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Item 2. Management’s Discussion and Analysis

2022-05-16 compared with 2021-11-15 · 425 added, 332 removed, 100 unchanged (88% of the section changed)

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Forward Looking Statements

Certain statements contained in this report and other publicly available documents incorporated herein by reference constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), and as defined in the Private Securities Litigation Reform Act of 1995.

Such statements are often, but not always, identified by the use of such words as “believes,” “anticipates,” “expects,” “intends,” “plan,” “goal,” “seek,” “project,” “estimate,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and 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.

Certain statements contained in this report and other publicly available documents incorporated herein by reference

constitute “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), and as defined in the Private Securities Litigation

Reform Act of 1995.

“will,” and other similar expressions.

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

These factors include, but are not limited to:

the effects of COVID-19 on our business, operations, customers and capital position;

the effects of COVID-19 on our business, operations, customers

and capital position;

higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition;

the impact of COVID-19 on local, national and global economic conditions;

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

changes in interest rates or disruptions in the mortgage market;

the effects of various governmental responses to COVID-19;

changes in political, economic or other factors, such as inflation rates, recessionary or expansive trends, taxes, the effects of implementation of legislation and the continuing economic uncertainty in various parts of the world;

changes in political, economic or other factors, such as inflation rates, recessionary or expansive trends, taxes, the effects

of implementation of legislation and the continuing economic uncertainty in various parts of the world;

competitive pressures;

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the level of defaults and prepayment on loans made by the Company;

unanticipated litigation, claims, or assessments;

unanticipated litigation,

claims, or assessments;

fluctuations in the cost of obtaining funds to make loans;

and regulatory changes.

Additional detailed information concerning such factors is available in the Company’s filings with the Securities and Exchange Commission, under the Exchange Act, including the disclosure under the heading “Item 1A.

Additional detailed information concerning such factors is available in the Company’s filings with the Securities and Exchange Commission, under

the Exchange Act, including the disclosure under the heading “Item 1A.

Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof.

The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements, whether as a result of new information, unanticipated future events or otherwise.

Financial Overview

Readers are cautioned not to place undue reliance on such forward

looking statements, which speak only as of the date hereof.

The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements, whether as a result of new information, unanticipated future

events or otherwise.

BUSINESS OVERVIEW:

The Company is primarily engaged in commercial and retail banking, offering a blend of commercial and consumer banking services within southeastern Ohio as well as western West Virginia.

The accompanying discussion on consolidated

financial statements include the accounts of Ohio Valley Banc Corp.

and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc., a consumer finance company (“Loan Central”), Ohio Valley Financial Services Agency,

LLC, an insurance agency, and OVBC Captive, Inc., a limited purpose property and casualty insurance company (“the Captive”).

The Bank has two wholly-owned subsidiaries, Race Day Mortgage, Inc., an Ohio corporation that provides online consumer

mortgages (“Race Day”), and Ohio Valley REO, LLC, an Ohio limited liability company.

Ohio Valley and its subsidiaries are collectively referred to as the “Company.”

The Company is primarily engaged in commercial and retail banking, offering a blend of commercial and consumer banking services within southeastern Ohio as

well as western West Virginia.

The banking services offered by the Bank include the acceptance of deposits in checking, savings, time and money market accounts;

the making and servicing of personal, commercial, floor plan and student loans;

the making of construction and real estate loans;

of construction and real estate loans;

and credit card services.

The Bank also offers individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services.

Furthermore, the Bank offers Tax Refund Advance Loans (“TALs”) to Loan Central tax customers.

Furthermore, the Bank offers Tax Refund Advance

Loans (“TALs”) to Loan Central tax customers.

A TAL represents a short-term loan offered by the Bank to tax preparation customers of Loan Central.

TAL originations began in 2020 in response to a state law enacted in 2019 that placed various restrictions on Loan Central’s short-term and small loan originations.

As a result, the Company changed its business model beginning in 2020 from assessing TAL fees to assessing tax preparation fees.

IMPACT of COVID-19:

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.

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 has 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.

The CARES Act provides assistance to small businesses through the establishment of the Paycheck Protection Program ("PPP").

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

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 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.

The CARES Act provided assistance to small

businesses through the establishment of the Paycheck Protection Program (“PPP”).

Pursuant to the CARES Act, PPP funds were provided to small businesses in the form of loans that would be fully forgiven if certain criteria were met.

In 2021, Congress

amended the PPP by extending the authority of the Small Business Administration (“SBA”) to guarantee loans and the ability of PPP lenders to disburse PPP loans until May 31, 2021.

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 $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 1.03% 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.

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.

This has led to a sustained low-rate interest environment over the past year.

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

Net income totaled $4,125 during the

first quarter of 2022, an increase of $594 over the same period of 2021.

Earnings per share for the first quarter of 2022 finished at $.87 per share, compared to $.74 per share during the first quarter of 2021.

