Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2019

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, 2019				December 31, 2018
	Balance		%		Balance		%
Commercial	$	77,071		15.8	$	112,440		21.9
Commercial real estate		292,150		59.8		303,804		59.0
Residential real estate		89,709		18.4		69,845		13.6
Consumer - home equity		25,578		5.2		25,076		4.9
Consumer - other		3,927		0.8		3,227		0.6
Total loans	$	488,435			$	514,392

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		Decreasing
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		Stable

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		Decreasing
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)
September 30, 2019	Commercial		Commercial real estate		Residential real estate			Consumer - home equity		Consumer - 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

	(Amounts in thousands)
September 30, 2018	Commercial			Commercial real estate		Residential real estate		Consumer - home equity			Consumer - other			Total
Balance at beginning of period	$	1,394		$	2,457	$	80	$	66		$	98		$	4,095
Loan charge-offs		—			—		—		—			(49	)		(49	)
Recoveries		—			16		—		1			14			31
Net loan recoveries (charge-offs)		—			16		—		1			(35	)		(18	)
Provision charged to operations		(123	)		128		25		(1	)		46			75
Balance at end of period	$	1,271		$	2,601	$	105	$	66		$	109		$	4,152

Nine Months Ended	(Amounts in thousands)
September 30, 2019	Commercial		Commercial real estate			Residential real estate			Consumer - home equity			Consumer - 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

	(Amounts in thousands)
September 30, 2018	Commercial			Commercial real estate			Residential real estate			Consumer - home equity			Consumer - other			Total
Balance at beginning of period	$	1,591		$	2,702		$	117		$	70		$	98		$	4,578
Loan charge-offs		(1,163	)		—			—			—			(126	)		(1,289	)
Recoveries		—			166			1			5			41			213
Net loan recoveries (charge-offs)		(1,163	)		166			1			5			(85	)		(1,076	)
Provision charged to operations		843			(267	)		(13	)		(9	)		96			650
Balance at end of period	$	1,271		$	2,601		$	105		$	66		$	109		$	4,152

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, 2019 and December 31, 2018:

	(Amounts in thousands)
September 30, 2019	Commercial		Commercial real estate		Residential real estate		Consumer - home equity		Consumer - other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	579	$	—	$	—	$	—	$	—	$	579
Collectively evaluated for impairment		1,222		2,259		345		101		135		4,062
Total ending allowance balance	$	1,801	$	2,259	$	345	$	101	$	135	$	4,641
Loan Portfolio:
Individually evaluated for impairment	$	5,061	$	2,983	$	—	$	—	$	—	$	8,044
Collectively evaluated for impairment		72,010		289,167		89,709		25,578		3,927		480,391
Total ending loans balance	$	77,071	$	292,150	$	89,709	$	25,578	$	3,927	$	488,435

	(Amounts in thousands)
December 31, 2018	Commercial		Commercial real estate		Residential real estate		Consumer - home equity		Consumer - other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,232		2,414		314		115		123		4,198
Total ending allowance balance	$	1,232	$	2,414	$	314	$	115	$	123	$	4,198
Loan Portfolio:
Individually evaluated for impairment	$	5,364	$	4,340	$	—	$	—	$	—	$	9,704
Collectively evaluated for impairment		107,076		299,464		69,845		25,076		3,227		504,688
Total ending loans balance	$	112,440	$	303,804	$	69,845	$	25,076	$	3,227	$	514,392

The decrease in commercial loan balances from year-end was due in part to 60-day or less term commercial loans for a total of $40.9 million that closed in December 2018 and were fully secured by segregated deposit accounts with the Bank. The loans matured in the first quarter of 2019. The commercial charge-off in 2018 related to loans that were restructured with no principal forgiveness with a new borrowing relationship, but with a substantial concession in interest rate. The below market rate triggered recognition of a charge-off equivalent to the difference in present value of loan payments discounted at the market rate of interest. The charged off amount of $1.1 million is recorded as a loan discount. As loan payments are made, interest is recognized at the market rate versus the negotiated rate via the amortization of the discount over the various lives of the loans. There was $625,000 in specific reserve previously allocated to these loans at December 31, 2017. The decrease in commercial real estate and the majority of the increase in residential real estate is due to reclassification of loans between these categories in 2019.

The allowance for commercial loans includes an amount for a single loan impairment, otherwise the provision decreased modestly. The decrease in the provision for commercial real estate loans is due mainly to a decrease in the concentration of credit factor. The recent segmentation of the commercial real estate loan portfolio into its five largest concentrations has resulted in lower allocations to those segments. The residential real estate, consumer-home equity and other household provisions remained fairly constant. 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 impacted home equity and consumer loans as well as commercial real estate loans.

