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 loan

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 $96.7 million and $95.7 million at June 30, 2020 and December 31, 2019, respectively.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020 and provides over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of June 30, 2020, the Company had 752 PPP loans with outstanding principal balances of $91.1 million. The PPP loans are 100% guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the Commercial loan category with no allowance for loan losses allocated.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $3.2 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2.

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 June 30, 2020 and December 31, 2019, there were no concentrations of loans related to any single industry.

The Company has identified industries that could be at a higher risk due to the COVID-19 pandemic. As of June 30, 2020 the total balance of loans to COVID-19 affected businesses was $36.2 million, with $31.6 million in loans to businesses in the hotel industry.

The following tables detail activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 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 and six month periods ended June 30, 2020 the decrease in the provision for loan losses for commercial loans and the increase for commercial real estate loans was due to the reallocation of allowance related to loans affected by the COVID-19 pandemic. The increase in all other categories is primarily related to the slowing economy and the continuing elevated unemployment rates associated with the pandemic.

The decrease in the provision for loan losses for the six months ended June 30, 2019 for 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 and the increase for commercial real estate loans was primarily due to the change 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 June 30, 2020
Beginning balance	$	2,609		$	2,300	$	1,347		$	255		$	518			$	91		$	7,120
Provision for loan losses		(343	)		480		237			82			2				259			717
Charge-offs		(4	)		—		—			—			(12	)						(16	)
Recoveries		4			1		1			—			8							14
Net charge-offs		—			1		1			—			(4	)						(2	)
Ending balance	$	2,266		$	2,781	$	1,585		$	337		$	516			$	350		$	7,835
Six months ended June 30, 2020
Beginning balance	$	2,408		$	2,153	$	1,152		$	203		$	481			$	620		$	7,017
Provision for loan losses		(131	)		627		446			134			89				(270	)		895
Charge-offs		(19	)		—		(15	)		—			(69	)						(103	)
Recoveries		8			1		2			—			15							26
Net recoveries		(11	)		1		(13	)		—			(54	)						(77	)
Ending balance	$	2,266		$	2,781	$	1,585		$	337		$	516		$	$	350		$	7,835
Three months ended June 30, 2019
Beginning balance	$	1,997		$	1,808	$	1,222		$	170		$	325			$	765		$	6,287
Provision for loan losses		277			138		5			(66	)		46				(115	)		285
Charge-offs		(11	)		—		—			—			(43	)						(54	)
Recoveries		4			—		2			—			13							19
Net (charge-offs) recoveries		(7	)		—		2			—			(30	)						(35	)
Ending balance	$	2,267		$	1,946	$	1,229		$	104		$	341			$	650		$	6,537
Six months ended June 30, 2019
Beginning balance	$	2,178		$	1,791	$	1,245		$	258		$	306			$	129		$	5,907
Provision for loan losses		(62	)		155		(19	)		(154	)		129				521			570
Charge-offs		(16	)		—		—			—			(108	)						(124	)
Recoveries		167			—		3			—			14							184
Net charge-offs		151			—		3			—			(94	)						60
Ending balance	$	2,267		$	1,946	$	1,229		$	104		$	341			$	650		$	6,537

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 June 30, 2020 and December 31, 2019:

(Dollars in thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Construction		Consumer		Unallocated		Total
June 30, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	6	$	19	$	1	$	—	$	7	$	—	$	33
Collectively evaluated for impairment		2,260		2,762		1,584		337		509		350		7,802
Total ending allowance balance	$	2,266	$	2,781	$	1,585	$	337	$	516	$	350	$	7,835
Loans:
Loans individually evaluated for impairment	$	2,465	$	2,596	$	728	$	—	$	146			$	5,935
Loans collectively evaluated for impairment		212,674		196,352		177,071		28,123		18,705				632,925
Total ending loans balance	$	215,139	$	198,948	$	177,799	$	28,123	$	18,851			$	638,860
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 June 30, 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
June 30, 2020
Commercial	$	2,899	$	2,281	$	183	$	2,464	$	6
Commercial real estate		2,968		2,363		241		2,604		19
Residential real estate		920		549		180		729		1
Consumer		148		—		151		151		7
Total impaired loans	$	6,935	$	5,193	$	755	$	5,948	$	33
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

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated.

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2020		2019		2020		2019
Average recorded investment:
Commercial	$	2,523	$	1,582	$	2,488	$	1,228
Commercial real estate		2,550		2,152		2,553		2,233
Residential real estate		820		943		833		986
Consumer		95		15		52		9
Average recorded investment in impaired loans	$	5,988	$	4,692	$	5,926	$	4,456
Interest income recognized:
Commercial	$	19	$	28	$	37	$	37
Commercial real estate		4		3		6		6
Residential real estate		9		12		19		23
Consumer		1		—		1		—
Interest income recognized on a cash basis on impaired loans	$	33	$	43	$	63	$	66

The following table presents the aging of past due loans and nonaccrual loans as of June 30, 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
June 30, 2020
Commercial	$	213,726	$	4	$	3	$	25	$	1,381	$	1,413	$	215,139
Commercial real estate		196,634		11		—		—		2,303		2,314		198,948
Residential real estate		176,946		202		10		—		641		853		177,799
Construction & land development		28,123		—		—		—		—		—		28,123
Consumer		18,795		23		1		—		32		56		18,851
Total Loans	$	634,224	$	240	$	14	$	25	$	4,357	$	4,636	$	638,860
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

The table below summarizes the Company’s deferral activity at June 30, 2020 under the COVID-19 related loan modification program to customers. Loan modifications consist of three to four months deferral of principal and interest payments, and extension of maturity date. All loans provided modifications were performing in accordance with their terms at the time of modification. In accordance with the CARES Act, these loans are not required to be evaluated as TDR’s.

	June 30, 2020
	Deferred		Outstanding
(Dollars in thousands)	# of loans		Portfolio		Deferred		%
Commercial:
Commercial	72		$	215,139	$	10,450		5
Commercial real estate	77			198,948		51,645		26
Construction		3		28,123		535		2
Total Commercial		152		442,210		62,630		14
Consumer:
Residential real estate	33			177,799		3,663		2
RV	12			9,271		254		3
Other consumer		15		9,580		211		2
Total Consumer		60		196,650		4,128		2
Total Loans	212		$	638,860	$	66,758		10

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 June 30, 2020, and $2.5 million as of December 31, 2019, with $31 thousand of specific reserves allocated to those loans at June 30, 2020 and $18 thousand at December 31, 2019, respectively. At June 30, 2020, $2.1 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $327 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.

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

Other real estate owned amounted to one property at $98 thousand at June 30, 2020 and $99 thousand at December 31, 2019, respectively. There were $61 thousand in mortgage loans in the process of foreclosure at June 30, 2020 and $50 thousand at December 31, 2019. There were no other repossessed assets at June 30, 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 June 30, 2020 and December 31, 2019:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
June 30, 2020
Commercial	$	192,349	$	4,601	$	15,408	$	—	$	2,781	$	215,139
Commercial real estate		171,443		9,930		15,547		—		2,028		198,948
Residential real estate		180		—		21		—		177,598		177,799
Construction & land development		22,513		93		478		—		5,039		28,123
Consumer		—		—		71		—		18,780		18,851
Total	$	386,485	$	14,624	$	31,525	$	—	$	206,226	$	638,860
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 June 30, 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
June 30, 2020
Commercial	$	2,781	$	—	$	2,781
Commercial real estate		2,028		—		2,028
Residential real estate		177,016		582		177,598
Construction & land development		5,039		—		5,039
Consumer		18,766		14		18,780
Total	$	205,630	$	596	$	206,226
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