What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-05-10 · 185 added, 148 removed, 252 unchanged (57% of the section changed)

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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 other 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 Coronavirus (“COVID-19”) pandemic, and which could cause actual results to differ materially from those expressed in such forward looking statements.

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:

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The actions taken by the Governors of the States of Ohio and West Virginia beginning in March of 2020 were imposed to mitigate the spread and lessen the public health impact of COVID-19.

During this time, the Bank’s primary channels of serving our customers have primarily consisted of drive-thru, mobile, and online banking services and appointment-only lobby services.

During this time, the Bank’s primary channels of serving our customers primarily consisted of drive-thru, mobile, and online banking services and appointment-only lobby services.

We have leveraged our digital banking platform with our customers, and we have implemented company-wide remote working arrangements.

In March 2021, the Company re-opened the lobbies of all the Bank’s financial service centers, stressing the importance of safety to its customers and employees.

As per state mandates in Ohio and West Virginia, masks will be required and social distancing measures will be maintained.

In June 2021, COVID-19 related health order restrictions for Ohio and West Virginia were lifted, resulting in no mask requirements, no social distancing requirements, and no occupancy limits when inside facilities.

However, with the recent rise in COVID-19 cases again, it is possible that our communities may consider further health order restrictions.

The Bank intends to comply with all health orders and will continue to encourage health and safety by allowing any employee, customer or vendor the option of wearing a mask if they so choose.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law.

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In 2021, Congress amended the PPP by extending the authority of the SBA to guarantee loans and the ability of PPP lenders to disburse PPP loans until May 31, 2021.

The Company continues to support its clients who have experienced financial hardship due to COVID-19 through participation in the PPP, assistance with expedited deposits of CARES Act stimulus payments, and loan modifications, as needed.

The Company has supported its clients who have experienced financial hardship due to COVID-19 through participation in the PPP, assistance with expedited deposits of CARES Act stimulus payments, and loan modifications, as needed.

FINANCIAL RESULTS OVERVIEW:

Net income totaled $3,531 during the first quarter of 2021, an increase of $2,529 over the same period of 2020.

Earnings per share for the first quarter of 2021 finished at $.74 per share, compared to $.21 per share during the first quarter of 2020.

Quarterly earnings improved largely due to lower provision expense and lower noninterest expense being partially offset by a decrease in noninterest income, while net interest income remained relatively stable.

The impact of higher net earnings during the first quarter of 2021 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets, which increased to 1.20% at March 31, 2021, compared to 0.40% at March 31, 2020.

The Company’s net income to average equity ratio, or return on equity, also increased to 10.47% at March 31, 2021, compared to 3.14% at March 31, 2020.

During the three months ended March 31, 2021, net interest income increased $44, or 0.4%, over the same period in 2020.

This increase reflected the benefit of a $169,976, or 18.2%, increase in average earning assets, which fully offset a 61 basis point decrease in the fully tax-equivalent (“FTE”) net interest margin.

Average earning assets were mostly impacted by growth in loans and higher balances maintained in the Company’s interest-bearing Federal Reserve clearing account.

Growth in loans benefited from the Company’s participation in the PPP to assist various businesses in our market during the pandemic.

Net income totaled $2,861 during the second quarter of 2021, an increase of $598 over the same period of 2020.

Earnings per share for the second quarter of 2021 finished at $.60 per share, compared to $.47 per share during the second quarter of 2020.

The Company’s net income during the six months ended June 30, 2021 totaled $6,392, an increase of $3,127 over the same period of 2020.

Earnings per share during the first six months of 2021 finished at $1.34 per share, compared to $.68 per share during the first six months of 2020.

Higher earnings during both the quarterly and year-to-date periods were impacted by minimal provision expense recognized during both periods in 2021, as well as growth in net interest income and lower noninterest expenses.

The impact of higher net earnings during 2021 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets, which increased to 1.06% at June 30, 2021, compared to 0.62% at June 30, 2020.

The Company’s net income to average equity ratio, or return on equity, also increased to 9.39% at June 30, 2021, compared to 5.07% at June 30, 2020.

During the three months ended June 30, 2021, net interest income increased $420, or 4.3%, over the same period in 2020.

During the six months ended June 30, 2021, net interest income increased $464, or 2.3%, over the same period in 2020.

The increases were impacted by growth in average earning assets, which increased $145,346 and $157,803 during the three and six months ended June 30, 2021, compared to the same periods in 2020, respectively.

Average earning asset growth came mostly from loan balance increases and higher balances maintained in the Company’s interest-bearing Federal Reserve clearing account.

Growth in loans benefited from positive commercial loan demand in our markets, as well as the Company’s participation in the PPP to assist various businesses in our market during the pandemic.

Higher Federal Reserve balances were the result of various stimulus payments received by customers.

The earnings contribution from higher average earning assets was mostly offset by a decline in yields on earning assets, which led to a decline in the fully tax-equivalent (“FTE”) net interest margin, which decreased 36 basis points and 48 basis points during the three and six months ended June 30, 2021, compared to the same periods in 2020, respectively.

The margin was negatively impacted by the actions of the Federal Reserve to reduce interest rates by 150 basis points in March 2020 due to concerns about the impact of COVID-19 on the economy.

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The change in asset mix during 2020 and 2021 into more PPP loans and elevated deposits at the Federal Reserve has had a dilutive effect on the net interest margin, with PPP loans carrying a 1.0% interest rate and the rate on balances maintained at the Federal Reserve currently at 15 basis points.

During the three months ended March 31, 2021, the Company experienced negative provision for loan loss, which contributed to a $3,898 decrease in provision expense when compared to the same period in 2020.

During the three months ended June 30, 2021, the Company’s provision for loan loss totaled $27, an increase of $420 in provision expense when compared to the same period in 2020.

The increase was primarily related to the reduction in specific reserves on collateral-dependent, impaired loans during the second quarter of 2020 that led to negative provision expense for that quarter.

During the six months ended June 30, 2021, the Company experienced negative provision for loan loss, which contributed to a $3,478 decrease in provision expense when compared to the same period in 2020.

The decrease from the prior year was largely impacted by the economic effects of the COVID-19 pandemic, which resulted in a higher general allocation of the allowance for loan losses during the first quarter of 2020.

Based on declining economic conditions and increasing unemployment levels, management increased general reserves by $2,287 during the first quarter of 2020 to reflect higher anticipated losses due to the expected financial impact of COVID-19 on its customers.

