NOTE 3 – LOANS

Loans consist of the following:


(Dollars in thousands)	March 31, 2016		December 31, 2015
Commercial	$	128,924	$	123,143
Commercial real estate		153,008		148,775
Residential real estate		127,099		125,775
Construction & land development		13,571		15,452
Consumer		10,383		9,268

Total loans before deferred costs		432,985		422,413
Deferred loan costs		468		458

Total Loans	$	433,453	$	422,871

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. At March 31, 2016 and December 31, 2015, approximately 76% of the outstanding principal balances of the Company’s commercial real estate loans were secured by owner-occupied properties.

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, minimizes 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 $80.2 million and $76.3 million at March 31, 2016 and December 31, 2015, respectively.

Concentrations of Credit

Nearly all of the Company’s lending activity occurs within the state of Ohio, including the four (4) 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. As of March 31, 2016 and December 31, 2015, 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, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

The changes in the provision for loan losses for the three months ended March 31, 2016 related to commercial and industrial loans were primarily due to the increase in a specific reserve amount for one commercial relationship as well as the increase in loan volume. The decrease in the provision related to commercial real estate loans was primarily due to a recovery of a prior charge-off as well as a decrease in a specific reserve amount related to one loan relationship.

The increase in the provision for loan losses for the three months ended March 31, 2015 related to commercial and industrial loans was primarily due to the increase in loan balances. The increase in the provision related to commercial real estate loans was affected by an increase in loan balances and charge-offs that occurred during the quarter. The increase in the provision related to consumer loans was due to charge-offs of loans in that category.


(Dollars in thousands)	Commercial			Commercial Real Estate			Residential Real Estate			Construction & Land Development			Consumer			Unallocated			Total
Three months ended March 31, 2016
Beginning balance	$	1,664		$	1,271		$	1,086		$	123		$	86		$	432		$	4,662
Provision for possible loan losses		394			(228	)		(4	)		(17	)		8			11			164
Charge-offs		(9	)		—			—			—			(1	)					(10	)
Recoveries		4			182			2			—			1						189

Net (charge-offs) recoveries		(5	)		182			2			—			—						179

Ending balance	$	2,053		$	1,225		$	1,084		$	106		$	94		$	443		$	5,005

Three months ended March 31, 2015
Beginning balance	$	1,289		$	1,524		$	1,039		$	142		$	60		$	327		$	4,381
Provision for possible loan losses		101			64			8			(9	)		36			(6	)		194
Charge-offs		(2	)		(24	)		(53	)		—			(30	)					(109	)
Recoveries		6			10			9			—			3						28
Net (charge-offs) recoveries		4			(14	)		(44	)		—			(27	)					(81	)

Ending balance	$	1,394		$	1,574		$	1,003		$	133		$	69		$	321		$	4,494

The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio segment and based on the impairment method as of March 31, 2016 and December 31, 2015:


(Dollars in thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Construction		Consumer		Unallocated		Total
March 31, 2016
Allowance for loan losses:
Individually evaluated for impairment	$	583	$	—	$	26	$	—	$	—	$	—	$	609
Collectively evaluated for impairment		1,470		1,225		1,058		106		94		443		4,396

Total ending allowance balance	$	2,053	$	1,225	$	1,084	$	106	$	94	$	443	$	5,005

Loans:
Loans individually evaluated for impairment	$	6,017	$	744	$	1,509	$	—	$	—			$	8,270
Loans collectively evaluated for impairment		122,907		152,264		125,590		13,571		10,383				424,715

Total ending loans balance	$	128,924	$	153,008	$	127,099	$	13,571	$	10,383			$	432,985

December 31, 2015
Allowance for loan losses:
Individually evaluated for impairment	$	299	$	64	$	26	$	—	$	—	$	—	$	389
Collectively evaluated for impairment		1,365		1,207		1,060		123		86		432		4,273

Total ending allowance balance	$	1,664	$	1,271	$	1,086	$	123	$	86	$	432	$	4,662

Loans:
Loans individually evaluated for impairment	$	6,127	$	1,064	$	1,533	$	—	$	—			$	8,724
Loans collectively evaluated for impairment		117,016		147,711		124,242		15,452		9,268				413,689

Total ending loans balance	$	123,143	$	148,775	$	125,775	$	15,452	$	9,268			$	422,413

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2016 and December 31, 2015:


(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance
March 31, 2016
Commercial	$	6,435	$	5,142	$	894	$	6,036	$	583
Commercial real estate		952		719		25		744		—
Residential real estate		1,671		849		661		1,510		26

