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) Cautionary Note Regarding Forward-Looking Statements Certain statements contained in this quarterly report on Form 10-Q (the “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. However, it is difficult to predict the effect of known factors, and by Ohio Valley Banc Corp. (“Ohio Valley”) cannot anticipate all factors that could affect future results. Important factors that could cause actual results to differ materially from expectations expressed in or implied in forward-looking statements 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 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 and elsewhere in this document (including, without limitation, in conjunction with the forward-looking statements themselves and under the heading “Critical Accounting Estimates”). All forward-looking statements are qualified in their entirety by these and other cautionary statements that the Company makes from time to time in its other SEC filings and public communications. 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 duty to update or revise, any forward-looking statements, whether as a result of new information, unanticipated future events or otherwise, except as required by law. 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. 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. 33 IMPACT OF PARTICIPATING IN THE OHIO HOMEBUYER PLUS PROGRAM: During the third quarter of 2024, the Company began participating in a program offered by the Ohio Treasurer called Ohio Homebuyer Plus. The program is designed to encourage Ohio residents to save for the purchase of a home. As a participant in the program, the Company developed the Sweet Home Ohio deposit account to offer participants an above-market interest rate of 5.83% along with a deposit bonus to assist customers in achieving their home savings goal. For each account that was opened, the Company received a deposit from the Treasurer at a subsidized interest rate of 0.86%. Accounts connected with Ohio Homebuyer Plus must be used within five years and the corresponding balance of Treasurer deposits will fluctuate based upon active customer accounts. At September 30, 2024, the balance of Sweet Home Ohio accounts totaled $5,283 and the amount deposited by the Treasurer totaled $100,000. This contributed to a $134,284 increase in total deposits from year-end 2023. Since the Treasurer deposits are classified as public funds, which are required to be collateralized, the Company invested the funds in securities to be pledged as collateral to the Treasurer. A total of $100,497 in U.S. Government securities were purchased at a weighted average yield of 4.7% with maturity terms ranging from 6 months to 18 months. This contributed to a $108,855 increase in securities from year-end 2023. The Company is expected to generate a net interest spread of 3.59% from its participation in the Homebuyer Plus program when considering the $100,497 investment in 4.7% yielding securities being partially offset by $105,283 in deposits at a weighted average cost of 1.11%. FINANCIAL RESULTS OVERVIEW: Net income totaled $2,719 during the third quarter of 2024, an increase of $468 from the same period of 2023. Earnings per share for the third quarter of 2024 finished at $.58 per share, compared to $.47 per share during the third quarter of 2023. Net income totaled $8,484 during the nine months ended September 30, 2024, a decrease of $924 from the same period of 2023. Earnings per share during the first nine months of 2024 finished at $1.79 per share, compared to $1.97 per share during the first nine months of 2023. The positive results during the quarterly period were impacted by a 13.4% increase in average earning assets, coming primarily from loans and securities, which contributed to a 10.6% and 2.9% increase in net interest income during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. During both the quarterly and year-to-date periods, earnings were negatively impacted by higher provision for credit loss and noninterest expenses. The negative effects from higher provision and noninterest expenses were partially offset by increases in noninterest income during both the quarterly and year-to-date periods. The contrasting results in net earnings during the quarterly and year-to-date periods of 2024 had a corresponding impact to the Company’s annualized net income to average asset ratio, or return on assets, which increased 5 basis points to 0.75% during the three months ended September 30, 2024, while decreasing 19 basis points to 0.81% during the nine months ended September 30, 2024, compared to the same periods in 2023, respectively. In addition, the Company’s net income to average equity ratio, or return on equity, increased 93 basis points to 7.39% during the three months ended September 30, 2024, while decreasing 141 basis points to 7.80% during the nine months ended September 30, 2023. During the three and nine months ended September 30, 2024, net interest income increased $1,205, or 10.6%, and $1,022, or 2.9%, over the same periods in 2023, respectively. The quarterly and yearly improvement to net interest income was mostly impacted by growth in average earning assets, which increased $158,933 and $135,741 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. This was partially offset by a lower net interest margin, decreasing 9 basis points and 32 basis points