Quarterly earnings improved largely due

to lower provision expense and higher noninterest income being partially offset by a combination of lower net interest income and higher noninterest expense.

The impact of higher net earnings during the first quarter of 2022 also had a direct impact

to the Company’s annualized net income to average asset ratio, or return on assets, which increased to 1.34% at March 31, 2022, compared to 1.20% at March 31, 2021.

The Company’s net income to average equity ratio, or return on equity, also increased

to 11.78% at March 31, 2022, compared to 10.47% at March 31, 2021.

During the three months ended March 31, 2022, net interest income decreased $58, or 0.6%, from the same period in 2021.

Lower net interest income was

negatively impacted by a 2.2% decrease in average loans, which contributed to a 7.3% decrease in interest and fees on loans.

The decrease in average loans was impacted mostly by lower residential real estate loans and payoffs of PPP loans.

loans, the Company’s remaining average earning assets increased 29.5%, coming mostly from securities and Federal Reserve Bank balances.

This composition of higher balances in securities and the Federal Reserve Bank, which yield less than loans, had a

dilutive effect on the net interest margin, which decreased from 3.73% during the quarter ended March 31, 2021, to 3.51% during the quarter ended March 31, 2022.

During the three months ended March 31, 2022, the Company experienced negative provision for loan loss, which contributed to a $1,074 decrease in provision expense when compared to the same period in 2021.

The decrease from the prior year was related to improved economic risk factors impacted by lower net

charge-offs and criticized and classified loans, as well as the partial release of the COVID-19 reserve for the pandemic environment.

During the three months ended March 31, 2022, noninterest income increased $381, or 11.4%, from the same period in 2021.

This growth came largely from

increases in service charges on deposit accounts, interchange income on debit and credit card transactions, and mortgage banking income in relation to Race Day, the Company’s new online mortgage company.

During the three months ended March 31, 2022, noninterest expense increased $601, or 6.5%, over the same period in 2021.

The increase was primarily related

to higher salaries and employee benefit costs impacted by the staffing of Race Day, as well as higher annual merit expenses.

The Company also experienced increases in data processing costs, professional fees, and software expense, as well as various

other overhead costs from Race Day.

The Company’s provision for income taxes increased $202, or 28.0%, during the three months ended March 31, 2022, largely due to the changes in taxable income

affected by the factors mentioned above.

At March 31, 2022, total assets were $1,258,176, an increase of $8,407 from year-end 2021.

Higher assets were primarily impacted by increases in cash and

cash equivalents and investment securities, which were collectively up $24,072, or 7.1%, from year-end 2021.

This was in relation to higher deposit balances during the first quarter of 2022.

The growth in assets from year-end 2021 was partially offset

by a $19,545, or 2.4%, decrease in loans.

The Company’s loan portfolio experienced decreases in the residential real estate segment (-1.4%), commercial real estate segment (-5.2%) and consumer loan segment (-2.8%).

At March 31, 2022, total liabilities were $1,121,565, up $13,152 from year-end 2021.

Contributing most to this increase were higher deposit balances, which

increased $14,510 from year-end 2021.

The increase was impacted mostly from higher interest-bearing demand deposits, partially offset by lower time deposits and noninterest bearing demand deposits.

At March 31, 2022, total shareholders’ equity was $136,611, down $4,745 since December 31, 2021.

This was from cash dividends paid and a decrease in net

unrealized gains on available for sale securities being partially offset by quarterly net income.

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

Comparison of Financial Condition

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.

at March 31, 2022 and December 31, 2021

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at March 31, 2022 compared to December 31, 2021.

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 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.

Over 87% of cash and cash equivalents consist of the Company’s interest-bearing Federal Reserve Bank clearing account, which decreased $3,561, or 2.9%, from year-end 2020.

At March 31, 2022, cash and cash equivalents were $163,724, an increase of $11,690, or 7.7%, from December 31, 2021.

The increase in cash and cash

equivalents came mostly from higher interest-bearing deposits on hand with correspondent banks.

Over 90% of cash and cash equivalents consist of the Company’s interest-bearing Federal Reserve Bank clearing account, which increased $11,516, or 8.5%,

from year-end 2021.

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, 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.

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.

During the first quarter of 2020, the rate associated with the Company’s Federal Reserve Bank clearing account decreased 150 basis points due to concerns about the impact of COVID-19 on the economy, resulting in a target federal funds rate range of 0% to 0.25%.

The factors contributing to higher clearing account balances include payoffs of larger commercial loans and growth in interest bearing deposit balances during the quarter.

The Company utilized a portion of its clearing account

balances and proceeds from loan payoffs to reinvest in higher-yielding investment securities during the first quarter of 2022.

This shift into higher-yielding investment securities helped to minimize the dilutive effect that higher clearing account

balances have 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

During the first quarter of 2022, the rate associated with the Company’s Federal Reserve Bank clearing account increased 25 basis points due to rising inflationary concerns, resulting in a target federal funds rate range of 0.25% to 0.50%.

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 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.

Furthermore, Federal Reserve balances are 100% secured.

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

The Company’s focus during periods of heightened liquidity will be to invest excess funds into longer-term, higher-yielding assets, primarily loans, when the opportunities arise.

Certificates of Deposit

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.

At March 31, 2022, the Company had $2,124 in certificates of deposit owned by the Captive, down from $2,329 at year-end 2021.

The deposits on hand at March

31, 2022 consist of nine certificates with remaining maturity terms ranging from less than 6 months up to 18 months.

The balance of total securities increased $12,382, or 6.6%, compared to year-end 2021.

The increase was impacted mostly by investment security purchases

funded by excess funds being maintained within the Federal Reserve Bank clearing account.

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

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 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.

Government agency (“Agency”) mortgage-backed securities, which represented 68.2% of total

investments at March 31, 2022.

During the first three months of 2022, the Company invested $19,763 in new Agency mortgage-backed securities, while receiving principal repayments of $6,237.

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 $9,820 in U.S.

Government securities during the first quarter of 2022.

In addition, the continued increases in long-term reinvestment rates during 2022 led to a $10,692 decrease in the net unrealized gain position associated

with the Company’s available for sale securities, which decreased the fair value of securities at March 31, 2022.

The fair value of an investment security moves inversely to interest rates, so as rates increased, the unrealized gain in the portfolio

These changes in rates are typical and do not impact earnings of the Company as long as the securities are held to full maturity.

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

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 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.

Warehouse lending consists of a line of credit provided by the Bank to another mortgage lender that makes loans for the purchase of one- to four-family residential real estate properties.

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

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 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.

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 $13,538, or 8.6%, decrease in the commercial and industrial portfolio from year-end 2020.

Gross loan balances lowered to

$811,646 at March 31, 2022, representing a decrease of $19,545, or 2.4%, as compared to $831,191 at December 31, 2021.

The decrease in loans came primarily from the commercial real estate portfolio, with other decreases coming from the residential

real estate, commercial and industrial, and total consumer loan portfolios from year-end 2021.

The Company’s commercial loan portfolio decreased $12,024, or 2.8%, from year-end 2021.

Contributing most to the decrease were lower loan balances within the

commercial real estate portfolio, decreasing $14,659, or 5.2%, from year-end 2021.

The commercial real estate segment comprised the largest portion of the Company’s total commercial loan portfolio at March 31, 2022 at 65.0%.

Decreases came primarily

from the principal payoffs of a limited number of large nonowner-occupied loan balances from year-end 2021.

Decreases in commercial real estate loans were partially offset by a $2,635, or 1.9%, increase in the commercial and industrial portfolio from year-end 2021.

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 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 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 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 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.

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 $7,549, or 13.3%, from year-end 2020.

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

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.

The Company’s remaining PPP loans of $446 that were outstanding at year-end 2021 were

paid off during the first quarter of 2022.

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.

Further decreases in the Company’s loan portfolio came from the residential real estate loan segment, which decreased $3,849, or 1.4%, from year-end 2021.

Although down, the residential real estate loan segment still comprises the largest portion of the Company’s overall loan portfolio at 33.3%, 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 principal repayments and payoffs in both long-term

fixed-rate and short-term adjustable-rate mortgages.

As refinancing volume has subsided and long-term reinvestment rates have increased, this has led to a slower demand for mortgage loans during 2022.

The Company’s loan portfolio at March 31, 2022 was also impacted by less consumer loan balances from year-end 2021, decreasing $3,672, or 2.8%.

was impacted by a $1,184, or 2.5%, decline in automobile loan balances.

Automobile loans represent the Company’s largest consumer loan segment at 36.2% of total consumer loans.

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 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.

The remaining consumer loan portfolio increased $1,528, or 7.6%, 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.

The pandemic environment continued to have a negative impact on auto loan

originations in 2022 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.

The remaining consumer loan portfolio decreased $2,488, or 2.9%, from year-end 2021, mostly from decreases in unsecured loans.

The Company will continue to attempt to increase its auto lending segment while maintaining strict loan

underwriting processes to limit future loss exposure.

However, the Company will place more emphasis on loan portfolios (i.e.

commercial and, to a smaller extent, residential real estate) with higher returns than auto loans.

Indirect automobile loans bear additional costs from dealers that partially offset interest revenue and lower the rate of return.

Indirect automobile loans

bear additional costs from dealers that partially offset interest revenue and lower the rate of return.

Allowance for Loan Losses

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 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 0.19% 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 $2,599 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.

The Company established a $5,268 allowance for loan losses at March 31, 2022, which represents a decrease from the $6,483 allowance at year-end 2021.

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 2022, the Company experienced a $1,271 decrease in its general allocations of the allowance for loan losses.

The key contributor to this decrease came from lower reserves associated with the COVID-19 risk factor.

The Company added a COVID-19 risk factor in 2020 due to the negative economic outlook of the pandemic.

