Loans

12 Months Ended

Dec. 31, 2023

NOTE 3 – LOANS

Loans consisted of the following on December 31:


(Dollars in thousands)	2023
Commercial and industrial	$	152,125
Commercial real estate		190,702
Commercial lessors of buildings		82,687
Construction		49,214
Consumer mortgage		166,891
Home equity line of credit		43,269
Consumer installment		10,636
Consumer indirect		5,957
Total loans		701,481
Allowance for credit losses		(6,607	)
Deferred loan fees, net		(77	)
Net Loans	$	694,797


(Dollars in thousands)	2022
Commercial	$	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
Net 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 designed to maximize loan income within an acceptable level of risk. Management reviews and the Board of Directors approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand their business. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s management examines current and occasionally projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. However, the cash flows of borrowers may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria.

With respect to loans to developers and builders secured by non-owner occupied properties, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, lease rates, and financial analysis of developers and property owners. Construction and land development loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be

inaccurate. Construction and land development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or permanent financing from the Company. These loans are closely monitored by on-site inspections and are considered to have higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.

The Company originates consumer loans utilizing a judgmental underwriting process. Policies and procedures are developed and modified, as needed, by management to monitor and manage consumer loan risk. This activity, coupled with relatively small loan amounts spread across many individual borrowers, minimizes risk.

The Company engages an independent loan review vendor that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Concentrations of Credit

Nearly all the Company’s lending activity occurs within the State of Ohio, including the four counties of Holmes, Stark, Tuscarawas, and Wayne, as well as other markets. The majority of the Company’s loan portfolio consists of commercial and industrial and commercial real estate loans. Credit concentrations, including commitments, as determined using North American Industry Classification Codes (NAICS), to the three largest industries compared to total loans at December 31, 2023, included $68 million, or 10% of total loans to lessors of non-residential buildings; $40 million, or 6%, of total loans to animal food producers; and $22 million, or 3% of total loans to lessors of residential buildings. The Company has less than 1% of total loans outstanding to loans secured by commercial office space. 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 and 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 years ended December 31, 2023, and 2022. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

During 2023, ACL balances were affected by the adoption of ASC 326 which changed the methodology for calculating the allowance for credit losses. These changes resulted in the addition of three new loan categories. In addition to the new methodology changes, the decrease in the commercial real estate provision was primarily related to the payoff of one large loan relationship with a specific allocation and the improvement of other specifically evaluated loans. The decrease in the provision for commercial and industrial loans was primarily due to the recovery of a prior loan charge off. The increase in the provision for commercial lessors of buildings relates to the increase in loans graded special mention. The increase in provision for consumer mortgages primarily relates to increased loan volume. The increase in the consumer indirect category is due to the increase in charge-offs in this portfolio.

During 2022, the decrease in the provision (recovery) for loan losses for construction and land development and commercial real estate loans was primarily related to the improvement in loans to businesses that were negatively impacted by the COVID-19 pandemic, the reduction of impaired and adversely classified loans, as well as a large recovery received on a previously charged-off loan. The decrease in the provision for consumer loans was primarily related to the tightening of underwriting guidelines pertaining to the RV portfolio along with a decline in RV loan balances and fewer consumer loan charge-offs in 2022. The provision related to residential real estate loans increased as a result of the growth in loan balances along with an increase in the general loss ratios due to elevated levels of economic uncertainty associated with increased inflation and higher interest rates.

Summary of Allowance for Credit Losses on Loans

The following table details activity in the allowance for credit losses on loans during the year ended December 31 2023:


(Dollars in thousands)	Beginning ALL Balance		Impact of Adopting ASC 326			Charge-offs			Recoveries		Provisions (Recovery)			Ending ACL Balance
December 31, 2023
Commercial and industrial	$	1,110	$	658		$	—		$	181	$	(212	)	$	1,737
Commercial real estate		2,760		(541	)		—			9		(591	)		1,637
Commercial lessors of buildings		—		974			—			—		226			1,200
Construction		803		(515	)		—			—		45			333
Consumer mortgage		1,268		(580	)		—			1		418			1,107
Home equity line of credit		—		201			—			—		87			288
Consumer installment		233		(183	)		(46	)		20		52			76
Consumer indirect		—		91			(66	)		31		173			229
Unallocated		664		(664	)		—			—		—			—
Total	$	6,838	$	(559	)	$	(112	)	$	242	$	198		$	6,607

Summary of Allowance for Loan Losses

The following table details activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2022:


(Dollars in thousands)	Beginning ALL Balance		(Recovery) Provision for Loan Losses			Charge-offs			Recoveries		Net (Charge-offs) Recoveries			Ending ALL Balance
December 31, 2022
Commercial	$	1,240	$	47		$	(227	)	$	50	$	(177	)	$	1,110
Commercial real estate		2,838		(68	)		(13	)		3		(10	)		2,760
Residential real estate		992		273			—			3		3			1,268
Construction & land development		1,380		(889	)		—			312		312			803
Consumer		421		(175	)		(48	)		35		(13	)		233
Unallocated		747		(83	)										664
Total	$	7,618	$	(895	)	$	(288	)	$	403	$	115		$	6,838

