Item 1A. Risk Factors
ITEM 1A – RISK FACTORS
Cautionary Statement Regarding Forward-Looking Information
Certain statements contained in this report and other publicly available documents incorporated herein by reference 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,” “intends,” “plan,” “goal,” “seek,” “project,” “estimate,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and similar expressions. Such statements involve various important assumptions, risks,
uncertainties, and other factors, many of which are beyond our control, particularly with regard to developments related to the COVID-19 pandemic, 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: the effects of the COVID-19 pandemic on our business, operations, customers and capital position; higher default rates on loans made to our customers related to COVID-19 and its impact on
our customers’ operations and financial condition; the impact of COVID-19 on local, national and global economic conditions; unexpected changes in interest rates or disruptions in the mortgage market related to COVID-19 or responses to the health
crisis; the effects of various governmental responses to the COVID-19 pandemic; 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.
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Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various
factors and possible events, including those factors identified below. There is also the risk that Ohio Valley’s management or Board of Directors incorrectly analyzes these risks and forces, or that the strategies Ohio Valley develops to address
them are unsuccessful.
Forward-looking statements speak only as of the date on which they are made. 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. All
subsequent written and oral forward-looking statements attributable to Ohio Valley or any person acting on our behalf are qualified in their entirety by the following cautionary statements.
The following are certain risks that management believes are specific to our business. This should not be viewed as an all-inclusive list of risks or presenting the risk factors
listed in any particular order.
Risks Related to Economic, Political and Market Conditions
Economic, political and market risks could adversely affect our earnings and capital through declines in loan demand, quality of investment securities, our borrowers’ ability to repay loans, the
value of the collateral securing our loans, and deposits.
Our success depends, to a certain extent, upon local and national economic and political conditions, as well as governmental fiscal and monetary policies. Inflation, recession,
unemployment, changes in interest rates, fiscal and monetary policy, tariffs, a United States withdrawal from a significant renegotiation of trade agreements, trade wars, and other factors beyond our control may adversely affect our deposit levels
and composition, the quality of our assets including investment securities available for purchase, and the demand for loans, which, in turn, may adversely affect our earnings and capital. Recent political developments have resulted in substantial
changes in economic and political conditions for the United States and the remainder of the world. Because a significant amount of our loans are secured by real estate, additional decreases in real estate values likely would adversely affect the
value of property used as collateral and our ability to sell the collateral upon foreclosure. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have
an adverse impact on our earnings and cash flows.
In addition, consistent with our community banking philosophy, substantially all of our loans are to individuals and businesses in Ohio and West Virginia. Therefore, our local and
regional economies have a direct impact on our ability to generate deposits to support loan growth, the demand for loans, the ability of borrowers to repay loans, the value of collateral securing our loans (particularly loans secured by real estate),
and our ability to collect, liquidate and restructure problem loans. Consequently, any decline in the economy of this market area could have a material adverse effect on our financial condition and results of operations. We are less able than
larger financial institutions to spread risks of unfavorable local economic conditions across a large number of diversified economies.
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Our earnings are significantly affected by the fiscal and monetary policies of the United States Government and its agencies, sometimes adversely.
The policies of
the Federal Reserve Board impact us significantly. The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings
and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are
difficult to predict. Federal Reserve Board policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve Board could reduce
the demand for a borrower’s products and services. This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations.
Changes in interest rates could have a material adverse effect on our financial condition and results of operations.
Our earnings depend substantially on our interest rate spread, which is the difference between (i) the rates we earn on loans, securities and other earning assets and (ii) the
interest rates we pay on deposits and other borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities (in particular,
the Federal Reserve Board). While we have taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that such measures will be effective in avoiding undue interest rate risk. As
market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits, which will result in a decrease of our net interest income and could have a material adverse effect on our financial condition and results of
operations.
In addition to the effect of changes in interest rates on our interest rate spread, changes in interest rates may negatively affect the ability of our borrowers to repay their
loans, particularly as interest rates have been rising and adjustable-rate debt becomes more expensive. Increased defaults on loans could have a material adverse effect on our financial condition, results of operations and cash flows.
A transition away from the London Interbank Offered Rate (“LIBOR”) as a reference rate for financial contracts could negatively affect our income and expenses and the value of various financial
contracts.
