4.	LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

Major classifications of loans at

December

are summarized as follows (in thousands):

	2016			2015

Commercial and industrial	$	60,630		$	42,536
Real estate - construction		23,709			22,137
Real estate - mortgage:
Residential		270,830			232,478
Commercial		249,490			231,701
Consumer installment		4,481			4,858
		609,140			533,710
Less allowance for loan and lease losses		(6,598	)		(6,385	)

Net loans	$	602,542		$	527,325

The Company’s primary business activity is with customers located within its local trade area, eastern Geauga County, and contiguous counties to the north, east, and south. The Company also serves the central Ohio market with offices in Dublin, Sunbury and Westerville, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at

December

31,

2016

and

2015,

loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

The following tables summarize the primary segments of the loan portfolio and the allowance for loan and lease losses as of

December

31,

2016

and

2015

(in thousands):

					Real Estate- Mortgage
December 31, 2016	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	1,190	$	913	$	3,135	$	7,187	$	5	$	12,430
Collectively evaluated for impairment		59,440		22,796		267,695		242,303		4,476		596,710
Total loans	$	60,630	$	23,709	$	270,830	$	249,490	$	4,481	$	609,140

					Real estate- Mortgage
December 31, 2015	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	1,808	$	1,787	$	3,881	$	6,199	$	6	$	13,681
Collectively evaluated for impairment		40,728		20,350		228,597		225,502		4,852		520,029
Total loans	$	42,536	$	22,137	$	232,478	$	231,701	$	4,858	$	533,710

					Real Estate- Mortgage
December 31, 2016	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	90	$	-	$	251	$	186	$	-	$	527
Collectively evaluated for impairment		358		172		2,567		2,949		25		6,071
Total ending allowance balance	$	448	$	172	$	2,818	$	3,135	$	25	$	6,598

					Real Estate- Mortgage
December 31, 2015	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	388	$	130	$	276	$	39	$	-	$	833
Collectively evaluated for impairment		479		146		2,863		2,039		25		5,552
Total ending allowance balance	$	867	$	276	$	3,139	$	2,078	$	25	$	6,385

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial and Industrial (“C&I”), Real Estate Construction, Real Estate - Mortgage which is further segmented into Residential and Commercial real estate, and Consumer Installment Loans. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment consists of loans made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purpose of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than

$150,000

and if the loan either is in nonaccrual status, or is risk rated Substandard or Doubtful and is greater than

days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will 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 in relation to 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.

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

three

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, with management primarily utilizing the fair value of collateral method. 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 on a quarterly basis. 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):

December 31, 2016
Impaired Loans

	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	319	$	318	$	-
Real estate - construction		913		909		-
Real estate - mortgage:
Residential		2,142		2,140		-
Commercial		2,031		2,027		-
Total	$	5,405	$	5,394	$	-

With an allowance recorded:
Commercial and industrial	$	871		868	$	90
Real estate - construction		-		-		-
Real estate - mortgage:
Residential		993		991		251
Commercial		5,156		5,147		186
Consumer installment		5		5		-
Total	$	7,025	$	7,011	$	527

Total:
Commercial and industrial	$	1,190	$	1,186	$	90
Real estate - construction		913		909		-
Real estate - mortgage:
Residential		3,135		3,131		251
Commercial		7,187		7,174		186
Consumer installment		5		5		-
Total	$	12,430	$	12,405	$	527

December 31, 2015
Impaired Loans

	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	1,027	$	1,025	$	-
Real estate - construction		1,657		1,651		-
Real estate - mortgage:
Residential		2,445		2,443		-
Commercial		2,337		2,335		-
Consumer installment		-		-		-
Total	$	7,466	$	7,454	$	-

With an allowance recorded:
Commercial and industrial	$	781	$	781	$	388
Real estate - construction		130		130		130
Real estate - mortgage:
Residential		1,436		1,436		276
Commercial		3,862		3,846		39
Consumer installment		6		6		-
Total	$	6,215	$	6,199	$	833

Total:
Commercial and industrial	$	1,808	$	1,806	$	388
Real estate - construction		1,787		1,781		130
Real estate - mortgage:
Residential		3,881		3,879		276
Commercial		6,199		6,181		39
Consumer installment		6		6		-
Total	$	13,681	$	13,653	$	833

The tables above include troubled debt restructuring totaling

$6.7

million and

$3.1

million as of

December

31,

2016

and

2015,

respectively.