Further impacting lower provision expense was a $1,168 decrease in net loan charge-offs, primarily from the commercial real estate and consumer loan portfolios.

During the three months ended March 31, 2021, noninterest income decreased $1,103, or 24.8%, from the same period in 2020.

The large decline came primarily from the one-time payment of $2,000 received in a litigation settlement with a third-party during the first quarter of 2020, which did not reoccur in 2021.

As part of the settlement agreement, the Bank is scheduled to process a certain amount of tax items starting in 2021 and ending in 2025.

As a result of this agreed processing, the Bank recognized $540 in electronic refund check/electronic refund deposit (“ERC/ERD”) income during the first quarter of 2021.

This, along with higher interchange income, mortgage banking income, tax preparation fees, and lower losses on other real estate owned, helped to partially offset the decrease in noninterest income related to 2020’s litigation settlement.

During the three months ended March 31, 2021, noninterest expense decreased $332, or 3.5%, from the same period in 2020.

The decrease was primarily related to the expense savings associated with a lower number of employees, which contributed to a $185, or 3.4%, decrease in salaries and employee benefits expense from the prior year.

The Company also experienced lower professional fees, decreasing $168, or 28.1%, from the prior year.

This was in large part due to lower legal fees associated with collecting troubled loans.

Furthermore, other noninterest expense was down $138, or 9.4%, in large part due to lower incentives paid on customer deposit accounts.

Based on declining economic conditions and increasing unemployment levels, management increased general reserves by $2,185 during the first half of 2020 to reflect higher anticipated losses due to the expected financial impact of COVID-19 on its customers.

Further impacting lower provision expense for the year was a $906 decrease in net charge-offs on loans that had not been specifically allocated for, primarily from the consumer and residential real estate loan portfolios.

During the three months ended June 30, 2021, noninterest income increased $257, or 11.4%, from the same period in 2020.

The increase in quarterly noninterest revenue resulted primarily from higher interchange income on debit and credit card transactions and higher electronic refund check/electronic refund deposit (“ERC/ERD”) income, partially offset by lower mortgage banking revenue.

During the six months ended June 30, 2021, noninterest income decreased $846, or 12.6%, from the same period in 2020.

While lower mortgage banking income was a factor, the year-to-date decrease in noninterest revenue came primarily from proceeds of $2,000 received in a litigation settlement with a third-party during the first quarter of 2020.

As part of the settlement agreement, the Bank is processing a certain amount of tax items, which started in 2021 and will end in 2025.

As a result, the Bank recognized $675 in ERC/ERD income during the first half of 2021, which included $135 being recognized during the second quarter of 2021.

This, along with higher interchange income and tax preparation fees, combined with lower losses on other real estate owned, helped to partially offset the year-to-date decrease in noninterest income related to 2020’s litigation settlement proceeds and lower mortgage banking income.

During the three months ended June 30, 2021, noninterest expense decreased $305, or 3.2%, from the same period in 2020.

During the six months ended June 30, 2021, noninterest expense decreased $637, or 3.3%, from the same period in 2020.

The decreases were primarily related to the expense savings associated with a lower number of employees, which contributed to a $147 decrease in salaries and employee benefits expense from the prior quarter and a $332 decrease from the prior year.

The Company also experienced a decrease in professional fees during both periods in large part to lower legal fees associated with collecting troubled loans.

Furthermore, other noninterest expense was down for the quarter and year, in large part due to lower incentives paid on customer deposit accounts.

Partially offsetting the expense decreases were higher FDIC insurance, software, and occupancy and equipment costs during 2021.

The Company’s provision for income taxes increased $642 during the three months ended March 31, 2021, largely due to the changes in taxable income affected by the factors mentioned above.

At March 31, 2021, total assets were $1,225,184, an increase of $38,252 from total assets of $1,186,932 at year-end 2020.

Higher assets were primarily impacted by increases in cash and cash equivalents and investment securities, which were collectively up $53,306, or 20.4%, from year-end 2020.

This was related to the investment of heightened deposit balances impacted by the various stimulus payments received by customers.

The growth in assets from year-end 2020 was partially offset by a $17,614, or 2.1%, decrease in loans.

The loan portfolio experienced decreases in the residential real estate segment (-4.9%), commercial real estate segment (-0.9%) and consumer loan segment (-1.9%).

At March 31, 2021, total liabilities were $1,087,444, up $36,836 from year-end 2020.

The Company’s provision for income taxes decreased $36 during the three months ended June 30, 2021, and increased $606 during the six months ended June 30, 2021, compared to the same periods in 2020.

This was largely due to the changes in taxable income affected by the factors mentioned above.

At June 30, 2021, total assets were $1,236,988, an increase of $50,056 from total assets of $1,186,932 at year-end 2020.

Higher assets were primarily impacted by increases in investment securities, which were up $61,058, or 49.9%, from year-end 2020.

The growth in securities was related to investing the heightened deposit balances received during the first half of 2021 as a result of the various stimulus payments received by customers.

The growth in assets from year-end 2020 was partially offset by a $12,365, or 10.0%, decrease in interest-bearing deposits with banks, primarily from the reinvestment of Federal Reserve Bank clearing account balances into securities.

The loan portfolio was relatively stable from year-end 2020, experiencing decreases in the residential real estate segment (-7.8%) and commercial and industrial segment (-8.8%), partially offset by increases in the commercial real estate segment (+12.0%) and consumer loan segment (+4.9%).

At June 30, 2021, total liabilities were $1,097,564, up $46,956 from year-end 2020.

Contributing most to this increase were higher deposit balances, which increased $51,351 from year-end 2020.

The increase was impacted mostly by customers receiving stimulus funds and their desire to preserve cash during this uncertain economic environment.

At March 31, 2021, total shareholders' equity was $137,740, up $1,416 since December 31, 2020.

The Company also utilized the excess funds to pay down a portion of its Federal Home Loan Bank borrowings, which contributed to a $3,559 decrease in other borrowed funds.

At June 30, 2021, total shareholders' equity was $139,424, up $3,100 since December 31, 2020.

Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums.

Comparison of Financial Condition

at March 31, 2021 and December 31, 2020

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at March 31, 2021 compared to December 31, 2020.

at June 30, 2021 and December 31, 2020

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at June 30, 2021 compared to December 31, 2020.

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 March 31, 2021, cash and cash equivalents were $176,420, an increase of $38,117, or 27.6%, from December 31, 2020.

The increase in cash and cash equivalents came mostly from higher interest-bearing deposits on hand with correspondent banks.

