Note (4)—Loans and allowance for loan losses:

Loans outstanding at June 30, 2017 and December 31, 2016, by major lending classification are as follows:

	June 30,			December 31,
	2017			2016
Commercial and industrial	$	423,704		$	386,233
Construction		282,727			245,905
Residential real estate:
1-to-4 family mortgage		307,152			294,924
Residential line of credit		177,783			177,190
Multi-family mortgage		52,810			44,977
Commercial real estate:
Owner occupied		371,462			357,346
Non-owner occupied		273,285			267,902
Consumer and other		82,051			74,307
Gross loans		1,970,974			1,848,784
Less: Allowance for loan losses		(23,247	)		(21,747	)
Net loans	$	1,947,727		$	1,827,037

As of June 30, 2017 and December 31, 2016, $390,143 and $565,717, respectively, of 1-to-4 family mortgage loans, loans held for sale and multi-family mortgage loans were pledged to the Federal Home Loan Bank of Cincinnati securing advances against the Bank’s line.

As of June 30, 2017 and December 31, 2016, $1,295,281 and $1,072,118, respectively, of commercial and industrial , construction, residential real estate, commercial real estate, and consumer and other loans were pledged to the Federal Reserve Bank under the Borrower-in-Custody program.

The following provides the allowance for loan losses by portfolio segment and the related investment in loans net of unearned interest for the three and six months ended June 30, 2017 and 2016 (in thousands):

	Commercial and industrial			Construction			1-to-4 family residential mortgage			Residential line of credit			Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied			Consumer and other			Total
Three Months Ended June 30, 2017
Beginning balance - March 31, 2017	$	5,402		$	5,598		$	2,896		$	1,514		$	508	$	3,387	$	2,660		$	933		$	22,898
Provision for loan losses		(1,342	)		(48	)		99			(29	)		5		585		(210	)		75			(865	)
Recoveries of loans previously charged-off		1,511			29			14			155			—		11		2			283			2,005
Loans charged off		(131	)		—			(35	)		(195	)		—		—		—			(430	)		(791	)
Ending balance - June 30, 2017	$	5,440		$	5,579		$	2,974		$	1,445		$	513	$	3,983	$	2,452		$	861		$	23,247
Six Months Ended June 30, 2017
Beginning balance - December 31, 2016	$	5,309		$	4,940		$	3,197		$	1,613		$	504	$	3,302	$	2,019		$	863		$	21,747
Provision for loan losses		(1,163	)		587			(140	)		(184	)		9		666		(1,208	)		311			(1,122	)
Recoveries of loans previously charged-off		1,594			58			40			211			—		15		1,641			296			3,855
Loans charged off		(300	)		(6	)		(123	)		(195	)		—		—		—			(609	)		(1,233	)
Ending balance - June 30, 2017	$	5,440		$	5,579		$	2,974		$	1,445		$	513	$	3,983	$	2,452		$	861		$	23,247

	Commercial and industrial			Construction			1-to-4 family residential mortgage			Residential line of credit			Multi- family residential mortgage			Commercial real estate owner occupied			Commercial real estate non-owner occupied			Consumer and other			Total
Three Months Ended June 30, 2016
Beginning balance - March 31, 2016	$	5,242		$	4,518		$	4,280		$	2,075		$	590		$	4,013		$	2,739		$	974		$	24,431
Provision for loan losses		416			(207	)		(661	)		(126	)		(137	)		(161	)		(106	)		193			(789	)
Recoveries of loans previously charged-off		462			64			45			70			—			5			1			99			746
Loans charged off		(196	)		(2	)		(53	)		(75	)		—			(93	)		—			(235	)		(654	)
Ending balance - June 30, 2016	$	5,924		$	4,373		$	3,611		$	1,944		$	453		$	3,764		$	2,634		$	1,031		$	23,734
Six Months Ended June 30, 2016
Beginning balance - December 31, 2015	$	5,135		$	5,143		$	4,176		$	2,201		$	311		$	3,682		$	2,622		$	1,190		$	24,460
Provision for loan losses		515			(873	)		(619	)		(289	)		142			164			7			155			(798	)
Recoveries of loans previously charged-off		472			105			107			107			—			11			5			171			978
Loans charged off		(198	)		(2	)		(53	)		(75	)		—			(93	)		—			(485	)		(906	)
Ending balance - June 30, 2016	$	5,924		$	4,373		$	3,611		$	1,944		$	453		$	3,764		$	2,634		$	1,031		$	23,734

