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 $88.1 million and $95.7 million at March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, 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 months ended March 31, 2020 and 2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

For the three-month period ended March 31, 2020 the increased allocation across all categories was primarily related to worsening economic conditions and the increasing unemployment rate at the end of March associated with the COVID-19 pandemic.

The decrease in the provision for loan losses for the three months ended March 31, 2019 related to commercial loans was primarily due to a recovery related to one loan relationship which contributed to declining historical losses of loans in this category. The decrease in the provision related to construction and land development loans was primarily due to the decrease in loan balances as construction projects were completed and transferred to permanent financing. The increase in the provision for consumer loans was related to increasing charge-offs as well as an increase in historical losses partially offset by lower delinquencies.

(Dollars in thousands)	Commercial			Commercial Real Estate		Residential Real Estate			Construction & Land Development			Consumer			Unallocated			Total
Three months ended March 31, 2020
Beginning balance	$	2,408		$	2,153	$	1,152		$	203		$	481		$	620		$	7,017
Provision for loan losses		212			147		209			52			87			(529	)		178
Charge-offs		(15	)		—		(15	)		—			(57	)					(87	)
Recoveries		4			—		1			—			7						12
Net charge-offs		(11	)		—		(14	)		—			(50	)					(75	)
Ending balance	$	2,609		$	2,300	$	1,347		$	255		$	518		$	91		$	7,120
Three months ended March 31, 2019
Beginning balance	$	2,178		$	1,791	$	1,245		$	258		$	306		$	129		$	5,907
Provision for loan losses		(339	)		17		(24	)		(88	)		83			636			285
Charge-offs		(5	)		—		—			—			(65	)					(70	)
Recoveries		163			-		1			-			1						165
Net (charge-offs) recoveries		158			-		1			-			(64	)					95
Ending balance	$	1,997		$	1,808	$	1,222		$	170		$	325		$	765		$	6,287

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 March 31, 2020 and December 31, 2019:

(Dollars in thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Construction		Consumer		Unallocated		Total
March 31, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	10	$	18	$	1	$	—	$	—	$	—	$	29
Collectively evaluated for impairment		2,599		2,282		1,346		255		518		91		7,091
Total ending allowance balance	$	2,609	$	2,300	$	1,347	$	255	$	518	$	91	$	7,120
Loans:
Loans individually evaluated for impairment	$	2,497	$	2,577	$	834	$	—	$	—			$	5,908
Loans collectively evaluated for impairment		137,467		189,810		176,570		26,516		18,598				548,961
Total ending loans balance	$	139,964	$	192,387	$	177,404	$	26,516	$	18,598			$	554,869
December 31, 2019
Allowance for loan losses:
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

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2020 and December 31, 2019:

(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total recorded investment¹		Related Allowance
March 31, 2020
Commercial	$	2,924	$	2,489	$	10	$	2,499	$	10
Commercial real estate		2,921		2,416		170		2,586		18
Residential real estate		1,010		577		259		836		1
Total impaired loans	$	6,855	$	5,482	$	439	$	5,921	$	29
December 31, 2019
Commercial	$	2,982	$	2,541	$	16	$	2,557	$	16
Commercial real estate		2,952		2,471		176		2,647		17
Residential real estate		1,024		457		396		853		1
Consumer		14		14		—		14		—
Total impaired loans	$	6,972	$	5,483	$	588	$	6,071	$	34

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 March 31,
(Dollars in thousands)	2020		2019
Average recorded investment:
Commercial	$	2,453	$	861
Commercial real estate		2,556		2,289
Residential real estate		846		1,018
Consumer		9		3
Average recorded investment in impaired loans	$	5,864	$	4,171
Interest income recognized:
Commercial	$	18	$	13
Commercial real estate		2		3
Residential real estate		10		12
Interest income recognized on a cash basis on impaired loans	$	30	$	28

The following table presents the aging of past due loans and nonaccrual loans as of March 31, 2020 and December 31, 2019 by class of loans:

			Accruing 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, 2020
Commercial	$	138,544	$	104	$	—	$	—	$	1,316	$	1,420	$	139,964
Commercial real estate		189,953		80		—		—		2,354		2,434		192,387
Residential real estate		176,176		357		207		2		662		1,228		177,404
Construction & land development		26,516		—		—		—		—		—		26,516
Consumer		18,344		198		21		—		35		254		18,598
Total Loans	$	549,533	$	739	$	228	$	2	$	4,367	$	5,336	$	554,869
December 31, 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

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 March 31, 2020, and $2.5 million as of December 31, 2019, with $18 thousand of specific reserves allocated to those loans at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, $2.1 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $252 thousand, all were in nonaccrual of interest status.

The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. There was one new TDR’s for the three month period ended March 31, 2020.

None of the loans restructured in 2019 defaulted in the first quarter of 2020. There was one loan in the amount of $200 thousand restructured in 2018 that subsequently defaulted in in the first quarter of 2019.

Other real estate owned amounted to one property at $99 thousand at March 31, 2020 and December 31, 2019, respectively. There were $44 thousand in consumer mortgage loans in the process of foreclosure at March 31, 2020 and $50 thousand at December 31, 2019. There were no other repossessed assets at March 31, 2020 and December 31, 2019.

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 $500 thousand. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings:

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. Assets assigned a Special Mention grade are not considered classified assets but are considered criticized. These assets exhibit potential weaknesses that, deserve management’s close attention. If left uncorrected, those potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Loans in this rating warrant special attention but have not yet reached the point of concern for loss. These assets have deteriorated sufficiently to the point they would have difficulty refinancing elsewhere. Similarly, purchasers of the business would not be eligible for bank financing unless they represent a significantly stronger credit risk.

Substandard. Loans classified as substandard are inadequately protected by the current sound 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 known 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 $500 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, 2020 and December 31, 2019:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
March 31, 2020
Commercial	$	112,315	$	8,402	$	18,190	$	—	$	1,057	$	139,964
Commercial real estate		170,352		7,221		13,615		—		1,199		192,387
Residential real estate		180		—		243		—		176,981		177,404
Construction & land development		22,626		99		—		—		3,791		26,516
Consumer		—		—		78		—		18,520		18,598
Total	$	305,473	$	15,722	$	32,126	$	—	$	201,548	$	554,869
December 31, 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

The following table presents loans that are not rated by class of loans as of March 31, 2020 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
March 31, 2020
Commercial	$	1,057	$	—	$	1,057
Commercial real estate		1,199		—		1,199
Residential real estate		176,574		407		176,981
Construction & land development		3,791		—		3,791
Consumer		18,520		—		18,520
Total	$	201,141	$	407	$	201,548
December 31, 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