OHIO VALLEY BANC CORP - Quarter Report: 2019 September (Form 10-Q)

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 September 30, 2019

☐ 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 0-20914

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)

_____________________

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

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 of the registrant outstanding as of November 12, 2019 was 4,777,878.

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 the Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	41

Signatures		42

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)

	September 30, 2019			December 31, 2018

ASSETS
Cash and noninterest-bearing deposits with banks	$	12,950		$	13,806
Interest-bearing deposits with banks		57,512			57,374
Total cash and cash equivalents		70,462			71,180

Certificates of deposit in financial institutions		2,360			2,065
Securities available for sale		111,242			102,164
Securities held to maturity (estimated fair value: 2019 - $13,883; 2018 - $16,234)		13,485			15,816
Restricted investments in bank stocks		7,506			7,506

Total loans		780,053			777,052
Less: Allowance for loan losses		(6,153	)		(6,728	)
Net loans		773,900			770,324

Premises and equipment, net		17,881			14,855
Premises and equipment held for sale, net		910			----
Other real estate owned, net		146			430
Accrued interest receivable		2,733			2,638
Goodwill		7,371			7,371
Other intangible assets, net		290			379
Bank owned life insurance and annuity assets		29,926			29,392
Operating lease right-of-use asset, net		1,120			----
Other assets		6,626			6,373
Total assets	$	1,045,958		$	1,030,493

LIABILITIES
Noninterest-bearing deposits	$	226,457		$	237,821
Noninterest-bearing deposits held for sale		8,283			----
Interest-bearing deposits		604,150			608,883
Interest-bearing deposits held for sale		18,392			----
Total deposits		857,282			846,704

Other borrowed funds		34,798			39,713
Subordinated debentures		8,500			8,500
Operating lease liability		1,120			----
Accrued liabilities		19,057			17,702
Total liabilities		920,757			912,619

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)		----			----

SHAREHOLDERS’ EQUITY
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 2019 - 5,437,617 shares issued; 2018 - 5,400,065 shares issued)		5,437			5,400
Additional paid-in capital		50,826			49,477
Retained earnings		84,257			80,844
Accumulated other comprehensive income (loss)		393			(2,135	)
Treasury stock, at cost (659,739 shares)		(15,712	)		(15,712	)
Total shareholders’ equity		125,201			117,874
Total liabilities and shareholders’ equity	$	1,045,958		$	1,030,493

See accompanying notes to consolidated financial statements

OHIO VALLEY BANC CORP.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018

Interest and dividend income:
Loans, including fees	$	11,362		$	11,118		$	34,576		$	33,134
Securities
Taxable		637			583			1,911			1,739
Tax exempt		85			93			253			280
Dividends		91			112			308			328
Interest-bearing deposits with banks		333			265			977			1,321
Other Interest		13			10			37			26
		12,521			12,181			38,062			36,828

Interest expense:
Deposits		1,592			1,081			4,446			2,934
Other borrowed funds		215			250			676			740
Subordinated debentures		88			87			274			241
		1,895			1,418			5,396			3,915
Net interest income		10,626			10,763			32,666			32,913
Provision for loan losses		444			962			2,015			1,695
Net interest income after provision for loan losses		10,182			9,801			30,651			31,218

Noninterest income:
Service charges on deposit accounts		553			534			1,573			1,551
Trust fees		59			69			195			197
Income from bank owned life insurance and annuity assets		179			173			534			522
Mortgage banking income		80			93			227			225
Electronic refund check / deposit fees		----			33			5			1,566
Debit / credit card interchange income		1,049			943			2,935			2,736
Gain (loss) on other real estate owned		(15	)		(82	)		(1	)		75
Other		202			164			488			669
		2,107			1,927			5,956			7,541
Noninterest expense:
Salaries and employee benefits		5,652			5,537			16,715			16,780
Occupancy		479			469			1,370			1,336
Furniture and equipment		255			263			788			775
Professional fees		598			514			1,959			1,537
Marketing expense		270			263			810			787
FDIC insurance		----			110			113			368
Data processing		540			759			1,629			2,180
Software		362			398			1,200			1,160
Foreclosed assets		62			54			187			164
Amortization of intangibles		27			33			89			105
Other		1,493			1,361			4,237			4,051
		9,738			9,761			29,097			29,243

Income before income taxes		2,551			1,967			7,510			9,516
Provision for income taxes		414			221			1,101			1,428