The following table presents interest income by class, recognized on impaired loans (in thousands):

	As of December 31, 2016				As of December 31, 2015				As of December 31, 2014

	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial and industrial	$	1,211	$	35	$	1,468	$	100	$	1,989	$	85
Real estate - construction		1,281		62		2,407		115		3,631		154
Real estate - mortgage:
Residential		3,529		178		4,356		160		5,331		171
Commercial		7,384		553		5,203		350		5,998		229
Consumer installment		6		11		6		-		11		1
Total	$	13,410	$	839	$	13,440	$	725	$	16,960	$	640

Troubled Debt Restructuring (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):

	December 31, 2016
	Number of Contracts						Pre-Modification		Post-Modification
	Term						Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment
Commercial and industrial		5		-		5	$	610	$	610
Residential real estate		4		-		4		166		166
Commercial real estate		1		-		1		311		311

	December 31, 2015
	Number of Contracts						Pre-Modification		Post-Modification
	Term						Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment
Commercial and industrial		6		-		6	$	434	$	434
Real estate construction		1		-		1		181		181
Residential real estate		5		1		6		515		535
Commercial real estate		1		-		1		270		270

	December 31, 2014
	Number of Contracts						Pre-Modification		Post-Modification
	Term						Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment
Residential real estate		3		-		3	$	140	$	140
Commercial real estate		1		-		1		48		48
Consumer		1		-		1		6		6

	December 31, 2016
	Number of		Recorded
Troubled Debt Restructurings subsequently defaulted	Contracts		Investment
Commercial and industrial		2	$	7
Real estate construction		1		-
Residential real estate		4		278
Commercial real estate		1		119

	December 31, 2015
	Number of		Recorded
Troubled Debt Restructurings subsequently defaulted	Contracts		Investment
Commercial and industrial		2	$	14
Real estate construction		1		130

	December 31, 2014
	Number of		Recorded
Troubled Debt Restructurings subsequently defaulted	Contracts		Investment
Residential real estate		1	$	15

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 are potentially weak, resulting in an 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

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 bankruptcy, repossession, or death, occurs to raise awareness of a possible credit 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 with the Chief Credit Officer ultimately responsible for accurate and timely risk ratings. The Credit Department performs an annual review of all commercial relationships

$1,000,000

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 commercial relationships greater than

$250,000

and/or criticized relationships greater than

$125,000.

Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on 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 tables present the classes of the loan portfolio summarized by the aggregate Pass rating and the criticized categories of Special Mention, Substandard, and Doubtful within the internal risk rating system as of

December

31,

2016

and

2015

(in thousands):

			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
December 31, 2016

Commercial and industrial	$	58,539	$	663	$	1,428	$	-	$	60,630
Real estate - construction		23,541		144		24		-		23,709
Real estate - mortgage:
Residential		264,481		428		5,921		-		270,830
Commercial		240,678		4,422		4,390		-		249,490
Consumer installment		4,467		-		14		-		4,481
Total	$	591,706	$	5,657	$	11,777	$	-	$	609,140

			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
December 31, 2015

Commercial and industrial	$	40,560	$	242	$	1,734	$	-	$	42,536
Real estate - construction		22,007		-		-		130		22,137
Real estate - mortgage:
Residential		225,945		728		5,805		-		232,478
Commercial		219,331		4,327		8,043		-		231,701
Consumer installment		4,854		-		4		-		4,858
Total	$	512,697	$	5,297	$	15,586	$	130	$	533,710

