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Note 8 - Loans and Related Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2022

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 8 - LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company’s primary business activity is with customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties. The Company also serves the central Ohio market with offices in Dublin, Plain City, Powell, Sunbury, and Westerville, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease losses. Interest income is recognized on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that the collection of interest is doubtful. Interest payments received on nonaccrual loans are applied against the unpaid principal balance until accrual status is restored.

Loan origination fees and certain direct loan origination costs are deferred with the net amount amortized over the contractual life of the loan as an adjustment of the related loan’s yield.

The following tables summarize the primary segments of the loan portfolio and allowance for loan and lease losses (in thousands):

September 30, 2022
Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	5,387	$	115,525	$	120,912
Non-owner occupied		14,140		271,279		285,419
Multifamily		-		38,063		38,063
Residential real estate		892		246,720		247,612
Commercial and industrial		1,763		145,224		146,987
Home equity lines of credit		246		114,098		114,344
Construction and other		-		33,748		33,748
Consumer installment		-		8,110		8,110
Total	$	22,428	$	972,767	$	995,195

December 31, 2021
Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	731	$	110,739	$	111,470
Non-owner occupied		5,297		278,321		283,618
Multifamily		-		31,189		31,189
Residential real estate		1,104		238,985		240,089
Commercial and industrial		587		148,225		148,812
Home equity lines of credit		250		104,105		104,355
Construction and other		-		54,148		54,148
Consumer installment		-		8,010		8,010
Total	$	7,969	$	973,722	$	981,691

The amounts above include net deferred loan origination fees of $1.9 million and $3.6 million on September 30, 2022, and December 31, 2021, respectively. The net deferred loan origination fees at September 30, 2022, and December 31, 2021, include $14,000 and $1.3 million, respectively, of unearned deferred fees from Paycheck Protection Program (“PPP”) loans.

September 30, 2022
Ending Allowance Balance by Impairment Evaluation:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	36	$	1,848	$	1,884
Non-owner occupied		310		5,388		5,698
Multifamily		-		623		623
Residential real estate		13		2,236		2,249
Commercial and industrial		306		1,426		1,732
Home equity lines of credit		1		1,892		1,893
Construction and other		-		429		429
Consumer installment		-		24		24
Total	$	666	$	13,866	$	14,532

December 31, 2021
Ending Allowance Balance by Impairment Evaluation:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	10	$	1,826	$	1,836
Non-owner occupied		655		6,776		7,431
Multifamily		-		454		454
Residential real estate		17		1,723		1,740
Commercial and industrial		42		840		882
Home equity lines of credit		16		1,436		1,452
Construction and other		-		533		533
Consumer installment		-		14		14
Total	$	740	$	13,602	$	14,342

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial Real Estate (“CRE”), which is further segmented into Owner Occupied (“CRE OO”), Non-owner Occupied (“CRE NOO”), and Multifamily Residential, Residential Real Estate (“RRE”), Commercial and Industrial (“C&I”), Home Equity Lines of Credit (“HELOC”), Construction and Other (“Construction”), and Consumer Installment Loans. The commercial real estate loan segments consist of loans made to finance the activities of commercial real estate owners and operators. The residential real estate and HELOC loan segments consist of loans made to finance the activities of residential homeowners. The C&I loan segment consists of loans made to finance the activities of commercial customers. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The increases in the allowance for loan loss for the C&I, RRE, and HELOC portfolios were partially offset by a decrease in the allowance for the CRE, Construction, and Consumer Installment portfolios.

Management evaluates individual loans in all of the commercial segments for possible impairment based on guidelines established by the Board of Directors. Loans are considered to be impaired when, based on current information and events, the Company will probably be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall concerning the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment unless such loans are part of a larger relationship that is impaired or the loan was modified in a troubled debt restructuring.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of the following methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made quarterly. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands):

September 30, 2022
Impaired Loans
			Unpaid
	Recorded			Principal	Related
	Investment			Balance	Allowance
With no related allowance recorded:
Commercial real estate:
Non-owner occupied	$	1,085	$	1,821	$	-
Residential real estate		573		635		-
Commercial and industrial		242		354		-
Home equity lines of credit		113		113		-
Total	$	2,013	$	2,923	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied	$	5,387	$	5,387	$	36
Non-owner occupied		13,055		13,124		310
Residential real estate		319		319		13
Commercial and industrial		1,521		1,521		306
Home equity lines of credit		133		133		1
Total	$	20,415	$	20,484	$	666