during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. The growth in average earning assets during both periods came primarily from loans, interest-bearing deposits with banks, and 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 grew largely in the third quarter of 2024 as a result of increased pledging requirements on public fund deposits, but remained below the prior year’s average balances as maturities continue to be 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 nine months ended September 30, 2024, the Company’s provision for credit loss expense increased $32 and $451, when compared to the same periods in 2023, respectively. The increases during both the quarterly and year-to-date periods came primarily from a specific reserve established on a collateral dependent impaired loan, a higher historical loss factor and an increase in net charge-offs, partially offset by decreases in select qualitative risk factors. 34 During the three and nine months ended September 30, 2024, noninterest income increased $286, or 11.1%, and $203, or 2.2%, over the same periods in 2023, respectively. The increases were largely due to service charges on deposit accounts, trust fee income, and income from bank owned life insurance (“BOLI”), which collectively increased noninterest income by $134 and $396 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. The increases were partially offset by decreases in mortgage application referral income 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 $247 in commissions earned in 2023. Other decreases came from losses related to both other real estate owned (“OREO”) and the sale of premises, which collectively reduced noninterest income by $92 during both the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. During the three and nine months ended September 30, 2024, noninterest expense increased $841, or 8.1%, and $1,758, or 5.7%, over the same periods in 2023. The increases were primarily related to a $687 and $1,315 increase in salaries and employee benefit costs during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. The increase in salaries and employee benefit costs was primarily related to annual merit increases, higher health insurance premiums, and the severance expense associated with a voluntary early retirement program. This voluntary severance package was offered to select employees meeting certain criteria during the third quarter of 2024. As of September 30, 2024, a total of $295 in severance expense had been incurred based on those employees that had accepted the severance package offer, while another $3,043 is expected to be expensed in the fourth quarter of 2024. The Company also experienced increases in both data processing and professional fee expense, which were collectively up $163 and $439 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. The changes in the Company’s provision for income taxes during the three and nine months ended September 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 September 30, 2024, total assets were $1,494,023, an increase of $141,888 from year-end 2023. Higher assets were primarily impacted by an increase in securities and loans. Securities increased $108,855, or 63.9%, from year-end 2023, primarily from the Company’s participation in the Ohio Homebuyer Plus program that led to an increase of $100,000 in deposits to a new public fund account during the third quarter of 2024. Since public fund accounts are required to be collateralized, the funds were used to invest in securities to meet pledging requirements and to serve as collateral to the account, which contributed to the increase in securities. Loans were up $77,012, or 7.9%, from year-end 2023. Growth in loans came from increases in the commercial real estate loan segment (+13.2%), residential real estate loan segment (+12.5%), and commercial and industrial loan segment (+2.9%), partially offset by a decrease in the consumer loan segment (-5.7%). The Company’s interest-bearing deposits with banks decreased $50,411, or 44.3%, from year-end 2023, coming mostly from deposits with the Federal Reserve. The Company utilized these funds to assist with funding the growth in loans, which provided a higher rate of return. At September 30, 2024, total liabilities were $1,341,870, up $133,742 from year-end 2023. Contributing most to this increase were higher deposit balances, which increased $134,284 from year-end 2023. Leading deposit growth were interest-bearing deposit balances, up $140,545 from year-end 2023, consisting of higher balances from Negotiable Order of Withdrawal (“NOW”) accounts (+70.5%), savings and money market accounts (+3.5%), and time deposits (+3.0%). The participation in the Ohio Homebuyer Plus program during the third quarter of 2024 contributed to most of the growth in NOW account balances (+$100,000), while also contributing to $5,283 in new savings account deposit balances during the third quarter of 2024. Partially offsetting growth in interest-bearing deposits were noninterest-bearing demand deposits, which decreased $6,261 from year-end 2023. At September 30, 2024, total shareholders' equity was $152,153, up $8,146 from December 31, 2023. This increase came primarily from year-to-date net income and an increase in net unrealized gains on available for sale securities, 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 September 30, 2024 and December 31, 2023 The