LIBOR is used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate
swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021. In November 2020, the Federal Reserve Board issued a statement supporting the release of
a proposal and supervisory statements designed to provide a clear end date for U.S. Dollar LIBOR (“USD LIBOR”), and the federal banking agencies issued a release encouraging banks to stop entering into USD LIBOR contracts by the end of 2021, noting
that most legacy contracts will mature prior to the date LIBOR ceases to be issued. It is uncertain at this time the extent to which those entering into financial contracts will transition to any other particular benchmark. Other benchmarks may
perform differently than LIBOR or other alternative benchmarks or have other consequences that cannot currently be anticipated. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and
which remain outstanding if LIBOR ceases to exist.
The Federal Reserve Board, in conjunction with the Alternative Reference
Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing USD LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities, otherwise known as the
Secured Overnight Financing Rate ("SOFR"). SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of
submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is
less likely to correlate with the funding costs of financial institutions. Whether or not SOFR attains traction as a LIBOR replacement tool remains in question, although transactions using SOFR have been completed, including by Fannie Mae. Both
Fannie Mae and Freddie Mac ceased accepting adjustable rate mortgages tied to LIBOR and began accepting mortgages based on SOFR in 2020.
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We have a limited number of loans, derivative contracts, borrowings and other financial instruments, and continue to enter into loans, derivatives contracts, borrowings and other
financial instruments, with attributes that are directly or indirectly dependent on LIBOR. The transition from LIBOR could create costs and additional risk for us. Since proposed alternative rates are calculated differently, payments under
contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Further, our
failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, any market-wide transition away
from LIBOR could have an adverse effect on our business, financial condition and results of operations.
Adverse changes in the financial markets may adversely impact our results of operations.
The capital and credit markets have been experiencing unprecedented levels of volatility since 2008. While we generally invest in securities with limited credit risk,
certain investment securities we hold possess higher credit risk since they represent beneficial interests in structured investments collateralized by residential mortgages . Regardless of the level of
credit risk, all investment securities are subject to changes in market value due to changing interest rates and implied credit spreads.
Structured investments have at times been subject to significant market volatility due to the uncertainty of credit ratings, deterioration in credit losses occurring within certain
types of residential mortgages, changes in prepayments of the underlying collateral and the lack of transparency related to the investment structures and the collateral underlying the structured investment vehicles.
A default by another larger financial institution could adversely affect financial markets generally.
Many financial institutions and their related operations are closely intertwined, and the soundness of such financial institutions may, to some degree, be interdependent. As a
result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This “systemic risk” may adversely affect our business.
Risks Related to Our Business
The economic impact of COVID-19 or any other pandemic could adversely affect our business, financial condition, liquidity, cash flows, and results of operations.
COVID-19 has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter
in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers
(e.g., waiving late payment and other fees). The federal bank regulatory agencies have encouraged financial institutions to prudently work with affected borrowers, and new legislation has provided relief from reporting loan classifications due to
modifications related to COVID-19.
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Given the ongoing and dynamic nature of COVID-19, it is difficult to predict the full impact of the pandemic on our business. The extent of such impact will depend on future
developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened. As of December 31, 2020, the Bank holds and services PPP loans. These PPP loans are subject to the
provisions of the CARES Act and to complex and evolving rules and guidance issued by the SBA and other government agencies. We expect that the great majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations. The
Bank has credit risk on the PPP loans if the SBA determines that there is a deficiency in the manner in which the Bank originates, funds or services loans, including any issue with the eligibility of a borrower to receive a PPP loan. We could face
additional risks in our administrative capabilities to service our PPP loans and risk with respect to the determination of loan forgiveness. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was
a deficiency in the manner in which we originated, funded or serviced the PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss
related to the deficiency.
The spread of COVID-19 has also caused us to modify our business practices, including employee work locations, and cancellation of physical participation in meetings,
events and conferences. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to such employees to be more limited or less
reliable. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity attacks, all of which could expose us to risks of data
or financial loss and could seriously disrupt our operations and the operations of any impacted customers.
COVID-19 or a new pandemic could subject us to any of the following risks, any of which could, individually or in the aggregate, have a material adverse effect on our business,
financial condition, liquidity, and results of operations:
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demand for our products and services may decline, making it difficult to grow assets and income;
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if high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
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collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase;
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our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
•
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
•
as the result of the decline in the Federal Reserve’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing
liabilities, reducing our net interest margin and spread and reducing net income.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require time to recover, the length of which is unknown and during which the United States may experience a
recession. Our business could be materially and adversely affected by such recession. To the extent the effects of COVID-19 adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of
heightening many of the other risks described in this section.