Over 89% of cash and cash equivalents consist of the Company’s interest-bearing Federal Reserve Bank clearing account, which increased $37,111, or 30.6%, from year-end 2020.

At June 30, 2021, cash and cash equivalents were $125,240, a decrease of $13,063, or 9.4%, from December 31, 2020.

The decrease in cash and cash equivalents came mostly from lower interest-bearing deposits on hand with correspondent banks.

Over 86% of cash and cash equivalents consist of the Company’s interest-bearing Federal Reserve Bank clearing account, which decreased $12,475, or 10.3%, from year-end 2020.

The Company utilizes its interest-bearing Federal Reserve Bank clearing account to manage excess funds, as well as to assist in funding earning asset growth.

The primary factor for the significant influx in clearing account balances was the investment of heightened deposit balances received during 2021 as a result of the pandemic environment.

Total deposits increased 27.6% from year-end 2020 in relation to customers receiving stimulus funds from various government programs and their desire to preserve cash during this uncertain economic environment.

Furthermore, several congressional acts led to the extension of the PPP loan program during the first quarter of 2021.

Prior to the second quarter of 2021, the clearing account balances had been increasing from year-end 2020, primarily from the investment of heightened deposit balances received during 2021 as a result of the pandemic environment.

This was in relation to customers receiving stimulus funds from various government programs and their desire to preserve cash during this uncertain economic environment.

Furthermore, several congressional acts led to the extension of the PPP loan program during the first half of 2021.

Under the reopened PPP, commercial business customers received loan proceeds, which helped to generate higher levels of investable deposits during the first quarter of 2021.

During the second quarter of 2021, the Company utilized a portion of its clearing account balances and proceeds from the payoffs of PPP loans to reinvest in higher-yielding investment securities.

While this redeployment of assets reduced clearing account balances from year-end 2020, the shift into higher-yielding investment securities lowered the dilutive effect that higher clearing account balances was having on the net interest margin.

The interest rate paid on both the required and excess reserve balances of the Federal Reserve Bank account is based on the targeted federal funds rate established by the Federal Open Market Committee.

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Although interest-bearing deposits in the Federal Reserve Bank are the Company's lowest-yielding interest-earning asset, the investment rate is higher than the rate the Company would have received from its investments in federal funds sold.

Furthermore, Federal Reserve balances are 100% secured.

Furthermore, Federal Reserve balances are guaranteed by the U.S.

As liquidity levels continuously vary based on consumer activities, amounts of cash and cash equivalents can vary widely at any given point in time.

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Certificates of deposit

At March 31, 2021, the Company had $2,255 in certificates of deposit owned by the Captive, down from $2,500 at year-end 2020.

The deposits on hand at March 31, 2021 consist of ten certificates with remaining maturity terms ranging from less than 3 months up to 26 months.

At June 30, 2021, the Company had $2,255 in certificates of deposit owned by the Captive, down from $2,500 at year-end 2020.

The deposits on hand at June 30, 2021 consist of ten certificates with remaining maturity terms ranging from less than 3 months up to 23 months.

The balance of total securities increased $61,058, or 49.9%, compared to year-end 2020.

The Company’s investment securities portfolio is made up mostly of U.S.

Government agency (“Agency”) mortgage-backed securities, which increased $4,237, or 4.5%, from year-end 2020 and represented 71.6% of total investments at March 31, 2021.

During the first three months of 2021, the Company invested $15,248 in new Agency mortgage-backed securities, while receiving principal repayments of $9,752.

Government agency (“Agency”) mortgage-backed securities, which increased $30,237, or 32.2%, from year-end 2020 and represented 67.9% of total investments at June 30, 2021.

During the first half of 2021, the Company redeployed a portion of its heightened excess deposits to purchase $50,732 in new Agency mortgage-backed securities, while receiving principal repayments of $18,682.

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 redeployed a portion of its heightened excess funds to purchase $5,174 in U.S.

Government securities, as well as $5,399 in Agency securities, net of maturities, during the first quarter of 2021.

The Company also utilized a portion of excess deposits to purchase $17,832 in U.S.

Government securities, as well as $12,899 in Agency securities, net of maturities, during the first half of 2021.

The shift from lower-yielding Federal Reserve Bank balances into higher-yielding securities has contributed positively to the net interest margin.

The loan portfolio represents the Company’s largest asset category and is its most significant source of interest income.

Gross loan balances lowered to $831,050 at March 31, 2021, representing a decrease of $17,614, or 2.1%, as compared to $848,664 at December 31, 2020.

The decrease in loans came primarily from the residential real estate portfolio, with other decreases coming from the total consumer and commercial loan portfolios from year-end 2020.

Gross loan balances were relatively stable at June 30, 2021 finishing at $847,916, a decrease of $748, or 0.1%, as compared to $848,664 at December 31, 2020.

The decrease in loans came primarily from the residential real estate and commercial and industrial portfolios, with increases coming from the total commercial real estate and consumer loan portfolios from year-end 2020.

The majority of the Company’s decrease in loans came from the residential real estate loan segment, which decreased $23,749, or 7.8%, from year-end 2020.

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The mortgage lender eventually sells the loans and repays the Bank.

As mortgage refinancings reached their peak during the second half of 2020, the volume of warehouse lending balances have decreased during the first quarter of 2021, finishing at $3,720 at March 31, 2021, as compared to $19,365 at December 31, 2020.

Furthermore, the low rate environment has contributed to a shift into more long-term fixed-rate mortgages (up $1,064) and less short-term adjustable-rate mortgages (down $3,519) at March 31, 2021.

The Company’s commercial loan portfolio, consisting of commercial real estate and commercial and industrial loans, decreased $279, or 0.1%, from year-end 2020.

Contributing most to the decrease were lower loan balances within the commercial real estate portfolio, decreasing $2,303, or 0.9%, from year-end 2020.

The commercial real estate segment comprised the largest portion of the Company’s total commercial loan portfolio at March 31, 2021 at 61.1%.

Decreases were largely from the principal repayments and payoffs of nonowner-occupied loan balances from year-end 2020.

Decreases in commercial real estate loans were partially offset by a $2,024, or 1.3%, increase in the commercial and industrial portfolio from year-end 2020.

As mortgage refinancings reached their peak during the second half of 2020, the volume of warehouse lending balances have decreased to zero at June 30, 2021, as compared to $19,365 at December 31, 2020.

Furthermore, the low rate environment has contributed to a shift into more long-term fixed-rate mortgages (up $555) and less short-term adjustable-rate mortgages (down $8,825) at June 30, 2021.

