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, tariffs, 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, 2024 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 active, wholly-owned subsidiary, Ohio Valley REO, LLC, an Ohio limited liability 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 and commercial 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. 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 (the “Treasurer”) called the 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 goals. For each Sweet Home Ohio 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 March 31, 2025, the balance of Sweet Home Ohio accounts totaled $7,729 compared to $6,775 at December 31, 2024. At March 31, 2025, the amount of Treasurer deposits totaled $82,373 compared to $97,366 at December 31, 2024. 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. At March 31, 2025, the balance of securities used to collateralize the Treasurer deposits totaled $96,707 compared to $102,871 at December 31, 2024. 30 FINANCIAL RESULTS OVERVIEW: Net income totaled $4,406 during the first quarter of 2025, an increase of $1,613 from the same period of 2024. Earnings per share for the first quarter of 2025 finished at $.94 per share, compared to $.58 per share during the first quarter of 2024. The positive results during the quarterly period were impacted by a 10.8% increase in average earning assets, coming primarily from loans and securities, which contributed to a 17.4% increase in net interest income during the three months ended March 31, 2025, compared to the same period in 2024. Also contributing to higher net earnings was a 44.6% decrease in provision for credit loss expense, impacted by a decrease in loan balances generally allocated for during 2025. The positive effects from higher net interest income and lower provision expense were partially offset by a 1.4% decrease in noninterest income and a 0.7% increase in noninterest expense. Higher net earnings also had a corresponding impact to the Company’s annualized net income to average asset ratio, or return on assets, which increased 37 basis points to 1.20% during the first quarter of 2025, compared to the same period in 2024. In addition, the Company’s net income to average equity ratio, or return on equity, increased 405 basis points to 11.82% during the first quarter of 2025, compared to the same period in 2024. During the three months ended March 31, 2025, net interest income increased $1,950, or 17.4%, over the same period in 2024. This growth came mostly from a $136,241 increase in average earning assets, led mostly by a 55.2% increase in average securities and a 7.0% increase in average loans. The growth in average securities came in large part to the increased pledging requirements on public fund deposits as part of the Ohio Homebuyer Plus program. The growth in average loans was related to the commercial and residential real estate lending segments. Earnings were further enhanced by a higher net interest margin, increasing 24 basis points during the three months ended March 31, 2025, compared to the same period in 2024. Margin growth was related to an increase in the yield on earning assets, while the cost of funding sources decreased. The improvement to earning asset yields was directly related to the growth in higher-yielding securities and loans, while the cost of funding sources decreased as the composition of funding sources shifted to lower cost deposit sources, such as NOW, money market, checking and savings accounts. During the three months ended March 31, 2025, the Company’s provision for credit loss expense decreased $335, when compared to the same period in 2024. The decrease during the quarter came primarily from lower general reserves associated with a $18,529 decrease in loans from year-end 2024. The decrease in total loans was primarily related to a $31,473 decrease in a warehouse line of credit extended to another mortgage lender. The Company also experienced lower reserves associated with select qualitative risk factors. During the three months ended March 31, 2025, noninterest income decreased $50, or 1.4% from the same period in 2024. The decrease came mostly from a decline in swap asset revenue and tax preparation fees, while changes in the remaining areas were minimal. During the three months ended March 31, 2025, noninterest expense increased $77, or 0.7%, over the same period in 2024. Noninterest expenses were led by increases in data processing, occupancy and equipment, and marketing costs, which collectively increased $240, or 13.1%. Data processing expenses were impacted by costs associated with the Company’s debit and credit card platforms. Occupancy and equipment costs were impacted by various repair and maintenance items. Marketing cost increases were impacted by higher donation and advertising budgets for 2025. Partially offsetting the increases in overhead costs were decreases in salaries and employee benefits and software expenses, which collectively decreased $235, or 3.5%. Cost savings in salaries and employee benefits was the direct result of a voluntary early retirement program implemented in 2024, while software expenses declined as a result of costs associated with select service agreements from the first quarter of 2024 that was not as impactful in 2025. The remaining noninterest expenses increased $72 primarily from higher FDIC insurance assessment costs. The $545 increase in the Company’s provision for income taxes during the three months ended March 31, 2025, compared to the same period in 2024, was largely due to the increase in operating income affected by the factors mentioned above, as well as an increase in the effective tax rate. At March 31, 2025, total assets were $1,513,105, an increase of $9,693 from year-end 2024. The increase in assets was primarily the result of a $34,634 increase in balances maintained at the FRB, as total loans decreased $18,529 and total securities decreased $9,378. As previously mentioned, the decrease in loans was related to a $31,473 decrease in a warehouse line of credit extended to another mortgage lender. Absent this decrease, the Company would have experienced loan growth of $12,944 during the first quarter of 2025 in the targeted commercial real estate and residential real estate loan portfolios. The decrease in securities was related to the lower need for securities to pledge to the Treasurer due to a $14,993 balance decrease. 31 At March 31, 2025, total liabilities were $1,357,390, up $4,306 from year-end 2024. Contributing most to this increase were higher deposit balances, which increased $8,991 from year-end 2024. Leading deposit growth were interest-bearing deposit balances, up $10,510 from year-end 2024, consisting of higher balances from savings and money market accounts (+2.4%), and time deposits (+1.6%), partially offset by a decrease in Negotiable Order of Withdrawal (“NOW”) accounts (-0.9%). At March 31, 2025, the Company experienced lower noninterest-bearing demand deposits, decreasing $1,519 from year-end 2024. At March 31, 2025, total shareholders' equity was $155,715, up $5,387 from December 31, 2024. This increase came primarily from quarterly net income and an after-tax increase in net unrealized gains on AFS securities, partially offset by quarterly cash dividends paid. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums. Comparison of Financial Condition at March 31, 2025 and December 31, 2024 The following discussion focuses in more detail on the consolidated financial condition of the Company at March 31, 2025 compared to December 31, 2024. This discussion should be read in conjunction with the interim consolidated financial statements and the notes included in this Form 10‑Q. Cash and Cash Equivalents At March 31, 2025, cash and cash equivalents were $120,608, an increase of $37,501, or 45.1%, from December 31, 2024. The increase came primarily from interest-bearing deposits with banks, which were up $34,634, or 51.4%, from year-end 2024. The Company’s interest-bearing FRB clearing account contributed most to the increase in interest-bearing deposits with banks, representing 84% of cash and cash equivalents at March 31, 2025. The Company utilizes its interest-bearing FRB clearing account to manage excess funds, as well as to assist in funding earning asset growth. The increases in excess funds during the first quarter of 2025 came primarily from decreases in both loans and securities, which were down $18,529 and $9,378, respectively, from year-end 2024. As previously mentioned, the decrease in loans was related to a $31,473 decrease in a warehouse line of credit extended to another mortgage lender. The decrease in securities was related to the lower need for securities to pledge to the Treasurer deposits as part of the Homebuyer Plus program. The interest rate paid on both the required and excess reserve balances of the FRB is based on the targeted federal funds rate established by the Federal Open Market Committee, which remained at a range of 4.25% to 4.50% at March 31, 2025 and December 31, 2024. The interest-bearing deposit balances in the FRB 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 The balance of total securities decreased $9,378, or 3.4% from year-end 2024. As previously mentioned, the decrease in securities was impacted by the lower need for securities to pledge to the Treasurer deposits in relation to the Homebuyers Plus program. The Company’s U.S. Government securities portfolio decreased $33,860 from $168,030 at year-end 2024 to $134,170 at March 31, 2025, impacted by $35,000 in scheduled maturities. The Company utilized a portion of its proceeds from maturities of U.S. Government securities to fund additional purchases in U.S. Government agency (“Agency”) mortgage-backed securities, which were up $24,918, or 26.5%, from year-end 2024. During the first quarter of 2025, purchases of Agency mortgage-backed securities totaled $27,482, while being partially offset by $4,460 in principal repayments. 