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 tables present the classes of the loan portfolio summarized by the aging categories of loans and nonaccrual loans as of

December

31,

2016

and

2015

(in thousands):

			30-59 Days		60-89 Days		90 Days+		Total		Total
	Current		Past Due		Past Due		Past Due		Past Due		Loans
December 31, 2016

Commercial and industrial	$	60,407	$	17	$	2	$	204	$	223	$	60,630
Real estate - construction		23,709		-		-		-		-		23,709
Real estate - mortgage:
Residential		268,041		1,909		207		673		2,789		270,830
Commercial		249,081		92		-		317		409		249,490
Consumer installment		4,465		-		10		6		16		4,481
Total	$	605,703	$	2,018	$	219	$	1,200	$	3,437	$	609,140

			30-59 Days		60-89 Days		90 Days+		Total		Total
	Current		Past Due		Past Due		Past Due		Past Due		Loans
December 31, 2015

Commercial and industrial	$	41,544	$	225	$	26	$	741	$	992	$	42,536
Real estate - construction		22,137		-		-		-		-		22,137
Real estate - mortgage:
Residential		229,725		1,482		92		1,179		2,753		232,478
Commercial		230,903		189		-		609		798		231,701
Consumer installment		4,837		16		3		2		21		4,858
Total	$	529,146	$	1,912	$	121	$	2,531	$	4,564	$	533,710

The following tables present the classes of the loan portfolio summarized by nonaccrual loans and loans

days or more past due and still accruing as of

December

31,

2016

and

2015

(in thousands):

			90+ Days Past
	Nonaccrual			Due and Accruing
December 31, 2016

Commercial and industrial	$	454	$	-
Real estate - construction		-		-
Real estate - mortgage:
Residential		4,034		-
Commercial		1,409		-
Consumer installment		6		-
Total	$	5,903	$	0

			90+ Days Past
	Nonaccrual			Due and Accruing
December 31, 2015

Commercial and industrial	$	1,450	$	-
Real estate - construction		130		-
Real estate - mortgage:
Residential		4,122		-
Commercial		1,842		-
Consumer installment		1		2
Total	$	7,545	$	2

Interest income that would have been recorded had these loans not been placed on nonaccrual status was

$309,000

2016,

$259,000

2015,

and

$207,000

2014.

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

for loans individually evaluated for impairment (discussed above) and ASC Subtopic

450

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.

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 purpose code level. A historical charge-off factor is calculated utilizing the last

twelve

consecutive quarters.

Management has identified a number of 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; value of underlying collateral; and concentrations of credit from a loan type, industry, and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order 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 primary segments of the loan portfolio (in thousands):

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2015	$	867		$	276		$	3,139		$	2,078		$	25		$	6,385
Charge-offs		(237	)		-			(414	)		(70	)		(22	)		(743	)
Recoveries		90			-			141			140			15			386
Provision		(272	)		(104	)		(48	)		987			7			570
ALLL balance at December 31, 2016	$	448		$	172		$	2,818		$	3,135		$	25		$	6,598

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2014	$	642		$	868		$	3,703		$	1,576		$	57		$	6,846
Charge-offs		(280	)		(385	)		(425	)		(92	)		(15	)		(1,197	)
Recoveries		207			-			186			5			23			421
Provision		298			(207	)		(325	)		589			(40	)		315
ALLL balance at December 31, 2015	$	867		$	276		$	3,139		$	2,078		$	25		$	6,385

The decrease in the ALLL balance for commercial and industrial loans was largely due to a

$237,000

charge off. The decrease in the ALLL balance for residential real estate was largely due to aggregate charge offs of

$414,000

of loans secured by

first

liens. The increase in the ALLL balance for commercial real estate is mostly due to the

7.7%

growth in the portfolio.