Total impaired loans	$	9,058	$	6,710	$	1,580	$	8,290	$	609

December 31, 2015
Commercial	$	6,541	$	5,832	$	301	$	6,133	$	299
Commercial real estate		1,265		670		393		1,063		64
Residential real estate		1,689		967		568		1,535		26

Total impaired loans	$	9,495	$	7,469	$	1,262	$	8,731	$	389

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)	2016		2015
Average recorded investment:
Commercial	$	6,016	$	5,857
Commercial real estate		984		1,704
Residential real estate		1,530		1,618

Average recorded investment in impaired loans	$	8,530	$	9,179

Interest income recognized:
Commercial	$	65	$	51
Commercial real estate		4		5
Residential real estate		15		16

Interest income recognized on a cash basis on impaired loans	$	84	$	72

The following table presents the aging of past due loans and nonaccrual loans as of March 31, 2016 and December 31, 2015 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
March 31, 2016
Commercial	$	128,225	$	86	$	169	$	—	$	444	$	699	$	128,924
Commercial real estate		152,192		—		108		39		669		816		153,008
Residential real estate		126,063		180		93		189		574		1,036		127,099
Construction & land development		13,558		13		—		—		—		13		13,571
Consumer		10,284		62		37		—		—		99		10,383

Total Loans	$	430,322	$	341	$	407	$	228	$	1,687	$	2,663	$	432,985

December 31, 2015
Commercial	$	122,760	$	34	$	172	$	—	$	177	$	383	$	123,143
Commercial real estate		147,920		—		59		—		796		855		148,775
Residential real estate		124,408		486		173		105		603		1,367		125,775
Construction & land development		15,452		—		—		—		—		—		15,452
Consumer		9,105		163		—		—		—		163		9,268

Total Loans	$	419,645	$	683	$	404	$	105	$	1,576	$	2,768	$	422,413

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 $6.7 million as of March 31, 2016, and $7.6 million as of December 31, 2015, with $26 thousand of specific reserves allocated to those loans for both periods. At March 31, 2016, $6.3 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $409 thousand, all were in nonaccrual of interest status.

The Company held no foreclosed real estate as of March 31, 2016 or December 31, 2015. Consumer mortgage loans in the process of foreclosure were $360 thousand at March 31, 2016 and $89 thousand at December 31, 2015.

The following table presents loans restructured during the three month period ended March 31, 2015.


(Dollars in thousands)	Number of loans restructured		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
For the Three Months Ended March 31, 2015
Residential Real Estate		1	$	29	$	29

Total Restructured Loans		1	$	29	$	29

The restructured loan was modified by changing the monthly payment to interest only. No principal reduction was made. None of the loans that were restructured in 2014 or 2015 have subsequently defaulted in the three month periods ended March 31, 2016 and 2015. There were no new TDR’s during the three month period ended March 31, 2016.

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 March 31, 2016 and December 31, 2015:


(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
March 31, 2016
Commercial	$	118,269	$	2,776	$	6,990	$	—	$	889	$	128,924
Commercial real estate		146,445		2,664		2,976		—		923		153,008
Residential real estate		223		—		202		—		126,674		127,099
Construction & land development		11,678		724		—		—		1,169		13,571
Consumer		—				—		—		10,383		10,383

Total	$	276,615	$	6,164	$	10,168	$	—	$	140,038	$	432,985

December 31, 2015
Commercial	$	112,229	$	3,100	$	7,044	$	—	$	770	$	123,143
Commercial real estate		141,621		2,742		3,150		—		1,262		148,775
Residential real estate		190		—		213		—		125,372		125,775
Construction & land development		11,015		944		—		—		3,493		15,452
Consumer		—		—		—		—		9,268		9,268

Total	$	265,055	$	6,786	$	10,407	$	—	$	140,165	$	422,413

The following table presents loans that are not rated by class of loans as of March 31, 2016 and December 31, 2015. 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, 2016
Commercial	$	889	$	—	$	889
Commercial real estate		923		—		923
Residential real estate		125,941		733		126,674
Construction & land development		1,169		—		1,169
Consumer		10,383		—		10,383

Total	$	139,305	$	733	$	140,038

December 31, 2015
Commercial	$	770	$	—	$	770
Commercial real estate		1,262		—		1,262
Residential real estate		124,700		672		125,372
Construction & land development		3,493		—		3,493
Consumer		9,268		—		9,268

Total	$	139,493	$	672	$	140,165