10-Q 1 sec10q063024.htm FORM 10-Q AT 06/30/24
United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 000-20914

OHIO VALLEY BANC CORP.
(Exact name of registrant as specified in its charter)

Ohio
31-1359191
(State of Incorporation)
(I.R.S. Employer Identification No.)

420 Third Avenue, Gallipolis, Ohio
45631
(Address of principal executive offices)
(ZIP Code)

(740) 446-2631
(Registrant’s telephone number, including area code)
_____________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common shares, without par value
OVBC
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☐
    
Accelerated filer  ☐
  
Non-accelerated filer  ☒
    
Smaller reporting company  ☒
  
Emerging growth company  ☐
        

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of common shares, without par value, of the registrant outstanding as of  August 13, 2024 was 4,711,001.



OHIO VALLEY BANC CORP.

Index

 
Page Number
PART I.
FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements (Unaudited)
  
 
Consolidated Balance Sheets
3
 
Consolidated Statements of Income
4
 
Consolidated Statements of Comprehensive Income
5
 
Consolidated Statements of Changes in Shareholders’ Equity
6
 
Condensed Consolidated Statements of Cash Flows
7
 
Notes to Unaudited Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
45
Item 4.
Controls and Procedures
45
     
PART II.
OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
46
Item 1A.
Risk Factors
46
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 3.
Defaults Upon Senior Securities
46
Item 4.
Mine Safety Disclosures
46
Item 5.
Other Information
46
Item 6.
Exhibits
48
     
Signatures
  
49


2

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 (dollars in thousands, except share and per share data)

 
June 30,
2024
    
December 31,
2023
  
             
ASSETS
            
Cash and noninterest-bearing deposits with banks
  
$
14,862
    
$
14,252
  
Interest-bearing deposits with banks
    
92,817
      
113,874
  
Total cash and cash equivalents
    
107,679
      
128,126
  
                 
Securities available for sale
    
162,749
      
162,258
  
Securities held to maturity, net of allowance for credit losses of $2 in 2024 and 2023
    
7,930
      
7,986
  
Restricted investments in bank stocks
    
5,016
      
5,037
  
                 
Total loans
    
1,040,284
      
971,900
  
Less: Allowance for credit losses
    
(9,431
)
    
(8,767
)
Net loans
    
1,030,853
      
963,133
  
                 
Premises and equipment, net
    
21,466
      
21,450
  
Premises and equipment held for sale, net
    
517
      
573
  
Accrued interest receivable
    
4,300
      
3,606
  
Goodwill
    
7,319
      
7,319
  
Other intangible assets, net
    
1
      
8
  
Bank owned life insurance and annuity assets
    
40,913
      
40,593
  
Operating lease right-of-use asset, net
    
1,114
      
1,205
  
Deferred tax assets
    
6,442
      
6,306
  
Other assets
    
7,018
      
4,535
  
Total assets
  
$
1,403,317
    
$
1,352,135
  
                 
LIABILITIES
                
Noninterest-bearing deposits
  
$
343,209
    
$
322,222
  
Interest-bearing deposits
    
835,219
      
804,914
  
Total deposits
    
1,178,428
      
1,127,136
  
                 
Other borrowed funds
    
42,056
      
44,593
  
Subordinated debentures
    
8,500
      
8,500
  
Operating lease liability
    
1,114
      
1,205
  
Allowance for credit losses on off-balance sheet commitments
    
629
      
692
  
Other liabilities
    
26,833
      
26,002
  
Total liabilities
    
1,257,560
      
1,208,128
  
                 
CONTINGENT LIABILITIES
    
—
      
—
  
                 
SHAREHOLDERS’ EQUITY
                
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 2024 - 5,490,995 shares issued; 2023 - 5,470,453 shares issued)
    
5,491
      
5,470
  
Additional paid-in capital
    
52,321
      
51,842
  
Retained earnings
    
118,531
      
114,871
  
Accumulated other comprehensive income (loss)
    