following discussion focuses in more detail on the consolidated financial condition of the Company at September 30, 2024 compared to December 31, 2023. This discussion should be read in conjunction with the interim consolidated financial statements and the notes included in this Form 10‑Q. 35 Cash and Cash Equivalents At September 30, 2024, cash and cash equivalents were $82,204, a decrease of $45,922, or 35.8%, from December 31, 2023. The decrease came primarily from interest-bearing deposits with banks, which were down $50,411, or 44.3%, from year-end 2023. Over 76% 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 nine months 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. In September 2024, the Federal Reserve took action to reduce short-term market rates by 50 basis points, in large part to inflationary improvements. The Federal Reserve reduced short-term rates again by another 25 basis points in November 2024. The two rate cuts have resulted in a lower target federal funds rate range of 4.50% to 4.75%. 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 balance of total securities increased $108,855, or 63.9% compared to year-end 2023. In relation to the Ohio Homebuyer Plus program, the Company experienced a $100,000 increase in interest-bearing deposits classified as public funds, which are required to be collateralized. To satisfy pledging requirements, the funds were invested in $100,497 of U.S. Government securities to pledge as collateral to the Treasurer. The securities were purchased at a weighted average yield of 4.7% with maturity terms ranging from 6 months to 18 months. As a result, the Company’s U.S. Government securities portfolio increased $118,545 from $50,297 at year-end 2023 to $168,842 at September 30, 2024. Partially offsetting the increase in U.S. Government securities was a decrease in U.S. Government agency (“Agency”) mortgage-backed securities, which were down $9,706, or 9.1%, from year-end 2023. During the first nine months of 2024, the Company received proceeds from principal repayments of $12,913. 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. Prior to the third quarter of 2024, the Company’s investment securities portfolio had been mostly comprised of Agency mortgage-backed securities, which now represent 34.5% of total investments at September 30, 2024, with U.S. Government securities now comprising the most at 60.5%. Included in the increasing factors mentioned above were changes in net unrealized losses associated with available for sale securities. During the third quarter of 2024, long-term reinvestment rates decreased, which led to a $5,432 increase in the fair value of the Company’s available for sale securities. The fair value of an investment security moves inversely to interest rates, so as rates decreased, the unrealized loss in the portfolio was decreased causing the fair value to increase. These changes in rates are typical and do not impact earnings of the Company as long as the securities are held to full maturity. 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. 36 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 REAL ESTATE BY INDUSTRY As of September 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 $ 168,471 46.09 % Accommodation and Food Services 59,913 16.39 % Retail Trade 26,021 7.12 % Health Care and Social Assistance 24,047 6.58 % Construction 20,308 5.56 % Manufacturing 19,686 5.39 % All Other 47,051 12.87 % Total $ 365,497 100.00 % 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 $1,048,912 at September 30, 2024, representing an increase of $77,012, or 7.9%, as compared to $971,900 at December 31, 2023. 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 $47,095, or 9.8%, from year-end 2023. Contributing most to this increase were higher loan balances within the commercial real estate portfolio, which increased $42,603, or 13.2%, from year-end 2023. Commercial real estate loans represent the largest segment of the Company’s total loan portfolio at September 30, 2024, at 34.8%. 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 $4,492, or 2.9%, from year-end 2023. The growth was impacted by an increase in larger loan originations during the year. 37 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. Further increases in loans came from the Company’s residential real estate loan portfolio, which increased $39,805, or 12.5%, from year-end 2023. At September 30, 2024, residential real estate loans represented the second largest segment of the Company’s total loan portfolio at 34.3%. 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 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 $5,829) and contributed to a shift into more short-term variable rate mortgages (up $27,850) at September 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 $20,047 during the first nine months of 2024. The increases in the Company’s commercial and residential real estate loan portfolios at September 30, 2024 were partially offset by a decrease in the consumer loan portfolio, which was down $9,888, or 5.7%, from year-end 2023. This change was impacted by a $7,949, or 10.6%, decrease in other consumer loans, impacted by principal repayments and payoffs. Decreases in consumer loans also came from a $7,538, or 12.3%, 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. As a result, the Company exited the indirect lending business for automobiles and recreational vehicles effective October 11, 2024. Decreases in consumer loans were partially offset by a $5,599, or 15.6%, 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 September 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 nine months ended September 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 September 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 nine months ended September 30, 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 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. 