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. At March 31, 2025, the Company’s investment securities portfolio was comprised mostly of U.S. Government securities at 50.5% of total investments, while Agency mortgage-backed securities represented 44.8%. 32 Included in the increasing factors mentioned above were changes in net unrealized losses associated with AFS securities. During the first quarter of 2025, a decrease in long-term market rates led to a $2,589 increase in the fair value associated with the Company’s AFS securities at March 31, 2025. The fair value of an investment security moves inversely to interest rates, so as rates decreased, the fair value increased, causing the unrealized loss in the portfolio 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. 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. COMMERCIAL REAL ESTATE BY INDUSTRY As of March 31, 2025 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 $ 182,292 47.85 % Accommodation and Food Services 65,581 17.21 % Retail Trade 29,536 7.75 % Health Care and Social Assistance 23,655 6.21 % Manufacturing 19,182 5.03 % Construction 16,230 4.26 % All Other 44,503 11.69 % Total $ 380,979 100.00 % 33 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 decreased to $1,043,296 at March 31, 2025, representing a decrease of $18,529, or 1.7%, as compared to $1,061,825 at December 31, 2024. The decrease in loans came primarily from the residential real estate loan and consumer loan portfolios, partially offset by increases in in the commercial real estate and commercial and industrial portfolios from year-end 2024. The Company’s residential real estate loan portfolio decreased $24,708, or 6.6%, from year-end 2024. At March 31, 2025, residential real estate loans represented the second largest segment of the Company’s total loan portfolio at 33.4%. As previously mentioned, the decrease was largely due to a $31,473 paydown in a warehouse line of credit extended to another 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. The paydown was a result of lower mortgage volume due to higher mortgage rates and the increase in the lead bank’s internal capacity in relation to a capital infusion. The balance of this line of credit is expected to increase in future periods if mortgage volume increases and the funding needs of the lead bank changes. The remaining residential real estate loan balances increased $6,765, or 1.8%, from year-end 2024. During 2025, as mortgage rates continued to increase, the Company experienced 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 $1,435) and contributed to a shift into more short-term variable rate mortgages (up $7,947) as of March 31, 2025. Further decreases in loans came from the Company’s consumer loan portfolio, which was down $8,003, or 5.1%, from year-end 2024. This change was impacted by a $4,651, or 9.3%, decrease in automobile loans. 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 during the fourth quarter of 2024. Decreases in consumer loans also came from a $4,248, or 6.6%, decrease in other consumer loans from year-end 2024, impacted by principal repayments and payoffs. Decreases in consumer loans were partially offset by a $896, or 2.1%, increase in home equity lines of credit. The decreases in the Company’s residential real estate and consumer loan portfolios at March 31, 2025 were partially offset by an increase in commercial loans. The Company’s commercial loan portfolio increased $14,182, or 2.7%, from year-end 2024. Contributing most to this increase were higher loan balances within the commercial real estate portfolio, which increased $7,992, or 2.1%, from year-end 2024. At March 31, 2025, commercial real estate loans represented the largest segment of the Company’s total loan portfolio at 36.5%. The increase from year-end 2025 came primarily from new originations within the owner- and nonowner-occupied loan segments. Commercial loans were also positively impacted by an increase in the commercial and industrial portfolio, which was up $6,190, or 3.9%, from year-end 2024. 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. Allowance for Credit Losses The Company maintains an 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. 34 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 March 31, 2025, the Company determined that all AFS securities that experienced a decline in fair value below the amortized cost basis from year-end 2024 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 months ended March 31, 2025. 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 March 31, 2025, a $1 ACL was recognized based on a .02% cumulative default rate taken from the S&P and Moody’s bond rating index. The $1 ACL for HTM debt securities was unchanged from December 31, 2024, resulting in no provision expense during the three months ended March 31, 2025. 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 March 31, 2025, the ACL for loans totaled $10,139, or 0.97%, of total loans. As of December 31, 2024, the ACL for loans totaled $10,088, or 0.95%, of total loans. All of the $51, or 0.5%, increase in the ACL came from loans collectively evaluated. The increase in ACL reserves was impacted primarily by a higher historical loss rate within the commercial real estate and commercial and industrial portfolios, partially offset by a lower historical loss rate within the consumer loan portfolio. At March 31, 2025, there were no specific reserves on loans being individually evaluated for impairment, the same as year-end 2024. The Company experienced minimal change in their delinquency levels from year-end 2024. Nonperforming loans to total loans increased slightly to 0.48% at March 31, 2025, compared to 0.46% at December 31, 2024, while nonperforming assets to total assets remained unchanged at 0.33%. The increase in nonperforming loans to total loans resulted from a $124 increase in nonaccrual loans, coming mostly from the commercial and industrial and residential real estate loan portfolios. Management believes that the ACL at March 31, 2025 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 March 31, 2025 increased $8,991, or 0.7%, from year-end 2024. This change in deposits came primarily from interest-bearing deposit balances, which were up by $10,510, or 1.1%, from year-end 2024, while noninterest-bearing deposits decreased $1,519, or 0.5%, from year-end 2024. 35 The increase in interest-bearing deposits came primarily from savings and money market account balances, which increased $6,948, or 2.4%, from year-end 2024. The increase came primarily from savings accounts, which increased $6,590 from year-end 2024, impacted mostly by the Company’s statement savings account product. Money market account balances increased $358 from year-end 2024, impacted mostly by increases in the Company’s tiered money market product (Money Fund) that was introduced in 2023 and offers a higher rate on tiered deposit balances. Further increases in interest-bearing deposits came from time deposit balances, which increased $6,136, or 1.6%, from year-end 2024. The increase came from retail time deposits, which increased $5,767 from year-end 2024. The surge in product rate increases on retail CDs continued to slow during 2025, which has limited the growth in time deposits from year-end 2024 compared to savings and money market deposits. The Company’s wholesale time deposits increased $369, or 0.6%, from year-end 2024. Partially offsetting the increases in savings, money market and time deposit balances were lower interest-bearing NOW account balances, which decreased $2,574, or 0.9%, from year-end 2024. The decrease was largely from a $14,993 decrease in the Company’s municipal NOW account with the Treasurer in relation to the Homebuyer Plus program. Excluding this decrease in the Treasurer account balances, the Company would have experienced a $16,216 increase in its other municipal NOW product balances, particularly within the Gallia County, Ohio, and Mason County, West Virginia, market areas. 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 2025, 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 $38,440 at March 31, 2025, a decrease of $1,300, or 3.3%, from year-end 2024. The decrease was related to the scheduled principal amortization for applicable 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 March 31, 2025 increased $5,387, or 3.6%, to finish at $155,715, as compared to $150,328 at December 31, 2024. This was primarily from quarterly net income and an increase in the fair value of AFS securities, partially offset by cash dividends paid. The after-tax increase in fair value on AFS securities totaled $2,018 from year-end 2024, as long-term market rates decreased during the first quarter of 2025, causing an increase in the fair value of AFS securities. Comparison of Results of Operations For the Three Months Ended March 31, 2025 and 2024 The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three months ended March 31, 2025, compared to the same period in 2024. 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 months ended March 31, 2025, net interest income increased $1,950, or 17.4%, compared to the same period in 2024. The improvement during 2025 came from average earning asset growth and the net interest margin. The average growth was impacted by a composition shift into higher-yielding loans and securities, combined with a consumer shift to more lower-cost deposit sources that helped reduce the higher average costs paid on deposits and borrowings. 