What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-15 compared with 2021-08-16 · 163 added, 168 removed, 269 unchanged (55% 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 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 Coronavirus (“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 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;

unexpected changes in interest rates or disruptions in the mortgage market;

the effects of various governmental responses to COVID-19;

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IMPACT of COVID-19:

COVID-19 has continued to cause significant disruption in the United States and international economies and financial markets.

The primary markets served by the Company in southeastern Ohio and western West Virginia have been significantly impacted by COVID-19, which has changed the way we live and work.

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 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.

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.

COVID-19 has caused significant disruption in the United States and international economies and financial markets.

The primary markets served by the Company in southeastern Ohio and western West Virginia were significantly impacted by COVID-19, which changed the way we live and work.

The continued effects of COVID-19 on the economy, supply chains, financial markets, unemployment levels, businesses and our customers is unknown and unpredictable.

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

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The PPP provides small businesses with funds to use for payroll and certain other expenses.

The funds are provided in the form of loans that will be fully forgiven if certain criteria are met.

The funds were provided in the form of loans that will be fully forgiven if certain criteria are met.

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 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.

The Company supported its clients who 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 $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.

Net income totaled $3,036 during the third quarter of 2021, an increase of $742 over the same period of 2020.

Earnings per share for the third quarter of 2021 finished at $.63 per share, compared to $.48 per share during the third quarter of 2020.

The Company’s net income during the nine months ended September 30, 2021 totaled $9,428, an increase of $3,869 over the same period of 2020.

Earnings per share during the first nine months of 2021 finished at $1.97 per share, compared to $1.16 per share during the first nine 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.

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 1.03% at September 30, 2021, compared to 0.69% at September 30, 2020.

The Company’s net income to average equity ratio, or return on equity, also increased to 9.13% at September 30, 2021, compared to 5.70% at September 30, 2020.

During the three months ended September 30, 2021, net interest income increased $277, or 2.7%, over the same period in 2020.

During the nine months ended September 30, 2021, net interest income increased $741, or 2.5%, over the same period in 2020.

The increases were impacted by growth in average earning assets, which increased $120,249 and $145,233 during the three and nine months ended September 30, 2021, compared to the same periods in 2020, respectively.

Average earning asset growth came mostly from increases in loans and investment securities, as well as 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.

Growth in investment securities and Federal Reserve balances came from excess deposits impacted by the various stimulus payments received by customers.

The earnings contribution from higher average earning assets was mostly offset by a decline in the fully tax-equivalent (“FTE”) net interest margin, which decreased 31 basis points and 42 basis points during the three and nine months ended September 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 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 $2,185 during the first half of 2020 to reflect higher anticipated losses due to the expected financial impact of COVID-19 on its customers.

During the three and nine months ended September 30, 2021, the Company experienced negative provision for loan loss, which contributed to a $91 and $3,569 decrease in provision expense when compared to the same periods in 2020, respectively.

The decreases in provision expense from 2020 came mostly from 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 nine months 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 $1,113 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.

During the three months ended September 30, 2021, noninterest income increased $178, or 7.3%, from the same period in 2020.

The increase in quarterly noninterest revenue came largely from higher interchange income on debit and credit card transactions, as well as increases in service charges on deposit accounts and other noninterest income related to sales of bank owned property.

These contributing factors to higher noninterest income for the quarter were partially offset by lower mortgage banking revenue.

During the nine months ended September 30, 2021, noninterest income decreased $668, or 7.3%, 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 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.

As a result, the Bank recognized $675 in electronic refund check/electronic refund deposit ("ERC/ERD") income during the first half of 2021.

This, along with higher interchange income and tax preparation fees, combined with lower losses on other real estate owned and gains on sale of bank owned property, 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 September 30, 2021, noninterest expense decreased $422, or 4.3%, from the same period in 2020.

During the nine months ended September 30, 2021, noninterest expense decreased $1,059, or 3.7%, from the same period in 2020.

The decreases were primarily related to the expense savings associated with a lower number of employees and the severance package payout of an employee during the third quarter of 2020, which contributed to a $497 decrease in salaries and employee benefits expense from the prior quarter and an $829 decrease from the prior year.

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

Expense savings during both periods also came from lower marketing expenses impacted by the pandemic environment which limited the Company’s marketing initiatives.

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

The Company’s provision for income taxes increased $226 during the three months ended September 30, 2021, and increased $832 during the nine months ended September 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.

