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Note 8 - Loans and Related Allowance for Credit Losses

3 Months Ended

Mar. 31, 2023

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

NOTE 8 - LOANS AND RELATED ALLOWANCE FOR CREDIT 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 and western Ohio market with offices in Ada, Bellefontaine, Dublin, Kenton, Marysville, 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 credit 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 (in thousands):

	March 31,			December 31,
	2023			2022

Commercial real estate:
Owner occupied	$	185,661		$	191,748
Non-owner occupied		394,331			380,580
Multifamily		63,892			58,251
Residential real estate		306,179			296,308
Commercial and industrial		195,024			195,602
Home equity lines of credit		126,555			128,065
Construction and Other		103,389			94,199
Consumer installment		7,816			8,119
Total loans		1,382,847			1,352,872
Less: Allowance for credit losses		(20,162	)		(14,438	)

Net loans	$	1,362,685		$	1,338,434

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into CRE, which is further segmented into Owner CRE OO, CRE NOO, and Multifamily Residential, RRE, C&I, HELOC, 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 and certain agricultural loans. 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 and certain agricultural loans. 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 credit 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 individually analyzed 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 individually analyze consumer and residential mortgage loans for a specific reserve unless such loans are part of a larger relationship that is individually analyzed or the loan was modified in a troubled debt restructuring.

Once the determination has been made that a loan is going to be individually analyzed, 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 individually analyzed loans does not differ from its overall policy for interest recognition.

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 following table represents outstanding loan balances by credit quality indicators and vintage year by class of financing receivable and current period gross charge-offs by year of origination under ASC 326 as of March 31, 2023:

March 31, 2023
Term Loans Amortized Cost Basis by Origination Year															Revolving Loans
(Dollar amounts in thousands)	2023		2022			2021		2020		2019		Prior			Amortized Cost			Total

Net loans held for investment:
Commercial real estate:
Owner occupied
Pass	$	3,245	$	31,354		$	42,999	$	26,212	$	14,801	$	48,029		$	3,863		$	170,503
Special Mention		-		4,092			-		1,589		701		431			-			6,813
Substandard		-		-			-		-		-		8,345			-			8,345
Total Owner occupied	$	3,245	$	35,446		$	42,999	$	27,801	$	15,502	$	56,805		$	3,863		$	185,661
Current-period gross charge-offs	$	-	$	-		$	-	$	-	$	-	$	-		$	-			-
Non-owner occupied
Pass	$	17,592	$	71,406		$	49,627	$	24,380	$	37,711	$	138,870		$	2,194		$	341,780
Special Mention		-		2,507			-		-		-		3,836			-			6,343
Substandard		-		-			-		-		-		41,335			-			41,335
Doubtful		-		-			696		-		4,177		-			-			4,873
Total Non-owner occupied	$	17,592	$	73,913		$	50,323	$	24,380	$	41,888	$	184,041		$	2,194		$	394,331
Current-period gross charge-offs		-	$	-		$	-	$	-	$	-	$	-		$	-			-
Multifamily
Pass	$	4,380	$	28,027		$	4,382	$	10,736	$	1,423	$	14,803		$	141		$	63,892
Special Mention		-		-			-		-		-		-			-			-
Substandard		-		-			-		-		-		-			-			-
Total Multifamily	$	4,380	$	28,027		$	4,382	$	10,736	$	1,423	$	14,803		$	141		$	63,892
Current-period gross charge-offs	$	-	$	-		$	-	$	-	$	-	$	-		$	-			-
Residential real estate
Pass	$	12,659	$	54,476		$	82,056	$	41,768	$	21,105	$	91,881			521		$	304,466
Special Mention		-		-			-		-		-		-			-			-
Substandard		-		-			258		-		28		1,427			-			1,713
Total Residential real estate	$	12,659	$	54,476		$	82,314	$	41,768	$	21,133	$	93,308		$	521		$	306,179
Current-period gross charge-offs	$	-	$	-		$	-	$	-	$	-	$	-		$	-		$	-
Commercial and industrial
Pass	$	7,682	$	48,127		$	22,392	$	33,958	$	3,950	$	9,180		$	59,737		$	185,026
Special Mention		-		390			347		166		145		567			6,178			7,793
Substandard		-		18			-		378		159		1,122			528			2,205
Total Commercial and industrial	$	7,682	$	48,535		$	22,739	$	34,502	$	4,254	$	10,869		$	66,443		$	195,024
Current-period gross charge-offs	$	-	$	-		$	-	$	-	$	-	$	(54	)	$	-		$	(54	)
Home equity lines of credit
Pass	$	-	$	233		$	247	$	22		66	$	2,813		$	122,027		$	125,408
Special Mention		-		-			-		-		-		-			-			-
Substandard		-		-			-		25		31		478			613			1,147
Total Home equity lines of credit	$	-	$	233		$	247	$	47	$	97	$	3,291		$	122,640		$	126,555
Current-period gross charge-offs	$	-	$	-		$	-	$	-	$	-	$	-		$	-		$	-
Construction and other
Pass	$	16,912	$	44,063		$	24,431	$	727	$	2,902	$	1,247		$	9,253		$	99,535
Special Mention		-		-			-		-		297		-			-			297
Substandard		-		-			420		-		2,037		-			1,100			3,557
Total Construction and other	$	16,912	$	44,063		$	24,851	$	727	$	5,236	$	1,247		$	10,353		$	103,389
Current-period gross charge-offs	$	-	$	-		$	-	$	-	$	-	$	-		$	-			-
Consumer installment
Pass	$	734	$	1,606		$	689	$	191	$	105	$	4,490		$	-		$	7,815
Special Mention		-		-			-		-		-		-			-			-
Substandard		-		-			-		1		-		-			-			1
Total Consumer installment	$	734	$	1,606		$	689	$	192	$	105	$	4,490		$	-		$	7,816
Current-period gross charge-offs	$	-	$	(22	)	$	-	$	-	$	-	$	(7	)	$	(29	)	$	(58	)

