NOTE

LOANS AND RELATED

ALLOWANCE FOR LOAN AND LEASE LOSSES

Major classifications of loans are summarized as follows (in thousands):

	March 31,			December 31,
	2018			2017

Commercial and industrial	$	99,809		$	101,346
Real estate - construction		48,687			47,017
Real estate - mortgage:
Residential		316,856			318,157
Commercial		448,766			437,947
Consumer installment		18,256			18,746
		932,374			923,213
Less: Allowance for loan and lease losses		(7,551	)		(7,190	)

Net loans	$	924,823		$	916,023

The amounts above include deferred loan origination costs of

$1.5

million at both

March 31, 2018

and

December 31, 2017.

The Company’s primary business activity is with customers located within its local Northeastern Ohio 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, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

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

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

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

					Real Estate- Mortgage
March 31, 2018	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	8,884	$	-	$	2,716	$	6,617	$	3	$	18,220
Collectively evaluated for impairment		90,925		48,687		314,140		442,149		18,253		914,154
Total loans	$	99,809	$	48,687	$	316,856	$	448,766	$	18,256	$	932,374

					Real estate- Mortgage
December 31, 2017	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	3,627	$	44	$	2,824	$	5,610	$	4	$	12,109
Collectively evaluated for impairment		97,719		46,973		315,333		432,337		18,742		911,104
Total loans	$	101,346	$	47,017	$	318,157	$	437,947	$	18,746	$	923,213

					Real Estate- Mortgage
March 31, 2018	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	$	997	$	-	$	124	$	756	$	-	$	1,877
Collectively evaluated for impairment		259		92		1,658		3,567		98		5,674
Total ending allowance balance	$	1,256	$	92	$	1,782	$	4,323	$	98	$	7,551

					Real Estate- Mortgage
December 31, 2017	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	$	694	$	-	$	140	$	733	$	-	$	1,567
Collectively evaluated for impairment		305		313		1,620		3,303		82		5,623
Total ending allowance balance	$	999	$	313	$	1,760	$	4,036	$	82	$	7,190

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 (“CRE”), 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. The increases in the allowance for loan loss for C&I, Residential, CRE, and Consumer Installment loan portfolios were partially offset by a decrease in the allowance for the Real Estate Construction portfolio.

Management evaluates individual loans in all of the commercial segments for possible impairment based on guidance established by the Board of Directors. 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, or the loan was modified in a troubled debt restructuring.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using

one

of the following methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, 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):

March 31, 2018
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	976	$	1,173	$	-
Real estate - mortgage:
Residential		1,597		1,822		-
Commercial		1,629		1,767		-
Total	$	4,202	$	4,762	$	-

With an allowance recorded:
Commercial and industrial	$	7,908	$	8,611	$	997
Real estate - mortgage:
Residential		1,119		1,165		124
Commercial		4,988		5,169		756
Consumer installment		3		3		-
Total	$	14,018	$	14,948	$	1,877

Total:
Commercial and industrial	$	8,884	$	9,784	$	997
Real estate - mortgage:
Residential		2,716		2,987		124
Commercial		6,617		6,936		756
Consumer installment		3		3		-
Total	$	18,220	$	19,710	$	1,877

December 31, 2017
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	450	$	1,006	$	-
Real estate - construction		44		44		-
Real estate - mortgage:
Residential		1,685		1,904		-
Commercial		1,870		1,984		-
Consumer installment		4		4		-
Total	$	4,053	$	4,942	$	-

With an allowance recorded:
Commercial and industrial	$	3,177	$	3,888	$	694
Real estate - mortgage:
Residential		1,139		1,179		140
Commercial		3,740		3,913		733
Total	$	8,056	$	8,980	$	1,567

Total:
Commercial and industrial	$	3,627	$	4,894	$	694
Real estate - construction		44		44		-
Real estate - mortgage:
Residential		2,824		3,083		140
Commercial		5,610		5,897		733
Consumer installment		4		4		-
Total	$	12,109	$	13,922	$	1,567

The tables above include troubled debt restructuring totaling

$9.1

million at

March 31, 2018

and

$5.4

million as of

December 31, 2017.

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, 2018				For the Three Months Ended March 31, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial and industrial	$	5,631	$	187	$	1,372	$	84
Real estate - construction		283		-		810		-
Real estate - mortgage:
Residential		2,892		21		3,092		22
Commercial		6,719		136		7,077		88
Consumer installment		4		-		5		-
Total	$	15,529	$	344	$	12,356	$	194

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 with loan balances of

$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 primary risk of commercial and industrial loans is the current economic uncertainties. 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 along with the slow recovery in the housing market. The primary risk of commercial real estate loans is 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):

	March 31, 2018
			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans

Commercial and industrial	$	87,415	$	8,955	$	3,439	$	-	$	99,809
Real estate - construction		48,687		-		-		-		48,687
Real estate - mortgage:
Residential		310,965		715		5,176		-		316,856
Commercial		434,991		8,206		5,569		-		448,766
Consumer installment		18,082		-		174		-		18,256
Total	$	900,140	$	17,876	$	14,358	$	-	$	932,374

	December 31, 2017
			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans

Commercial and industrial	$	95,621	$	1,942	$	3,783	$	-	$	101,346
Real estate - construction		46,995		-		22		-		47,017
Real estate - mortgage:
Residential		312,176		723		5,258		-		318,157
Commercial		424,225		9,164		4,558		-		437,947
Consumer installment		18,742		-		4		-		18,746
Total	$	897,759	$	11,829	$	13,625	$	-	$	923,213

The increase in the amount classified as special mention for commercial and industrial loans for the

three

-month period ended

March 31, 2018

is due to a large relationship of

$5.8

million being reclassified as a troubled debt restructuring (TDR).

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 include nonaccrual loans, TDRs, loans

days or more past due, EMORECO assets, other real estate owned, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about 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 classes of the loan portfolio summarized by the aging categories of performing loans (in thousands):

	March 31, 2018
			30-59 Days		60-89 Days		90 Days+		Total		Total
	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial and industrial	$	99,201	$	175	$	366	$	67	$	608	$	99,809
Real estate - construction		48,647		40		-		-		40		48,687
Real estate - mortgage:
Residential		313,459		1,943		538		916		3,397		316,856
Commercial		445,861		1,652		260		993		2,905		448,766
Consumer installment		18,243		11		2		-		13		18,256
Total	$	925,411	$	3,821	$	1,166	$	1,976	$	6,963	$	932,374

	December 31, 2017
			30-59 Days		60-89 Days		90 Days+		Total		Total
	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial and industrial	$	99,633	$	1,607	$	29	$	77	$	1,713	$	101,346
Real estate - construction		47,017		-		-		-		-		47,017
Real estate - mortgage:
Residential		314,866		1,977		227		1,087		3,291		318,157
Commercial		434,879		1,907		1		1,160		3,068		437,947
Consumer installment		18,736		10		-		-		10		18,746
Total	$	915,131	$	5,501	$	257	$	2,324	$	8,082	$	923,213

The following tables present the classes of the loan portfolio summarized by nonaccrual loans (in thousands):

	March 31, 2018
			90+ Days Past
	Nonaccrual		Due and Accruing

Commercial and industrial	$	1,351	$	-
Real estate - construction		-		-
Real estate - mortgage:
Residential		3,934		-
Commercial		3,462		-
Consumer installment		-		-
Total	$	8,747	$	-

	December 31, 2017
			90+ Days Past
	Nonaccrual		Due and Accruing

Commercial and industrial	$	1,120	$	-
Real estate - construction		-		-
Real estate - mortgage:
Residential		4,002		-
Commercial		3,311		-
Consumer installment		-		-
Total	$	8,433	$	-

Interest income that would have been recorded had these loans

not

been placed on nonaccrual status was

$369,000

for the

three

months ended

March 31, 2018

and

$437,000

for the year ended

December 31, 2017.

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 Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the

two

components represents the Company’s ALLL. Management also performs impairment analyses on TDRs, which

may

result in specific reserves.

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

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

twelve

consecutive historical 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, 2017	$	999		$	313		$	1,760	$	4,036	$	82		$	7,190
Charge-offs		(9	)		-			-		-		(4	)		(13	)
Recoveries		109			17			20		-		18			164
Provision		157			(238	)		2		287		2			210
ALLL balance at March 31, 2018	$	1,256		$	92		$	1,782	$	4,323	$	98		$	7,551

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2016	$	448		$	172		$	2,818		$	3,135		$	25		$	6,598
Charge-offs		(20	)		-			(68	)		(19	)		(101	)		(208	)
Recoveries		78			17			7			-			63			165
Provision		110			(3	)		(234	)		262			30			165
ALLL balance at March 31, 2017	$	616		$	186		$	2,523		$	3,378		$	17		$	6,720

The negative provision allocated to real estate construction loans in the amount of

$238,000

for the

three

-month period ended

March 31, 2018

is due to the historical loss rate for the real estate construction pool changing to -

0.127%

from

0.775%

for this time period in the prior year.

The negative provision allocated to residential real estate loans in the amount of

$234,000

for the

three

-month period ended

March 31, 2017

is due to the payoff of a large residential credit during that period.

The following tables summarize troubled debt restructurings (in thousands):

	For the Three Months Ended
	March 31, 2018
	Number of Contracts						Pre-Modification		Post-Modification
	Term						Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment
Commercial and industrial		2		-		2	$	6,977	$	6,977
Residential real estate		2		-		2		63		63

	For the Three Months Ended
	March 31, 2017
	Number of Contracts						Pre-Modification		Post-Modification
	Term						Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment
Commercial and industrial		1		-		1	$	50	$	50
Residential real estate		2		-		2		36		36

There were

subsequent defaults of troubled debt restructurings for the

three

months ended

March 31, 2018.

One

residential real estate contract with a recorded investment of

$33,000

had subsequently defaulted for the

three

-month period ended

March 31, 2017.