NET INCOME	$	2,137		$	1,746		$	6,409		$	8,088

Earnings per share	$	.45		$	.37		$	1.35		$	1.71

See accompanying notes to consolidated financial statements

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

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018

Net Income	$	2,137		$	1,746		$	6,409		$	8,088

Other comprehensive income:
Change in unrealized gain (loss) on available for sale securities		(251	)		(534	)		3,200			(2,508	)
Related tax (expense) benefit		52			112			(672	)		527
Total other comprehensive income (loss), net of tax		(199	)		(422	)		2,528			(1,981	)

Total comprehensive income	$	1,938		$	1,324		$	8,937		$	6,107

See accompanying notes to consolidated financial statements

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 (Loss)			Treasury Stock			Total Shareholders' Equity
Balance at July 1, 2019	$	5,427	$	50,492	$	83,121		$	592		$	(15,712	)	$	123,920
Net income		----		----		2,137			----			----			2,137
Other comprehensive (loss), net		----		----		----			(199	)		----			(199	)
Common stock issued through dividend reinvestment, 10,120 shares		10		334		----			----			----			344
Cash dividends, $.21 per share		----		----		(1,001	)		----			----			(1,001	)
Balance at September 30, 2019	$	5,437	$	50,826	$	84,257		$	393		$	(15,712	)	$	125,201

Balance at July 1, 2018	$	5,387	$	48,933	$	77,230		$	(2,610	)	$	(15,712	)	$	113,228
Net income		----		----		1,746			----			----			1,746
Other comprehensive (loss), net		----		----		----			(422	)		----			(422	)
Common stock issued through dividend reinvestment, 5,740 shares		6		275		----			----			----			281
Cash dividends, $.21 per share		----		----		(994	)		----			----			(994	)
Stranded tax ASU 2018-02		----		----		----			----			----			----
Balance at September 30, 2018	$	5,393	$	49,208	$	77,982		$	(3,032	)	$	(15,712	)	$	113,839

Year-to-date	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive (Loss)			Treasury Stock			Total Shareholders' Equity
Balance at January 1, 2019	$	5,400	$	49,477	$	80,844		$	(2,135	)	$	(15,712	)	$	117,874
Net income		----		----		6,409			----			----			6,409
Other comprehensive income, net		----		----		----			2,528			----			2,528
Common stock issued to ESOP, 8,333 shares		8		320		----			----			----			328
Common stock issued through dividend reinvestment, 29,219 shares		29		1,029		----			----			----			1,058
Cash dividends, $.63 per share		----		----		(2,996	)		----			----			(2,996	)
Balance at September 30, 2019	$	5,437	$	50,826	$	84,257		$	393		$	(15,712	)	$	125,201

Balance at January 1, 2018	$	5,362	$	47,895	$	72,694		$	(878	)	$	(15,712	)	$	109,361
Net income		----		----		8,088			----			----			8,088
Other comprehensive (loss), net		----		----		----			(1,981	)		----			(1,981	)
Common stock issued to ESOP, 7,294 shares		7		288		----			----			----			295
Common stock issued through dividend reinvestment, 23,560 shares		24		1,025		----			----			----			1,049
Cash dividends, $.63 per share		----		----		(2,973	)		----			----			(2,973	)
Stranded tax ASU 2018-02		----		----		173			(173	)		----			----
Balance at September 30, 2018	$	5,393	$	49,208	$	77,982		$	(3,032	)	$	(15,712	)	$	113,839

See accompanying notes to consolidated financial statements

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

	Nine months ended September 30,
	2019			2018

Net cash provided by operating activities:	$	9,571		$	13,239

Investing activities:
Proceeds from maturities of securities available for sale		14,145			17,324
Purchases of securities available for sale		(20,127	)		(23,756	)
Proceeds from maturities of securities held to maturity		2,301			321
Purchase of certificates of deposit in financial institutions		(295	)		(490	)
Net change in loans		(5,646	)		(14,349	)
Proceeds from sale of other real estate owned		393			810
Purchases of premises and equipment		(4,828	)		(1,437	)
Net cash used in investing activities		(14,057	)		(21,577	)

Financing activities:
Change in deposits		10,622			(3,758	)
Proceeds from common stock through dividend reinvestment		1,058			1,049
Cash dividends		(2,996	)		(2,973	)
Proceeds from Federal Home Loan Bank borrowings		----			8,000
Repayment of Federal Home Loan Bank borrowings		(3,017	)		(2,487	)
Change in other long-term borrowings		(1,899	)		(862	)
Change in other short-term borrowings		----			(85	)
Net cash provided by financing activities		3,768			(1,116	)