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 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total Past Due		Total Loans
December 31, 2023
Commercial and industrial	$	151,964	$	111	$	50	$	—	$	161	$	152,125
Commercial real estate		190,702		—		—		—		—		190,702
Commercial lessors of buildings		82,687		—		—		—		—		82,687
Construction		49,214		—		—		—		—		49,214
Consumer mortgage		166,411		307		173		—		480		166,891
Home equity line of credit		42,955		33		281		—		314		43,269
Consumer installment		10,602		25		9		—		34		10,636
Consumer indirect		5,821		52		84		—		136		5,957
Total Loans	$	700,356	$	528	$	597	$	—	$	1,125	$	701,481

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 December 31, 2023:


(Dollars in thousands)	Nonaccrual with no ACL		Nonaccrual with ACL		Total Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Total Nonperforming
December 31, 2023
Commercial and industrial	$	59	$	—	$	59	$	—	$	59
Commercial real estate		62		—		62		—		62
Commercial lessors of buildings		15		—		15		—		15
Construction		—		—		—		—		—
Consumer mortgage		172		—		172		—		172
Home equity line of credit		—		—		—		—		—
Consumer installment		49		—		49		—		49
Consumer indirect		39		—		39		—		39
Total Loans	$	396	$	—	$	396	$	—	$	396

Interest income recognized on nonaccrual loans as of December 31, 2023 was $2 thousand on commercial real estate loans and $33 thousand on consumer mortgage loans. Several consumer mortgage loans on nonaccrual are at an amortized cost basis of $0 and all payments are being recognized as interest income when received.

The following table presents the aging of accruing past due and nonaccrual loans by class of loans as of December 31, 2022:


			Accruing Loans
(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Nonaccrual		Total Past Due and Nonaccrual		Total Loans
December 31, 2022
Commercial	$	129,270	$	70	$	3	$	—	$	—	$	73	$	129,343
Commercial real estate		231,693		—		—		—		92		92		231,785
Residential real estate		193,794		95		137		—		99		331		194,125
Construction & land development		55,286		32		—		—		—		32		55,318
Consumer		16,091		103		128		—		65		296		16,387
Total loans	$	626,134	$	300	$	268	$	—	$	256	$	824	$	626,958

Credit Quality Indicators

The Company categorizes commercial and commercial real estate loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial and commercial real estate loans individually by classifying the loans as to credit risk. This analysis includes commercial loans with an outstanding exposure balance greater than $500 thousand. This analysis is performed on an annual basis.

The Company uses the following definitions for risk ratings:

Pass. Loans classified as pass (Cash Secured, Exceptional, Acceptable, Monitor or Pass Watch) may exhibit a wide array of characteristics but at a minimum represent an acceptable risk to the Bank. Borrowers in this rating may have leveraged but acceptable balance sheet positions, satisfactory asset quality, stable to favorable sales and earnings trends, acceptable liquidity, and adequate cash flow. Loans are considered fully collectable and require an average amount of administration. While generally adhering to credit policy, these loans may exhibit occasional exceptions that do not result in undue risk to the Bank. Borrowers are generally capable of absorbing setbacks, financial and otherwise, without the threat of failure.

Special Mention. Loans classified as special mention have a material weakness deserving of management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses jeopardizing the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, values, highly questionable, and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Based on the most recent analysis performed, the following tables present the recorded investment in non-homogeneous loans by internal risk rating system:


	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
December 31, 2023
Commercial and industrial:
Pass	$	32,037	$	25,996	$	12,196	$	5,207	$	3,388	$	7,112	$	45,423	$	—	$	131,359
Special mention		76		225		522		33		33		65		3,872		—		4,826
Substandard		782		2,968		1,021		1,017		106		1,416		8,630		—		15,940
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	32,895	$	29,189	$	13,739	$	6,257	$	3,527	$	8,593	$	57,925	$	—	$	152,125
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Pass	$	22,206	$	38,696	$	54,830	$	12,233	$	19,543	$	21,938	$	647	$	—	$	170,093
Special Mention		241		1,380		2,292		2,496		—		322		—		—		6,731
Substandard		1,150		—		888		—		466		11,374		—		—		13,878
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	23,597	$	40,076	$	58,010	$	14,729	$	20,009	$	33,634	$	647	$	—	$	190,702
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial lessors of buildings:
Pass	$	18,353	$	22,762	$	15,455	$	6,429	$	3,543	$	8,934	$	360	$	—	$	75,836
Special Mention		—		436		1,687		—		3,578		—		—		—		5,701
Substandard		—		—		—		989		—		161		—		—		1,150
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	18,353	$	23,198	$	17,142	$	7,418	$	7,121	$	9,095	$	360	$	—	$	82,687
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial construction:
Pass	$	24,119	$	14,855	$	576	$	272	$	281	$	256	$	—	$	—	$	40,359
Special Mention		—		258		43		635		—		—		—		—		936
Substandard		—		—		—		30		80		—		—		—		110
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	24,119	$	15,113	$	619	$	937	$	361	$	256	$	—	$	—	$	41,405
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total
Pass	$	96,715	$	102,309	$	83,057	$	24,141	$	26,755	$	38,240	$	46,430	$	—	$	417,647
Special Mention		317		2,299		4,544		3,164		3,611		387		3,872		—		18,194
Substandard		1,932		2,968		1,909		2,036		652		12,951		8,630		—		31,078
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	98,964	$	107,576	$	89,510	$	29,341	$	31,018	$	51,578	$	58,932	$	—	$	466,919
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
December 31, 2022
Commercial	$	119,353	$	282	$	7,927	$	—	$	1,781	$	129,343
Commercial real estate		220,414		485		8,352		—		2,534		231,785
Construction & land development		40,640		6,655		—		—		8,023		55,318
Total	$	380,407	$	7,422	$	16,279	$	—	$	12,338	$	416,446

