5.	LOANS AND RELATED ALL OWANCE FOR LOAN AND LEASE LOSSES

The Company’s primary business activity is with loan 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, Powell, Plain City and Westerville, Ohio. The Northeastern Ohio trade area includes locations in Beachwood, Twinsburg, and Solon, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at

December 31, 2019

and

2018,

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

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

					Real Estate-Mortgage
December 31, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	882	$	-	$	1,628	$	10,559	$	1	$	13,070
Collectively evaluated for impairment		88,645		63,246		345,419		459,468		14,410		971,188
Total loans	$	89,527	$	63,246	$	347,047	$	470,027	$	14,411	$	984,258

					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

The amounts above include net deferred loan origination costs of

$1.3

million and

$1.6

million at

December 31, 2019

and

December 31, 2018,

respectively.

					Real Estate-Mortgage
December 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	$	3	$	-	$	30	$	627	$	-	$	660
Collectively evaluated for impairment		453		97		1,628		3,902		28		6,108
Total ending allowance balance	$	456	$	97	$	1,658	$	4,529	$	28	$	6,768

					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, 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 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

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. 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, 2019
Impaired Loans
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	747	$	1,524	$	-
Real estate - mortgage:
Residential		979		1,057		-
Commercial		5,617		5,617		-
Consumer installment		1		1		-
Total	$	7,344	$	8,199	$	-

With an allowance recorded:
Commercial and industrial	$	135	$	135	$	3
Real estate - mortgage:
Residential		649		700		30
Commercial		4,942		4,952		627
Total	$	5,726	$	5,787	$	660

Total:
Commercial and industrial	$	882	$	1,659	$	3
Real estate - mortgage:
Residential		1,628		1,757		30
Commercial		10,559		10,569		627
Consumer installment		1		1		-
Total	$	13,070	$	13,986	$	660

December 31, 2018
Impaired Loans
	Recorded		Unpaid 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

$3.6

million and

$4.4

million as of

December 31, 2019

and

2018,

respectively.

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

	As of December 31, 2019				As of December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial and industrial	$	1,770	$	141	$	4,210	$	172
Real estate - construction		648		-		9		-
Real estate - mortgage:
Residential		1,803		51		2,531		57
Commercial		10,366		375		6,805		377
Consumer installment		2		-		3		-
Total	$	14,589	$	567	$	13,558	$	606

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 total impact on the ALLL for

2019

and

2018

related to TDRs was

$33,000

and

$459,000,

respectively.

The following tables present the number of loan modifications by class, the corresponding recorded investment, and the subsequently defaulted modifications (in thousands) for the years ended:

	December 31, 2019
	Number of Contracts						Pre-Modification		Post-Modification
Troubled Debt Restructurings	Term Modification		Other		Total		Outstanding Recorded Investment		Outstanding Recorded Investment
Commercial and industrial		3		-		3	$	488	$	490
Residential real estate		4		2		6		294		354
							$	782	$	844

	December 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		1		-		1	$	44	$	44
Residential real estate		3		2		5		286		286
Commercial real estate		1		-		1		94		94
							$	424	$	424

	December 31, 2018
Troubled Debt Restructurings	Number of		Recorded
subsequently defaulted	Contracts		Investment
Residential real estate		1	$	19

One loan with a book balance of

$36,000

was restructured in

2019

and defaulted by

December 31, 2019.

There were

subsequent defaults of troubled debt restructurings for the year ended

December 31, 2019.

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 or Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. 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 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 (in thousands):

			Special						Total
December 31, 2019	Pass		Mention		Substandard		Doubtful		Loans

Commercial and industrial	$	84,136	$	3,619	$	1,772	$	-	$	89,527
Real estate - construction		63,246		-		-		-		63,246
Real estate - mortgage:
Residential		342,988		420		3,639		-		347,047
Commercial		453,170		6,989		9,868		-		470,027
Consumer installment		14,399		-		12		-		14,411
Total	$	957,939	$	11,028	$	15,291	$	-	$	984,258

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

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2019	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial and industrial	$	88,965	$	190	$	66	$	306	$	562		89,527
Real estate - construction		63,246		-		-		-		-		63,246
Real estate - mortgage:
Residential		344,311		1,713		63		960		2,736		347,047
Commercial		465,666		63		-		4,298		4,361		470,027
Consumer installment		13,378		623		216		194		1,033		14,411
Total	$	975,566	$	2,589	$	345	$	5,758	$	8,692	$	984,258

			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 classes of the loan portfolio summarized by nonaccrual loans and loans

days or more past due and still accruing (in thousands):

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

Commercial and industrial	$	946	$	-
Real estate - mortgage:
Residential		3,285		-
Commercial		4,451		-
Consumer installment		197		-
Total	$	8,879	$	-

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

Commercial and industrial	$	996	$	91
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

$342,000

2019

and

$456,000

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 analysis 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. A historical charge-off factor is calculated utilizing 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, 2018	$	969		$	100		$	1,581		$	4,651		$	127		$	7,428
Charge-offs		(519	)		-			(523	)		(32	)		(735	)		(1,809	)
Recoveries		82			74			78			17			8			259
Provision		(76	)		(77	)		522			(107	)		628			890
ALLL balance at December 31, 2019	$	456		$	97		$	1,658		$	4,529		$	28		$	6,768

	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		(610	)		-			(177	)		(111	)		(220	)		(1,118	)
Recoveries		287			63			128			-			38			516
Provision		293			(276	)		(130	)		726			227			840
ALLL balance at December 31, 2018	$	969		$	100		$	1,581		$	4,651		$	127		$	7,428

The provision fluctions during the the year ended

December 31, 2019

allocated to:

●

commercial and industrial loans are due to the charge-offs of

two

large relationships totaling

$438,000,

which had specific reserves allocated at the end of

2018.

●

residential portfolio are due to the charge-off of

two

relationships totalling

$360,000

and portfolio growth.

●

commercial real estate loans are due to a small charge-off and a declining portfolio balance.

●

consumer installments are due to charge-offs in the student loan portfolio totaling

$566,000.

The provision fluctions during the the year ended

December 31, 2018

allocated to:

●

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

0.127%

from

0.775%

in the

first

quarter of

2018

as well as

charge-offs for the year.

●

residential real estate are due to a continued decline in historical losses and consistent decreases in the ratio of nonperforming loans to toal loans in this segment over the past few years resulting in a decrease in the reserves required.

●

consumer installment loans are primarily due to increases in historical losses for this segment over the prior year.