The following tables represent credit exposures by internally assigned grades for September 30, 2019 and December 31, 2018. 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, 2019 and December 31, 2018:

	(Amounts in thousands)
	Commercial		Commercial real estate
September 30, 2019
Pass	$	58,822	$	265,054
Special Mention		6,366		23,350
Substandard		11,883		3,746
Doubtful		—		—
Ending Balance	$	77,071	$	292,150

	(Amounts in thousands)
	Commercial		Commercial real estate
December 31, 2018
Pass	$	94,316	$	271,370
Special Mention		6,914		25,199
Substandard		11,210		7,235
Doubtful		—		—
Ending Balance	$	112,440	$	303,804

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, 2019 and December 31, 2018:

	(Amounts in thousands)
	Residential real estate		Consumer - home equity		Consumer - other
September 30, 2019
Performing	$	89,154	$	25,428	$	3,925
Nonperforming		555		150		2
Total	$	89,709	$	25,578	$	3,927

	(Amounts in thousands)
	Residential real estate		Consumer - home equity		Consumer - other
December 31, 2018
Performing	$	69,535	$	24,956	$	3,227
Nonperforming		310		120		—
Total	$	69,845	$	25,076	$	3,227

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. Loans in foreclosure are considered nonperforming.

The following table is a summary of classes of loans on non-accrual status as of September 30, 2019 and December 31, 2018:

	(Amounts in thousands)
	September 30, 2019		December 31, 2018
Commercial	$	1,533	$	1,291
Commercial real estate		578		512
Residential real estate		555		310
Consumer:
Consumer - home equity		150		120
Consumer - other		2		—
Total	$	2,818	$	2,233

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.

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

The following presents, by class, information related to loans modified in a TDR during the periods ending September 30, 2018.

	(Dollar amounts in thousands)
	Three Months Ended								Nine Months Ended
	September 30, 2018								September 30, 2018
	Number of contracts		Pre- modification recorded investment		Post- modification recorded investment		Increase in the allowance		Number of contracts		Pre- modification recorded investment		Post- modification recorded investment		Increase in the allowance
Commercial		—	$	—	$	—	$	—		7	$	5,373	$	4,210	$	—
Commercial real estate		—		—		—		—		—		—		—		—
Total restructured loans		—	$	—	$	—	$	—		7	$	5,373	$	4,210	$	—
Subsequently defaulted		—		—						—		—

The seven commercial loans were all to one new borrowing relationship. The loans were restructured with no principal forgiveness, but with a substantial concession in interest rate. The below market rate triggered recognition of a charge-off equivalent to the difference in present value of loan payments discounted at the market rate of interest. The charged off amount of $1.1 million is recorded as loan discount. As loan payments are made, interest will be recognized at the market rate versus the negotiated rate via the amortization of the discount over the various lives of the loans.

The following table is an aging analysis of the recorded investment of past due loans as of September 30, 2019 and December 31, 2018:

	(Amounts in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
September 30, 2019
Commercial	$	—	$	91	$	1,533	$	1,624	$	75,447	$	77,071	$	—
Commercial real estate		—		—		257		257		291,893		292,150		—
Residential real estate		14		103		540		657		89,052		89,709		—
Consumer:
Consumer - home equity		15		—		125		140		25,438		25,578		—
Consumer - other		11		—		2		13		3,914		3,927		—
Total	$	40	$	194	$	2,457	$	2,691	$	485,744	$	488,435	$	—

	(Amounts in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
December 31, 2018
Commercial	$	14	$	—	$	1,291	$	1,305	$	111,135	$	112,440	$	—
Commercial real estate		—		—		167		167		303,637		303,804		—
Residential real estate		36		182		257		475		69,370		69,845		—
Consumer:
Consumer - home equity		—		141		25		166		24,910		25,076		—
Consumer - other		17		—		—		17		3,210		3,227		—
Total	$	67	$	323	$	1,740	$	2,130	$	512,262	$	514,392	$	—

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, 2019 and December 31, 2018. 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, 2019 and 2018.

	(Amounts in thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
September 30, 2019
With no related allowance recorded:
Commercial	$	4,077	$	5,023	$	—
Commercial real estate		2,983		2,983		—
With an allowance recorded:
Commercial		984		984		579
Commercial real estate		—		—		—
Total:
Commercial	$	5,061	$	6,007	$	579
Commercial real estate	$	2,983	$	2,983	$	—

	(Amounts in thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2018
With no related allowance recorded:
Commercial	$	5,364	$	6,411	$	—
Commercial real estate		4,340		4,340		—
With an allowance recorded:
Commercial		—		—		—
Commercial real estate		—		—		—
Total:
Commercial	$	5,364	$	6,411	$	—
Commercial real estate	$	4,340	$	4,340	$	—

	(Amounts in thousands)
	Three Months Ended				Nine Months Ended
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income 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

	(Amounts in thousands)
	Three Months Ended				Nine Months Ended
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2018
With no related allowance recorded:
Commercial	$	5,456	$	7	$	3,846	$	18
Commercial real estate		4,481		71		4,401		283
With an allowance recorded:
Commercial		—		—		1,214		46
Commercial real estate		—		—		—		—
Total:
Commercial	$	5,456	$	7	$	5,060	$	64
Commercial real estate	$	4,481	$	71	$	4,401	$	283