Based on positive asset quality trends and lower net charge offs, management released $645 of the COVID-19 risk factor during the first quarter of 2022, resulting in a corresponding decrease in both

provision expense and general allocations of the allowance for loan loss.

As a result, the general reserve allocation related to COVID-19 totaled $1,936 at March 31, 2022 as compared to $2,633 at December 31, 2021.

The Company will continue to

monitor the related economic effects of the pandemic environment and asset quality trends moving forward to determine the appropriate level of the COVID-19 risk factor.

Excluding the impact from the COVID-19 risk factor, the Company experienced a $574 decrease in general allocations of the allowance for loan losses related

to improvements in various economic risk factors.

These include risk factors from lower historical loan losses and lower criticized and classified assets.

The historical loan loss factor decreased from 0.18% at year-end 2021 to 0.17% at March 31,

Risk factors associated with criticized and classified assets also decreased as a result of various commercial loan upgrades from improvements in the financial performance of certain borrowers’ ability to repay their loans.

Most recently, the

Company upgraded a single commercial loan relationship totaling $2,232 from a classified to a criticized loan status, which also contributed to the release of general reserves during the first quarter of 2022.

Additionally, the Company’s delinquency

levels decreased from year-end 2021, with nonperforming loans to total loans of 0.52% at March 31, 2022 compared to 0.56% at December 31, 2021, and lower nonperforming assets to total assets of 0.34% at March 31, 2022 compared to 0.37% at year-end

General allocations during the first quarter of 2022 increased in relation to higher unemployment rates within the Company’s market areas, only partially offsetting the decreasing allocation factors already discussed.

Decreases in general allocations were partially offset by a $56 increase in specific allocations from year-end 2021.

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 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.

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 2022.

The Company’s allowance for loan losses to total loans ratio finished at 0.65% at March 31, 2022 and 0.78% at year-end 2021.

Management believes that the

allowance for loan losses at March 31, 2022 was adequate and reflected probable incurred losses in the loan portfolio.

There can be no assurance, however, that adjustments to the allowance for loan losses will not be required in the future.

Changes in the circumstances of particular borrowers, as well as adverse developments in the economy, particularly with respect to COVID-19, are factors that could change, and management will make adjustments to the allowance for loan losses as needed.

Asset quality will continue to remain a key focus of the Company, as management continues to stress not just loan growth, but quality in loan underwriting.

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 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.

The Company attributes much of this increase to retention of proceeds from government stimulus programs, such as the PPP and consumer economic impact payments received, and a more cautious consumer.

in the circumstances of particular borrowers, as well as adverse developments in the economy, particularly with respect to COVID-19, are factors that could change, and management will make adjustments to the allowance for loan losses as needed.

quality will continue to remain a key focus of the Company, as management continues to stress not just loan growth, but quality in loan underwriting.

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, 2022 increased $14,510, or 1.4%, from year-end 2021.

This change in deposits came primarily from interest-bearing deposit balances, which were up by $22,435, or 3.2%, from

year-end 2021, while noninterest-bearing deposits decreased $7,925, or 2.2%, from year-end 2021.

The increase in interest-bearing deposits came mostly from higher interest-bearing NOW account balances from year-end 2021, which increased $22,891, or

This increase was largely driven by higher municipal NOW product balances, particularly within the Gallia County, Ohio and Mason County, West Virginia market areas.

Growth in interest-bearing deposits also came from savings deposits, which increased $19,082, or 15.9%, from year-end 2020, primarily from higher statement savings account balances impacted by the government stimulus proceeds previously mentioned.

Interest-bearing deposit growth was partially offset by lower money market balances from year-end 2020, which decreased $917, or 0.6%.

The deposit rate on the Company’s Prime Investment money market account was reduced during the first quarter of 2021 in response to decreasing market rates in 2020.

This contributed to a consumer shift from money market deposits into savings and noninterest-bearing deposit accounts.

Growth in interest-bearing deposits also came from savings deposits, which

increased $5,996, or 4.1%, from year-end 2021, primarily from higher statement savings account balances.

Interest-bearing deposit growth was further impacted by higher money market balances from year-end 2021, which increased $2,636, or 1.6%.

Partially offsetting the increases in interest-bearing deposits were time deposit balances, which decreased $9,088, or 4.8%, from year-end 2021.

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.

decrease came from lower brokered and internet CD issuances as a result of the heightened liquidity position from year-end 2021.

The Company’s retail time deposits also decreased from year-end 2021 in relation to the consumer shift to savings and money

market products.

The decrease in noninterest-bearing deposits came mostly from the Company’s business and incentive-based checking account balances from year-end 2021.

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 2022, 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 $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.

Other borrowed funds were $18,929 at March 31, 2022, a decrease of $685, or 3.5%, from year-end 2021.

The decrease was related primarily to the principal

repayments applied to various FHLB advances during the first quarter of 2022.

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 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.

