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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-15 · 279 added, 410 removed, 101 unchanged (87% 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, 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.

These factors include, but are not limited to:

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

unexpected changes in interest rates or disruptions in the

mortgage market;

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

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;

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(“Ohio Valley”) and its direct and indirect subsidiaries (collectively, 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, 2022.

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.

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 following discussion on consolidated

financial statements include the accounts of Ohio Valley 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.

The following discussion on consolidated financial statements include the accounts of Ohio Valley 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 provided online consumer mortgages (“Race Day”), and Ohio Valley REO, LLC, an Ohio limited liability company.

In February 2023, Ohio Valley announced that it was taking steps toward closing Race Day.

The decision to start this process was made due to low loan demand, issues retaining

personnel, and lack of profitability.

Ohio Valley plans to see current loan applications in progress to completion.

An exact date of closing is anticipated to be set once existing loan applications have been processed.

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 decision to start this process was made due to low loan demand, issues retaining personnel, and lack of profitability.

All pending loan applications have been processed and a closing date will be determined upon termination of various contractual service agreements.

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;

of construction and real estate loans;

the making 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.

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The new accounting guidance replaces the “incurred loss” model with an “expected loss” model, which is referred to as the current expected credit loss (“CECL”) model.

The measurement of expected credit losses under the CECL model is

applicable to financial assets measured at amortized cost, including loan receivables and held to maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of

credit, financial guarantees, and other similar instruments).

The measurement of expected credit losses under the CECL model is applicable to financial assets measured at amortized cost, including loan receivables and held to maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments).

Upon adoption of ASC 326, the Company increased the allowance for credit losses by $2,162.

In addition, a reserve for unfunded commitments and held to maturity securities was established

totaling $631 and $3, respectively.

In addition, a reserve for unfunded commitments and held to maturity securities was established totaling $631 and $3, respectively.

The Company recorded a net charge to retained earnings of $2,209 as of January 1, 2023 for the cumulative effect of adopting ASC 326.

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FINANCIAL RESULTS OVERVIEW:

Net income totaled $3,908 during the

first quarter of 2023, a decrease of $217 from the same period of 2022.

Earnings per share for the first quarter of 2023 finished at $.82 per share, compared to $.87 per share during the first quarter of 2022.

Quarterly earnings decreased largely from

increases in provision for credit loss expense and noninterest expense being partially offset by increases in both net interest and noninterest income.

The impact of lower net earnings during the first quarter of 2023 also had a direct impact to the

Company’s annualized net income to average asset ratio, or return on assets, which decreased to 1.28% for the three months ended March 31, 2023, compared to 1.34% for the three months ended March 31, 2022.

Conversely, the Company’s net income to

average equity ratio, or return on equity, increased to 11.85% for the three months ended March 31, 2023, compared to 11.78% for the three months ended March 31, 2022.

While current year net earnings were down, the Company recorded a $2,209 charge to

retained earnings for the cumulative effect of adopting ASC 326 on January 1, 2023.

This impact of adopting new accounting guidance reduced capital but had no corresponding impact to net earnings, which contributed to the increase in average return on

equity during 2023 over 2022.

During the three months ended March 31, 2023, net interest income increased $1,732, or 17.3%, over the same period in 2022.

Growth in net interest income was

impacted by an increase in the net interest margin, which completely offset the effects of lower average earning assets.

The Federal Reserve’s actions of increasing market interest rates during 2022 and 2023 have had a significant impact in growing the

net interest margin, which finished at 4.21% for the quarter ended March 31, 2023 compared to 3.51% at the end of the same period in 2022.

The net interest margin has responded positively due to the yield on earning assets increasing more than the cost

of interest-bearing liabilities.

Average assets during the first quarter of 2023 decreased $25,531 compared to the first quarter of 2022.

While average assets were down 2.2%, the Company benefited from having higher relative balances maintained in

loans, as opposed to the Federal Reserve, which generally yields less than loans.

During the first quarter of 2023, average loans increased $78,563, while average balances with the Federal Reserve decreased $92,224, compared to the same period in 2022.

The Company’s provision for credit loss during the first quarter of 2023 increased $1,615, largely due to a $1,126 negative provision for credit loss

recorded during the three months ended March 31, 2022 .

This negative provision expense from the first quarter of 2022 was related to lower criticized and classified loans and the partial release of the COVID reserve for the pandemic environment.

During the three months ended March 31, 2023, noninterest income increased $47, or 1.3%, over the same period in 2022.

This increase was largely from $231 in

commissions earned by Race Day during 2023 for mortgage application referrals.

This was partially offset by a decrease of $188 in mortgage banking income from loan sales to the secondary market, which have been negatively impacted by elevated mortgage

During the three months ended March 31, 2023, noninterest expense increased $484, or 4.9%, over the same period in 2022.

The increase was primarily related

to salaries and employee benefit costs impacted by higher annual merit expenses.

The Company also experienced increases in software expense, FDIC insurance premiums, and data processing costs, partially offset by a decrease in professional fees.

The Company’s provision for income taxes decreased $103 during the three months ended March 31, 2023, compared to the same period in 2022.

This was largely

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

At March 31, 2023, total assets were $1,266,465, an increase of $55,678 from year-end 2022.

Higher assets were primarily impacted by increases in cash and

cash equivalents and loans, which were collectively up $65,122, or 7.0%, from year-end 2022.

Growth in cash and cash equivalents came primarily from higher balances held at the Federal Reserve as a result of the growth in deposits exceeding the growth

Growth in total loans came from increases in the consumer loan segment (+10.9%), commercial and industrial loan segment (+4.3%), commercial real estate loan segment (+1.6%), partially offset by a decrease in the residential real estate loan

segment (-2.0%).

At March 31, 2023, total liabilities were $1,128,920, up $53,161 from year-end 2022.

Contributing most to this increase were higher deposit balances, which

increased $53,540 from year-end 2022.

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

At March 31, 2023, total shareholders' equity was $137,545, up $2,517 from December 31, 2022.

This increase came from quarterly net income, a decrease in net

unrealized losses on available for sale securities, partially offset by quarterly cash dividends paid.

The increase in shareholders’ equity was further limited by the adoption of new accounting guidance for measuring credit losses, which required a

$2,209 charge to retained earnings.

Net income totaled $3,249 during the second quarter of 2023, an increase of $1,250 from the same period of 2022.

Earnings per share for the second quarter of 2023 finished at $.68 per share, compared to $.42 per share during the second quarter of 2022.

Net income totaled $7,157 during the six months ended June 30, 2023, an increase of $1,033 from the same period of 2022.

Earnings per share during the first six months of 2023 finished at $1.50 per share, compared to $1.29 per share during the first six months of 2022.

During both the quarterly and year-to-date periods, earnings were positively impacted by higher net interest and noninterest income that more than offset increases in noninterest expense.

Net earnings were also positively impacted by lower provision for credit loss expense during the quarterly period, while higher provision for credit loss expense had a negative impact to net earnings during the year-to-date period.

The impact of higher net earnings during 2023 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets, which increased to 1.16% for the six months ended June 30, 2023, compared to 0.98% for the six months ended June 30, 2022.

The Company’s net income to average equity ratio, or return on equity, also increased to 10.63% for the six months ended June 30, 2023, compared to 8.87% for the six months ended June 30, 2022.

In addition, the Company recorded a $2,209 charge to retained earnings for the cumulative effect of adopting ASC 326 on January 1, 2023.

