Loans | NOTE 3 – LOANS Loans consist of the following: (Dollars in thousands) September 30, 2021 December 31, 2020 Commercial 1 $ 128,653 $ 191,540 Commercial real estate 190,553 187,221 Residential real estate 168,563 177,155 Construction & land development 42,319 36,038 Consumer 16,356 17,916 Total loans before deferred costs 546,444 609,870 Deferred loan (fees) costs, net (349 ) (711 ) Total Loans $ 546,095 $ 609,159 1 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. 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 $137.5 million and $117.5 million on September 30, 2021 and December 31, 2020, respectively. 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 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 208 PPP loans with outstanding principal balances of $17.0 million as of September 30, 2021, and 671 PPP loans with balances of $70.1 million outstanding as of December 31, 2020. 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 September 30, 2021, 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 nine months ended September 30, 2021 and 2020, interest and fee income recognized on PPP loans was $2.7 million and $1.5 million, respectively. For the three months ended September 30, 2021 and 2020, interest and fee income recognized on PPP loans was $969 thousand and $845 thousand, respectively. As of September 30, 2021, there was approximately $620 thousand in remaining unearned fees on PPP loans outstanding. 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 at September 30, 2021, included $50.4 million, or 9%, of total loans to lessors of non-residential buildings or dwellings, and $33.5 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 September 30, 2021, the total balance of loans, including commitments, identified to COVID-19 affected businesses was $51.8 million, with $33.5 million of those loans to assisted living facilities and $14.0 million to businesses in the hotel industry. 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, 2021 and 2020. 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 and nine months ended September 30, 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 provision for all other categories for the three and nine-month periods is related to the improvement in economic conditions along with fewer delinquent and nonperforming loans and improvement in adversely classified loan balances. For the three and nine months ended September 30, 2020 the increase in the provision for loan losses for commercial real estate and construction loans was primarily due to the increased risk identified for businesses affected by the COVID-19 pandemic. The decrease in provision related to the commercial loan category was primarily due to lower commercial loan volume, excluding the SBA guaranteed PPP loans along with lower historical losses. The decrease in provision related to residential real estate and other consumer loans was due to the improvement in the unemployment rate during the third quarter as businesses reopened after the economic shutdown. S ummary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Real Estate Residential Real Estate Construction & Land Development Consumer Unallocated Total Three Months Ended September 30, 2021 Beginning balance $ 1,335 $ 3,404 $ 1,060 $ 767 $ 278 $ 1,031 $ 7,875 (Recovery of) provision for loan losses 9 (280 ) (32 ) 508 (9 ) (406 ) (210 ) Charge-offs — — — — (39 ) (39 ) Recoveries 5 — 2 — 12 19 Net (charge-offs) recoveries 5 — 2 — (27 ) (20 ) Ending balance $ 1,349 $ 3,124 $ 1,030 $ 1,275 $ 242 $ 625 $ 7,645 Nine Months Ended September 30, 2021 Beginning balance $ 1,739 $ 3,469 $ 1,156 $ 756 $ 352 $ 802 $ 8,274 (Recovery of) provision for loan