Total shareholders’ equity at March 31, 2022 decreased $4,745, or 3.4%, to finish at $136,611, as compared to $141,356 at December 31, 2021.

This was from

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

The after-tax decrease in net unrealized gain totaled $8,447 from year-end 2021, as market rate increases

continued during the first quarter of 2022 causing a decrease in the fair value of the Company’s available for sale investment portfolio.

Comparison of Results of Operations

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.

For the Three Months Ended

March 31, 2022 and 2021

The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three months ended March 31, 2022,

compared to the same period in 2021.

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

Net Interest Income

The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense incurred on interest-bearing liabilities.

During the 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 $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.

This trend of decreasing market rates led to lower yields on the Company’s loan portfolio and lower loan interest revenue.

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

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.

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 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 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 $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 $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 $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.

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, 2022, net interest income was down $58, or 0.6%, compared to the same period in 2021.

The moderate decline was mostly attributable to lower

earning asset yields and lower loan fees being partially offset by an increase in average earning assets combined with a decrease in the average costs paid on deposits.

Total interest and fee income recognized on the Company’s earning assets decreased $469, or 4.2%, during the first quarter of 2022 compared to the same

period in 2021.

The decrease was impacted by interest and fees on loans, which decreased $767, or 7.3%.

The decrease was partially the result of a decline in loan fees of $340, or 32.0%, impacted by PPP fees.

PPP fees decreased from $367 during the

first quarter of 2021 to only $15 during the first quarter of 2022, due to loan payoffs.

Total interest and fee income also decreased due to interest on loans, which decreased $427, or 4.5%, during the first quarter of 2022 as a result of lower loan

yields and lower average balances.

Average loan yields decreased from 5.18% to 4.91% when comparing the first quarters of 2021 to 2022.

Loan yields continued to be impacted by the interest rate reductions from the Federal Reserve Bank in 2020, which

led to lower loan interest revenue.

Average loans for the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021 decreased $18,141, or 2.2%.

The decrease came mostly from the payoffs of all the Company’s PPP loans during 2021 and

2022, which resulted in a decrease of $27,430 in average loan balances.

Average real estate loan balances also decreased during the first quarter of 2022 impacted by principal repayments and payoffs combined with a lower volume of new originations as

the trend of increased mortgage refinancings have slowed since the heavy refinancing period of 2020 and, to a lesser extent, 2021.

During the three months ended March 31, 2022, interest income from interest-bearing deposits with banks increased $26, or 92.9%, when compared to the same

period in 2021.

The impact came from higher average balances maintained within the Company’s interest-bearing Federal Reserve Bank clearing account, which increased $11,147 during the first quarter of 2022 compared to the same period in 2021.

Furthermore, during the first quarter of 2022, the Federal Reserve raised the target federal funds rate by 25 basis points due to rising inflationary concerns.

This had a corresponding effect on the interest rate tied to the Federal Reserve clearing

account, which also increased by 25 basis points.

Total interest on securities increased $278, or 59.9%, during the first quarter of 2022 compared to the same period in 2021.

Due to the surge in deposits and

proceeds from PPP loan payoffs, the Company has taken opportunities to reinvest a portion of these excess funds into new U.S.

Government, Agency and Agency mortgage-backed securities, contributing to a $69,277 increase in average securities during the

first quarter of 2022 over the first quarter of 2021.

The average yield on securities also increased from 1.47% to 1.50% to further enhance the growth in interest income.

The change was partly impacted by the Company’s decision to sell $48,732 in lower

yielding securities during the fourth quarter of 2021 that carried an average yield of 0.89% and replace them with similar securities at an average yield of 1.30%.

Total interest expense incurred on the Company’s interest-bearing liabilities decreased $411, or 38.1%, during the first quarter of 2021 compared to the same

period in 2022.

Interest expense decreased despite an increase in average interest-bearing deposits of $31,586 during the first quarter of 2022 compared to the same period in 2021.

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 2021.

Lower deposit expense was mostly impacted by the continued decline in CD rates, which contributed to a

$350 decrease in time deposit interest expense during the first quarter of 2022 compared to the same period in 2021.

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 42 basis points from 0.87% at September 30, 2020 to 0.45% at September 30, 2021.

result of the rate repricing on time deposits, the Company’s total weighted average costs on interest-bearing deposits has decreased by 23 basis points from 0.52% at March 31, 2021 to 0.29% at March 31, 2022.

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 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.

During 2022, the

Company’s first quarter net interest margin finished at 3.51%, compared to 2021’s first quarter net interest margin of 3.73%.

The decrease in margin was largely impacted by the decrease in PPP loan fees and a low interest rate environment that impacted

lower earning asset yields during 2022.

While average earning assets were up during the first quarter of 2022, the increase came largely from lower yielding securities and Federal Reserve clearing account balances, which had a dilutive effect to the

net interest margin during the first quarter of 2022.