This impact of adopting new accounting guidance reduced capital but had no corresponding impact to net earnings, which contributed to a portion of the increase in average return on equity during 2023 over 2022.

During the three and six months ended June 30, 2023, net interest income increased $1,061 and $2,793 over the same periods in 2022, respectively.

Growth in net interest income during both periods was impacted by increases in the net interest margin, which more than offset the effects of lower average earning assets.

The Federal Reserve’s actions of increasing market interest rates during 2022 and 2023 have had a significant impact in growing the net interest margin, which finished at 4.03% and 4.12% for the three and six months ended June 30, 2023, compared to 3.64% and 3.58% for the three and six months ended June 30, 2022, respectively.

The net interest margin has responded positively due to the yield on earning assets increasing more than the cost of interest-bearing liabilities.

Average earning assets decreased 0.3% during the second quarter of 2023, and 1.2% during the first half of 2023, compared to the same periods in 2022.

While average earning assets were down during both the quarterly and year-to-date periods in 2023, the Company benefited from having higher relative balances maintained in loans, as opposed to the Federal Reserve, which generally yields less than loans.

During the three and six months ended June 30, 2023, average loans increased $92,386 and $85,513, while average balances with the Federal Reserve decreased $70,852 and $81,479, compared to the same periods in 2022, respectively.

During the three months ended June 30, 2023, the Company’s provision for credit loss was $24, which represented a decrease of $789 when compared to the same period in 2022.

The quarterly decrease in provision was primarily associated with a $717 decrease in net charge-offs, mostly within the commercial and industrial portfolio.

During the six months ended June 30, 2023, provision for credit loss was $513 compared to negative provision of $313 during the six months ended June 30, 2022.

Provision expense in 2023 was largely related to net charge-offs of $439, primarily from the consumer loan portfolio.

The negative provision expense from 2022 was largely impacted by improvements in lower criticized and classified loans and the partial release of the COVID reserve for the pandemic environment.

During the three and six months ended June 30, 2023, noninterest income increased $77 and $124 over the same periods in 2022, respectively.

The increases were largely from higher service charges on deposit accounts, interchange on debit and credit cards, and higher commissions earned by Race Day during 2023 for mortgage application referrals.

Increases in noninterest revenue were partially offset by decreases in mortgage banking income from loan sales to the secondary market, which have been negatively impacted by elevated mortgage rates.

During the three and six months ended June 30, 2023, noninterest expense increased $392 and $876 over the same periods in 2022, respectively.

The increases were primarily related to salaries and employee benefit costs impacted by higher annual merit expenses.

The Company also experienced increases in FDIC insurance premiums, software expense, and data processing costs, partially offset by decreases in professional fees and Race Day operating expenses.

The Company’s provision for income taxes increased $285 and $182 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

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

At June 30, 2023, total assets were $1,274,230, an increase of $63,443 from year-end 2022.

Higher assets were primarily impacted by increases in loans and cash and cash equivalents, which were collectively up $75,708, or 8.1%, from year-end 2022.

Growth in total loans came from increases in the consumer loan segment (+14.1%), residential real estate loan segment (+7.4%), commercial and industrial loan segment (+6.3%), and commercial real estate loan segment (+4.3%).

Growth in cash and cash equivalents came primarily from higher balances held at the Federal Reserve as a result of the growth in deposits.

At June 30, 2023, total liabilities were $1,136,158, up $60,399 from year-end 2022.

Contributing most to this increase were higher deposit balances, which increased $48,917 from year-end 2022.

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

At June 30, 2023, total shareholders’ equity was $138,072, up $3,044 from December 31, 2022.

This increase came from year-to-date net income, a decrease in net unrealized losses on available for sale securities, partially offset by cash dividends paid.

The increase in shareholders’ equity was further limited by the adoption of new accounting guidance for measuring credit losses, which required a $2,209 charge to retained earnings.

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

Comparison of Financial Condition

at March 31, 2023 and December 31, 2022

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at March 31, 2023 compared to December 31, 2022.

at June 30, 2023 and December 31, 2022

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at June 30, 2023 compared to December 31, 2022.

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

Cash and Cash Equivalents

At March 31, 2023, cash and cash equivalents were $89,848, an increase of $43,858, or 95.4%, from December 31, 2022.

The increase in cash and cash

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

Over 81% of cash and cash equivalents consisted of the Company’s interest-bearing Federal Reserve Bank clearing account, which increased $42,753, or

138.8%, from year-end 2022.

At June 30, 2023, cash and cash equivalents were $56,795, an increase of $10,805, or 23.5%, from December 31, 2022.

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

Over 71% of cash and cash equivalents consisted of the Company’s interest-bearing Federal Reserve Bank clearing account, which increased $9,734, or 31.6%, from year-end 2022.

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.

During the first quarter of 2023, the Company experienced increases in funds from Bank deposits, primarily time deposits, which were maintained in the Federal Reserve account.

A portion of these clearing account funds

were used to reinvest in higher-yielding loans, and to also help cover deposit runoff in noninterest-bearing demand and other interest-bearing deposit balances.

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 three months of 2023, the rate associated with the Company’s Federal Reserve Bank clearing account increased 50

basis points due to continued rising inflationary concerns, resulting in a target federal funds rate range of 4.75% to 5.00%.

During the first half of 2023, the Company experienced increases in funds from Bank deposits, primarily time deposits, which were maintained in the Federal Reserve account.

Other funds also came from the maturities and paydowns of securities available for sale and proceeds from FHLB borrowings.

A portion of these clearing account funds were used to reinvest in higher-yielding loans, and to also help cover deposit runoff in noninterest-bearing demand and other interest-bearing deposit balances.

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 half of 2023, the rate associated with the Company’s Federal Reserve Bank clearing account increased 75 basis points due to continued rising inflationary concerns, resulting in a target federal funds rate range of 5.00% to 5.25%.

The interest-bearing deposit balances in the Federal Reserve Bank account are 100% secured 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

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

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

Certificates of Deposit

At March 31, 2023, the Company had $735 in certificates of deposit owned by the Captive, down from $1,127 at year-end 2022.

The deposits on hand at March

31, 2023 consist of three certificates with remaining maturity terms of less than six months.

At June 30, 2023, the Company had $245 in certificates of deposit owned by the Captive, down from $1,862 at year-end 2022.

The deposits on hand at June 30, 2023 consist of one certificate with a remaining maturity term of less than five months.

The balance of total securities decreased $9,828, or 5.1%, compared to year-end 2022.

The decrease came mostly from U.S.

Government agency (“Agency”)

mortgage-backed securities, which were down $2,954, or 2.4%, from year-end 2022.

The Company’s investment securities portfolio is made up mostly of Agency mortgage-backed securities, which represented 62.7% of total investments at March 31, 2023.

During the first quarter of 2023, the Company received proceeds from principal repayments of $4,416.

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.

Government agency (“Agency”) mortgage-backed securities, which were down $8,460, or 7.0%, from year-end 2022.

The Company’s investment securities portfolio is made up mostly of Agency mortgage-backed securities, which represented 61.5% of total investments at June 30, 2023.

During the first half of 2023, the Company received proceeds from principal repayments of $9,162.

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 experienced $2,000 in maturities from its Agency security portfolio, which further decreased investments from year-end 2022.

Partially offsetting these decreasing factors were changes in net unrealized losses associated with available for sale securities.

During 2023, long-term

reinvestment rates decreased, which led to a $2,145 increase in the fair value of the Company’s available for sale securities.

The fair value of an investment security moves inversely to interest rates, so as rates decreased, the unrealized loss in

the portfolio was reduced causing the fair value to increase.

During 2023, long-term reinvestment rates decreased, which led to a $936 increase in the fair value of the Company’s available for sale securities.

The fair value of an investment security moves inversely to interest rates, so as rates decreased, the unrealized loss in the portfolio was reduced causing the fair value to increase.

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 increased to

$906,313 at March 31, 2023, representing an increase of $21,264, or 2.4%, as compared to $885,049 at December 31, 2022.

The increase in loans came primarily from the consumer and commercial loan portfolios, partially offset by a decrease in the

residential real estate portfolio from year-end 2022.

Gross loan balances increased to $949,952 at June 30, 2023, representing an increase of $64,903, or 7.3%, as compared to $885,049 at December 31, 2022.

The Company recognized increases in all of its loan segments from year-end 2022.

The Company’s residential real estate loan portfolio increased $22,000, or 7.4%, from year-end 2022.

At June 30, 2023, residential real estate loans represented the largest segment of the Company’s total loan portfolio at 33.6% and consisted primarily of one- to four-family residential mortgages and carries many of the same customer and industry risks as the commercial loan portfolio.

The increase in residential real estate loans was largely related to short-term adjustable-rate mortgages, which increased $15,759, or 9.6%, from year-end 2022.

With elevated mortgage rates, mortgage customers are selecting more in-house variable rate mortgage products instead of long-term fixed-rate products.

Also contributing to the increase in residential real estate loans was the funding of a warehouse line of credit by the Bank for a mortgage lender.

The warehouse lending line is used by the mortgage lender to make loans for the purchase of one- to four-family residential real estate properties.

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

From year-end 2022, warehouse lending balances increased $5,622 during the first half of 2023.

The Company’s total consumer loan balances from year-end 2022 increased $20,921, or 14.1%.

This change was impacted by an $11,534, or 17.6%, increase in

other consumer loans.

Growth in other consumer loans came largely from the purchase of a pool of unsecured loans in January 2023 that had a carrying amount of $14,218 at March 31, 2023.

Growth in consumer loans also came from a $3,881, or 7.1%,

increase in automobile loans, and a $731, or 2.6%, increase in home equity lines of credit.

This change was impacted by a $13,151, or 20.1%, increase in other consumer loans.

Growth in other consumer loans came largely from the purchase of a pool of unsecured loans in January 2023 that had a carrying amount of $13,124 at June 30, 2023.

Growth in consumer loans also came from a $5,393, or 9.8%, increase in automobile loans, and a $2,377, or 8.6%, increase in home equity lines of credit.

Further increases in loans came from the Company’s commercial loan portfolio, which increased $21,982, or 5.0%, from year-end 2022.

Contributing most to this

increase were higher loan balances within the commercial and industrial portfolio, up $6,516, or 4.3%, from year-end 2022.

Contributing most to this increase were higher loan balances within the commercial real estate portfolio, which increased $12,467, or 4.3%, from year-end 2022.

The commercial real estate segment comprised the second largest portion of the Company’s total loan portfolio at June 30, 2023, at 31.7%.

The increase from year-end 2022 came primarily from the construction loan segment.

Commercial loans were also positively impacted by an increase in the commercial and industrial portfolio, up $9,515, or 6.3%, from year-end 2022.

The growth was impacted by an increase in larger loan originations during the year.

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.

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.

Commercial loans were also positively impacted by an increase in the commercial real estate portfolio, which increased $4,590, or 1.6%, from year-end 2022.

The commercial real estate segment comprised the largest portion of the Company’s total loan portfolio at March 31, 2023 at 32.4%.

The increase came from the nonowner-occupied and construction loan segments, which offset the decrease in owner-occupied

loans from year-end 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, and 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 residential real estate loan portfolio decreased $5,988, or 2.0%, from year-end 2022.

Residential real estate loans represent the second

largest segment of the Company’s total loan portfolio at 32.1% 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 was largely related to the principal repayments and payoffs in both long-term fixed-rate and short-term adjustable-rate mortgages.

decrease in refinancing volume and an increase in long-term reinvestment rates have led to a slower demand for mortgage loans during 2023.

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, and 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.

Allowance for Credit Losses

The Company maintains an allowance for credit losses (“ACL”) that represents management’s best estimate of the appropriate level of losses and risks inherent

in our applicable financial assets under the current expected credit loss (“CECL”) model.

The Company maintains an allowance for credit losses (“ACL”) that represents management’s best estimate of the appropriate level of losses and risks inherent in our applicable financial assets under the current expected credit loss (“CECL”) model.

The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all.

determination of the ACL involves a high degree of judgement and subjectivity.

The determination of the ACL involves a high degree of judgement and subjectivity.

Please refer to Note 1 of the notes to the financial statements for discussion regarding our ACL methodologies for securities and loans.

For AFS debt securities, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized

costs basis is due to credit-related factors or noncredit-related factors.

Upon adoption of ASC 326 on January 1, 2023, and as of March 31, 2023, the Company determined that all AFS securities that experienced a decline in fair value below the

amortized cost basis were due to non-credit related factors.

For AFS debt securities, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized costs basis is due to credit-related factors or noncredit-related factors.

Upon adoption of ASC 326 on January 1, 2023, and as of June 30, 2023, the Company determined that all AFS securities that experienced a decline in fair value below the amortized cost basis were due to non-credit related factors.

Furthermore, the security types for all AFS debt securities contained explicit government guarantees.

Therefore, no ACL was recorded, and no provision expense was recognized during the three

months ended March 31, 2023.

For HTM debt securities, the Company evaluates the securities collectively by major security type at each measurement date to determine expected credit

losses based on issuer’s bond rating, historical loss, financial condition, and timely principal and interest payments.

Upon adoption of ASC 326 on January 1, 2023, a $3 ACL was recognized based on a .03% cumulative default rate taken from the S&P

and Moody’s bond rating index.

At March 31, 2023, the ACL for HTM debt securities remained unchanged at $3, resulting in no provision expense during the three months ended March 31, 2023.

For loans, the Company’s ACL is management’s estimate of expected lifetime credit losses, measured over the contractual life of a loan, that considers

historical loss experience, current conditions, and forecasts of future economic conditions.

Therefore, no ACL was recorded, and no provision expense was recognized during the three and six months ended June 30, 2023.

For HTM debt securities, the Company evaluates the securities collectively by major security type at each measurement date to determine expected credit losses based on issuer’s bond rating, historical loss, financial condition, and timely principal and interest payments.

Upon adoption of ASC 326 on January 1, 2023, a $3 ACL was recognized based on a .03% cumulative default rate taken from the S&P and Moody’s bond rating index.

At June 30, 2023, the ACL for HTM debt securities remained unchanged at $3, resulting in no provision expense during the three and six months ended June 30, 2023.

For loans, the Company’s ACL is management’s estimate of expected lifetime credit losses, measured over the contractual life of a loan, that considers historical loss experience, current conditions, and forecasts of future economic conditions.

The ACL on loans is established through a provision for credit losses recognized in earnings.

The ACL on loans is reduced by charge-offs on loans and is

increased by recoveries of amounts previously charged off.

The ACL on loans is reduced by charge-offs on loans and is increased by recoveries of amounts previously charged off.

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors within two main components.

The first component involves

pooling loans into portfolio segments for loans that share similar risk characteristics.

The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics.

The second component involves individually analyzed loans that do no share similar risk characteristics with loans that are pooled into portfolio segments.

for loans with similar risk characteristics are collectively evaluated for expected credit losses based on certain quantitative information that include historical loss rates, prepayment rates, and curtailment rates.

Expected credit losses on loans

with similar characteristics are also determined by certain qualitative factors that include national unemployment rates, national gross domestic product forecasts, changes in lending policy, quality of loan review, and delinquency status.

loans that do not share similar risk characteristics are individually evaluated for expected credit losses primarily based on foreclosure status and whether a loan is collateral-dependent.

Expected credit losses on individually evaluated loans are then

determined using the present value of expected future cash flows based upon the loan’s original effective interest rate, at the loan’s observable market price, or if the loan was collateral dependent, at the fair value of the collateral.

As of March 31, 2023, the ACL for loans totaled $7,607, or 0.84%, of total loans.

As of December 31, 2022, the ACL for loans totaled $5,269, or 0.60%, of

The ACL for loans with similar risk characteristics are collectively evaluated for expected credit losses based on certain quantitative information that include historical loss rates, prepayment rates, and curtailment rates.

Expected credit losses on loans with similar characteristics are also determined by certain qualitative factors that include national unemployment rates, national gross domestic product forecasts, changes in lending policy, quality of loan review, and delinquency status.

The ACL for loans that do not share similar risk characteristics are individually evaluated for expected credit losses primarily based on foreclosure status and whether a loan is collateral-dependent.

Expected credit losses on individually evaluated loans are then determined using the present value of expected future cash flows based upon the loan’s original effective interest rate, at the loan’s observable market price, or if the loan was collateral dependent, at the fair value of the collateral.

As of June 30, 2023, the ACL for loans totaled $7,571, or 0.80%, of total loans.

As of December 31, 2022, the ACL for loans totaled $5,269, or 0.60%, of total loans.

The increase in the ACL of $2,302, or 43.7%, was primarily due to the $2,162 impact of adopting ASC 326 on January 1, 2023, affected mostly by the residential real estate and consumer loan portfolio segments.

Upon transition to the CECL

model, the Company’s ACL increased another $176 to finish with $7,607 in reserves, all from loans collectively evaluated.

This increase was mostly impacted by a $22,441 increase in collectively evaluated loan balances during the first quarter of 2023,

primarily from consumer loans.

Upon transition to the CECL model, the Company’s ACL increased another $140 to finish with $7,571 in reserves, all from loans collectively evaluated.

This increase was mostly impacted by a $66,092 increase in collectively evaluated loan balances during the first half of 2023, primarily from the residential real estate and consumer loan segments.

This was partially offset by lower expected loss rates in relation to an improved unemployment forecast.

The Company experienced lower delinquency levels from year-end 2022, which resulted in lower provision expense.

Nonperforming loans to total loans decreased

to 0.39% at March 31, 2023, compared to 0.43% at December 31, 2022, and nonperforming assets to total assets decreased to 0.28% at March 31, 2023, compared to 0.31% at December 31, 2022.

During the first quarter of 2023, the Company individually evaluated several loans with a single borrower relationship for expected credit loss.

value of the loans’ collateral was measured to the loans’ recorded investment and no expected losses were identified as part of that review.

As a result, there were no specific reserves recorded during the three months ended March 31, 2023.

Management believes that the allowance for loan losses at March 31, 2023 was appropriate to absorb expected losses in the loan portfolio.

Changes in the

circumstances of particular borrowers, as well as adverse developments in the economy, are factors that could change, and management will make adjustments to the allowance for credit 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, fund the

borrowing needs of loan customers, and fund ongoing operations.

Total deposits at March 31, 2023 increased $53,540, or 5.2%, from year-end 2022.

This change in deposits came primarily from interest-bearing deposit balances, which were up by $68,359, or

10.2%, from year-end 2022, while noninterest-bearing deposits decreased $14,819, or 4.2%, from year-end 2022.

Nonperforming loans to total loans decreased to 0.29% at June 30, 2023, compared to 0.43% at December 31, 2022, and nonperforming assets to total assets decreased to 0.22% at June 30, 2023, compared to 0.31% at December 31, 2022.

During the first half of 2023, the Company individually evaluated several loans with a single borrower relationship for expected credit loss.

The fair value of the loans’ collateral was measured to the loans’ recorded investment and no expected losses were identified as part of that review.

As a result, there were no specific reserves recorded during the three and six months ended June 30, 2023.

Management believes that the allowance for credit losses at June 30, 2023 was appropriate to absorb expected losses in the loan portfolio.

Changes in the circumstances of particular borrowers, as well as adverse developments in the economy, are factors that could change, and management will make adjustments to the allowance for credit 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, fund the borrowing needs of loan customers, and fund ongoing operations.

Total deposits at June 30, 2023 increased $48,917, or 4.8%, from year-end 2022.

This change in deposits came primarily from interest-bearing deposit balances, which were up by $64,356, or 9.6%, from year-end 2022, while noninterest-bearing deposits decreased $15,439, or 4.4%, from year-end 2022.

The increase in interest-bearing deposits came primarily from time deposit balances, which increased $111,962, or 73.7%, from year-end 2022.

The increase came from brokered CD issuances, which were up collectively by $58,707, primarily to manage the Company’s tightened liquidity position during the first quarter of 2023.

Further increases came from retail time deposits, which

increased $40,971 from year-end 2022.

The increase came from brokered CD issuances, which were up collectively by $57,968, primarily to manage the Company’s tightened liquidity position during the first half of 2023.

Further increases came from retail time deposits, which increased $53,994 from year-end 2022.

As market rates increased during 2022, deposit rates began adjusting upward during the second half of 2022 and into 2023.

This contributed to higher rate offerings on CD products, influencing a consumer shift away

from lower-cost savings and money market products and into more higher-cost time deposit products.

Also impacting deposit balance growth were higher interest-bearing NOW account balances from year-end 2022, which increased $4,055, 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.

Partially offsetting the increases in time deposit and NOW accounts were decreases in other interest-bearing balances that include money

market deposits (down $27,626) and savings deposits (down $7,748).

This has contributed to higher rate offerings on CD products, influencing a consumer shift away from lower-cost savings and money market products and into more higher-cost time deposit products.

Partially offsetting the increases in time deposits were decreases in savings deposits (down $15,164) and money market deposits (down $20,553) from year-end 2022.

Elevated deposit rates on CD products and deposit rate competition were contributing factors to the deposit decreases.

The decrease in noninterest-bearing demand deposits came primarily from the Company’s business and incentive-based checking account

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 2023, reflecting the Company’s efforts to reduce its reliance on higher cost funding and improve net interest income.

The growth in time deposit balances were also partially offset by lower interest-bearing NOW account balances from year-end 2022, which decreased $11,889, or 5.7%.

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

The decrease in noninterest-bearing demand deposits came primarily 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 2023, 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 $17,330 at March 31, 2023, a decrease of $615, or 3.4%, from year-end 2022.

The decrease was related to the

ongoing monthly principal repayments of FHLB advances.

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 $26,904 at June 30, 2023, an increase of $8,959, or 49.9%, from year-end 2022.

The increase was related to a $10,000 FHLB fixed-rate advance from the second quarter that was used to help fund earning asset growth.

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

Shareholders’ Equity

Total shareholders' equity at March 31, 2023 increased $2,517, or 1.9%, to finish at $137,545, as compared to $135,028 at December 31,

This was primarily from quarterly net income and an increase in the fair value of available for sale securities, partially offset by cash dividends paid and a transition adjustment related to the adoption of ASC 326.

The after-tax change in fair

value totaled $1,695 from year-end 2022, as long-term market rates decreased during the first three months of 2023, causing an increase in the fair value of the Company’s available for sale investment portfolio.

The after-tax impact from the adoption

of ASC totaled $2,209 and was applied against retained earnings effective January 1, 2023.

Total shareholders’ equity at June 30, 2023 increased $3,044, or 2.3%, to finish at $138,072, as compared to $135,028 at December 31, 2022.

This was primarily from year-to-date net income and an increase in the fair value of available for sale securities, partially offset by cash dividends paid and a transition adjustment related to the adoption of ASC 326.

The after-tax change in fair value totaled $740 from year-end 2022, as long-term market rates decreased during the first half of 2023, causing an increase in the fair value of the Company’s available for sale investment portfolio.

The after-tax impact from the adoption of ASC totaled $2,209 and was applied against retained earnings effective January 1, 2023.

Comparison of Results of Operations

For the Three Months Ended

March 31, 2023 and 2022

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

March 31, 2023, compared to the same period in 2022.

For the Three and Six Months Ended

June 30, 2023 and 2022

The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three and six months ended June 30, 2023, compared to the same period in 2022.

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 March 31, 2023, net interest income increased $1,732, or 17.3%, compared to the same period in 2022.

The improvement came from higher earning asset

yields completely offsetting higher average costs paid on deposits, combined with a composition shift into higher-yielding loans.

Total interest and fee income recognized on the Company’s earning assets increased $3,137, or 29.4%, during the first quarter of 2023, compared to the same

period in 2022.

The earnings growth was impacted by interest on loans, which increased $2,478, or 25.3%.

This improvement was largely related to average loan yield increases impacted by the aggressive actions taken by the Federal Reserve to increase

rates during 2022 and 2023.

Since the end of March 2022, the Federal Reserve has increased rates by another 450 basis points, which contributed to the repricing of a portion of the Company’s loan portfolio.

As a result, the average interest rate yield

on loans increased 71 basis points to 5.62% during the first quarter of 2023, compared to 4.91% during the first quarter of 2022.

Average loans increased $78,563 during the first quarter of 2023, compared to the first quarter of 2022.

quarter-to-date increase was largely impacted by growth in average commercial and consumer loans.

Total interest income from interest-bearing deposits with banks increased $372 during the first quarter of 2023, compared to the same period in 2022.

increase was largely from the rate increases associated with the Company’s interest-bearing Federal Reserve Bank clearing account.

As previously mentioned, the Federal Reserve took action during 2022 to increase short-term rates due to rising

inflationary concerns.

Since the end of March 2022, the target federal funds rate has increased by another 450 basis points.

This had a corresponding effect to the interest rate tied to the Federal Reserve clearing account, which also increased by 450

basis points during that time.

The impact from higher rates was partially offset by lower average Federal Reserve Bank balances, which decreased $92,224 during the first quarter of 2023, compared to the same period in 2022.

The Company utilized Federal

Reserve Bank balances to help fund new loans and manage the net decrease in average deposits during that time.

Total interest on securities increased $258, or 34.8%, during the first quarter of 2023, compared to the same period in 2022.

Contributing most to this

increase was the average yield on securities increasing 41 basis points to reach 1.91% during the first quarter of 2023.

The average yield increase was positively impacted by the reinvestment of maturities at market rates higher than the average

portfolio yield.

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

During the three months ended June 30, 2023, net interest income increased $1,061, or 10.1%, compared to the same period in 2022.

During the six months ended June 30, 2023, net interest income increased $2,793, or 13.6%, compared to the same period in 2022.

The improvement during both periods came from net interest margin improvement that contributed to higher earning asset yields.

This, combined with a composition shift into higher-yielding loans, completely offset higher average costs paid on deposits.

Total interest and fee income recognized on the Company’s earning assets increased $3,273, or 32.7%, during the second quarter of 2023, and $5,751, or 29.0%, during the first half of 2023, compared to the same periods in 2022.

The earnings growth was impacted by interest on loans, which increased $3,313, or 35.4%, and $5,818, or 31.6%, during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

This improvement was largely related to average loan yield increases impacted by the aggressive actions taken by the Federal Reserve to increase rates during 2022 and 2023.

Since the end of June 2022, the Federal Reserve has increased rates by another 350 basis points, which contributed to the repricing of a portion of the Company’s loan portfolio.

As a result, the average interest rate yield on loans increased 95 basis points to 5.81% during the second quarter of 2023 and increased 82 basis points to 5.71% during the first half of 2023, compared to the same periods in 2022, respectively.

Average loans increased $92,386, or 11.1%, and $88,513, or 10.3%, during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

The increases were largely impacted by growth in average commercial and consumer loans.

Total interest income from interest-bearing deposits with banks increased $439 during the second quarter of 2023, and $811 during the first half of 2023, compared to the same periods in 2022, respectively.

This growth in income was largely from the rate increases associated with the Company’s interest-bearing Federal Reserve Bank clearing account.

As previously mentioned, the Federal Reserve took action during 2022 to increase short-term rates due to rising inflationary concerns.

Since the end of June 2022, the target federal funds rate has increased by another 350 basis points.

This had a corresponding effect to the interest rate tied to the Federal Reserve clearing account, which also increased by 350 basis points during that time.

The impact from higher rates was partially offset by lower average Federal Reserve Bank balances, which decreased $70,852 during the second quarter of 2023, and $81,479 during the first half of 2023, compared to the same periods in 2022, respectively.

The Company utilized Federal Reserve Bank balances to help fund new loans and manage the net decrease in average deposits during that time.

Total interest on securities increased $79, or 8.8%, during the second quarter of 2023, and $337, or 20.6%, during the first half of 2023, compared to the same periods in 2022, respectively.

Contributing most to this increase was the average yield on securities increasing 37 basis points to reach 2.08% during the second quarter of 2023, and 49 basis points to reach 2.09% during the first half of 2023, compared to the same periods in 2022, respectively.

The average yield increase was positively impacted by the reinvestment of maturities at market rates higher than the average portfolio yield.

The average securities yield was also positively impacted by the Company’s decision to sell $12,500 in lower yielding securities during the fourth quarter of 2022 and use the proceeds to reinvest into higher-yielding securities.

However, with the Company’s focus of reinvesting excess funds into higher-yielding loans and managing excess funds within its higher-yielding Federal Reserve deposit account, average security balances have decreased $9,017 during the first quarter of

2023, compared to the same period in 2022.

Total interest expense incurred on the Company’s interest-bearing liabilities increased $1,405 during the first quarter of 2023, compared to the same period

Total interest expense incurred on the Company’s interest-bearing liabilities increased $2,735 during the second quarter of 2023, and $4,140 during the first half of 2023, compared to the same periods in 2022, respectively.

Increases in interest expense were impacted by a rise in average costs combined with increases in higher-costing average deposit balances.

The elevated market rates in 2022 and 2023 had a more immediate impact to increasing rates on earning

assets, while the average cost of deposits did not increase until the second half of 2022.

Entering 2023, rates on the Company’s retail CD offerings have adjusted to much higher levels than a year ago, leading to more of a consumer demand to reinvest

from lower-cost savings and money market deposit products (average cost at 0.44%) into more time deposit products (average cost at 2.45%).

Furthermore, the Company issued $62,707 in brokered CDs during the first quarter of 2023 at average costs ranging

from 4.5% to 4.6%.

These wholesale deposits were used to manage liquidity constraints during the first quarter of 2023, but also contributed to the growth in interest expense over 2022.

With deposit rates on the rise, the Company experienced a

composition shift from less lower-cost average savings, NOW and money market account balances (down $33,594) into more higher-cost average time deposit balances (up $30,229).

As a result of the rate repricings on time deposits and the deposit shift

into higher-cost deposits, the Company’s total weighted average costs on interest-bearing deposits increased by 75 basis points from 0.29% at March 31, 2022, to 1.04% at March 31, 2023.

The elevated market rates in 2022 and 2023 had a more immediate impact to increasing rates on earning assets, while the average cost of deposits did not increase until the second half of 2022.

Entering 2023, rates on the Company’s retail CD offerings have adjusted to much higher levels than a year ago, leading to more of a consumer demand to reinvest from lower-cost NOW, savings and money market deposit products (average cost at 0.62%) into more time deposit products (average cost at 2.92%).

Furthermore, the Company issued $62,707 in brokered CDs during the first quarter of 2023 at average costs ranging from 4.5% to 4.6%.

These wholesale deposits were used to manage liquidity constraints, but also contributed to the growth in interest expense over 2022.

With deposit rates on the rise, the Company experienced a composition shift from less lower-cost average NOW, savings, and money market account balances (down $52,256) into more higher-cost average time deposit balances (up $56,508).

As a result of the rate repricings on time deposits and the deposit shift into higher-cost deposits, the Company’s total weighted average costs on interest-bearing deposits increased by 108 basis points from 0.29% at June 30, 2022, to 1.37% at June 30, 2023.

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

During 2023, the

Company’s first quarter net interest margin improved to 4.21%, compared to 2022’s first quarter net interest margin of 3.51%.

The quarterly margin increase was impacted by the actions taken by the Federal Reserve to increase rates during 2022 and 2023.

During 2023, the Company’s second quarter net interest margin improved to 4.03%, compared to 2022’s second quarter net interest margin of 3.64%.

The Company’s year-to-date net interest margin improved to 4.12% at June 30, 2023, compared to 2022’s year-to-date net interest margin of 3.58% at June 30, 2022.

The margin increases were impacted by the actions taken by the Federal Reserve to increase rates during 2022 and 2023.

This had a direct impact to the rate repricings on the loan and securities portfolios, and the Federal Reserve Bank account, which had a positive impact on the margin.

Margin enhancement also came from the redeployment of Federal Reserve Bank balances

into higher yielding loans.

Margin enhancement also came from the redeployment of Federal Reserve Bank balances into higher yielding loans.

Partially offsetting these positive effects to the margin were increases in average deposit costs and the composition shift to higher-cost time deposit balances from a year ago.

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.

Although the net interest margin increased over the prior year’s quarterly and year-to-date periods, on a linked quarter basis, the 4.03% net interest margin during the second quarter of 2023 represents a decrease from the 4.21% margin during the first quarter of 2023 and the 4.38% margin during the fourth quarter of 2022.

The decrease is a result of the Company offering higher rates on deposit accounts as market competition increased and to the higher utilization of wholesale funding sources to fund asset growth.

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.

Provision for Credit Losses

The Company’s provision for credit losses expense totaled $489 during the three months ended March 31, 2023, an increase of $1,615 when compared to $1,126 in

negative provision expense during the three months ended March 31, 2022.

For 2023, the provision expense came primarily from $289 in net loan charge-offs, primarily in the commercial real estate and consumer loan portfolios.

Further provision expense

on loans came from $176 in expected losses associated with the $22,441 increase in general loan balances from year-end 2022.

For 2022, the negative provision expense was primarily impacted by the release of general loan reserves within the allowance

based on various credit quality improvements.

During the first quarter of 2022, the Company released $645 in COVID-19 general 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 negative provision expense during the first quarter of 2022 was the release of $574 in other general reserves.

This reduction in other general reserves was affected by various improvements within

the economic risk factor calculation that included:

For the three months ended June 30, 2023, the Company’s provision for credit losses expense totaled $24, a decrease of $789 from the same period in 2022.

Lower quarterly provision expense was primarily related to a $717 decrease in net loan charge-offs during the second quarter of 2023 compared to the same period in 2022.

In June 2022, the Company charged off two commercial and industrial loans totaling $613 as part of a single borrower relationship, which required a corresponding increase to provision expense.

For the six months ended June 30, 2023, the Company’s provision for credit losses expense totaled $513, an increase of $826 when compared to $313 in negative provision expense during the six months ended June 30, 2022.

For 2023, the provision expense was impacted by $439 in net loan charge-offs, primarily in the commercial real estate and consumer loan portfolios.

Further provision expense on loans in 2023 came from $140 in expected losses associated with the $66,092 increase in general loan balances from year-end 2022.

For 2022, the negative provision expense was impacted by the release of general loan reserves within the allowance based on various credit quality improvements.

Further contributing to negative provision expense during the first half of 2022 was the release of $911 in other general reserves.

This reduction in other general reserves was 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.

This resulted in a corresponding decrease of $574 to provision expense in March 2022.

Credit loss expense during the first quarter of 2023 also came from unfunded commitments on off-balance sheet liabilities.

Upon adoption of ASC 326, the

Company established $631 in reserves for unfunded commitments within total liabilities on the consolidated balance sheet.

This resulted in a corresponding decrease of $911 to provision expense during the first half of 2022.

The impact of lower general reserves was partially offset by $956 in net charge-offs and $297 in specific allocations on loans individually evaluated for impairment, which increased provision expense during the first half of 2022.

Credit loss expense during 2023 also came from unfunded commitments on off-balance sheet liabilities.

Upon adoption of ASC 326, the Company established $631 in reserves for unfunded commitments within total liabilities on the consolidated balance sheet.

This transition adjustment was included as a charge to retained earnings on January 1, 2023.

The Company re-evaluated its unfunded

commitments to extend credit at March 31, 2023 and determined a reserve of $655 was required, which resulted in a $24 provision expense charge during the first quarter of 2023.

Future provisions to the allowance for credit 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 (this “MD&A”).

The Company re-evaluated its unfunded commitments to extend credit at June 30, 2023 and determined a reserve of $565 was required, which resulted in a $90 recovery of provision expense during the second quarter of 2023, and a $66 recovery of provision expense during the first half of 2023.

Future provisions to the allowance for credit 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 Credit Losses” within this Management’s Discussion and Analysis (this “MD&A”).

Noninterest Income

Noninterest income increased $47, or 1.3%, during the three months ended March 31, 2023, compared to the same period in 2022.

Higher noninterest revenue was

largely impacted by increases in other noninterest income, which increased $263 over 2022.

This was primarily from broker fee income of $231 at Race Day recorded during the first quarter of 2023.

Beginning in the fourth quarter of 2022, Race Day

transitioned from originating and selling loans to a broker that identifies and matches home borrowers with potential lenders, while also assisting in the underwriting process.

This transition is a result of the Company’s decision to discontinue

operations of Race Day, as discussed above.

Noninterest income increased $77, or 2.9%, during the three months ended June 30, 2023, and increased $124, or 2.0%, during the six months ended June 30, 2023, compared to the same periods in 2022, respectively.

Higher noninterest revenue was largely impacted by increases in other noninterest income, which increased $162 and $425 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

Other noninterest income came primarily from broker fee income at Race Day.

Beginning in the fourth quarter of 2022, Race Day transitioned from originating and selling loans to a broker that identifies and matches home borrowers with potential lenders, while also assisting in the underwriting process.

This transition is a result of the Company’s decision to discontinue operations of Race Day, as discussed above.

The broker fees represent commissions earned by Race Day for mortgage application referrals at the time the loan was funded by the lender.

The Company does not expect to continue to receive this level of

broker fee commissions during the second quarter of 2023 as it is anticipated that Race Day will continue to wind down operations.

Partially offsetting the increase in other noninterest income was a $188, or 80.0%, decrease in mortgage banking income affected by a lower volume of real

estate loans sold to the secondary market in 2023.

During periods of heavy refinancing due to lower market rates, the Company will take opportunities to sell a portion of its real estate volume to the secondary market to satisfy consumer demand and

help minimize the interest rate risk exposure to rising rates.

During the three and six months ended June 30, 2023, Race Day’s broker fee income totaled $16 and $247, respectively.

The Company does not expect to receive further broker fee commissions during the remainder of 2023 as it is anticipated that Race Day will continue to wind down operations.

Growth in other noninterest income also came from interest rate swaps, gains on the sale of OREO, and commissions from card merchants, which were collectively up $131 and $156 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

Growth in noninterest income was further impacted by increases in service charges on deposit accounts, which increased $58 during the second quarter of 2023, and $111 during the first half of 2023, compared to the same periods in 2022, respectively.

This included a higher volume of overdraft transactions during both the quarterly and year-to-date periods of 2023.

Increases in noninterest revenue also came from debit/credit card interchange income, which increased $38 during the second quarter of 2023, and $76 during the first half of 2023, compared to the same periods in 2022, respectively.

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.

Partially offsetting the increases in other noninterest income were decreases in mortgage banking income affected by a lower volume of real estate loans sold to the secondary market in 2023.

During periods of heavy refinancing due to lower market rates, the Company will take opportunities to sell a portion of its real estate volume to the secondary market to satisfy consumer demand and help minimize the interest rate risk exposure to rising rates.

However, market rates have continued to shift upward in 2023, causing long-term mortgage rates to increase and slow down the consumer demand for long-term, fixed-rate real estate mortgages.

As a result, the Bank’s mortgage banking income decreased $92 and Race Day’s mortgage banking income decreased $96 during the first quarter of 2023, compared to the first quarter of 2022.

The impact to Race Day was largely due to their transition to

broker activity as previously discussed.

The remaining noninterest income categories decreased $28, or 0.9%, during the first quarter of 2023, compared to the first quarter of 2022.

The net decrease

came primarily from bank owned life insurance and annuity asset income (down $67), and tax preparation fees (down $57), partially offset by increases in service charges on deposit accounts (up $53), and debit/credit card interchange income (up $38).

As a result, the Bank’s mortgage banking income decreased $48 and $140 during the three and six months ended June 30, 2023, while Race Day’s mortgage banking income decreased $128 and $224 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

The impact to Race Day was largely due to their transition to broker activity as previously discussed.

The remaining noninterest income categories decreased $5, or 1.1%, and $124, or 6.1%, during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

The decreases came primarily from lower tax preparation fees during the quarter and year-to-date periods.

Noninterest Expense

Noninterest expense increased $484, or 4.9%, during the first quarter of 2023, compared to the same period in 2022.

Contributing most to the increase in

noninterest expense were salaries and employee benefits, which increased $314 during the first quarter of 2023, compared to the same period in 2022.

increase was largely from annual performance- based merit increases that were recorded in the first quarter of 2023.

Higher noninterest expense also came from software costs, which increased $59 during the first quarter of 2023, compared to the same period in 2022.

increase was largely impacted by various software purchases and enhancements at the Bank to further improve operational efficiencies in 2023.

Further impacting higher overhead costs were FDIC premium costs, which increased $56 during the first quarter of 2023, compared to the same period in 2022.

Noninterest expense increased $392, or 3.9%, during the second quarter of 2023, and $876, or 4.4%, during the first half of 2023, compared to the same periods in 2022, respectively.

Contributing most to the increase in noninterest expense were salaries and employee benefits, which increased $158 and $472 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

The e xpense increases were largely from annual performance-based merit increases that were recorded in the first quarter of 2023.

Increases in noninterest expense were also impacted by higher building and equipment costs, which increased $112 and $128 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

This was primarily related to building repair and maintenance costs, as well as utility costs.

Further impacting higher overhead costs was FDIC premium expense, which increased $54 and $110 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

During the fourth quarter of 2022, the FDIC announced it was going to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning in the first quarterly assessment period of 2023.

This action by the FDIC is

in response to the Deposit Insurance Fund reserve falling below the 1.35% minimum level in the second quarter of 2020 following outsized growth in insured deposits in the first half of 2020.

The Bank adjusted its premium expense accrual in anticipation

of the 2-basis point adjustment increase to all quarterly assessments during 2023.

Also contributing to higher noninterest expense were data processing expenses, which increased $48 during the first quarter of 2023, compared to the same

period in 2022.

This action by the FDIC is in response to the Deposit Insurance Fund reserve falling below the 1.35% minimum level in the second quarter of 2020 following outsized growth in insured deposits in the first half of 2020.

The Bank adjusted its premium expense accrual in anticipation of the 2-basis point adjustment increase to all quarterly assessments during 2023.

Also contributing to higher noninterest expense were data processing expenses, which increased $38 and $86 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

Higher costs in this category were the direct result of special programming costs associated with enhancing mobile and desktop user platforms, as well as the volume increase in debit card transactions, which increased processing costs.

Partially offsetting the increases in noninterest expense were lower professional fees, which decreased $56 during the first quarter of 2023, compared to the

same period in 2022.

Higher noninterest expense also came from software costs, which increased $32 and $91 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

The increase was largely impacted by various software purchases and enhancements at the Bank to further improve operational efficiencies in 2023.

Partially offsetting the increases in noninterest expense were lower professional fees, which decreased $65 and $121 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

Professional fees for the year were impacted by lower accounting expenses in relation to higher-than-normal costs in 2022 that were associated with adhering to new regulatory guidance in 2022.

The Company also experienced a lower volume of collection costs during the first quarter of 2023.

T he remaining noninterest expense categories increased $63, or 2.6%,

during the first quarter of 2023, compared to the same period in 2022.

The net increase came primarily from other noninterest expense (up $37) impacted by higher loan closing costs, net occupancy/furniture/equipment expense (up $16), and marketing

costs (up $12).

The Company also experienced a lower volume of collection costs during the three and six months ended June 30, 2023.

The remaining noninterest expense categories increased $63, or 3.5%, and $110, or 3.1%, during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

The net increase came primarily from other noninterest expense, which was up $84 during the quarter and $121 during the year-to-date period, impacted by higher loan closing costs, consulting expense, and interest rate swap expense, partially offset by decreases in various overhead expenses associated with Race Day resulting from the continued unwinding of business operations mentioned above.

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

effects from provision expense are excluded from the efficiency ratio.

The 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 three months ended March 31, 2023 to the same period in 2022, the Company has benefited from an increase in earning asset yields due to market rate increases by the Federal Reserve, and a higher composition of higher-yielding loans.

positive factors have completely offset the negative effects of higher average costs on interest-bearing liabilities and a deposit shift to more higher-cost time deposit balances.

As a result, net interest income during the three months ended March 31,

2023 has outperformed the net interest income results during the same period in 2022.

Increases in overhead costs associated with annual merit increases have contributed to higher noninterest expense, which was up 4.9% during the three months ended

March 31, 2023, compared to the same periods in 2022.

However, the increases in overhead expense, net of noninterest revenue, during the first quarter of 2023 are only partially offsetting the benefits of higher net interest earnings.

As a result, the

Company’s quarterly efficiency number decreased (improved) to 65.7% during the three months ended March 31, 2023, from 70.8% during the same period in 2022.

Comparing the three and six months ended June 30, 2023 to the same periods in 2022, the Company has benefited from an increase in earning asset yields due to market rate increases by the Federal Reserve, and a higher composition of higher-yielding loans.

These positive factors have completely offset the negative effects of higher average costs on interest-bearing liabilities and a deposit shift to more higher-cost time deposit balances.

As a result, net interest income during the three and six months ended June 30, 2023 has outperformed the net interest income results during the same periods in 2022.

Increases in overhead costs associated with annual merit increases have contributed to higher noninterest expense during both the three and six months ended June 30, 2023, compared to the same periods in 2022.

However, the increases in overhead expense, net of noninterest revenue, during the three and six months ended June 30, 2023 are only partially offsetting the benefits of higher net interest earnings.

As a result, the Company’s quarterly efficiency number decreased (improved) to 71.9% during the three months ended June 30, 2023, from 75.3% during the same period in 2022.

The Company’s year-to-date efficiency number also decreased (improved) to 68.7% during the six months ended June 30, 2023, from 73.0% during the same period in 2022.

Provision for income taxes

The Company’s income tax provision decreased $103 during the three months ended March 31, 2023, compared to the same period in 2022.

The change in tax

expense corresponded directly to the change in associated taxable income during 2023 and 2022.

The Company’s income tax provision increased $285 and $182 during the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

The changes in tax expense corresponded directly to the changes in associated taxable income during 2023 and 2022.

Capital Resources

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

(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%.

(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 credit 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 2013.

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

CBLR is Tier 1 capital, as calculated under present rules.

The Bank opted into the CBLR, and therefore, is not required to comply with the Basel III capital requirements 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 current rules and

Call Report instructions were impacted by the Company’s adoption of ASC 326 and its election to apply the 3-year CECL transition provision on January 1, 2023.

By making this election, the Bank, in accordance with Section 301 of the regulatory capital

rules, will increase it retained earnings (Tier 1 Capital) and average assets by 75% of its CECL transition amount during the first year of the transition period, 50% of its CECL transition amount during the second year, and 25% of its CECL

transitional amount during the third year of the transition period.

The Bank’s transition amount from the adoption of CECL totaled $2,276, which resulted in the add-back of $1,707 to both Tier 1 capital and average assets as part of the CBLR

calculation for March 31, 2023.

As of March 31, 2023, the Bank’s CBLR was 11.22%.

Cash dividends paid by the Company were $1,002 during the first three months of 2023.

The current rules and Call Report instructions were impacted by the Company’s adoption of ASC 326 and its election to apply the 3-year CECL transition provision on January 1, 2023.

By making this election, the Bank, in accordance with Section 301 of the regulatory capital rules, will increase it retained earnings (Tier 1 Capital) and average assets by 75% of its CECL transition amount during the first year of the transition period, 50% of its CECL transition amount during the second year, and 25% of its CECL transitional amount during the third year of the transition period.

The Bank’s transition amount from the adoption of CECL totaled $2,276, which resulted in the add-back of $1,707 to both Tier 1 capital and average assets as part of the CBLR calculation for June 30, 2023.

As of June 30, 2023, the Bank’s CBLR was 11.13%.

Cash dividends paid by the Company were $2,769 during the first half of 2023.

The year-to-date dividends paid totaled $0.58 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, which totaled $270,186, represented 21.3% of total assets at March 31, 2023

compared to $230,853 and 19.1% of total assets at December 31, 2022.

This higher composition of liquidity was largely impacted by growth in time deposits, which increased 65.6% from year-end 2022.

Of the Company's $251,597 in time deposit balances at

March 31, 2023, only 21.9%, or $55,043, were deemed uninsured as per the $250 FDIC threshold.

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, which totaled $231,888, represented 18.2% of total assets at June 30, 2023 compared to $230,853 and 19.1% of total assets at December 31, 2022.

This growth in liquid funds came primarily from increases in deposits, as well as increases in borrowings and net proceeds from maturities and paydowns of securities.

A large portion of these dollars were used to fund the 7.3% growth in loans.

Increases in deposits were largely impacted by growth in time deposits, which increased 73.7% from year-end 2022.

Of the Company’s $263,881 in time deposit balances at June 30, 2023, only 20.8%, or $54,906, were deemed uninsured as per the $250 FDIC threshold.

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

At March 31, 2023, the Bank could borrow an additional

$101,748 from the FHLB.

Furthermore, the Bank has established a borrowing line with the Federal Reserve, which had availability of $58,204 at March 31, 2023.

At June 30, 2023, the Bank could borrow an additional $106,932 from the FHLB.

Furthermore, the Bank has established a borrowing line with the Federal Reserve, which had availability of $60,804 at June 30, 2023.

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

our liquidity position dictates, the preceding funding sources, or other sources such as brokered CD’s, may be utilized to supplement our liquidity position.

For further cash flow information, see the condensed consolidated statement of cash flows

As our liquidity position dictates, the preceding funding sources, or other sources such as brokered CD’s, may be utilized to supplement our liquidity position.

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.

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.

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.

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.

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

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 2022 Annual Report to

Shareholders, as updated in Note 1 of the Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

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 credit losses to be a critical accounting policy.

The most significant accounting policies followed by the Company are presented in Note A to the financial statements in the Company’s 2022 Annual Report to Shareholders, as updated in Note 1 of the Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

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 credit losses to be a critical accounting policy.

Allowance for credit losses

The Company believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant

accounting policies.

The allowance for credit losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or off-balance sheet credit

conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

However, this evaluation has subjective components requiring material estimates,

including expected default probabilities, the expected loss given default, the amounts and timing of expected future cash flows on impaired loans, and estimated losses based on historical loss experience and forecasted economic conditions.

factors may be susceptible to significant change.

The Company believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies.

Management’s determination of the adequacy of the allowance for credit losses is based on periodic evaluations of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected loss given default, the amounts and timing of expected future cash flows on impaired loans, and estimated losses based on historical loss experience and forecasted economic conditions.

All of these factors may be susceptible to significant change.

To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods.

Refer to “Allowance

for Credit Losses” and “Provision for Credit Losses” sections within this MD&A for additional discussion.

Refer to “Allowance for Credit Losses” and “Provision for Credit Losses” sections within this MD&A for additional discussion.

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.

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

To 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