OTE

–

LOANS

AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:	June 30,		December 31,
	2016		2015
Residential real estate	$	225,731	$	223,875
Commercial real estate:
Owner-occupied		70,478		73,458
Nonowner-occupied		83,659		72,002
Construction		30,099		23,852
Commercial and industrial		83,365		81,936
Consumer:
Automobile		46,239		44,566
Home equity		19,712		20,841
Other		43,653		45,222
		602,936		585,752
Less: Allowance for loan losses		6,934		6,648

Loans, net	$	596,002	$	579,104

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2016 and 2015:

June 30, 2016	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,185		$	1,995		$	2,672		$	1,094		$	6,946
Provision for loan losses		(258	)		1,445			(1,266	)		220			141
Loans charged off		(67	)		(52	)		----			(353	)		(472	)
Recoveries		46			76			10			187			319
Total ending allowance balance	$	906		$	3,464		$	1,416		$	1,148		$	6,934

June 30, 2015	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,465		$	4,210		$	1,738		$	907		$	8,320
Provision for loan losses		(121	)		(64	)		478			506			799
Loans charged-off		(126	)		(1,366	)		(22	)		(446	)		(1,960	)
Recoveries		12			15			93			165			285
Total ending allowance balance	$	1,230		$	2,795		$	2,287		$	1,132		$	7,444

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended

June 30, 2016 and 2015:

June 30, 2016	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,087		$	1,959		$	2,589		$	1,013		$	6,648
Provision for loan losses		(218	)		1,462			(1,184	)		560			620
Loans charged off		(171	)		(52	)		----			(836	)		(1,059	)
Recoveries		208			95			11			411			725
Total ending allowance balance	$	906		$	3,464		$	1,416		$	1,148		$	6,934

June 30, 2015	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,426		$	4,195		$	1,602		$	1,111		$	8,334
Provision for loan losses		(90	)		(58	)		492			377			721
Loans charged-off		(223	)		(1,374	)		(24	)		(707	)		(2,328	)
Recoveries		117			32			217			351			717
Total ending allowance balance	$	1,230		$	2,795		$	2,287		$	1,132		$	7,444

The following table presents the balance in the allowance for loan losses and the recorded investment of loans by portfolio segment and based on impairment method as of June 30, 2016 and December 31, 2015:

June 30, 2016	Residential Real Estate		Commercial Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	----	$	1,893	$	735	$	2	$	2,630
Collectively evaluated for impairment		906		1,571		681		1,146		4,304
Total ending allowance balance	$	906	$	3,464	$	1,416	$	1,148	$	6,934

Loans:
Loans individually evaluated for impairment	$	726	$	11,914	$	9,329	$	218	$	22,187
Loans collectively evaluated for impairment		225,005		172,322		74,036		109,386		580,749
Total ending loans balance	$	225,731	$	184,236	$	83,365	$	109,604	$	602,936

December 31, 2015	Residential Real Estate		Commercial Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	----	$	311	$	1,850	$	3	$	2,164
Collectively evaluated for impairment		1,087		1,648		739		1,010		4,484
Total ending allowance balance	$	1,087	$	1,959	$	2,589	$	1,013	$	6,648

Loans:
Loans individually evaluated for impairment	$	1,001	$	7,318	$	8,691	$	218	$	17,228
Loans collectively evaluated for impairment		222,874		161,994		73,245		110,411		568,524
Total ending loans balance	$	223,875	$	169,312	$	81,936	$	110,629	$	585,752

The following tables present information related to loans individually evaluated for impairment by class of loans as of

June 30, 2016 and December 31, 2015:

June 30, 2016	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial real estate:
Owner-occupied	$	4,936	$	4,936	$	1,789
Nonowner-occupied		390		390		104
Commercial and industrial		887		887		735
Consumer:
Home equity		218		218		2
With no related allowance recorded:
Residential real estate		726		726		----
Commercial real estate:
Owner-occupied		3,691		3,144		----
Nonowner-occupied		5,659		3,262		----
Construction		280		182		----
Commercial and industrial		8,442		8,442		----
Total	$	25,229	$	22,187	$	2,630

December 31, 2015	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial real estate:
Owner-occupied	$	204	$	204	$	204
Nonowner-occupied		396		396		107
Commercial and industrial		4,355		4,355		1,850
Consumer:
Home equity		218		218		3
With no related allowance recorded:
Residential real estate		1,001		1,001		----
Commercial real estate:
Owner-occupied		3,812		3,265		----
Nonowner-occupied		5,178		2,773		----
Construction		680		680		----
Commercial and industrial		4,336		4,336		----
Total	$	20,180	$	17,228	$	2,164

The following tables present information related to loans individually evaluated for impairment by class of loans for the three and six months ended June 30, 2016 and 2015:

	Three months ended June 30, 2016						Six months ended June 30, 2016
	Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized		Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial real estate:
Owner-occupied	$	2,570	$	143	$	143	$	1,781	$	147	$	147
Nonowner-occupied		392		5		5		393		10		10
Commercial and industrial		887		----		----		887		----		----
Consumer:
Home equity		218		2		2		218		4		4
With no related allowance recorded:
Residential real estate		728		7		7		730		16		16
Commercial real estate:
Owner-occupied		3,197		40		40		3,220		83		83
Nonowner-occupied		3,378		29		29		3,176		42		42
Construction		431		97		97		514		97		97
Commercial and industrial		8,212		95		95		8,076		187		187
Total	$	20,013	$	418	$	418	$	18,995	$	586	$	586

	Three months ended June 30, 2015						Six months ended June 30, 2015
	Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized		Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial real estate:
Owner-occupied	$	478	$	----	$	----	$	711	$	----	$	----
Nonowner-occupied		3,575		49		49		3,598		65		65
Commercial and industrial		3,185		40		40		2,909		65		65
Consumer:
Home equity		218		2		2		219		4		4
With no related allowance recorded:
Residential real estate		1,656		16		16		1,575		25		25
Commercial real estate:
Owner-occupied		2,570		30		30		2,573		60		60
Nonowner-occupied		3,630		13		13		3,857		25		25
Construction		680		----		----		453		----		----
Commercial and industrial		4,249		51		51		4,322		107		107
Total	$	20,241	$	201	$	201	$	20,217	$	351	$	351

The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees.

Nonaccrual loans and loans past due 90 days or more and still accruing include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified as impaired loans.

The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of June 30, 2016 and December 31, 2015, other real estate owned secured by residential real estate totaled $818 and $1,131, respectively. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $1,099 and $988 as of June 30, 2016 and December 31, 2015, respectively.

The following table presents the recorded investment of nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of June 30, 2016 and December 31, 2015:

June 30, 2016	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	142	$	2,185
Commercial real estate:
Owner-occupied		135		394
Nonowner-occupied		----		2,402
Construction		----		182
Commercial and industrial		75		1,200
Consumer:
Automobile		56		16
Home equity		----		32
Other		46		----
Total	$	454	$	6,411

December 31, 2015	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	20	$	2,048
Commercial real estate:
Owner-occupied		----		404
Nonowner-occupied		----		2,737
Construction		----		769
Commercial and industrial		----		1,152
Consumer:
Automobile		18		27
Home equity		----		96
Other		1		3
Total	$	39	$	7,236

The following table presents the aging of the recorded investment of past due loans by class of loans as of June 30, 2016 and December 31, 2015:

June 30, 2016	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Loans Not Past Due		Total

Residential real estate	$	3,477	$	1,319	$	1,742	$	6,538	$	219,193	$	225,731
Commercial real estate:
Owner-occupied		348		1,305		396		2,049		68,429		70,478
Nonowner-occupied		34		48		2,402		2,484		81,175		83,659
Construction		355		----		182		537		29,562		30,099
Commercial and industrial		115		25		1,221		1,361		82,004		83,365
Consumer:
Automobile		789		152		68		1,009		45,230		46,239
Home equity		74		70		16		160		19,552		19,712
Other		568		264		46		878		42,775		43,653
Total	$	5,760	$	3,183	$	6,073	$	15,016	$	587,920	$	602,936

December 31, 2015	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Loans Not Past Due		Total

Residential real estate	$	2,564	$	1,484	$	1,708	$	5,756	$	218,119	$	223,875
Commercial real estate:
Owner-occupied		141		33		371		545		72,913		73,458
Nonowner-occupied		35		334		2,737		3,106		68,896		72,002
Construction		----		2		769		771		23,081		23,852
Commercial and industrial		31		88		1,077		1,196		80,740		81,936
Consumer:
Automobile		727		197		36		960		43,606		44,566
Home equity		75		----		76		151		20,690		20,841
Other		420		104		4		528		44,694		45,222
Total	$	3,993	$	2,242	$	6,778	$	13,013	$	572,739	$	585,752

Troubled Debt Restructurings:

A troubled debt restructuring (“TDR”) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. All TDR’s are considered to be impaired. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a reduction in the contractual principal and interest payments of the loan; or short-term interest-only payment terms.

The Company has allocated reserves for a portion of its TDR’s to reflect the fair values of the underlying collateral or the present value of the concessionary terms granted to the customer.

