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 the Board of Directors 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 their 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. However, the cash flows of borrowers 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 generally 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.

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, lease rates, and financial analysis of 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 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 permanent financing from the Company. 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. Policies and procedures are developed and modified, as needed, by management to monitor and manage consumer loan risk. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

The Company engages an independent loan review vendor that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Audit Committee. 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.

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 industrial and commercial real estate loans. See concentration of credit discussion included in the 2019 Financial Review.

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2019, 2018, and 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

During 2019, the increase in the provision for loan losses related to commercial loans was primarily related to loans in the sawmill industry that have been affected by tariffs on trade with China along with an increase in loans in the special mention category. The increase in the provision for commercial real estate loans was primarily related to the $13 million increase in loan volume. The provision related to consumer loans was due to historical losses of loans in this category. The decrease in the provision related to residential real estate loans was primarily related to the decrease in specific allocation amounts related to three mortgage loans.

During 2018, the increase in the provision for loan losses related to commercial loans was predominantly due to the $5.9 million increase of loans classified as substandard, as well as charge-offs, and loan volume increases. The increase in the provision related to consumer loans was due to an increase in charge-offs and delinquencies. The increase related to commercial real estate loans was primarily related to the $5 million increase of loans classified as substandard.

During 2017, the increase in the provision for loan losses related to commercial loans was primarily due to the net charge-offs of loans in this category. The increase related to commercial real estate loans was due to the increase of nonperforming loans in this category, as well as the increase in the specific allocation to one commercial real estate loan. The increase in the provision amounts allocated to the remaining loan categories, primarily relate to loan growth.

(Dollars in thousands)		Commercial				Commercial Real Estate				Residential Real Estate				Construction & Land Development				Consumer				Unallocated				Total
December 31, 2019
Beginning balance	$		2,178		$		1,791		$		1,245		$		258		$		306		$		129		$		5,907
Provision for loan losses			102				361				(100	)			(55	)			341				491				1,140
Charge-offs			(47	)			—				—				—				(211	)							(258	)
Recoveries			175				1				7				—				45								228
Net (charge-offs) recoveries			128				1				7				—				(166	)			—				(30	)
Ending balance	$		2,408		$		2,153		$		1,152		$		203		$		481		$		620		$		7,017

December 31, 2018
Beginning balance	$		1,813		$		1,735		$		1,273		$		237		$		175		$		371		$		5,604
Provision for loan losses			1,127				158				6				21				246				(242	)			1,316
Charge-offs			(823	)			(103	)			(37	)			—				(119	)							(1,082	)
Recoveries			61				1				3				—				4								69
Net (charge-offs) recoveries			(762	)			(102	)			(34	)			—				(115	)			—				(1,013	)
Ending balance	$		2,178		$		1,791		$		1,245		$		258		$		306		$		129		$		5,907

December 31, 2017
Beginning balance	$		2,207		$		1,264		$		1,189		$		178		$		141		$		312		$		5,291
Provision for loan losses			429				471				76				59				51				59				1,145
Charge-offs			(1,184	)			—				—				—				(20	)							(1,204	)
Recoveries			361				—				8				—				3								372
Net (charge-offs) recoveries			(823	)			—				8				—				(17	)			—				(832	)
Ending balance	$		1,813		$		1,735		$		1,273		$		237		$		175		$		371		$		5,604

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

(Dollars in thousands)		Commercial			Commercial Real Estate			Residential Real Estate			Construction & Land Development			Consumer			Unallocated			Total
2019
Allowance for loan losses:
Ending allowance balances attributable to loans:
Individually evaluated for impairment	$		16	$		17	$		1	$		—	$		—	$		—	$		34
Collectively evaluated for impairment			2,392			2,136			1,151			203			481			620			6,983
Total ending allowance balance	$		2,408	$		2,153	$		1,152	$		203	$		481	$		620	$		7,017

Loans:
Loans individually evaluated for impairment	$		2,555	$		2,637	$		853	$		—	$		14				$		6,059
Loans collectively evaluated for impairment			134,559			194,111			173,406			23,960			19,038						545,074
Total ending loans balance	$		137,114	$		196,748	$		174,259	$		23,960	$		19,052				$		551,133

2018
Allowance for loan losses:
Ending allowance balances attributable to loans:
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 December 31:

(Dollars in thousands)		Unpaid Principal Balance			Recorded Investment With No Allowance			Recorded Investment With Allowance			Total Recorded Investment ¹			Related Allowance			Average Recorded Investment			Interest Income Recognized
2019
Commercial	$		2,982	$		2,541	$		16	$		2,557	$		16	$		2,054	$		68
Commercial real estate			2,952			2,471			176			2,647			17			2,517			11
Residential real estate			1,024			457			396			853			1			1,093			54
Consumer			14			14			—			14			—			12			1
Total impaired loans	$		6,972	$		5,483	$		588	$		6,071	$		34	$		5,676	$		134

2018
Commercial	$		815	$		383	$		36	$		419	$		36	$		1,511	$		37
Commercial real estate			2,616			1,976			433			2,409			64			3,531			19
Residential real estate			1,190			763			269			1,032			1			1,327			57
Total impaired loans	$		4,621	$		3,122	$		738	$		3,860	$		101	$		6,369	$		113

2017
Commercial	$		3,352	$		1,329	$		399	$		1,728	$		74	$		2,884	$		52
Commercial real estate			4,826			3,117			1,566			4,683			151			3,213			14
Residential real estate			1,654			1,119			352			1,471			19			1,476			57
Total impaired loans	$		9,832	$		5,565	$		2,317	$		7,882	$		244	$		7,573	$		123

¹ Includes principal, accrued interest, unearned fees, and origination costs.

The following table presents the aging of accruing past due and nonaccrual loans by class of loans as of December 31:

(Dollars in thousands)		Current			30-59 Days Past Due			60-89 Days Past Due			90 Days + Past Due			Nonaccrual			Total Past Due and Nonaccrual			Total Loans
2019
Commercial	$		135,707	$		15	$		—	$		67	$		1,325	$		1,407	$		137,114
Commercial real estate			194,157			186			—			—			2,405			2,591			196,748
Residential real estate			173,023			264			277			174			521			1,236			174,259
Construction & land development			23,960			—			—			—			—			—			23,960
Consumer			18,640			365			—			—			47			412			19,052
Total loans	$		545,487	$		830	$		277	$		241	$		4,298	$		5,646	$		551,133

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

The Company had troubled debt restructurings (“TDRs”) of $2.5 million as of December 31, 2019, with $18 thousand of specific reserves allocated to customers whose loan terms have been modified in TDRs. The increase in 2019 TDRs resulted primarily from an active line of credit that was designated as a TDR in a prior year. As of December 31, 2018, the Company had TDRs of $1.5 million, with $17 thousand of specific reserves allocated. At December 31, 2019, $2.2 million of the loans classified as TDRs were performing in accordance with their modified terms. The remaining $254 thousand were classified as nonaccrual.

Loan modifications that are considered TDRs completed during the year ended December 31 were as follows:

(Dollars in thousands)	Number Of Loans Restructured			Pre-Modification Recorded Investment			Post-Modification Recorded Investment
2019
Consumer		1	$		17	$		17
Total restructured loans		1	$		17	$		17

2018
Commercial		1	$		200	$		200
Residential real estate		2			27			27
Total restructured loans		3	$		227	$		227

2017
Commercial		2	$		150	$		150
Commercial real estate		4			288			288
Residential real estate		2			52			52
Total restructured loans		8	$		490	$		490

The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. No principal reductions were made. There was one loan in the amount of $200 thousand restructured in 2018 that has subsequently defaulted in 2019. None of the loans restructured in 2017 subsequently defaulted in 2018.

Other real estate owned amounted to one property at $99 thousand as of December 31, 2019 and 2018. Mortgage loans in the process of foreclosure were $50 thousand at December 31, 2019, and $57 thousand at December 31, 2018.

The Company categorizes commercial and commercial real estate 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 and commercial real estate 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.

Pass. Loans classified as pass (Cash Secured, Exceptional, Acceptable, Monitor 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 a material weakness that deserves management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position 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 Bank 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, 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 was as follows at December 31:

(Dollars in thousands)		Pass			Special Mention			Substandard			Doubtful			Not Rated			Total
2019
Commercial	$		110,731	$		15,040	$		10,295	$		—	$		1,048	$		137,114
Commercial real estate			174,045			11,546			9,994			—			1,163			196,748
Residential real estate			183			—			237			—			173,839			174,259
Construction & land development			19,423			104			—			—			4,433			23,960
Consumer			—			—			73			—			18,979			19,052
Total	$		304,382	$		26,690	$		20,599	$		—	$		199,462	$		551,133

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

Nonperforming loans include loans past due 90 days and greater and loans on nonaccrual of interest status that have not been risk rated. The following table presents loans that are not rated, by class of loans as of December 31:

(Dollars in thousands)		Performing			Nonperforming			Total
2019
Commercial	$		1,048	$		—	$		1,048
Commercial real estate			1,163			—			1,163
Residential real estate			173,407			432			173,839
Construction & land development			4,433			—			4,433
Consumer			18,979			—			18,979
Total	$		199,030	$		432	$		199,462

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

For the years ended December 31, 2019 and 2018, the Company had outstanding MSRs of $328 thousand and $281 thousand, respectively. No valuation allowance was recorded at December 31, 2019 or 2018, as the fair value of the MSRs exceeded their carrying value. On December 31, 2019, the Company had $75.9 million residential mortgage loans with servicing retained as compared to $66.8 million with servicing retained at December 31, 2018.

Total loans serviced for others approximated $97.7 million and $92.3 million at December 31, 2019 and 2018, respectively.