The following table provides the allocation of the allowance for loan losses by loan category broken out between loans individually evaluated for impairment and loans collectively evaluated for impairment as of June 30, 2017 and December 31, 2016:

													June 30, 2017
	Commercial and industrial		Construction		1-to-4 family residential mortgage		Residential line of credit		Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Consumer and other		Total
Amount of allowance allocated to:
Individually evaluated for impairment	$	38	$	—	$	17	$	—	$	—	$	85	$	62	$	—	$	202
Collectively evaluated for impairment		5,402		5,579		2,957		1,445		513		3,898		2,390		861		23,045
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—		—
Ending balance - June 30, 2017	$	5,440	$	5,579	$	2,974	$	1,445	$	513	$	3,983	$	2,452	$	861	$	23,247

													December 31, 2016
	Commercial and industrial		Construction		1-to-4 family residential mortgage		Residential line of credit		Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Consumer and other		Total
Amount of allowance allocated to:
Individually evaluated for impairment	$	135	$	—	$	23	$	—	$	—	$	113	$	242	$	—	$	513
Collectively evaluated for impairment		5,174		4,940		3,174		1,613		504		3,189		1,777		863		21,234
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—		—
Ending balance - December 31, 2016	$	5,309	$	4,940	$	3,197	$	1,613	$	504	$	3,302	$	2,019	$	863	$	21,747

The following table provides the amount of loans by loan category broken between loans individually evaluated for impairment and loans collectively evaluated for impairment as of June 30, 2017 and December 31, 2016:

													June 30, 2017
	Commercial and industrial		Construction		1-to-4 family residential mortgage		Residential line of credit		Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Consumer and other		Total
Loans, net of unearned income
Individually evaluated for impairment	$	1,222	$	299	$	2,191	$	—	$	1,001	$	2,374	$	2,103	$	24	$	9,214
Collectively evaluated for impairment		422,242		278,077		302,961		177,783		51,785		365,087		266,068		82,024		1,946,027
Acquired with deteriorated credit quality		240		4,351		2,000		—		24		4,001		5,114		3		15,733
Ending balance - June 30, 2017	$	423,704	$	282,727	$	307,152	$	177,783	$	52,810	$	371,462	$	273,285	$	82,051	$	1,970,974

													December 31, 2016
	Commercial and industrial		Construction		1-to-4 family residential mortgage		Residential line of credit		Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Consumer and other		Total
Loans, net of unearned income
Individually evaluated for impairment	$	1,476	$	2,686	$	2,471	$	311	$	1,027	$	2,752	$	2,201	$	27	$	12,951
Collectively evaluated for impairment		384,279		238,900		290,346		176,879		43,922		350,812		260,361		74,276		1,819,775
Acquired with deteriorated credit quality		478		4,319		2,107		—		28		3,782		5,340		4		16,058
Ending balance - December 31, 2016	$	386,233	$	245,905	$	294,924	$	177,190	$	44,977	$	357,346	$	267,902	$	74,307	$	1,848,784

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. The Company analyzes loans individually by classifying the loans as to credit risk. The Company’s risk rating definitions include:

Watch. Loans rated as watch includes loans in which management believes conditions have occurred, or may occur, which could result in the loan being downgraded to a worse rated category. Also included in watch are loans rated as special mention, which have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans rated as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so rated have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Also included in this category are purchased credit impaired loans and loans considered doubtful, which have all the weaknesses previously described and management believes those weaknesses may make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above are considered to be pass rated loans.