36 Total interest and fee income recognized on the Company’s earning assets increased $2,116, or 12.0%, during the first quarter of 2025, compared to the same period in 2024. The earnings growth was impacted by interest on loans, which increased $1,445, or 9.5%. This improvement was impacted by increases in both average loan balances and loan yields. Overall, average loans increased $68,219, or 7.0%, during the three months ended March 31, 2025, compared to the same period in 2024. Balance increases were mostly realized within the commercial and residential real estate loan portfolios due to higher commercial loan volume and a consumer preference for short-term, variable rate residential real estate loans. Loan revenue improvement also came from average loan yields increasing from 6.34% during the first quarter of 2024 to 6.53% during the first quarter of 2025. Loan yield increases were mostly impacted by the commercial and residential real estate loan portfolios. Total interest on securities increased $1,264, or 137.5%, during the first quarter of 2025, compared to the same period in 2024. 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 Treasurer as part of the program. This contributed to increases in average security balances, which were up $95,521 during the first quarter of 2025, compared to the same period in 2024. 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 2024 and 2025, 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 3.17% average yield on the total securities portfolio at March 31, 2025. Average security yields have also been positively impacted by the elevated market rate environment during 2024 that continued into 2025. As a result, average security yields increased 119 basis points to 3.17% during the first quarter of 2025, compared to the same period in 2024. Total interest income from interest-bearing deposits with banks decreased $591 during the first quarter of 2025, compared to the same period in 2024. This was largely from average balance decreases with the Company’s interest-bearing FRB clearing account, which decreased $27,503 during the three months ended March 31, 2025, compared to the same period in 2024. FRB clearing balances were used to assist in funding loan growth, which contributed to the average balance decrease of FRB funds during the first quarter of 2025, compared to the first quarter of 2024. Further impacting lower interest income from the FRB clearing account were short-term rate decreases during 2024. Between September and December 2024, the FRB took action to reduce the rate associated with the FRB clearing account by 100 basis points due to improvements in inflationary pressures. This action lowered the target federal funds rate to a range of 4.25% to 4.50%, which had a negative impact on the FRB clearing account’s interest earnings. Total interest expense incurred on the Company’s interest-bearing liabilities increased $166 during the first quarter of 2025, compared to the same period in 2024. Increases in interest expense were impacted by growth in the Company’s average interest-bearing deposits, which increased $125,662 during the first quarter of 2025, compared to the same period in 2024. A large portion of this growth came from lower-costing NOW and savings account balances related to the Company’s participation in the Homebuyers Plus program. With the additions of the municipal NOW Treasurer account and new Home Sweet Home savings accounts during the second half of 2024, this contributed to an average balance increase of over $94,595 in interest-bearing deposits during the first quarter of 2025. Average interest-bearing deposit growth also came from a $31,770 increase in the Company’s lower-costing tiered money market product (Money Fund). The Company also experienced a $7,609 increase in its average time deposits during the first quarter of 2025, compared to the same period in 2024. While the movement of higher time deposit balances had a corresponding impact to higher interest expense, the average cost associated with time deposits decreased during the first quarter of 2025, compared to the same period in 2024. During 2023, rate offerings on retail CDs continued to adjust up as a result of market competition. The Company had offered various “short-term” CD rate specials with maturity terms of less than one year to attract and retain its core deposit funding during this time. Since then, product rates on retail CDs have decreased, which has allowed a large portion of those short-term retail CDs to renew at lower rates, or in some cases, be reinvested into lower-costing savings or money market accounts. Furthermore, the Company’s average wholesale funding balances decreased $20,172 during the first quarter of 2025, which included the use of brokered CDs (average cost of 4.70%) and FHLB advances (average cost of 4.05%). With the Company utilizing the growth in its lower-cost retail deposit sources to fund earning asset growth, the reliance on higher-cost wholesale deposits to fund asset growth decreased, which helped to limit the growth in interest expense during 2025. As a result of the rate repricings on retail CDs and the deposit shift into lower-cost funding sources, the Company’s total weighted average costs on interest-bearing liabilities decreased by 14 basis points from 2.15% at March 31, 2024 to 2.01% at March 31, 2025. 