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We operate in an extremely competitive market, and our business will suffer if we are unable to compete effectively.
In our market area, we encounter significant competition from other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer
finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and
product delivery systems and the accelerating pace of consolidation among financial service providers. Many of our competitors have substantially greater resources and lending limits than we do and may offer services that we do not or cannot
provide. Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, consumers can now pay bills and transfer funds directly
without banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. In addition, technological advancements allow
parties to better serve customers, increase efficiency, and reduce costs. Our ability to maintain our history of strong financial performance and return on investment to shareholders will depend, in part , on our
ability to use technology to deliver products and services that provide convenience to customers and to create additional efficiencies in our operations .
Our small to medium-sized business target market may have fewer financial resources to weather a downturn in the economy.
We target our business development and marketing strategy largely to serve the banking and financial services needs of small to medium-sized businesses. These small to medium-sized
businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger companies. If general economic conditions negatively impact our Ohio and West Virginia markets or the other geographic markets in which we
operate, our results of operations and financial condition may be negatively affected.
Our business strategy includes growth plans. Our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
We intend to continue pursuing a profitable growth strategy. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies
in significant growth stages of development. We cannot assure you that we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of
operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implement our business
strategy. Also, if we grow more slowly than anticipated, our operating results could be materially adversely affected.
Our ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial
institutions in our market areas, our ability to raise sufficient capital and our ability to manage our growth. While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be
no assurance growth opportunities will be available or growth will be successfully managed.
We may acquire other financial institutions or parts of institutions in the future and may open new branches. We also may consider and enter into new lines of business or offer
new products or services. Expansions of our business involve a number of expenses and risks, including:
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the time and costs associated with identifying and evaluating potential acquisitions or new products or services;
•
the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to the target institutions;
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the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the
expansion;
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our ability to finance an acquisition or other expansion and the possible dilution to our existing shareholders;
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the diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses;
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entry into unfamiliar markets;
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the possible failure of the introduction of new products and services into our existing business;
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the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and
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the risk of loss of key employees and customers.
We may incur substantial costs to expand, and we can give no assurance that such expansion will result in the levels of profits we expect. Neither can we assure that integration efforts for any
future acquisitions will be successful. We may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of our existing shareholders. We may also lose customers as we close one or more branches
as part of a plan to expand into other areas or become more productive from other branches.
We may not be able to adapt to technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve customers while reducing costs. Our future success depends, in part, upon our ability to address customer needs by using technology to provide products and services that will
satisfy customer demands, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our
customers. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect our growth, revenue and profit.
We are at risk of increased losses from fraud.
Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. In some cases, these individuals are part of larger criminal rings, which allow them to be more
effective. Such fraudulent activity has taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients
through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud. An emerging type of fraud even
involves the creation of synthetic identification in which fraudsters "create" individuals for the purpose of perpetrating fraud. Further, in addition to fraud committed directly against us, we may suffer losses as a result of fraudulent activity
committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce certain aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as
unaffiliated healthcare providers and government entities, in order to impersonate the consumer and thereby commit fraud.
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Periodic regulatory reviews may affect our operations and financial condition.
We are subject to periodic reviews from state and federal regulators, which may impact our operations and our financial condition. As part of the regulatory review, the loan portfolio and the
allowance for loan losses are evaluated. As a result, the incurred loss identified on loans or the assigned loan rating could change and may require us to increase our provision for loan losses or loan charge-offs. In addition, any downgrade in
loan ratings could impact our level of impaired loans or classified assets. Any increase in our provision for loan losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our financial
condition and results of operations. Findings of deficiencies in compliance with regulations could result in restrictions on our activities or even a loss in our financial holding company status.
Our exposure to credit risk could adversely affect our earnings and financial condition.
Making loans carries inherent risks, including interest rate changes over the time period in which loans may be repaid, risks resulting from changes in the economy, risks that we
will have inaccurate or incomplete information about borrowers, risks that borrowers will become unable to repay loans; and, in the case of loans secured by collateral, risks resulting from uncertainties about the future value of the collateral.
Commercial and commercial real estate loans comprise a significant portion of our loan portfolio. Commercial loans generally are viewed as having a higher credit risk than
residential real estate or consumer loans because they usually involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. Since our loan portfolio contains a significant number of
commercial and commercial real estate loans, the deterioration of one or a few of these loans could cause a significant increase in nonperforming loans, and ultimately could have a material adverse effect on our earnings and financial condition.