The Company’s commercial loan portfolio, consisting of commercial real estate and commercial and industrial loans, increased $16,557, or 4.0%, from year-end 2020.

Contributing most to the increase were higher loan balances within the commercial real estate portfolio, increasing $30,492, or 12.0%, from year-end 2020.

The commercial real estate segment comprised the largest portion of the Company’s total commercial loan portfolio at June 30, 2021 at 66.4%.

Increases were largely from new originations of both owner-occupied and nonowner-occupied loan balances from year-end 2020.

In general, commercial real estate loan demand has been positive in the Company’s market areas, particularly in the counties of Pike and Athens in Ohio and Cabell County in West Virginia.

Increases in commercial real estate loans were partially offset by a $13,935, or 8.8%, decrease in the commercial and industrial portfolio from year-end 2020.

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 and industrial segment also includes PPP loan balances that had a significant impact on average earning asset growth in 2021.

Although a second round of PPP loans were initiated by the Bank during the first quarter of 2021, the Bank experienced no net loan growth in its PPP loan portfolio from year-end 2020.

The commercial and industrial segment also includes PPP loan balances that have had an impact on average earning asset growth in 2021.

Although a second round of PPP loans were initiated by the Bank during the first quarter of 2021, the Bank experienced a $19,402 decrease in its PPP loan portfolio from year-end 2020.

This was because the payoffs of PPP loans from the initial round of originations in 2020 completely offset the new PPP loan originations in 2021.

PPP loans are forgiven by the SBA as long as the small business borrower meets certain criteria on the use of loan proceeds.

At March 31, 2021, the Company’s PPP loans totaled $25,829 as compared to $27,933 at year-end 2020.

As of June 30, 2021, all of the initial round of PPP originations from 2020 had been paid off.

As a result, the Company’s PPP loans totaled $8,531 at June 30, 2021 as compared to $27,933 at year-end 2020.

While management believes lending opportunities exist in the Company’s markets, future commercial lending activities will depend upon economic and other 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.

The Company’s loan portfolio at March 31, 2021 was also impacted by less consumer loan balances from year-end 2020, decreasing $2,444, or 1.9%.

This change was primarily impacted by a decline in automobile loan balances.

The Company’s loan portfolio at June 30, 2021 was also impacted by higher consumer loan balances from year-end 2020, increasing $6,444, or 4.9%.

This change was driven by an increase in unsecured loan balances.

As part of the Company’s efforts to invest the heightened cash provided by the various stimulus programs, the Company purchased multiple pools of loans issued to healthcare professionals during the first half of 2021.

In relation to the purchase of these loans, the other consumer loan segment increased $7,413, or 13.0%, from year-end 2020.

Partially offsetting this increase was a decline in automobile loan balances.

Automobile loans represent the Company’s largest consumer loan segment at 38.6% of total consumer loans.

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Further limiting the volume of automobile loan originations were heightened incentives being offered from the captive auto finance companies in response to the pandemic.

The remaining consumer loan portfolio decreased $678, or 0.9%, from year-end 2020, mostly from decreases in unsecured loans, partially offset by higher home equity lines of credit.

The remaining consumer loan portfolio increased $859, or 4.3%, from year-end 2020, from higher home equity lines of credit.

The Company will continue to attempt to increase its auto lending segment while maintaining strict loan underwriting processes to limit future loss exposure.

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Allowance for Loan Losses

The Company established a $6,887 allowance for loan losses at March 31, 2021, which represents a decrease from the $7,160 allowance at year-end 2020.

The Company established a $6,799 allowance for loan losses at June 30, 2021, which represents a decrease from the $7,160 allowance at year-end 2020.

As part of the Company’s quarterly analysis of the allowance for loan losses, management will review various factors that directly impact the general allocation needs 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.

During the first quarter of 2021, the Company experienced a $363 decrease in its general allocations of the allowance for loan losses.

A stable historical loan loss factor combined with lower criticized and classified assets and higher annualized loan recoveries were the key factors to the first quarter drop in general allocations.

The historical loan loss factor remain unchanged at 0.24% from year-end 2020 to March 31, 2021, while the criticized and classified risk factors decreased as a result of various commercial loan upgrades from improvements in the financial performance of certain borrowers’ ability to repay their loans.

During the first half of 2021, the Company experienced a $421 decrease in its general allocations of the allowance for loan losses.

A lower historical loan loss factor and lower criticized and classified assets were the key factors to the year-to-date drop in general allocations.

The historical loan loss factor decreased from 0.24% at year-end 2020 to 0.23% at June 30, 2021, while both the criticized and classified risk factors decreased as a result of various commercial loan upgrades from improvements in the financial performance of certain borrowers’ ability to repay their loans.

This contributed to lower classified assets from year-end 2020, particularly within the commercial and industrial loan segment.

Additionally, the Company’s delinquency levels decreased from year-end 2020, with nonperforming loans to total loans of 0.74% at March 31, 2021 compared to 0.82% at December 31, 2020, and lower nonperforming assets to total assets of 0.50% at March 31, 2021 compared to 0.59% at year-end 2020.

General allocations during the first quarter of 2021 increased in relation to higher unemployment rates within the Company’s market areas, only partially offsetting the decreasing allocation factors already discussed.

Additionally, the Company’s delinquency levels decreased from year-end 2020, with nonperforming loans to total loans of 0.77% at June 30, 2021 compared to 0.82% at December 31, 2020, and lower nonperforming assets to total assets of 0.53% at June 30, 2021 compared to 0.59% at year-end 2020.

During the first quarter of 2020, the Company added a new risk factor to the evaluation of the allowance for loan losses pertaining to the COVID-19 pandemic.

The risk factor was necessary to account for the changes in economic conditions resulting from increases in unemployment that would produce higher anticipated losses as a result of COVID-19.

The general reserve allocation related to COVID-19 totaled $2,233 at March 31, 2021 as compared to $2,315 at December 31, 2020.

The general reserve allocation related to COVID-19 totaled $2,434 at June 30, 2021 as compared to $2,315 at December 31, 2020.

While the Company has yet to experience any significant charge-offs related to COVID-19, the continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to impact the Company’s estimate of its allowance for loan losses and resulting provision expense going forward.

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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.

The change in specific reserves was primarily related to the loan impairments of one borrower relationship during the first quarter of 2021.

The Company’s allowance for loan losses to total loans ratio finished at 0.83% at March 31, 2021 and 0.84% at year-end 2020.