losses (393 ) (346 ) (130 ) 519 (128 ) (177 ) (655 ) Charge-offs (25 ) — — — (39 ) (64 ) Recoveries 28 1 4 — 57 90 Net (charge-offs) recoveries 3 1 4 — 18 26 Ending balance $ 1,349 $ 3,124 $ 1,030 $ 1,275 $ 242 $ 625 $ 7,645 Three Months Ended September 30, 2020 Beginning balance $ 2,266 $ 2,781 $ 1,585 $ 337 $ 516 $ 350 $ 7,835 Provision for loan losses (512 ) 500 (390 ) 229 (112 ) 662 377 Charge-offs (26 ) — — — (2 ) (28 ) Recoveries 118 40 1 — 12 171 Net (charge-offs) recoveries 92 40 1 — 10 143 Ending balance $ 1,846 $ 3,321 $ 1,196 $ 566 $ 414 $ 1,012 $ 8,355 Nine Months Ended September 30, 2020 Beginning balance $ 2,408 $ 2,153 $ 1,152 $ 203 $ 481 $ 620 $ 7,017 Provision for loan losses (643 ) 1,127 56 363 (23 ) 392 1,272 Charge-offs (45 ) — (15 ) — (71 ) (131 ) Recoveries 126 41 3 — 27 197 Net (charge-offs) recoveries 81 41 (12 ) — (44 ) 66 Ending balance $ 1,846 $ 3,321 $ 1,196 $ 566 $ 414 $ 1,012 $ 8,355 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 September 30, 2021 and December 31, 2020: (Dollars in thousands) Commercial Commercial Real Estate Residential Real Estate Construction Consumer Unallocated Total September 30, 2021 Allowance for loan losses: Individually evaluated for impairment $ 211 $ 20 $ 2 $ — $ 3 $ — $ 236 Collectively evaluated for impairment 1,138 3,104 1,028 1,275 239 625 7,409 Total ending allowance balance $ 1,349 $ 3,124 $ 1,030 $ 1,275 $ 242 $ 625 $ 7,645 Loans: Loans individually evaluated for impairment $ 413 $ 1,974 $ 805 $ — $ 127 $ 3,319 Loans collectively evaluated for impairment 128,240 188,579 167,758 42,319 16,229 543,125 Total ending loans balance $ 128,653 $ 190,553 $ 168,563 $ 42,319 $ 16,356 $ 546,444 December 31, 2020 Allowance for loan losses: Individually evaluated for impairment $ 4 $ 20 $ 1 $ — $ 5 $ — $ 30 Collectively evaluated for impairment 1,735 3,449 1,155 756 347 802 8,244 Total ending allowance balance $ 1,739 $ 3,469 $ 1,156 $ 756 $ 352 $ 802 $ 8,274 Loans: Loans individually evaluated for impairment $ 2,560 $ 2,875 $ 756 $ — $ 141 $ 6,332 Loans collectively evaluated for impairment 188,980 184,346 176,399 36,038 17,775 603,538 Total ending loans balance $ 191,540 $ 187,221 $ 177,155 $ 36,038 $ 17,916 $ 609,870 The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2021 and December 31, 2020: (Dollars in thousands) Unpaid Principal Balance Recorded Investment with no Allowance Recorded Investment with Allowance Total recorded investment 1 Related Allowance September 30, 2021 Commercial $ 424 $ 202 $ 211 $ 413 $ 211 Commercial real estate 2,434 1,864 111 1,975 20 Residential real estate 872 430 380 810 2 Consumer 130 11 120 131 3 Total impaired loans $ 3,860 $ 2,507 $ 822 $ 3,329 $ 236 December 31, 2020 Commercial $ 2,604 $ 1,965 $ 597 $ 2,562 $ 4 Commercial real estate 3,755 2,673 211 2,884 20 Residential real estate 923 513 247 760 1 Consumer 143 — 146 146 5 Total impaired loans $ 7,425 $ 5,151 $ 1,201 $ 6,352 $ 30 1 includes principal, accrued interest, unearned fees, and origination costs The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated. Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2021 2020 2021 2020 Average recorded investment: Commercial $ 1,237 $ 2,220 $ 1,745 $ 2,398 Commercial real estate 2,199 2,553 2,557 2,553 Residential real estate 822 759 822 808 Consumer 128 192 134 99 Average recorded investment in impaired loans $ 4,386 $ 5,724 $ 5,258 $ 5,858 Interest income recognized: Commercial $ 3 $ 14 $ 22 $ 51 Commercial real estate 20 3 71 9 Residential real estate 7 7 23 26 Consumer 2 4 6 5 Interest income recognized on a cash basis on impaired loans $ 32 $ 28 $ 122 $ 91 The following table presents the aging of past due loans and nonaccrual loans as