Loans | NOTE 3 – LOANS Loans consisted of the following on December 31: (Dollars in thousands) 2022 2021 Commercial $ 129,343 $ 123,933 Commercial real estate 231,785 194,754 Residential real estate 194,125 168,247 Construction & land development 55,318 46,042 Consumer 16,387 16,074 Total loans before deferred loan (fees) and costs 626,958 549,050 Deferred loan (fees) and costs 213 104 Total loans $ 627,171 $ 549,154 Loan Origination/Risk Management The Company has certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. Management reviews and the Board of Directors 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 their 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. However, the cash flows of borrowers 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 generally 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. With respect to loans to developers and builders 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, lease rates, and financial analysis of 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 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 permanent financing from the Company. 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. Policies and procedures are developed and modified, as needed, by management to monitor and manage consumer loan risk. This activity, coupled with relatively small loan amounts spread across many individual borrowers, minimizes risk. The Company engages an independent loan review vendor that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Audit Committee. 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. Paycheck Protection Program 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 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 provided loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash flow assistance to employers who maintained their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. During 2021 and 2020, the Company originated 1,351 PPP loans with principal balances of $ 128.9 million. The PPP loans are 100 % guaranteed by the SBA and are eligible for forgiveness by the SBA to the extent that the proceeds were used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan was made if certain conditions were met regarding employee retention and compensation levels. The majority of PPP loans deemed eligible for forgiveness by the SBA have been repaid by the SBA to the Company. As of December 31, 2022, the Company has received $ 128.5 million in loan forgiveness from the SBA. The remaining $ 359 thousand of PPP loans are included in the Commercial loan category with no allowance for loan losses allocated. 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 industrial and commercial real estate loans. Credit concentrations, including commitments, as determined using North American Industry Classification Codes (NAICS), to the four largest industries compared to total loans at December 31, 2022, included $ 73 million, or 12 %, of total loans to lessors of non-residential buildings; $ 26 million, or 4 %, of total loans to assisted living facilities for the elderly; $ 17 million, or 3 %, of total loans to lessors of other real estate property; and $ 17 million, or 3 %, of total loans to home centers (hardware stores). 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 Loan Losses The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 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. During 2022, the decrease in the provision (recovery) for loan losses for construction and land development and commercial real estate loans was primarily related to the improvement in loans to businesses that were negatively impacted by the COVID-19 pandemic, the reduction of impaired and adversely classified loans, as well as a large recovery received on a previously charged-off loan. The decrease in the provision for consumer loans was primarily related to the tightening of underwriting guidelines pertaining to the RV portfolio along with a decline in RV loan balances and fewer consumer loan charge-offs in 2022. The provision related to residential real estate loans increased as a result of the growth in loan balances along with an increase in the general loss ratios due to elevated levels of economic uncertainty associated with increased inflation and higher interest rates. During 2021, the increase in the provision for loan losses for construction and land development loans was primarily related to loans to assisted living facilities that have been affected by the COVID-19 pandemic. The decrease in the provision related to commercial, commercial real estate and residential real estate loans was primarily related to the improvement in economic conditions along with fewer delinquent and nonperforming loans and improvement in adversely classified loans. The provision related to consumer loans increased primarily as a result of the increase in historical losses of loans in this category. Summary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Residential Construction Consumer Unallocated Total December 31, 2022 Beginning balance $ 1,240 $ 2,838 $ 992 $ 1,380 $ 421 $ 747 $ 7,618 (Recovery) provision for loan losses 47 ( 68 ) 273 ( 889 ) ( 175 ) ( 83 ) ( 895 ) Charge-offs ( 227 ) ( 13 ) — — ( 48 ) ( 288 ) Recoveries 50 3 3 312 35 403 Net (charge-offs) ( 177 ) ( 10 ) 3 312 ( 13 ) 115 Ending balance $ 1,110 $ 2,760 $ 1,268 $ 803 $ 233 $ 664 $ 6,838 December 31, 2021 Beginning balance $ 1,739 $ 3,469 $ 1,156 $ 756 $ 352 $ 802 $ 8,274 (Recovery) provision for loan losses ( 495 ) ( 639 ) ( 189 ) 624 99 ( 55 ) ( 655 ) Charge-offs ( 35 ) — — — ( 95 ) ( 130 ) Recoveries 31 8 25 — 65 129 Net (charge-offs) ( 4 ) 8 25 — ( 30 ) ( 1 ) Ending balance $ 1,240 $ 2,838 $ 992 $ 1,380 $ 421 $ 747 $ 7,618 The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio segment and impairment method as of December 31: (Dollars in thousands) Commercial Commercial Residential Construction Consumer Unallocated Total 2022 Allowance for loan losses: Ending allowance balances Individually evaluated for $ — $ — $ — $ — $ 4 $ — $ 4 Collectively evaluated for 1,110 2,760 1,268 803 229 664 6,834 Total ending allowance $ 1,110 $ 2,760 $ 1,268 $ 803 $ 233 $ 664 $ 6,838 Loans: Loans individually $ 123 $ 113 $ 677 $ — $ 123 $ 1,036 Loans collectively 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 2021 Allowance for loan losses: Ending allowance balances Individually evaluated for $ 208 $ 9 $ 2 $ — $ 3 $ — $ 222 Collectively evaluated for 1,032 2,829 990 1,380 418 747 7,396 Total ending allowance $ 1,240 $ 2,838 $ 992 $ 1,380 $ 421 $ 747 $ 7,618 Loans: Loans individually $ 342 $ 291 $ 856 $ 329 $ 137 $ 1,955 Loans collectively 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 December 31: (Dollars in thousands) Unpaid Recorded Recorded Total 1 Related Average Interest 2022 Commercial $ 123 $ 124 $ — $ 124 $ — $ 327 $ 7 Commercial real estate 117 92 20 112 — 118 4 Residential real estate 733 166 518 683 — 758 31 Construction & land development — — — — — 123 — Consumer 127 6 121 127 4 130 8 Total impaired loans $ 1,101 $ 387 $ 659 $ 1,046 $ 4 $ 1,456 $ 50 2021 Commercial $ 354 $ 134 $ 208 $ 342 $ 208 $ 1,397 $ 23 Commercial real estate 433 233 59 292 9 1,945 85 Residential real estate 925 571 291 862 2 826 31 Construction & land development 646 330 — 330 — 330 — Consumer 141 23 119 142 3 132 8 Total impaired loans $ 2,499 $ 1,291 $ 677 $ 1,968 $ 222 $ 4,630 $ 147 1 Includes principal, accrued interest, unearned fees, and origination costs. The following table presents the aging of accruing past due and nonaccrual loans by class of loans as of December 31: Accruing Loans (Dollars in thousands) Current 30-59 60-89 90 Days + Nonaccrual Total Past Total 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 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 Troubled Debt Restructurings The Company had troubled debt restructurings (“TDRs”) of $ 944 thousand as of December 31, 2022, with $ 4 thousand of specific reserves allocated to customers whose loan terms have been modified in TDRs. On December 31, 2022, $ 916 thousand of the loans classified as TDRs were performing in accordance with their modified terms. The remaining $ 28 thousand were classified as nonaccrual. On December 31, 2021, the Company had TDRs of $ 1.3 million, with $ 14 thousand of specific reserves allocated. There were no l oan modifications considered TDRs completed during the year ended December 31, 2022.The following table represents the loan modification considered TDRs completed during the year ended December 31, 2021: (Dollars in thousands) Number Of Pre-Modification Post-Modification 2021 Commercial 4 $ 960 $ 960 Commercial Real Estate 2 1,686 1,686 Residential Real Estate 1 159 159 Consumer 1 13 13 Total restructured loans 8 $ 2,818 $ 2,818 The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. No principal reductions were made. No ne of the loans restructured in 2021 subsequently defaulted in 2022. Real Estate Loans in Foreclosure There was no other real estate owned on December 31, 2022, or 2021, respectively. Mortgage loans in the process of foreclosure were $ 17 thousand on December 31, 2022. There were no mortgage loans in the process of foreclosure on December 31, 2021. Credit Quality Indicators The Company categorizes commercial and commercial real estate 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 and commercial real estate 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 collectable 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. Loans classified as special mention have a material weakness deserving of management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses jeopardizing the liquidation of the debt. They are characterized by the distinct possibility that the Bank 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 existing facts, conditions, 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 was as follows on December 31: (Dollars in thousands) Pass Special Substandard Doubtful Not Total 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 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 and greater and loans on nonaccrual of interest status. Mortgage Servicing Rights For the years ended December 31, 2022 and 2021, the Company had outstanding MSRs of $ 621 thousand and $ 604 thousand, respectively. The capitalized additions of servicing rights is included in net gain on sale of loans on the consolidated statement of income. No valuation allowance was recorded on December 31, 2022 or 2021, as the fair value of the MSRs exceeded their carrying value. On December 31, 2022, the Company had $ 130.1 million residential mortgage loans with servicing retained as compared to $ 133.8 million with servicing retained on December 31, 2021. Total loans serviced for others approximated $ 137.5 million and $ 142.1 million on December 31, 2022, and 2021, respectively. The following summarizes mortgage servicing rights capitalized and amortized during each year: (Dollars in thousands) 2022 2021 Beginning of year $ 604 $ 488 Capitalized additions 97 224 Amortization ( 80 ) ( 108 ) Valuation allowance — — End of year $ 621 $ 604 |