We may also have concentrated credit exposure to a particular industry, resulting in a risk of a material adverse effect on our earnings or financial condition if there is an event adversely affecting that industry.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information provided to us by customers and counterparties,
including financial statements and other financial information. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of
independent auditors. For example, in deciding whether to extend credit to a business, we may assume that the customer’s audited financial statements conform with United States generally accepted accounting principles (“GAAP”) and present fairly,
in all material respects, the financial condition, results of operations and cash flows of the customer. We may also rely on the audit report covering those financial statements. Our financial condition, results of operations and cash flows could
be negatively impacted to the extent that we rely on financial statements that do not comply with GAAP or on financial statements and other financial information that are materially misleading.
We may be required to repurchase loans we have sold or indemnify loan purchasers under the terms of the sale agreements, which could adversely affect our liquidity, results of operations and financial condition.
When the Bank sells a mortgage loan, it agrees to repurchase or substitute a mortgage loan if it is later found to have breached any representation or warranty the Bank made about the loan or if the
borrower is later found to have committed fraud in connection with the origination of the loan. While we have underwriting policies and procedures designed to avoid breaches of representations and warranties as well as borrower fraud, we cannot
assurance that no breach or fraud will ever occur. Required repurchases, substitutions or indemnifications could have an adverse effect on our liquidity, results of operations and financial condition.
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If our actual loan losses exceed our allowance for loan losses, our net income will decrease.
Our loan customers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance.
We may experience significant loan losses, which could have a material adverse effect on our operating results. In accordance with GAAP, we maintain an allowance for loan losses to provide for loan defaults and non-performance, which when combined,
we refer to as the allowance for loan losses. Our allowance for loan losses may not be adequate to cover actual credit losses, and future provisions for credit losses could have a material adverse effect on our operating results. Our allowance for
loan losses is based upon a number of relevant factors, including, but not limited to, trends in the level of nonperforming assets and classified loans, current economic conditions in the primary lending area, prior experience, possible losses
arising from specific problem loans, and our evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond
our control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. Moreover, the Financial Accounting Standards Board (“FASB”)
has changed its requirements for establishing the allowance, which will be effective for us in the first quarter of 2023. We cannot assure you that we will not further increase the allowance for loan losses or that regulators will not require us to
increase this allowance. Either of these occurrences could have a material adverse effect on our financial condition and results of operations.
We may lose business due to declining use by consumers of banks to complete financial transactions or increased depositing of funds electronically with banks outside of our market area, which could
negatively affect our net financial condition and results of operations.
Technology and other changes allow parties to complete financial transactions without banks. For example, consumers can pay bills and transfer funds directly without banks. Consumers can also shop
for higher deposit interest rates at banks across the country, which may offer higher rates because they have few or no physical branches and open deposit accounts electronically. This process could result in the loss of fee income, as well as the
loss of client deposits and the income generated from those deposits, in addition to increasing our funding costs.
Failures of, or material breaches in security of, our systems or those of third-party service providers may have a material adverse effect on our business.
We collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both us and third-party service providers. Our dependence upon
automated systems to record and process the Bank’s transactions poses the risk that technical system flaws, employee errors, tampering or manipulation of those systems, or attacks by third parties will result in losses and may be difficult to
detect. Our inability to use these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. In recent years, some banks have experienced denial of service attacks in which
individuals or organizations flood the bank's website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. We could also be adversely affected if one of our employees
causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. We are further exposed to the risk that third-party
service providers may be unable to fulfill their contractual obligations or will be affected by the same risks as the Bank has. These disruptions may interfere with service to the Bank’s customers, cause additional regulatory scrutiny and result in
a financial loss or liability. We are also at risk of the impact of natural disasters, terrorism and international hostilities on our systems or for the effects of outages or other failures involving power or communications systems operated by
others.
Employees could engage in fraudulent, improper or unauthorized activities on behalf of clients or improper use of confidential information. We may not be able to prevent employee errors or
misconduct, and the precautions we take to detect this type of activity might not be effective in all cases. Employee errors or misconduct could subject us to civil claims for negligence or regulatory enforcement actions, including fines and
restrictions on our business.
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In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse
transactions out of customer accounts. Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies and procedures will prevent all fraudulent transfers. Such activity can result
in financial liability and harm to our reputation.