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

However, if loan balances do not continue to expand and remain a larger component of overall earning assets, the Company will face pressure within its net interest income and margin improvement.

However, if loan balances do not continue to expand and remain a larger

component of overall earning assets, the Company will face pressure within its net interest income and margin improvement.

Provision for Loan Losses

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.

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 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.

For the three months ended March 31, 2022, the Company’s provision expense decreased $1,074 from the same period in 2021.

The quarterly improvement came primarily from a decrease in general allocations.

As previously discussed, the Company’s general allocations of the allowance for loan losses were

impacted by the release of $645 in COVID-19 general reserves during the first quarter of 2022.

The Company removed a portion of its COVID-19 reserves due to positive asset quality trends and lower net charge offs, which resulted in a corresponding

decrease of $645 to provision expense in March 2022.

Further contributing to lower provision expense were the impacts of the Company’s other general reserve

During the first quarter of 2022, the Company decreased its general allocations, excluding the COVID-19 risk factor, from $3,840 at December 31, 2021 to $3,266 at March 31, 2022.

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.

Further reducing provision expense was a decrease of $132 in net charge-offs during the three months ended March 31, 2022 compared to the same period in 2021.

This was primarily from lower charge-offs

recorded within the commercial real estate portfolio.

Lower provision expense was also impacted by a decrease in specific allocations that totaled $90 at March 31, 2021 compared to $66 in specific allocations at March 31, 2022.

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 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 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 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.

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.

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 income for the three months ended March 31, 2022 increased $381, or 11.4%, when compared to the three months ended March 31, 2021.

in noninterest revenue was largely impacted by a $153, or 37.8%, increase in service charges on deposit accounts.

This included a higher volume of overdraft transactions during the 2022 first quarter period.

Increases in noninterest income also came from interchange income, which increased $85, or 8.1%, during the first quarter of 2022.

This was impacted by an

increase in consumer spending that led to a higher volume of transactions associated with the Company’s debit and credit card products.

Further impacting growth in noninterest revenue was mortgage banking income, which increased $56, or 31.3%, during the first quarter of 2022.

banking income increased largely due to Race Day, the Bank’s new online mortgage company.

Race Day was formed in April 2021 and began conducting business during the third quarter of 2021.

During the first quarter of 2022, Race Day experienced loan

sales that yielded $96 in mortgage banking revenue.

This increase was partially offset by a $40 decrease in the Bank’s secondary market income due to less volume of mortgage refinancings.

Other noninterest income also increased $52, or 34.7%, during the first quarter of 2022.

This came largely from higher servicing fees on a select number of

commercial loans.

The remaining noninterest income categories increased $35, or 2.3%, during the first quarter of 2022 compared to the same period in 2021, primarily from

higher earnings on bank owned life insurance and annuity assets.

Noninterest Expense

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 $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.

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.

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.

Noninterest expense during the first quarter of 2022 increased $601, or 6.5% compared to the same period in 2021.

Contributing most to the increase in

noninterest expense were salaries and employee benefits, which increased $300, or 5.7%, during the three months ended March 31, 2022 compared to the same period in 2021.

The e xpense increase was largely from the staffing of Race Day employees in 2021, which led to higher salaries expense in 2022.

Other expense increases in this category also came from annual merit increases and higher retirement

plan costs in 2022.

Higher noninterest expense also came from data processing expense, which increased $97, or 16.9%, during the first quarter of 2022 compared to the same

period in 2021.

Higher costs in this category were the direct result of the volume increase in debit and credit card transactions, which increased processing costs.

Further impacting higher overhead costs were professional fees, which increased $59, or 13.7%, during the first quarter of 2022 compared to the same period

Professional fees were impacted by accounting expenses associated with adhering to regulatory guidance, as well as higher legal expenses.

Noninterest expense was also impacted by higher software costs, which increased $54, or 12.0%, during the first quarter of 2022 compared to the same period

This increase was largely impacted by the associated software costs from Race Day, which included various software platforms and resources that were necessary to begin conducting business.

Other noninterest expense also increased $162, or 12.2%, during the first quarter of 2022 compared to the same period in 2021.

This was primarily impacted

by various other overhead costs associated with Race Day, including loan expenses and employee recruiting costs.

The remaining noninterest expense categories decreased $71, or 6.2%, during the first quarter of 2022 compared to the same period in 2021.

These decreases

were impacted mostly from expense savings related to lower marketing and furniture and equipment costs.

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

The effects from provision expense are excluded from the efficiency ratio.

effects from provision expense are excluded from the efficiency ratio.

Management continues to place emphasis on managing its balance sheet mix and interest rate sensitivity as well as developing more innovative ways to generate noninterest revenue.

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 72.3% 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 70.9% during the first nine months of 2021 compared to 73.8% during the same period in 2020.

Comparing the first quarters of 2022 and 2021, the Company benefited from a larger decrease in the average cost on interest-bearing liabilities than the decrease on earning asset yields.

