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

3 Months Ended

Mar. 31, 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 (ALLL). 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 ALLL (in thousands):

March 31, 2022
Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	716	$	112,874	$	113,590
Non-owner occupied		5,213		288,532		293,745
Multifamily		-		29,385		29,385
Residential real estate		996		243,751		244,747
Commercial and industrial		630		131,053		131,683
Home equity lines of credit		249		106,051		106,300
Construction and other		-		50,152		50,152
Consumer installment		-		8,118		8,118
Total	$	7,804	$	969,916	$	977,720

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 $2.8 million and $3.6 million on March 31, 2022, and December 31, 2021, respectively. The net deferred loan origination fees on March 31, 2022, and December 31, 2021, include $602,000 and $1.3 million, respectively, of unearned deferred fees from PPP loans.

March 31, 2022
Ending Allowance Balance by Impairment Evaluation:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	10	$	1,755	$	1,765
Non-owner occupied		623		7,049		7,672
Multifamily		-		419		419
Residential real estate		14		1,787		1,801
Commercial and industrial		56		848		904
Home equity lines of credit		14		1,341		1,355
Construction and other		-		558		558
Consumer installment		-		18		18
Total	$	717	$	13,775	$	14,492

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. Although PPP loans are included with C&I loans, the nature of PPP loans differs considerably from the rest of the category. Loans funded through the PPP program are fully guaranteed by the U.S. government. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The slight increases in the allowance for loan loss for the CRE, RRE, Construction, C&I, and consumer installment portfolios, were partially offset by a slight decrease in the allowance for HELOC‘s.

Management evaluates individual loans in 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 decision 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):

March 31, 2022
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Non-owner occupied	$	1,374	$	1,546	$	-
Residential real estate		713		771		-
Commercial and industrial		421		508		-
Home equity lines of credit		42		42		-
Total	$	2,550	$	2,867	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied	$	716	$	716	$	10
Non-owner occupied		3,839		4,377		623
Residential real estate		283		283		14
Commercial and industrial		209		224		56
Home equity lines of credit		207		207		14
Total	$	5,254	$	5,807	$	717

Total:
Commercial real estate:
Owner occupied	$	716	$	716	$	10
Non-owner occupied		5,213		5,923		623
Residential real estate		996		1,054		14
Commercial and industrial		630		732		56
Home equity lines of credit		249		249		14
Total	$	7,804	$	8,674	$	717

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 $2.4 million and $2.6 million as of March 31, 2022, and December 31, 2021, respectively. The amounts allocated within the allowance for losses for these troubled debt restructurings were $159,000 and $150,000 on March 31, 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 March 31, 2022				For the Three Months Ended March 31, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized



Commercial real estate:
Owner occupied	$	724	$	11	$	1,542	$	16
Non-owner occupied		5,255		58		4,490		44
Residential real estate		1,050		12		1,278		11
Commercial and industrial		609		14		920		7
Home equity lines of credit		250		3		243		2
Total	$	7,888	$	98	$	8,473	$	80

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. The majority of 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 event. 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. Detailed reviews, including resolutions plans, are performed on loans classified as Substandard every quarter. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in determining the allowance.

The primary risk of commercial and industrial loans is related to deterioration in the cash flow of the business that may result in the liquidation of the business assets securing the loan. C&I loans are, by nature, secured by less substantial collateral than real estate secured 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
March 31, 2022	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	106,422	$	2,373	$	4,795	$	-	$	113,590
Non-owner occupied		241,133		2,978		49,634		-		293,745
Multifamily		29,385		-		-		-		29,385
Residential real estate		242,397		-		2,350		-		244,747
Commercial and industrial		124,823		3,556		3,304		-		131,683
Home equity lines of credit		105,182		-		1,118		-		106,300
Construction and other		39,823		339		9,990		-		50,152
Consumer installment		8,114		-		4		-		8,118
Total	$	897,279	$	9,246	$	71,195	$	-	$	977,720