The following table presents the types of TDR loan modifications by class of loans as of June 30, 2016 and December 31, 2015:

June 30, 2016	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total TDR’s
Residential real estate
Interest only payments	$	726	$	----	$	726
Commercial real estate:
Owner-occupied
Interest only payments		389		----		389
Rate reduction		----		232		232
Reduction of principal and interest payments		592		----		592
Maturity extension at lower stated rate than market rate		1,932		----		1,932
Credit extension at lower stated rate than market rate		204		----		204
Nonowner-occupied
Interest only payments		539		2,148		2,687
Rate reduction		390		----		390
Credit extension at lower stated rate than market rate		575		----		575
Commercial and industrial
Interest only payments		7,462		----		7,462
Credit extension at lower stated rate than market rate		980		391		1,371
Consumer:
Home equity
Maturity extension at lower stated rate than market rate		218		----		218

Total TDR’s	$	14,007	$	2,771	$	16,778

December 31, 2015	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total TDR’s
Residential real estate
Interest only payments	$	1,001	$	----	$	1,001
Commercial real estate:
Owner-occupied
Interest only payments		433		----		433
Rate reduction		----		232		232
Reduction of principal and interest payments		604		----		604
Maturity extension at lower stated rate than market rate		1,996		----		1,996
Credit extension at lower stated rate than market rate		204		----		204
Nonowner-occupied
Interest only payments		300		2,473		2,773
Rate reduction		396		----		396
Commercial and industrial
Interest only payments		7,579		----		7,579
Credit extension at lower stated rate than market rate		226		391		617
Consumer:
Home equity
Maturity extension at lower stated rate than market rate		218		----		218

Total TDR’s	$	12,957	$	3,096	$	16,053

During the three and six months ended June 30, 2016, the TDR's described above decreased the provision expense and the allowance for loan losses by $1,167 and $1,119, respectively, with no corresponding charge-offs. This is compared to a $47 decrease and a $68 increase in the provision expense and the allowance for loan losses during the three and six months ended June 30, 2015, respectively, with a corresponding charge-off of $1,304. During the year ended December 31, 2015, the TDR's described above increased the allowance for loan losses and provision expense by $93 with corresponding charge-offs of $1,422. The charge-offs of $1,422 during 2015 included $1,304 that were related to specific reserves that had already been provided for during 2014, and, as a result, did not impact provision expense during 2015.

At June 30, 2016, the balance in TDR loans increased $725, or 4.5%, from year-end 2015. The increase was largely due to concessions granted on two commercial real estate nonowner-occupied loans during the first quarter of 2016. The Company had 83% of its TDR's performing according to their modified terms at June 30, 2016, as compared to 81% at December 31, 2015. The Company's specific allocations in reserves to customers whose loan terms have been modified in TDR’s totaled $550 at June 30, 2016, as compared to $1,669 in reserves at December 31, 2015. At June 30, 2016, the Company had $864 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDR’s, as compared to $995 at December 31, 2015.

There were no TDR loan modifications during the three months ended June 30, 2016. The following table presents the pre- and post-modification balances of TDR loan modifications by class of loans that occurred during the three months ended June 30, 2015:

	TDR’s Performing to Modified Terms				TDR’s Not Performing to Modified Terms
Three months ended June 30, 2015	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Pre- Modification Recorded Investment		Post- Modification Recorded Investment

Residential real estate:
Interest only payments	$	495	$	495	$	----	$	----
Total TDR’s	$	495	$	495	$	----	$	----

The following table presents the pre- and post-modification balances of TDR loan modifications by class of loans that occurred during the six months ended June 30, 2016 and 2015:

	TDR’s Performing to Modified Terms				TDR’s Not Performing to Modified Terms
Six months ended June 30, 2016	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Pre- Modification Recorded Investment		Post- Modification Recorded Investment

Commercial real estate:
Nonowner-occupied
Interest only payments	$	238	$	238	$	----	$	----
Credit extension at lower stated rate than market rate		575		575		----		----
Total TDR’s	$	813	$	813	$	----	$	----

	TDR’s Performing to Modified Terms				TDR’s Not Performing to Modified Terms
Six months ended June 30, 2015	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Pre- Modification Recorded Investment		Post- Modification Recorded Investment

Residential real estate:
Interest only payments	$	495	$	495	$	----	$	----
Total TDR’s	$	495	$	495	$	----	$	----