At September 30, 2021, total assets were $1,245,378, an increase of $58,446 from total assets of $1,186,932 at year-end 2020.

Higher assets were primarily impacted by increases in investment securities, which were up $60,859, or 49.7%, 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.

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

Securities growth from year-end 2020 was partially offset by a $2,931, or 0.3%, decrease in loans and a $2,578, or 2.1%, decrease in interest-bearing deposits with banks.

The loan portfolio experienced decreases in the residential real estate segment (-8.3%) and commercial and industrial segment (-8.6%), partially offset by increases in the commercial real estate segment (+11.5%) and consumer loan segment (+5.2%).

Lower interest-bearing deposits with banks came primarily from the reinvestment of Federal Reserve Bank clearing account balances into securities.

At September 30, 2021, total liabilities were $1,104,448, up $53,840 from year-end 2020.

Contributing most to this increase were higher deposit balances, which increased $57,936 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.

The increase was largely a result of customers receiving stimulus funds and the customer’s perceived desire to preserve cash during this uncertain economic environment.

The Company also utilized the excess funds to pay down a portion of its Federal Home Loan Bank borrowings, which contributed to a $4,578 decrease in other borrowed funds.

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

At September 30, 2021, total shareholders' equity was $140,930, up $4,606 since December 31, 2020.

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

Comparison of Financial Condition

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.

at September 30, 2021 and December 31, 2020

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at September 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 June 30, 2021, cash and cash equivalents were $125,240, a decrease of $13,063, or 9.4%, from December 31, 2020.

At September 30, 2021, cash and cash equivalents were $135,064, a decrease of $3,239, or 2.3%, from December 31, 2020.

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

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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.

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.

Prior to the second quarter of 2021, 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 perceived 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.

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Certificates of deposit

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 Company had $2,500 in certificates of deposit owned by the Captive at September 30, 2021 and year-end 2020.

The deposits on hand at September 30, 2021 consist of eleven certificates with remaining maturity terms ranging from less than 3 months up to 24 months.

The balance of total securities increased $60,859, or 49.7%, 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 $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.

Government agency (“Agency”) mortgage-backed securities, which increased $31,563, or 33.5%, from year-end 2020 and represented 68.6% of total investments at September 30, 2021.

During 2021, the Company redeployed a portion of its heightened excess deposits to purchase $60,910 in new Agency mortgage-backed securities, while receiving principal repayments of $27,315.

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 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.

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

Gross loan balances at September 30, 2021 finished at $845,733, a decrease of $2,931, or 0.3%, 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 $25,374, or 8.3%, from year-end 2020.

Although down, the residential real estate loan segment still comprises the largest portion of the Company’s overall loan portfolio at 33.2% and consists primarily of one- to four-family residential mortgages and carries many of the same customer and industry risks as the commercial loan portfolio.

Although down, the residential real estate loan portfolio still represents the largest class of the Company’s overall loans at 33.1% and consists primarily of one- to four-family residential mortgages and carries many of the same customer and industry risks as the commercial loan portfolio.

The decrease in residential real estate loans came largely from the Bank's warehouse lending volume.

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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 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.

As mortgage refinancings reached their peak during the second half of 2020, the volume of warehouse lending balances decreased to zero by the end of the second quarter 2021, as compared to $19,365 at year-end 2020.

Furthermore, the low rate environment has contributed to a shift into more long-term fixed-rate mortgages (up $837) and less short-term adjustable-rate mortgages (down $11,002) at September 30, 2021.

The Company’s commercial loan portfolio, consisting of commercial real estate and commercial and industrial loans, increased $15,585, or 3.8%, from year-end 2020.

Contributing most to the increase were higher loan balances within the commercial real estate portfolio, increasing $29,123, or 11.5%, 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%.

The commercial real estate segment comprised the largest portion of the Company’s total commercial loan portfolio at September 30, 2021 at 66.2%.

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

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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.

Although a second round of PPP loans were initiated by the Bank during the first half of 2021, the Bank experienced a $22,322 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.

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.

As of September 30, 2021, all of the initial round of PPP originations from 2020 were paid off.

As a result, the Company’s PPP loans totaled $5,611 at September 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 June 30, 2021 was also impacted by higher consumer loan balances from year-end 2020, increasing $6,444, or 4.9%.

The Company’s loan portfolio at September 30, 2021 was also impacted by higher consumer loan balances from year-end 2020, increasing $6,858, or 5.2%.