Total:
Commercial real estate:
Owner occupied	$	5,387	$	5,387	$	36
Non-owner occupied		14,140		14,945		310
Residential real estate		892		954		13
Commercial and industrial		1,763		1,875		306
Home equity lines of credit		246		246		1
Total	$	22,428	$	23,407	$	666

December 31, 2021
Impaired Loans
			Unpaid
	Recorded			Principal	Related
	Investment			Balance	Allowance
With no related allowance recorded:
Commercial real estate:
Non-owner occupied	$	1,547	$	1,802	$	-
Residential real estate		820		874		-
Commercial and industrial		370		538		-
Home equity lines of credit		7		7		-
Total	$	2,744	$	3,221	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied	$	731	$	731	$	10
Non-owner occupied		3,750		4,277		655
Residential real estate		284		284		17
Commercial and industrial		217		230		42
Home equity lines of credit		243		243		16
Total	$	5,225	$	5,765	$	740

Total:
Commercial real estate:
Owner occupied	$	731	$	731	$	10
Non-owner occupied		5,297		6,079		655
Residential real estate		1,104		1,158		17
Commercial and industrial		587		768		42
Home equity lines of credit		250		250		16
Total	$	7,969	$	8,986	$	740

The tables above include troubled debt restructuring totaling $2.8 million and $2.6 million as of September 30, 2022, and December 31, 2021, respectively. The amounts allocated within the allowance for losses for these troubled debt restructurings were $308,000 and $150,000 on September 30, 2022, and December 31, 2021, respectively.

The following tables present the average balance and interest income by class, recognized on impaired loans (in thousands):

	For the Three Months Ended September 30, 2022				For the Nine Months Ended September 30, 2022
	Average		Interest		Average		Interest
	Recorded Investment		Income Recognized		Recorded Investment		Income Recognized

Commercial real estate:
Owner occupied	$	3,044	$	119	$	1,884	$	142
Non-owner occupied		9,637		340		7,446		455
Residential real estate		934		10		992		35
Commercial and industrial		1,806		37		1,207		102
Home equity lines of credit		247		4		248		9
Total	$	15,668	$	510	$	11,777	$	743

	For the Three Months Ended September 30, 2021				For the Nine Months Ended September 30, 2021
	Average		Interest		Average		Interest
	Recorded Investment		Income Recognized		Recorded Investment		Income Recognized

Commercial real estate:
Owner occupied	$	1,428	$	14	$	1,485	$	45
Non-owner occupied		5,419		34		4,955		101
Residential real estate		1,190		18		1,234		42
Commercial and industrial		694		9		807		22
Home equity lines of credit		245		6		244		9
Total	$	8,976	$	81	$	8,725	$	219

Management uses a nine-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but have potential weaknesses, resulting in undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as payment delinquency, bankruptcy, repossession, or death, occurs to raise awareness of a possible credit quality loss. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships with loan balances of $750,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews a sample of commercial relationships greater than $250,000 and criticized relationships greater than $150,000. Detailed reviews, including plans for resolution, are performed on criticized loans on at least a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The primary risk of commercial and industrial loans is related to deterioration in the cash flow of the business, which may result in the liquidation of the business assets securing the loan. C&I loans are, by nature, secured by less substantial collateral than secured real-estate loans. The primary risk of real estate construction loans is potential delays and disputes during the completion process. The primary risk of residential real estate loans is current economic uncertainties. The primary risk of commercial real estate loans is the loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.

The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk-rating system (in thousands):

			Special						Total
September 30, 2022	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	111,173	$	1,164	$	8,575	$	-	$	120,912
Non-owner occupied		242,133		215		43,071		-		285,419
Multifamily		38,063		-		-		-		38,063
Residential real estate		245,278		-		2,334		-		247,612
Commercial and industrial		140,328		3,641		3,018		-		146,987
Home equity lines of credit		113,337		-		1,007		-		114,344
Construction and other		33,359		319		70		-		33,748
Consumer installment		8,071		-		39		-		8,110
Total	$	931,742	$	5,339	$	58,114	$	-	$	995,195

			Special						Total
December 31, 2021	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	104,217	$	2,400	$	4,853	$	-	$	111,470
Non-owner occupied		230,672		3,038		49,908		-		283,618
Multifamily		31,189		-		-		-		31,189
Residential real estate		237,132		-		2,957		-		240,089
Commercial and industrial		143,911		2,748		2,153		-		148,812
Home equity lines of credit		103,296		-		1,059		-		104,355
Construction and other		53,807		341		-		-		54,148
Consumer installment		8,005		-		5		-		8,010
Total	$	912,229	$	8,527	$	60,935	$	-	$	981,691

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

Nonperforming assets are nonaccrual loans, including nonaccrual troubled debt restructurings (“TDR”), loans 90 days or more past due, other real estate owned, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about the collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against the principal balance.

The following tables present the aging of the recorded investment in past-due loans by class of loans (in thousands):

			30-59 Days		60-89 Days		90 Days+		Total		Total
September 30, 2022	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	120,885	$	27	$	-	$	-	$	27	$	120,912
Non-owner occupied		285,258		-		-		161		161		285,419
Multifamily		38,063		-		-		-		-		38,063
Residential real estate		246,058		1,179		-		375		1,554		247,612
Commercial and industrial		146,805		41		127		14		182		146,987
Home equity lines of credit		114,156		159		-		29		188		114,344
Construction and other		33,748		-		-		-		-		33,748
Consumer installment		7,925		149		36		-		185		8,110
Total	$	992,898	$	1,555	$	163	$	579	$	2,297	$	995,195

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2021	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	111,257	$	81	$	132	$	-	$	213	$	111,470
Non-owner occupied		282,365		880		-		373		1,253		283,618
Multifamily		31,189		-		-		-		-		31,189
Residential real estate		238,483		1,187		-		419		1,606		240,089
Commercial and industrial		148,437		112		-		263		375		148,812
Home equity lines of credit		104,316		-		39		-		39		104,355
Construction and other		54,148		-		-		-		-		54,148
Consumer installment		7,799		16		19		176		211		8,010
Total	$	977,994	$	2,276	$	190	$	1,231	$	3,697	$	981,691

The following tables present the recorded investment in nonaccrual loans and loans past due over 89 days and still on accrual by class of loans (in thousands):

			90+ Days Past Due
September 30, 2022	Nonaccrual		and Accruing

Commercial real estate:
Owner occupied	$	71	$	-
Non-owner occupied		1,450		-
Residential real estate		1,568		-
Commercial and industrial		197		-
Home equity lines of credit		131		-
Construction and other		70		-
Consumer installment		205		-
Total	$	3,692	$	-

			90+ Days Past Due
December 31, 2021	Nonaccrual		and Accruing

Commercial real estate:
Owner occupied	$	81	$	-
Non-owner occupied		2,442		-
Residential real estate		1,577		-
Commercial and industrial		456		-
Home equity lines of credit		121		-
Consumer installment		182		-
Total	$	4,859	$	-

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $39,000 and $120,000 for the three and nine months ended September 30, 2022, respectively. Interest income that would have been recorded had these loans not been placed on nonaccrual status was $107,000 and $290,000 for the three and nine months ended September 30, 2021, respectively.

An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio. The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification, and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.

The Company’s methodology for determining the ALLL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Company’s ALLL. Management also performs impairment analyses on TDRs, which may result in specific reserves.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALLL analysis. Management tracks the historical net charge-off activity at the call code level. The historical charge-off factor was calculated using the last twelve consecutive historical quarters.

Management has identified several additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are national and local economic trends and conditions; levels of and trends in delinquency rates and nonaccrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; the value of underlying collateral; and concentrations of credit from a loan type, industry, and geographic standpoint.

Management reviews the loan portfolio quarterly using a defined, consistently applied process to make appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.

The following tables summarize the ALLL within the primary segments of the loan portfolio and the activity within those segments (in thousands):

	For the nine months ended September 30, 2022
	Allowance for Loan and Lease Losses
	Balance										Balance
	December 31, 2021		Charge-offs			Recoveries		Provision			September 30, 2022
Loans:
Commercial real estate:
Owner occupied	$	1,836	$	-		$	4	$	44		$	1,884
Non-owner occupied		7,431		(150	)	$	-	$	(1,583	)	$	5,698
Multifamily		454		-		$	-	$	169		$	623
Residential real estate		1,740		-		$	61	$	448		$	2,249
Commercial and industrial		882		(30	)	$	269	$	611		$	1,732
Home equity lines of credit		1,452		(25	)	$	-	$	466		$	1,893
Construction and other		533		-		$	-	$	(104	)	$	429
Consumer installment		14		(46	)	$	107	$	(51	)	$	24
Total	$	14,342	$	(251	)	$	441	$	0		$	14,532

	For the nine months ended September 30, 2021
	Allowance for Loan and Lease Losses
	Balance										Balance
	December 31, 2020		Charge-offs			Recoveries		Provision			September 30, 2021
Loans:
Commercial real estate:
Owner occupied	$	1,342	$	-		$	44	$	166		$	1,552
Non-owner occupied		6,817		(313	)		-		1,196			7,700
Multifamily		461		-			-		(63	)		398
Residential real estate		1,683		(27	)		4		15			1,675
Commercial and industrial		1,353		-			70		(264	)		1,159
Home equity lines of credit		1,405		-			55		(132	)		1,328
Construction and other		378		-			46		(33	)		391
Consumer installment		20		(102	)		98		15			31
Total	$	13,459	$	(442	)	$	317	$	900		$	14,234

	For the three months ended September 30, 2022
	Allowance for Loan and Lease Losses
	Balance										Balance
	June 30, 2022		Charge-offs			Recoveries		Provision			September 30, 2022
Loans:
Commercial real estate:
Owner occupied	$	1,803	$	-		$	1	$	80		$	1,884
Non-owner occupied		7,347		(150	)		-		(1,499	)		5,698
Multifamily		416		-			-		207			623
Residential real estate		1,853		-			34		362			2,249
Commercial and industrial		1,213		-			61		458			1,732
Home equity lines of credit		1,495		-			-		398			1,893
Construction and other		399		-			-		30			429
Consumer installment		24		-			36		(36	)		24
Total	$	14,550	$	(150	)	$	132	$	-		$	14,532

	For the three months ended September 30, 2021
	Allowance for Loan and Lease Losses
	Balance										Balance
	June 30, 2021		Charge-offs			Recoveries		Provision			September 30, 2021
Loans:
Commercial real estate:
Owner occupied	$	1,525	$	-		$	1	$	26		$	1,552
Non-owner occupied		7,624		(50	)		0		126			7,700
Multifamily		449		-			0		(51	)		398
Residential real estate		1,792		-			1		(118	)		1,675
Commercial and industrial		1,123		-			19		17			1,159
Home equity lines of credit		1,261		-			3		64			1,328
Construction and other		408		-			18		(35	)		391
Consumer installment		18		-			42		(29	)		31
Total	$	14,200	$	(50	)	$	84	$	0		$	14,234

The provision fluctuations during the three and nine months ended September 30, 2022, allocated to:

●

non-owner occupied commercial loans due to a decrease in special mention and substandard credits.

●

commercial and industrial loans are due to an increase in loans, excluding the impact of PPP forgiveness, coupled with an increase in the specific reserve on impaired loans.

●

residential loans and home equity lines of credit are due to an increase in outstanding balances.

The provision fluctuations during the nine months ended September 30, 2021, allocated to:

●

non-owner occupied commercial real estate loans are due to exposure to the substandard rate credits related to the hospitality industry.

●

commercial and industrial loans are due to a decrease in outstanding balances as PPP loans receive forgiveness.

●

home equity lines of credit are due to a decrease in outstanding balances.

The provision fluctuations during the three months ended September 30, 2021, allocated to:

●

non-owner occupied commercial real estate loans are due to exposure to the substandard rate credits related to the hospitality industry.

●

residential loans are due to a decrease in special mention and substandard credits.

●

home equity lines of credit are due to a decrease in outstanding balances.

TDR describes loans on which the bank has granted concessions for reasons related to the customer’s financial difficulties. Such concessions may include one or more of the following:

●

reduction in the interest rate to below-market rates

●

extension of repayment requirements beyond normal terms

●

reduction of the principal amount owed

●

reduction of accrued interest due

●

acceptance of other assets in full or partial payment of a debt

In each case, the concession is made due to deterioration in the borrower’s financial condition, and the new terms are less stringent than those required on a new loan with similar risk.

The following tables present the number of loan modifications by class, the corresponding recorded investment, and the subsequently defaulted modifications (in thousands) for the periods ended:

For the Three Months Ended

September 30, 2022

Number of Contracts

Pre-Modification

Post-Modification

Term

Outstanding Recorded

Troubled Debt Restructurings

Modification

Other

Total

Investment

Commercial and industrial

For the Nine Months Ended

September 30. 2022