OTE

–

LOANS

AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:	September 30,		December 31,
	2016		2015
Residential real estate	$	273,335	$	223,875
Commercial real estate:
Owner-occupied		82,204		73,458
Nonowner-occupied		98,923		72,002
Construction		34,494		23,852
Commercial and industrial		97,192		81,936
Consumer:
Automobile		58,359		44,566
Home equity		20,159		20,841
Other		56,921		45,222
		721,587		585,752
Less: Allowance for loan losses		7,537		6,648

Loans, net	$	714,050	$	579,104

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

September 30, 2016	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	906		$	3,464		$	1,416		$	1,148		$	6,934
Provision for loan losses		228			802			149			529			1,708
Loans charged off		(151	)		(11	)		(587	)		(704	)		(1,453	)
Recoveries		30			19			1			298			348
Total ending allowance balance	$	1,013		$	4,274		$	979		$	1,271		$	7,537

September 30, 2015	Residential Real Estate			Commercial Real Estate			Commercial and Industrial		Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,230		$	2,795		$	2,287	$	1,132		$	7,444
Provision for loan losses		(166	)		(214	)		205		164			(11	)
Loans charged-off		(40	)		(596	)		----		(309	)		(945	)
Recoveries		219			15			11		169			414
Total ending allowance balance	$	1,243		$	2,000		$	2,503	$	1,156		$	6,902

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

September 30, 2016 and 2015:

September 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		10			2,264			(1,035	)		1,089			2,328
Loans charged off		(322	)		(63	)		(587	)		(1,540	)		(2,512	)
Recoveries		238			114			12			709			1,073
Total ending allowance balance	$	1,013		$	4,274		$	979		$	1,271		$	7,537

September 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		(256	)		(272	)		697			541			710
Loans charged-off		(263	)		(1,970	)		(24	)		(1,016	)		(3,273	)
Recoveries		336			47			228			520			1,131
Total ending allowance balance	$	1,243		$	2,000		$	2,503		$	1,156		$	6,902

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 September 30, 2016 and December 31, 2015:

September 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	$	----	$	2,705	$	245	$	2	$	2,952
Collectively evaluated for impairment		1,013		1,569		734		1,269		4,585
Total ending allowance balance	$	1,013	$	4,274	$	979	$	1,271	$	7,537

Loans:
Loans individually evaluated for impairment	$	724	$	13,391	$	9,099	$	216	$	23,430
Loans collectively evaluated for impairment		272,611		202,230		88,093		135,223		698,157
Total ending loans balance	$	273,335	$	215,621	$	97,192	$	135,439	$	721,587

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

September 30, 2016 and December 31, 2015:

September 30, 2016	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial real estate:
Owner-occupied	$	5,918	$	5,918	$	2,603
Nonowner-occupied		387		387		102
Commercial and industrial		391		391		245
Consumer:
Home equity		216		216		2
With no related allowance recorded:
Residential real estate		724		724		----
Commercial real estate:
Owner-occupied		3,291		2,744		----
Nonowner-occupied		5,614		3,798		----
Construction		641		544		----
Commercial and industrial		8,708		8,708		----
Total	$	25,890	$	23,430	$	2,952

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 nine months ended September 30, 2016 and 2015:

	Three months ended September 30, 2016						Nine months ended September 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	$	5,427	$	94	$	94	$	2,815	$	241	$	241
Nonowner-occupied		389		5		5		392		15		15
Commercial and industrial		391		----		----		391		----		----
Consumer:
Home equity		217		1		1		218		5		5
With no related allowance recorded:
Residential real estate		725		4		4		728		20		20
Commercial real estate:
Owner-occupied		2,797		37		37		2,879		120		120
Nonowner-occupied		3,680		33		33		3,557		75		75
Construction		363		11		11		521		108		108
Commercial and industrial		8,575		103		103		8,234		290		290
Total	$	22,564	$	288	$	288	$	19,735	$	874	$	874

	Three months ended September 30, 2015						Nine months ended September 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:
Residential real estate	$	895	$	----	$	----	$	895	$	----	$	----
Commercial real estate:
Owner-occupied		204		11		11		204		11		11
Nonowner-occupied		401		5		5		404		70		70
Commercial and industrial		3,589		52		52		3,343		117		117
Consumer:
Home equity		218		2		2		219		6		6
With no related allowance recorded:
Residential real estate		1,005		11		11		761		36		36
Commercial real estate:
Owner-occupied		2,873		74		74		2,617		135		135
Nonowner-occupied		2,910		12		12		3,605		37		37
Construction		680		----		----		510		----		----
Commercial and industrial		3,800		26		26		3,897		133		133
Total	$	16,575	$	193	$	193	$	16,455	$	545	$	545

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 September 30, 2016 and December 31, 2015, other real estate owned secured by residential real estate totaled $986 and $1,131, respectively. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $1,042 and $988 as of September 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 September 30, 2016 and December 31, 2015:

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

Residential real estate	$	152	$	3,387
Commercial real estate:
Owner-occupied		207		1,575
Nonowner-occupied		----		2,711
Construction		----		544
Commercial and industrial		----		661
Consumer:
Automobile		53		16
Home equity		----		35
Other		31		98
Total	$	443	$	9,027

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 September 30, 2016 and December 31, 2015:

September 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	$	4,355	$	1,677	$	2,164	$	8,196	$	265,139	$	273,335
Commercial real estate:
Owner-occupied		162		338		1,508		2,008		80,196		82,204
Nonowner-occupied		226		316		2,235		2,777		96,146		98,923
Construction		414		----		182		596		33,898		34,494
Commercial and industrial		370		230		602		1,202		95,990		97,192
Consumer:
Automobile		1,030		228		63		1,321		57,038		58,359
Home equity		174		----		----		174		19,985		20,159
Other		1,120		199		56		1,375		55,546		56,921
Total	$	7,851	$	2,988	$	6,810	$	17,649	$	703,938	$	721,587

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 September 30, 2016 and December 31, 2015:

September 30, 2016	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total TDR’s
Residential real estate
Interest only payments	$	724	$	----	$	724
Commercial real estate:
Owner-occupied
Interest only payments		316		----		316
Rate reduction		----		232		232
Reduction of principal and interest payments		586		----		586
Maturity extension at lower stated rate than market rate		1,610		----		1,610
Credit extension at lower stated rate than market rate		204		----		204
Nonowner-occupied
Interest only payments		600		2,374		2,974
Rate reduction		387		----		387
Credit extension at lower stated rate than market rate		574		----		574
Commercial and industrial
Interest only payments		7,750		----		7,750
Credit extension at lower stated rate than market rate		957		392		1,349
Consumer:
Home equity
Maturity extension at lower stated rate than market rate		216		----		216

Total TDR’s	$	13,924	$	2,998	$	16,922

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 months ended September 30, 2016, the TDR’s described above increased the provision expense and the allowance for loan losses by $14, with corresponding charge-offs of $11. During the nine months ended September 30, 2016, the TDR's described above decreased the provision expense and the allowance for loan losses by $1,105, with corresponding charge-offs of $11. These results are compared to a $44 decrease in both the provision expense and the allowance for loan losses during the three and nine months ended September 30, 2015, with corresponding charge-offs of $1,422. 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 September 30, 2016, the balance in TDR loans increased $869, or 5.4%, from year-end 2015. The increase was largely from additional funds advanced to one commercial and industrial loan relationship during the third quarter of 2016. The Company had 82% of its TDR's performing according to their modified terms at September 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 $553 at September 30, 2016, as compared to $1,669 in reserves at December 31, 2015. At September 30, 2016, the Company had $1,292 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 September 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 September 30, 2015:

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

Commercial real estate:
Owner-occupied
Maturity extension at lower stated rate than market rate	$	1,025	$	1,025	$	----	$	----
Total TDR’s	$	1,025	$	1,025	$	----	$	----

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

	TDR’s Performing to Modified Terms				TDR’s Not Performing to Modified Terms
Nine months ended September 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	$	----	$	----	$	226	$	226
Credit extension at lower stated rate than market rate		574		574		----		----
Total TDR’s	$	574	$	574	$	226	$	226

	TDR’s Performing to Modified Terms				TDR’s Not Performing to Modified Terms
Nine months ended September 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	$	----	$	----
Commercial real estate:
Owner-occupied
Maturity extension at lower stated rate than market rate		1,025		1,025		----		----
Total TDR’s	$	1,520	$	1,520	$	----	$	----

During the third quarter of 2016, the Company placed one commercial real estate TDR totaling $226 on nonaccrual status. The borrower continues to experience financial difficulty and the Company has started the foreclosure process. The Company reviewed the loan’s collateral during the third quarter and identified $11 in collateral impairment, which resulted in a partial charge-off of principal. There were no specific allocations of the allowance for loan losses recorded on the impaired TDR loan at September 30, 2016. All of the Company’s loans that were restructured during the nine months ended September 30, 2015 were performing in accordance with their modified terms. Excluding the commercial real estate loan of $226 previously mentioned, there were no other TDR’s described above at September 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 nine months ended September 30, 2016 increased the provision expense and the allowance for loan losses by $11. As of September 30, 2016, the Company had no allocation of reserves to customers whose loan terms were modified during the first nine months of 2016. The loans modified during the nine months ended September 30, 2015 had no impact on the provision expense or the allowance for loan losses. As of September 30, 2015, the Company had no allocation of reserves to customers whose loan terms were modified during the first nine 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 September 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:

September 30, 2016	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	72,943	$	370	$	8,891	$	82,204
Nonowner-occupied		88,613		367		9,943		98,923
Construction		33,951		----		543		34,494
Commercial and industrial		94,011		----		3,181		97,192
Total	$	289,518	$	737	$	22,558	$	312,813

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 September 30, 2016 and December 31, 2015:

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

Performing	$	58,290	$	20,124	$	56,792	$	269,796	$	405,002
Nonperforming		69		35		129		3,539		3,772
Total	$	58,359	$	20,159	$	56,921	$	273,335	$	408,774

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 5.09% of total loans were unsecured at September 30, 2016, down from 6.06% at December 31, 2015.