The following table shows credit quality indicators by portfolio class at June 30, 2017 and December 31, 2016:

June 30, 2017	Pass		Watch		Substandard		Total
Commercial and industrial	$	382,189	$	39,404	$	2,111	$	423,704
Construction		275,094		2,701		4,932		282,727
Residential real estate:
1-to-4 family mortgage		291,280		5,135		10,737		307,152
Residential line of credit		174,178		1,424		2,181		177,783
Multi-family mortgage		51,642		143		1,025		52,810
Commercial real estate:
Owner occupied		353,275		9,293		8,894		371,462
Non-owner occupied		259,588		6,216		7,481		273,285
Consumer and other		81,107		447		497		82,051
Total	$	1,868,353	$	64,763	$	37,858	$	1,970,974

December 31, 2016	Pass		Watch		Substandard		Total
Commercial and industrial	$	351,046	$	31,074	$	4,113	$	386,233
Construction		236,588		4,612		4,705		245,905
Residential real estate:
1-to-4 family mortgage		277,948		6,945		10,031		294,924
Residential line of credit		173,011		1,875		2,304		177,190
Multi-family mortgage		43,770		152		1,055		44,977
Commercial real estate:
Owner occupied		338,698		10,459		8,189		357,346
Non-owner occupied		249,877		10,273		7,752		267,902
Consumer and other		73,454		417		436		74,307
Total	$	1,744,392	$	65,807	$	38,585	$	1,848,784

Loans acquired in business combinations that exhibited at the date of acquisition evidence of deterioration of credit quality since origination such that it was probable that all contractually required payments would not be collected are considered to be purchased credit impaired and were as follows at June 30, 2017 and December 31, 2016:

	June 30, 2017		December 31, 2016
Commercial and industrial	$	240	$	478
Construction		4,351		4,319
Residential real estate:
1-to-4 family mortgage		2,000		2,107
Residential line of credit		—		—
Multi-family mortgage		24		28
Commercial real estate:
Owner occupied		4,001		3,782
Non-owner occupied		5,114		5,340
Consumer and other		3		4
Total	$	15,733	$	16,058

The following table presents the current carrying value of loans determined to be impaired at the time of acquisition at June 30, 2017 and December 31, 2016:

	June 30, 2017			December 31, 2016
Contractually-required principal and interest	$	21,042		$	22,961
Nonaccretable difference		(3,464	)		(4,459	)
Cash flows expected to be collected		17,578			18,502
Accretable yield		(1,845	)		(2,444	)
Carrying value	$	15,733		$	16,058

Changes in accretable yield and nonaccretable difference of purchased loans were as follows:

	Accretable yield						Nonaccretable Difference
	Purchased Credit Impaired			Purchased Non-impaired			Purchased Credit Impaired			Purchased Non-impaired			Total
Balance at March 31, 2017	$	(2,142	)	$	(1,103	)	$	(3,756	)	$	—		$	(7,001	)
Principal reductions/ pay-offs		(292	)		—			292			—			—
Charge-offs		—			—			—			—			—
Recoveries		—			—			—			—			—
Accretion		589			259			—			—			848
Balance at June 30, 2017	$	(1,845	)	$	(844	)	$	(3,464	)	$	—		$	(6,153	)

Balance at March 31, 2016	$	(1,460	)	$	(1,729	)	$	(7,698	)	$	—		$	(10,887	)
Principal reductions/ pay-offs		(1,227	)		—			1,227			—			—
Charge-offs		—			—			32			—			32
Sale of credit card portfolio		—			—			—			—			—
Accretion		1,439			116			—			—			1,555
Balance at June 30, 2016	$	(1,248	)	$	(1,613	)	$	(6,439	)	$	—		$	(9,300	)

	Accretable yield						Nonaccretable Difference
	Purchased Credit Impaired			Purchased Non-impaired			Purchased Credit Impaired			Purchased Non-impaired			Total
Balance at December 31, 2016	$	(2,444	)	$	(1,240	)	$	(4,459	)	$	—		$	(8,143	)
Principal reductions/ pay-offs		(990	)		—			990			—			—
Charge-offs		—			—			5			—			5
Recoveries		(23	)		—			—			—			(23	)
Accretion		1,612			396			—			—			2,008
Balance at June 30, 2017	$	(1,845	)	$	(844	)	$	(3,464	)	$	—		$	(6,153	)

Balance at December 31, 2015	$	(1,637	)	$	(2,147	)	$	(8,369	)	$	(70	)	$	(12,223	)
Principal reductions/ pay-offs		(1,458	)		—			1,458			—			—
Charge-offs		—			—			472			—			472
Sale of credit card portfolio		—			—			—			70			70
Accretion		1,847			534			—			—			2,381
Balance at June 30, 2016	$	(1,248	)	$	(1,613	)	$	(6,439	)	$	—		$	(9,300	)

Nonperforming loans include loans that are no longer accruing interest (non-accrual loans) and loans past due ninety or more days and still accruing interest. Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. Loans acquired with deteriorated credit quality amounting to $15,733 and $16,058, respectively, at June 30, 2017 and December 31, 2016 have been excluded from the tables below in accordance with ASC-310-10-50, Receivables- Overall- Disclosure.

