these loans were performing in accordance with their terms prior to modification, are currently performing, and are in conformance with the guidelines of the CARES Act. Since June 30, 2020, 90 prior modifications aggregating $49 million have returned to full payment status. For further discussion, see Significant Developments Impact of COVID-19 section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.

The following table is an aging analysis of the recorded investment of past due loans as of September 30, 2020 and December 31, 2019:

	(Amounts in thousands)
													Recorded
													Investment >
	30-59 Days		60-89 Days		90 Days Or								90 Days and
	Past Due		Past Due		Greater		Total Past Due		Current		Total Loans		Accruing
September 30, 2020
Commercial	$	—	$	—	$	890	$	890	$	122,513	$	123,403	$	—
Commercial real estate		—		276		121		397		303,007		303,404		—
Residential real estate		—		52		403		455		79,353		79,808		—
Consumer:
Consumer - home equity		—		108		55		163		23,586		23,749		—
Consumer - other		8		—		—		8		3,774		3,782		—
Total	$	8	$	436	$	1,469	$	1,913	$	532,233	$	534,146	$	—

	(Amounts in thousands)
													Recorded
													Investment >
	30-59 Days		60-89 Days		90 Days Or								90 Days and
	Past Due		Past Due		Greater		Total Past Due		Current		Total Loans		Accruing
December 31, 2019
Commercial	$	1	$	—	$	1,152	$	1,153	$	98,711	$	99,864	$	—
Commercial real estate		—		—		253		253		301,831		302,084		—
Residential real estate		5		214		454		673		86,499		87,172		—
Consumer:
Consumer - home equity		24		25		123		172		25,684		25,856		—
Consumer - other		14		—		—		14		3,726		3,740		—
Total	$	44	$	239	$	1,982	$	2,265	$	516,451	$	518,716	$	—

An impaired loan is a loan on which, based on current information and events, it is probable that a creditor will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. However, an insignificant delay or insignificant shortfall in amount of payments on a loan does not indicate that the loan is impaired.

When a loan is determined to be impaired, impairment should be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, the Company will measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

The following are the criteria for selecting individual loans / relationships for impairment analysis. Non-homogenous loans which meet the criteria below are evaluated quarterly.

•

All borrowers whose loans are classified doubtful by examiners and internal loan review

•

All loans on non-accrual status

•

Any loan in foreclosure

•

Any loan with a specific allowance

•

Any loan determined to be collateral dependent for repayment

•

Loans classified as troubled debt restructuring

Commercial loans and commercial real estate loans evaluated for impairment are excluded from the general pool of loans in the ALLL calculation regardless if a specific reserve was determined. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following table presents the recorded investment and unpaid principal balances for impaired loans, excluding homogenous loans for which impaired analyses are not necessarily performed, with the associated allowance amount, if applicable, at September 30, 2020 and December 31, 2019. Also presented are the average recorded investments in the impaired balances and interest income recognized after impairment for the three and nine months ended September 30, 2020 and 2019.

(Amounts in thousands)

Recorded Investment

Unpaid Principal Balance

Related Allowance

September 30, 2020

With no related allowance recorded:

Commercial

3,833

4,759

—

Commercial real estate

2,473

—

With an allowance recorded:

Commercial

812

579

Commercial real estate

—

Total:

Commercial

4,645

5,571

579

Commercial real estate

2,473

—

	(Amounts in thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2019
With no related allowance recorded:
Commercial	$	3,925	$	4,946	$	—
Commercial real estate		2,940		2,940		—
With an allowance recorded:
Commercial		984		984		579
Commercial real estate		—		—		—
Total:
Commercial	$	4,909	$	5,930	$	579
Commercial real estate	$	2,940	$	2,940	$	—

(Amounts in thousands)

Three Months Ended

Nine Months Ended

Average Recorded

Interest Income

Average Recorded

Interest Income

Investment

Recognized

Investment

Recognized

September 30, 2020

With no related allowance recorded:

Commercial

3,826

3,853

117

Commercial real estate

2,723

2,720

119

With an allowance recorded:

Commercial

812

—

850

—

Commercial real estate

—

Total:

Commercial

4,638

4,703

117

Commercial real estate

2,723

2,720

119

	(Amounts in thousands)				(Amounts in thousands)
	Three Months Ended				Nine Months Ended
	Average Recorded		Interest Income		Average Recorded		Interest Income
	Investment		Recognized		Investment		Recognized
September 30, 2019
With no related allowance recorded:
Commercial	$	4,074	$	39	$	4,395	$	258
Commercial real estate		3,049		45		3,157		156
With an allowance recorded:
Commercial		984		—		769		—
Commercial real estate		—		—		—		—
Total:
Commercial	$	5,058	$	39	$	5,164	$	258
Commercial real estate	$	3,049	$	45	$	3,157	$	156