OHIO VALLEY BANC CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (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, 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: 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; the level of defaults and prepayment on loans made by Ohio Valley Banc Corp. (“Ohio Valley”) and its direct and indirect subsidiaries (collectively, the “Company”); unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Additional detailed information concerning such factors is available in the Company’s filings with the Securities and Exchange Commission, under the Exchange Act, including the disclosure under the heading “Item 1A. 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 otherwise. BUSINESS OVERVIEW: The following discussion on consolidated financial statements include the accounts of Ohio Valley and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc., a consumer finance company (“Loan Central”), 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. Ohio Valley and its subsidiaries are collectively referred to as the “Company.” The Company is primarily engaged in commercial and retail banking, offering a blend of commercial and consumer banking services within southeastern Ohio as well as western West Virginia. The banking services offered by the Bank include the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; the making of construction and real estate loans; and credit card services. The Bank also offers individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. Furthermore, the Bank offers Tax Refund Advance Loans (“TALs”) to Loan Central tax customers. A TAL represents a short-term loan offered by the Bank to tax preparation customers of Loan Central. FINANCIAL RESULTS OVERVIEW: Net income totaled $2,972 during the second quarter of 2024, a decrease of $277 from the same period of 2023. Earnings per share for the second quarter of 2024 finished at $.63 per share, compared to $.68 per share during the second quarter of 2023. Net income totaled $5,765 during the six months ended June 30, 2024, a decrease of $1,392 from the same period of 2023. Earnings per share during the first six months of 2024 finished at $1.21 per share, compared to $1.50 per share during the first six months of 2023. During both the quarterly and year-to-date periods, earnings were negatively impacted by higher provision for credit losses and noninterest expense, which were up collectively by $605 and $1,336 over the same periods in 2023, respectively. During the second quarter of 2024, earnings were positively impacted by a $349 increase in net interest income, while net interest income decreased $183 during the first half of 2024, compared to the same periods in 2023, respectively. The Company’s noninterest income had a minimal impact to the change in net earnings during both the quarterly and year-to-date periods of 2024 compared to 2023. The impact of lower net earnings during 2024 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets, which decreased to 0.84% for the six months ended June 30, 2024, compared to 1.16% for the six months ended June 30, 2023. In addition, the Company’s net income to average equity ratio, or return on equity, decreased to 8.01% for the six months ended June 30, 2024, compared to 10.63% for the six months ended June 30, 2023. 33 During the three months ended June 30, 2024, net interest income increased $349, or 3.0%, over the same period in 2023. During the six months ended June 30, 2024, net interest income decreased $183, or 0.8%, from the same period in 2023. The quarterly improvement to net interest income was mostly impacted by a $128,928 increase in average earning assets. This was partially offset by a decrease in the net interest margin of 29 basis points. The year-to-date decrease to net interest income was mostly impacted by a decrease in the net interest margin of 44 basis points, which more than offset a $124,072 increase in average earning assets. The growth in average earning assets during both the quarterly and year-to-date periods came primarily from loans and interest-bearing deposits with banks, partially offset by lower securities. Loan increases were led by the commercial and residential real estate loan segments, while interest-bearing deposits with banks consisted mostly of average balances maintained at the Federal Reserve. Average securities decreased as maturities were deployed into higher yielding loans. Decreases to the net interest margin during both the quarterly and year-to-date periods were 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. During the three and six months ended June 30, 2024, the Company’s provision for credit loss expense increased $157 and $419, when compared to the same periods in 2023, respectively. The increases during both the quarterly and year-to-date periods came primarily from a higher historical loss factor and increases in general reserves associated with the growth in loans, partially offset by decreases in both net charge-offs and select qualitative risk factors. During the three and six months ended June 30, 2024, noninterest income decreased $12, or 0.4%, and $83, or 1.3%, from the same periods in 2023. The decreases were 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 $16 and $247 in commissions earned during the second quarter and first half of 2023, respectively. Other decreases came from losses related to both other real estate owned (“OREO”) and the pending sale of premises, which collectively reduced noninterest income by $92 during both the second quarter and first half of 2024 compared to the same periods in 2023. These decreases were partially offset by a $78 and $192 increase in service charges on deposit accounts during both the quarterly and year-to-date periods. During the three and six months ended June 30, 2024, noninterest expense increased $448, or 4.3%, and $917, or 4.4%, over the same periods in 2023. The increases were primarily related to a $345 and $628 increase in salaries and employee benefit costs during both the second quarter and first half of 2024, impacted by higher annual merit increases and higher health insurance premiums. The Company also experienced increases in both data processing and professional fee expense, which were collectively up $136 and $276 during the second quarter and first half of 2024 compared to the same periods in 2023. The changes in the Company’s provision for income taxes during the three and six months ended June 30, 2024, compared to the same periods in 2023, were largely due to the changes in taxable income affected by the factors mentioned above. At June 30, 2024, total assets were $1,403,317, an increase of $51,182 from year-end 2023. Higher assets were primarily impacted by an increase in loans, which were up $68,384, or 7.0%, from year-end 2023. Growth in loans came from increases in the residential real estate loan segment (+12.5%), commercial real estate loan segment (+8.9%), and commercial and industrial loan segment (+3.6%), partially offset by a decrease in the consumer loan segment (-3.4%). At June 30, 2024, total liabilities were $1,257,560, up $49,432 from year-end 2023. Contributing most to this increase were higher deposit balances, which increased $51,292 from year-end 2023. Leading deposit growth were interest-bearing deposit balances, up $30,305 from year-end 2023, consisting of higher balances from savings and money market accounts (+5.6%), NOW accounts (+6.0%), and time deposits (+1.5%). Growth in deposits were also impacted by noninterest-bearing demand deposits, which increased $20,987 from year-end 2023. 34 At June 30, 2024, total shareholders' equity was $145,757, up $1,750 from December 31, 2023. This increase came primarily from year-to-date net income, partially offset by quarterly cash dividends paid and the purchase of treasury shares under the Company’s treasury repurchase program. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums. Comparison of Financial Condition at June 30, 2024 and December 31, 2023 The following discussion focuses in more detail on the consolidated financial condition of the Company at June 30, 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 June 30, 2024, cash and cash equivalents were $107,679, a decrease of $20,447, or 16.0%, from December 31, 2023. The decrease came primarily from interest-bearing deposits with banks, which were down $21,057, or 18.5%, from year-end 2023. Over 85% of cash and cash equivalents is comprised of the Company’s interest-bearing Federal Reserve Bank clearing account, which contributed most to the 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 half of 2024, the Company utilized a portion of its clearing account balances to reinvest in higher-yielding loans, which helped to reduce the negative effects from net interest margin compression. The interest rate paid on both the required and excess reserve balances of the Federal Reserve Bank account is based on the targeted federal funds rate established by the Federal Open Market Committee. During the first half of 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. Government. As liquidity levels continuously vary based on consumer activities, amounts of cash and cash equivalents can vary widely at any given point in time. The Company’s focus during periods of heightened liquidity will be to invest excess funds into longer-term, higher-yielding assets, primarily loans, when opportunities arise. Securities Total securities of $170,679 at June 30, 2024 were relatively stable when compared to $170,244 at year-end 2023, increasing $435, or 0.3%. The Company’s U.S. Government securities portfolio increased $9,712, or 19.3%, from year-end 2023. This increase in U.S. Government securities came primarily from $19,357 in purchases partially offset by $10,000 in maturities. Partially offsetting the increase in U.S. Government securities was a decrease in U.S. Government agency (“Agency”) mortgage-backed securities, which were down $9,194, or 8.7%, from year-end 2023. The Company’s investment securities portfolio is made up mostly of Agency mortgage-backed securities, which represented 56.8% of total investments at June 30, 2024. During the first half of 2024, the Company received proceeds from principal repayments of $8,489. 