38 As of September 30, 2024, the ACL for loans totaled $9,919, or 0.95%, 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 $1,152, or 13.1%, was mostly from loans collectively evaluated, which increased $725. The increase was impacted by additional reserves from a $72,333 increase in collectively evaluated loan balances during the first nine months of 2024, primarily from the residential and commercial real estate loan segments. The increase in ACL reserves was 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 residential real estate segment. Increases in the ACL were also impacted by a $427 increase in specific reserves on loans individually evaluated for impairment from year-end 2023. During the third quarter of 2024, the Company individually evaluated several loans associated with three borrower relationships for expected credit loss. After measuring the fair value of the loans’ collateral to the loans’ recorded investment, the Company identified $427 in expected losses related to the impairments of one commercial and industrial borrower relationship. This resulted in a corresponding charge to provision expense to establish the specific allocation within the ACL at September 30, 2024. The Company experienced higher delinquency levels from year-end 2023. Nonperforming loans to total loans increased to 0.44% at September 30, 2024, compared to 0.26% at December 31, 2023, and nonperforming assets to total assets increased to 0.32% at September 30, 2024, compared to 0.19% at December 31, 2023. The increase in both delinquency calculations resulted from a $2,138 increase in nonaccrual loans, primarily as a result of a single commercial and industrial loan relationship that was placed into nonaccrual status during the third quarter of 2024. Management believes that the ACL at September 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 September 30, 2024 increased $134,284, or 11.9%, from year-end 2023. This change in deposits came primarily from interest-bearing deposit balances, which were up by $140,545, or 17.5%, from year-end 2023, while noninterest-bearing deposits decreased $6,261, or 1.9%, from year-end 2023. The increase in interest-bearing deposits came primarily from higher interest-bearing NOW account balances, which increased $120,194, or 70.5%, from year-end 2023. The increase was largely driven by the Company’s participation with the Ohio Homebuyer Plus program that resulted in $100,000 in deposits to a new municipal NOW account with the State of Ohio Treasurer. Excluding the new Treasurer account, the Company also experienced increases of $24,069 in other municipal NOW product balances, particularly within the Gallia County, Ohio, and Mason County, West Virginia, market areas. 39 Also impacting deposit balance growth were time deposit balances, which increased $11,459, or 3.0%, from year-end 2023. The increase came from retail time deposits, which increased $28,252 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 $16,793, or 21.7%, decrease in wholesale time deposit balances from year-end 2023. Further increases in interest-bearing deposits came from savings and money market account balances, which increased $8,892, or 3.5%, 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 also experienced a $5,283 increase in its new Sweet Home Ohio savings account balances as part of the Ohio Homebuyer Plus program. The Company’s remaining savings account balances were down from year-end 2023. The decrease in noninterest-bearing demand deposits was primarily from the Company’s business and incentive-based checking account balances. While facing increased competition for deposits in its market areas, the Company will continue to emphasize growth and retention in its core deposit relationships during the remainder of 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 $40,888 at September 30, 2024, a decrease of $3,705, or 8.3%, 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, 2024 increased $8,146, or 5.7%, to finish at $152,153, as compared to $144,007 at December 31, 2023. This was primarily from year-to-date net income and an increase in net unrealized gains on available for sale securities, 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, 2025. As of November 14, 2024, the Company had repurchased approximately $2,967 in common stock. Comparison of Results of Operations For the Three and Nine Months Ended September 30, 2024 and 2023 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, 2024, compared to the same period in 2023. This discussion should be read in conjunction with the interim consolidated financial statements and the notes 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 and nine months ended September 30, 2024, net interest income increased $1,205, or 10.6%, and $1,022, of 2.9%, compared to the same periods in 2023, respectively. The improvement during both periods came from average earning asset growth 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. 40 Total interest and fee income recognized on the Company’s earning assets increased $3,473, or 21.8%, during the third quarter of 2024, and $10,998, or 24.6%, during the first nine months of 2024, compared to the same periods in 2023. The earnings growth was impacted by interest on loans, which increased $2,395, or 16.7%, and $8,206, or 20.6%, during the three and nine months ended September 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 third quarter of 2024, the Company experienced a 9.1% increase in higher-yielding loans, with average loan balances increasing from $952,452 during the three months ended September 30, 2023 to $1,038,784 during the three months ended September 30, 2024. This large composition shift to higher-yielding loans contributed to most of the loan interest and fee revenue improvement during the third quarter of 2024. Overall, average loans have increased $86,332 and $83,488 during the three and nine months ended September 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 contributed to the repricing of a portion of the Company’s loan portfolio. As a result, the average interest rate yield on loans increased 43 basis points to 6.45% during the third quarter of 2024 and increased 59 basis points to 6.41% during the first nine months of 2024, compared to the same periods in 2023. Total interest on securities increased $869, or 90.8%, during the third quarter of 2024, and $794, or 27.1%, during the first nine months of 2024, compared to the same periods in 2023. The earnings growth was primarily from the purchase of $100,497 in U.S. Government securities during the third quarter of 2024 as part of the Company’s participation in the state’s Homebuyer Plus program. The securities were purchased at a weighted average yield of 4.7% with maturity terms ranging from 6 months to 18 months. The security purchases were used to collateralize $100,00 in public fund deposits received by the State Treasurer as part of the program. This contributed to increases in average security balances, which were up $59,752 and $9,272 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. While securities have grown in large part due to the security purchases from the Homebuyer Plus program, the Company has placed more emphasis on growing its higher-yielding loan portfolio during 2023 and 2024, utilizing 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, impacted by the $100,497 purchase of U.S Government securities at a weighted average yield of 4.7% that was higher than the 2.39% average yield on the total securities portfolio. Average security yields have also been positively impacted by the elevated market rate environment during both 2023 and 2024. As a result, average security yields increased 98 basis points to 2.89% during the third quarter of 2024 and increased 48 basis points to 2.39% during the first nine months of 2024, compared to the same periods in 2023. Total interest income from interest-bearing deposits with banks increased $189 during the third quarter of 2024, and $1,955 during the first nine months 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 $14,099 and $44,271 during the three and nine months ended September 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. The rate increases were the result of the Federal Reserve increasing short-term rates during 2022 and 2023 due to rising inflationary concerns at that time. However, in September 2024, the Federal Reserve took action to reduce short-term rates by 50 basis points due in large part to the improvement in the inflationary pressures that had negatively impacted the economy in 2022 and 2023. This lowered the target federal funds rate to a range of 4.75% to 5.00%, which is expected to have a negative impact on the Federal Reserve Bank clearing account’s interest earnings. Total interest expense incurred on the Company’s interest-bearing liabilities increased $2,268 during the third quarter of 2024, and $9,976 during the first nine months 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 $9,782 at an average cost of 1.37% during the year) into more higher-cost time deposit products (up $129,211 at an average cost of 4.67% during the year). Furthermore, the Company’s average wholesale funding balances increased $20,053 during the year, which included the use of brokered CDs (average cost of 4.88%) 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 123 basis points from 1.68% at September 30, 2023, to 2.91% at September 30, 2024. 41 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 3.76%, compared to 2023’s third quarter net interest margin of 3.85%. The Company’s year-to-date net interest margin decreased to 3.71% at September 30, 2024, compared to 2023’s year-to-date net interest margin of 4.03% at September 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 nine months ended September 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. From the first quarter to the second quarter of 2024, the net interest margin increased 13 basis points from 3.61% to 3.74% and from the second quarter to the third quarter of 2024, the net interest margin increased 2 basis points from 3.74% to 3.76%. These margin improvements were related to increases in earning asset yields and a higher composition of average loan balances due to the 9.0% increase in average year-to-date 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 