NOTE

LOANS AND RELATED

ALLOWANCE FOR LOAN AND LEASE LOSSES

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

	March 31,			December 31,
	2019			2018

Commercial and industrial	$	85,756		$	83,857
Real estate - construction		58,019			56,731
Real estate - mortgage:
Residential		340,483			336,487
Commercial		504,289			498,247
Consumer installment		15,937			16,787
		1,004,484			992,109
Less: Allowance for loan and lease losses		(7,206	)		(7,428	)

Net loans	$	997,278		$	984,681

The amounts above include deferred loan origination costs of

$1.4

million and

$1.6

million at

March 31, 2019

and

December 31, 2018.

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, Sunbury, Westerville, and Powell, 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 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 allowance for loan and lease losses (in thousands):

					Real Estate - Mortgage
March 31, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	1,825	$	3,239	$	1,856	$	9,049	$	2	$	15,971
Collectively evaluated for impairment		83,931		54,780		338,627		495,240		15,935		988,513
Total loans	$	85,756	$	58,019	$	340,483	$	504,289	$	15,937	$	1,004,484

					Real Estate - Mortgage
December 31, 2018	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	2,570	$	-	$	1,970	$	9,533	$	2	$	14,075
Collectively evaluated for impairment		81,287		56,731		334,517		488,714		16,785		978,034
Total loans	$	83,857	$	56,731	$	336,487	$	498,247	$	16,787	$	992,109

					Real Estate - Mortgage
March 31, 2019	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	$	203	$	661	$	45	$	54	$	-	$	963
Collectively evaluated for impairment		383		87		1,578		4,107		88		6,243
Total ending allowance balance	$	586	$	748	$	1,623	$	4,161	$	88	$	7,206

					Real Estate - Mortgage
December 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	$	667	$	-	$	43	$	643	$	1	$	1,354
Collectively evaluated for impairment		302		100		1,538		4,008		126		6,074
Total ending allowance balance	$	969	$	100	$	1,581	$	4,651	$	127	$	7,428

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, Real Estate Construction, Residential, and CRE portfolios were partially offset by a decrease in the allowance for the Consumer Installment 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 present value of expected cash flows. 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, 2019
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	671	$	1,169	$	-
Real estate - mortgage:
Residential		1,496		1,660		-
Commercial		2,621		2,887		-
Consumer installment		2		2		-
Total	$	4,790	$	5,718	$	-

With an allowance recorded:
Commercial and industrial	$	1,154	$	1,365	$	203
Real estate - construction		3,239		3,239		661
Real estate - mortgage:
Residential		360		411		45
Commercial		6,428		6,446		54
Total	$	11,181	$	11,461	$	963

Total:
Commercial and industrial	$	1,825	$	2,534	$	203
Real estate - construction		3,239		3,239		661
Real estate - mortgage:
Residential		1,856		2,071		45
Commercial		9,049		9,333		54
Consumer installment		2		2		-
Total	$	15,971	$	17,179	$	963

December 31, 2018
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	207	$	413	$	-
Real estate - mortgage:
Residential		1,306		1,462		-
Commercial		1,867		2,186		-
Total	$	3,380	$	4,061	$	-

With an allowance recorded:
Commercial and industrial	$	2,363	$	3,013	$	667
Real estate - mortgage:
Residential		664		715		43
Commercial		7,666		7,676		643
Consumer installment		2		2		1
Total	$	10,695	$	11,406	$	1,354

Total:
Commercial and industrial	$	2,570	$	3,426	$	667
Real estate - mortgage:
Residential		1,970		2,177		43
Commercial		9,533		9,862		643
Consumer installment		2		2		1
Total	$	14,075	$	15,467	$	1,354

The tables above include troubled debt restructuring totaling

$3.8

million as of

March 31, 2019

and

$4.4

million as of

December 31, 2018.

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, 2019				For the Three Months Ended March 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial and industrial	$	2,198	$	30	$	5,631	$	187
Real estate - construction		1,620		45		283		-
Real estate - mortgage:
Residential		1,913		12		2,892		21
Commercial		9,291		98		6,719		136
Consumer installment		2		-		4		-
Total	$	15,024	$	185	$	15,529	$	344

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. The Credit Department performs an annual review of all commercial relationships with loan balances of

$500,000

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 related to deterioration in the value of collateral securing the loan should foreclosure become necessary. 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):

			Special						Total
March 31, 2019	Pass		Mention		Substandard		Doubtful		Loans

Commercial and industrial	$	80,203	$	3,204	$	2,349	$	-	$	85,756
Real estate - construction		53,458		1,322		3,239		-		58,019
Real estate - mortgage:
Residential		335,486		547		4,450		-		340,483
Commercial		489,289		6,744		8,256		-		504,289
Consumer installment		15,927		-		10		-		15,937
Total	$	974,363	$	11,817	$	18,304	$	-	$	1,004,484

			Special						Total
December 31, 2018	Pass		Mention		Substandard		Doubtful		Loans

Commercial and industrial	$	77,002	$	4,572	$	2,283	$	-	$	83,857
Real estate - construction		55,397		1,334		-		-		56,731
Real estate - mortgage:
Residential		332,475		553		3,459		-		336,487
Commercial		483,516		6,617		8,114		-		498,247
Consumer installment		16,776		-		11		-		16,787
Total	$	965,166	$	13,076	$	13,867	$	-	$	992,109

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 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 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, 2019	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial and industrial	$	85,157	$	279	$	73	$	247	$	599	$	85,756
Real estate - construction		54,515		265		3,239		-		3,504		58,019
Real estate - mortgage:
Residential		335,148		2,816		1,094		1,425		5,335		340,483
Commercial		502,895		499		422		473		1,394		504,289
Consumer installment		15,918		17		2		-		19		15,937
Total	$	993,633	$	3,876	$	4,830	$	2,145	$	10,851	$	1,004,484

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

Commercial and industrial	$	82,770	$	288	$	213	$	586	$	1,087	$	83,857
Real estate - construction		56,731		-		-		-		-		56,731
Real estate - mortgage:
Residential		331,379		2,612		1,083		1,413		5,108		336,487
Commercial		496,597		664		-		986		1,650		498,247
Consumer installment		16,768		19		-		-		19		16,787
Total	$	984,245	$	3,583	$	1,296	$	2,985	$	7,864	$	992,109

The following tables present the recorded investment in non-accrual loans and loans past due over

days still on accrual by class of loans (in thousands):

March 31, 2019	Nonaccrual		90+ Days Past Due and Accruing

Commercial and industrial	$	1,004	$	-
Real estate - construction		3,239		-
Real estate - mortgage:
Residential		3,844		-
Commercial		2,379		-
Consumer installment		6		-
Total	$	10,472	$	-

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

Commercial and industrial	$	996	$	91
Real estate - construction		-		-
Real estate - mortgage:
Residential		2,731		754
Commercial		2,864		100
Consumer installment		4		-
Total	$	6,595	$	945

Interest income that would have been recorded had these loans

not

been placed on nonaccrual status was

$91,000

for the

three

months ended

March 31, 2019

and

$456,000

for the year ended

December 31, 2018.

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. 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 and the activity within those segments (in thousands):

	Commercial and industrial			Real estate- construction		Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2018	$	969		$	100	$	1,581		$	4,651		$	127		$	7,428
Charge-offs		(347	)		-		(91	)		(32	)		(47	)		(517	)
Recoveries		16			23		14			1			1			55
Provision		(52	)		625		119			(459	)		7			240
ALLL balance at March 31, 2019	$	586		$	748	$	1,623		$	4,161		$	88		$	7,206

	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

The provision fluctuations during the

three

-month period ended

March 31, 2019

allocated to:

●

commercial and industrial loans are due to the charge-off of a large relationship of

$336,000

from a previous reserve of

$358,000.

●

real estate construction loans are due to the addition of a large loan requiring a reserve of

$661,000.

●

commercial real estate loans are due to the payoff of

one

relationship that had a previous reserve balance of

$435,000.

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

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

There were

troubled debt restructurings during the

three

months ended

March 31, 2019.

There were

subsequent defaults of troubled debt restructurings for the

three

months ended

March 31, 2019

and

March 31, 2018.