Management believes that the allowance for loan losses at March 31, 2021 was adequate and reflected probable incurred losses in the loan portfolio.

The change in specific reserves was primarily related to the loan impairments of one borrower relationship during the first half of 2021.

The Company’s allowance for loan losses to total loans ratio finished at 0.80% at June 30, 2021 and 0.84% at year-end 2020.

Management believes that the allowance for loan losses at June 30, 2021 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.

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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 March 31, 2021 increased $38,889, or 3.9%, from year-end 2020.

Total deposits at June 30, 2021 increased $51,351, or 5.2%, from year-end 2020.

This change in deposits came primarily from interest-bearing deposit balances, which were up by $41,552, or 6.1%, from year-end 2020, while noninterest-bearing deposits increased $9,799, or 3.1%, from year-end 2020.

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The decrease came from lower brokered and internet CD issuances as a result of the heightened liquidity position from year-end 2020.

The Company’s retail time deposits were relatively stable from year-end 2020.

The Company’s retail time deposits were up $1,366 from year-end 2020.

The increase in noninterest-bearing deposits came mostly from the Company’s business and incentive-based checking account balances from year-end 2020.

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Other Borrowed Funds

Other borrowed funds were $26,691 at March 31, 2021, a decrease of $1,172, or 4.2%, from year-end 2020.

The decrease was related primarily to the principal repayments applied to various FHLB advances during the first quarter of 2021.

Other borrowed funds were $24,304 at June 30, 2021, a decrease of $3,559, or 12.8%, from year-end 2020.

The decrease was related primarily to the principal repayments applied to various FHLB advances during the first and second quarters of 2021.

While deposits continue to be the primary source of funding for growth in earning assets, management will continue to utilize FHLB advances and promissory notes to help manage interest rate sensitivity and liquidity.

Shareholders’ Equity

Total shareholders' equity at March 31, 2021 increased $1,416, or 1.0%, to finish at $137,740, as compared to $136,324 at December 31, 2020.

This was from quarterly net income being partially offset by cash dividends paid and a decrease in net unrealized gain on available for sale securities.

Total shareholders' equity at June 30, 2021 increased $3,100, or 2.3%, to finish at $139,424, as compared to $136,324 at December 31, 2020.

This was from year-to-date net income being partially offset by cash dividends paid and a decrease in net unrealized gain on available for sale securities.

Comparison of Results of Operations

For the Three Months Ended

March 31, 2021 and 2020

The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three months ended March 31, 2021 compared to the same period in 2020.

For the Three and Six Months Ended

June 30, 2021 and 2020

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, 2021 compared to the same period in 2020.

This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10‑Q.

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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 three months ended March 31, 2021, net interest income remained relatively stable at $10,048 compared to $10,004 at March 31, 2020.

The moderate change was mostly attributable to higher average earning assets providing favorable increases to interest revenue being offset by a net interest margin compression in relation to decreases in market rates that contributed to lower earning asset yields.

Total interest and fee income recognized on the Company’s earning assets decreased $659, or 5.6%, during the first quarter of 2021 compared to the same period in 2020.

The decrease was impacted by interest and fees on loans, which decreased $308, or 2.8%.

This result was directly related to the decline in loan yields, which decreased from 5.78% to 5.18% when comparing the first quarters of 2020 to 2021.

During the three months ended June 30, 2021, net interest income increased $420, or 4.3%, compared to the same period in 2020.

During the six months ended June 30, 2021, net interest income increased $464, or 2.3%, compared to the same period in 2020.

The increases during both periods were mostly attributable to higher average earning assets providing favorable increases to interest revenue being partially offset by a net interest margin compression in relation to decreases in market rates that contributed to lower earning asset yields.

Total interest and fee income recognized on the Company’s earning assets decreased $200, or 1.8%, during the second quarter of 2021, and decreased $859, or 3.7%, during the first half of 2021, compared to the same periods in 2020.

The quarterly and year-to-date decreases were impacted by interest and fees on loans, which decreased $77, or 0.7%, and $385, or 1.8%, during the three and six months ended June 30, 2021, compared to the same periods in 2020.

These results were directly related to the decline in loan yields, which decreased from 5.41% to 5.05% when comparing the second quarters of 2020 to 2021, and decreased from 5.58% to 5.11% when comparing the first half of 2020 to 2021.

Loan yields were impacted by interest rate reductions from the Federal Reserve Bank in March 2020.

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Partially offsetting the effects from lower loan yields was average growth in loans.

Average loans for the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020 increased $72,151, or 9.4%, which came mostly from the origination of PPP loans during 2020 and 2021.

Average loans for the second quarter of 2021 compared to the second quarter of 2020 increased $48,601, or 6.1%, while average loans for the first half of 2021 compared to the first half of 2020 increased $60,403, or 7.7%.

These increases came mostly from the growing commercial loan demand within the Company’s market areas.

Commercial loan growth was also impacted by the origination of PPP loans during 2020 and 2021.

While PPP loans contributed to higher earning asset balances, they also had a dilutive effect to loan yields as a result of the 1% interest rate associated with each loan.

These factors contributed to a decrease of $670 in loan interest income during the three months ended March 31, 2021 compared to the same period in 2020.

Loan revenue was positively impacted by loan fees, which increased $362 during the first quarter of 2021 compared to the same period in 2020.

The increase came largely from $367 in loan fees earned on the origination of government-guaranteed PPP loans as a result of normal amortization and loan forgiveness.

During the three months ended March 31, 2021, interest income from interest-bearing deposits with banks decreased $134, or 82.7% when compared to the same period in 2020.

This change in interest revenue came primarily from the Company’s interest-bearing Federal Reserve Bank clearing account.

The quarterly decrease in interest income was primarily due to the interest rate tied to this interest-bearing clearing account, which was 0.10% at March 31, 2021 compared to 0.25% at March 31, 2020.

The increase in liquidity from the surge in deposit liabilities allowed the Company to maintain higher average balances within the account, which increased $83,223 during the first quarter of 2021compared to the same period in 2020.

Total interest on securities decreased $206, or 30.7%, during the first quarter of 2021 compared to the same period in 2020.

These factors contributed to decreases of $191 and $861 in loan interest income during the three and six months ended June 30, 2021, compared to the same periods in 2020.

Loan revenue was positively impacted by loan fees, which increased $114 during the second quarter of 2021, and $476 during the first half of 2021, compared to the same periods in 2020.

The increases were largely impacted by loan fees earned on the origination of government-guaranteed PPP loans, which increased $14 and $382 during the second quarter and first half of 2021, as a result of normal amortization and loan forgiveness.