Management cannot be certain that the security controls we have adopted will prevent unauthorized access to our computer systems or those of our third-party service providers,
whom we require to maintain similar controls. A security breach of the computer systems and loss of confidential information, such as customer account numbers or personal information, could result in a loss of customers’ confidence and, thus, loss of
business. In addition, unauthorized access to or use of sensitive data could subject us to litigation and liability and costs to prevent further such occurrences.
Further, we may be affected by data breaches at retailers and other third parties who participate in data interchanges with us and our customers that involve the theft of
customer credit and debit card data, which may include the theft of our debit card PIN numbers and commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in us incurring
significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on our results of operations.
Our assets at risk for cyber-attacks include financial assets and non-public information belonging to customers. We use several third-party vendors who have access to our assets via electronic
media. Certain cyber security risks arise due to this access, including cyber espionage, blackmail, ransom, and theft. As cyber and other data security threats continue to evolve, we may be required to expend significant additional resources to
continue to modify and enhance our protective measures or to investigate and remediate any security vulnerabilities.
Our ability to pay cash dividends is limited, and we may be unable to pay cash dividends in the future even if we would like to do so.
We are dependent primarily upon the earnings of our operating subsidiaries for funds to pay dividends on our common stock. The payment of dividends by us is also subject to certain
regulatory restrictions. As a result, any payment of dividends in the future will be dependent, in large part, on our ability to satisfy these regulatory restrictions and our subsidiaries’ earnings, capital requirements, financial condition and
other factors. Although our financial earnings and financial condition have allowed us to declare and pay periodic cash dividends to our shareholders, there can be no assurance that our dividend policy or the size of dividend distribution will
continue in the future, even if we are able to pay dividends. Our failure to pay dividends on our common shares could have a material adverse effect on the market price of our common shares.
The loss of key members of our senior management team could adversely affect our business.
We believe that our success depends largely on the efforts and abilities of our senior management. Their experience and industry contacts significantly benefit us. In addition, our
success depends in part upon senior management’s ability to implement our business strategy. The competition for qualified personnel in the financial services industry is intense, and the loss of services of any of our senior executive officers or
an inability to continue to attract, retain and motivate key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional qualified personnel.
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Loss of key employees may disrupt relationships with certain customers.
Our business is primarily relationship-driven in that many of our key employees have extensive customer relationships. Loss of a key employee with such customer relationships may lead to the loss of
business if the customers were to follow that employee to a competitor. While we believe we have strong relationships with our key producers, we cannot guarantee that all of our key personnel will remain with our organization. Loss of such key
personnel, should they enter into an employment relationship with one of our competitors, could result in the loss of some of our customers.
If we foreclose on collateral property and own the underlying real estate, we may be subject to the increased costs associated with the ownership of real property, resulting in reduced revenue.
We may have to foreclose on collateral property to protect our investment and may thereafter own and operate such property, in which case we will be exposed to the risks inherent in the ownership
of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to: (i) general or local economic conditions; (ii) neighborhood values; (iii) interest
rates; (iv) real estate tax rates; (v) operating expenses of the mortgaged properties; (vi) supply of and demand for rental units or properties; (vii) ability to obtain and maintain adequate occupancy of the properties; (viii) zoning laws; (ix)
governmental rules, regulations and fiscal policies; and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real
estate. Therefore, the cost of operating a real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment, or we may be required to dispose of the real property at a loss.
We may also acquire properties with hazardious substances that must be removed or remediated, the costs of which could be substantial, and we may not be able to recover such costs from the responsible parties. The foregoing expenditures and costs
could adversely affect our ability to generate revenues, resulting in reduced levels of profitability.
The failure of our common shares to be included in the Russell 3000 Index could result in the market for our common shares to become limited and volatile and the price at which you can sell your
shares to decrease.
Your ability to sell or purchase our common shares depends upon the existence of an active trading market for our common shares. Additionally, a fair valuation of the purchase or
sales price of our common shares also depends upon an active trading market, and thus the price you receive for a thinly-traded stock may not reflect its true value. A limited trading market for common shares may cause fluctuations in the market
value of those common shares to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market.
Although our common shares are quoted on the NASDAQ Global Market, the volume of trades on any given day has historically been limited. As a result, shareholders might not have been
able to sell or purchase our common shares at the volume, price or time desired. On June 26, 2017, our common shares were added to the Russell 3000® Index. The addition of our common shares to the Russell 3000® Index increased the volume of trading
in our shares as well as the price at which our shares trade. There can be no assurance that our common shares will remain in that index. If our common shares are removed from the Russell 3000® Index, the volume of trading in our shares may
decrease materially as well as the prices at which our shares trade.
Risks Related to Legal, Regulatory and Accounting Changes
New laws and increased regulatory oversight may significantly affect our business, financial condition and results of operations.
The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of
our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, borrowers, the DIF and the banking system as a whole, and not to benefit our shareholders. Regulations
affecting banks and financial services businesses are undergoing continuous changes, and management cannot predict the effect of these changes. The impact of any changes to laws and regulations or other actions by regulatory agencies may
negatively impact us and our ability to increase the value of our business, possibly limiting the services we provide, increasing the potential for competition from non-banks, or requiring us to change the way we operate.
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Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an
institution, the classification of assets held by an institution, the adequacy of an institution’s allowance for loan losses and the ability to complete acquisitions. Additionally, actions by regulatory agencies against us could cause us to devote
significant time and resources to defending our business and may lead to penalties that materially affect us and our shareholders. Even the reduction of regulatory restrictions could have an adverse effect on us and our shareholders if such
lessening of restrictions increases competition within our industry or market area.
In addition to laws, regulations and actions directed at the operations of banks, proposals to reform the housing finance market could negatively affect our ability to sell loans.
Although it is impossible for us to predict at this time what changes in laws and regulations will be implemented and the effect they will have on us and the rest of our industry, it is possible that
our revenue could decrease, our interest expense could increase and deposit insurance premiums could change, and steps may need to be taken to increase qualifying capital. Our operating and compliance costs could increase and could adversely affect
our financial condition and results of operations.
Increases in FDIC insurance premiums may have a material adverse effect on our earnings.
Increased bank failures for several years commencing in 2008 greatly increased resolution costs of the FDIC and depleted the DIF. In order to maintain a strong funding position and
restore reserve ratios of the DIF, the FDIC took a number of actions, including increasing assessment rates of insured institutions, requiring riskier institutions to pay a larger share of premiums by factoring in rate adjustments based on secured
liabilities and unsecured debt levels, changing the assessment base and requiring a prepayment of assessments for over three years.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional financial institution failures, we may be required
to pay even higher FDIC premiums. Increases in FDIC insurance premiums may materially adversely affect our results of operations and our ability to continue to pay dividends on our common shares at the current rate or at all. The FDIC has recently
adopted rules revising its assessments in a manner benefitting banks with assets totaling less than $10 billion. There can be no assurance, though, that assessments will not be changed in the future.
Changes in accounting standards, policies, estimates or procedures could impact our reported financial condition or results of operations.
Entities that set generally applicable accounting standards, such as the FASB, the Securities and Exchange Commission, and other regulatory boards, periodically change the financial
accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be difficult to predict and can materially affect how we record and report our financial condition and results of operations.
In some cases, we could be required to apply a new or revised standard retroactively, which would result in the restatement of our financial statements for prior periods.
In June 2016, FASB issued a new accounting standard for recognizing current expected credit losses, commonly referred to as CECL. CECL will result in earlier recognition of credit
losses and requires consideration of not only past and current events but also reasonable and supportable forecasts that affect collectability. In October 2019, FASB announced it would delay the effective date of CECL for smaller companies, such as
Ohio Valley, until fiscal years beginning after December 15, 2022. Upon adoption of CECL, credit loss allowances may increase, which will decrease retained earnings and regulatory capital. The federal banking regulators have adopted a regulation
that will allow banks to phase in the day-one impact of CECL on regulatory capital over three years. CECL implementation poses operational risk, including the failure to properly transition internal processes or systems, which could lead to call
report errors, financial misstatements, or operational losses.
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Management’s accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in
selecting and applying many of these accounting policies and methods in order to ensure that they comply with GAAP and reflect management’s judgment as to the most appropriate manner in which to record and report our financial condition and results
of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in reporting materially different amounts than
would have been reported under a different alternative.
Management has identified several accounting policies that are considered significant (one as being “critical”) to the presentation of our financial condition and results of
operations because they require management to make particularly subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different
conditions or using different assumptions. Because of the inherent uncertainty of estimates about these matters, no assurance can be given that the application of alternative policies or methods might not result in our reporting materially different
amounts.
ITEM 1B – UNRESOLVED STAFF COMMENTS
Not applicable.