and third quarters of 2024. This, along with the benefits of higher-yielding loan growth, contributed to the increase in net interest income during the three and nine months ended September 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 September 30, 2024, the Company’s provision for credit losses expense totaled $920, an increase of $32 when compared to $888 in provision expense during the three months ended September 30, 2023. For the nine months ended September 30, 2024, the Company’s provision for credit losses expense totaled $1,852, an increase of $451 when compared to $1,401 in provision expense during the nine months ended September 30, 2023. The increase in credit loss expense came primarily from loans, impacted by a $427 increase in specific reserves associated with a single borrower relationship. The specific reserve associated with the collateral dependent commercial and industrial loan relationship was identified during the third quarter of 2024 and required a corresponding provision expense charge of $427 to establish the specific reserve. Provision expense was also impacted by increases in net charge-offs, which were up $285 and $177 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. Also contributing to additional provision expense was a higher historical loan loss factor coming primarily from the commercial real estate loan segment. Partially offsetting the increasing effects to provision expense were decreases in certain qualitative risk factors associated with the commercial real estate loan segment. Credit loss expense during 2024 was also impacted by unfunded commitments, which was down $140 and $137 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. The impact came mostly from the commercial real estate construction segment. 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 Estimates” within this Management’s Discussion and Analysis. 42 Noninterest Income Noninterest income increased $286, or 11.1%, during the three months ended September 30, 2024, and $203, or 2.2%, during the nine months ended September 30, 2024, compared to the same periods in 2023. Higher noninterest revenue was largely impacted by increases in service charges on deposit accounts, which were up $96, or 13.4%, during the third quarter of 2024, and $288, or 14.6%, during the first nine months of 2024, compared to the same periods in 2023. The increases have been impacted by a higher volume of overdraft transactions during 2024. Trust fee income and BOLI earnings were also up during 2024, collectively increasing $38, or 12.8%, and $108, or 12.2%, during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. Trust fees were impacted by higher quarterly trustee revenues, while BOLI earnings were positively impacted by an elevated rate environment and an increase in BOLI plan assets. Other noninterest income increased $108, or 7.5%, during the third quarter of 2024, but decreased $172, or 16.6%, during the first nine months of 2024, compared to the same periods in 2023. The largest impact came from closing of Race Day in December 2023, which resulted in no mortgage application referral income in 2024 compared to $247 in commissions earned in 2023. 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 recorded a $46 fair value adjustment on one of its support facilities being held for sale that reduced the carrying value of the facility and reduced other noninterest during 2024. The remaining noninterest income categories increased $42, or 3.2%, during the third quarter of 2024, and decreased $21, or 0.4%, during the first nine months of 2024, compared to the same periods in 2023. The quarterly increases primarily came from higher interchange income, while the year-to-date decrease was impacted by lower mortgage banking income and lower tax preparation fees. Noninterest Expense Noninterest expense increased $841, or 8.1%, during the three months ended September 30, 2024, and increased $1,758, or 5.7%, during the nine months ended September 30, 2024, compared to the same periods from 2023. Contributing most to the increase in noninterest expense were salaries and employee benefit costs, which increased $687 and $1,315 during the three and nine months ended September 30, 2024, compared to the same periods from 2023, respectively. The e xpense increase was largely from annual performance-based merit increases, higher health insurance premiums, and the severance expense associated with a voluntary early retirement program. During the third quarter of 2024, the Company established a voluntary early retirement program for select employees meeting certain criteria. Based on the number of employees that accepted the severance package as of September 30, 2024, the Company incurred an expense of $295. Subsequent to quarter end, additional employees accepted the offer, and the Company anticipates recording additional severance expense of $3,043 during the fourth quarter of 2024. The early retirement program is expected to reduce salary and employee benefit expense on a go forward basis. Also contributing to higher salaries and employee benefit costs was an increase in the Company’s average full-time equivalent employee base, which was up three employees from 240 at September 30, 2023 to 243 at September 30, 2024. The growth in salaries and employee benefit expense was partially offset by the elimination of staffing for Race Day by April 2023, which resulted in a savings of $200 for the first nine months of 2024, when compared to the same period last year. Higher noninterest expense also came from data processing expense, which increased $83 during the third quarter of 2024, and $232 during the first nine months 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 $80 during the third quarter of 2024, and $207 during the first nine months 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 change in the remaining noninterest expense categories was minimal, decreasing $9, or 0.3%, during the third quarter of 2024, and increasing $4, or 0.1%, during the first nine months of 2024. 