During the three months ended June 30, 2021, interest income from interest-bearing deposits with banks increased $15, or 83.3%, when compared to the same period in 2020.

During the six months ended June 30, 2021, interest income from interest-bearing deposits with banks decreased $119, or 66.1%, when compared to the same period in 2020.

These changes in interest revenue came primarily from the Company’s interest-bearing Federal Reserve Bank clearing account.

The year-to-date decrease in interest income was primarily due to the interest rate tied to this interest-bearing clearing account, which was 0.15% at June 30, 2021 compared to 0.25% at June 30, 2020.

The increase in liquidity from the surge in deposit liabilities allowed the Company to maintain higher average balances within the account, which increased $71,424 during the first half of 2021, compared to the same period in 2020.

The quarterly increase in interest income was the result of a $59,566 increase in average clearing balances during the second quarter of 2021, as well as a more comparable quarterly interest rate tied to the account after the Federal Reserve reduced rates during the first quarter of 2020.

Total interest on securities decreased $126, or 18.9%, during the second quarter of 2021, and $332, or 24.9%, during the first half of 2021, compared to the same periods in 2020.

The Company has taken opportunities to reinvest a portion of excess deposits into new U.S.

Government, Agency and Agency mortgage-backed securities, contributing to a $14,038 increase in average securities during the first quarter of 2021 over the first quarter of 2020.

Government, Agency and Agency mortgage-backed securities, contributing to a $25,528 increase in average securities during the first half of 2021 over the first half of 2020.

However, the increase in average securities was completely offset by a decline in securities yield of 87 basis points from 2.27% to 1.40%.

Total interest expense incurred on the Company’s interest-bearing liabilities decreased $703, or 39.5%, during the first quarter of 2020 compared to the same period in 2020.

Interest expense decreased despite an increase in average interest-bearing deposits of $76,252 during the first quarter of 2021 compared to the same period in 2020.

Total interest expense incurred on the Company’s interest-bearing liabilities decreased $620, or 38.7%, during the second quarter of 2021, and decreased $1,323, or 39.1%, during the first half of 2021, compared to the same periods in 2020.

Interest expense decreased despite increases in average interest-bearing deposits of $73,358 during the second quarter of 2021, and $74,909 during the second half of 2021, compared to the same periods in 2020.

The converse relationship between increasing average interest-bearing liabilities to lower interest expense is related to the repricing efforts in a lower rate environment which drove down average costs during 2020.

This included the rate reduction to the Company’s Prime Investment deposit account, which contributed to a $213 decrease in money market interest expense during the first quarter of 2021 compared to the same period in 2020.

Deposit expense was further impacted by lower CD rates, which have contributed to a $394 decrease in time deposit interest expense during the first quarter of 2021 compared to the same period in 2020.

This included the rate reduction to the Company’s Prime Investment deposit account, which contributed to a $148 decrease in money market interest expense during the second quarter of 2021, and a $361 decrease during the first half of 2021, compared to the same periods in 2020.

Deposit expense was further impacted by lower CD rates, which have contributed to a $434 decrease in time deposit interest expense during the second quarter of 2021, and a $828 decrease during the first half of 2021, compared to the same periods in 2020.

As CD rates have repriced downward, the Company has benefited from lower interest expense on newly issued CDs at lower rates.

As a result of the rate repricings on money market accounts and time deposits, the Company’s total weighted average costs on interest-bearing deposits has decreased by 48 basis points from 1.00% at March 31, 2020 to 0.52% at March 31, 2021.

As a result of the rate repricings on money market accounts and time deposits, the Company’s total weighted average costs on interest-bearing deposits has decreased by 44 basis points from 0.92% at June 30, 2020 to 0.48% at June 30, 2021.

The Company’s net interest margin is defined as fully tax-equivalent net interest income as a percentage of average earning assets.

During 2021, the Company’s first quarter net interest margin finished at 3.73%, compared to 2020’s first quarter net interest margin of 4.34%.

The decrease in margin was largely impacted by the decreasing market rates that impacted lower earning asset yields primarily during 2020.

Interest rates were reduced at the end of the first quarter of 2020 because of the growing concern of the COVID-19 pandemic.

During 2021, the Company’s second quarter net interest margin finished at 3.58%, compared to 2020’s second quarter net interest margin of 3.94%.

The year-to-date net interest margin at June 30, 2021 finished at 3.65%, compared to 4.13% at June 30, 2020.

The decreases in margin were largely impacted by the decreasing market rates that impacted lower earning asset yields primarily during 2020.

Market rates were reduced at the end of the first quarter of 2020 because of the growing concern of the COVID-19 pandemic.

The Company’s primary focus is to invest its funds into higher yielding assets, particularly loans, as opportunities arise.

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Provision for Loan Losses

For the three months ended March 31, 2021, the Company’s provision expense decreased $3,898 from the same period in 2020.

The quarterly improvement came primarily from the addition of a new risk reserve allocation in 2020 that was less impactful in 2021.

For the three months ended June 30, 2021, the Company’s provision expense increased $420, and for the six months ended June 30, 2021, provision expense decreased $3,478, compared to the same periods in 2020.

The quarterly provision increase came primarily from the reduction in specific reserves on collateral-dependent, impaired loans during the second quarter of 2020, particularly within the commercial real estate and commercial and industrial loan portfolios.

The year-to-date provision decrease was largely impacted by the addition of a new risk reserve allocation in 2020 that was less impactful in 2021.

As previously discussed, the Company’s general reserves during the first quarter of 2020 were significantly impacted by a $1,942 allocation of the allowance for loan losses as a result of the expected financial impact of COVID-19 on its customers.

The allocation resulted in a corresponding entry to provision expense in March 2020.

Further reducing provision expense was a decrease of $1,168 in net charge-offs during the three months ended March 31, 2021 compared to the same period in 2020.

This was primarily from lower charge-offs recorded within the commercial real estate and consumer loan portfolios.

Further impacting lower provision expense was a $906 decrease in net loan charge-offs during the six months ended June 30, 2021, compared to the same period in 2020.

This was primarily from lower charge-offs on loans that were not previously allocated for within the residential real estate and consumer loan portfolios.

Further contributing to lower provision expense were the impacts of lower general reserve allocations.

During the first quarter of 2021, the Company decreased its general allocation from $7,160 at December 31, 2020 to $6,797 at March 31, 2021.

During the first half of 2021, the Company decreased its general allocation from $7,160 at December 31, 2020 to $6,739 at June 30, 2021.