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
December 31, 2023
Consumer mortgage:
Performing	$	24,521	$	34,798	$	35,802	$	32,259	$	8,931	$	30,408	$	—	$	—	$	166,719
Nonperforming		—		—		—		—		—		172		—		—		172
Total	$	24,521	$	34,798	$	35,802	$	32,259	$	8,931	$	30,580	$	—	$	—	$	166,891
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer construction:
Performing	$	5,463	$	1,477	$	264	$	483	$	81	$	41	$	—	$	—	$	7,809
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	5,463	$	1,477	$	264	$	483	$	81	$	41	$	—	$	—	$	7,809
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity line of credit:
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	43,223	$	46	$	43,269
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	43,223	$	46	$	43,269
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer installment:
Performing	$	5,705	$	3,067	$	981	$	513	$	118	$	184	$	68	$	—	$	10,636
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	5,705	$	3,067	$	981	$	513	$	118	$	184	$	68	$	—	$	10,636
YTD gross charge-offs	$	2	$	12	$	19	$	5	$	2	$	6	$	—	$	—	$	46
Consumer indirect:
Performing	$	858	$	1,086	$	622	$	568	$	607	$	2,128	$	—	$	—	$	5,869
Nonperforming		—		3		—		—		81		4		—		—		88
Total	$	858	$	1,089	$	622	$	568	$	688	$	2,132	$	—	$	—	$	5,957
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	66	$	—	$	—	$	66
Total
Performing	$	36,547	$	40,428	$	37,669	$	33,823	$	9,737	$	32,761	$	43,291	$	46	$	234,302
Nonperforming		—		3		—		—		81		176		—		—		260
Total	$	36,547	$	40,431	$	37,669	$	33,823	$	9,818	$	32,937	$	43,291	$	46	$	234,562
Total YTD gross charge-offs	$	2	$	12	$	19	$	5	$	2	$	72	$	—	$	—	$	112

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 of the collateral 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, and 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 year ended December 31, 2023.

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 segment and impairment method at December 31, 2022:


(Dollars in thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Construction & Land Development		Consumer		Unallocated		Total
December 31, 2022
Allowance for loan losses:
Ending allowance balances attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	4	$	—	$	4
Collectively evaluated for impairment		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 evaluated for impairment	$	123	$	113	$	677	$	—	$	123			$	1,036
Loans collectively evaluated for impairment		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 at December 31, 2022:


(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment 1		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2022
Commercial	$	123	$	124	$	—	$	124	$	—	$	327	$	7
Commercial real estate		117		92		20		112		—		118		4
Residential real estate		733		166		518		683		—		758		31
Construction & land development		—		—		—		—		—		123		—
Consumer		127		6		121		127		4		130		8
Total impaired loans	$	1,101	$	387	$	659	$	1,046	$	4	$	1,456	$	50

1 Includes principal, accrued interest, unearned fees, and origination costs.

Real Estate Loans in Foreclosure

There was no other real estate owned on December 31, 2023, or 2022, respectively. Mortgage loans in the process of foreclosure were $8 thousand on December 31, 2023 and $17 thousand on December 31, 2022.

Mortgage Servicing Rights

For the years ended December 31, 2023 and 2022, the Company had outstanding MSRs of $600 thousand and $621 thousand, respectively. The capitalized additions of servicing rights are included in net gain on sale of loans on the Consolidated Statements of Income. No valuation allowance was recorded on December 31, 2023 or 2022, as the fair value of the MSRs approximates their carrying value. On December 31, 2023, the Company had $124 million residential mortgage loans sold with servicing retained as compared to $130 million sold with servicing retained on December 31, 2022.

Total loans serviced for others including commercial loans, approximated $132 million and $138 million on December 31, 2023, and 2022, respectively.

The following summarizes mortgage servicing rights capitalized and amortized during each year:


(Dollars in thousands)	2023			2022
Beginning of year	$	621		$	604
Capitalized additions		47			97
Amortization		(68	)		(80	)
Valuation allowance		—			—
End of year	$	600		$	621