OHIO VALLEY BANC CORP - FORM 10-Q

Attached files

file	filename
EX-32 - SECTION 1350 CERTIFICATION 06/30/17 - OHIO VALLEY BANC CORP	exhibit32_063017.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER 06/30/17 - OHIO VALLEY BANC CORP	exhibit31_2_063017.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER 06/30/17 - OHIO VALLEY BANC CORP	exhibit31_1_063017.htm
EX-4 - EXHIBIT 4 AS OF 06/30/17 - OHIO VALLEY BANC CORP	exhibit4_063017.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 0-20914

OHIO VALLEY BANC CORP.

(Exact name of registrant as specified in its charter)

Ohio	31-1359191
(State of Incorporation)	(I.R.S. Employer Identification No.)

420 Third Avenue
Gallipolis, Ohio	45631
(Address of principal executive offices)	(ZIP Code)

(740) 446-2631

(Issuer's telephone number, including area code)

_____________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐		Accelerated filer	☒
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of common shares of the registrant outstanding as of August 9, 2017 was 4,683,107.

OHIO VALLEY BANC CORP.

Index

		Page Number
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Changes in Shareholders' Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to the Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	40

Signatures		41

Exhibit Index		42

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OHIO VALLEY BANC CORP.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and per share data)

	June 30, 2017			December 31, 2016
	UNAUDITED
ASSETS
Cash and noninterest-bearing deposits with banks	$	11,013		$	12,512
Interest-bearing deposits with banks		24,473			27,654
Total cash and cash equivalents		35,486			40,166

Certificates of deposit in financial institutions		1,820			1,670
Securities available for sale		102,697			96,490
Securities held to maturity (estimated fair value: 2017 - $19,330; 2016 - $19,171)		18,605			18,665
Restricted investments in bank stocks		7,506			7,506

Total loans		756,905			734,901
Less: Allowance for loan losses		(6,952	)		(7,699	)
Net loans		749,953			727,202

Premises and equipment, net		13,233			12,783
Other real estate owned		2,436			2,129
Accrued interest receivable		2,264			2,315
Goodwill		7,371			7,801
Other intangible assets, net		588			670
Bank owned life insurance and annuity assets		29,529			29,349
Other assets		8,668			7,894
Total assets	$	980,156		$	954,640

LIABILITIES
Noninterest-bearing deposits	$	227,064		$	209,576
Interest-bearing deposits		581,128			580,876
Total deposits		808,192			790,452

Other borrowed funds		40,655			37,085
Subordinated debentures		8,500			8,500
Accrued liabilities		13,822			14,075
Total liabilities		871,169			850,112

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)		----			----

SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 2017 - 5,342,846 shares issued; 2016 - 5,325,504 shares issued)		5,343			5,326
Additional paid-in capital		47,268			46,788
Retained earnings		72,112			69,117
Accumulated other comprehensive loss		(24	)		(991	)
Treasury stock, at cost (659,739 shares)		(15,712	)		(15,712	)
Total shareholders' equity		108,987			104,528
Total liabilities and shareholders' equity	$	980,156		$	954,640

See accompanying notes to consolidated financial statements

OHIO VALLEY BANC CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except per share data)

	Three months ended June 30,					Six months ended June 30,
	2017			2016		2017			2016

Interest and dividend income:
Loans, including fees	$	10,131		$	8,135	$	20,921		$	17,062
Securities
Taxable		536			491		1,024			979
Tax exempt		105			112		208			226
Dividends		94			73		186			147
Other Interest		123			102		388			269
		10,989			8,913		22,727			18,683
Interest expense:
Deposits		628			510		1,228			1,008
Other borrowed funds		229			147		445			272
Subordinated debentures		61			50		118			97
		918			707		1,791			1,377
Net interest income		10,071			8,206		20,936			17,306
Provision for loan losses		175			141		320			620
Net interest income after provision for loan losses		9,896			8,065		20,616			16,686

Noninterest income:
Service charges on deposit accounts		530			434		1,034			839
Trust fees		55			56		113			116
Income from bank owned life insurance and annuity assets		182			191		404			400
Mortgage banking income		50			61		105			118
Electronic refund check / deposit fees		291			270		1,667			2,024
Debit / credit card interchange income		863			625		1,643			1,211
Gain (loss) on other real estate owned		(21	)		13		(71	)		8
Other		162			211		330			380
		2,112			1,861		5,225			5,096
Noninterest expense:
Salaries and employee benefits		5,145			4,528		10,509			9,098
Occupancy		448			405		882			834
Furniture and equipment		258			201		518			386
Professional fees		451			341		904			678
Marketing expense		257			248		512			495
FDIC insurance		109			148		267			297
Data processing		553			336		1,088			689
Software		378			302		737			594
Foreclosed assets		75			121		267			186
Amortization of intangibles		41			----		82			----
Merger related expenses		----			134		27			361
Other		2,161			1,009		3,458			2,124
		9,876			7,773		19,251			15,742

Income before income taxes		2,132			2,153		6,590			6,040
Provision for income taxes		391			447		1,632			1,502

NET INCOME	$	1,741		$	1,706	$	4,958		$	4,538

Earnings per share	$	.37		$	.41	$	1.06		$	1.10

See accompanying notes to consolidated financial statements

OHIO VALLEY BANC CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (dollars in thousands)

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016

Net Income	$	1,741		$	1,706		$	4,958		$	4,538

Other comprehensive income:
Change in unrealized loss on available for sale securities		771			499			1,465			1,437
Related tax expense		(262	)		(170	)		(498	)		(489	)
Total other comprehensive income, net of tax		509			329			967			948

Total comprehensive income	$	2,250		$	2,035		$	5,925		$	5,486

See accompanying notes to consolidated financial statements

OHIO VALLEY BANC CORP. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands, except share and per share data)

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016

Balance at beginning of period	$	107,651		$	93,631		$	104,528		$	90,470

Net income		1,741			1,706			4,958			4,538

Other comprehensive income, net of tax		509			329			967			948

Common stock issued through DRIP (2017 - 2,224 shares issued)		69			----			69			----

Common stock issued to ESOP (2017 - 15,118 shares issued; 2016 - 24,572 shares issued)		----			----			428			575

Cash dividends		(983	)		(870	)		(1,963	)		(1,735	)

Balance at end of period	$	108,987		$	94,796		$	108,987		$	94,796

Cash dividends per share	$	.21		$	.21		$	.42		$	.42

See accompanying notes to consolidated financial statements

OHIO VALLEY BANC CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)

	Six months ended June 30,
	2017			2016

Net cash provided by operating activities:	$	4,978		$	7,176

Investing activities:
Proceeds from maturities of securities available for sale		12,170			8,805
Purchases of securities available for sale		(17,082	)		(10,278	)
Proceeds from maturities of securities held to maturity		422			981
Purchases of securities held to maturity		(389	)		(412	)
Proceeds from maturities of certificates of deposit in financial institutions		245			----
Purchases of certificates of deposit in financial institutions		(395	)		----
Net change in loans		(24,076	)		(17,583	)
Proceeds from sale of other real estate owned		773			386
Purchases of premises and equipment		(997	)		(438	)
Proceeds from bank owned life insurance		224			----
Net cash used in investing activities		(29,105	)		(18,539	)

Financing activities:
Change in deposits		17,840			17,569
Cash dividends		(1,963	)		(1,735	)
Proceeds from Federal Home Loan Bank borrowings		4,785			8,203
Repayment of Federal Home Loan Bank borrowings		(962	)		(715	)
Change in other long-term borrowings		(228	)		----
Change in other short-term borrowings		(25	)		(22	)
Net cash provided by financing activities		19,447			23,300

Change in cash and cash equivalents		(4,680	)		11,937
Cash and cash equivalents at beginning of period		40,166			45,530
Cash and cash equivalents at end of period	$	35,486		$	57,467

Supplemental disclosure:

Cash paid for interest	$	1,698		$	1,330
Cash paid for income taxes		2,236			1,675
Transfers from loans to other real estate owned		1,236			65
Other real estate owned sales financed by The Ohio Valley Bank Company		85			274

See accompanying notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. ("Ohio Valley") and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the "Bank"), Loan Central, Inc. ("Loan Central"), a consumer finance company, Ohio Valley Financial Services Agency, LLC ("Ohio Valley Financial Services"), an insurance agency, and OVBC Captive, Inc. (the "Captive"), a limited purpose property and casualty insurance company. The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC ("Ohio Valley REO"), an Ohio limited liability company, to which the Bank transfers certain real estate acquired by the Bank through foreclosure for sale by Ohio Valley REO. Ohio Valley and its subsidiaries are collectively referred to as the "Company". All material intercompany accounts and transactions have been eliminated in consolidation.

These interim financial statements are prepared by the Company without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at June 30, 2017, and its results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2017. The accompanying consolidated financial statements do not purport to contain all the necessary financial disclosures required by U.S. generally accepted accounting principles ("US GAAP") that might otherwise be necessary in the circumstances. The Annual Report of the Company for the year ended December 31, 2016 contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.

The consolidated financial statements for 2016 have been reclassified to conform to the presentation for 2017. These reclassifications had no effect on the net income or shareholders' equity.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The accounting and reporting policies followed by the Company conform to US GAAP established by the Financial Accounting Standards Board ("FASB"). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

INDUSTRY SEGMENT INFORMATION: Internal financial information is primarily reported and aggregated in two lines of business, banking and consumer finance.

EARNINGS PER SHARE: Earnings per share are computed based on net income divided by the weighted average number of common shares outstanding during the period. The weighted average common shares outstanding were 4,681,763 and 4,142,247 for the three months ended June 30, 2017 and 2016, respectively. The weighted average common shares outstanding were 4,677,066 and 4,134,956 for the six months ended June 30, 2017 and 2016, respectively. Ohio Valley had no dilutive effect and no potential common shares issuable under stock options or other agreements for any period presented.

NEW ACCOUNTING PRONOUNCEMENTS: In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)". The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, with early adoption permitted on January 1, 2017. Management is currently evaluating the impact of this update on its consolidated financial statements and related disclosures, however, adoption by the Company is not expected to have a material impact. The Company's primary sources of revenues are derived from interest and dividends earned on loans, investment securities and other financial instruments that are not within the scope of ASU 2014-09.

