Loans | NOTE 3 – LOANS Loans consist of the following: (Dollars in thousands) March 31, 2022 December 31, 2021 Commercial 1 $ 127,217 $ 123,933 Commercial real estate 189,417 194,754 Residential real estate 172,987 168,247 Construction & land development 62,184 46,042 Consumer 15,318 16,074 Total loans before deferred costs 567,123 549,050 Deferred loan costs, net 252 104 Total Loans $ 567,375 $ 549,154 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 $142.1 million 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 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. 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 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. Allowance for Loan Losses 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. 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 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 investment 1 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 1 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 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 $1.2 million as of March 31, 2022, and $1.3 million as of December 31, 2021, with $5 thousand There were no loan modifications considered TDRs completed during the three months ended March 31, 2022. (Dollars in thousands) Number of loans restructured Pre- Modification Recorded Investment Post- Modification Recorded Investment Three Months Ended March 31, 2021 Commercial real estate 1 1,300 1,300 Residential real estate 1 88 88 2 $ 1,388 $ 1,388 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 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. 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 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. |