Total Loans	$	63,204	$	286,299		$	228,544	$	140,153	$	89,638	$	368,854		$	206,155		$	1,382,847

The following table presents 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
December 31, 2022	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	176,400	$	6,873	$	8,475	$	-	$	191,748
Non-owner occupied		331,584		6,387		42,609		-		380,580
Multifamily		58,251		-		-		-		58,251
Residential real estate		294,254		-		2,054		-		296,308
Commercial and industrial		185,674		7,936		1,992		-		195,602
Home equity lines of credit		127,080		-		985		-		128,065
Construction and other		90,728		308		3,163		-		94,199
Consumer installment		8,117		-		2		-		8,119
Total	$	1,272,088	$	21,504	$	59,280	$	-	$	1,352,872

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.

The following table presents collateral-dependent loans by classes of loan type as of March 31, 2023 (in thousands):

	March 31, 2023
	Type of Collateral
(Dollar amounts in thousands)	Real Estate		Blanket Lien		Investment/Cash		Other		Total
Commercial real estate:
Non-owner occupied	$	15,854	$	-	$	-	$	-	$	15,854
Residential real estate		177		-		-		-		177
Commercial and industrial		-		47		-		18		65
Home equity lines of credit		120		-		-		-		120
Total	$	16,151	$	47	$	-	$	18	$	16,216

The following table presents information related to impaired loans by class of loans under ASC 310 as of December 31, 2022 (in thousands):

December 31, 2022
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	4,141	$	4,141	$	-
Non-owner occupied		1,042		1,042		-
Residential real estate		706		770		-
Commercial and industrial		450		547		-
Home equity lines of credit		112		112		-
Total	$	6,451	$	6,612	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied	$	1,509	$	1,509	$	407
Non-owner occupied		12,528		12,528		167
Residential real estate		317		317		28
Commercial and industrial		1,378		1,378		39
Home equity lines of credit		132		132		48
Total	$	15,864	$	15,864	$	689

Total:
Commercial real estate:
Owner occupied	$	5,650	$	5,650	$	407
Non-owner occupied		13,570		13,570		167
Residential real estate		1,023		1,087		28
Commercial and industrial		1,828		1,925		39
Home equity lines of credit		244		244		48
Total	$	22,315	$	22,476	$	689

The tables above include troubled debt restructuring totaling $3.3 million as of December 31, 2022, respectively. The amounts allocated within the allowance for losses for these troubled debt restructurings were $72,000 as of December 31, 2022.

The following table presents the average recorded investment in impaired loans by class and interest income recognized by loan, under ASC 310, for the three month period ended March 31, 2022 (in thousands):

	For the Three Months Ended March 31, 2022
	Average Recorded Investment		Interest Income Recognized

Commercial real estate:
Owner occupied	$	724	$	11
Non-owner occupied		5,255		58
Residential real estate		1,050		12
Commercial and industrial		609		14
Home equity lines of credit		250		3
Total	$	7,888	$	98

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30:

(In Thousands)	December 1, 2022		December 31, 2022
Outstanding balance	$	7,919	$	7,998
Carrying amount	$	6,019	$	6,068

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.