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities". The update provides updated accounting and reporting requirements for both public and non-public entities. The most significant provisions that will impact the Company are: 1) equity securities available for sale will be measured at fair value, with the changes in fair value recognized in the income statement; 2) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments at amortized cost on the balance sheet; 3) utilization of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) require separate presentation of both financial assets and liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. The update will be effective for interim and annual periods beginning after December 15, 2017, using a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. Early adoption is not permitted. Management is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued an update (ASU 2016-02, Leases) which will require lessees to record most leases on their balance sheets and recognize leasing expenses in the income statement. Operating leases, except for short-term leases that are subject to an accounting policy election, will be recorded on the balance sheet for lessees by establishing a lease liability and corresponding right-of-use asset. The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Management is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses". ASU 2016-13 requires entities to report "expected" credit losses on financial instruments and other commitments to extend credit rather than the current "incurred loss" model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, for annual periods and interim periods within those annual periods, beginning after December 15, 2018. Management is currently in the developmental stages, collecting available historical information, in order to assess the expected credit losses. However, the impact to the financial statements are still yet to be determined.

In August 2016, FASB issued an update (ASU 2016-15, "Statement of Cash Flows") (Topic 230), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update apply to all entities, including business entities and not-for-profit entities that are required to present a statement of cash flows, and are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

In January 2017, the FASB issued an update (ASU 2017-04, Intangibles – Goodwill and Other) which is intended to simplify the measurement of goodwill in periods following the date on which the goodwill is initially recorded. Under the amendments in this update, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. A public business entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of the Company's valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:

Securities: The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management's own assumptions of fair value based on factors that include recent market data or industry-wide statistics. On an as-needed basis, the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs that typically approximate 10%.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements at June 30, 2017 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Government sponsored entity securities		----	$	13,642		----
Agency mortgage-backed securities, residential		----		89,055		----

	Fair Value Measurements at December 31, 2016 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Government sponsored entity securities		----	$	10,544		----
Agency mortgage-backed securities, residential		----		85,946		----

There were no transfers between Level 1 and Level 2 during 2017 or 2016.

Assets and Liabilities Measured on a Nonrecurring Basis

Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

	Fair Value Measurements at June 30, 2017, Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial real estate:
Nonowner-occupied		----		----	$	2,462
Construction		----		----		290
Commercial and industrial		----		----		373

Other real estate owned:
Commercial real estate:
Construction		----		----		754

	Fair Value Measurements at December 31, 2016, Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial real estate:
Owner-occupied		----		----	$	3,536
Nonowner-occupied		----		----		1,985
Commercial and industrial		----		----		298

Other real estate owned:
Commercial real estate:
Construction		----		----		754

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

At June 30, 2017, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $3,125, with no corresponding valuation allowance. This resulted in no change to provision expense during the three months ended June 30, 2017, and a decrease of $221 in provision expense during the six months ended June 30, 2017, with $1,011 in additional charge-offs recognized. This is compared to an increase of $1,574 in provision expense during the three months ended June 30, 2016, and an increase of $1,658 in provision expense during the six months ended June 30, 2016, with no additional charge-offs recognized. At December 31, 2016, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $8,732, with a corresponding valuation allowance of $2,913, resulting in an increase of $2,509 in provision expense during the year ended December 31, 2016, with no additional charge-offs recognized.

Other real estate owned that was measured at fair value less costs to sell at June 30, 2017 and December 31, 2016 had a net carrying amount of $754, which is made up of the outstanding balance of $2,217, net of a valuation allowance of $1,463. There were no corresponding write downs during the three and six months ended June 30, 2017 and 2016.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2017 and December 31, 2016:

June 30, 2017

Fair Value

Valuation

Technique(s)

Unobservable

Input(s)

Range

(Weighted Average)

Impaired loans:

Commercial real estate:

Nonowner-occupied

2,462

Sales approach

Adjustment to comparables

0% to 250%

56.4%

Income approach

Capitalization Rate

Construction

290

Sales approach

Adjustment to comparables

15.7% to 52%

31.7%

Commercial and industrial

373

Sales approach

Adjustment to comparables

2% to 14.2%

8.1%

Other real estate owned:

Commercial real estate:

Construction

754

Sales approach

Adjustment to comparables

0% to 30%

11.7%

December 31, 2016

Fair Value

Valuation

Technique(s)

Unobservable

Input(s)

Range

(Weighted Average)

Impaired loans:

Commercial real estate:

Owner-occupied

3,536

Sales approach

Adjustment to comparables

0% to 65%

13.7%

Cost approach

Adjustment to comparables

0% to 29.5%

14.8%

Nonowner-occupied

1,985

Sales approach

Adjustment to comparables

0% to 250%

58.6%

Commercial and industrial

298

Sales approach

Adjustment to comparables

0.9% to 9.7%

5.2%

Other real estate owned:

Commercial real estate:

Construction

754

Sales approach

Adjustment to comparables

0% to 30%

11.7%

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The carrying amounts and estimated fair values of financial instruments at June 30, 2017 and December 31, 2016 are as follows:

			Fair Value Measurements at June 30, 2017 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	35,486	$	35,486	$	----	$	----	$	35,486
Certificates of deposit in financial institutions		1,820		----		1,820		----		1,820
Securities available for sale		102,697		----		102,697		----		102,697
Securities held to maturity		18,605		----		9,977		9,353		19,330
Restricted investments in bank stocks		7,506		N/A		N/A		N/A		N/A
Loans, net		749,953		----		----		733,487		733,487
Accrued interest receivable		2,264		----		264		2,000		2,264

Financial liabilities:
Deposits		808,192		227,064		581,060		----		808,124
Other borrowed funds		40,655		----		39,839		----		39,839
Subordinated debentures		8,500		----		6,287		----		6,287
Accrued interest payable		607		2		605		----		607

			Fair Value Measurements at December 31, 2016 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	40,166	$	40,166	$	----	$	----	$	40,166
Certificates of deposit in financial institutions		1,670		----		1,670		----		1,670
Securities available for sale		96,490		----		96,490		----		96,490
Securities held to maturity		18,665		----		9,541		9,630		19,171
Restricted investments in bank stocks		7,506		N/A		N/A		N/A		N/A
Loans, net		727,202		----		----		727,079		727,079
Accrued interest receivable		2,315		----		224		2,091		2,315

Financial liabilities:
Deposits		790,452		209,576		581,340		----		790,916
Other borrowed funds		37,085		----		35,948		----		35,948
Subordinated debentures		8,500		----		5,821		----		5,821
Accrued interest payable		513		4		509		----		513

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Certificates of Deposit in Financial Institutions: The carrying amounts of certificates of deposit in financial institutions approximate fair values and are classified as Level 2.

Securities Held to Maturity: The fair values for securities held to maturity are determined in the same manner as securities held for sale and discussed earlier in this note. Level 3 securities consist of nonrated municipal bonds and tax credit ("QZAB") bonds.

Restricted Investments in Bank Stocks: It is not practical to determine the fair value of Federal Home Loan Bank, Federal Reserve Bank and United Bankers Bank stock due to restrictions placed on their transferability.

Loans: Fair values of loans are estimated as follows: The fair value of fixed rate loans is estimated by discounting future cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Deposits: The fair values disclosed for noninterest-bearing deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Other Borrowed Funds: The carrying values of the Company's short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification. The fair values of the Company's long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Subordinated Debentures: The fair values of the Company's Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable and Payable: The carrying amount of accrued interest approximates fair value, resulting in a classification that is consistent with the earning assets and interest-bearing liabilities with which it is associated.

Off-balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of commitments is not material.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

NOTE 3 – SECURITIES

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at June 30, 2017 and December 31, 2016 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:

Securities Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2017
U.S. Government sponsored entity securities	$	13,689	$	----	$	(47	)	$	13,642
Agency mortgage-backed securities, residential		89,044		718		(707	)		89,055
Total securities	$	102,733	$	718	$	(754	)	$	102,697

December 31, 2016
U.S. Government sponsored entity securities	$	10,624	$	----	$	(80	)	$	10,544
Agency mortgage-backed securities, residential		87,367		495		(1,916	)		85,946
Total securities	$	97,991	$	495	$	(1,996	)	$	96,490

NOTE 3 – SECURITIES (Continued)

Securities Held to Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Estimated Fair Value
June 30, 2017
Obligations of states and political subdivisions	$	18,601	$	741	$	(16	)	$	19,326
Agency mortgage-backed securities, residential		4		----		----			4
Total securities	$	18,605	$	741	$	(16	)	$	19,330

December 31, 2016
Obligations of states and political subdivisions	$	18,661	$	654	$	(148	)	$	19,167
Agency mortgage-backed securities, residential		4		----		----			4
Total securities	$	18,665	$	654	$	(148	)	$	19,171

The amortized cost and estimated fair value of debt securities at June 30, 2017, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities. Securities not due at a single maturity are shown separately.

