Loans

3 Months Ended

Mar. 31, 2023

NOTE 3 – LOANS

The composition of net loans receivable as of March 31, 2023 and December 31, 2022:


(Dollars in thousands)	March 31, 2023
Commercial and industrial	$	137,369
Commercial real estate		167,878
Commercial lessors of buildings		81,917
Construction		43,498
Consumer mortgage		157,316
Home equity line of credit		43,323
Consumer installment		9,951
Consumer indirect		6,374
Total loans		647,626
Allowance for credit losses		(6,307	)
Deferred loan costs, net		147
Net Loans	$	641,466


(Dollars in thousands)	December 31, 2022
Commercial	$	129,343
Commercial real estate		231,785
Residential real estate		194,125
Construction & land development		55,318
Consumer		16,387
Total loans		626,958
Allowance for loan losses		(6,838	)
Deferred loan costs, net		213
Total Loans	$	620,333

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, inventory, and equipment, 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.

NOTE 3 – LOANS (CONTINUED)

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.

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 credit 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 $135.0 and $137.5 million on March 31, 2023 and December 31, 2022, respectively.

NOTE 3 – LOANS (CONTINUED)

Concentrations of Credit

Nearly all 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. Credit concentrations, including commitments, as determined using North American Industry Classification Codes (NAICS), to the two largest industries compared to total loans on March 31, 2023, included $68.6 million, or 11%, of total loans to lessors of non-residential buildings, and $25.3 million, or 4%, of total loans to assisted living facilities for the elderly. These loans are generally secured by real property and equipment, with repayment expected from operational cash flow. Credit evaluation is based on a review of cash flow coverage of principal, interest payments, and the adequacy of the collateral received.

Allowance for Credit Losses

The following table details activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2023. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


(Dollars in thousands)	Beginning Balance		Impact of Adopting ASC 326			Charge-offs			Recoveries		Provisions (Reductions)			Ending Balance
March 31, 2023
Commercial and industrial	$	1,110	$	658		$	—		$	10	$	43		$	1,821
Commercial real estate		2,760		(541	)		—			1		16			2,236
Commercial lessors of buildings		—		974			—			—		(9	)		965
Construction		803		(515	)		—			—		(17	)		271
Consumer mortgage		1,268		(580	)		—			—		5			693
Home equity line of credit		—		201			—			—		(15	)		186
Consumer installment		233		(183	)		(8	)		—		5			47
Consumer indirect		—		91			(31	)		24		4			88
Unallocated		664		(664	)		—			—		—			—
	$	6,838	$	(559	)	$	(39	)	$	35	$	32		$	6,307

NOTE 3 – LOANS (CONTINUED)

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, 2022.


(Dollars in thousands)	Commercial			Commercial Real Estate			Residential Real Estate		Construction & Land Development		Consumer			Unallocated			Total
Three Months Ended March 31, 2022
Beginning balance	$	1,240		$	2,838		$	992	$	1,380	$	421		$	747		$	7,618
(Recovery of) provision for loan losses		(65	)		(288	)		46		154		(31	)		(116	)		(300	)
Charge-offs		(10	)		—			—		—		(21	)					(31	)
Recoveries		4			—			1		—		13						18
Net (charge-offs) recoveries		(6	)		—			1		—		(8	)					(13	)
Ending balance	$	1,169		$	2,550		$	1,039	$	1,534	$	382		$	631		$	7,305

Age Analysis of Past-Due Loans Receivable and Nonperforming Loans

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past-due status.


(Dollars in thousands)	Current		30-60 Days Past Due		61-89 Days Past Due		90 Days + Past Due		Total Past Due		Total Loans
March 31, 2023
Commercial and industrial	$	137,318	$	51	$	—	$	—	$	51	$	137,369
Commercial real estate		167,878		—		—		—		—		167,878
Commercial lessors of buildings		81,917		—		—		—		—		81,917
Construction		43,467		31		—		—		31		43,498
Consumer mortgage		157,079		237		—		—		237		157,316
Home equity line of credit		43,074		162		87		—		249		43,323
Consumer installment		9,868		83		—		—		83		9,951
Consumer indirect		6,374		—		—		—		—		6,374
Total Loans	$	646,975	$	564	$	87	$	—	$	651	$	647,626

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing interest as of March 31, 2023:


(Dollars in thousands)	Nonaccrual with no ACL		Nonaccrual with ACL		Total Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Total Nonperforming
March 31, 2023
Commercial and industrial	$	2	$	—	$	2	$	—	$	2
Commercial real estate		87		—		87		—		87
Commercial lessors of buildings		—		—		—		—		—
Construction		—		—		—		—		—
Consumer mortgage		73		—		73		—		73
Home equity line of credit		—		—		—		—		—
Consumer installment		56		—		56		—		56
Consumer indirect		—		—		—		—		—
Total Loans	$	218	$	—	$	218	$	—	$	218

NOTE 3 – LOANS (CONTINUED)

The following table presents the aging of past due loans and nonaccrual loans as of December 31, 2022:


			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
December 31, 2022
Commercial	$	129,270	$	70	$	3	$	—	$	—	$	73	$	129,343
Commercial real estate		231,693		—		—		—		92		92		231,785
Residential real estate		193,794		95		137		—		99		331		194,125
Construction & land development		55,286		32		—		—		—		32		55,318
Consumer		16,091		103		128		—		65		296		16,387
Total Loans	$	626,134	$	300	$	268	$	—	$	256	$	824	$	626,958

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 all commercial loans before origination and an annual review of those with an outstanding commitment greater than $500 thousand. 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.

NOTE 3 – LOANS (CONTINUED)

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Based on the most recent analysis performed, the following tables present the recorded investment in non-homogeneous loans by internal risk rating system as of March 31, 2023 and December 31, 2022:


	Term Loans Amortized Costs Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior						Total
March 31, 2023
Commercial and industrial:
Pass	$	6,532	$	33,855	$	17,116	$	7,745	$	5,613	$	11,097	$	45,792	$	—	$	127,750
Special mention		—		21		—		—		22		—		244		—		287
Substandard		—		498		507		805		4		614		6,904		—		9,332
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	6,532	$	34,374	$	17,623	$	8,550	$	5,639	$	11,711	$	52,940	$	—	$	137,369
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Pass	$	8,059	$	27,184	$	48,057	$	13,725	$	20,714	$	36,117	$	444	$	—	$	154,300
Special Mention		—		—		—		409		6,630		—		—		—		7,039
Substandard		—		—		933		642		479		4,485		—		—		6,539
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	8,059	$	27,184	$	48,990	$	14,776	$	27,823	$	40,602	$	444	$	—	$	167,878
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial lessors of buildings:
Pass	$	483	$	26,745	$	26,775	$	8,383	$	8,117	$	10,856	$	183	$	—	$	81,542
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		375		—		—		—		—		375
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	483	$	26,745	$	26,775	$	8,758	$	8,117	$	10,856	$	183	$	—	$	81,917
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction:
Pass	$	2,106	$	27,238	$	4,250	$	961	$	403	$	325	$	481	$	—	$	35,764
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	2,106	$	27,238	$	4,250	$	961	$	403	$	325	$	481	$	—	$	35,764
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total
Pass	$	17,180	$	115,022	$	96,198	$	30,814	$	34,847	$	58,395	$	46,900	$	—	$	399,356
Special Mention		—		21		—		409		6,652		—		244		—		7,326
Substandard		—		498		1,440		1,822		483		5,099		6,904		—		16,246
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	17,180	$	115,541	$	97,638	$	33,045	$	41,982	$	63,494	$	54,048	$	—	$	422,928


(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
December 31, 2022
Commercial	$	119,353	$	282	$	7,927	$	—	$	1,781	$	129,343
Commercial real estate		220,414		485		8,352		—		2,534		231,785
Construction & land development		40,640		6,655		—		—		8,023		55,318
Total	$	380,407	$	7,422	$	16,279	$	—	$	12,338	$	416,446

NOTE 3 – LOANS (CONTINUED)

The Company monitors the credit risk profile by payment activity for residential and consumer loan classes. Loans past due 90 days or more and loans on nonaccrual status are considered nonperforming. The following table presents the amortized cost in residential consumer loans based on payment activity:


	Term Loans Amortized Costs Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior						Total
March 31, 2023
Consumer mortgage:
Performing	$	6,702	$	31,912	$	39,547	$	35,326	$	9,748	$	34,008	$	—	$	—	$	157,243
Nonperforming		—		—		—		—		—		73		—		—		73
Total	$	6,702	$	31,912	$	39,547	$	35,326	$	9,748	$	34,081	$	—	$	—	$	157,316
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction
Performing	$	614	$	5,257	$	282	$	1,320	$	126	$	135	$	—	$	—	$	7,734
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	614	$	5,257	$	282	$	1,320	$	126	$	135	$	—	$	—	$	7,734
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity line of credit:
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	43,269	$	54	$	43,323
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	43,269	$	54	$	43,323
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer installment:
Performing	$	1,632	$	4,859	$	1,812	$	929	$	353	$	303	$	63	$	—	$	9,951
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	1,632	$	4,859	$	1,812	$	929	$	353	$	303	$	63	$	—	$	9,951
Current period gross charge-offs	$	—	$	3	$	1	$	2	$	33	$	—	$	—	$	—	$	39
Consumer indirect:
Performing	$	177	$	1,322	$	766	$	647	$	759	$	2,647	$	—	$	—	$	6,318
Nonperforming		—		—		7		—		—		49		—		—		56
Total	$	177	$	1,322	$	773	$	647	$	759	$	2,696	$	—	$	—	$	6,374
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	31	$	—	$	—	$	31
Total
Performing	$	8,511	$	38,093	$	42,125	$	36,902	$	10,860	$	36,958	$	43,332	$	54	$	216,835
Nonperforming		—		—		7		—		—		122		—		—		129
Total	$	8,511	$	38,093	$	42,132	$	36,902	$	10,860	$	37,080	$	43,332	$	54	$	216,964

Modifications to Borrowers Experiencing Financial Difficulty

Occasionally, the Bank modifies loans to borrowers in financial distress by providing – principal forgiveness, term extension, an other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

In some cases, the Bank may provide multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

There were no modifications of loans to borrowers in financial distress completed during the quarter ended March 31, 2023.

NOTE 3 – LOANS (CONTINUED)

Impaired Loans

The following impaired loan information relates to required disclosures under the previous incurred loan loss methodology and are only presented with prior period information.

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 December 31, 2022:


(Dollars in thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Construction		Consumer		Unallocated		Total
December 31, 2022
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	4	$	—	$	4
Collectively evaluated for impairment		1,110		2,760		1,268		803		229		664		6,834
Total ending allowance balance	$	1,110	$	2,760	$	1,268	$	803	$	233	$	664	$	6,838
Loans:
Loans individually evaluated for impairment	$	123	$	113	$	677	$	—	$	123			$	1,036
Loans collectively evaluated for impairment		129,220		231,672		193,448		55,318		16,264				625,922
Total ending loans balance	$	129,343	$	231,785	$	194,125	$	55,318	$	16,387			$	626,958

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2022:


(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total recorded investment1		Related Allowance
December 31, 2022
Commercial	$	123	$	124	$	—	$	124	$	—
Commercial real estate		117		92		20		112		—
Residential real estate		733		166		518		683		—
Construction & land development		—		—		—		—		—
Consumer		127		6		121		127		4
Total impaired loans	$	1,101	$	387	$	659	$	1,046	$	4

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

NOTE 3 – LOANS (CONTINUED)

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)	2022
Average recorded investment:
Commercial	$	264
Commercial real estate		222
Residential real estate		849
Construction & land development		329
Consumer		135
Average recorded investment in impaired loans	$	1,799
Interest income recognized:
Commercial	$	1
Commercial real estate		2
Residential real estate		8
Construction & land development		—
Consumer		2
Interest income recognized on a cash basis on impaired loans	$	13