Conversely, this is compared to a $574 general allocation increase during the same period in 2020, excluding the COVID-19 risk factor.

Lower general reserves have been affected by various improvements within the economic risk factor calculation that included:

lower criticized and classified assets, lower delinquency levels, and higher annualized level of loan recoveries.

Lower provision expense was also impacted by a decrease in specific allocations that totaled $90 at March 31, 2021 compared to $854 in specific allocations at March 31, 2020.

lower criticized and classified assets, lower delinquency levels, and a lower historical loan loss factor.

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 March 31, 2021 decreased $1,103, or 24.8%, when compared to the three months ended March 31, 2020.

The key contributor to the decrease in noninterest revenue was the one-time payment received in a litigation settlement with a third-party in 2020.

Noninterest income for the three months ended June 30, 2021 increased $257, or 11.4%, when compared to the three months ended June 30, 2020.

Conversely, noninterest income for the six months ended June 30, 2021 decreased $846, or 12.6%, when compared to the six months ended June 30, 2020.

A significant factor to both period comparisons was from the proceeds received in a litigation settlement with a third-party in 2020.

During the first quarter of 2020, the Bank entered into a settlement agreement related to the previously disclosed litigation the Bank had filed against a third-party tax software product provider for breach of contract.

Under the settlement agreement, the third-party paid a $2,000 settlement payment to the Bank in March 2020, which was recorded as noninterest income.

As part of the settlement agreement, the Bank is scheduled to process a certain amount of tax items starting in 2021 and ending in 2025.

As a result of this processing agreement, the Bank recognized $540 in ERC/ERD income during the first quarter of 2021, which helped to partially offset the effects of the settlement proceeds received in 2020.

Increases in noninterest revenue also came from interchange income, which increased $107, or 11.4%, during the first quarter of 2021.

As part of the settlement agreement, the Bank began earning revenue for the processing of a certain amount of tax items, which started in 2021 and will end in 2025.

As a result, the Bank recognized $540 in ERC/ERD income during the first quarter of 2021, and $135 in ERC/ERD income during the second quarter of 2021.

This revenue also helped to partially offset the effects of the settlement proceeds received in 2020.

Noninterest revenue was also impacted by interchange income, which increased $243, or 26.1%, during the second quarter of 2021, and $350, or 18.7%, during the first half of 2021 compared to the same periods in 2020.

This was largely impacted by the economic stimulus proceeds received by customers due to the COVID-19 pandemic that increased consumer spending.

Lower losses on the sales of foreclosed assets also improved noninterest income during the first quarter of 2021.

The Company experienced $101 in losses on the sale of foreclosed assets during the first quarter of 2020 compared to a $1 gain during the first quarter of 2021.

Tax preparation fee income also increased noninterest revenue during 2021.

As previously discussed, the Company changed its business model in 2020 for assessing fees related to tax refund advance loans.

By charging for the tax preparation services, the Company recorded increases of $36 and $115 in tax preparation fee income for the second quarter and first half of 2021, compared to the same periods in 2020.

Lower losses on the sales of foreclosed assets also improved noninterest income during the first half of 2021.

The Company experienced $83 in losses on the sale of valuation of foreclosed assets during the first half of 2020 compared to a $1 gain during the first half of 2021.

This was primarily from an adjustment to the fair value of one foreclosed commercial property during the first quarter of 2020.

Increases to noninterest revenue also came from mortgage banking income.

During the second quarter of 2021, the Company recorded no gains or losses on OREO properties compared to an $18 gain from the second quarter of 2021.

Partially offsetting increases to noninterest revenue was lower mortgage banking income.

Mortgage banking income is highly influenced by mortgage interest rates and housing market conditions.

With mortgage rates at record lows during 2020 impacted by the COVID-19 pandemic, the consumer demand to refinance long-term, fixed-rate real estate mortgages significantly increased.

While the heavy volume of refinancing has slowed since 2020, the amount of loans sold during the first quarter of 2021 still exceeded the volume of loan sales experienced during the first quarter of 2020.

This led to an increase of $89 in mortgage banking income during the first quarter of 2021 over the same period in 2020.

Tax preparation fee income also increased during the first quarter of 2021.

As previously discussed, the Company changed its business model in 2020 for assessing fees related to tax refund advance loans.

By charging for the tax preparation services, the Company recorded $694 in tax preparation fee income for the first three months of 2021 compared to $615 during the same period in 2020.

The remaining noninterest income categories decreased $20, or 2.2%, during the first quarter of 2021 compared to the same period in 2020, largely from lower service charges on deposit accounts as a result of less overdraft fees impacted by economic stimulus proceeds received by customers.

With the heavy volume of refinancing having slowed since 2020, the amount of loans sold during the three and six months ended June 30, 2021 has decreased from the volume of loan sales experienced during the same periods in 2020.

As a result, mortgage banking income decreased $245, or 56.8%, during the second quarter of 2021, and decreased $156, or 29.9%, during the first half of 2021, compared to the same periods in 2020.

The remaining noninterest income categories increased $106, or 12.5%, during the second quarter of 2021, and $86, or 4.9%, during the first half of 2021, compared to the same periods in 2020.

The increases were largely impacted by a $70 gain on the sale of a branch building in Jackson, Ohio.

The building was sold in June 2021 and had been acquired as part of the merger with the Milton Banking Company in 2016.

Noninterest Expense

Noninterest expense during the first quarter of 2021 decreased $332, or 3.5% compared to the same period in 2020.

Contributing most to the decline in noninterest expense was salaries and employee benefits, which decreased $185, or 3.4%, during the three months ended March 31, 2021 compared to the same period in 2020.

The expense savings can be related to a lower employee base, with the Bank’s average full-time equivalent employee base at 234 employees for March 31, 2021 compared to 244 employees at March 31, 2020.

Noninterest expense during the second quarter of 2021 decreased $305, or 3.2% compared to the same period in 2020.

Noninterest expense during the first half of 2021 decreased $637, or 3.3% compared to the same period in 2020.

Contributing most to the decline in noninterest expense was salaries and employee benefits, which decreased $147, or 2.7%, and $332, or 3.1%, during the three and six months ended June 30, 2021, compared to the same periods in 2020.

The e xpense savings can be related to a lower employee base, with the Bank’s average full-time equivalent employee base at 234 employees for June 30, 2021 compared to 244 employees at June 30, 2020.

The impact of a lower employee base has more than offset the expense increases associated with annual merit increases in 2021.

