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.

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.

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.

(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 investment¹		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

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.

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.

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