However, this benefit was completely offset by the significant

decrease in PPP loan fees that were more impactful during the first quarter of 2021 than 2022.

Furthermore, the Company’s $601 increase in overhead expense was only partially offset by the $381 increase in noninterest income.

As a result, the Company’s

efficiency number increased (regressed) to 70.8% during the quarterly period ended March 31, 2022 compared to 68.0% during the same period in 2021.

Provision for income taxes

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.

The Company’s income tax provision increased $202 during the three months ended March 31, 2022 compared to the same period in 2021.

The change in tax

expense corresponded directly to the change in associated taxable income during 2022 and 2021.

Capital Resources

Federal regulators have classified and defined capital into the following components:

(1) tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (2) tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt, preferred stock and hybrid instruments which do not qualify as tier 1 capital.

In September 2019, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies).

Under the rule, a qualifying community banking organization (“QCBO”) is eligible to opt into the Community Bank Leverage Ratio (“CBLR”) framework in lieu of the Basel III capital requirements if it has less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposure and a leverage ratio greater than 9.0%.

(i) Tier 1 capital, which includes tangible

shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (ii) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt, preferred stock and

hybrid instruments which do not qualify as Tier 1 capital.

In September 2019, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking

agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies).

Under the rule, a qualifying community banking organization (“QCBO”) is eligible to opt into the Community

Bank Leverage Ratio (“CBLR”) framework in lieu of the Basel III capital requirements if it has less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposure

and a leverage ratio greater than 9.0%.

The new rule took effect January 1, 2020, and QCBOs were allowed to opt into the new CBLR framework in their Call Report beginning the first quarter of 2020.

A QCBO opting into the CBLR framework must maintain a CBLR of 9.0%, subject to a two quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period.

A QCBO opting into the CBLR framework must maintain a CBLR of 9.0%, subject to a two quarter grace period to come back into compliance,

provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period.

A QCBO failing to satisfy these requirements must comply with the existing Basel III capital requirements as implemented by the banking regulators in July

The numerator of the CBLR is Tier 1 capital, as calculated under present rules.

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 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 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.

Beginning in 2021, the CBLR increased to 8.5% for the calendar year.

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

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

As of March 31, 2022,

the Bank’s CBLR was 10.56%.

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.

The CBLR was then increased to 8.5% in 2021 until it was returned to 9% for all community banks beginning January 1, 2022.

Cash dividends paid by the Company were $998 during the first three months of 2022.

The year-to-date dividends paid totaled $0.21 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 $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 September 30, 2021, the Bank could borrow an additional $109,438 from the FHLB.

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 market place.

Total cash and cash equivalents, held to maturity securities maturing within one year, and available for sale securities, which totaled $353,763, represented 28.1% of total assets at March 31, 2022

compared to $329,264 and 26.3% of total assets at December 31, 2021.

To further enhance the Bank’s ability to meet liquidity demands, the FHLB offers advances to the Bank.

At March 31, 2022, the Bank could borrow an additional $107,949 from the FHLB.

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

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

At March 31, 2022, this line had total availability of $51,344.

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

Off-Balance Sheet Arrangements

As discussed in Note 5 – Financial Instruments with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet credit-related activities, including commitments to extend credit and standby letters of credit, which could require the Company to make cash payments in the event that specified future events occur.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party.

While these commitments are necessary to meet the financing needs of the Company’s customers, many of these commitments are expected to expire without being drawn upon.

Therefore, the total amount of commitments does not necessarily represent future cash requirements.

For further cash

flow information, see the condensed consolidated statement of cash flows above.

Management does not rely on any single source of liquidity and monitors the level of liquidity based on many factors affecting the Company’s financial condition.

Critical Accounting Policies

The most significant accounting policies followed by the Company are presented in Note A to the financial statements in the Company’s 2020 Annual Report to Shareholders.

The most significant accounting policies followed by the Company are presented in Note A to the financial statements in the Company’s 2021 Annual Report to

Shareholders.

These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements.

Management currently views the adequacy of the allowance for loan losses to be a critical accounting policy.

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The allowance for loan losses is a valuation allowance for probable incurred credit losses.

Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Loan losses are charged against the allowance when management

believes the uncollectibility of a loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio,

information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in

management’s judgment, should be charged off.

The allowance consists of specific and general components.

The specific component relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Impaired loans generally consist of loans with balances of $200 or more on nonaccrual status or nonperforming in nature.

impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Impaired loans generally consist of loans with balances of $200

or more on nonaccrual status or nonperforming in nature.

Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal

and interest payments when due.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis,

taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

Commercial and commercial real estate loans are individually evaluated for impairment.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

Smaller balance homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure.

TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.

If a loan is impaired, a portion of the allowance is allocated so that

the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

Smaller balance homogeneous loans, such as consumer

and most residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure.

TDRs are measured at the present value of estimated future cash flows using the loan’s effective

rate at inception.

If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral.

For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and impaired loans that are not individually reviewed for impairment and is based on historical loss experience adjusted for current factors.

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years for the consumer and real estate portfolio segment and 5 years for the commercial portfolio segment.

For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the

accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and impaired loans that are not individually reviewed for impairment and is based on historical loss

experience adjusted for current factors.

segment and 5 years for the commercial portfolio segment.

The total loan portfolio’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

These economic factors include consideration of the following:

These economic factors include consideration

of the following:

levels of and trends in delinquencies and impaired loans;

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effects of any changes in risk selection and underwriting standards;

other changes in lending policies, procedures, and practices;

other changes in

lending policies, procedures, and practices;

experience, ability, and depth of lending management and other relevant staff;

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and effects of changes in credit concentrations.

2020, the Company established a new economic risk factor in relation to the COVID-19 pandemic.

The risk factor captures the exposure of our current historical loss metrics to the heightened losses experienced following the Great Recession that

occurred from 2007 to 2009.

To the extent the loss history incurred during an economic downturn exceeded our current loss history, a general allocation to the allowance for loan losses was made.

The COVID-19 risk factor allocation amount is subject

to change based on the actual loss history experienced and may be removed when the risk of loss in relation to the pandemic environment diminishes.

The following portfolio segments have been identified:

Commercial Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer.

Commercial and industrial loans consist of borrowings for commercial purposes by individuals, corporations, partnerships, sole proprietorships, and other business enterprises.

Commercial Real Estate, Commercial and

Industrial, Residential Real Estate, and Consumer.

Commercial and industrial loans consist of borrowings for commercial purposes by individuals, corporations, partnerships, sole proprietorships, and other

business enterprises.

Commercial and industrial loans are generally secured by business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or operations.

The Company’s risk exposure is related to deterioration in the value of collateral securing the loan should foreclosure become necessary.

Generally, business assets used or produced in operations do not maintain their value upon foreclosure, which may require the Company to write down the value significantly to sell.

Commercial real estate consists of nonfarm, nonresidential loans secured by owner-occupied and nonowner-occupied commercial real estate as well as commercial construction loans.

An owner-occupied loan relates to a borrower purchased building or space for which the repayment of principal is dependent upon cash flows from the ongoing business operations conducted by the party, or an affiliate of the party, who owns the property.

Generally, business assets used or produced in operations do not maintain their value upon foreclosure, which may

require the Company to write down the value significantly to sell.

Commercial real estate consists of nonfarm, nonresidential loans secured by owner-occupied and nonowner-occupied commercial real estate as well as commercial

construction loans.

who owns the property.

Owner-occupied loans that are dependent on cash flows from operations can be adversely affected by current market conditions for their product or service.

A nonowner-occupied loan is a property loan for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property.

Nonowner-occupied loans that are dependent upon rental income are primarily impacted by local economic conditions which dictate occupancy rates and the amount of rent charged.

A nonowner-occupied loan is a property loan for which the repayment of

principal is dependent upon rental income associated with the property or the subsequent sale of the property.

Nonowner-occupied loans that are dependent upon rental income are primarily impacted by local economic conditions which dictate occupancy

rates and the amount of rent charged.

Commercial construction loans consist of borrowings to purchase and develop raw land into one- to four-family residential properties.

Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements.

Repayment of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon completion.

Construction loans are extended to individuals as well as corporations for the

construction of an individual or multiple properties and are secured by raw land and the subsequent improvements.

Repayment of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon

Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value which may be absorbed by the Company.

Residential real estate loans consist of loans to individuals for the purchase of one- to four-family primary residences with repayment primarily through wage or other income sources of the individual borrower.

The Company’s loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.

Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other loans to individuals for household, family, and other personal expenditures, both secured and unsecured.

Residential real estate loans consist of loans to individuals for the purchase of one- to four-family primary residences with repayment primarily through

wage or other income sources of the individual borrower.

The Company’s loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at

Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other loans to individuals for household, family,

and other personal expenditures, both secured and unsecured.

These loans typically have maturities of 6 years or less with repayment dependent on individual wages and income.

The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary.

During the last several years, one of the most significant portions of the Company’s net loan charge-offs have been from consumer loans.

Nevertheless, the Company has allocated the highest percentage of its allowance for loan losses as a percentage of loans to the other identified loan portfolio segments due to the larger dollar balances and inherent risk associated with such portfolios.

The risk of loss on consumer loans is elevated as the collateral securing

these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary.

During the last several years, one of the most significant portions of the Company’s net loan charge-offs have been from

consumer loans.

such portfolios.

Concentration of Credit Risk

The Company maintains a diversified credit portfolio, with residential real estate loans currently comprising the most significant portion.

Credit risk is primarily subject to loans made to businesses and individuals in southeastern Ohio and western West Virginia.

Credit risk is

primarily subject to loans made to businesses and individuals in southeastern Ohio and western West Virginia.

Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group.

To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations.

the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis