What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-15 compared with 2023-11-14 · 395 added, 454 removed, 141 unchanged (86% of the section changed)

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(dollars in thousands, except share and per share data)

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.

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

“will,” and other similar expressions.

Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control, particularly with regard to developments related to the current economic and

geopolitical landscape, and which could cause actual results to differ materially from those expressed in such forward looking statements.

These factors include, but are not limited to:

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

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;

the effects of fluctuating interest rates on our customers’

operations and financial condition;

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

of the world;

competitive pressures;

fluctuations in interest rates;

the level of defaults and prepayment on loans made by Ohio Valley Banc Corp.

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Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

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

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 includes 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.

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

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”), and Ohio Valley Financial Services Agency, LLC, an

insurance agency.

The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC, an Ohio limited liability company.

In December 2023, Ohio Valley ceased operating Race Day Mortgage, Inc.

(“Race Day”), which had been a wholly-owned subsidiary of the

Bank since April 2021.

The decision to cease operating Race Day was made due to low loan demand, poor employee retention, and lack of profitability.

In December 2023, Ohio Valley also ceased operating OVBC Captive, Inc.

(the “Captive”), which had been

a subsidiary of Ohio Valley since July 2014.

The decision to cease operating the Captive was the result of proposed IRS regulations that adversely impacted the taxation of small captives and severely limited the Captive’s ability to operate.

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

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

IMPACT OF ADOPTING NEW ACCOUNTING GUIDANCE:

Effective January 1, 2023, the Company adopted ASU No.

2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”) (“ASC 326”) as amended.

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).

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.

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.

The adoption of ASC 326 did not have an effect to net earnings on January 1, 2023.

FINANCIAL RESULTS OVERVIEW:

Net income totaled $2,793 during the

third quarter of 2023, a decrease of $1,439 from the same period of 2022.

Earnings per share for the third quarter of 2023 finished at $.47 per share, compared to $.77 per share during the third quarter of 2022.

Net income totaled $9,408 during the

nine months ended September 30, 2023, a decrease of $406 from the same period of 2022.

Earnings per share during the first nine months of 2023 finished at $1.97 per share, compared to $2.06 per share during the first nine months of 2022.

the quarterly and year-to-date periods, earnings were negatively impacted by higher provision for credit loss and noninterest expenses.

Net earnings were also negatively impacted by lower net interest income during the quarterly period, while higher

net interest income had a positive impact to net earnings during the year-to-date period.

Noninterest income was relatively stable and had minimal impact to both the quarterly and year-to-date net earnings.

The impact of lower 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 decreased to 1.00% for the nine months ended September 30, 2023, compared to 1.04% for the nine months ended September 30, 2022.

Company’s net income to average equity ratio, or return on equity, also decreased to 9.21% for the nine months ended September 30, 2023, compared to 9.56% for the nine months ended September 30, 2022.

During the three months ended September 30, 2023, net interest income decreased $469 from the same period in 2022.

This was impacted by a decrease in the net

interest margin, which finished at 3.85% during the three months ended September 30, 2023, compared to 4.03% during the same period in 2022.

Margin compression during the quarter was largely the result of rate increases on deposit accounts and a

composition shift to higher-cost certificate of deposit (“CD”) accounts.

Furthermore, the higher utilization of wholesale funding sources to fund quarterly asset growth contributed to a higher cost of funds, which also had a negative effect on the

Partially offsetting the negative effects of higher-cost funding sources was a 0.8% increase in average earning assets during the third quarter of 2023, primarily from loans.

In contrast to the quarterly results, net interest income during the

nine months ended September 30, 2023 increased $2,324 over the same period in 2022.

Growth in year-to-date net interest income was impacted by an increase 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% for the nine months ended September 30, 2023, compared to 3.73% for the

same period in 2022.

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

Average earning assets decreased 0.5% during the first nine months of 2023,

compared to the same period in 2022.

While average earning assets were down, 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 nine

months ended September 30, 2023, average loans increased $87,715, while average balances with the Federal Reserve decreased $73,664, compared to the same period in 2022.

During the three and nine months ended September 30, 2023, the Company’s provision expense for credit loss was $888 and $1,401, compared to a negative

provision of $378 and $691 during the three and nine months ended September 30, 2022, respectively.

Provision expense during 2023 was largely related to net charge-offs, increases in certain qualitative risk factors, and a general growth in loan

balances, partially offset by lower expected loss rates.

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.

Noninterest income decreased $47 during the three months ended September 30, 2023, and increased $77 during the nine months ended September 30, 2023,

compared to the same periods in 2022.

The factors contributing to increases in noninterest income were largely from higher service charges on deposit accounts and higher commissions earned by Race Day during 2023 for mortgage application referrals.

factors contributing to decreases in noninterest income were largely from 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 nine months ended September 30, 2023, noninterest expense increased $32 and $908 over the same periods in 2022, respectively.

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 furniture and equipment costs, partially offset

by decreases in professional fees and Race Day operating expenses.

The Company’s provision for income taxes decreased $375 and $193 during the three and nine months ended September 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 September 30, 2023, total assets were $1,313,952, an increase of $103,165 from year-end 2022.

Higher assets were primarily impacted by increases in loans

and cash and cash equivalents, which were collectively up $121,373, or 13.0%, from year-end 2022.

Growth in total loans came from increases in the consumer loan segment (+15.2%), residential real estate loan segment (+8.4%), commercial real estate loan

segment (+7.8%), and commercial and industrial loan segment (+4.0%).

Growth in cash and cash equivalents came primarily from higher balances held at the Federal Reserve as a result of proceeds from the maturities and principal repayments of securities,

as well as the growth in deposits and other borrowed funds.

At September 30, 2023, total liabilities were $1,177,159, up $101,400 from year-end 2022.

Contributing most to this increase were higher deposit balances,

which increased $67,885 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 September 30, 2023, total shareholders' equity was $136,793, up $1,765 from December 31, 2022.

This increase came from year-to-date net income, partially

offset by cash dividends paid and an increase in net unrealized losses on available for sale securities.

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.

first quarter of 2024, a decrease of $1,115 from the same period of 2023.

Earnings per share for the first quarter of 2024 finished at $.58 per share, compared to $.82 per share during the first quarter of 2023.

Lower quarterly earnings were largely

the result of decreases in both net interest and noninterest income combined with increases in both provision for credit losses and noninterest expense.

The impact of lower net earnings during the first quarter of 2024 also had a direct impact to the

Company’s annualized net income to average asset ratio, or return on assets, which decreased to 0.83% for the three months ended March 31, 2024, compared to 1.28% for the three months ended March 31, 2023.

In addition, the Company’s net income to

average equity ratio, or return on equity, decreased to 7.77% for the three months ended March 31, 2024, compared to 11.85% for the three months ended March 31, 2023.

During the three months ended March 31, 2024, net interest income decreased $532, or 4.5%, from the same period in 2023.

The decrease was largely related to

the decrease in the net interest margin, which was partially offset by growth in average earning assets, led by strong growth in the loan portfolio.

The net interest margin decreased 60 basis points from 4.21% during the quarter ended March 31, 2023,

to 3.61% during the quarter ended March 31, 2024.

The margin decrease was largely related to the cost of funding sources increasing more than the yield on earning assets.

This increase in the cost of funding was partially linked to the Company’s

decision to increase rates on deposit accounts to attract deposits amidst heightened market competition for such funds.

In addition, the composition of funding sources trended toward certificates of deposit (“CDs”), and wholesale funding sources, which

generally cost more than other funding sources, such as checking, NOW, savings and money market deposit products.

The effects from a lower margin were partially offset by a 10.5% increase in average earning assets, primarily from average loans, which

were up $78,997 during the first quarter of 2024 compared to the same period in 2023, led by the commercial and residential real estate loan segments.

For the same period, the average balance maintained at the Federal Reserve increased $60,307 and

average securities decreased $16,983, as maturities were deployed into higher yielding loans.

The Company’s provision for credit loss expense increased $262, or 53.6%, during the first quarter of 2024 compared to the same period in 2023.

was primarily related to a $106 increase in net charge-offs, higher general reserves associated with the growth in loans, and an increase in select

qualitative risk factors.

During the three months ended March 31, 2024, noninterest income decreased $71, or 1.9%, from the same period in 2023.

This decrease was largely due to the

closure of Race Day at the end of 2023.

Due to the closure, there was no mortgage application referral income earned in 2024 compared to $231 in commissions earned during the first quarter of 2023.

This decrease was partially offset by a $114 increase

in service charges on deposit accounts.

During the three months ended March 31, 2024, noninterest expense increased $469, or 4.6%, over the same period in 2023.

The increase was primarily related

to a $283 increase in salaries and employee benefit costs, impacted by higher annual merit increases and higher health insurance premiums.

The Company also experienced increases in both data processing and software expense, which were up $246 during

the first quarter of 2024 compared to the same period in 2023.

The Company’s provision for income taxes decreased $219 during the three months ended March 31, 2024, compared to the same period in 2023.

This was largely

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

At March 31, 2024, total assets were $1,372,599, an increase of $20,464 from year-end 2023.

Higher assets were primarily impacted by an increase in loans,

which were up $17,962, or 1.8%, from year-end 2023.

Growth in loans came from increases in the commercial real estate loan segment (+4.0%), commercial and industrial loan segment (+2.0%), and residential real estate loan segment (+1.6%), partially

offset by a decrease in the consumer loan segment (-2.0%).

At March 31, 2024, total liabilities were $1,226,817, up $18,689 from year-end 2023.

Contributing most to this increase were higher deposit balances, which

increased $21,648 from year-end 2023.

The deposit increase was primarily impacted by higher time deposits and NOW account deposits, partially offset by lower noninterest-bearing demand deposits.

At March 31, 2024, total shareholders' equity was $145,782, up $1,775 from December 31, 2023.

This increase came primarily from quarterly net income,

partially offset by quarterly cash dividends paid and an increase in net unrealized losses on available for sale securities.

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

Comparison of Financial Condition

at September 30, 2023 and December 31, 2022

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

at March 31, 2024 and December 31, 2023

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at March 31, 2024 compared to December 31, 2023.

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

Cash and Cash Equivalents

At September 30, 2023, cash and cash equivalents were $91,190, an increase of $45,200, or 98.3%, from December 31, 2022.

The increase in cash and cash

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

Over 80% of cash and cash equivalents consisted of the Company’s interest-bearing Federal Reserve Bank clearing account, which increased $42,359, or

137.6%, from year-end 2022.

At March 31, 2024, cash and cash equivalents were $129,060, an increase of $934, or 0.7%, from December 31, 2023.

The increase came primarily from cash and

noninterest-bearing deposits with banks, which were up $1,170, or 8.2%, from year-end 2023, primarily from higher cash on hand.

Over 88% of cash and cash equivalents is comprised of the Company’s interest-bearing Federal Reserve Bank clearing account,

which contributed most to the $236, or 0.2%, decrease in interest-bearing deposits with banks.

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 nine months 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 nine months of 2023, the rate associated with the Company’s Federal Reserve Bank clearing account increased 100 basis points due to continued rising inflationary concerns, resulting in a target federal funds rate range of 5.25% to

During the first quarter of 2024, the Company experienced increases in funds primarily from interest-bearing deposits, which were used to reinvest in

higher-yielding loans, and to also help cover deposit runoff in noninterest-bearing demand 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 2024, the rate associated with the Company’s Federal Reserve Bank clearing account remained at the target federal funds rate range of 5.25% to 5.50%.

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

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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 in Financial Institutions

At September 30, 2023, the Company had no balances classified as CDs owned by the Captive, compared to $1,862 at year-end 2022.

The balance of total securities decreased $17,512, or 9.1%, compared to year-end 2022.

The decrease came mostly from U.S.

Government agency (“Agency”)

mortgage-backed securities, which were down $15,994, or 13.2%, from year-end 2022.

The Company’s investment securities portfolio is made up mostly of Agency mortgage-backed securities, which represented 59.9% of total investments at September 30,

During the first nine months of 2023, the Company received proceeds from principal repayments of $13,773.

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.

Further contributing to these decreasing factors were changes in net unrealized losses associated with available for sale securities.

During the nine months

ended September 2023, long-term reinvestment rates increased, which led to a $2,097 decrease 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

moved up, the unrealized loss in the portfolio was increased causing the fair value to decrease.

Total securities of $170,154 at March 31, 2024 were relatively stable when compared to $170,244 at year-end 2023, decreasing just $90, or 0.1%.

Company’s U.S.

Government securities portfolio increased $4,583, or 9.1%, from year-end 2023.

This increase in U.S.

Government securities came primarily from $9,554 in purchases partially offset by $5,000 in maturities.

Completely offsetting the

increase in U.S.

Government securities was a decrease in U.S.

Government agency (“Agency”) mortgage-backed securities, which were down $4,595, or 4.3%, from year-end 2023.

The Company’s investment securities portfolio is made up mostly of Agency

mortgage-backed securities, which represented 59.6% of total investments at March 31, 2024.

During the first quarter of 2024, the Company received proceeds from principal repayments of $4,119.

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.

Included in the decreasing factors mentioned above were changes in net unrealized losses associated with available for sale securities.

long-term reinvestment rates increased, which led to a $600 decrease 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 increased, the unrealized

loss in the portfolio was increased causing the fair value to decrease.

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

$961,222 at September 30, 2023, representing an increase of $76,173, or 8.6%, as compared to $885,049 at December 31, 2022.

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

Loan segments have been identified

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

Commercial real estate consists of owner-occupied, nonowner-occupied and construction loans.

Owner-occupied loans consist of nonfarm, nonresidential

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

Owner-occupied loans of the Company include loans secured by hospitals, churches, and hardware and convenience stores.

Nonowner-occupied loans are property loans for which the repayment of principal is dependent upon rental income associated

with the property or the subsequent sale of the property, such as apartment buildings, condominiums, hotels, and motels.

These loans are primarily impacted by the level of interest rates associated with the debt and to local economic conditions, which

dictate occupancy rates and the amount of rent charged.

The increase in debt service due to higher interest rates may not be able to be passed on to tenants.

As part of the origination process, loan interest rates and occupancy rates are stressed to

determine the impact on the borrower’s ability to maintain adequate debt service under different economic conditions.

Furthermore, the Company monitors the concentration in any one industry and has established limits relative to capital.

credit quality trends are monitored by industry to determine if a change in the risk exposure to a certain industry may warrant a change in our underwriting standards.

Table I has been provided to illustrate the industry composition of the commercial

real estate portfolio.

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

Commercial real

estate also includes loan participations with other banks outside the Company’s primary market area.

COMMERCIAL REAL ESTATE BY INDUSTRY

As of March 31, 2024

The following table provides the composition of commercial real estate loans by industry classification (as defined by the North American Industry

Classification System).

(dollars in thousands)

Real Estate Rental and Leasing

Accommodation and Food Services

Health Care and Social Assistance

Manufacturing

Although the Company is not actively seeking to participate in loans originated outside its primary market area, it has taken advantage of the relationships

it has with certain lenders in those areas where the Company believes it can profitably participate with an acceptable level of risk.

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.

Residential real estate loans consist of loans to individuals for the purchase of 1-4 family primary residences with repayment primarily through wage or

other income sources of the individual borrower.

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

Consumer loans are primarily secured by automobiles, mobile homes, recreational vehicles, and other personal property.

Personal loans and unsecured credit

card receivables are also included as consumer loans.

The Company’s loan balances increased to $989,862 at March 31, 2024, representing an increase of $17,962, or 1.8%, as compared to $971,900 at December 31,

The increase in loans came primarily from the commercial and residential real estate loan portfolios, partially offset by a decrease in the consumer portfolio from year-end 2023.

The Company’s commercial loan portfolio increased $16,178, or 3.4%, from year-end 2023.

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the commercial real estate portfolio, which increased $13,003, or 4.0%, from year-end 2023.

The commercial real estate segment comprised the second largest portion of the Company’s total loan portfolio at September 30, 2023, at 32.4%.

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 $6,043, or 4.0%, from year-end 2022.

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.

Collateral securing these loans includes equipment, inventory, and stock.

The Company’s residential real estate loan portfolio increased $24,931, or 8.4%, from year-end 2022.

At September 30, 2023, residential real estate loans

represented the largest segment of the Company’s total loan portfolio at 33.5% 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.

in residential real estate loans was largely related to short-term adjustable-rate mortgages, which increased $24,468, or 14.9%, 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.

Further increases in loans came from the Company’s total consumer loan balances from year-end 2022, which increased $22,544, or 15.2%.

This change was

impacted by a $10,883, or 16.6%, 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 $12,412 at September 30, 2023.

consumer loans also came from a $7,379, or 13.5%, increase in automobile loans, and a $4,282, or 15.4%, increase in home equity lines of credit.

The commercial real estate segment comprised the largest portion of the Company’s total loan portfolio at March 31, 2024, at 33.9%.

The increase from year-end

2023 came primarily from new originations within the construction and nonowner-occupied loan segments, which offset the decrease from larger payoffs within owner-occupied loans from year-end 2023.

Commercial loans were also positively impacted by an increase in the commercial and industrial portfolio, which was up $3,175, or 2.0%, from year-end 2023.

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

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

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its commercial lending, which generally yields a higher return on investment as compared to other types of loans.

Further increases in loans came from the Company’s residential real estate loan portfolio, which increased $5,234, or 1.6%, from year-end 2023.

real estate loans represent the second largest segment of the Company’s total loan portfolio at 32.8%.

During 2024, mortgage rates continued to increase

as a result of an elevated interest rate environment, which provided the Company with less opportunities to sell long-term fixed rate loans to the secondary market.

With elevated mortgage rates, mortgage customers were selecting more in-house variable

rate mortgage products instead of long-term fixed rate mortgage products.

This had a direct impact on lowering loan volume within the long-term fixed rate loan portfolio (down $1,527) and contributed to a shift into more short-term variable rate

mortgages (up $8,646) at March 31, 2024.

The increases in the Company’s loan balances at March 31, 2024 were partially offset by a decrease in the consumer loan portfolio, which decreased $3,450, or

2.0%, from year-end 2023.

This change was impacted by a $3,171, or 4.2%, decrease in other consumer loans, impacted by principal repayments and payoffs.

Decreases in consumer loans also came from a $2,820, or 4.6%, decrease in automobile loans from

year-end 2023.

This was directly impacted by management’s strategy to place more emphasis on higher yielding loan portfolios (i.e.

commercial, and to a smaller extent, residential real estate).

Indirect automobile loans bear additional costs from

dealers that partially offset interest revenue and lower the rate of return.

Decreases in consumer loans were partially offset by a $2,541, or 7.1%, increase in home equity lines of credit.

Allowance for Credit Losses

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

Upon adoption of ASC 326 on January 1, 2023, and as of September 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

and nine months ended September 30, 2023.

As of March 31, 2024, the Company determined that all AFS securities that experienced a decline in fair value below the amortized cost basis from year-end 2023 were due to

non-credit related factors.

Furthermore, the Company does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.

no ACL was recorded, and no provision expense was recognized during the three months ended March 31, 2024 .

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 September 30, 2023, the ACL for HTM debt securities was reduced to $2 based on a decrease in the cumulative default rate from .03% to .02%.

This resulted in a $1 recovery of provision expense during the three and nine

months ended September 30, 2023.

At March 31, 2024, a $2 ACL was recognized based on a .02% cumulative default rate taken from the S&P and Moody’s bond rating

The $2 ACL for HTM debt securities was unchanged from December 31, 2023, resulting in no provision expense during the three months ended March 31, 2024.

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

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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.

The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments.

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

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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 September 30, 2023, the ACL for loans totaled $8,173, or 0.85%, of total loans.

As of March 31, 2024, the ACL for loans totaled $9,229, or 0.93%, of total loans.

As of December 31, 2023, the ACL for loans totaled $8,767, or 0.90%, of

The increase in the ACL of $2,904, or 55.1%, 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 $742 to finish with $8,173 in reserves, all from loans collectively evaluated.

This increase was mostly

impacted by additional reserves associated with certain qualitative risk factors incorporating the national trend of higher loan delinquencies and charge offs.

Higher ACL reserves were also impacted by a $22,441 increase in collectively evaluated loan

balances during the first nine months of 2023, primarily from the consumer and commercial loan segments.

These factors were partially offset by lower expected loss rates in relation to an improved unemployment and gross domestic product forecast.

The Company experienced lower delinquency levels from year-end 2022.

Nonperforming loans to total loans decreased to 0.28% at September 30, 2023, compared to

0.43% at December 31, 2022, and nonperforming assets to total assets decreased to 0.21% at September 30, 2023, compared to 0.31% at December 31, 2022.

During the first nine months of 2023, the Company individually evaluated several loans associated with two borrower relationships 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 nine months ended September

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

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

The increase in the ACL of $462, or 5.3%, was all from loans collectively evaluated.

The increase was impacted by additional reserves from a higher historical loss rate within the residential real estate loan segment, and a qualitative

risk adjustment that increased reserves within the commercial real estate segment.

Higher ACL reserves were also impacted by an $18,037 increase in collectively evaluated loan balances during the first quarter of 2024, primarily from the commercial

real estate loan segment.

The Company experienced higher delinquency levels from year-end 2023.

Nonperforming loans to total loans increased to 0.37% at March 31, 2024, compared to

0.26% at December 31, 2023, and nonperforming assets to total assets increased to 0.27% at March 31, 2024, compared to 0.19% at December 31, 2023.

The increase in both delinquency calculations resulted from an increase in nonaccrual loans, primarily as

a result of one residential real estate loan totaling $927 that was placed into nonaccrual status during the first quarter of 2024.

During the first quarter of 2024, the Company individually evaluated several loans associated with three borrower relationships for expected credit loss.

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

As a result, there were no specific reserves recorded during the three months ended March 31, 2024.

Management believes that the ACL at March 31, 2024 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 ACL 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 are used as part of the Company’s liquidity management strategy to meet obligations for depositor withdrawals, fund the

borrowing needs of loan customers, and fund ongoing operations.

Total deposits at September 30, 2023 increased $67,885, or 6.6%, from year-end 2022.

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

$95,753, or 14.2%, from year-end 2022, while noninterest-bearing deposits decreased $27,868, or 7.9%, from year-end 2022.

Deposits continue to be the most significant source of funds used by the Company to support earning assets.

Total deposits at March 31, 2024 increased $21,648, or 1.9%, from year-end 2023.

This change in deposits came primarily from interest-bearing deposit balances, which were up by $37,296, or 4.6%, from year-end 2023, while noninterest-bearing deposits decreased $15,648, or 4.9%, from year-end 2023.

The increase in interest-bearing deposits came primarily from time deposit balances, which increased $17,334, or 4.6%, from year-end

The increase came from retail time deposits, which increased $17,831 from year-end 2023.

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

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.

Further increases came from brokered CD issuances, which were up collectively by

$63,987, primarily to fund asset growth during the first nine months of 2023.

Partially offsetting the increases in time deposits were decreases in savings deposits (down $25,957) and money market deposits (down

As deposit competition increased in 2023 due to the elevated market rate environment, prices on the Company’s retail CDs adjusted upward and influenced a

consumer shift away from both noninterest-bearing deposits and lower-cost savings products, and into a greater number of higher-cost time deposit products, such as CDs.

Wholesale time deposit issuances decreased $498, or 0.6%, from year-end 2023.

Also impacting deposit balance growth were higher interest-bearing NOW account balances, which increased $14,049, or 8.2%, from year-end

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

Further increases in interest-bearing deposits came from savings and money market account balances, which increased $5,913, or 2.3%,

from year-end 2023.

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

The growth in time deposit balances were also partially offset by lower interest-bearing NOW account balances from year-end 2022, which

decreased $21,109, or 10.1%.

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 increase came from money market accounts, particularly the Company’s tiered money market product (Money Fund) that was introduced in 2023 and offers a higher rate on tiered deposit balances.

The Company’s savings account

balances were down from year-end 2023.

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

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Other Borrowed Funds

Other borrowed funds were $45,751 at September 30, 2023, an increase of $27,806, or 155.0%, from year-end 2022.

The increase was related

to a $10,000 FHLB fixed-rate advance from the second quarter and $20,000 in FHLB fixed-rate advances from the third quarter that were 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.

Other borrowed funds were $43,261 at March 31, 2024, a decrease of $1,332, or 3.0%, from year-end 2023.

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.

Shareholders’ Equity

Total shareholders' equity at September 30, 2023 increased $1,765, or 1.3%, to finish at $136,793, as compared to $135,028 at December

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

The after-tax change in

fair value totaled $1,657 from year-end 2022, as long-term market rates increased during the first nine months of 2023, causing a decrease 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 March 31, 2024 increased $1,775, or 1.2%, to finish at $145,782, as compared to $144,007 at December 31,

This was primarily from quarterly net income, partially offset by cash dividends paid and a decrease in the fair value of available for sale securities.

The after-tax change in fair value totaled $468 from year-end 2023, as long-term market rates

increased during the first three months of 2024, causing a decrease in the fair value of the Company’s available for sale investment portfolio.

Comparison of Results of Operations

For the Three and Nine Months Ended

September 30, 2023 and 2022

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

ended September 30, 2023, compared to the same period in 2022.

For the Three Months Ended

March 31, 2024 and 2023

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

March 31, 2024, compared to the same period in 2023.

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

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assets and interest expense incurred on interest-bearing liabilities.

During the three months ended September 30, 2023, net interest income decreased $469, or 4.0%, compared to the same period in 2022.

During the nine months ended September 30, 2023,

net interest income increased $2,324, or 7.2%, compared to the same period in 2022.

The quarterly decrease in net interest income was negatively impacted by the current trend of rising interest costs that emerged in late 2022 and early 2023.

most of 2022, the Company experienced an increasing trend in the net interest margin in relation to the significant increase in market interest rates based on actions taken by the Federal Reserve.

These rate increases were favorable to the Bank as a

result of the substantial amount of immediately-repricing, interest-earning assets it maintained on its balance sheet and the ability to sustain a low cost of deposits in relation to the rising interest rates.

However, during the fourth quarter of 2022

and first quarter of 2023, the Bank began to use its excess cash to fund a decline in deposit balances and an increase in loans.

In addition, during the first quarter of 2023, the average cost of the Bank’s interest-bearing deposits began to increase

more significantly due to customer pricing pressures, deposit competition, and a higher utilization of wholesale funding sources.

These factors contributed to net interest margin compression during the third quarter of 2023, resulting in a higher

increase in interest expense on deposits and borrowings than the increase in interest income on earning assets.

While the year-to-date net interest margin continues to remain stronger than the year before, the higher deposit rates and use of more

expensive wholesale funding sources continue to reduce the pace of margin growth.

The net interest margin during the nine months ended September 30, 2023 increased 30 basis points over the prior year.

This is compared to a year-over-year margin

increase of 54 basis points at June 30, 2023, and a year-over-year margin increase of 70 basis points at March 31, 2023.

Total interest and fee income recognized on the Company’s earning assets increased $3,400, or 27.1%, during the third quarter of 2023, and $10,333, or 30.0%,

during the first nine months of 2023, compared to the same periods in 2022.

The earnings growth was impacted by interest on loans, which increased $3,315, or 30.2%, and $9,066, or 29.4%, during the three and nine months ended September 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 September

2022, the Federal Reserve has increased rates by another 225 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 90 basis points to 6.02% during

the third quarter of 2023, and increased 85 basis points to 5.82% during the first nine months of 2023, compared to the same periods in 2022, respectively.

Average loans increased $92,049, or 10.7%, and $87,716, or 10.5%, during the three and nine

months ended September 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 $85 during the third quarter of 2023, and $897 during the first nine months 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 September 2022, the target federal funds rate has increased by another 225 basis points.

This had a corresponding effect to the interest rate tied to

the Federal Reserve clearing account, which also increased by 225 basis points during that time.

The impact from higher rates was partially offset by lower average Federal Reserve Bank balances, which decreased $46,031 during the third quarter of 2023,

and $73,664 during the first nine months 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 $23, or 2.5%, during the third quarter of 2023, and $360, or 14.0%, during the first nine months of 2023, compared to

the same periods in 2022, respectively.

Contributing most to this increase was the average yield on securities increasing 21 basis points to reach 1.91% during the third quarter of 2023, and 29 basis points to reach 1.92% during the first nine months

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 $19,301 and $16,870 during the third quarter and first nine months of 2023, compared to the same

periods in 2022, respectively.

Total interest expense incurred on the Company’s interest-bearing liabilities increased $3,869 during the third quarter of 2023, and $8,009 during the first

nine months of 2023, compared to the same periods in 2022, respectively.

During the three months ended March 31, 2024, net interest income decreased $532, or 4.5%, compared to the same period in 2023.

The decrease was largely related to the negative

impact of higher average costs paid on deposits and borrowings completely offsetting higher earning asset yields, which contributed to a 60 basis point decrease in the net interest margin.

These negative effects were partially offset by a composition

shift into higher-yielding loans.

Total interest and fee income recognized on the Company’s earning assets increased $3,890, or 28.2%, during the first quarter of 2024, compared to the same

period in 2023.

The earnings growth was impacted by interest on loans, which increased $2,912, or 25.2%.

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

rates by 425 basis points during 2022 and another 100 basis points during 2023.

This has contributed to the repricing of a portion of the Company’s loan portfolio.

As a result, the average interest rate yield on loans increased 72 basis points to 6.34%

during the first quarter of 2024, compared to 5.62% during the first quarter of 2023.

Average loans increased $78,996 during the first quarter of 2024, compared to the first quarter of 2023.

The quarter-to-date increase was largely impacted by growth

in average commercial and residential real estate loans.

Total interest income from interest-bearing deposits with banks increased $991 during the first quarter of 2024, compared to the same period in 2023.

increase was largely from a $60,308 increase in average balances associated with the Company’s interest-bearing Federal Reserve Bank clearing account during the first quarter of 2024, compared to the first quarter of 2023.

Increases in Federal Reserve

Bank clearing balances were impacted by the growth in interest-bearing Bank deposits, influenced by product rate increases during 2023 and 2024.

Excess funds also came from the maturities and paydowns on investment securities, as well as new FHLB

The Company utilized a portion of these proceeds to fund the growth in loans.

Further impacting interest income from interest-bearing deposits with banks were rate increases associated with the Federal Reserve Bank clearing account.

previously mentioned, the Federal Reserve took action during 2022 and 2023 to increase short-term rates due to rising inflationary concerns.

Since the end of March 2023, the target federal funds rate increased by another 50 basis points, which had a

corresponding effect to the interest rate tied to the Federal Reserve clearing account.

Total interest on securities decreased $81, or 8.1%, during the first quarter of 2024, compared to the same period in 2023, impacted mostly by a $16,983

decrease in average security balances.

During 2023, the Company placed more emphasis on growing its higher-yielding loan portfolio and utilized proceeds from various maturities and repayments of securities to help fund this growth.

The negative impact

from lower average balances was partially offset by a 7 basis point increase in the average yield on securities, which grew to 1.98% during the first quarter of 2024 compared to 1.91% during the first quarter of 2023.

The average yield increase was

positively impacted by the elevated market rate environment during both 2023 and 2024.

Total interest expense incurred on the Company’s interest-bearing liabilities increased $4,422 during the first quarter of 2024, compared to the same period

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 NOW, savings and money market deposit products (average cost at 0.78%) into more time deposit products (average cost at 3.24%).

Furthermore, the Company issued $76,134 in

brokered CDs during the first half of 2023 with a weighted average interest rate of 4.58%.

These wholesale deposits were used to fund asset growth, 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 $70,389) into more higher-cost average time deposit balances (up $80,383).

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 136 basis points from 0.28% at September 30, 2022, to 1.64% at September 30, 2023.

As market competition continued to increase, rate offerings on CDs continued to adjust up in 2023.

Company increased CD rates during this time to attract and retain deposits, which has led to more of a consumer demand to reinvest from lower-cost NOW, savings and money market account deposit products (down $63,751 at an average cost of 1.33%) into

more higher-cost time deposit products (up $174,225 at an average cost of 4.63%).

Furthermore, the Company’s average wholesale funding balances increased $49,897, which included the use of brokered CDs (average cost of 4.87%) and FHLB advances (average

cost of 4.03%).

These higher-cost wholesale deposits were used to fund asset growth, but also contributed to the growth in interest expense over 2023.

As a result of the rate repricings on time deposits and the deposit shift into higher-cost funding

sources, the Company’s total weighted average costs on interest-bearing liabilities increased by 187 basis points from 1.07% at March 31, 2023, to 2.94% at March 31, 2024.

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

During 2024, the

Company’s third quarter net interest margin decreased to 3.85% at September 30, 2023, compared to 2022’s third quarter net interest margin of 4.03% at September 30, 2022.

As previously discussed, the quarterly margin decrease was caused by higher

average costs associated with the Bank’s interest-bearing liabilities due to customer pricing pressures, deposit competition, and a higher utilization of wholesale funding sources.

Furthermore, the Bank continues to experience a deposit composition

shift into more higher-costing retail CDs and less lower-costing NOW, savings, money market, and checking account deposits, which put increased pressure on margin growth during the third quarter of 2023.

Partially offsetting these negative effects

during the third quarter of 2023 were increases in earning asset yields and a higher composition of average loan balances.

The Company’s year-to-date net interest margin improved to 4.03% at September 30, 2023, compared to 2022’s year-to-date net interest margin of 3.73% at

September 30, 2022.

Year-to-date margin improvement was 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.

Partially offsetting these positive effects to the margin have been

increases in average deposit costs and the composition shift to higher-cost time deposit balances from a year ago.

Company’s first quarter net interest margin decreased to 3.61%, compared to 2023’s first quarter net interest margin of 4.21%.

The quarterly margin decrease was impacted by higher average costs associated with the Bank’s interest-bearing liabilities

due to customer pricing pressures, deposit competition, and a higher utilization of wholesale funding sources.

Furthermore, the Bank continues to experience a deposit composition shift into more higher-cost retail CDs and less lower-cost NOW, savings,

money market, and checking account deposits, which put increased pressure on margin growth during the first quarter of 2024.

Partially offsetting these negative effects during the first quarter of 2024 were increases in earning asset yields and a

higher composition of average loan balances.

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

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

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

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

Provision for Credit Losses

For the three months ended September 30, 2023, the Company’s provision for credit losses expense totaled $888, an increase of $1,266 when compared to $378 in

negative provision expense during the three months ended September 30, 2022.

For 2023, third quarter provision expense was primarily related to additional reserves associated with certain qualitative risk factors that incorporated a national trend of

higher loan delinquencies and charge offs.

This contributed to $779 in provision expense from the Company’s economic risk factor calculation.

Other increases to provision expense came from higher net charge-offs on loans and an increase in general

loan balances, that collectively contributed to $301 in provision expense during the third quarter of 2023.

Partially offsetting these negative effects was a $310 reduction in provision expense from the Company’s lower expected loss rates in relation

to an improved unemployment and gross domestic product forecast.

For 2022, third quarter negative provision expense was related to the elimination of a specific reserve on a collateral dependent impaired loan.

Upon receiving payoff of the impaired

loan, the Company reduced provision expense by $297, which had represented the specific reserves allocated to the collateral deficiency of the loan.

For the nine months ended September 30, 2023, the Company’s provision for credit losses expense totaled $1,401, an increase of $2,092 when compared to $691

in negative provision expense during the nine months ended September 30, 2022.

For 2023, year-to-date provision expense was impacted by additional

reserves associated with certain qualitative risk factors that incorporated a national trend of higher loan delinquencies and charge offs.

This contributed to $863 in provision expense from the Company’s economic risk factor calculation.

Further provision expense in 2023 came from $649 in net loan

charge-offs and $614 in expected losses associated with an increase in general loan balances from year-end 2022.

Partially offsetting these negative effects was a $748 reduction in provision expense from the Company’s lower expected loss

rates in relation to an improved unemployment and gross domestic product forecast.

For 2022, year-to-date negative provision expense was 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 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

nine months of 2022 was the release of $1,017 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 $1,017 to provision expense during the first nine months of 2022.

The impact of lower general reserves was partially offset by $981

in net charge-offs, which increased provision expense during the first nine months 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 September 30, 2023 and determined a reserve of $643 was required, which resulted in provision expense of $77 during the third quarter of 2023, and provision expense of $12 during the first nine months of 2023.

Credit loss expense during 2023 was further impacted by held to maturity debt securities.

Upon adoption of ASC 326, the Company established $3 in reserves

for held to maturity debt securities 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 reserve for held to maturity debt securities at September

30, 2023 and determined a reserve of $2 was required, which resulted in a $1 recovery of provision expense during both the three and nine months ended September 30, 2023.

Provision for credit losses is recorded to achieve an ACL that is adequate to absorb estimated losses inherent in the Company’s loan portfolio, unfunded

loans, and held to maturity debt securities.

Management performs, on a quarterly basis, a detailed analysis of the ACL that encompasses asset portfolio composition, asset quality, loss experience and other relevant economic factors.

The Company’s

provision for credit losses expense totaled $751 during the three months ended March 31, 2024, an increase of $262, or 53.6%, when compared to $489 in provision expense during the three months ended March 31, 2023.

The increase in credit loss expense

came primarily from loans, impacted by additional reserves associated with certain qualitative risk factors and historical loan loss factors that contributed to $316 in additional provision expense during the first quarter of 2024.

The increasing

factors came primarily from the residential real estate and commercial real estate loan segments.

Further increases in loan provision came from an increase in net charge-offs, which increased $106, or 37.0%, during the first quarter of 2024, compared

to the same period in 2023.

Higher net charge-offs during 2024 came mostly from the consumer loan portfolio and required corresponding increases to provision expense.

Partially offsetting the increasing effects to provision expense mentioned above was

a $4,404 decrease in collectively evaluated loan balances at March 31, 2024 compared to March 31, 2023.

This resulted in less general reserves and a corresponding

decrease to provision expense.

Partially offsetting the increase in credit loss expense on loans was a $130 decrease in credit loss expense on unfunded commitments during the first quarter

of 2024, compared to the same period in 2023.

During the first quarter of 2024, credit loss expense on unfunded commitments was reduced by $106, compared to $24 in credit loss expense during the first quarter of 2023.

This was primarily due to the

increases in funding of commercial real estate construction loans during the first quarter of 2024 that reduced the unused commitments on those funds.

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”).

detail under the caption “Critical Accounting Policies - Allowance for Credit Losses” within this Management’s Discussion and Analysis.

Noninterest Income

Noninterest income decreased $47, or 1.8%, during the three months ended September 30, 2023, and increased $77, or 0.9%, during the nine months ended

September 30, 2023, compared to the same periods in 2022, respectively.

Noninterest revenue was positively impacted by increases in other noninterest income, which increased $37 and $462 during the three and nine months ended September 30, 2023,

compared to the same periods in 2022, respectively.

The changes to 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 commissions earned on mortgage application referrals ended in April 2023, which led to no commission revenue earned during

the third quarter of 2023, compared to no fee income earned during the third quarter of 2022.

Race Day’s mortgage broker fee income during the nine months ended September 30, 2023 totaled $247, compared to no income earned during the nine months ended

September 30, 2022.

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 and commissions from card merchants, which were collectively up $92 and $205 during the three and nine months ended September 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 $52 during the third quarter of 2023,

and $163 during the first nine months 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.

Noninterest income was negatively impacted by 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 fixed-rate 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 $36 and $176 during the three and nine months ended September 30, 2023, while Race Day’s mortgage banking income decreased $107 and $331 during the three and nine months ended September 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 increased $7, or 0.4%, and decreased $41, or 0.7%, during the three and nine months ended September 30, 2023,

compared to the same periods in 2022, respectively.

The quarterly increase came primarily from growth in bank owned life insurance and annuity asset income.

The year-to-date decrease came primarily from lower tax preparation fees and bank owned life

insurance and annuity asset income, partially offset by an increase in debit/credit card interchange income.

Noninterest income decreased $71, or 1.9%, during the three months ended March 31, 2024, compared to the same period in 2023.

Lower noninterest revenue was

largely impacted by decreases in other noninterest income, which decreased $161 from 2023.

The decrease was largely impacted by the closing of Race Day in December 2023, which resulted in a $231 decrease in mortgage application referral income.

Partially offsetting the decrease in other noninterest income was a $114, or 18.7%, increase in service charges on deposit accounts during the first quarter

of 2024, compared to the same period in 2023.

This was impacted by a higher volume of overdraft transactions during the three months ended March 31, 2024.

The remaining noninterest income categories decreased $24, or 0.9%, during the first quarter of 2024, compared to the first quarter of 2023.

The net decrease

came primarily from debit/credit card interchange income (down $28) and tax preparation fees (down $24), partially offset by increases in bank owned life insurance and annuity asset income (up $18) and trust fee income (up $18).

Noninterest Expense

Noninterest expense increased $32, or 0.3%, during the third quarter of 2023, and $908, or 3.0%, during the first nine months 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 $42 and $514 during the three and nine months ended September 30, 2023, compared to the same periods in 2022,

respectively.

The e xpense increases were largely from annual performance-based merit increases.

However, the growth in salaries and employee benefit expense

was offset due to the elimination of staffing for Race Day by April 2023.

As a result, a savings in salary and employee benefit expense was realized totaling $253 during the third quarter of 2023, and $500 during the first nine months of 2023,

compared to the same periods in 2022.

Increases in noninterest expense were also impacted by higher building and equipment costs, which increased $31 and $159 during the three and

nine months ended September 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 $61 and $171 during the three and nine months ended September 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 software costs, which increased $60 and $151 during the three and nine months ended September 30, 2023, compared to the same periods in 2022, respectively.

Noninterest expense increased $469, or 4.6%, during the first quarter of 2024, compared to the same period in 2023.

Contributing most to the increase in

noninterest expense were salaries and employee benefits, which increased $283 during the first quarter of 2024, compared to the same period in 2023.

increase was largely from annual performance- based merit increases and higher health insurance premiums that were recorded in the first quarter of 2024.

Furthermore, the Company’s average full-time equivalent employee base was up seven employees

from 237 at March 31, 2023 to 244 at March 31, 2024.

Partially offsetting the growth in salaries and employee benefit expense was the elimination of staffing for Race Day by April 2023, which resulted in a savings of $192 for the first quarter of

2024, compared to the same period in 2023.

Higher noninterest expense also came from data processing expense, which increased $87 during the first quarter of 2024, compared to the same period in 2023.

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.

Also contributing to higher noninterest expense was software costs, which increased $59 during the first quarter of 2024, compared to the same period in

The increase was largely impacted by various software purchases and enhancements at the Bank to further improve operational efficiencies in 2024.

Also impacting noninterest expense were professional fees, which increased $12 during the three months ended September 30, 2023, but decreased $109 during the nine months ended September 30, 2023, compared to the same periods in 2022, respectively.

Professional fees during the quarter were impacted primarily by

higher collection costs.

Professional fees for the year were impacted primarily 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 remaining noninterest expense categories decreased $174, or 6.7%, but increased $22, or 0.3%, during the three and nine months ended September 30, 2023, compared to the same periods in 2022, respectively.

These changes came primarily from other noninterest expense, which decreased $108 during the

quarter, but increased $13 during the year-to-date period, impacted by higher loan closing costs, consulting expense, and interest rate swap expense.

These increases were completely offset during the third quarter, and partially offset during the

year-to-date period by, decreases in various overhead expenses associated with Race Day resulting from the continued unwinding of business operations mentioned above.

Higher noninterest expense was also impacted by professional fees, which were up $53 during the first quarter of 2024, compared to the same period in 2023.

Higher professional fees were largely impacted by an increase in legal expense during 2024 due to a higher volume of collection costs.

The remaining noninterest expense categories decreased $13, or 0.5%, during the first quarter of 2024, compared to the same period in 2023.

The net decrease

came primarily from other noninterest expense (down $42) impacted by decreases in various overhead expenses associated with the closing of Race Day, partially offset by higher furniture/equipment expense (up $36).

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

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

Comparing the three and nine months ended September 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.

However, the continued trend of increasing deposit rates, a deposit composition shift to higher-cost time deposit balances, and the increased use of higher-cost wholesale funding sources led to margin compression during the third

quarter of 2023, and had a negative impact to quarterly net interest income.

As a result, net interest income during the three months ended September 30, 2023 finished below the net interest income results from the same period in 2022, while net

interest income during the nine months ended September 30, 2023 outperformed the net interest income results over the same period in 2022.

Contributions from noninterest income were relatively stable during both the quarterly and year-to-date periods

of 2023, compared to the same periods in 2022, and had minimal impact to earnings.

While noninterest expense was also stable during the quarter, the year-to-date noninterest expense continues to be impacted by increases in overhead costs associated

with annual merit increases.

However, the year-to-date increase in noninterest expense only partially offset the increase in year-to-date net interest income.

As a result, the Company’s quarterly efficiency number increased (regressed) to 73.6% during

the three months ended September 30, 2023, from 71.0% during the same period in 2022.

The Company’s year-to-date efficiency number decreased (improved) to 70.3% during the nine months ended September 30, 2023, from 72.3% during the same period in 2022.

Comparing the three months ended March 31, 2024 to the same period in 2023, 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.

had a negative impact to quarterly net interest income.

As a result, net interest income during the three months ended March 31, 2024 finished below the net interest income results from the same period in 2023.

Contributions from noninterest income

fell back by 1.9% during the first quarter of 2024, while overhead expense increased 4.6% due to higher annual merit adjustments and health insurance premiums.

The combination of lower net interest and noninterest revenue and higher overhead costs

restricted the Company from generating any efficiency improvement.

As a result, the Company’s quarterly efficiency number increased (regressed) to 71.5% during the three months ended March 31, 2024, from 65.7% during the same period in 2023.

Provision for income taxes

The Company’s income tax provision decreased $375 and $193 during the three and nine months ended September 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.

The Company’s income tax provision decreased $219 during the three months ended March 31, 2024, compared to the same period in 2023.

The change in tax

expense corresponded directly to the change in associated taxable income during 2024 and 2023.

Capital Resources

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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

September 30, 2023.

As of September 30, 2023, the Bank’s CBLR was 11.06%.

Cash dividends paid by the Company were $3,820 during the first nine months of 2023.

The year-to-date dividends paid totaled $0.80 per share.

The Bank’s transition amount during year two of the transitional period totaled $2,276, which resulted in the add-back of $1,138 to both Tier 1 capital and average assets as part of the CBLR

calculation for March 31, 2024.

As of March 31, 2024, the Bank’s CBLR was 10.65%.

Cash dividends paid by the Company were $1,050 during the first three months of 2024.

The year-to-date dividends paid totaled $0.22 per

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 $258,617, represented 19.7% of total assets at September 30, 2023

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

The Company manages funding and liquidity based on point-in-time metrics as well as forward-looking projections, which incorporate different sources and uses of funds under base and stress scenarios.

Liquidity risk is monitored and managed by the Asset Liability Committee using a series of policy limits and key risk indicators are established to ensure risks are managed within the Company’s risk tolerance.

The Company maintains a contingency

funding plan that provides for liquidity stress testing, which assesses the liquidity needs under varying market conditions, time horizons and other events.

The stress testing provides for ongoing monitoring of unused borrowing capacity and available

sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity.

Total cash and cash equivalents, HTM securities maturing within one year, and AFS securities, which totaled $292,142, represented 21.3% of total assets at

March 31, 2024 compared to $290,781 and 21.5% of total assets at December 31, 2023.

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 8.6% growth in loans.

A large portion of these dollars were used to fund the 1.8% growth in loans.

Increases in deposits were largely impacted by growth in time deposits, which increased 4.6% from year-end 2023.

Of the Company’s $1,095,540 in total deposit balances at September 30, 2023,

only 34.8%, or $381,673, 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 September 30, 2023, the Bank could borrow an additional $87,522

from the FHLB.

Furthermore, the Bank has established a borrowing line with the Federal Reserve, which had availability of $62,519 at September 30, 2023.

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

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.

In addition to the on-balance sheet liquidity discussed above, the Bank has established multiple sources of funding to further enhance the Bank’s ability to

meet liquidity demands.

The Bank has pledged collateral to the FHLB and the FRB to establish committed borrowing lines.

At March 31, 2024, the Bank could borrow an additional $81,930 from the FHLB and the borrowing line with the FRB had availability of

For each of these sources, the Bank has established an internal limit of 85% of our borrowing capacity.

In addition to the committed borrowing lines, the Bank has access to several wholesale funding sources, such as, brokered CDs, a $20

million federal funds purchase limit with a correspondent bank, and the ability to bid on available funds from select deposit placement services.

The Bank has established limits for each respective funding source and a collective limit on all wholesale

funding sources.

During 2024, the Bank mostly utilized brokered CDs and the FHLB to assist with funding loan growth.

The Bank’s internal limit on brokered CDs is 10% of total assets.

At March 31, 2024, the amount of brokered CDs outstanding was 4.78%

of total assets, as compared to 4.86% at December 31, 2023.

At March 31, 2024, the Bank had utilized 55.35% of our FHLB capacity, an increase from 51.74% at December 31, 2023.

The collective internal limit on all wholesale funding sources is 40% of

total assets.

At March 31, 2024, the Bank’s total wholesale funding sources represented 14.30% of total assets.

Based on the collective internal wholesale funding limit, the Bank had the capacity to borrow an additional $349 million in wholesale funds

and the available funding from the respective wholesale funding sources exceeded this amount, which provides the flexibility to utilize one source more than another due to pricing or availability.

As part of performing liquidity stress tests, the Bank monitors and evaluates the exposure to uninsured deposits.

Of the Company’s $1,148,784 in total

deposit balances at March 31, 2024, only 33.9%, or $389,826, were deemed uninsured as per the $250 FDIC threshold.

A portion of these deposits are on behalf of public entity customers, which require the Bank to pledge securities or FHLB letters of

credit to cover the amount of the deposit balance that is deemed uninsured.

To the extent these deposits left the Bank, the level of unpledged securities and the borrowing capacity at the FHLB would increase or could be utilized to fund the deposit

The sum of current on-balance sheet liquidity and available wholesale funding sources exceeded the balance of uninsured deposits at March 31, 2024.

Included in on-balance sheet liquidity are AFS securities in an unrealized loss position.

Although management does not intend to sell the securities before the recovery of its cost basis, they are a contingent resource from a liquidity perspective.

As our liquidity position dictates, the preceding funding sources may be utilized to supplement our liquidity position.

If the utilization of wholesale

funding increases to fund asset growth or for liquidity management purposes, the net interest margin may be negatively impacted due to the higher relative cost of these sources as compared to core deposits.

For further cash flow information, see the

condensed consolidated statement of cash flows.

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.

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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.

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

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.

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.

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

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 exposure.

Management’s determination of the adequacy of the

ACL 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 Management’s Discussion

and Analysis for additional discussion.

Concentration of Credit Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis