NOTE

LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

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

	March 31,		December 31,
	2017		2016

Commercial and industrial	$	91,777	$	60,630
Real estate - construction		29,238		23,709
Real estate - mortgage:
Residential		300,508		270,830
Commercial		395,102		249,490
Consumer installment		20,533		4,481
		837,158		609,140
Less: Allowance for loan and lease losses		6,720		6,598

Net loans	$	830,438	$	602,542

The amounts above include deferred loan origination costs of

$3.2

million and

$1.7

million at

March

31,

2017

and

December

31,

2016,

respectively.

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. The Northeastern Ohio trade area includes the newly acquired Liberty locations in Beachwood, Twinsburg, and Solon, 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 as income when earned 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 being deferred and the net amount amortized as an adjustment of the related loan’s yield. Management is amortizing these amounts over the contractual life of the related loans.

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, 2017	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	1,553	$	706	$	3,049	$	6,967	$	4	$	12,279
Collectively evaluated for impairment		90,224		28,532		297,459		388,135		20,529		824,879
Total loans	$	91,777	$	29,238	$	300,508	$	395,102	$	20,533	$	837,158

					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
March 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	$	237	$	-	$	104	$	188	$	-	$	529
Collectively evaluated for impairment		379		186		2,419		3,190		17		6,191
Total ending allowance balance	$	616	$	186	$	2,523	$	3,378	$	17	$	6,720

					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

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 increase in the allowance for loan loss for C&I, Real Estate Construction, and CRE loan portfolios were partially offset by decreases in the allowance for the Residential and Consumer Installment loan portfolios.

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.

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, 2017
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	488		485		-
Real estate - construction		706		675		-
Real estate - mortgage:
Residential		2,296		2,286		-
Commercial		1,616		1,610		-
Consumer installment		4		4		-
Total	$	5,110	$	5,060	$	-

With an allowance recorded:
Commercial and industrial	$	1,065		1,060		237
Real estate - construction		-		-		-
Real estate - mortgage:
Residential		753		749		104
Commercial		5,351		5,319		188
Total	$	7,169	$	7,128	$	529

Total:
Commercial and industrial	$	1,553	$	1,545	$	237
Real estate - construction		706		675		-
Real estate - mortgage:
Residential		3,049		3,035		104
Commercial		6,967		6,929		188
Consumer installment		4		4		-
Total	$	12,279	$	12,188	$	529

December 31, 2016
Impaired Loans
			Unpaid
	Recorded		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

The tables above include troubled debt restructuring totaling

$1.7

million at

March

31,

2017

and

$6.7

million as of

December

31,

2016.

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, 2017
	Average Recorded		Interest Income
	Investment		Recognized
Total:
Commercial and industrial	$	1,372	$	84
Real estate - construction		810		-
Real estate - mortgage:
Residential		3,092		22
Commercial		7,077		88
Consumer installment		5		-
	$	12,356	$	194

	For the Three Months Ended March 31, 2016
	Average Recorded		Interest Income
	Investment		Recognized
Total:
Commercial and industrial	$	1,337	$	13
Real estate - construction		1,620		25
Real estate - mortgage:
Residential		3,983		36
Commercial		7,719		123
Consumer installment		6		-
	$	14,665	$	197

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 /or 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
	Pass		Mention		Substandard		Doubtful		Loans
March 31, 2017

Commercial and industrial	$	85,248	$	2,051	$	4,478	$	-	$	91,777
Real estate - construction		29,215		-		23		-		29,238
Real estate - mortgage:
Residential		294,284		568		5,656		-		300,508
Commercial		386,346		3,844		4,912		-		395,102
Consumer installment		20,526		-		7		-		20,533
Total	$	815,619	$	6,463	$	15,076	$	-	$	837,158

			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

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, troubled debt restructurings (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):

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

Commercial and industrial	$	90,236	$	1,325	$	9	$	207	$	1,541	$	91,777
Real estate - construction		29,238		-		-		-		-		29,238
Real estate - mortgage:
Residential		296,786		2,767		454		501		3,722		300,508
Commercial		394,255		361		30		456		847		395,102
Consumer installment		20,503		17		13		-		30		20,533
Total	$	831,018	$	4,470	$	506	$	1,164	$	6,140	$	837,158

			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

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

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


Commercial and industrial	$	410	$	-
Real estate - construction		-		-
Real estate - mortgage:
Residential		4,145		35
Commercial		1,990		-
Consumer installment		-		-
Total	$	6,545	$	35

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


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

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

$462,000

for the

three

months ended

March

31,

217

and

$309,000

for the year ended

December

31,

2016.

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, 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

	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		(120	)		-			(42	)		-		(15	)		(177	)
Recoveries		37			-			4			-		3			44
Provision		(201	)		(29	)		(385	)		705		15			105
ALLL balance at March 31, 2016	$	583		$	247		$	2,716		$	2,783	$	28		$	6,357

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

	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

	For the Three Months Ended
	March 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		2		-		2	$	33	$	33
Residential real estate		2		-		2		74		74
Commercial real estate		2		-		2		581		581

The following tables summarizes subsequent defaults of troubled debt restructurings (in thousands):

	For the Three Months Ended
	March 31, 2017
Troubled Debt Restructurings	Number of		Recorded
subsequently defaulted	Contracts		Investment
Residential real estate		1	$	33

There were

subsequent defaults of troubled debt restructurings for the

three

months ended

March

31,

2016.