¹ Includes $2.0 million and $4.6 million of Paycheck Protection Program loans on March 31, 2022, and December 31, 2021, respectively.

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.

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 $142.1 million on March 31, 2022 and December 31, 2021, respectively.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided 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. The Company had 19 PPP loans with outstanding principal balances of $2.0 million as of March 31, 2022, and 76 PPP loans with balances of $4.6 million outstanding as of December 31, 2021. 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, as of March 31, 2022, the Company has received approximately $5.4 million in fees associated with the processing of these loans since the inception of the program. Upon funding of the loans, fees are deferred and amortized over the life of the loan with the unearned balance fully recognized at the time a loan is forgiven as an adjustment to yield in accordance with FASB ASC 310-20-25-2. For the three months ended March 31, 2022, and 2021, interest and fee income recognized on PPP loans was $132 thousand and $902 thousand, respectively. As of March 31, 2022, there was approximately $49 thousand in remaining unearned fees on PPP loans outstanding.

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, 2022, included $66.8 million, or 12%, of total loans to lessors of non-residential buildings or dwellings, and $33.3 million, or 6%, 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.

The Company has identified industries that could be at a higher risk due to the COVID-19 pandemic. As of March 31, 2022, the total balance of loans, including commitments, identified to COVID-19 affected businesses was $45.5 million, with $33.3 million of those loans to assisted living facilities and $10.7 million to businesses in the hotel industry.

The following tables detail activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2022, and 2021. 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 March 31, 2022, the decrease in the provision for loan losses for commercial real estate loans was primarily due to the improvement in businesses affected by the COVID-19 pandemic as well as the reduction of loans in this category. The increase in the provision for construction and land development loans and residential real estate loans was primarily related to the increase in balances of loans in these categories. The decrease in provision for all other categories for the three-month period is related to the improvement in overall economic conditions.

For the three months ended March 31, 2021, the decrease in the provision for loan losses for commercial loans was primarily related to payoffs of loans in the sawmill industry, which was partially offset by an increase related to provisions for impaired loans. The decrease in provision for the consumer loan category is primarily due to a reduction in delinquencies and historical losses, along with net recoveries for the three-month period. The increase in the provision for construction loans is primarily due to the uncertainty related to businesses affected by the COVID economic shutdown. The increase in the unallocated portion of the allowance for loan losses is due to the continuing uncertainty from the effects of the pandemic.

(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
Three Months Ended March 31, 2021
Beginning balance	$	1,739		$	3,469		$	1,156		$	756	$	352		$	802		$	8,274
Provision for loan losses		(115	)		20			(23	)		44		(79	)		183			30
Charge-offs		(3	)		—			—			—		(2	)					(5	)
Recoveries		19			—			1			—		19						39
Net (charge-offs) recoveries		16			—			1			—		17						34
Ending balance	$	1,640		$	3,489		$	1,134		$	800	$	290		$	985		$	8,338

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, 2022 and December 31, 2021:

(Dollars in thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Construction		Consumer		Unallocated		Total
March 31, 2022
Allowance for loan losses:
Individually evaluated for impairment	$	205	$	—	$	2	$	—	$	3			$	210
Collectively evaluated for impairment		964		2,550		1,037		1,534		379		631		7,095
Total ending allowance balance	$	1,169	$	2,550	$	1,039	$	1,534	$	382	$	631	$	7,305
Loans:
Loans individually evaluated for impairment	$	336	$	254	$	840	$	329	$	133			$	1,892
Loans collectively evaluated for impairment		126,881		189,163		172,147		61,855		15,185				565,231
Total ending loans balance	$	127,217	$	189,417	$	172,987	$	62,184	$	15,318			$	567,123
December 31, 2021
Allowance for loan losses:
Individually evaluated for impairment	$	208	$	9	$	2	$	—	$	3	$	—	$	222
Collectively evaluated for impairment		1,032		2,829		990		1,380		418		747		7,396
Total ending allowance balance	$	1,240	$	2,838	$	992	$	1,380	$	421	$	747	$	7,618
Loans:
Loans individually evaluated for impairment	$	342	$	291	$	856	$	329	$	137			$	1,955
Loans collectively evaluated for impairment		123,591		194,463		167,391		45,713		15,937				547,095
Total ending loans balance	$	123,933	$	194,754	$	168,247	$	46,042	$	16,074			$	549,050

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2022 and December 31, 2021:

(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total recorded investment¹		Related Allowance
March 31, 2022
Commercial	$	351	$	132	$	205	$	337	$	205
Commercial real estate		396		230		24		254		—
Residential real estate		911		556		288		844		2
Construction & land development		647		330		—		330		—
Consumer		137		9		129		138		3
Total impaired loans	$	2,442	$	1,257	$	646	$	1,903	$	210
December 31, 2021
Commercial	$	354	$	134	$	208	$	342	$	208
Commercial real estate		433		233		59		292		9
Residential real estate		925		571		291		862		2
Construction & land development		646		330		—		330		—
Consumer		141		23		119		142		3
Total impaired loans	$	2,499	$	1,291	$	677	$	1,968	$	222

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		2021
Average recorded investment:
Commercial	$	264	$	2,025
Commercial real estate		222		2,814
Residential real estate		849		810
Construction & land development		329		325
Consumer		135		139
Average recorded investment in impaired loans	$	1,799	$	6,113
Interest income recognized:
Commercial	$	1	$	10
Commercial real estate		2		30
Residential real estate		8		8
Construction & land development		—		—
Consumer		2		2
Interest income recognized on a cash basis on impaired loans	$	13	$	50

The following table presents the aging of past due loans and nonaccrual loans as of March 31, 2022 and December 31, 2021 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, 2022
Commercial	$	127,011	$	—	$	—	$	1	$	205	$	206	$	127,217
Commercial real estate		189,279		—		—		—		138		138		189,417
Residential real estate		172,441		70		—		120		356		546		172,987
Construction & land development		61,855		—		—		—		329		329		62,184
Consumer		15,160		92		34		—		32		158		15,318
Total Loans	$	565,746	$	162	$	34	$	121	$	1,060	$	1,377	$	567,123
December 31, 2021
Commercial	$	123,698	$	5	$	17	$	5	$	208	$	235	$	123,933
Commercial real estate		194,615		—		—		—		139		139		194,754
Residential real estate		167,689		191		—		—		367		558		168,247
Construction & land development		45,713		—		—		—		329		329		46,042
Consumer		15,863		171		—		—		40		211		16,074
Total Loans	$	547,578	$	367	$	17	$	5	$	1,083	$	1,472	$	549,050

All troubled debt restructurings (“TDRs”) are individually evaluated for impairment and a related allowance is recorded, as needed. Loans whose terms have been modified as TDRs totaled $1.2 million as of March 31, 2022, and $1.3 million as of December 31, 2021, with $5 thousand of specific reserves allocated to those loans at March 31, 2022 and $14 thousand at December 31, 2021, respectively. On March 31, 2022, $1.1 million of the loans classified as TDRs were performing in accordance with their modified terms. The remaining $94 thousand were classified as nonaccrual.

There were no loan modifications considered TDRs completed during the three months ended March 31, 2022. Loan modifications considered TDRs completed during the three months ended March 31, 2021 were as follows:

The loans restructured were modified by changing the monthly payment to interest only and modifying the maturity dates.

None of the loans restructured in 2021 have defaulted in the three months ended March 31, 2022. None of the loans restructured in 2020 defaulted in 2021.

There was no other real estate owned on March 31, 2022 and December 31, 2021. There were no consumer mortgage loans secured by residential real estate in the process of foreclosure on March 31, 2022 and December 31, 2021. There were no repossessed assets on March 31, 2022 and December 31, 2021.

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.

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 annually 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, 2022 and December 31, 2021:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
March 31, 2022
Commercial	$	117,674	$	5,272	$	1,843	$	—	$	2,428	$	127,217
Commercial real estate		172,890		3,169		12,416		—		942		189,417
Construction & land development		48,639		5,811		329		—		7,405		62,184
Total	$	339,203	$	14,252	$	14,588	$	—	$	10,775	$	378,818
December 31, 2021
Commercial	$	114,608	$	5,959	$	2,203	$	—	$	1,163	$	123,933
Commercial real estate		176,547		7,313		10,186		—		708		194,754
Construction & land development		33,205		5,439		329		—		7,069		46,042
Total	$	324,360	$	18,711	$	12,718	$	—	$	8,940	$	364,729

Management monitors the credit quality of residential real estate and consumer loans as homogenous groups. These loans are evaluated based on delinquency status and included in the past due table in this section. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status.