37 The Company’s net interest margin is defined as fully tax-equivalent net interest income as a percentage of average earning assets. During 2025, the Company’s first quarter net interest margin increased to 3.85%, compared to 2024’s first quarter net interest margin of 3.61%. Positive contributions to margin growth came from a 10.9% increase in the Company’s average earning assets, mostly from higher-yielding loans and securities. The margin increase was also positively impacted by lower average costs associated with the Bank’s interest-bearing liabilities due to a deposit composition shift into more lower-cost NOW, savings, money market, and checking account deposits. Furthermore, the Company has benefited from its retail CDs repricing at lower product rates, while also relying less on wholesale funding sources. The Company’s primary focus is to invest its funds into higher yielding assets, particularly loans, as opportunities arise. However, if loan balances do not continue to expand and remain a larger component of overall earning assets, the Company will face pressure within its net interest income and margin improvement. Provision for Credit Losses 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 HTM 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 March 31, 2025, the Company’s provision for credit losses expense totaled $416, a decrease of $335 when compared to $751 in provision expense during the three months ended March 31, 2024. The decrease in credit loss expense came primarily from loans, which decreased by $381 during the first quarter of 2025, compared to the same period in 2024. Provision expense on loans during 2025 was impacted primarily by decreases in loan balances generally allocated for during 2025. The risk associated with an $18,529 decrease in loans generated lower general reserves and a corresponding decrease to provision expense. Provision expense on loans during 2025 was also impacted by lower reserves associated with the improvements of certain qualitative risk factors that included commercial real estate loan concentration risk, industry outlooks in farmland and agriculture, and delinquency levels associated within the consumer loan segment. These decreasing effects to provision expense on loans were partially offset by the effects of higher net charge-offs and a higher historical loan loss factor that increased reserves primarily from a regression in GDP and unemployment projections from year-end 2024. Credit loss expense during 2025 was also impacted by unfunded commitments on off-balance sheet liabilities, which increased $46 during the three months ended March 31, 2025, compared to the same period in 2024. During the first quarter of 2025, credit loss expense on unfunded commitments was reduced by $60, compared to a reduction of $106 in credit loss expense during first quarter of 2024. The impact came mostly from the commercial real estate construction segment. Future provisions to the ACL 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. Noninterest Income Noninterest income decreased $50, or 1.4%, during the three months ended March 31, 2025, compared to the same period in 2024. The decrease came mostly from a decline in swap asset revenue (down $37) and tax preparation fees (down $11), while the remaining areas of noninterest income were down $2. 38 Noninterest Expense Noninterest expense increased $77, or 0.7%, during the three months ended March 31, 2025, compared to the same period in 2024. The Company’s largest noninterest expense, salaries and employee benefits, decreased $155, or 2.5%, during the three months ended March 31, 2025, compared to the same period in 2024. The e xpense decrease was largely from the Company’s full-time equivalent employee base being down nineteen employees from 271 at March 31, 2024 to 252 at March 31, 2025. Furthermore, insurance premium costs saw a decrease in the first quarter, also coinciding with a smaller full-time equivalent employee base. The primary reason for the decrease in employee base was due to the voluntary early retirement program that was implemented in 2024. The early retirement program was expected to reduce salary and employee benefit expense. Partially offsetting the expense savings from the early retirement program were annual merit increases. Lower noninterest expense also came from software expense, which decreased $80 during the first quarter of 2025, compared to the same period in 2024. Lower costs in this category were the direct result of timing differences with two large service agreements during the first quarter of 2024, totaling $76 in expense. Completely offsetting the decreases in noninterest expense listed above were various increases in noninterest expense, including data processing fees, which increased $118 during the first quarter of 2025, compared to the same period in 2024. Higher data processing fees were primarily related to debit and credit card processing due to higher transaction volume and conversion costs for the Company’s new reward platform. Also contributing to higher noninterest expense was occupancy and equipment expenses, which increased $68 during the first quarter of 2025, compared to the same period in 2024. Increases in this category came primarily from building repairs and maintenance on bank owned ATM’s. Higher noninterest expense also came from marketing costs, which increased $54 during the first quarter of 2025, compared to the same period in 2024. The increase was largely impacted by an increase in donation and advertising budgets for 2025. The remaining noninterest expense categories increased $72, or 3.4%, during the first quarter of 2025, compared to the same period in 2024. The increase was mostly a result of higher FDIC insurance expenses (up $35), as well as a slight increase in professional fees (up $14). 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 months ended March 31, 2025 to the same period in 2024, the Company has benefited from an increase in average earning assets, primarily from higher-yielding loans and securities, a decrease in average costs on interest-bearing deposits, and a deposit composition shift from higher-costing time deposits to lower-costing savings, NOW, money market and checking account deposits. While noninterest revenue is below the prior year, earnings have benefited from cost savings in salaries and employee benefits that resulted from management’s implementation of a voluntary retirement program in 2024. This has helped to limit overhead expense to just a 0.7% increase over 2024. With a strong 17.4% increase in net interest income combined with minimal overhead expense pickup from 2024, the Company’s year-to-date efficiency number decreased (improved) to 63.95% during the three months ended March 31, 2025, compared to 71.47% during the three months ended March 31, 2024. Provision for income taxes The Company’s income tax provision increased $545 during the three months ended March 31, 2025, compared to the same period in 2024. The increase in tax expense was primarily associated with the 63.6% increase in operating income and an increase in the effective tax rate from 17.7% at March 31, 2024 to 20.6% at March 31, 2025. The effective rate increased primarily from lower tax-exempt earnings during the first quarter of 2025. 39 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 three of the transitional period totaled $2,276, which resulted in the add-back of $569 to both Tier 1 capital and average assets as part of the CBLR calculation for March 31, 2025. As of March 31, 2025, the Bank’s CBLR was 10.13%. Cash dividends paid by the Company were $1,037 during the first three months of 2025. The year-to-date dividends paid totaled $0.22 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, which 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 $380,702, represented 25.2% of total assets at March 31, 2025 compared to $352,563 and 23.5% of total assets at December 31, 2024. This growth in liquid funds came primarily from a decrease in loans that was impacted by a large $31,473 paydown on the Bank’s warehouse line of credit extended to another mortgage lender. Liquid fund growth from year-end 2024 also came from an increase in net proceeds from maturities and paydowns of securities. Increases in deposits were largely impacted by growth in time, savings and money market deposits, which increased 1.9% from year-end 2024, partially offset by lower interest-bearing and noninterest-bearing demand deposits, which decreased 0.7%, from year-end 2024. 40 In addition to the on-balance sheet liquidity discussed above, the Bank has established multiple sources of funding to further enhance the Bank’s ability to meet liquidity demands. The Bank has pledged collateral to the FHLB and the FRB to establish committed borrowing lines. At March 31, 2025, the Bank could borrow an additional $89,603 from the FHLB and the borrowing line with the FRB had availability of $50,738. 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. The Bank’s internal limit on brokered CDs is 10% of total assets. At March 31, 2025, the amount of brokered CDs outstanding was 3.24% of total assets, as compared to 3.25% at December 31, 2024. At March 31, 2025, the Bank had utilized 52.62% of our FHLB capacity, an increase from 52.21% at December 31, 2024. The collective internal limit on all wholesale funding sources is 40% of total assets. At March 31, 2025, the Bank’s total wholesale funding sources represented 11.80% of total assets. Based on the collective internal wholesale funding limit, the Bank had the capacity to borrow an additional $423 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 $1,284,169 in total deposit balances at March 31, 2025, only 38.7%, or $497,388, 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 March 31, 2025. 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. 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. 41 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.