All of the Company’s loans that were restructured during the six months ended June 30, 2016 and 2015 were performing in accordance with their modified terms. Furthermore, there were no TDR’s described above at June 30, 2016 and 2015 that experienced any payment defaults within twelve months following their loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. TDR loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The loans modified during the six months ended June 30, 2016 had no impact on the provision expense or the allowance for loan losses. As of June 30, 2016, the Company had no allocation of reserves to customers whose loan terms were modified during the first six months of 2016. The loans modified during the six months ended June 30, 2015 had no impact on the provision expense or the allowance for loan losses. As of June 30, 2015, the Company had no allocation of reserves to customers whose loan terms were modified during the first six months of 2015.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. These risk categories are represented by a loan grading scale from 1 through 10. The Company analyzes loans individually with a higher credit risk rating and groups these loans into categories called “criticized” and ”classified” assets. The Company considers its criticized assets to be loans that are graded 8 and its classified assets to be loans that are graded 9 through 10. The Company’s risk categories are reviewed at least annually on loans that have aggregate borrowing amounts that meet or exceed $500.

The Company uses the following definitions for its criticized loan risk ratings:

Special Mention (Loan Grade 8).

Loans classified as special mention indicate considerable risk due to deterioration of repayment (in the earliest stages) due to potential weak primary repayment source, or payment delinquency. These loans will be under constant supervision, are not classified and do not expose the institution to sufficient risks to warrant classification. These deficiencies should be correctable within the normal course of business, although significant changes in company structure or policy may be necessary to correct the deficiencies. These loans are considered bankable assets with no apparent loss of principal or interest envisioned. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. Credits that are defined as a troubled debt restructuring should be graded no higher than special mention until they have been reported as performing over one year after restructuring.

The Company uses the following definitions for its classified loan risk ratings:

Substandard (Loan Grade 9).

Loans classified as substandard represent very high risk, serious delinquency, nonaccrual, or unacceptable credit. Repayment through the primary source of repayment is in jeopardy due to the existence of one or more well defined weaknesses and the collateral pledged may inadequately protect collection of the loans. Loss of principal is not likely if weaknesses are corrected, although financial statements normally reveal significant weakness. Loans are still considered collectible, although loss of principal is more likely than with special mention loan grade 8 loans. Collateral liquidation considered likely to satisfy debt.

Doubtful (Loan Grade 10).

Loans classified as doubtful display a high probability of loss, although the amount of actual loss at the time of classification is undetermined. This should be a temporary category until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification. These loans exhibit all substandard characteristics with the addition that weaknesses make collection or liquidation in full highly questionable and improbable. This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain important and reasonable specific pending factors which may strengthen the credit can be more accurately determined. These factors may include proposed acquisitions, liquidation procedures, capital injection, receipt of additional collateral, mergers, or refinancing plans. A doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded substandard.

Criticized and classified loans will mostly consist of commercial and industrial and commercial real estate loans. The Company considers its loans that do not meet the criteria for a criticized and classified asset rating as pass rated loans, which will include loans graded from 1 (Prime) to 7 (Watch). All commercial loans are categorized into a risk category either at the time of origination or reevaluation date. As of June 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of commercial loans by class of loans was as follows:

June 30, 2016	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	61,875	$	369	$	8,234	$	70,478
Nonowner-occupied		74,319		1,717		7,623		83,659
Construction		29,554		----		545		30,099
Commercial and industrial		79,906		----		3,459		83,365
Total	$	245,654	$	2,086	$	19,861	$	267,601

December 31, 2015	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	62,287	$	6,738	$	4,433	$	73,458
Nonowner-occupied		61,577		6,305		4,120		72,002
Construction		23,080		----		772		23,852
Commercial and industrial		70,852		5,232		5,852		81,936
Total	$	217,796	$	18,275	$	15,177	$	251,248

The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau), but the scores are not updated. The Company focuses mostly on the performance and repayment ability of the borrower as an indicator of credit risk and does not consider a borrower's credit score to be a significant influence in the determination of a loan's credit risk grading.

For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment of residential and consumer loans by class of loans based on repayment activity as of June 30, 2016 and December 31, 2015:

June 30, 2016	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	46,167	$	19,680	$	43,607	$	223,404	$	332,858
Nonperforming		72		32		46		2,327		2,477
Total	$	46,239	$	19,712	$	43,653	$	225,731	$	335,335

December 31, 2015	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	44,521	$	20,745	$	45,218	$	221,807	$	332,291
Nonperforming		45		96		4		2,068		2,213
Total	$	44,566	$	20,841	$	45,222	$	223,875	$	334,504

The Company, through its subsidiaries, originates residential, consumer, and commercial loans to customers located primarily in the southeastern areas of Ohio as well as the western counties of West Virginia. Approximately 5.53% of total loans were unsecured at June 30, 2016, down from 6.06% at December 31, 2015.