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. During 2024, long-term reinvestment rates increased, which led to a $615 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. Loans The loan portfolio represents the Company’s largest asset category and is its most significant source of interest income. Loan segments have been identified as Commercial Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer. 35 COMMERCIAL REAL ESTATE BY INDUSTRY As of June 30, 2024 Table I 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) Amount % of Total Real Estate Rental and Leasing $ 167,075 47.49 % Accommodation and Food Services 61,158 17.39 % Health Care and Social Assistance 24,247 6.89 % Construction 24,113 6.85 % Retail Trade 19,592 5.57 % Manufacturing 19,438 5.53 % All Other 36,161 10.28 % Total $ 351,784 100.00 % Commercial real estate consists of owner-occupied, nonowner-occupied and construction loans. Owner-occupied loans consist of nonfarm, nonresidential properties. 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 property. 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. In addition, 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. 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 $1,040,284 at June 30, 2024, representing an increase of $68,384, or 7.0%, as compared to $971,900 at December 31, 2023. The increase in loans came primarily from the residential and commercial real estate loan portfolios, partially offset by a decrease in the consumer portfolio from year-end 2023. 36 The Company’s residential real estate loan portfolio increased $39,844, or 12.5%, from year-end 2023. At June 30, 2024, residential real estate loans represented the largest segment of the Company’s total loan portfolio at 34.5%. 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 $3,734) and contributed to a shift into more short-term variable rate mortgages (up $19,864) at June 30, 2024. Also contributing to the increase in residential real estate loans was the funding of a warehouse line of credit by the Bank for a mortgage lender. The warehouse lending line is used by the mortgage lender to make loans for the purchase of one- to four-family residential real estate properties. The mortgage lender eventually sells the loan and repays the Bank. From year-end 2023, warehouse lending balances increased $18,291 during the first half of 2024. Further increases in loans came from the Company’s commercial loan portfolio, which increased $34,476, or 7.2%, from year-end 2023. Contributing most to this increase were higher loan balances within the commercial real estate portfolio, which increased $28,890, or 8.9%, from year-end 2023. Commercial real estate loans represent the second largest segment of the Company’s total loan portfolio at June 30, 2024, at 33.8%. The increase from year-end 2023 came primarily from new originations within the nonowner-occupied and construction loan segments. Commercial loans were also positively impacted by an increase in the commercial and industrial portfolio, which was up $5,589, or 3.6%, 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 related conditions, such as general demand for loans in the Company’s primary markets, interest rates offered by the Company, and the effects of competitive pressure and normal underwriting considerations. Management will continue to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans. The increases in the Company’s loan balances at June 30, 2024 were partially offset by a decrease in the consumer loan portfolio, which was down $5,936, or 3.4%, from year-end 2023. This change was impacted by a $5,474, or 7.3%, decrease in other consumer loans, impacted by principal repayments and payoffs. Decreases in consumer loans also came from a $4,746, or 7.7%, 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 $4,284, or 11.9%, increase in home equity lines of credit. Allowance for Credit Losses The Company maintains an allowance for credit losses (“ACL”) that represents management’s best estimate of the appropriate level of losses and risks inherent in our applicable financial assets under the current expected credit loss (“CECL”) model. The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. The determination of the ACL involves a high degree of judgement and subjectivity. Please refer to Note 1 of the notes to the financial statements for discussion regarding our ACL methodologies for securities and loans. For AFS debt securities, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized costs basis is due to credit-related factors or noncredit-related factors. As of June 30, 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. Therefore, no ACL was recorded, and no provision expense was recognized during the three and six months ended June 30, 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. At June 30, 2024, a $2 ACL was recognized based on a .02% cumulative default rate taken from the S&P and Moody’s bond rating index. The $2 ACL for HTM debt securities was unchanged from December 31, 2023, resulting in no provision expense during the three and six months ended June 30, 2024. 37 For loans, the Company’s ACL is management’s estimate of expected lifetime credit losses, measured over the contractual life of a loan, that considers historical loss experience, current conditions, and forecasts of future economic conditions. The ACL on loans is established through a provision for credit losses recognized in earnings. The ACL on loans is reduced by charge-offs on loans and is increased by recoveries of amounts previously charged off. Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors within two main components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. The ACL for loans with similar risk characteristics are collectively evaluated for expected credit losses based on certain quantitative information that include historical loss rates, prepayment rates, and curtailment rates. Expected credit losses on loans with similar characteristics are also determined by certain qualitative factors that include national unemployment rates, national gross domestic product forecasts, changes in lending policy, quality of loan review, and delinquency status. The ACL for loans that do not share similar risk characteristics are individually evaluated for expected credit losses primarily based on foreclosure status and whether a loan is collateral-dependent. Expected credit losses on individually evaluated loans are then determined using the present value of expected future cash flows based upon the loan’s original effective interest rate, at the loan’s observable market price, or if the loan was collateral dependent, at the fair value of the collateral. As of June 30, 2024, the ACL for loans totaled $9,431, or 0.91%, of total loans. As of December 31, 2023, the ACL for loans totaled $8,767, or 0.90%, of total loans. The increase in the ACL of $664, or 7.6%, was all from loans collectively evaluated. The increase was impacted by additional reserves from a $68,721 increase in collectively evaluated loan balances during the first half of 2024, primarily from the residential and commercial real estate loan segments. Higher ACL reserves were also impacted by a higher historical loss rate within the commercial and residential real estate loan segments, partially offset by a lower qualitative risk adjustment that decreased reserves within the commercial real estate segment . The Company experienced higher delinquency levels from year-end 2023. Nonperforming loans to total loans increased to 0.50% at June 30, 2024, compared to 0.26% at December 31, 2023, and nonperforming assets to total assets increased to 0.38% at June 30, 2024, compared to 0.19% at December 31, 2023. The increase in both delinquency calculations resulted from a $2,230 increase in nonaccrual loans, primarily as a result of one single loan relationship secured primarily by residential real estate property that was placed into nonaccrual status during the first half of 2024. During the first half of 2024, the Company individually evaluated several loans associated with three 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 the review. As a result, there were no specific reserves recorded during the three and six months ended June 30, 2024. Management believes that the ACL at June 30, 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 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. Deposits continue to be the most significant source of funds used by the Company to support earning assets. Total deposits at June 30, 2024 increased $51,292, or 4.6%, from year-end 2023. This change in deposits came primarily from interest-bearing deposit balances, which were up by $30,305, or 3.8%, from year-end 2023, while noninterest-bearing deposits also increased $20,987, or 6.5%, from year-end 2023. The increase in interest-bearing deposits came primarily from savings and money market account balances, which increased $14,412, or 5.6%, from year-end 2023. 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. 38 Also impacting deposit balance growth were higher interest-bearing NOW account balances, which increased $10,198, or 6.0%, from year-end 2023. 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 time deposit balances, which increased $5,695, or 1.5%, from year-end 2023. The increase came from retail time deposits, which increased $23,481 from year-end 2023. 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 lower-cost savings products, and into a greater number of higher-cost time deposit products, such as CDs. During the second quarter of 2024, the Company experienced $16,546 in brokered CD maturities, which contributed to a $17,787, or 22.9%, decrease in wholesale time deposit balances from year-end 2023. The increase in noninterest-bearing demand deposits came primarily from the Company’s incentive-based checking account balances. While facing increased competition for deposits in its market areas, the Company will continue to emphasize growth and retention in its core deposit relationships during the remainder of 2024, reflecting the Company’s efforts to reduce its reliance on higher cost funding and improve net interest income. Other Borrowed Funds Other borrowed funds were $42,056 at June 30, 2024, a decrease of $2,537, or 5.7%, 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 June 30, 2024 increased $1,750, or 1.2%, to finish at $145,757, as compared to $144,007 at December 31, 2023. This was primarily from quarterly net income, partially offset by cash dividends paid and the purchase of 82,673 treasury shares under the Company’s treasury repurchase program. The repurchase program was originally approved in 2021 to allow the Company to repurchase up to $5,000 in additional common shares from time to time up to the plan’s expiration date of August 31, 2024. As of August 14, 2024, the Company had repurchased approximately $2,967 in common stock. Comparison of Results of Operations For the Three and Six Months Ended June 30, 2024 and 2023 The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three and six months ended June 30, 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. Net Interest Income The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense incurred on interest-bearing liabilities. During the three months ended June 30, 2024, net interest income increased $349, or 3.0%, compared to the same period in 2023. Conversely, net interest income decreased $183, or 0.8%, during the six months ended June 30, 2024, compared to the same period in 2023. The quarterly improvement was mostly impacted by a composition shift into higher-yielding loans, which increased earning asset yields that completely offset the negative effects of higher average costs paid on deposits and borrowings. The year-to-date 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 44 basis point decrease in the net interest margin. These negative effects were partially offset by a composition shift into higher-yielding loans during the first half of 2024. 39 Total interest and fee income recognized on the Company’s earning assets increased $3,635, or 24.2%, during the second quarter of 2024, and $7,525, or 26.1%, during the first half of 2024, compared to the same periods in 2023. The earnings growth was impacted by interest on loans, which increased $2,858, or 22.6%, and $5,770, or 23.8%, during the three and six months ended June 30, 2024, compared to the same periods in 2023, respectively. This improvement was impacted by increases in both loan yields and average loan balances. Particularly in the second quarter of 2024, the Company experienced a 9.2% increase in higher-yielding loans, with average loan balances increasing from $928,418 during the three months ended June 30, 2023 to $1,013,845 during the three months ended June 30, 2024. This large composition shift to higher-yielding loans contributed to most of the loan interest and fee revenue improvement during the second quarter of 2024. Overall, average loans have increased $85,427 and $82,124 during the three and six months ended June 30, 2024, compared to the same periods in 2023. The increases during both periods came primarily from loans secured by residential and commercial real estate properties, including average balance increases in the Bank’s warehouse line of credit for a mortgage lender. Loan revenue improvement also came from 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 64 basis points to 6.46% during the second quarter of 2024 and increased 69 basis points to 6.40% during the first half of 2024, compared to the same periods in 2023. Total interest income from interest-bearing deposits with banks increased $775 during the second quarter of 2024, and $1,766 during the first half of 2024, compared to the same periods in 2023. This was largely from average balance increases with the Company’s interest-bearing Federal Reserve Bank clearing account, which grew $58,747 and $59,518 during the three and six months ended June 30, 2024, compared to the same periods in 2023, respectively. 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 advances. 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. As 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 June 2023, the target federal funds rate increased by another 25 basis points, which had a corresponding effect to the interest rate tied to the Federal Reserve clearing account. Total interest on securities increased $6, or 0.6%, during the second quarter of 2024, but decreased $75, or 3.8%, during the first half of 2024, compared to the same periods in 2023. The minimal to declining impact to security earnings during 2024 was largely from decreases in average security balances, which were down $12,831 and $14,907 during the three and six months ended June 30, 2024, compared to the same periods in 2023, respectively. During 2023 and 2024, 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 loan growth. Earnings from securities were positively impacted by increases in the average yield on securities as a result of the elevated market rate environment during both 2023 and 2024. Average security yields increased 19 basis points to 2.10% during the second quarter of 2024, which completely offset the negative impact from lower average balances during the quarter. Average security yields increased 13 basis points to 2.04% during the first half of 2024, which only partially offset the negative impact from lower average security balances during the year. Total interest expense incurred on the Company’s interest-bearing liabilities increased $3,286 during the second quarter of 2024, and $7,708 during the first half of 2024, compared to the same periods in 2023. Increases in interest expense were impacted by a rise in average costs combined with increases in higher-costing average deposit balances. As market competition continued to increase, rate offerings on CDs continued to adjust up in 2023. The 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 $45,269 at an average cost of 1.36% during the year) into more higher-cost time deposit products (up $150,970 at an average cost of 4.67% during the year). Furthermore, the Company’s average wholesale funding balances increased $34,747 during the year, 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 155 basis points from 1.40% at June 30, 2023, to 2.95% at June 30, 2024. 40 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 second quarter net interest margin decreased to 3.74%, compared to 2023’s second quarter net interest margin of 4.03%. The Company’s year-to-date net interest margin decreased to 3.68% at June 30, 2024, compared to 2023’s year-to-date net interest margin of 4.12% at June 30, 2023. The margin decreases were 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 three and six months ended June 30, 2024. Although the net interest margin has decreased from the prior year’s quarterly and year-to-date periods, the net interest margin has improved during 2024 when comparing linked quarters. When comparing the second quarter net interest margin of 3.74% to the first quarter net interest margin of 3.61% from 2024, this represents an increase of 13 basis points. The increase was related to increases in earning asset yields and a higher composition of average loan balances due to the 9.2% quarterly increase in average loans. Positive contributions to the margin have also come from an average deposit mix that is trending back towards checking, NOW, savings and money market deposit accounts during the second quarter of 2024. This, along with the benefits of higher-yielding loan growth, contributed to the quarterly increase in net interest income during the three months ended June 30, 2024. The Company’s primary focus is to invest its funds into higher yielding assets, particularly loans, as opportunities arise. However, if loan balances do not continue to expand and remain a larger component of overall earning assets, the Company will continue to face pressure within its net interest income and margin improvement. Provision for Credit Losses 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. For the three months ended June 30, 2024, the Company’s provision for credit losses expense totaled $181, an increase of $157 when compared to $24 in provision expense during the three months ended June 30, 2023. For the six months ended June 30, 2024, the Company’s provision for credit losses expense totaled $932, an increase of $419 when compared to $513 in provision expense during the six months ended June 30, 2023. The increase in credit loss expense came primarily from loans, impacted by additional reserves associated with a higher historical loan loss factor and increases in collectively evaluated loan balances. In total, these increasing factors contributed to $508 and $639 in additional provision expense during the three and six months ended June 30, 2024, compared to the same periods in 2023, respectively. The increase in the historical loss factor came primarily from the commercial real estate loan segment. The growth in collectively evaluated loan balances during the six months ended June 30, 2024 was $2,629 higher than the growth during the same period in 2023, which resulted in additional general reserves and a corresponding increase to provision expense. Partially offsetting the increasing effects to provision expense mentioned above were decreases in certain qualitative risk factors and net charge-offs, which were down $484 and $223 during the three and six months ended June 30, 2024, compared to the same periods in 2023, respectively. The decrease in the qualitative risk factor came primarily from the commercial real estate loan segment, while lower net charge-offs during 2024 came primarily from an increase in recoveries within the commercial and industrial loan portfolio. Credit loss expense during 2024 also came from unfunded commitments, which was up $3 and $133 during the three and six months ended June 30, 2024, compared to the same periods in 2023, respectively. This was primarily due to an increase in the originations of several new commercial real estate lines during the second quarter of 2024, as well as a $10,000 increase to a credit line amount on a loan secured by residential real estate. These factors increased unused commitments during 2024, which contributed to additional reserves. 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. Noninterest Income Noninterest income decreased $12, or 0.4%, during the three months ended June 30, 2024, and decreased $83, or 1.3%, during the six months ended June 30, 2024, compared to the same periods from 2023. Lower noninterest revenue was largely impacted by decreases in other noninterest income, which decreased $121 and $282 during the three and six months ended June 30, 2024, compared to the same periods from 2023, respectively. The decreases were largely impacted by the closing of Race Day in December 2023, which resulted in a $16 and $247 decrease in mortgage application referral income during the second quarter and first half of 2024, compared to the same periods from 2023, respectively. Other noninterest income was also impacted by losses incurred on OREO properties and the sale of bank premises. During the second quarter of 2024, the Company re-evaluated the fair value of a single property carried as OREO resulting in a $7 loss adjustment to the property’s fair value. This is compared to a $38 gain on OREO that was recognized during the second quarter of 2023. Furthermore, the Company is in the process of completing the sale of one of its support facilities. At June 30, 2024, the Company and the prospective buyer reached an agreement on the sale price of the facility. While the transaction is still subject to further approvals, the Company reduced the carrying value of the facility to reflect the expected sales price. This resulted in a $46 loss on sale of bank premises, which further reduced other noninterest income during the second quarter of 2024. 41 Partially offsetting the decreases in other noninterest income were increases in service charges on deposit accounts, which were up $78, or 11.9%, during the second quarter of 2024, and $192, or 15.2%, during the first half of 2024, compared to the same periods in 2023. The increases have been impacted by a higher volume of overdraft transactions during 2024. The remaining noninterest income categories increased $31, or 1.8%, during the second quarter of 2024, and $7, or 0.2%, during the first half of 2024, compared to the same periods in 2023. The net increases came primarily from bank owned life insurance and annuity asset income and trust fee income, partially offset by lower tax preparation fees during the quarter and year-to-date periods. Noninterest Expense Noninterest expense increased $448, or 4.3%, during the three months ended June 30, 2024, and increased $917, or 4.4%, during the six months ended June 30, 2024, compared to the same periods from 2023. Contributing most to the increase in noninterest expense were salaries and employee benefits, which increased $345 and $628 during the three and six months ended June 30, 2024, compared to the same periods from 2023, respectively. The e xpense increase was largely from annual performance-based merit increases and higher health insurance premiums. Furthermore, the Company’s average full-time equivalent employee base was up five employees from 238 at June 30, 2023 to 243 at June 30, 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 $24 for the second quarter of 2024, and $216 for the first half of 2024, compared to the same periods in 2023. Higher noninterest expense also came from data processing expense, which increased $62 during the second quarter of 2024, and $149 during the first half of 2024, compared to the same periods from 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 were professional fees, which increased $74 during the second quarter of 2024, and $127 during the first half of 2024, compared to the same periods from 2023. Higher professional fees were largely impacted by an increase in director fees, as well as a general increase in legal fees during 2024 due to a higher volume of collection costs. The remaining noninterest expense categories decreased $33, or 1.0%, during the second quarter of 2024, and increased $13, or 0.2%, during the first half of 2024, compared to the same periods in 2023. These changes came primarily from a quarterly and year-to-date decline in other noninterest expense from various overhead expenses associated with the closing of Race Day. The Race Day closing also contributed to reducing software expense for the quarter, while minimizing the increase in software expense for the year. The expense savings from Race Day was partially offset by higher furniture and equipment expenses during the quarterly and year-to-date periods. Efficiency The Company’s efficiency ratio is defined as noninterest expense as a percentage of fully tax-equivalent net interest income plus noninterest income. The effects from provision expense are excluded from the efficiency ratio. 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 six months ended June 30, 2024 to the same periods 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. 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 both the second quarter and the first half of 2024 and had a negative impact to year-to-date net interest income. However, the elevated growth in average loans during the second quarter, combined with a quarterly transition to more lower-cost funding deposits had a positive impact to quarter-to-date net interest income, which increased over the prior year’s second quarter net interest income results. While net interest earnings are improving, contributions from noninterest income fell back by 0.4% and 1.3% during the second quarter and first half of 2024, while overhead expense increased 4.3% and 4.4% during the same periods due to higher annual merit adjustments and health insurance premiums. The positive effects of lower but improving net interest income were completely offset by reduced noninterest revenue and higher overhead costs, which restricted the Company from generating any efficiency improvement. As a result, the Company’s quarterly efficiency number increased (regressed) to 73.4% during the three months ended June 30, 2024, from 71.9% during the same period in 2023. The Company’s year-to-date efficiency number also increased (regressed) to 72.4% during the six months ended June 30, 2024, from 68.7% during the same period in 2023. 42 Provision for income taxes The Company’s income tax provision increased $9 during the three months ended June 30, 2024, and decreased $210 during the six months ended June 30, 2024, compared to the same periods in 2023. The changes in tax expense corresponded directly to the changes in associated taxable income during 2024 and 2023. Capital Resources Federal regulators have classified and defined capital into the following components: (i) Tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (ii) Tier 2 capital, which includes a portion of the allowance for credit losses, certain qualifying long-term debt, preferred stock and hybrid instruments which do not qualify as Tier 1 capital. In September 2019, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies). Under the rule, a qualifying community banking organization (“QCBO”) is eligible to opt into the Community Bank Leverage Ratio (“CBLR”) framework in lieu of the Basel III capital requirements if it has less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposure and a leverage ratio greater than 9.0%. The new rule took effect January 1, 2020, and QCBOs were allowed to opt into the new CBLR framework in their Call Report beginning the first quarter of 2020. A QCBO opting into the CBLR framework must maintain a CBLR of 9.0%, subject to a two-quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period. A QCBO failing to satisfy these requirements must comply with the existing Basel III capital requirements as implemented by the banking regulators in July 2013. The Bank opted into the CBLR, and therefore, is not required to comply with the Basel III capital requirements The numerator of the CBLR is Tier 1 capital, as calculated under present rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital. The current rules and Call Report instructions were impacted by the Company’s adoption of ASC 326 and its election to apply the 3-year CECL transition provision on January 1, 2023. By making this election, the Bank, in accordance with Section 301 of the regulatory capital rules, will increase it retained earnings (Tier 1 Capital) and average assets by 75% of its CECL transition amount during the first year of the transition period, 50% of its CECL transition amount during the second year, and 25% of its CECL transitional amount during the third year of the transition period. The Bank’s transition amount 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 June 30, 2024. As of June 30, 2024, the Bank’s CBLR was 10.48%. Cash dividends paid by the Company were $2,105 during the first half of 2024. The year-to-date dividends paid totaled $0.44 per share. Liquidity 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. 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. 43 Total cash and cash equivalents, HTM securities maturing within one year, and AFS securities, which totaled $271,333, represented 19.3% of total assets at June 30, 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 7.0% growth in loans. Increases in deposits were largely impacted by growth in NOW, savings and money market deposits, which increased 5.8% from year-end 2023, as well as growth in noninterest-bearing deposits, which increased 6.5%, from year-end 2023. 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 June 30, 2024, the Bank could borrow an additional $86,730 from the FHLB and the borrowing line with the FRB had availability of $60,067. 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 $25 million federal funds purchase limit with two correspondent banks, 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 June 30, 2024, the amount of brokered CDs outstanding was 3.49% of total assets, as compared to 4.86% at December 31, 2023. At June 30, 2024, the Bank had utilized 53.18% 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 June 30, 2024, the Bank’s total wholesale funding sources represented 12.53% of total assets. Based on the collective internal wholesale funding limit, the Bank had the capacity to borrow an additional $381 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 $1,178,428 in total deposit balances at June 30, 2024, only 35.9%, or $422,598, 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 outflow. The sum of current on-balance sheet liquidity and available wholesale funding sources exceeded the balance of uninsured deposits at June 30, 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. Off-Balance Sheet Arrangements As discussed in Note 5 – Financial Instruments with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet credit-related activities, including commitments to extend credit and standby letters of credit, which could require the Company to make cash payments in the event that specified future events occur. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. While these commitments are necessary to meet the financing needs of the Company’s customers, many of these commitments are expected to expire without being drawn upon. Therefore, the total amount of commitments does not necessarily represent future cash requirements. 44 Critical Accounting Policies The Company believes the determination of the ACL involves a higher degree of judgment and complexity than its other significant accounting policies. The ACL 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 The Company maintains a diversified credit portfolio, with residential real estate loans currently comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in southeastern Ohio and western West Virginia. Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group. To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.