	Available for Sale				Held to Maturity
Debt Securities:	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Due in one year or less	$	4,602	$	4,591	$	89	$	89
Due in over one to five years		6,027		5,999		6,839		7,101
Due in over five to ten years		3,060		3,052		8,415		8,862
Due after ten years		----		----		3,258		3,274
Agency mortgage-backed securities, residential		89,044		89,055		4		4
Total debt securities	$	102,733	$	102,697	$	18,605	$	19,330

The following table summarizes securities with unrealized losses at June 30, 2017 and December 31, 2016, aggregated by major security type and length of time in a continuous unrealized loss position:

June 30, 2017	Less Than 12 Months							12 Months or More						Total
	Fair Value			Unrealized Loss				Fair Value			Unrealized Loss			Fair Value			Unrealized Loss
Securities Available for Sale
U.S. Government sponsored
entity securities		$	13,642		$	(47	)		$	----		$	----		$	13,642		$	(47	)
Agency mortgage-backed
securities, residential			46,195			(707	)			----			----			46,195			(707	)
Total available for sale		$	59,837		$	(754	)		$	----		$	----		$	59,837		$	(754	)

	Less Than 12 Months							12 Months or More						Total
	Fair Value			Unrecognized Loss				Fair Value			Unrecognized Loss			Fair Value			Unrecognized Loss
Securities Held to Maturity
Obligations of states and
political subdivisions		$	1,524		$	(16	)		$	----		$	----		$	1,524		$	(16	)
Total held to maturity		$	1,524		$	(16	)		$	----		$	----		$	1,524		$	(16	)

December 31, 2016	Less Than 12 Months							12 Months or More						Total
	Fair Value			Unrealized Loss				Fair Value			Unrealized Loss			Fair Value			Unrealized Loss
Securities Available for Sale
U.S. Government sponsored
entity securities		$	10,544		$	(80	)		$	----		$	----		$	10,544		$	(80	)
Agency mortgage-backed
securities, residential			64,043			(1,916	)			----			----			64,043			(1,916	)
Total available for sale		$	74,587		$	(1,996	)		$	----		$	----		$	74,587		$	(1,996	)

NOTE 3 – SECURITIES (Continued)

	Less Than 12 Months							12 Months or More						Total
	Fair Value			Unrecognized Loss				Fair Value			Unrecognized Loss			Fair Value			Unrecognized Loss
Securities Held to Maturity
Obligations of states and
political subdivisions		$	3,813		$	(148	)		$	----		$	----		$	3,813		$	(148	)
Total held to maturity		$	3,813		$	(148	)		$	----		$	----		$	3,813		$	(148	)

There were no sales of investment securities during the three and six months ended June 30, 2017 and 2016. Unrealized losses on the Company's debt securities have not been recognized into income because the issuers' securities are of high credit quality as of June 30, 2017, and management does not intend to sell, and it is likely that management will not be required to sell, the securities prior to their anticipated recovery. Management does not believe any individual unrealized loss at June 30, 2017 and December 31, 2016 represents an other-than-temporary impairment.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:	June 30,			December 31,
	2017			2016
Residential real estate	$	304,537		$	286,022
Commercial real estate:
Owner-occupied		75,829			77,605
Nonowner-occupied		93,083			90,532
Construction		43,215			45,870
Commercial and industrial		102,950			100,589
Consumer:
Automobile		64,540			59,772
Home equity		21,300			20,861
Other		51,451			53,650
		756,905			734,901
Less: Allowance for loan losses		(6,952	)		(7,699	)

Loans, net	$	749,953		$	727,202

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2017 and 2016:

June 30, 2017	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,392		$	2,729		$	1,360		$	1,834		$	7,315
Provision for loan losses		(68	)		(89	)		(35	)		367			175
Loans charged off		(73	)		(53	)		(399	)		(384	)		(909	)
Recoveries		49			226			6			90			371
Total ending allowance balance	$	1,300		$	2,813		$	932		$	1,907		$	6,952

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

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2017 and 2016:

June 30, 2017	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	939		$	4,315		$	907		$	1,538		$	7,699
Provision for loan losses		377			(1,176	)		350			769			320
Loans charged off		(146	)		(612	)		(403	)		(705	)		(1,866	)
Recoveries		130			286			78			305			799
Total ending allowance balance	$	1,300		$	2,813		$	932		$	1,907		$	6,952

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

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, 2017 and December 31, 2016:

June 30, 2017	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	$	----	$	97	$	----	$	1	$	98
Collectively evaluated for impairment		1,300		2,716		932		1,906		6,854
Total ending allowance balance	$	1,300	$	2,813	$	932	$	1,907	$	6,952

Loans:
Loans individually evaluated for impairment	$	1,141	$	7,262	$	9,077	$	209	$	17,689
Loans collectively evaluated for impairment		303,396		204,865		93,873		137,082		739,216
Total ending loans balance	$	304,537	$	212,127	$	102,950	$	137,291	$	756,905

December 31, 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	$	----	$	2,535	$	241	$	205	$	2,981
Collectively evaluated for impairment		939		1,780		666		1,333		4,718
Total ending allowance balance	$	939	$	4,315	$	907	$	1,538	$	7,699

Loans:
Loans individually evaluated for impairment	$	717	$	13,111	$	8,465	$	416	$	22,709
Loans collectively evaluated for impairment		285,305		200,896		92,124		133,867		712,192
Total ending loans balance	$	286,022	$	214,007	$	100,589	$	134,283	$	734,901

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables present information related to loans individually evaluated for impairment by class of loans as of June 30, 2017 and December 31, 2016:

June 30, 2017	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial real estate:
Nonowner-occupied	$	377	$	377	$	97
Consumer:
Home equity		209		209		1
With no related allowance recorded:
Residential real estate		1,141		1,141		----
Commercial real estate:
Owner-occupied		3,164		2,665		----
Nonowner-occupied		5,229		3,773		----
Construction		993		447		----
Commercial and industrial		9,390		9,077		----
Total	$	20,503	$	17,689	$	98

December 31, 2016	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial real estate:
Owner-occupied	$	5,477	$	5,477	$	2,435
Nonowner-occupied		384		384		100
Commercial and industrial		392		392		241
Consumer:
Home equity		416		416		205
With no related allowance recorded:
Residential real estate		717		717		----
Commercial real estate:
Owner-occupied		3,638		3,091		----
Nonowner-occupied		5,078		3,632		----
Construction		1,001		527		----
Commercial and industrial		8,073		8,073		----
Total	$	25,176	$	22,709	$	2,981

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, 2017 and 2016:

	Three months ended June 30, 2017						Six months ended June 30, 2017
	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:
Nonowner-occupied	$	379	$	5	$	5	$	380	$	14	$	14
Consumer:
Home equity		209		2		2		210		5		5
With no related allowance recorded:
Residential real estate		1,028		12		12		992		20		20
Commercial real estate:
Owner-occupied		2,836		36		36		2,921		120		120
Nonowner-occupied		3,779		21		21		3,730		74		74
Construction		487		5		5		501		108		108
Commercial and industrial		8,990		100		100		8,815		290		290
Total	$	17,708	$	181	$	181	$	17,549	$	631	$	631

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

	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

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, 2017 and December 31, 2016, other real estate owned secured by residential real estate totaled $564 and $938, respectively. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $1,812 and $1,492 as of June 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016:

June 30, 2017	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	185	$	3,366
Commercial real estate:
Owner-occupied		----		384
Nonowner-occupied		----		2,713
Construction		----		447
Commercial and industrial		70		468
Consumer:
Automobile		110		30
Home equity		235		17
Other		141		58
Total	$	741	$	7,483

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

December 31, 2016	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	132	$	3,445
Commercial real estate:
Owner-occupied		28		1,571
Nonowner-occupied		----		2,506
Construction		----		527
Commercial and industrial		----		867
Consumer:
Automobile		121		5
Home equity		----		34
Other		46		6
Total	$	327	$	8,961

The following table presents the aging of the recorded investment of past due loans by class of loans as of June 30, 2017 and December 31, 2016:

June 30, 2017	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	$	4,312	$	1,017	$	2,207	$	7,536	$	297,001	$	304,537
Commercial real estate:
Owner-occupied		1,870		512		234		2,616		73,213		75,829
Nonowner-occupied		83		235		2,478		2,796		90,287		93,083
Construction		191		62		447		700		42,515		43,215
Commercial and industrial		1,075		234		475		1,784		101,166		102,950
Consumer:
Automobile		850		225		140		1,215		63,325		64,540
Home equity		136		232		235		603		20,697		21,300
Other		547		128		200		875		50,576		51,451
Total	$	9,064	$	2,645	$	6,416	$	18,125	$	738,780	$	756,905

December 31, 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	$	3,728	$	953	$	2,201	$	6,882	$	279,140	$	286,022
Commercial real estate:
Owner-occupied		134		366		1,325		1,825		75,780		77,605
Nonowner-occupied		261		18		2,506		2,785		87,747		90,532
Construction		66		52		182		300		45,570		45,870
Commercial and industrial		1,283		483		800		2,566		98,023		100,589
Consumer:
Automobile		1,091		221		126		1,438		58,334		59,772
Home equity		349		45		----		394		20,467		20,861
Other		685		155		46		886		52,764		53,650
Total	$	7,597	$	2,293	$	7,186	$	17,076	$	717,825	$	734,901

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.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the types of TDR loan modifications by class of loans as of June 30, 2017 and December 31, 2016:

.June 30, 2017	TDR's Performing to Modified Terms		TDR's Not Performing to Modified Terms		Total TDR's
Residential real estate:
Interest only payments	$	706	$	----	$	706
Maturity extension at lower stated rate than market rate		231				231
Credit extension at lower stated rate than market rate		----		204		204
Commercial real estate:
Owner-occupied
Interest only payments		164		----		164
Reduction of principal and interest payments		566		----		566
Maturity extension at lower stated rate than market rate		1,525		----		1,525
Nonowner-occupied
Interest only payments		560		2,179		2,739
Rate reduction		377		----		377
Credit extension at lower stated rate than market rate		572		----		572
Commercial and industrial:
Interest only payments		8,229		----		8,229
Maturity extension at lower stated rate than market rate		770		----		770
Credit extension at lower stated rate than market rate		----		78		78
Consumer:
Home equity
Maturity extension at lower stated rate than market rate		208		----		208

Total TDR's	$	13,908	$	2,461	$	16,369

December 31, 2016	TDR's Performing to Modified Terms		TDR's Not Performing to Modified Terms		Total TDR's
Residential real estate:
Interest only payments	$	717	$	----	$	717
Commercial real estate:
Owner-occupied
Interest only payments		284		----		284
Rate reduction		----		232		232
Reduction of principal and interest payments		579		----		579
Maturity extension at lower stated rate than market rate		1,582		----		1,582
Nonowner-occupied
Interest only payments		600		2,210		2,810
Rate reduction		384		----		384
Credit extension at lower stated rate than market rate		574		----		574
Commercial and industrial:
Interest only payments		8,074		----		8,074
Credit extension at lower stated rate than market rate		----		391		391
Consumer:
Home equity
Maturity extension at lower stated rate than market rate		213		----		213
Credit extension at lower stated rate than market rate		203		----		203

Total TDR's	$	13,210	$	2,833	$	16,043

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

During the three and six months ended June 30, 2017, the TDR's described above decreased the provision expense and the allowance for loan losses by $79 and $135, respectively, with corresponding charge-offs of $313. This is compared to a decrease of $1,167 and $1,119 in the provision expense and the allowance for loan losses during the three and six months ended June 30, 2016, respectively, with no corresponding charge-offs. During the year ended December 31, 2016, the TDR's described above decreased the allowance for loan losses and provision expense by $1,112 with corresponding charge-offs of $11.

At June 30, 2017, the balance in TDR loans increased $326, or 2.0%, from year-end 2016. The Company had 85% of its TDR's performing according to their modified terms at June 30, 2017, as compared to 82% at December 31, 2016. The Company's specific allocations in reserves to customers whose loan terms have been modified in TDR's totaled $98 at June 30, 2017, as compared to $546 in reserves at December 31, 2016. At June 30, 2017, the Company had $2,271 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDR's, as compared to $2,427 at December 31, 2016.

There were no TDR loan modifications or defaults 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, 2017:

			TDR's Performing to Modified Terms				TDR's Not Performing to Modified Terms
Three months ended June 30, 2017	Number of Loans		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Pre-Modification Recorded Investment		Post-Modification Recorded Investment

Residential real estate		1	$	231	$	231	$	----	$	----
Commercial and industrial		2		770		770		----		----
Total TDR's		3	$	1,001	$	1,001	$	----	$	----

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, 2017 and 2016:

			TDR's Performing to Modified Terms				TDR's Not Performing to Modified Terms
Six months ended June 30, 2017	Number of Loans		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Pre-Modification Recorded Investment		Post-Modification Recorded Investment

Residential real estate		1	$	231	$	231	$	----	$	----
Commercial and industrial		2		770		770		----		----
Total TDR's		3	$	1,001	$	1,001	$	----	$	----

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

Commercial real estate:
Nonowner-occupied
Interest only payments		1	$	238	$	238	$	----	$	----
Credit extension at lower stated rate than market rate		1		575		575		----		----
Total TDR's		2	$	813	$	813	$	----	$	----

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

All of the Company's loans that were restructured during the six months ended June 30, 2017 were performing in accordance with their modified terms and have not experienced any payment defaults within twelve months following their loan modification. The Company's loans that were restructured during the six months ended June 30, 2016 included a loan for $238 that experienced a payment default within twelve months following the loan modification and is not performing in accordance with the modified loan terms as of June 30, 2017. 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 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, 2017 had no impact on the provision expense or the allowance for loan losses. As of June 30, 2017, the Company had no allocation of reserves to customers whose loan terms were modified during the first six months of 2017. 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.

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 11. 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. 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. 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. 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.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Loss. Loans classified as loss are considered uncollectible and are of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset yielding such a minimum value even though partial recovery may be affected in the future. Amounts classified as loss should be promptly charged off.

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, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of commercial loans by class of loans was as follows:

June 30, 2017	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	64,378	$	2,124	$	9,327	$	75,829
Nonowner-occupied		86,284		2,240		4,559		93,083
Construction		42,504		----		711		43,215
Commercial and industrial		96,611		1,355		4,984		102,950
Total	$	289,777	$	5,719	$	19,581	$	315,077

December 31, 2016	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	66,495	$	428	$	10,682	$	77,605
Nonowner-occupied		83,103		2,364		5,065		90,532
Construction		45,325		----		545		45,870
Commercial and industrial		94,091		188		6,310		100,589
Total	$	289,014	$	2,980	$	22,602	$	314,596

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, 2017 and December 31, 2016:

June 30, 2017	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	64,400	$	21,048	$	51,252	$	300,986	$	437,686
Nonperforming		140		252		199		3,551		4,142
Total	$	64,540	$	21,300	$	51,451	$	304,537	$	441,828

December 31, 2016	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	59,646	$	20,827	$	53,598	$	282,445	$	416,516
Nonperforming		126		34		52		3,577		3,789
Total	$	59,772	$	20,861	$	53,650	$	286,022	$	420,305

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 5.12% of total loans were unsecured at June 30, 2017, down from 5.61% at December 31, 2016.

NOTE 5 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual amount of those instruments. The contract amounts of these instruments are not included in the consolidated financial statements. At June 30, 2017, the contract amounts of these instruments totaled approximately $69,364, compared to $67,191 at December 31, 2016. The Bank uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. Since many of these instruments are expected to expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.

NOTE 6 - OTHER BORROWED FUNDS

Other borrowed funds at June 30, 2017 and December 31, 2016 are comprised of advances from the Federal Home Loan Bank ("FHLB") of Cincinnati and promissory notes. At June 30, 2017 and December 31, 2016, FHLB Borrowings included $48 and $73 in capitalized lease obligations, respectively.

	FHLB Borrowings		Promissory Notes		Totals

June 30, 2017	$	33,000	$	7,655	$	40,655
December 31, 2016	$	29,203	$	7,882	$	37,085

Pursuant to collateral agreements with the FHLB, advances were secured by $295,597 in qualifying mortgage loans, $68,056 in commercial loans and $5,365 in FHLB stock at June 30, 2017. Fixed-rate FHLB advances of $32,952 mature through 2042 and have interest rates ranging from 1.34% to 3.31% and a year-to-date weighted average cost of 2.14%. There were no variable-rate FHLB borrowings at June 30, 2017.

At June 30, 2017, the Company had a cash management line of credit enabling it to borrow up to $75,000 from the FHLB. All cash management advances have an original maturity of 90 days. The line of credit must be renewed on an annual basis. There was $75,000 available on this line of credit at June 30, 2017.

Based on the Company's current FHLB stock ownership, total assets and pledgeable loans, the Company had the ability to obtain borrowings from the FHLB up to a maximum of $217,234 at June 30, 2017. Of this maximum borrowing capacity, the Company had $143,081 available to use as additional borrowings, of which $75,000 could be used for short-term, cash management advances, as mentioned above.

Promissory notes, issued primarily by Ohio Valley, are due at various dates through a final maturity date of August 1, 2026, and have fixed rates ranging from 1.25% to 4.09% through August 1, 2021 and a year-to-date weighted average cost of 2.79% at June 30, 2017, as compared to 2.34% at December 31, 2016. Promissory notes payable by Ohio Valley to related parties totaled $360 at June 30, 2017. Promissory notes payable to other banks totaled $3,671 at June 30, 2017.

Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $41,200 at June 30, 2017 and $45,000 at December 31, 2016.

Scheduled principal payments as of June 30, 2017:

	FHLB Borrowings		Promissory Notes		Totals

2017	$	4,738	$	1,079	$	5,817
2018		2,891		2,261		5,152
2019		2,724		1,852		4,576
2020		2,541		519		3,060
2021		2,240		541		2,781
Thereafter		17,866		1,403		19,269
	$	33,000	$	7,655	$	40,655

NOTE 7 – SEGMENT INFORMATION

The reportable segments are determined by the products and services offered, primarily distinguished between banking and consumer finance. They are also distinguished by the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business, which are then aggregated if operating performance, products/services, and customers are similar. Loans, investments, and deposits provide the majority of the net revenues from the banking operation, while loans provide the majority of the net revenues for the consumer finance segment. All Company segments are domestic.

Total revenues from the banking segment, which accounted for the majority of the Company's total revenues, totaled 90.8% and 89.1% of total consolidated revenues for the quarters ended June 30, 2017 and 2016, respectively.

The accounting policies used for the Company's reportable segments are the same as those described in Note 1 - Summary of Significant Accounting Policies. Income taxes are allocated based on income before tax expense.

Information for the Company's reportable segments is as follows:

	Three Months Ended June 30, 2017
	Banking		Consumer Finance		Total Company
Net interest income	$	9,487	$	584	$	10,071
Provision expense		175		----		175
Noninterest income		1,962		150		2,112
Noninterest expense		9,316		560		9,876
Tax expense		332		59		391
Net income		1,626		115		1,741
Assets		968,864		11,292		980,156

	Three Months Ended June 30, 2016
	Banking		Consumer Finance		Total Company
Net interest income	$	7,617	$	589	$	8,206
Provision expense		130		11		141
Noninterest income		1,734		127		1,861
Noninterest expense		7,099		674		7,773
Tax expense		438		9		447
Net income		1,684		22		1,706
Assets		814,176		12,273		826,449

	Six Months Ended June 30, 2017
	Banking		Consumer Finance		Total Company
Net interest income	$	18,877	$	2,059	$	20,936
Provision expense		200		120		320
Noninterest income		4,741		484		5,225
Noninterest expense		17,898		1,353		19,251
Tax expense		1,269		363		1,632
Net income		4,251		707		4,958
Assets		968,864		11,292		980,156

	Six Months Ended June 30, 2016
	Banking		Consumer Finance		Total Company
Net interest income	$	15,288	$	2,018	$	17,306
Provision expense		505		115		620
Noninterest income		4,566		530		5,096
Noninterest expense		14,293		1,449		15,742
Tax expense		1,169		333		1,502
Net income		3,887		651		4,538
Assets		814,176		12,273		826,449

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in thousands, except share and per share data)

Forward Looking Statements

Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as "believes," "anticipates," "expects," and similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control and which could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to: changes in political, economic or other factors, such as inflation rates, recessionary or expansive trends, taxes, the effects of implementation of legislation and the continuing economic uncertainty in various parts of the world; competitive pressures; fluctuations in interest rates; the level of defaults and prepayment on loans made by the Company; unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in management's discussion and analysis is available in the Company's filings with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, including the disclosure under the heading "Item 1A. Risk Factors" of Part 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements, whether as a result of new information, unanticipated future events or otherwise.

Financial Overview

The Company is primarily engaged in commercial and retail banking, offering a blend of commercial and consumer banking services within southeastern Ohio as well as western West Virginia. The banking services offered by the Bank include the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; the making of construction and real estate loans; and credit card services. The Bank also offers individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. In addition, the Bank is one of a limited number of financial institutions that facilitates the payment of tax refunds through a third-party tax refund product provider. The Bank has facilitated the payment of these tax refunds through electronic refund check/deposit ("ERC/ERD") transactions. ERC/ERD transactions involve the payment of a tax refund to the taxpayer after the Bank has received the refund from the federal/state government. ERC/ERD transactions occur primarily during the tax refund season, typically during the first quarter of each year. Loan Central also provides refund anticipation loans ("RALs") to its customers. RALs are short-term cash advances against a customer's anticipated income tax refund.