(11,907
)
    
(11,428
)
Treasury stock, at cost (2024 - 779,994 shares; 2023 - 697,321shares)
    
(18,679
)
    
(16,748
)
Total shareholders’ equity
    
145,757
      
144,007
  
Total liabilities and shareholders’ equity
  
$
1,403,317
    
$
1,352,135
  

 See accompanying notes to consolidated financial statements

3


OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)

 
Three months ended
June 30,
    
Six months ended
June 30,
  
   
2024
    
2023
    
2024
    
2023
  
                         
Interest and dividend income:
                        
Loans, including fees
  
$
16,130
    
$
13,293
    
$
31,380
    
$
25,569
  
Securities
                                
Taxable
    
947
      
934
      
1,832
      
1,892
  
Tax exempt
    
34
      
41
      
68
      
83
  
Dividends
    
95
      
75
      
193
      
165
  
Interest-bearing deposits with banks
    
1,446
      
671
      
2,863
      
1,097
  
Other interest
    
—
      
3
      
—
      
5
  
     
18,652
      
15,017
      
36,336
      
28,811
  
                                 
Interest expense:
                                
Deposits
    
6,102
      
3,091
      
12,001
      
4,923
  
Other borrowed funds
    
431
      
169
      
869
      
271
  
Subordinated debentures
    
156
      
143
      
313
      
281
  
     
6,689
      
3,403
      
13,183
      
5,475
  
Net interest income
    
11,963
      
11,614
      
23,153
      
23,336
  
Provision for (recovery of) credit losses
    
181
      
24
      
932
      
513
  
Net interest income after provision for (recovery of) credit losses
    
11,782
      
11,590
      
22,221
      
22,823
  
                                 
Noninterest income:
                                
Service charges on deposit accounts
    
731
      
653
      
1,456
      
1,264
  
Trust fees
    
101
      
82
      
205
      
168
  
Income from bank owned life insurance and annuity assets
    
226
      
211
      
451
      
418
  
Mortgage banking income
    
40
      
44
      
79
      
91
  
Electronic refund check / deposit fees
    
135
      
135
      
675
      
675
  
Debit / credit card interchange income
    
1,223
      
1,215
      
2,368
      
2,388
  
Tax preparation fees
    
26
      
33
      
633
      
664
  
Other
    
219
      
340
      
530
      
812
  
     
2,701
      
2,713
      
6,397
      
6,480
  
Noninterest expense:
                                
Salaries and employee benefits
    
6,186
      
5,841
      
12,353
      
11,725
  
Occupancy
    
537
      
485
      
1,006
      
947
  
Furniture and equipment
    
326
      
330
      
660
      
628
  
Professional fees
    
507
      
433
      
993
      
866
  
Marketing expense
    
221
      
241
      
446
      
482
  
FDIC insurance
    
161
      
142
      
309
      
280
  
Data processing
    
788
      
726
      
1,595
      
1,446
  
Software
    
541
      
588
      
1,162
      
1,150
  
Foreclosed assets
    
2
      
7
      
—
      
9
  
Amortization of intangibles
    
4
      
6
      
7
      
13
  
Other
    
1,590
      
1,616
      
3,073
      
3,141
  
     
10,863
      
10,415
      
21,604
      
20,687
  
                                 
Income before income taxes
    
3,620
      
3,888
      
7,014
      
8,616
  
Provision for income taxes
    
648
      
639
      
1,249
      
1,459
  
                                 
NET INCOME
  
$
2,972
    
$
3,249
    
$
5,765
    
$
7,157
  
                                 
Earnings per share
  
$
0.63
    
$
0.68
    
$
1.21
    
$
1.50
  

See accompanying notes to consolidated financial statements

4

OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)

 
Three months ended
June 30,
    
Six months ended
June 30,
  
   
2024
    
2023
    
2024
    
2023
  
                         
Net Income
  
$
2,972
    
$
3,249
    
$
5,765
    
$
7,157
  
                                 
Other comprehensive income (loss):
                                