of September 30, 2021 and December 31, 2020 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 September 30, 2021 Commercial $ 128,351 $ 20 $ 6 $ — $ 276 $ 302 $ 128,653 Commercial real estate 190,416 — — — 137 137 190,553 Residential real estate 167,798 205 — — 560 765 168,563 Construction & land development 41,990 — — — 329 329 42,319 Consumer 16,261 46 31 — 18 95 16,356 Total Loans $ 544,816 $ 271 $ 37 $ — $ 1,320 $ 1,628 $ 546,444 December 31, 2020 Commercial $ 190,264 $ 51 $ — $ — $ 1,225 $ 1,276 $ 191,540 Commercial real estate 185,005 11 — — 2,205 2,216 187,221 Residential real estate 175,812 606 — 49 688 1,343 177,155 Construction & land development 35,721 — — — 317 317 36,038 Consumer 17,713 168 22 — 13 203 17,916 Total Loans $ 604,515 $ 836 $ 22 $ 49 $ 4,448 $ 5,355 $ 609,870 Troubled Debt Restructurings 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 $2.6 million as of September 30, 2021, and $2.8 million as of December 31, 2020, with $25 thousand Loan modifications considered TDRs completed during the three and nine-months ended September 30 were as follows: (Dollars in thousands) Number of loans restructured Pre- Modification Recorded Investment Post- Modification Recorded Investment Three Months Ended September 30, 2021 Commercial 1 $ 66 $ 66 Total Restructured Loans 1 $ 66 $ 66 Nine Months Ended September 30, 2021 Commercial 4 $ 960 $ 960 Commercial real estate 2 1,686 1,686 Residential real estate 1 88 88 Total Restructured Loans 7 $ 2,734 $ 2,734 Nine Months Ended September 30, 2020 Commercial 5 $ 181 $ 181 Commercial real estate 1 80 80 Residential real estate 1 66 66 Consumer 6 146 146 13 $ 473 $ 473 The loans restructured were modified by changing the monthly payment to interest only and modifying the maturity dates. None of the loans There was no other real estate owned on September 30, 2021 and December 31, 2020. There were no mortgage loans in the process of foreclosure on September 30, 2021 and $21 thousand on December 31, 2020. There were repossessed assets of $33 thousand on September 30, 2021 and none on December 31, 2020. 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. 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 September 30, 2021 and December 31, 2020: (Dollars in thousands) Pass Special Mention Substandard Doubtful Not Rated Total September 30, 2021 Commercial $ 123,092 $ 543 $ 3,543 $ — $ 1,475 $ 128,653 Commercial real estate 170,065 5,119 13,957 — 1,412 190,553 Residential real estate 164 — 119 — 168,280 168,563 Construction & land development 34,508 210 329 — 7,272 42,319 Consumer — — 10 — 16,346 16,356 Total $ 327,829 $ 5,872 $ 17,958 $ — $ 194,785 $ 546,444 December 31, 2020 Commercial $ 177,620 $ 2,352 $ 9,644 $ — $ 1,924 $ 191,540 Commercial real estate 161,091 2,545 21,812 — 1,773 187,221 Residential real estate 174 — 114 — 176,867 177,155 Construction & land development 29,182 — — 317 6,539 36,038 Consumer — — 105 — 17,811 17,916 Total $ 368,067 $ 4,897 $ 31,675 $ 317 $ 204,914 $ 609,870 The following table presents loans that are not rated by class of loans as of September 30, 2021 and December 31, 2020. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status. (Dollars in thousands) Performing Non- Performing Total September 30, 2021 Commercial $ 1,475 $ — $ 1,475 Commercial real estate 1,412 — 1,412 Residential real estate 167,738 542 168,280 Construction & land development 7,272 — 7,272 Consumer 16,328 18 16,346 Total $ 194,225 $ 560 $ 194,785 December 31, 2020 Commercial $ 1,924 $ — $ 1,924 Commercial real estate 1,773 — 1,773 Residential real estate 176,278 589 176,867 Construction & land development 6,539 — 6,539 Consumer 17,798 13 17,811 Total $ 204,312 $ 602 $ 204,914 |