On August 5, 2016, the Company completed the merger of Milton Bancorp, Inc. ("Milton Bancorp") into Ohio Valley. Immediately following the merger, Milton Bancorp's wholly-owned subsidiary, The Milton Banking Company ("Milton Bank"), was merged with and into the Bank. Milton Bank's results of operations were included in the Company's results beginning August 6, 2016. This transaction resulted in the addition of $132 million in assets and 5 branch locations in Jackson, Madison and Pickaway counties in Ohio.

Net income totaled $1,741 during the second quarter of 2017, an increase of $35, or 2.1%, compared to $1,706 during the second quarter of 2016. Earnings per share for the second quarter of 2017 finished at $.37 per share, compared to $.41 per share during the second quarter of 2016. The Company's net income during the six months ended June 30, 2017 totaled $4,958, an increase of $420, or 9.3%, compared to $4,538 during the six months ended June 30, 2016. Earnings per share during the first six months of 2017 finished at $1.06 per share, compared to $1.10 per share during the first six months of 2016. Higher earnings during both the quarterly and year-to-date periods were impacted primarily by the benefits of higher net interest income and lower provision expense partially offset by general increases in various overhead expenses.

The annualized net income to average asset ratio, or return on assets ("ROA"), decreased to 0.97% at June 30, 2017, compared to 1.05% at June 30, 2016. The Company's net income to average equity ratio, or return on equity ("ROE"), also decreased to 9.40% at June 30, 2017, compared to 9.88% at June 30, 2016.

Net interest income for the three and six months ended June 30, 2017 showed positive growth over the same periods in 2016, increasing 22.7% and 21.0%, respectively. The increase came primarily from interest revenues associated with $145,252 of year-to-date average earning asset growth. The growth in year-to-date average earning assets came primarily from average loans, which contributed $152,209 to the increase in average earning assets. While the Company continues to experience growth from its existing markets, the large growth in loans came primarily from the Milton Bank merger, which resulted in the acquisition of $112 million in loans. Also contributing to net interest income growth was higher interest recorded from the Company's interest-bearing Federal Reserve clearing account. While the average interest-bearing balances maintained at the Federal Reserve have decreased 13.6% during the first six months of 2017, it has been the Federal Reserve's action of increasing short-term interest rates that has contributed to higher interest income.

During the three months ended June 30, 2017, the Company's provision expense was limited to just a $34 increase over the prior year's second quarter. The Company also benefited from a $300 decrease in provision expense during the six months ended 2017 versus the same period in 2016. Lower provision expense during 2017 was largely impacted by a $2,883 decrease in specific allocations from December 31, 2016 related to the financial performance improvement of one commercial real estate loan relationship during the first quarter of 2017. The decrease in specific allocations was partially offset by a $2,136 increase in general allocations from December 31, 2016 related to specific loan portfolio risks that management determined were necessary. Provision expense during 2017 has also benefited from lower net charge-offs on loans without specific reserves. Impacted by a lower level of specific reserves, the allowance for loan losses decreased by $747 from year-end 2016 to finish at $6,952, or .92% of total loans at June 30, 2017, as compared to 1.05% at December 31, 2016 and 1.15% at June 30, 2016.

Total noninterest income during the three months ended June 30, 2017 increased $251, or 13.5%, over the second quarter of 2016, and increased $129, or 2.5%, during the first six months of 2017, as compared to the same period in 2016. Noninterest income improvement was impacted primarily by increases in fee income related to a higher deposit base from the Milton bank acquisition. The higher deposit base contributed to quarterly and year-to-date increases of over 30% in debit and credit card interchange income and over 20% in service charges on deposit accounts. Partially offsetting growth in noninterest income were lower tax processing fees through ERC/ERD transactions during the six months ended June 30, 2017. In addition to a reduced number of tax refunds being processed during the first half of 2017, the per item fees received by the Company were lower under the new contract with the third-party tax refund product provider. The remaining noninterest income categories decreased $104 during the three months ended June 30, 2017, and $141 during the six months ended June 30, 2017, as compared to the same periods during 2016, primarily from higher losses on the sale of other real estate owned ("OREO").

Total noninterest expense increased $2,103 for the second quarter of 2017, and increased $3,509 during the first six months of 2017, as compared to the same periods in 2016. The increase was impacted by the acquisition of Milton Bank, which contributed to general increases in most noninterest expense categories related to having a larger organization after the merger. Higher overhead expense came mostly from salaries and employee benefit costs, which grew by $617, or 13.6%, during the second quarter of 2017, and $1,411, or 15.5%, during the first half of 2017, as compared to the same periods in 2016. The increase was largely the result of adding Milton Bank employees, as well as annual merit increases and higher health insurance costs. Further contributing to higher overhead costs was fraud expense. During the second quarter of 2017, management discovered four fraudulent wire transfers with a single account relationship totaling $933. As of June 30, 2017, the Company was able to recover $103, resulting in net fraud expense of $830, which impacted other noninterest expense during both the three months and six months ended June 30, 2017. The remaining noninterest categories increased $656, or 20.2%, during the three months ended June 30, 2017, and increased $1,268, or 19.1%, during the six months ended June 30, 2017, as compared to 2016. This additional overhead expense came primarily from data processing, professional fees, and expenses associated with facilities.

At June 30, 2017, total assets were $980,156, compared to $954,640 at year-end 2016. Asset growth was impacted mostly by gross loan balances, which were up by $22,004 from year-end 2016, driven by higher residential real estate and consumer auto loan originations, as well as commercial loan balance increases from the West Virginia market area. Total investment securities also increased 5.3% from year-end 2016, due mostly to new purchases of mortgage-backed securities. The growth experienced in loans and securities was partially funded by interest-bearing deposits from the Company's Federal Reserve clearing account, which decreased 11.5% from year-end 2016.

Total liabilities were $871,169 at June 30, 2017, up $21,057 from December 31, 2016. Total deposit balances experienced continued growth during 2017, increasing $17,740 compared to year-end 2016. Noninterest-bearing deposits accounted for $17,488 of the increase, coming mostly from business checking and incentive-based checking account transactions.

At June 30, 2017, total shareholders' equity was $108,987, up $4,459 since December 31, 2016. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums.

Comparison of Financial Condition
at June 30, 2017 and December 31, 2016

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at June 30, 2017 compared to December 31, 2016. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10‑Q.

Cash and Cash Equivalents

At June 30, 2017, cash and cash equivalents were $35,486, a decrease of $4,680 compared to $40,166 at December 31, 2016. The decrease in cash and cash equivalents came mostly from the Company's interest-bearing Federal Reserve Bank clearing account, impacted by the funding need associated with growth in earning assets. The Company utilizes its interest-bearing Federal Reserve Bank clearing account to maintain seasonal tax refund deposits, as well as to fund earning asset growth and maturities of retail certificates of deposit ("CD's"). The interest rate paid on both the required and excess reserve balances is based on the targeted federal funds rate established by the Federal Open Market Committee. Short-term rate increases of 25 basis points during each of December 2016, March 2017 and June 2017 caused the federal funds rate to finish at 1.25% at June 30, 2017. The interest rate increases had a corresponding effect on the interest revenue growth experienced during the first and second quarters of 2017 on Federal Reserve Bank clearing account balances. The 1.25% interest rate is higher than what the Company would have received from its investments in federal funds sold. Furthermore, Federal Reserve Bank balances are 100% secured.

As liquidity levels vary continuously based on consumer activities, amounts of cash and cash equivalents can vary widely at any given point in time. The Company's focus will be to invest excess funds in longer-term, higher-yielding assets, primarily loans, when the opportunities arise.

Certificates of deposit

At June 30, 2017, the Company had $1,820 in certificates of deposit owned by the Captive, up slightly from year-end 2016. The deposits on hand at June 30, 2017 consist of eight certificates with remaining maturity terms ranging from less than 12 months up to 35 months.

Securities

The balance of total securities increased $6,147, or 5.3%, compared to year-end 2016. The Company's investment securities portfolio is made up mostly of U.S. Government agency ("Agency") mortgage-backed securities, which increased $3,109, or 3.6%, from year-end 2016 and represented 73.4% of total investments at June 30, 2017. During the first half of 2017, the Company invested $10,010 in new Agency mortgage-backed securities, while receiving principal repayments of $7,930. The monthly repayment of principal has been the primary advantage of Agency mortgage-backed securities as compared to other types of investment securities, which deliver proceeds upon maturity or call date. The Company also experienced a $3,098, or 29.4%, increase in U.S. Government sponsored entity securities, primarily from new purchases during the second quarter of 2017.

Loans

The loan portfolio represents the Company's largest asset category and is its most significant source of interest income. Gross loan balances totaled $756,905 at June 30, 2017, representing an increase of $22,004, or 3.0%, as compared to $734,901 at December 31, 2016. Loans were positively impacted by growth in residential real estate, consumer automobile and commercial and industrial loan balances.

The residential real estate loan segment comprises the largest portion of the Company's overall loan portfolio at 40.2% and consists primarily of one- to four-family residential mortgages and carries many of the same customer and industry risks as the commercial loan portfolio. Residential real estate loan balances during the first half of 2017 increased $18,515 or 6.5%, from year-end 2016. This increase was largely from the Bank's warehouse lending volume. Warehouse lending consists of a line of credit provided by the Bank to another mortgage lender that makes loans for the purchase of one- to four-family residential real estate properties. The mortgage lender eventually sells the loans and repays the Bank. From year-end 2016, warehouse lending balances increased $10,403 to finish at $15,928 at June 30, 2017. The Company's growth in residential real estate loans was further impacted by higher balances in its Athens, Ohio and West Virginia markets. The real estate loan portfolio is also impacted by loan construction projects. During the period when a borrower's one- to four-family residential home is being built, it is first classified as a construction loan. At the completion of this construction phase, the loan is re-classified to a residential real estate loan. At June 30, 2017, construction loans were down 5.8%, indicating a higher transition of loan balances from commercial real estate to residential real estate. Total loan production within the real estate portfolio consists of increasing short-term adjustable-rate mortgages partially offset by decreasing long-term fixed-rate mortgages. As part of management's interest rate risk strategy, the Company continues to sell most of its long-term fixed-rate residential mortgages to the Federal Home Loan Mortgage Corporation, while maintaining the servicing rights for those mortgages. A customer that does not qualify for a long-term, secondary market loan may choose from one of the Company's other adjustable-rate mortgage products, which contributed to higher balances of adjustable-rate mortgages from year-end 2016.