Change in unrealized gain (loss) on available for sale securities
    
(15
)
    
(1,209
)
    
(615
)
    
936
  
Related tax (expense) benefit
    
4
      
254
      
136
      
(196
)
Total other comprehensive income (loss), net of tax
    
(11
)
    
(955
)
    
(479
)
    
740
  
                                 
Total comprehensive income (loss)
  
$
2,961
    
$
2,294
    
$
5,286
    
$
7,897
  

See accompanying notes to consolidated financial statements


5

OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(dollars in thousands, except share and per share data)

Quarter-to-date
  
Common
Stock
    
Additional
Paid-In
Capital
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Treasury
Stock
    
Total
Shareholders’
Equity
  
Balance at April 1, 2024
  
$
5,491
    
$
52,321
    
$
116,614
    
$
(11,896
)
  
$
(16,748
)
  
$
145,782
  
Net income
    
—
      
—
      
2,972
      
—
      
—
      
2,972
  
Other comprehensive loss, net
    
—
      
—
      
—
      
(11
)
    
—
      
(11
)
Cash dividends, $0.22 per share
    
—
      
—
      
(1,055
)
    
—
      
—
      
(1,055
)
Shares acquired for treasury, 82,673 shares
    
—
      
—
      
—
      
—
      
(1,931
)
    
(1,931
)
Balance at June 30, 2024
  
$
5,491
    
$
52,321
    
$
118,531
    
$
(11,907
)
  
$
(18,679
)
  
$
145,757
  
                                                 
Balance at April 1, 2023
  
$
5,470
    
$
51,842
    
$
110,017
    
$
(13,118
)
  
$
(16,666
)
  
$
137,545
  
Net income
    
—
      
—
      
3,249
      
—
      
—
      
3,249
  
Other comprehensive loss, net
    
—
      
—
      
—
      
(955
)
    
—
      
(955
)
Cash dividends, $0.37 per share
    
—
      
—
      
(1,767
)
    
—
      
—
      
(1,767
)
Balance at June 30, 2023
  
$
5,470
    
$
51,842
    
$
111,499
    
$
(14,073
)
  
$
(16,666
)
  
$
138,072
  

Year-to-date
  
Common
Stock
    
Additional
Paid-In
Capital
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Treasury
Stock
    
Total
Shareholders’
Equity
  
Balance at January 1, 2024
  
$
5,470
    
$
51,842
    
$
114,871
    
$
(11,428
)
  
$
(16,748
)
  
$
144,007
  
Net income
    
—
      
—
      
5,765
      
—
      
—
      
5,765
  
Other comprehensive loss, net
    
—
      
—
      
—
      
(479
)
    
—
      
(479
)
Cash dividends, $0.44 per share
    
—
      
—
      
(2,105
)
    
—
      
—
      
(2,105
)
Common Stock issued to ESOP, 20,542 shares
    
21
      
479
      
—
      
—
      
—
      
500
  
Shares acquired for treasury, 82,673 shares
    
—
      
—
      
—
      
—
      
(1,931
)
    
(1,931
)
Balance at June 30, 2024
  
$
5,491
    
$
52,321
    
$
118,531
    
$
(11,907
)
  
$
(18,679
)
  
$
145,757
  
                                                 
Balance at January 1, 2023
  
$
5,465
    
$
51,722
    
$
107,111
    
$
(14,813
)
  
$
(16,666
)
  
$
132,819
  
Net income
    
—
      
—
      
7,157
      
—
      
—
      
7,157
  
Other comprehensive income, net
    
—
      
—
      
—
      
740
      
—
      
740
  
Cash dividends, $0.58 per share
    
—
      
—
      
(2,769
)
    
—
      
—
      
(2,769
)
Common stock issued to ESOP, 4,746 shares
    
5
      
120
      
—
      
—
      
—
      
125
  
Balance at June 30, 2023
  
$
5,470
    
$
51,842
    
$
111,499
    
$
(14,073
)
  
$
(16,666
)
  
$
138,072
  

See accompanying notes to consolidated financial statements


6

OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands)

 
Six months ended
June 30,
  
   
2024
    
2023
  
             
Net cash provided by operating activities:
  
$
5,108
    
$
8,176
  
                 
Investing activities:
                
Proceeds from maturities and paydowns of securities available for sale
    
18,531
      
11,328
  
Purchases of securities available for sale
    
(19,357
)
    
—
  
Proceeds from calls and maturities of securities held to maturity
    
47
      
249
  
Purchases of securities held to maturity
    
—
      
(586
)
Proceeds from maturities of certificates of deposit in financial institutions
    
—
      
1,855
  
Purchases of certificates of deposit in financial institutions
    
—
      
(245
)
Purchases of restricted investments in bank stocks
    
(79
)
    
(111
)
Redemptions of restricted investments in bank stocks
    
100
      
1,860
  
   Net change in loans
    
(68,631
)
    
(65,406
)
Purchases of premises and equipment
    
(1,017
)
    
(1,422
)
Withdrawals from bank owned life insurance and annuity asset
    
131
      
—
  
Net cash (used in) investing activities
    
(70,275
)
    
(52,478
)
                 
Financing activities:
                
Change in deposits
    
51,292
      
48,917
  
Cash dividends
    
(2,105
)
    
(2,769
)
Purchases of treasury stock
    
(1,931
)
    
—
  
Proceeds from Federal Home Loan Bank borrowings
    
—
      
10,000
  
Repayment of Federal Home Loan Bank borrowings
    
(2,604
)
    
(1,060
)
Change in other short-term borrowings
    
68
      
19
  
Net cash provided by financing activities
    
44,720
      
55,107
  
                 
Change in cash and cash equivalents
    
(20,447
)
    
10,805
  
Cash and cash equivalents at beginning of period
    
128,126
      
45,990
  
Cash and cash equivalents at end of period
  
$
107,679
    
$
56,795
  
                 
Supplemental disclosure:
                
Cash paid for interest
  
$
12,202
    
$
2,859
  
Cash paid for income taxes
    
1,850
      
1,900
  
Operating lease liability arising from obtaining right-of-use asset
    
—
      
187
  

See accompanying notes to consolidated financial statements



7

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION:  The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. (“Ohio Valley”) and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc., a consumer finance company, and Ohio Valley Financial Services Agency, LLC, an insurance agency. The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC (“Ohio Valley REO”), an Ohio limited liability company, to which the Bank transfers certain real estate acquired by the Bank through foreclosure for sale by Ohio Valley REO. In December 2023, Ohio Valley ceased operating Race Day Mortgage, Inc. (“Race Day”), which had been a wholly-owned subsidiary of the Bank since April 2021. The decision to cease operating Race Day was made due to low loan demand, poor employee retention, and lack of profitability. In December 2023, Ohio Valley also ceased operating OVBC Captive, Inc. (the “Captive”), which had been a subsidiary of Ohio Valley since July 2014. The decision to cease operating the Captive was the result of proposed IRS regulations that adversely impacted the taxation of small captives and severely limited the Captive’s ability to operate. Ohio Valley and its subsidiaries are collectively referred to as the “Company.”  All material intercompany accounts and transactions have been eliminated in consolidation.

These interim financial statements are prepared by the Company without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at June 30, 2024, and its results of operations and cash flows for the periods presented.  The results of operations for the three and six months ended June 30, 2024, are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2024.  The accompanying consolidated financial statements do not purport to contain all the necessary financial disclosures required by U.S. generally accepted accounting principles (“US GAAP”) that might otherwise be necessary in the circumstances.  The Annual Report of the Company for the year ended December 31, 2023, contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.

The consolidated financial statements for 2023 have been reclassified to conform to the presentation for 2024.  These reclassifications had no effect on net income or shareholders’ equity.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:  The accounting and reporting policies followed by the Company conform to US GAAP established by the Financial Accounting Standards Board (“FASB”). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

INDUSTRY SEGMENT INFORMATION:  Internal financial information is primarily reported and aggregated in two lines of business: banking and consumer finance.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The updated accounting guidance requires expanded reportable segment disclosures, primarily related to significant segment expenses which are regularly provided to the company's chief operating decision maker. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024. Retrospective application is required. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements and related disclosures.
 
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The updated accounting guidance requires enhanced income tax disclosures, including the disaggregation of existing disclosures related to the tax rate reconciliation and income taxes paid. This ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements and related disclosures.


8

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

DEBT SECURITIES:  The Company classifies securities into held to maturity (“HTM”) and available for sale (“AFS”) categories. HTM securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Securities classified as AFS include securities that could be sold for liquidity, investment management or similar reasons even if there is not a present intention of such a sale. AFS securities are reported at fair value, with unrealized gains or losses included in other comprehensive income, net of tax.

Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses are recognized upon the sale of specific identified securities on the completed trade date.

ALLOWANCE FOR CREDIT LOSSES (“ACL”) - AFS SECURITIES: For AFS debt securities in an unrealized position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities AFS that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair values has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

Changes in the ACL are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $517 at June 30, 2024 and $394 at December 31, 2023, and are excluded from the estimate of credit losses.

Management classifies the AFS portfolio into the following major security types: U.S. Government securities, U.S. Government sponsored entity securities, and Agency mortgage-backed residential securities. At June 30, 2024 and December 31, 2023, there was no ACL related to AFS debt securities.

ACL - HTM SECURITIES: Management measures expected credit losses on HTM debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in the Company’s consolidated statements of income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. Management classifies the HTM portfolio into two major security types:  Obligations of states and political subdivisions and Agency mortgage-backed residential securities. Agency mortgage-backed residential securities consist of only two securities with balances that are not significant. With regard to obligations of states and political subdivisions, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. At June 30, 2024, the ACL related to HTM debt securities was $2, unchanged from December 31, 2023. Furthermore, there was no corresponding provision expense during the three and six months ended June 30, 2024 and 2023.

LOANS: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an ACL. Interest income is reported on an accrual basis using the interest method and includes amortization of net deferred loan fees and costs over the loan term using the level yield method without anticipating prepayments.  The amount of the Company’s recorded investment is not materially different than the amount of unpaid principal balance for loans.

9

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interest income is discontinued and the loan moved to nonaccrual status when full loan repayment is in doubt, typically when the loan payments are past due 90 days or over unless the loan is well-secured or in process of collection. Past due status is based on the contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income.  Interest received on such loans is accounted for on the cash-basis method until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The Bank also originates long-term, fixed-rate mortgage loans, with the full intention of being sold to the secondary market.  These loans are considered held for sale during the period of time after the principal has been advanced to the borrower by the Bank, but before the Bank has been reimbursed by the Federal Home Loan Mortgage Corporation, typically within a few business days.  Loans sold to the secondary market are carried at the lower of aggregate cost or fair value. As of June 30, 2024, there was a $200 loan held for sale by the Bank, as compared to none at December 31, 2023.

ACL – LOANS: The ACL for loans is a contra asset valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans.

The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period.

The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans.

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the ACL using the following methods:

Portfolio Segment
  
Measurement Method
  
Loss Driver
         
Residential real estate
  
Cumulative Undiscounted Expected Loss
  
National Unemployment, National GDP
         
Commercial real estate:
        
  Owner-occupied
  
Cumulative Undiscounted Expected Loss
  
National Unemployment, National GDP
  Nonowner-occupied
  
Cumulative Undiscounted Expected Loss
  
National Unemployment, National GDP
  Construction
  
Cumulative Undiscounted Expected Loss
  
National Unemployment, National GDP
         
Commercial and industrial
  
Cumulative Undiscounted Expected Loss
  
National Unemployment, National GDP
         
Consumer:
        
  Automobile
  
Cumulative Undiscounted Expected Loss
  
National Unemployment
  Home equity
  
Cumulative Undiscounted Expected Loss
  
National Unemployment
  Other
  
Cumulative Undiscounted Expected Loss, Remaining Life Method
  
National Unemployment

Historical credit loss experience is the basis for the estimation of expected credit losses. We apply historical loss rates to pools of loans with similar risk characteristics. In defining historical loss rates and the prepayment rates and curtailment rates used to determine the expected life of loans, the use of regional and national peer data was used. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Our reasonable and supportable forecast adjustment is based on the national unemployment rate and the national gross domestic product forecast for the first year. For periods beyond our reasonable and supportable forecast, we revert to historical loss rates utilizing a straight-line method over a two-year reversion period. The qualitative adjustments for current conditions are based upon changes in lending policies and practices, experience and ability of lending staff, quality of the Company’s loan review system, value of underlying collateral, the volume and severity of past due loans, the value of underlying collateral for collateral dependent loans, the existence of and changes in concentrations and other external factors. Each factor is assigned a value to reflect improving, stable, or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower, or the extension of renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.


10

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on nonaccrual status, any outstanding accrued interest is reversed against interest income.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. We evaluate all loans that meet the following criteria:  1) when it is determined that foreclosure is probable; 2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral; 3) when it is determined by management that a loan does not share similar risk characteristics with other loans. Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of
expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of
collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the loan balance.

At June 30, 2024, there was $9,431 in the ACL related to loans, compared to $8,767 at December 31, 2023. This resulted in corresponding provision expense of $138 and $995 during the three and six months ended June 30, 2024, compared to $114 and $579 in provision expense during the three and six months ended June 30, 2023, respectively.

The Company’s loan portfolio segments have been identified as follows:  Commercial and Industrial, Commercial Real Estate, Residential Real Estate, and Consumer.

Commercial and industrial: Portfolio segment consists of borrowings for commercial purposes to individuals, corporations, partnerships, sole proprietorships, and other business enterprises.  Commercial and industrial loans are generally secured by business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or operations.  The Company’s risk exposure is related to deterioration in the value of collateral securing the loan should foreclosure become necessary.  Generally, business assets used or produced in operations do not maintain their value upon foreclosure, which may require the Company to write down the value significantly to sell.

Commercial real estate: Portfolio segment consists of nonfarm, nonresidential loans secured by owner-occupied and nonowner-occupied commercial real estate as well as commercial construction loans.  An owner-occupied loan relates to a borrower purchased building or space for which the repayment of principal is dependent upon cash flows from the ongoing business operations conducted by the party, or an affiliate of the party, who owns the property. Owner-occupied loans that are dependent on cash flows from operations can be adversely affected by current market conditions for their product or service. A nonowner-occupied loan is a property loan for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property.  Nonowner-occupied loans that are dependent upon rental income 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. Commercial construction loans consist of borrowings to purchase and develop raw land into 1-4 family residential properties.  Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements.  Repayment of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value that may be absorbed by the Company.

Residential real estate:  Portfolio segment consists 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:  Portfolio segment consists of loans to individuals secured by automobiles, open-end home equity loans and other loans to individuals for household, family, and other personal expenditures, both secured and unsecured.  These loans typically have maturities of six years or less with repayment dependent on individual wages and income.  The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary.  The Company has allocated the highest percentage of its ACL as a percentage of loans to the other identified loan portfolio segments due to the larger dollar balances associated with such portfolios.


11

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ACL – OFF-BALANCE SHEET CREDIT EXPOSURES: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. At June 30, 2024, there was $629 in the ACL related to off-balance sheet credit exposures, compared to $692 at December 31, 2023. This resulted in a corresponding provision expense of $43 and a recovery of $63 in provision expense during the three and six months ended June 30, 2024, respectively. This is compared to a $90 and $66 recovery of provision expense during the three and six months ended June 30, 2023, respectively.

EARNINGS PER SHARE:  Earnings per share is based on net income divided by the weighted average number of common shares outstanding during the quarter.  The weighted average common shares outstanding were 4,740,073 and 4,776,520 for the three months ended June 30, 2024 and 2023, respectively. The weighted average common shares outstanding were 4,762,923 and 4,774,999 for the six months ended June 30, 2024 and 2023, respectively. Ohio Valley had no dilutive effect and no potential common shares issuable under stock options or other agreements for any period presented.


12

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:

Securities:  The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Individually Evaluated Collateral Dependent Loans:  The fair value of individually evaluated collateral dependent loans is generally based on the fair value of collateral, less costs to sell. When carried at fair value, individually evaluated collateral dependent loans generally receive specific allocations of the ACL. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. In some instances, fair value adjustments can be made based on a quoted price from an observable input, such as a purchase agreement. Such adjustments would be classified as a Level 2 classification. Individually evaluated collateral dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned:  Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. In some instances, fair value adjustments can be made based on a quoted price from an observable input, such as a purchase agreement.  Such adjustments would be classified as a Level 2 classification.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management’s own assumptions of fair value based on factors that include recent market data or industry-wide statistics.

On an as-needed basis, the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs, which typically amount to approximately 10%.

Interest Rate Swap Agreements:  The fair value of interest rate swap agreements is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments).  The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).


13


NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:

 
Fair Value Measurements at June 30, 2024 Using
  
   
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable Inputs
(Level 3)
  
Assets:
                  
U.S. Government securities
  
$
60,009
    
$
—
    
$
—
  
U.S. Government sponsored entity securities
    
—
      
5,850
      
—
  
Agency mortgage-backed securities, residential
    
—
      
96,890
      
—
  
Interest rate swap derivatives
    
—
      
1,251
      
—
  
                         
Liabilities:
                        
Interest rate swap derivatives
    
—
      
(1,251
)
    
—
  

 
Fair Value Measurements at December 31, 2023 Using
  
   
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable Inputs
(Level 3)
  
Assets:
                  
U.S. Government securities
  
$
50,297
    
$
—
    
$
—
  
U.S. Government sponsored entity securities
    
—
      
5,877
      
—
  
Agency mortgage-backed securities, residential
    
—
      
106,084
      
—
  
Interest rate swap derivatives
    
—
      
1,147
      
—
  
                         
Liabilities:
                        
Interest rate swap derivatives
    
—
      
(1,147
)
    
—
  

Assets and Liabilities Measured on a Nonrecurring Basis
There were no assets or liabilities measured at fair value on a nonrecurring basis at June 30, 2024 and December 31, 2023.


14


NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of financial instruments at June 30, 2024 and December 31, 2023 are as follows:

 
Carrying
    
Fair Value Measurements at June 30, 2024 Using
  
   
Value
    
Level 1
    
Level 2
    
Level 3
    
Total
  
Financial Assets:
                              
Cash and cash equivalents
  
$
107,679
    
$
107,679
    
$
—
    
$
—
    
$
107,679
  
Securities available for sale
    
162,749
      
60,009
      
102,740
      
—
      
162,749
  
Securities held to maturity
    
7,930
      
—
      
3,892
      
3,290
      
7,182
  
Loans, net
    
1,030,853
      
—
      
—
      
1,012,086
      
1,012,086
  
Interest rate swap derivatives
    
1,251
      
—
      
1,251
      
—
      
1,251
  
Accrued interest receivable
    
4,300
      
—
      
581
      
3,719
      
4,300
  
                                         
Financial liabilities:
                                        
Deposits
    
1,178,428
      
793,611
      
384,609
      
—
      
1,178,220
  
Other borrowed funds
    
42,056