			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
March 31, 2022	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	113,458	$	-	$	132	$	-	$	132	$	113,590
Non-owner occupied		293,276		96		-		373		469		293,745
Multifamily		29,385		-		-		-		-		29,385
Residential real estate		243,784		636		3		324		963		244,747
Commercial and industrial		131,002		568		33		80		681		131,683
Home equity lines of credit		106,082		150		-		68		218		106,300
Construction and other		50,152		-		-		-		-		50,152
Consumer installment		8,081		33		4		-		37		8,118
Total	$	975,220	$	1,483	$	172	$	845	$	2,500	$	977,720

			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):

March 31, 2022	Nonaccrual		90+ Days Past Due and Accruing

Commercial real estate:
Owner occupied	$	78	$	-
Non-owner occupied		2,388		-
Residential real estate		1,539		-
Commercial and industrial		313		-
Home equity lines of credit		220		-
Consumer installment		190		-
Total	$	4,728	$	-

December 31, 2021	Nonaccrual		90+ Days Past Due 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 $64,000 and $124,000 for the three months ended March 31, 2022, and March 31, 2021, respectively.

An 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 deemed 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 that 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 are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources. These qualitative factors include 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 three months ended March 31, 2022
	Allowance for Loan and Lease Losses
	Balance										Balance
	December 31, 2021		Charge-offs			Recoveries		Provision			March 31, 2022
Loans:
Commercial real estate:
Owner occupied	$	1,836	$	-		$	1	$	(72	)	$	1,765
Non-owner occupied		7,431		-			-		241			7,672
Multifamily		454		-			-		(35	)		419
Residential real estate		1,740		-			27		34			1,801
Commercial and industrial		882		(30	)		149		(97	)		904
Home equity lines of credit		1,452		(25	)		-		(72	)		1,355
Construction and other		533		-			-		25			558
Consumer installment		14		(6	)		34		(24	)		18
Total	$	14,342	$	(61	)	$	211	$	-		$	14,492

	For the three months ended March 31, 2021
	Allowance for Loan and Lease Losses
	Balance										Balance
	December 31, 2019		Charge-offs			Recoveries		Provision			March 31, 2021
Loans:
Commercial real estate:
Owner occupied	$	1,342	$	-		$	1	$	84		$	1,427
Non-owner occupied		6,817		-			-		431			7,248
Multifamily		461		-			-		27			488
Residential real estate		1,683		(27	)		2		89			1,747
Commercial and industrial		1,353		-			19		68			1,440
Home equity lines of credit		1,405		-			8		(83	)		1,330
Construction and other		378		-			6		40			424
Consumer installment		20		(74	)		28		44			18
Total	$	13,459	$	(101	)	$	64	$	700		$	14,122

The provision fluctuations during the three-month period ended March 31, 2022 allocated to:

	●	Non-owner occupied commercial real estate portfolios are due to increased loan volume.
	●	Commercial and industrial loans are due to a decrease in outstanding balances as PPP loans receive forgiveness.

The provision fluctuations during the three-month period ended March 31, 2021 allocated to:

	●	Owner occupied commercial real estate portfolios are due to an increase in substandard rate credits related to the hospitality industry.
	●	commercial and industrial loans due to the allocation required for the PPP loans.
	●	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 summarize troubled debt restructurings that did not meet the exemption criteria above (in thousands):

For the Three Months Ended

March 31, 2022

Number of Contracts

Pre-Modification

Post-Modification

Troubled Debt Restructurings

Term

Modification

Other

Total

Outstanding Recorded

Investment

Outstanding Recorded

Investment

Commercial and industrial

For the Three Months Ended

March 31, 2021

Number of Contracts

Pre-Modification

Post-Modification

Troubled Debt Restructurings

Term

Modification

Other

Total

Outstanding Recorded

Investment

Outstanding Recorded

Investment

Commercial and industrial

There were no subsequent defaults of troubled debt restructurings for the three-month periods ended March 31, 2022, and March 31, 2021.