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

Major classifications of loans at

December 31

are summarized as follows (in thousands):

	2018			2017

Commercial and industrial	$	83,857		$	101,346
Real estate - construction		56,731			47,017
Real estate - mortgage:
Residential		336,487			318,157
Commercial		498,247			437,947
Consumer installment		16,787			18,746
		992,109			923,213
Less: Allowance for loan and lease losses		(7,428	)		(7,190	)

Net loans	$	984,681		$	916,023

The amounts above include net deferred loan origination costs of

$1.6

million and

$1.5

million at

December 31, 2018

and

December 31, 2017,

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, Powell and Westerville, Ohio. The Northeastern Ohio trade area includes the recently 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 at

December 31, 2018

and

2017,

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, 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
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
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

					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, 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, 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

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

$4.4

million and

$5.4

million as of

December 31, 2018

and

2017,

respectively.

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

	As of December 31, 2018				As of December 31, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial and industrial	$	4,210	$	172	$	2,378	$	123
Real estate - construction		9		-		565		20
Real estate - mortgage:
Residential		2,531		57		3,068		75
Commercial		6,805		377		6,820		159
Consumer installment		3		-		5		-
Total	$	13,558	$	606	$	12,836	$	377

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

2018

and

2017

related to TDRs was

$459,000

and

$509,000,

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, 2018
	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	$	44	$	44
Residential real estate		3		2		5		286		286
Commercial real estate		1		-		1		94		94
							$	424	$	424

	December 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		4		-		4	$	127	$	127
Residential real estate		5		-		5		256		256
							$	383	$	383

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

There were

subsequent defaults of troubled debt restructurings for the year ended

December 31, 2017.

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, 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

			Special						Total
December 31, 2017	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

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, 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

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2017	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 and loans

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

			90+ Days Past
December 31, 2018	Nonaccrual		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

			90+ Days Past
December 31, 2017	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

$456,000

2018

and

$437,000

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 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, 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

	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		(536	)		-		(117	)		(39	)		(462	)		(1,154	)
Recoveries		234			34		241			111			81			701
Provision		853			107		(1,182	)		829			438			1,045
ALLL balance at December 31, 2017	$	999		$	313	$	1,760		$	4,036		$	82		$	7,190

The negative provision allocated to real estate construction loans for the year ended

December 31, 2018

is 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. The decline in the reserve allocated for residential real estate is due to a continued decline in historical losses and consistent decreases in the ratio of nonperforming loans to total loans in this segment over the past few years resulting in a decrease in the reserves required. The increase in the ALLL balance for consumer installment loans is primarily due to increases in historical losses for this segment over the prior year. The negative provision allocated to residential real estate loans in the amount of

$1.2

million for the year ended

December 31, 2017

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