Loans | NOTE 3 – LOANS The composition of net loans receivable as of September 30, 2023 and December 31, 2022: (Dollars in thousands) September 30, 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, 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 Residential Construction 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 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 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 60-89 90 Days + Total Past Due Total 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 60-89 90 Days + Non- Total Total 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 Substandard Doubtful Not 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 Residential Construction Consumer Unallocated Total December 31, 2022 Allowance for loan losses: Individually evaluated for $ — $ — $ — $ — $ 4 $ — $ 4 Collectively evaluated for 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 $ 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 The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2022: (Dollars in thousands) Unpaid Recorded Recorded Total 1 Related 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 1 Includes 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 |