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, 2023	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	185,661	$	-	$	-	$	-	$	-	$	185,661
Non-owner occupied		387,309		1,454		-		5,568		7,022		394,331
Multifamily		63,892		-		-		-		-		63,892
Residential real estate		305,310		334		324		211		869		306,179
Commercial and industrial		194,903		29		-		92		121		195,024
Home equity lines of credit		123,241		3,185		110		19		3,314		126,555
Construction and other		103,389		-		-		-		-		103,389
Consumer installment		7,816		-		-		-		-		7,816
Total	$	1,371,521	$	5,002	$	434	$	5,890	$	11,326	$	1,382,847

											Purchase
			30-59 Days		60-89 Days		90 Days+		Total		Credit		Total
December 31, 2022	Current		Past Due		Past Due		Past Due		Past Due		Impaired Loans		Loans

Commercial real estate:
Owner occupied	$	191,748	$	-	$	-	$	-	$	-	$	-	$	191,748
Non-owner occupied		380,467		113		-		-		113		2,992		380,580
Multifamily		58,251		-		-		-		-		-		58,251
Residential real estate		293,698		2,093		111		406		2,610		24		296,308
Commercial and industrial		195,532		62		4		4		70		-		195,602
Home equity lines of credit		127,494		415		145		11		571		-		128,065
Construction and other		93,997		202		-		-		202		3,052		94,199
Consumer installment		8,096		23		-		-		23		-		8,119
Total	$	1,349,283	$	2,908	$	260	$	421	$	3,589	$	6,068	$	1,352,872

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, 2023
	Nonaccrual		Nonaccrual				Loans Past
(Dollar amounts in thousands)	with no		with		Total		Due Over 90 Days		Total
	ACL		ACL		Nonaccrual		Still Accruing		Nonperforming
Commercial real estate:
Owner occupied	$	-	$	65	$	65	$	-	$	65
Non-owner occupied		4,873		-		4,873		-		4,873
Residential real estate		173		916		1,089		-		1,089
Commercial and industrial		170		92		262		-		262
Home equity lines of credit		-		364		364		-		364
Construction and other		-		66		66		-		66
Consumer installment		161		2		163		-		163
Total	$	5,377	$	1,505	$	6,882	$	-	$	6,882

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

Commercial real estate:
Owner occupied	$	69	$	-
Residential real estate		1,431		-
Commercial and industrial		186		-
Home equity lines of credit		191		-
Construction and other		68		-
Consumer installment		166		-
Total	$	2,111	$	-

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $115,000 and $64,000 for the three months ended March 31, 2023 and 2022 respectively.

On January 1, 2023, the Company adopted CECL. This methodology for calculating the allowance for credit losses considers the possibility of loss over the life of the loan. It also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan. To develop the ACL estimate under the current expected loss model, the Company segments the loan portfolio into loan pools based on loan type and similar credit risk elements. An ACL is maintained to absorb losses from the loan portfolio. The ACL 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.

Prior to January 1, 2023 the Company’s methodology for determining the allowance for loan losses (ALLL) was based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment 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 represented the Company’s ALLL. Management also performed impairment analyses on TDRs, which could have resulted in specific reserves.

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

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

	For the three months ended March 31, 2023
	Allowance for Credit Losses
	Balance		CECL											Balance
	December 31, 2022		Adoption			Charge-offs			Recoveries		Provision			March 31, 2023
Loans:
Commercial real estate:
Owner occupied	$	2,203	$	811		$	-		$	1	$	(337	)	$	2,678
Non-owner occupied		5,597		(1,206	)		-			-		321			4,712
Multifamily		662		591			-			-		118			1,371
Residential real estate		2,047		2,744			-			-		176			4,967
Commercial and industrial		1,483		2,320			(54	)		10		60			3,819
Home equity lines of credit		1,753		(1,031	)		-			70		17			809
Construction and other		609		956			-			-		(12	)		1,553
Consumer installment		84		197			(58	)		39		(9	)		253
Total	$	14,438	$	5,382		$	(112	)	$	120	$	334		$	20,162

	For the three months ended March 31, 2022
	Allowance for Loan Losses
	Balance										Balance
	December 31, 2021		Charge-offs			Recoveries		Provision			December 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

The increase in the ACL in 2022 was primarily related to higher expected probable losses inherent in the loan portfolio that was directly related to quantitative and qualitative factors associated with the current economic environment and overall growth in the loan portfolio.

The provision fluctuations during the three months ended March 31, 2023, allocated to:

●

non-owner occupied commercial loans, multifamily loans, and residential real estate loans are due to an increase in outstanding balances.

●

owner-occupied loans are due to a decrease in outstanding balances.

The provision fluctuations during the three months 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.

Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

The table below details the amortized cost of gross loans held for investment made to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2023:

					Payment		Interest Rate				Percentage of
					Deferral		Reduction				Total Loans
	Payment		Term		and Term		and Term				Held for
	Deferral		Extension		Extension		Past Due		Total		Investment

Commercial real estate:
Non-owner occupied	$	-	$	4,179	$	-	$	-	$	4,179		0.30	%
Commercial and industrial		-		149		-		-		149		0.01	%
Consumer installment		-		8		-		-		8		0.00	%
Total	$	-	$	4,336	$	-	$	-	$	4,336		0.31	%

As of March 31, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first quarter of 2023 that subsequently defaulted. Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.

Troubled Debt Restructuring Disclosures Prior to the Adoption of ASU 2022-02

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

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