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

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Automobile loans decreased primarily as a result of COVID-19 and the stay-at-home orders that resulted in limited automobile sales within the Company’s market areas during 2020.

The pandemic environment continued to have a negative impact on consumer loan demand in 2021.

The pandemic environment continued to have a negative impact on auto loan originations in 2021 in part due to supply constraints that were impacted by a chip shortage.

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

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Allowance for Loan Losses

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.

The Company established a $6,664 allowance for loan losses at September 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 half of 2021, the Company experienced a $421 decrease in its general allocations of the allowance for loan losses.

During the first nine months of 2021, the Company experienced a $530 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 0.77% 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.

The historical loan loss factor decreased from 0.24% at year-end 2020 to 0.19% at September 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 criticized and classified assets from year-end 2020, particularly within the commercial real estate segment.

Additionally, the Company’s delinquency levels decreased from year-end 2020, with nonperforming loans to total loans of 0.72% at September 30, 2021 compared to 0.82% at December 31, 2020, and lower nonperforming assets to total assets of 0.49% at September 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 $2,434 at June 30, 2021 as compared to $2,315 at December 31, 2020.

The general reserve allocation related to COVID-19 totaled $2,599 at September 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 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.

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

The Company’s allowance for loan losses to total loans ratio finished at 0.79% at September 30, 2021 and 0.84% at year-end 2020.

Management believes that the allowance for loan losses at September 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 June 30, 2021 increased $51,351, or 5.2%, from year-end 2020.

Total deposits at September 30, 2021 increased $57,936, or 5.8%, from year-end 2020.

This change in deposits came primarily from interest-bearing deposit balances, which were up by $41,518, or 6.1%, from year-end 2020, while noninterest-bearing deposits increased $16,418, or 5.2%, from year-end 2020.

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Partially offsetting the increases in interest-bearing deposits were time deposit balances, which decreased $12,031, or 5.8%, from year-end 2020.

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 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.

The decrease came largely 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 down $1,412 from year-end 2020.

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

While facing increased competition for deposits in its market areas, the Company will continue to emphasize growth and retention in its core deposit relationships during the remainder of 2021, reflecting the Company’s efforts to reduce its reliance on higher cost funding and improve net interest income.

Other Borrowed Funds

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.

Other borrowed funds were $23,285 at September 30, 2021, a decrease of $4,578, or 16.4%, from year-end 2020.

The decrease was related primarily to the principal repayments applied to various FHLB advances during the second and third 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 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.

Total shareholders' equity at September 30, 2021 increased $4,606, or 3.4%, to finish at $140,930, as compared to $136,324 at December 31, 2020.

The increase was from year-to-date net income, which was partially offset by cash dividends paid, a decrease in net unrealized gain on available for sale securities, and the purchase of treasury shares under the Company’s recently announced stock buyback plan.

Comparison of Results of Operations

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.

For the Three and Nine Months Ended

September 30, 2021 and 2020

The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three and nine months ended September 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 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.

During the three months ended September 30, 2021, net interest income increased $277, or 2.7%, compared to the same period in 2020.

During the nine months ended September 30, 2021, net interest income increased $741, or 2.5%, 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.

Total interest and fee income recognized on the Company’s earning assets decreased $348, or 3.0%, during the third quarter of 2021, and decreased $1,207, or 3.5%, during the first nine months 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 $355, or 3.3%, and $740, or 2.3%, during the three and nine months ended September 30, 2021, compared to the same periods in 2020.

These results were directly related to the decline in loan yields, which decreased from 5.24% to 4.98% when comparing the third quarters of 2020 to 2021, and decreased from 5.47% to 5.07% when comparing the first nine months 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 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%.

Average loans for the third quarter of 2021 compared to the third quarter of 2020 increased $13,890, or 1.7%, while average loans for the first nine months of 2021 compared to the first nine months of 2020 increased $44,793, or 5.6%.

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

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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 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 factors contributed to decreases of $456 and $1,318 in loan interest income during the three and nine months ended September 30, 2021, compared to the same periods in 2020.

Loan revenue was positively impacted by loan fees, which increased $101 during the third quarter of 2021, and $578 during the first nine months 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 $120 and $502 during the third quarter and first nine months of 2021, as a result of normal amortization and loan forgiveness.

As of September 30, 2021, there were $273 in deferred PPP loan fees yet to be recognized.