The commercial lending segment increased $481, or 0.2%, from year-end 2016, which came mostly from the commercial and industrial loan portfolio, which increased $2,361, or 2.3%, from year-end 2016. The increase was impacted by loan originations from the West Virginia market area during the first quarter of 2017. Commercial and industrial loans consist of loans to corporate borrowers primarily in small to mid-sized industrial and commercial companies that include service, retail and wholesale merchants. Collateral securing these loans includes equipment, inventory, and stock.

The commercial real estate loan segment comprises the largest portion of the Company's total commercial loan portfolio at June 30, 2017, representing 67.3%. At June 30, 2017, commercial real estate loans totaled $212,127, which decreased $1,880, or 0.9%, from year-end 2016. Larger payoffs caused owner-occupied loans to decrease $1,776, or 2.3%, from year-end 2016, while a higher number of one- to four-family residential homes completed their building phase, causing construction loans to decrease $2,655, or 5.8%, from year-end 2016. Partially offsetting these decreases was an increase in loan originations causing nonowner-occupied loan balances to grow by $2,551, or 2.8%, from year-end 2016. While management believes lending opportunities exist in the Company's markets, future commercial lending activities will depend upon economic and related conditions, such as general demand for loans in the Company's primary markets, interest rates offered by the Company, the effects of competitive pressure and normal underwriting considerations. Management will continue to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans.

Consumer loan balances at June 30, 2017 represented an increase of $3,008, or 2.2%, from year-end 2016. The increase was largely due to the Company's automobile loan segment, which grew by $4,768, or 8.0%, from year-end 2016. Automobile loans represent the Company's largest consumer loan segment at 47.0% of total consumer loans. The Company continues to target more auto dealers within its market areas and offer interest rates that are more competitive with local banks. Growth in automobile loans was partially offset by decreases in other consumer loans, which were down 4.1%. The Company will continue to monitor its auto lending segment while maintaining strict loan underwriting processes to limit future loss exposure.

Allowance for Loan Losses

The Company established a $6,952 allowance for loan losses at June 30, 2017, which was a decrease from the $7,699 allowance at year-end 2016. The allowance was impacted by a decrease of $2,883 in specific allocations from year-end 2016. Specific allocations of the allowance for loan losses identify loan impairment by measuring fair value of the underlying collateral and the present value of estimated future cash flows. When re-evaluating the impaired loan balances to their corresponding collateral values at June 30, 2017, it was determined that a commercial real estate loan relationship was no longer impaired and no longer collateral dependent due to the borrower's financial performance improvement. This resulted in the removal of that borrower's specific allocation of $1,681 that had previously been identified as impairment. Further contributing to lower specific reserves during the first half of 2017 were the charge-offs of several collateral dependent specific allocations. Total charge-offs of $612 in commercial real estate loans and $399 in commercial and industrial loans were recorded as a result of asset impairment. However, these specific reserves had already been allocated for prior to 2017, which resulted in no corresponding provision expense impact in 2017.

Partially offsetting the decrease in specific allocations was an increase in the Company's general allocations of the allowance for loan losses from year-end 2016. As part of the Company's quarterly analysis of the allowance for loan losses, management reviewed various factors that directly impact the general allocation need of the allowance, which include: historical loan losses, loan delinquency levels, local economic conditions and unemployment rates, criticized/classified asset coverage levels and loan loss recoveries. The Company's risk factors have benefited from a decline in troubled assets, with nonperforming loans to total loans finishing at 1.09% at June 30, 2017, as compared to 1.26% at December 31, 2016. The Company's nonperforming assets to total assets also improved to 1.09% at June 30, 2017, as compared to 1.20% at December 31, 2016. General risks in the portfolio were also positively impacted by lower impaired loans at June 30, 2017, which decreased $5,020, or 22.1%, from year-end 2016. However, it was the addition of new risk factors during the first quarter of 2017 that caused the general allocation component of the allowance for loan losses to increase $2,136, or 45.3%, from year-end 2016. During the first quarter of 2017, the Company continued to experience lower historical loan loss factors, which prompted management to evaluate the exposure to losses incurred during an economic downturn. Based on historical losses incurred outside the Company's lookback period, management determined it would be necessary to include an economic risk factor to add general reserves for losses based upon the difference in the Company's current historical loss factors and risks in the portfolio. Furthermore, management evaluated recent changes in loan underwriting standards, which may expose the loan portfolio to additional credit risk. As a result, an economic risk factor was added, which contributed to additional general reserves.

The Company's allowance for loan losses to total loans ratio finished at 0.92% at June 30, 2017 and 1.05% at year-end 2016. Management believes that the allowance for loan losses at June 30, 2017 was adequate and reflected probable incurred losses in the loan portfolio. There can be no assurance, however, that adjustments to the allowance for loan losses will not be required in the future. Changes in the circumstances of particular borrowers, as well as adverse developments in the economy, are factors that could change and make adjustments to the allowance for loan losses necessary. Asset quality will continue to remain a key focus, as management continues to stress not just loan growth, but quality in loan underwriting as well.

Deposits

Deposits continue to be the most significant source of funds used by the Company to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. Total deposits at June 30, 2017 increased $17,740, or 2.2%, from year-end 2016. This deposit growth came primarily from noninterest-bearing deposit balances. During the first quarter of 2017, the Company experienced a significant increase in its business checking account balances, which increased $9,743, or 8.7%, from year-end 2016. This increase was largely the result of ERC/ERD tax refund items processed during the first four months of 2017. As a result of the tax processing activity being seasonal, these elevated balances within the Company's business checking accounts should continue to decrease during the remainder of 2017. Noninterest deposits were also impacted by growth in incentive based checking account balances from year-end 2016.

Deposit growth also came from interest-bearing NOW account balances, which increased $4,728, or 3.1%, during the first half of 2017 as compared to year-end 2016. This increase was largely driven by growth in municipal NOW products. Interest-bearing deposit growth also came from statement savings account balances, which increased $3,857, or 4.1%, from year-end 2016.

During the first half of 2017, time deposits decreased $9,267, or 4.9%, from year-end 2016. Based on the minimal spread between a short-term CD rate and a statement savings rate, many customers choose to invest balances into a more liquid product, perhaps hoping for rising rates in the near future. This change in time deposits from year-end 2016 fits within management's strategy of focusing on more "core" deposit balances.

While facing increased competition for deposits in its market areas, the Company will continue to emphasize growth and retention in its core deposit relationships during the remainder of 2017, reflecting the Company's efforts to reduce its reliance on higher cost funding and improving net interest income.

Other Borrowed Funds

Other borrowed funds were $40,655 at June 30, 2017, an increase of $3,570, or 9.6%, from year-end 2016. The increase was necessary to help fund earning asset growth during the first half of 2017. While deposits continue to be the primary source of funding for growth in earning assets, management will continue to utilize Federal Home Loan Bank advances and promissory notes to help manage interest rate sensitivity and liquidity.

Shareholders' Equity

The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors. At June 30, 2017, the Bank's capital exceeded the minimum requirements to be deemed "well capitalized" under applicable prompt corrective action regulations. Total shareholders' equity at June 30, 2017 of $108,987 increased $4,459, or 4.3%, as compared to $104,528 at December 31, 2016. Capital growth during 2017 came primarily from year-to-date net income of $4,958.

Comparison of Results of Operations

for the Three and Six Months Ended

June 30, 2017 and 2016

The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three and six months ended June 30, 2017 compared to the same period in 2016. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10‑Q.

Net Interest Income

The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense incurred on interest-bearing liabilities. During the second quarter of 2017, net interest income increased $1,865, or 22.7%, as compared to the second quarter of 2016. During the six months ended June 30, 2017, net interest income also increased $3,630, or 21.0%, as compared to the six months ended June 30, 2016. The improvement came primarily from the acquisition of Milton Bank during the third quarter of 2016, which contributed to higher interest income on acquired earning assets partially offset by interest expense on acquired interest-bearing deposits. In total, the Company benefited from $2,852 in net interest income generated by the Milton Bank acquisition. Further contributions to net interest income came from higher interest income on interest-bearing deposits with banks as a result of short-term rate increases.

Total interest and fee income recognized on the Company's earning assets increased $2,076, or 23.3%, during the second quarter of 2017, which contributed to a year-to-date increase of $4,044, or 21.6%, as compared to the same periods in 2016. While the Company generated loan growth primarily through the Milton Bank merger, there were already trends of loan origination improvement making a positive impact to loan earnings. Warehouse lending balances are up $15,928 from a year ago at June 30, 2016. The West Virginia market areas have been successful in generating over $21 million in loans from a year ago at June 30, 2016. The Athens, Ohio loan production office has generated over $10 million in commercial and residential real estate loans from a year ago at June 30, 2016. Loan growth has also been improving within the automobile segment, as well as the commercial and industrial loan segment, impacted by loan participations and loans to states and political subdivisions from a year ago. With the merger and improved loan production, the Company's loan income increased $1,996, or 24.5%, during the second quarter of 2017, which contributed to a year-to-date increase of $3,859, or 22.6%, as compared to the same periods in 2016.

During the three and six months ended June 30, 2017, total other interest income increased $21, or 20.6%, and $119, or 44.2%, as compared to the same periods in 2016, respectively. The increases were primarily due to higher interest revenue recorded from the Company's interest-bearing Federal Reserve clearing account. The Company continues to utilize its Federal Reserve clearing account to manage seasonal tax refund deposits and fund earning asset growth. This interest-bearing account carried an interest rate of 0.50% during most of 2016. In December 2016, the Federal Reserve increased short-term rates by 25 basis points, and then again in both March and June 2017 by another 25 basis points each. These short-term rate adjustments have increased the Federal Reserve clearing account's interest rate from 0.50% of a year ago to 1.25%. The timing of the December 2016 and March 2017 rate adjustments benefited the Company, as it entered into the first quarter of 2017 experiencing significant levels of excess funds impacted by the large volume of ERC/ERD transactions that was maintained within the Federal Reserve clearing account.