43 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 nine months ended September 30, 2024 to the same periods in 2023, the Company has benefited from an increase in earning asset yields due to previous market rate increases by the Federal Reserve, and a higher composition of higher-yielding loans. Average loans continue to grow, increasing over 9% during both the quarterly and year-to-date periods, and continued to transition into more lower-cost funding deposits during the third quarter that had a positive impact to quarterly net interest income. Earnings also benefited from the $100,497 purchase of securities during the third quarter of 2024 due to the Company’s participation in the Homebuyer Plus program. 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 third quarter and the first nine months of 2024 and had a negative impact to year-to-date net interest income. While net interest earnings are improving, contributions from noninterest income also grew by 11.1% and 2.2% during the third quarter and the first nine months of 2024, while overhead expense increased 8.1% and 5.7% during the same periods due to higher annual merit adjustments and health insurance premiums, as well as severance expense. The positive effects of higher net interest income during the quarter was the contributing factor to the Company’s improved quarterly efficiency number, which decreased to 72.0% during the three months ended September 30, 2024, from 73.6% during the same period in 2023. However, the net interest income growth for the year was completely offset by higher overhead expense which has contributed to a higher year-to-date efficiency number, which increased (regressed) to 72.3% during the nine months ended September 30, 2024, from 70.3% during the same period in 2023. Provision for income taxes The Company’s income tax provision increased $150 during the three months ended September 30, 2024, and decreased $60 during the nine months ended September 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 September 30, 2024. As of September 30, 2024, the Bank’s CBLR was 10.25%. 44 Cash dividends paid by the Company were $3,141 during the first nine months of 2024. The year-to-date dividends paid totaled $0.66 per share. Liquidity Liquidity relates to the Company's ability to meet the cash demands and credit needs of its customers in the short and long-term 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 Bank’s 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 $354,566, represented 23.7% of total assets at September 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 7.9% growth in loans. Increases in deposits were largely impacted by growth in NOW, savings and money market deposits, which increased 30.3% from year-end 2023, partially offset by lower noninterest-bearing deposits, which decreased 1.9%, 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 September 30, 2024, the Bank could borrow an additional $72,342 from the FHLB and the borrowing line with the FRB had availability of $57,544. 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 September 30, 2024, the amount of brokered CDs outstanding was 3.28% of total assets, as compared to 4.86% at December 31, 2023. At September 30, 2024, the Bank had utilized 59.53% 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 September 30, 2024, the Bank’s total wholesale funding sources represented 12.38% of total assets. Based on the collective internal wholesale funding limit, the Bank had the capacity to borrow an additional $408 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 $1,261,420 in total deposit balances at September 30, 2024, only 40.2%, or $507,385, 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 September 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. 45 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. Critical Accounting Estimates The preparation of financial statements and related disclosures requires management to use judgment and make estimates. The Company evaluates such estimates on an ongoing basis. By their nature, these judgments are subject to uncertainty. We base our estimates on historical experience, current trends and other factors that we believe to be relevant and reasonable under the circumstances at the time the estimate was made. We believe our estimates, assumptions, and judgments are reasonable in that they were based on information available when the estimates, assumptions and judgments were made. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from those implied by our assumptions and estimates. 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 individually evaluated collateral dependent 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. 46 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.