During the three months ended September 30, 2021, interest income from interest-bearing deposits with banks increased $30, or 150.0%, when compared to the same period in 2020.

During the nine months ended September 30, 2021, interest income from interest-bearing deposits with banks decreased $89, or 44.5%, 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 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 September 30, 2021 compared to 0.25% at September 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 $64,185 during the first nine months of 2021, compared to the same period in 2020.

The quarterly increase in interest income was the result of a $49,895 increase in average clearing balances during the third 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 $20, or 3.3%, during the third quarter of 2021, and $352, or 18.1%, during the first nine months 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 $25,528 increase in average securities during the first half of 2021 over the first half of 2020.

Government, Agency and Agency mortgage-backed securities, contributing to a $35,968 increase in average securities during the first nine months of 2021 over the first nine months of 2020.

However, the increase in average securities was completely offset by a decline in securities yield of 82 basis points from 2.19% to 1.37%.

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.

Total interest expense incurred on the Company’s interest-bearing liabilities decreased $625, or 41.9%, during the third quarter of 2021, and decreased $1,948, or 39.9%, during the first nine months of 2021, compared to the same periods in 2020.

Interest expense decreased despite increases in average interest-bearing deposits of $57,340 during the third quarter of 2021, and $69,037 during the first nine months 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 $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.

This included the rate reduction to the Company’s Prime Investment deposit account, which contributed to a $156 decrease in money market interest expense during the third quarter of 2021, and a $518 decrease during the first nine months of 2021, compared to the same periods in 2020.

Deposit expense was further impacted by lower CD rates, which have contributed to a $448 decrease in time deposit interest expense during the third quarter of 2021, and a $1,276 decrease during the first nine months 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 44 basis points from 0.92% at June 30, 2020 to 0.48% at June 30, 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 42 basis points from 0.87% at September 30, 2020 to 0.45% at September 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 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.

During 2021, the Company’s third quarter net interest margin finished at 3.57%, compared to 2020’s third quarter net interest margin of 3.88%.

The year-to-date net interest margin at September 30, 2021 finished at 3.62%, compared to 4.04% at September 30, 2020.

The decreases 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.

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

For the three months ended September 30, 2021, the Company’s provision expense decreased $91, and for the nine months ended September 30, 2021, provision expense decreased $3,569, compared to the same periods in 2020.

The quarterly provision decrease was largely impacted by a decline in net charge offs that contributed to a lower historical loss factor resulting in lower general reserves.

The year-to-date provision decrease was primarily 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 2020 were significantly impacted by a $2,287 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 corresponding entries to provision expense during the nine months ended September 2020.

Further impacting lower provision expense was a $1,113 decrease in net loan charge-offs during the nine months ended September 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 commercial real estate and consumer loan portfolios.

Further contributing to lower provision expense were the impacts of lower general reserve allocations, exclusive of the allocation for the impact of COVID-19.

During the first nine months of 2021, the Company decreased its general allocation from $7,160 at December 31, 2020 to $6,630 at September 30, 2021.

Conversely, this is compared to a $280 general allocation increase during the same period in 2020, excluding the COVID-19 risk factor.

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Noninterest Income

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.

Noninterest income for the three months ended September 30, 2021 increased $178, or 7.3%, when compared to the three months ended September 30, 2020.

Conversely, noninterest income for the nine months ended September 30, 2021 decreased $668, or 7.3%, when compared to the nine months ended September 30, 2020.

A significant factor leading to lower revenue for 2021 was 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 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.

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

Noninterest revenue was also impacted by interchange income, which increased $107, or 9.5%, during the third quarter of 2021, and $457, or 15.2%, during the first nine months 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 has increased consumer spending.

Other noninterest income also increased $199, or 126.7%, during the third quarter of 2021, and $264, or 49.0%, during the first nine months of 2021, compared to the same periods in 2020.

This was primarily impacted by the sale of bank owned property during 2021.

This contributed to increases in the gains on property sales of $123 during the third quarter of 2021 and $193 during the first nine months of 2021, compared to the same periods in 2020.

The increases were impacted by the sale of vacant land in Lawrence County, Ohio and a branch building in Jackson, Ohio that had been acquired as part of the merger with the Milton Banking Company back in 2016.

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.

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.

By charging for the tax preparation services, the Company recorded an increase of $109 in tax preparation fee income for the first nine months of 2021, while experiencing a decrease of $6 in tax preparation fees during the third quarter of 2021, compared to the same periods in 2020.

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

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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.

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.

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

As a result, mortgage banking income decreased $266, or 59.8%, during the third quarter of 2021, and decreased $422, or 43.7%, during the first nine months of 2021, compared to the same periods in 2020.

The remaining noninterest income categories increased $144, or 20.8%, during the third quarter of 2021, and $249, or 12.6%, during the first nine months of 2021, compared to the same periods in 2020.

The increases were largely impacted by increases in service charges on deposit accounts, earnings on bank owned life insurance, and lower losses on the sale of OREO properties.

Noninterest Expense

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.

Noninterest expense during the third quarter of 2021 decreased $422, or 4.3% compared to the same period in 2020.

Noninterest expense during the first nine months of 2021 decreased $1,059, or 3.6% compared to the same period in 2020.

Contributing most to the decline in noninterest expense was salaries and employee benefits, which decreased $497, or 8.3%, and $829, or 4.9%, during the three and nine months ended September 30, 2021, compared to the same periods in 2020.

The decreases were partly impacted by the expense associated with the severance package payout of an employee in September 2020 that had a reverse effect in 2021.

The e xpense savings during both periods was also impacted by a lower employee base, with the Bank’s average full-time equivalent employee base at 234 employees for the nine months ended September 30, 2021 compared to 243 employees for the nine months ended September 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 $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.

Further impacting lower overhead costs were professional fees, which decreased $100, or 19.1%, during the third quarter of 2021, and $314, or 19.7%, during the first nine months 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 $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.

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

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.

Marketing expenses have also decreased $178, or 58.2%, during the three months ended September 30, 2021, and decreased $203, or 23.4%, during the nine months ended September 30, 2021, compared to the same periods in 2020.

With COVID-19 still having a disruptive effect to consumer behavior, the opportunities to advertise and promote the brand of the Company have been limited in 2021.

Decreases in noninterest expense were partially offset by higher occupancy, furniture, equipment and software expenses, which were collectively up $151, or 13.9%, during the third quarter of 2021, and $317, or 9.6%, during the first nine months 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 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.

Further impacting overhead costs was an increase in FDIC assessment costs.

During 2020, the Bank utilized its remaining FDIC credits that were issued in September 2019.

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

This contributed to a $149 increase in assessment costs during the nine months ended September 30, 2021, with third quarter costs up $15 for 2021, compared to the same periods in 2020.

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

The remaining noninterest expense categories increased $187, or 9.7%, during the third quarter of 2021, but decreased $179, or 2.8%, during the first nine months of 2021, compared to the same periods in 2020.

The quarter-to-date increase was in large part to higher data processing expense associated with debit and credit card volume.

The year-to-date decrease was primarily impacted by lower customer incentive expenses paid on deposit accounts and use of credit cards.

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 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.

Comparing the third 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 4.3% combined with noninterest revenue improvement of 7.3% 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.

As a result, the Company’s efficiency number decreased (improved) to 72.3% during the quarterly period ended September 30, 2021 compared to 78.3% during the same period in 2020.

Comparing the first nine months of 2021 to the first nine months 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 2.5% increase in net interest income.

Combining the net interest income improvement with the 3.6% savings in noninterest expense was enough to completely offset the 7.3% 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.

As a result, the Company’s efficiency number decreased (improved) to 70.9% during the first nine months of 2021 compared to 73.8% during the same period in 2020.

Provision for income taxes

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 Company’s income tax provision increased $226 during the three months ended September 30, 2021 compared to the same period in 2020.

The Company’s income tax provision increased $832 during the nine months ended September 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 denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital.

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

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

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

As of September 30, 2021, the Bank’s CBLR was 10.32%, and the Company’s CBLR was 11.35%.

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 $2,011 during the first half of 2021.

Cash dividends paid by the Company were $3,016 during the first nine months of 2021.

The year-to-date dividends paid totaled $0.63 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 $299,961, represented 24.3% of total assets at June 30, 2021.

Total cash and cash equivalents, held to maturity securities maturing within one year and available for sale securities, totaling $309,605, represented 24.9% of total assets at September 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 June 30, 2021, the Bank could borrow an additional $99,332 from the FHLB.

At September 30, 2021, the Bank could borrow an additional $109,438 from the FHLB.

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

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

At September 30, 2021, this line had total availability of $58,118.

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