Total interest expense incurred on the Company's interest-bearing liabilities during the second quarter of 2017 increased $211, or 29.8%, and increased $414, or 30.1%, during the six months ended June 30, 2017, as compared to the same periods in 2016. The increases were primarily from the Milton Bank acquired deposits that generated more interest expense. However, the Company's interest expense continues to be minimized by a sustained low-rate environment that has impacted the repricings of various Bank deposit products, including certain interest-bearing demand accounts. This has contributed to a minimal change in the weighted average cost of the Company's core deposits, which finished at 0.25% at June 30, 2017, as compared to 0.23% at June 30, 2016. The Company continues to utilize more of its lower cost, core deposit funding sources to further reduce interest expense. In addition, over 60% of the acquired Milton Bank deposits consisted of core deposit funding sources. As a result, the Company's average interest- and non-interest bearing core deposits increased $94,705, or 16.2%, while the average balances of higher costing time deposits increased $28,587, or 18.6%, during the first six months of 2017, as compared to the same period in 2016. The minimal change in average market interest rates and the continued emphasis on utilizing lower costing deposit balances have caused the Company's total weighted average costs on interest-bearing deposits to increase by only 2 basis points from 0.41% at June 30, 2017 to 0.43% at June 30, 2016.

During 2017, the Company's net interest margin results improved over the prior year, finishing at 4.45% during the second quarter of 2017, as compared to 4.22% during the second quarter of 2016. The net interest margin also improved to 4.49% during the first six months of 2017, as compared to 4.36% during the first six months of 2016. This improvement was due to a 17.9% increase in average earning assets combined with a higher deposit mix of lower-costing core deposits and a sustained low rate environment that has helped to minimize interest expense. The Company's primary focus is to invest its funds into higher yielding assets, particularly loans, as opportunities arise. However, if loan balances do not continue to expand and remain a larger component of overall earning assets, the Company will face pressure within its net interest income and margin improvement.

Provision for Loan Losses

During the second quarter of 2017, the Company experienced an increase in provision expense of just $34, or 24.1%, as compared to the second quarter of 2016. During the first half of 2017, the Company experienced a decrease in provision expense of $300, or 48.4%, as compared to the first half of 2016. With little change to provision expense during the quarterly period comparison, the decrease in provision expense during the year-to-date comparison was primarily due to a $2,883 decrease in specific allocations, which was mostly due to one commercial real estate loan relationship. As previously mentioned, the financial improvement of this commercial borrower contributed to the removal of $1,681 in specific allocations, which lowered provision expense during the first half of 2017. The benefit of lower specific reserves was partially offset by a $2,136 increase in general allocations from year-end 2016. As previously mentioned, management further evaluated the risks associated with loan loss history and loan underwriting that resulted in additional risk factors being added to the allowance for loan loss determination during the first quarter of 2017.

Net charge-offs increased $385 during the second quarter of 2017, and increased $733 during the first half of 2017, as compared to the same periods in 2016. The increases were largely related to charge-offs of specific reserves for which allocations had been made prior to 2017, which resulted in specific reserve charge-offs of $454 during the second quarter of 2017 and $1,011 during the first half of 2017. Due to the allocations prior to 2017, there was no corresponding provision expense associated with these charge-offs. As a result, net charge-offs for loans without specific reserves declined $69 during the second quarter of 2017 and $278 during the first half of 2017, as compared to the same periods in 2016.

Future provisions to the allowance for loan losses will continue to be based on management's quarterly in-depth evaluation that is discussed in further detail under the caption "Critical Accounting Policies - Allowance for Loan Losses" within this Management's Discussion and Analysis.

Noninterest Income

Noninterest income for the three months ended June 30, 2017 increased $251, or 13.5%, when compared to the three months ended June 30, 2016. Noninterest income for the six months ended June 30, 2017 increased $129, or 2.5%, when compared to the six months ended June 30, 2016.In total, the Company benefited from $357 in noninterest income generated by the addition of Milton Bank's customer deposit base. The larger deposit base contributed to improvements in debit and credit card interchange income and service charges on deposit accounts, which increased collectively by $334, or 31.5%, during the three months ended June 30, 2017, and $627, or 30.6%, during the first half of 2017, as compared to the same periods in 2016. The volume of transactions utilizing the Company's credit card and Jeanie Plus debit card continue to increase from a year ago, which are being impacted by cash and merchandise incentives that promote customer use of electronic payments.

During the three months ended June 30, 2017, the Company's seasonal ERC/ERD fees increased $21, or 7.8%, but decreased $357, or 17.6%, during the six months ended June 30, 2017, as compared to the same periods in 2016. In the fourth quarter of 2014, the Bank entered into a new agreement with a third-party tax refund product provider, which lowered the per-item fee associated with each refund facilitated. As a result, the lower fee structure has caused tax processing revenues to be lower than the year before. Furthermore, the Company experienced a decrease in the number of ERC/ERD transactions that were facilitated. As a result of ERC/ERD fee activity being mostly seasonal, a minimal amount of income is expected during the second half of 2017.

The Company's remaining noninterest income categories were collectively down by $104, or 19.6%, during the second quarter of 2017, and down by $141, or 13.8%, during the first half of 2017, when compared to the same periods in 2016. The decreases were primarily due to higher losses on OREO.

Noninterest Expense

Noninterest expense during the second quarter of 2017 increased $2,103, or 27.1%, and increased $3,509, or 22.3%, during the six months ended June 30, 2017, as compared to the same periods in 2016. The acquisition of Milton Bank contributed to an increase in most of the noninterest expense categories related to having a larger organization after the merger. A significant contributor to higher noninterest expense was salaries and employee benefits, which increased $617, or 13.6%, during the three months ended June 30, 2017, and increased $1,411, or 15.5%, during the six months ended June 30, 2017, as compared to the same periods in 2016. In addition to adding Milton Bank employees, the salaries and employee benefit category was also impacted by annual merit increases and higher health insurance costs.

The Company also experienced increases in data processing expense, which increased $217, or 64.6%, during the second quarter of 2017, and increased $399, or 57.9%, during the first half of 2017, as compared to the same periods in 2016. Data processing charges grew as a result of higher transaction volume associated with debit and credit cards, as well as higher processing charges from the Company's Big Rewards customer incentive platform.

Other noninterest expense increased $1,152, or 114.2%, during the second quarter of 2017, and increased $1,334, or 62.8%, during the first half of 2017, as compared to the same periods in 2016. The increases during both periods were primarily related to $830 in fraud expense that was recorded in the second quarter of 2017. At that time, the Company was made aware that the processing of four wire transfers associated with a single account relationship in May 2017 totaling $933 were fraudulently initiated. The Company was able to recover $103 of the fraudulent expense, which resulted in a net loss exposure of $830 at June 30, 2017. As of the report date, a determination of whether or not existing insurance policies will cover all or part of the remaining losses is still pending.

Overhead expense was further impacted by increases in professional fees, which were up $110, or 32.3%, during the second quarter of 2017, and up $226, or 33.3%, during the first half of 2017, as compared to the same periods in 2016. Both period increases were impacted by legal expense associated with the recovery efforts on loan deficiency balances.

Partially offsetting overhead expenses were lower merger related expenses, which decreased $134 during the three months ended June 30, 2017, and decreased $334 during the first half of 2017, as compared to the same periods in 2016. During the first quarter of 2016, the Company executed the merger agreement with Milton Bancorp. The merger was eventually finalized on August 5, 2016. The Company anticipates the remaining merger related expenses in 2017 to be minimal.

The remaining noninterest expense categories increased $141, or 9.9%, during the second quarter of 2017, and increased $473, or 16.9%, during the first half of 2017, as compared to the same periods in 2016. The addition of Milton Bank contributed to the increases of various noninterest expense areas that include software, building and equipment, customer incentives, and intangible asset amortization.

The Company's efficiency ratio is defined as noninterest expense as a percentage of fully tax-equivalent net interest income plus noninterest income. The effects from provision expense are excluded from the efficiency ratio. Management continues to place emphasis on managing its balance sheet mix and interest rate sensitivity as well as developing more innovative ways to generate noninterest revenue. During the quarterly and year-to-date periods ending June 30, 2017, the Company was successful in generating more net interest income primarily due to higher average earning assets while minimizing funding costs. However, a 17.6% year-over-year decline in tax processing fees combined with fraudulent wire expense and higher personnel costs caused overhead expense to outpace net revenue levels during 2017. As a result, the Company's efficiency levels have regressed, finishing at 79.8% and 72.5% during both the quarterly and year-to-date periods ended June 30, 2017, as compared to the stronger 76.0% and 69.3% efficiency levels during the same periods in 2016.

Capital Resources

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. In addition, in order for a financial holding company to continue to engage in activities permitted only for financial holding companies, it must be "well capitalized". Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective for the Company and the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity tier 1 capital to risk-weighted assets ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer began to phase in on January 1, 2016 at 0.625%, and will be phased in over a four-year period, increasing by the same amount on each subsequent January 1, until fully phased-in on January 1, 2019. Further, Basel III rules increased the minimum ratio of tier 1 capital to risk-weighted assets increased from 4.0% to 6.0% and all banks are now subject to a 4.0% minimum leverage ratio. The required total risk-based capital ratio was unchanged. Failure to maintain the required common equity tier 1 capital conservation buffer will result in potential restrictions on a bank's ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. At June 30, 2017, the Company was not required to meet the capital requirements as a Small Bank Holding Company, with assets below $1 billion.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2017 and year-end 2016, the Bank met the capital requirements to be deemed well capitalized under the regulatory framework for prompt corrective action. The Company's capital also met the requirements for the Company to be deemed well capitalized under requirements that would apply to the Company if it were not a Small Bank Holding Company.

The following table summarizes the capital ratios of the Company and Bank:

	6/30/17		12/31/16

Common equity tier 1 risk-based capital ratio
Company		14.3%		14.0%
Bank		14.4%		14.2%

Tier 1 risk-based capital ratio
Company		15.5%		15.3%
Bank		14.4%		14.2%

Total risk-based capital ratio
Company		16.5%		16.4%
Bank		15.3%		15.3%

Leverage ratio
Company		11.1%		11.2%
Bank		10.3%		10.4%

Cash dividends paid by the Company were $1,963 during the first half of 2017. The year-to-date dividends paid totaled $0.42 per share for 2017.