Further impacting lower overhead costs were professional fees, which decreased $168, or 28.1%, during the first quarter of 2021 compared to the same period in 2020.

Further impacting lower overhead costs were professional fees, which decreased $46, or 9.7%, during the second quarter of 2021, and $214, or 20.0%, during the first half of 2021, compared to the same periods in 2020.

These decreases were largely from lower litigation costs related to a fewer number of bankruptcy-related loan cases in 2021 impacted by the COVID-19 pandemic environment.

Other noninterest expense also decreased $138, or 9.4%, during the first quarter of 2021 compared to the same period in 2020.

Other noninterest expense also decreased $96, or 6.4%, during the second quarter of 2021, and $234, or 7.9%, during the first half of 2021, compared to the same periods in 2020.

This was primarily impacted by lower customer incentive expenses paid on deposit accounts and use of credit cards.

Decreases in noninterest expense were partially offset by an increase in FDIC assessment costs.

The Bank’s FDIC assessment at March 31, 2021 was $79 compared to no assessment cost at March 31, 2020.

During 2020, the Bank had continued to utilize a portion of its remaining FDIC credits that had been issued in September 2019.

Excluding the credit, the Bank’s first quarter 2020 assessment would have been $68.

Further impacting overhead costs were higher occupancy, furniture, equipment and software expenses, which were collectively up $137, or 12.7%, during the first quarter of 2020 over the same period in 2020.

The Bank’s FDIC assessments during the first half of 2020 were reduced by $115 in credits.

At June 30, 2020, the Bank had fully exhausted all of its credits and did not recognize any premium expense discounts during the rest of 2020.

This contributed to increases of $55 and $134 in assessment costs during the three and six months ended June 30, 2021, compared to the same periods in 2020.

Further impacting overhead costs were higher occupancy, furniture, equipment and software expenses, which were collectively up $29, or 2.6%, during the second quarter of 2021, and $166, or 7.5%, during the first half of 2021, compared the same periods in 2020.

Building and equipment costs were driven by increases in depreciable assets associated with the new OVB On the Square facility.

Higher software costs were associated with the platform used to facilitate the second round of PPP loans during the first quarter of 2021.

The remaining noninterest expense categories decreased $57, or 6.2%, during the first quarter of 2021 compared to the same period in 2020.

These decreases were impacted mostly from expense savings related to lower data processing and foreclosure costs.

Higher software costs were associated with the platform used to increase loan processing efficiencies.

The remaining noninterest expense categories decreased $100, or 9.5%, during the second quarter of 2021, and $157, or 7.9%, during the first half of 2021, compared to the same periods in 2020.

These decreases were impacted mostly from expense savings related to lower marketing, data processing and foreclosure costs.

The Company’s efficiency ratio is defined as noninterest expense as a percentage of fully tax-equivalent net interest income plus noninterest income.

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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.

Comparing the first quarters of 2021 and 2020, the Company’s asset yields were negatively impacted by market rate reductions related to COVID-19, which resulted in a greater decrease in yield on earning assets than the average cost on interest-bearing liabilities.

Loan fee increases in 2021 impacted by PPP loans were able to bring net interest income back more in line with 2020.

However, the Company’s noninterest expense savings of 3.5% was not enough to offset a 24.8% decrease in noninterest income.

As a result, the Company’s efficiency number increased (regressed) to 68.0% during the quarterly period ended March 31, 2021 compared to 65.4% during the same period in 2020.

Comparing the second quarters of 2021 and 2020, the Company’s asset yields were negatively impacted by market rate reductions related to COVID-19, which resulted in a greater decrease in yield on earning assets than the average cost on interest-bearing liabilities.

However, average earning asset growth, including a composition shift from less Federal Reserve Bank balances to higher-yielding investment securities, helped to completely offset the negative effects from the net interest margin compression.

Further positive contributions came from noninterest expense savings of 3.2% combined with noninterest revenue improvement of 11.4% for the quarter.

As a result, the Company’s efficiency number decreased (improved) to 72.4% during the quarterly period ended June 30, 2021 compared to 79.0% during the same period in 2020.

Comparing the first half of 2021 to the first half of 2020, average earning asset yields remained lower due to the reduction in market rates.

Growth in average earning assets, higher loan fees, and redeploying excess Federal Reserve Bank balances into securities helped to generate a 2.3% increase in net interest income.

Combining the net interest income improvement with the 3.3% savings in noninterest expense was enough to completely offset the 12.6% decrease in noninterest income.

As a result, the Company’s efficiency number decreased (improved) to 70.2% during the first half of 2021 compared to 71.6% during the same period in 2020.

Provision for income taxes

The Company’s income tax provision increased $642 during the three months ended March 31, 2021 compared to the same period in 2020.

The Company’s income tax provision decreased $36 during the three months ended June 30, 2021 compared to the same period in 2020.

The Company’s income tax provision increased $606 during the six months ended June 30, 2021 compared to the same period in 2020.

The change in tax expense corresponded directly to the change in associated taxable income during 2021 and 2020.

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The Bank has opted into the CBLR, and will therefore not be required to comply with the Basel III capital requirements.

As of March 31, 2021, the Bank’s CBLR was 10.65%, and the Company’s CBLR was 11.64%.

As of June 30, 2021, the Bank’s CBLR was 10.31%, and the Company’s CBLR was 11.28%.

Pursuant to the CARES Act, the federal banking regulators in April 2020 issued interim final rules to set the CBLR at 8% beginning in the second quarter of 2020 through the end of 2020.

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Community banks will have until January 1, 2022 before the CBLR requirement will return to 9%.

Cash dividends paid by the Company were $1,005 during the first three months of 2021.

Cash dividends paid by the Company were $2,011 during the first half of 2021.

The year-to-date dividends paid totaled $0.42 per share.

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 $305,236, represented 24.9% of total assets at March 31, 2021.

Total cash and cash equivalents, held to maturity securities maturing within one year and available for sale securities, totaling $299,961, represented 24.3% of total assets at June 30, 2021.

The COVID-19 pandemic had a significant impact on higher levels of excess funds in 2021, which included customer deposits of stimulus monies from various government relief programs.

In addition, the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity demands.

At March 31, 2021, the Bank could borrow an additional $92,178 from the FHLB.

At June 30, 2021, the Bank could borrow an additional $99,332 from the FHLB.

Furthermore, the Bank has established a borrowing line with the Federal Reserve.

At March 31, 2021, this line had total availability of $57,389.

At June 30, 2021, this line had total availability of $57,773.

Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis