Loans

9 Months Ended

Sep. 30, 2023

NOTE 3 – LOANS

The composition of net loans receivable as of September 30, 2023 and December 31, 2022:


(Dollars in thousands)	September 30, 2023
Commercial and industrial	$	143,227
Commercial real estate		188,910
Commercial lessors of buildings		78,520
Construction		44,446
Consumer mortgage		167,419
Home equity line of credit		41,093
Consumer installment		11,197
Consumer indirect		6,168
Total loans		680,980
Allowance for credit losses		(6,691	)
Deferred loan fees, net		(31	)
Net Loans	$	674,258


(Dollars in thousands)	December 31, 2022
Commercial and industrial	$	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

* See Note 1 for reclassification of balances due to the adoption of ASC 326.

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 $132.2 and $137.5 million on September 30, 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 September 30, 2023, included $62.9 million, or 9%, of total loans to lessors of non-residential buildings, and $39.6 million, or 6%, of total loans to manufacturers of animal food. 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 ("ACL") by portfolio segment for the three and nine months ended September 30, 2023. 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 months ended in September 2023, the decrease in the provision for commercial and industrial loans primarily relates to the recovery of prior loan charge-offs, as well as the decrease in substandard loan balances in this loan category. The remaining provision changes for the quarter are primarily a result of changes in loan volume in each loan category.

For the nine month period in 2023, the decrease in provision for commercial real estate loans is due to the payoff of one larger loan relationship with a specific allocation. The increase in the provision for commercial lessors of buildings relates to the increase in loans graded special mention in this category. All other changes during the nine month period are related to loan volume changes.


(Dollars in thousands)	Beginning Balance		Impact of Adopting ASC 326			Charge-offs			Recoveries		Provisions (Recovery)			Ending Balance
Three Months Ended September 30, 2023
Commercial and industrial	$	2,119	$	—		$	—		$	147	$	(303	)	$	1,963
Commercial real estate		1,882		—			—			8		239			2,129
Commercial lessors of buildings		1,237		—			—			—		(11	)		1,226
Construction		283		—			—			—		(28	)		255
Consumer mortgage		714		—			—			—		61			775
Home equity line of credit		178		—			—			—		9			187
Consumer installment		52		—			(8	)		—		13			57
Consumer indirect		94		—			(35	)		7		33			99
Unallocated		—		—			—			—		—			—
	$	6,559	$	—		$	(43	)	$	162	$	13		$	6,691

Nine Months Ended September 30, 2023
Commercial and industrial	$	1,110	$	658		$	—		$	166	$	29		$	1,963
Commercial real estate		2,760		(541	)		—			9		(99	)		2,129
Commercial lessors of buildings		—		974			—			—		252			1,226
Construction		803		(515	)		—			—		(33	)		255
Consumer mortgage		1,268		(580	)		—			1		86			775
Home equity line of credit		—		201			—			—		(14	)		187
Consumer installment		233		(183	)		(31	)		12		26			57
Consumer indirect		—		91			(66	)		34		40			99
Unallocated		664		(664	)		—			—		—			—
	$	6,838	$	(559	)	$	(97	)	$	222	$	287		$	6,691

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 and nine months ended September 30, 2022.


(Dollars in thousands)	Commercial and industrial			Commercial Real Estate			Residential Real Estate		Construction & Land Development			Consumer			Unallocated		Total
Three Months Ended September 30, 2022
Beginning balance	$	1,213		$	2,422		$	1,177	$	1,607		$	395		$	454	$	7,268
(Recovery of) provision for loan losses		45			(298	)		111		(331	)		(137	)		360		(250	)
Charge-offs		(13	)		(12	)		—		—			(4	)				(29	)
Recoveries		4			—			1		—			14					19
Net (charge-offs) recoveries		(9	)		(12	)		1		—			10					(10	)
Ending balance	$	1,249		$	2,112		$	1,289	$	1,276		$	268		$	814	$	7,008
Nine Months Ended September 30, 2022
Beginning balance	$	1,240		$	2,838		$	992	$	1,380		$	421		$	747	$	7,618
(Recovery of) provision for loan losses		30			(715	)		295		(416	)		(156	)		67		(895	)
Charge-offs		(31	)		(12	)		—		—			(28	)				(71	)
Recoveries		10			1			2		312			31					356
Net (charge-offs) recoveries		(21	)		(11	)		2		312			3					285
Ending balance	$	1,249		$	2,112		$	1,289	$	1,276		$	268		$	814	$	7,008

NOTE 3 – LOANS (CONTINUED)

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		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total Past Due		Total Loans
September 30, 2023
Commercial and industrial	$	143,026	$	184	$	17	$	—	$	201	$	143,227
Commercial real estate		188,576		334		—		—		334		188,910
Commercial lessors of buildings		78,520		—		—		—		—		78,520
Construction		44,446		—		—		—		—		44,446
Consumer mortgage		166,980		394		45		—		439		167,419
Home equity line of credit		40,874		219		—		—		219		41,093
Consumer installment		11,044		121		20		12		153		11,197
Consumer indirect		6,168		—		—		—		—		6,168
Total Loans	$	679,634	$	1,252	$	82	$	12	$	1,346	$	680,980

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 September 30, 2023:


(Dollars in thousands)	Nonaccrual with no ACL		Nonaccrual with ACL		Total Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Total Nonperforming
September 30, 2023
Commercial and industrial	$	17	$	—	$	17	$	—	$	17
Commercial real estate		79		—		79		—		79
Commercial lessors of buildings		—		—		—		—		—
Construction		—		—		—		—		—
Consumer mortgage		110		—		110		—		110
Home equity line of credit		—		—		—		—		—
Consumer installment		16		—		16		12		28
Consumer indirect		26		—		26		—		26
Total Loans	$	248	$	—	$	248	$	12	$	260

Interest income recognized on nonaccrual loans for the nine months ended September 30, 2023 was $1 thousand on commercial real estate loans and $22 thousand on consumer mortgage loans. Several of the consumer mortgage loans are at an amortized cost basis of $0 and all payments are being recognized as interest income.

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 and industrial	$	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 September 30, 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
September 30, 2023
Commercial and industrial:
Pass	$	21,665	$	27,127	$	13,867	$	5,840	$	4,057	$	8,540	$	45,546	$	—	$	126,642
Special mention		16		19		651		178		90		352		7,248		—		8,554
Substandard		294		570		483		901		60		1,230		4,493		—		8,031
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	21,975	$	27,716	$	15,001	$	6,919	$	4,207	$	10,122	$	57,287	$	—	$	143,227
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Pass	$	20,649	$	36,877	$	57,330	$	14,776	$	19,773	$	24,035	$	695	$	—	$	174,135
Special Mention		213		465		652		398		—		2,688		—		—		4,416
Substandard		—		—		902		—		471		8,986		—		—		10,359
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	20,862	$	37,342	$	58,884	$	15,174	$	20,244	$	35,709	$	695	$	—	$	188,910
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial lessors of buildings:
Pass	$	13,317	$	22,938	$	15,821	$	6,516	$	3,594	$	9,202	$	381	$	—	$	71,769
Special Mention		—		446		1,513		—		3,627		—		—		—		5,586
Substandard		—		—		—		999		—		166		—		—		1,165
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	13,317	$	23,384	$	17,334	$	7,515	$	7,221	$	9,368	$	381	$	—	$	78,520
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction:
Pass	$	16,348	$	19,495	$	599	$	275	$	288	$	269	$	—	$	—	$	37,274
Special Mention		—		289		6		635		—		—		—		—		930
Substandard		—		—		—		33		80		—		—		—		113
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	16,348	$	19,784	$	605	$	943	$	368	$	269	$	—	$	—	$	38,317
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total
Pass	$	71,979	$	106,437	$	87,617	$	27,407	$	27,712	$	42,046	$	46,622	$	—	$	409,820
Special Mention		229		1,219		2,822		1,211		3,717		3,040		7,248		—		19,486
Substandard		294		570		1,385		1,933		611		10,382		4,493		—		19,668
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	72,502	$	108,226	$	91,824	$	30,551	$	32,040	$	55,468	$	58,363	$	—	$	448,974


(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
December 31, 2022
Commercial and industrial	$	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 the loan classes listed below. 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
September 30, 2023
Consumer mortgage:
Performing	$	19,430	$	35,098	$	38,086	$	33,815	$	9,080	$	31,800	$	—	$	—	$	167,309
Nonperforming		—		—		—		—		—		110		—		—		110
Total	$	19,430	$	35,098	$	38,086	$	33,815	$	9,080	$	31,910	$	—	$	—	$	167,419
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction
Performing	$	3,422	$	1,736	$	270	$	576	$	83	$	42	$	—	$	—	$	6,129
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	3,422	$	1,736	$	270	$	576	$	83	$	42	$	—	$	—	$	6,129
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity line of credit:
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	41,046	$	47	$	41,093
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	41,046	$	47	$	41,093
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer installment:
Performing	$	5,410	$	3,476	$	1,187	$	603	$	211	$	208	$	74	$	—	$	11,169
Nonperforming		—		1		17		—		10		—		—		—		28
Total	$	5,410	$	3,477	$	1,204	$	603	$	221	$	208	$	74	$	—	$	11,197
YTD gross charge-offs	$	1	$	11	$	10	$	3	$	2	$	4	$	—	$	—	$	31
Consumer indirect:
Performing	$	760	$	1,219	$	636	$	589	$	643	$	2,295	$	—	$	—	$	6,142
Nonperforming		—		—		—		—		21		5		—		—		26
Total	$	760	$	1,219	$	636	$	589	$	664	$	2,300	$	—	$	—	$	6,168
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	66	$	—	$	—	$	66
Total
Performing	$	29,022	$	41,529	$	40,179	$	35,583	$	10,017	$	34,345	$	41,120	$	47	$	231,842
Nonperforming		—		1		17		—		31		115		—		—		164
Total	$	29,022	$	41,530	$	40,196	$	35,583	$	10,048	$	34,460	$	41,120	$	47	$	232,006

Consumer mortgages are substantially secured by one to four family owner occupied properties and consumer indirect loans are substantially secured by recreational vehicles. All nonperforming consumer loans are evaluated when placed on nonaccrual status and may be charged down based on the fair value less cost to sell if that value is lower than the outstanding balance.

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 nine months ended September 30, 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 and industrial		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 and industrial	$	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.


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
(Dollars in thousands)	2022		2022
Average recorded investment:
Commercial and industrial	$	255	$	258
Commercial real estate		173		198
Residential real estate		715		781
Construction & land development		—		164
Consumer		131		132
Average recorded investment in impaired loans	$	1,274	$	1,533
Interest income recognized:
Commercial and industrial	$	—	$	2
Commercial real estate		2		6
Residential real estate		7		23
Construction & land development		—		—
Consumer		2		6
Interest income recognized on a cash basis on impaired loans	$	11	$	37