Liquidity

Liquidity relates to the Company's ability to meet the cash demands and credit needs of its customers and is provided by the ability to readily convert assets to cash and raise funds in the marketplace. Total cash and cash equivalents, held to maturity securities maturing within one year and available for sale securities, totaling $138,272, represented 14.1% of total assets at June 30, 2017. In addition, the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity demands. At June 30, 2017, the Bank could borrow an additional $143,081 from the FHLB, of which $75,000 could be used for short-term, cash management advances. Furthermore, the Bank has established a borrowing line with the Federal Reserve. At June 30, 2017, this line had total availability of $49,612. Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank.

Off-Balance Sheet Arrangements

As discussed in Note 5 – Financial Instruments with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet credit-related activities, including commitments to extend credit and standby letters of credit, which could require the Company to make cash payments in the event that specified future events occur. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. While these commitments are necessary to meet the financing needs of the Company's customers, many of these commitments are expected to expire without being drawn upon. Therefore, the total amount of commitments does not necessarily represent future cash requirements.

Critical Accounting Policies

The most significant accounting policies followed by the Company are presented in Note A to the financial statements in the Company's 2016 Annual Report to Shareholders. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the adequacy of the allowance for loan losses and business combinations to be critical accounting policies.

Allowance for loan losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans generally consist of loans with balances of $200 or more on nonaccrual status or nonperforming in nature. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. 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 and reasons for the delay, the borrower's prior payment record, and the amount of shortfall in relation to the principal and interest owed.

Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and impaired loans that are not individually reviewed for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years for the consumer and real estate portfolio segment and 5 years for the commercial portfolio segment. The total loan portfolio's actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: Commercial Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer.

Commercial and industrial loans consist of borrowings for commercial purposes by individuals, corporations, partnerships, sole proprietorships, and other business enterprises. Commercial and industrial loans are generally secured by business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or operations. The Company's risk exposure is related to deterioration in the value of collateral securing the loan should foreclosure become necessary. Generally, business assets used or produced in operations do not maintain their value upon foreclosure, which may require the Company to write down the value significantly to sell.

Commercial real estate consists of nonfarm, nonresidential loans secured by owner-occupied and nonowner-occupied commercial real estate as well as commercial construction loans. An owner-occupied loan relates to a borrower purchased building or space for which the repayment of principal is dependent upon cash flows from the ongoing business operations conducted by the party, or an affiliate of the party, who owns the property. Owner-occupied loans that are dependent on cash flows from operations can be adversely affected by current market conditions for their product or service. A nonowner-occupied loan is a property loan for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property. Nonowner-occupied loans that are dependent upon rental income are primarily impacted by local economic conditions which dictate occupancy rates and the amount of rent charged. Commercial construction loans consist of borrowings to purchase and develop raw land into one- to four-family residential properties. Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements. Repayment of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value which may be absorbed by the Company.

Residential real estate loans consist of loans to individuals for the purchase of one- to four-family primary residences with repayment primarily through wage or other income sources of the individual borrower. The Company's loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.

Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other loans to individuals for household, family, and other personal expenditures, both secured and unsecured. These loans typically have maturities of 6 years or less with repayment dependent on individual wages and income. The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary. During the last several years, one of the most significant portions of the Company's net loan charge-offs have been from consumer loans. Nevertheless, the Company has allocated the highest percentage of its allowance for loan losses as a percentage of loans to the other identified loan portfolio segments due to the larger dollar balances and inherent risk associated with such portfolios.

Business combinations

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred and the amount of any noncontrolling interest in the acquiree. Acquisition related transaction costs are expensed and included in other operational result. When a business is acquired, the Company assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. We are required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective. Under FASB ASC 350 (SFAS No. 142 Goodwill and Other Intangible Assets), goodwill and indefinite-lived assets recorded must be reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill or the indefinite-lived intangible asset.

Concentration of Credit Risk

The Company maintains a diversified credit portfolio, with residential real estate loans currently comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in southeastern Ohio and western West Virginia. Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group. To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's goal for interest rate sensitivity management is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the Company's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability, but excessive levels of IRR can threaten the Company's earnings and capital.

The Company evaluates IRR through the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The modeling process starts with a base case simulation, which assumes a static balance sheet and flat interest rates. The base case scenario is compared to rising and falling interest rate scenarios assuming a parallel shift in all interest rates. Comparisons of net interest income and net income fluctuations from the flat rate scenario illustrate the risks associated with the current balance sheet structure.

The Company's Asset/Liability Committee monitors and manages IRR within Board approved policy limits. The current IRR policy limits anticipated changes in net interest income to an instantaneous increase or decrease in market interest rates over a 12 month horizon to +/- 5% for a 100 basis point rate shock, +/- 7.5% for a 200 basis point rate shock and +/- 10% for a 300 basis point rate shock. Based on the level of interest rates, management did not test interest rates down 200 or 300 basis points.

The following table presents the Company's estimated net interest income sensitivity:

Change in Interest Rates in Basis Points		June 30, 2017 Percentage Change in Net Interest Income		December 31, 2016 Percentage Change in Net Interest Income
	+300		.01%		(.39%)
	+200		.17%		(.05%)
	+100		.18%		.09%)
	-100		(1.26%)		(1.72%)

The estimated percentage change in net interest income due to a change in interest rates was within the policy guidelines established by the Board. With the historical low interest rate environment, management generally has been focused on limiting the duration of assets, while trying to extend the duration of our funding sources to the extent customer preferences will permit the Company to do so. At June 30, 2017, the interest rate risk profile reflects a modest asset sensitive position, which produces higher net interest income due to an increase in interest rates. In a declining rate environment, net interest income is impacted by the interest rate on many deposit accounts not being able to adjust downward. With interest rates so low, deposit accounts are perceived to be at or near an interest rate floor. As a result, net interest income decreases in a declining interest rate environment. Overall, management is comfortable with the current interest rate risk profile, which reflects minimal exposure to interest rate changes.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

With the participation of the Chief Executive Officer (the principal executive officer) and the Vice President and Chief Financial Officer (the principal financial officer) of Ohio Valley, Ohio Valley's management has evaluated the effectiveness of Ohio Valley's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the quarterly period covered by this Quarterly Report on Form 10‑Q. Based on that evaluation, Ohio Valley's Chief Executive Officer and Vice President and Chief Financial Officer have concluded that Ohio Valley's disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10‑Q to ensure that information required to be disclosed by Ohio Valley in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Ohio Valley in the reports that it files or submits under the Exchange Act is accumulated and communicated to Ohio Valley's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in Ohio Valley's internal control over financial reporting (as defined in Rule 13a‑15(f) under the Exchange Act) that occurred during Ohio Valley's fiscal quarter ended June 30, 2017, that has materially affected, or is reasonably likely to materially affect, Ohio Valley's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

You should carefully consider the risk factors disclosed in Part I, Item 1.A. "Risk Factors" in Ohio Valley's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission. These risk factors could materially affect the Company's business, financial condition or future results. The risk factors described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may materially adversely affect the Company's business, financial condition and/or operating results. Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward looking statements contained in such risk factors or in any other statement made at any time by any director, officer, employee or other representative of the Company unless and until any such revisions or updates are expressly required to be disclosed by applicable securities laws or regulations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Ohio Valley did not purchase any of its shares during the three months ended June 30, 2017.

Ohio Valley did not sell any unregistered equity securities during the three months ended June 30, 2017.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

(a) Exhibits:

Reference is made to the Exhibit Index set forth immediately following the signature page of this Form 10-Q.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			OHIO VALLEY BANC CORP.

Date:	August 9, 2017	By:	/s/Thomas E. Wiseman
			Thomas E. Wiseman
			President and Chief Executive Officer

Date:	August 9, 2017	By:	/s/Scott W. Shockey
			Scott W. Shockey
			Senior Vice President and Chief Financial Officer

EXHIBIT INDEX

The following exhibits are included in this Form 10-Q or are incorporated by reference as noted in the following table:

Exhibit Number		Exhibit Description

2(a)		Agreement and Plan of Merger between Ohio Valley Banc Corp. and Milton Bancorp, Inc. dated January 7, 2016: Incorporated herein by reference to Exhibit 2.1 to Ohio Valley's Current Report on Form 8-K filed on January 7, 2016 (SEC File No. 0-20914).

2(b)		Amendment to Agreement and Plan of Merger by and between Ohio Valley Banc Corp. and Milton Bancorp, Inc., dated April 20, 2016: Incorporated herein by reference to Exhibit 2.1 to Ohio Valley's Current Report on Form 8-K filed on April 21, 2016 (SEC File No. 0-20914).

3(a)		Amended Articles of Incorporation of Ohio Valley (reflects amendments through April 7, 1999) [for SEC reporting compliance only - - not filed with the Ohio Secretary of State]. Incorporated herein by reference to Exhibit 3(a) to Ohio Valley's Annual Report on Form 10-K for fiscal year ended December 31, 2007 (SEC File No. 0-20914).

3(b)		Code of Regulations of Ohio Valley (as amended by the shareholders on May 12, 2010): Incorporated herein by reference to Exhibit 3(b) to Ohio Valley's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 (SEC File No. 0-20914).

4		Agreement to furnish instruments and agreements defining rights of holders of long-term debt: Filed herewith.

31.1		Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer): Filed herewith.

31.2		Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer): Filed herewith.

32		Section 1350 Certifications (Principal Executive Officer and Principal Accounting Officer): Filed herewith.

101.INS #		XBRL Instance Document: Filed herewith. #

101.SCH #		XBRL Taxonomy Extension Schema: Filed herewith. #

101.CAL #		XBRL Taxonomy Extension Calculation Linkbase: Filed herewith. #

101.DEF #		XBRL Taxonomy Extension Definition Linkbase: Filed herewith. #

101.LAB #		XBRL Taxonomy Extension Label Linkbase: Filed herewith. #

101.PRE #		XBRL Taxonomy Extension Presentation Linkbase: Filed herewith. #

# Attached as Exhibit 101 are the following documents formatted in XBRL (eXtensive Business Reporting Language): (i) Unaudited Consolidated Balance Sheets; (ii) Unaudited Condensed Consolidated Statements of Income; (iii) Unaudited Consolidated Statements of Comprehensive Income; (iv) Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity; (v) Unaudited Condensed Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements.

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