The following table provides the period-end amounts of loans that are past due thirty to eighty-nine days, past due ninety or more days and still accruing interest, loans not accruing interest and loans current on payments accruing interest by category at June 30, 2017 and December 31, 2016:

June 30, 2017	30-89 days past due		90 days or more and accruing interest		Non-accrual loans		Loans current on payments and accruing interest		Total
Commercial and industrial	$	388	$	29	$	1,089	$	421,958	$	423,464
Construction		82		194		244		277,856		278,376
Residential real estate:
1-to-4 family mortgage		2,435		720		2,261		299,736		305,152
Residential line of credit		777		515		541		175,950		177,783
Multi-family mortgage		—		—		—		52,786		52,786
Commercial real estate:
Owner occupied		739		10		1,874		364,838		367,461
Non-owner occupied		—		—		2,293		265,878		268,171
Consumer and other		343		151		25		81,529		82,048
Total	$	4,764	$	1,619	$	8,327	$	1,940,531	$	1,955,241

December 31, 2016	30-89 days past due		90 days or more and accruing interest		Non-accrual loans		Loans current on payments and accruing interest		Total
Commercial and industrial	$	262	$	127	$	1,297	$	384,069	$	385,755
Construction		441		17		254		240,874		241,586
Residential real estate:
1-to-4 family mortgage		3,130		697		2,289		286,701		292,817
Residential line of credit		1,139		433		601		175,017		177,190
Multi-family mortgage		—		—		—		44,949		44,949
Commercial real estate:
Owner occupied		186		—		2,007		351,371		353,564
Non-owner occupied		158		—		2,251		260,153		262,562
Consumer and other		433		55		30		73,785		74,303
Total	$	5,749	$	1,329	$	8,729	$	1,816,919	$	1,832,726

Impaired loans recognized in conformity with ASC 310 at June 30, 2017 and December 31, 2016, segregated by class, were as follows:

June 30, 2017	Recorded investment		Unpaid principal		Related allowance
With a related allowance recorded:
Commercial and industrial	$	730	$	445	$	38
Construction		—		—		—
Residential real estate:
1-to-4 family mortgage		96		362		17
Residential line of credit		—		—		—
Multi-family mortgage		—		—		—
Commercial real estate:
Owner occupied		609		648		85
Non-owner occupied		507		1,036		62
Consumer and other		—		—		—
Total	$	1,942	$	2,491	$	202
With no related allowance recorded
Commercial and industrial	$	492	$	631	$	—
Construction		299		315		—
Residential real estate:
1-to-4 family mortgage		2,095		2,097		—
Residential line of credit		—		—		—
Multi-family mortgage		1,001		1,000		—
Commercial real estate:
Owner occupied		1,765		2,222		—
Non-owner occupied		1,596		2,333		—
Consumer and other		24		24		—
Total	$	7,272	$	8,622	$	—
Total impaired loans	$	9,214	$	11,113	$	202

December 31, 2016	Recorded investment		Unpaid principal		Related allowance
With a related allowance recorded:
Commercial and industrial	$	854	$	854	$	135
Construction		—		—		—
Residential real estate:
1-to-4 family mortgage		103		369		23
Residential line of credit		—		—		—
Multi-family mortgage		—		—		—
Commercial real estate:
Owner occupied		635		654		113
Non-owner occupied		1,151		1,678		242
Consumer and other		1		1		—
Total	$	2,744	$	3,556	$	513
With no related allowance recorded:
Commercial and industrial	$	622	$	746	$	—
Construction		2,686		2,694		—
Residential real estate:
1-to-4 family mortgage		2,368		2,370		—
Residential line of credit		311		321		—
Multi-family mortgage		1,027		1,027		—
Commercial real estate:
Owner occupied		2,117		3,205		—
Non-owner occupied		1,050		1,781		—
Consumer and other		26		26		—
Total	$	10,207	$	12,170	$	—
Total impaired loans	$	12,951	$	15,726	$	513

Average recorded investment and interest income on a cash basis recognized during the three and six months ended June 30, 2017 and 2016 on impaired loans, segregated by class, were as follows:

	Three Months Ended				Six Months Ended
June 30, 2017	Average recorded investment		Interest income recognized (cash basis)		Average recorded investment		Interest income recognized (cash basis)
With a related allowance recorded:
Commercial and industrial	$	729	$	5	$	792	$	10
Construction		—		—		—		—
Residential real estate:
1-to-4 family mortgage		98		—		100		—
Residential line of credit		—		—		—		—
Multi-family mortgage		—		—		—		—
Commercial real estate:
Owner occupied		616		8		622		20
Non-owner occupied		514		2		829		2
Consumer and other		—		—		1		—
Total	$	1,956	$	15	$	2,343	$	32
With no related allowance recorded
Commercial and industrial	$	519	$	7	$	557	$	16
Construction		302		4		1,493		9
Residential real estate:
1-to-4 family mortgage		2,106		15		2,232		32
Residential line of credit		—		—		156		—
Multi-family mortgage		1,008		12		1,014		23
Commercial real estate:
Owner occupied		1,801		23		1,941		61
Non-owner occupied		1,602		5		1,323		5
Consumer and other		25		—		25		1
Total	$	7,361	$	66	$	8,740	$	147
Total impaired loans	$	9,317	$	81	$	11,083	$	179
June 30, 2016
With a related allowance recorded:
Commercial and industrial	$	848	$	6	$	1,051	$	11
Construction		—		—		154		—
Residential real estate:
1-to-4 family mortgage		481		10		2,130		26
Residential line of credit		160		2		160		2
Multi-family mortgage		—		—		—		—
Commercial real estate:
Owner occupied		431		1		1,271		1
Non-owner occupied		1,652		2		2,878		8
Consumer and other		—		—		—		—
Total	$	3,571	$	21	$	7,644	$	48
With no related allowance recorded
Commercial and industrial	$	578	$	—	$	488	$	4
Construction		1,549		31		2,676		62
Residential real estate:
1-to-4 family mortgage		2,661		38		1,746		96
Residential line of credit		—		—		—		—
Multi-family mortgage		1,030		11		1,060		12
Commercial real estate:
Owner occupied		1,799		7		943		43
Non-owner occupied		1,389		—		1,110		1
Consumer and other		13		—		—		—
Total	$	9,018	$	87	$	8,023	$	218
Total impaired loans	$	12,589	$	108	$	15,667	$	266

As of June 30, 2017 and December 31, 2016, the Company has a recorded investment in troubled debt restructurings of $8,488 and $8,802, respectively. The modifications included extensions of the maturity date and/or a stated rate of interest to one lower than the current market rate. The Company has allocated $189 and $402 of specific reserves for those loans at June 30, 2017 and December 31, 2016, respectively, and has committed to lend additional amounts totaling up to $1 and $1, respectively to these customers. Of these loans, $4,295 and $4,265 were classified as non-accrual loans as of June 30, 2017 and December 31, 2016.

The following table presents the financial effect of TDRs recorded during the periods indicated:


Three Months Ended June 30, 2016	Number of loans	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Charge offs and specific reserves
Residential real estate:
1-to-4 family mortgage	2	$	14	$	14	$	—
Total	2	$	14	$	14	$	—

Six Months Ended June 30, 2017	Number of loans	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Charge offs and specific reserves
Commercial and industrial	1	$	5	$	5	$	—
Commercial real estate:
Owner occupied	1		377		377		—
Non-owner occupied	2		711		711		—
Total	4	$	1,093	$	1,093	$	—

Six Months Ended June 30, 2016	Number of loans	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Charge offs and specific reserves
Residential real estate:
1-4 family mortgage	4	$	722	$	722	$	39
Total	4	$	722	$	722	$	39

There were no TDR’s recorded during the three months ended June 30, 2017. Additionally, there were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the six months ended June 30, 2017 or 2016.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

The terms of certain other loans were modified during the six months ended June 30, 2017 and 2016 that did not meet the definition of a troubled debt restructuring. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company’s internal underwriting policy.