Change in cash and cash equivalents		(718	)		(9,454	)
Cash and cash equivalents at beginning of period		71,180			74,573
Cash and cash equivalents at end of period	$	70,462		$	65,119

Supplemental disclosure:
Cash paid for interest	$	4,791		$	3,580
Cash paid for income taxes		890			1,750
Cash paid for amounts included in the measurement of operating lease liabilities		216			----
Transfers from loans to other real estate owned		112			494
Operating lease right-of-use asset		1,120			----
Operating lease liability		1,120			----

See accompanying notes to consolidated financial statements

NOTES TO 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. (“Loan Central”), a consumer finance company, Ohio Valley Financial Services Agency, LLC, an insurance agency, and OVBC Captive, Inc. (the “Captive”), a limited purpose property and casualty insurance company. 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. 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 September 30, 2019, and its results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2019. 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, 2018 contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.

The consolidated financial statements for 2018 have been reclassified to conform to the presentation for 2019. These reclassifications had no effect on the 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.

EARNINGS PER SHARE: Earnings per share are computed based on net income divided by the weighted average number of common shares outstanding during the period. The weighted average common shares outstanding were 4,773,258 and 4,730,624 for the three months ended September 30, 2019 and 2018, respectively. The weighted average common shares outstanding were 4,761,954 and 4,722,189 for the nine months ended September 30, 2019 and 2018, respectively. Ohio Valley had no dilutive effect and no potential common shares issuable under stock options or other agreements for any period presented.

ADOPTION OF NEW ACCOUNTING STANDARD UPDATES (“ASU”): On January 1, 2019, the Company adopted ASU 2016-02, “Leases”, which requires the recognition of the right-of-use (“ROU”) assets and related operating and finance lease liabilities on the balance sheet. As permitted by ASU 2016-02, the Company applied the optional transition method and elected the adoption date of January 1, 2019. As a result, the consolidated balance sheet prior to January 1, 2019 was not restated and continues to be reported under the old guidance, which did not require the recognition of operating leases on the balance sheet. Therefore, the consolidated balance sheet for 2019 is not comparative to 2018.

As permitted by ASU 2016-02, the Company elected the package of practical expedients that permits the Company to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) initial direct costs for any existing leases. As a result, leases entered into prior to January 1, 2019 were accounted for under the old guidance and were not reassessed. For lease contracts entered into on or after January 1, 2019, the Company will assess whether the contract is or contains a lease based on (1) whether the contract involves the use of a distinct, identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of asset, and (3) whether the Company has the right to direct the use of asset.

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The adoption of ASU 2016-02 had a substantial impact to our consolidated balance sheet, primarily from the recognition of the operating lease ROU assets and the liability for operating leases. Operating leases consist primarily of branch buildings and office space for both the Bank and Loan Central. The Company has no finance leases. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities were both recognized based on the present value of future lease payments, discounted with an incremental borrowing rate for the same term as the underlying lease. The present value of future minimum lease payments also includes any options noted within the lease terms to extend the lease when it is reasonably certain the Company will exercise that option. The Company elected to keep leases with an initial term of 12 months or less off of the consolidated balance sheet and recognize those lease payments in the consolidated statements of income on a straight-line basis over the lease term. Leases that contain variable lease payments, including payments based on an index or rate, are initially measured using the index or rate in effect at the commencement date. Additional payments based on the change in an index or rate are recorded as a period expense when incurred. Upon adoption, the Company recorded an adjustment of $1,280 to operating ROU assets and the related lease liability. For additional information on leases, see Note 8.

Beginning January 1, 2019, the Company adopted ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities Receivables”, which requires the amortization of the premium on callable debt securities to the earliest call date. The amortization period for callable debt securities purchased at a discount was not be impacted by the ASU. This ASU did not have a material impact on the Company’s consolidated financial position or results of operations.

ACCOUNTING GUIDANCE TO BE ADOPTED IN FUTURE PERIODS: In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses”. ASU 2016-13 requires entities to replace the current “incurred loss” model with an “expected loss” model, which is referred to as the current expected credit loss (“CECL”) model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. A CECL steering committee has developed a CECL model and is evaluating the source data, various credit loss methodologies and model results in relation to the new ASU guidance. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. Management expects the adoption will result in a material increase to the allowance for loan losses balance. At this time, the impact is being evaluated. On October 16, 2019, the FASB confirmed it would delay the effective date of this ASU for smaller reporting companies, such as the Company, until fiscal years beginning after December 15, 2022.

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.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. 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. Impaired 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.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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 that typically approximate 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).

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 September 30, 2019 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 sponsored entity securities		----	$	16,736			----
Agency mortgage-backed securities, residential		----		94,506			----
Interest rate swap derivatives		----		609			----
Interest rate swap derivatives		----		(609	)		----

	Fair Value Measurements at December 31, 2018 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 sponsored entity securities		----	$	16,630			----
Agency mortgage-backed securities, residential		----		85,534			----
Interest rate swap derivatives		----		101			----
Interest rate swap derivatives		----		(101	)		----

There were no transfers between Level 1 and Level 2 during 2019 or 2018.

Assets and Liabilities Measured on a Nonrecurring Basis

There were no assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2019. Assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2018 are summarized below:

Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Nonowner-occupied		----		----	$	264

Other real estate owned:
Commercial real estate:
Construction		----		228		----

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

At September 30, 2019, the Company had no recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans and, therefore, recorded no impact to provision expense during the three and nine months ended September 30, 2019. This is compared to an increase of $409 to provision expense on such loans during the three and nine months ended September 30, 2018, with no additional charge-offs recognized. At December 31, 2018, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $362, with a corresponding valuation allowance of $98, resulting in an increase of $4 to provision expense during the year ended December 31, 2018, with no corresponding charge-offs recognized.

At September 30, 2019, there was no other real estate owned that was measured at fair value less costs to sell. At December 31, 2018, other real estate owned that was measured at fair value less costs to sell had a net carrying amount of $228, which was made up of the outstanding balance of $2,217, net of a valuation allowance of $1,989. There were no corresponding write downs during the three and nine months ended September 30, 2019 and 2018.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2018:

December 31, 2018

Fair Value

Valuation Technique(s)

Unobservable

Input(s)

Range

(Weighted Average)

Impaired loans:

Commercial real estate:

Nonowner-occupied

264

Sales approach

Adjustment to comparables

6.8% to 66.7%

18.0

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The carrying amounts and estimated fair values of financial instruments at September 30, 2019 and December 31, 2018 are as follows:

			Fair Value Measurements at September 30, 2019 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	70,462	$	70,462	$	----	$	----	$	70,462
Certificates of deposit in financial institutions		2,360		----		2,360		----		2,360
Securities available for sale		111,242		----		111,242		----		111,242
Securities held to maturity		13,485		----		7,678		6,205		13,883
Loans, net		773,900		----		----		775,675		775,675
Accrued interest receivable		2,733		----		402		2,331		2,733

Financial liabilities:
Deposits, including held for sale		857,282		233,876		614,917		----		848,793
Other borrowed funds		34,798		----		36,493		----		36,493
Subordinated debentures		8,500		----		6,723		----		6,723
Accrued interest payable		1,860		3		1,857		----		1,860

			Fair Value Measurements at December 31, 2018 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	71,180	$	71,180	$	----	$	----	$	71,180
Certificates of deposit in financial institutions		2,065		----		2,065		----		2,065
Securities available for sale		102,164		----		102,164		----		102,164
Securities held to maturity		15,816		----		7,625		8,609		16,234
Loans, net		770,324		----		----		766,784		766,784
Accrued interest receivable		2,638		----		312		2,326		2,638

Financial liabilities:
Deposits		846,704		237,821		607,593		----		845,414
Other borrowed funds		39,713		----		37,644		----		37,644
Subordinated debentures		8,500		----		7,054		----		7,054
Accrued interest payable		1,255		3		1,252		----		1,255

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

NOTE 3 – SECURITIES

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at September 30, 2019 and December 31, 2018 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive (loss) and gross unrecognized gains and losses:

Securities Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2019
U.S. Government sponsored entity securities	$	16,577	$	171	$	(12	)	$	16,736
Agency mortgage-backed securities, residential		94,168		701		(363	)		94,506
Total securities	$	110,745	$	872	$	(375	)	$	111,242

December 31, 2018
U.S. Government sponsored entity securities	$	16,837	$	8	$	(215	)	$	16,630
Agency mortgage-backed securities, residential		88,030		92		(2,588	)		85,534
Total securities	$	104,867	$	100	$	(2,803	)	$	102,164

Securities Held to Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Estimated Fair Value
September 30, 2019
Obligations of states and political subdivisions	$	13,482	$	399	$	(1	)	$	13,880
Agency mortgage-backed securities, residential		3		----		----			3
Total securities	$	13,485	$	399	$	(1	)	$	13,883

December 31, 2018
Obligations of states and political subdivisions	$	15,813	$	502	$	(84	)	$	16,231
Agency mortgage-backed securities, residential		3		----		----			3
Total securities	$	15,816	$	502	$	(84	)	$	16,234

The amortized cost and estimated fair value of debt securities at September 30, 2019, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities. Securities not due at a single maturity are shown separately.

	Available for Sale				Held to Maturity
Debt Securities:	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Due in one year or less	$	1,101	$	1,096	$	----	$	----
Due in over one to five years		15,476		15,640		6,580		6,745
Due in over five to ten years		----		----		6,902		7,135
Due after ten years		----		----		----		----
Agency mortgage-backed securities, residential		94,168		94,506		3		3
Total debt securities	$	110,745	$	111,242	$	13,485	$	13,883

NOTE 3 – SECURITIES (Continued)

The following table summarizes securities with unrealized losses at September 30, 2019 and December 31, 2018, aggregated by major security type and length of time in a continuous unrealized loss position:

September 30, 2019	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Government sponsored
entity securities	$	----	$	----		$	1,995	$	(12	)	$	1,995	$	(12	)
Agency mortgage-backed
securities, residential		24,046		(89	)		22,528		(274	)		46,574		(363	)
Total available for sale	$	24,046	$	(89	)	$	24,523	$	(286	)	$	48,569	$	(375	)

	Less Than 12 Months					12 Months or More				Total
	Fair Value		Unrecognized Loss			Fair Value		Unrecognized Loss		Fair Value		Unrecognized Loss
Securities Held to Maturity
Obligations of states and
political subdivisions	$	204	$	(1	)	$	----	$	----	$	204	$	(1	)
Total held to maturity	$	204	$	(1	)	$	----	$	----	$	204	$	(1	)

December 31, 2018	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Government sponsored
entity securities	$	1,981	$	(1	)	$	8,679	$	(214	)	$	10,660	$	(215	)
Agency mortgage-backed
securities, residential		8,564		(43	)		62,619		(2,545	)		71,183		(2,588	)
Total available for sale	$	10,545	$	(44	)	$	71,298	$	(2,759	)	$	81,843	$	(2,803	)

	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrecognized Loss			Fair Value		Unrecognized Loss			Fair Value		Unrecognized Loss
Securities Held to Maturity
Obligations of states and
political subdivisions	$	484	$	(3	)	$	1,312	$	(81	)	$	1,796	$	(84	)
Total held to maturity	$	484	$	(3	)	$	1,312	$	(81	)	$	1,796	$	(84	)

There were no sales of investment securities during the three or nine months ended September 30, 2019 or 2018. Unrealized losses on the Company’s debt securities have not been recognized into income because the issuers’ securities are of high credit quality as of September 30, 2019, and management does not intend to sell, and it is likely that management will not be required to sell, the securities prior to their anticipated recovery. Management does not believe any individual unrealized loss at September 30, 2019 and December 31, 2018 represents an other-than-temporary impairment.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:	September 30,			December 31,
	2019			2018
Residential real estate	$	314,761		$	304,079
Commercial real estate:
Owner-occupied		58,062			61,694
Nonowner-occupied		128,698			117,188
Construction		36,307			37,478
Commercial and industrial		100,509			113,243
Consumer:
Automobile		65,195			70,226
Home equity		23,658			22,512
Other		52,863			50,632
		780,053			777,052
Less: Allowance for loan losses		(6,153	)		(6,728	)

Loans, net	$	773,900		$	770,324

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2019 and 2018:

September 30, 2019	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,973		$	2,222		$	1,095		$	2,111		$	7,401
Provision for loan losses		(165	)		(536	)		1,193			(48	)		444
Loans charged off		(465	)		----			(1,168	)		(419	)		(2,052	)
Recoveries		80			92			11			177			360
Total ending allowance balance	$	1,423		$	1,778		$	1,131		$	1,821		$	6,153

September 30, 2018	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,886		$	2,392		$	1,242		$	2,119		$	7,639
Provision for loan losses		681			(378	)		197			462			962
Loans charged-off		(184	)		----			(136	)		(722	)		(1,042	)
Recoveries		49			431			80			196			756
Total ending allowance balance	$	2,432		$	2,445		$	1,383		$	2,055		$	8,315

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2019 and 2018:

September 30, 2019	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,583		$	2,186		$	1,063		$	1,896		$	6,728
Provision for loan losses		96			(403	)		1,497			825			2,015
Loans charged off		(872	)		(579	)		(1,512	)		(1,612	)		(4,575	)
Recoveries		616			574			83			712			1,985
Total ending allowance balance	$	1,423		$	1,778		$	1,131		$	1,821		$	6,153

September 30, 2018	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,470		$	2,978		$	1,024		$	2,027		$	7,499
Provision for loan losses		1,261			(1,041	)		196			1,279			1,695
Loans charged-off		(421	)		(1	)		(140	)		(1,818	)		(2,380	)
Recoveries		122			509			303			567			1,501
Total ending allowance balance	$	2,432		$	2,445		$	1,383		$	2,055		$	8,315

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the balance in the allowance for loan losses and the recorded investment of loans by portfolio segment and based on impairment method as of September 30, 2019 and December 31, 2018:

September 30, 2019	Residential Real Estate		Commercial Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	----	$	----	$	----	$	----	$	----
Collectively evaluated for impairment		1,423		1,778		1,131		1,821		6,153
Total ending allowance balance	$	1,423	$	1,778	$	1,131	$	1,821	$	6,153

Loans:
Loans individually evaluated for impairment	$	445	$	11,342	$	5,102	$	356	$	17,245
Loans collectively evaluated for impairment		314,316		211,725		95,407		141,360		762,808
Total ending loans balance	$	314,761	$	223,067	$	100,509	$	141,716	$	780,053

December 31, 2018	Residential Real Estate		Commercial Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	----	$	98	$	----	$	----	$	98
Collectively evaluated for impairment		1,583		2,088		1,063		1,896		6,630
Total ending allowance balance	$	1,583	$	2,186	$	1,063	$	1,896	$	6,728

Loans:
Loans individually evaluated for impairment	$	1,667	$	3,835	$	7,116	$	----	$	12,618
Loans collectively evaluated for impairment		302,412		212,525		106,127		143,370		764,434
Total ending loans balance	$	304,079	$	216,360	$	113,243	$	143,370	$	777,052

The following tables present information related to loans individually evaluated for impairment by class of loans as of September 30, 2019 and December 31, 2018:

September 30, 2019	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded	$	----	$	----	$	----
With no related allowance recorded:
Residential real estate		445		445		----
Commercial real estate:
Owner-occupied		3,244		3,244		----
Nonowner-occupied		9,421		8,098		----
Construction		323		----		----
Commercial and industrial		6,277		5,102		----
Consumer:
Home equity		350		350		----
Other		6		6		----
Total	$	20,066	$	17,245	$	----

December 31, 2018	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial real estate:
Nonowner-occupied	$	362	$	362	$	98
With no related allowance recorded:
Residential real estate		1,667		1,667		----
Commercial real estate:
Owner-occupied		2,527		2,527		----
Nonowner-occupied		2,368		946		----
Construction		336		----		----
Commercial and industrial		7,116		7,116		----
Total	$	14,376	$	12,618	$	98

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables present information related to loans individually evaluated for impairment by class of loans for the three and nine months ended September 30, 2019 and 2018:

	Three months ended September 30, 2019						Nine months ended September 30, 2019
	Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized		Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded	$	----	$	----	$	----	$	----	$	----	$	----
With no related allowance recorded:
Residential real estate		446		4		4		469		20		20
Commercial real estate:
Owner-occupied		3,349		53		53		3,144		167		167
Nonowner-occupied		7,949		142		142		6,243		370		370
Construction		----		5		5		----		15		15
Commercial and industrial		6,089		110		110		6,110		352		352
Consumer:
Home equity		175		15		15		87		15		15
Other		6		----		----		5		----		----
Total	$	18,014	$	329	$	329	$	16,058	$	939	$	939

	Three months ended September 30, 2018						Nine months ended September 30, 2018
	Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized		Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Residential real estate	$	707	$	----	$	----	$	711	$	----	$	----
Commercial real estate:
Nonowner-occupied		365		3		3		368		12		12
With no related allowance recorded:
Residential real estate		219		4		4		222		34		34
Commercial real estate:
Owner-occupied		2,434		36		36		2,462		105		105
Nonowner-occupied		1,786		11		11		2,154		47		47
Construction		----		5		5		----		15		15
Commercial and industrial		5,753		89		89		5,474		321		321
Total	$	11,264	$	148	$	148	$	11,391	$	534	$	534

The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees.

Nonaccrual loans and loans past due 90 days or more and still accruing include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified as impaired loans.

The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of September 30, 2019 and December 31, 2018, other real estate owned for residential real estate properties totaled $68. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $1,561 and $2,375 as of September 30, 2019 and December 31, 2018, respectively.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the recorded investment of nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of September 30, 2019 and December 31, 2018:

September 30, 2019	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	242	$	6,090
Commercial real estate:
Owner-occupied		151		139
Nonowner-occupied		----		765
Construction		----		187
Commercial and industrial		4		515
Consumer:
Automobile		234		66
Home equity		----		407
Other		305		83
Total	$	936	$	8,252

December 31, 2018	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	19	$	6,661
Commercial real estate:
Owner-occupied		----		470
Nonowner-occupied		362		574
Construction		66		416
Commercial and industrial		31		228
Consumer:
Automobile		270		59
Home equity		91		183
Other		228		86
Total	$	1,067	$	8,677

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the aging of the recorded investment of past due loans by class of loans as of September 30, 2019 and December 31, 2018:

September 30, 2019	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Loans Not Past Due		Total

Residential real estate	$	3,437	$	1,728	$	1,496	$	6,661	$	308,100	$	314,761
Commercial real estate:
Owner-occupied		1,141		----		248		1,389		56,673		58,062
Nonowner-occupied		194		231		338		763		127,935		128,698
Construction		93		----		----		93		36,214		36,307
Commercial and industrial		1,618		8		121		1,747		98,762		100,509
Consumer:
Automobile		1,098		229		245		1,572		63,623		65,195
Home equity		137		24		372		533		23,125		23,658
Other		633		136		312		1,081		51,782		52,863
Total	$	8,351	$	2,356	$	3,132	$	13,839	$	766,214	$	780,053

December 31, 2018	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Loans Not Past Due		Total

Residential real estate	$	3,369	$	1,183	$	1,642	$	6,194	$	297,885	$	304,079
Commercial real estate:
Owner-occupied		298		----		129		427		61,267		61,694
Nonowner-occupied		299		----		747		1,046		116,142		117,188
Construction		31		----		265		296		37,182		37,478
Commercial and industrial		428		192		110		730		112,513		113,243
Consumer:
Automobile		1,287		286		289		1,862		68,364		70,226
Home equity		171		92		260		523		21,989		22,512
Other		593		291		228		1,112		49,520		50,632
Total	$	6,476	$	2,044	$	3,670	$	12,190	$	764,862	$	777,052

Troubled Debt Restructurings:

A troubled debt restructuring (“TDR”) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. All TDR’s are considered to be impaired. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a reduction in the contractual principal and interest payments of the loan; or short-term interest-only payment terms.

The Company has allocated reserves for a portion of its TDR’s to reflect the fair values of the underlying collateral or the present value of the concessionary terms granted to the customer.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the types of TDR loan modifications by class of loans as of September 30, 2019 and December 31, 2018:

September 30, 2019	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total TDR’s
Residential real estate:
Interest only payments	$	211	$	----	$	211
Commercial real estate:
Owner-occupied
Interest only payments		905		----		905
Reduction of principal and interest payments		1,532		----		1,532
Maturity extension at lower stated rate than market rate		412		----		412
Credit extension at lower stated rate than market rate		395		----		395
Nonowner-occupied
Rate reduction		----		258		258
Credit extension at lower stated rate than market rate		556		----		556
Commercial and industrial:
Interest only payments		4,196		133		4,329
Reduction of principal and interest payments		191		----		191

Total TDR’s	$	8,398	$	391	$	8,789

December 31, 2018	TDR’s Performing to Modified Terms		TDR’s Not Performing to Modified Terms		Total TDR’s
Residential real estate:
Interest only payments	$	216	$	----	$	216
Commercial real estate:
Owner-occupied
Interest only payments		968		----		968
Reduction of principal and interest payments		529		----		529
Maturity extension at lower stated rate than market rate		469		----		469
Credit extension at lower stated rate than market rate		402		----		402
Nonowner-occupied
Interest only payments		----		385		385
Rate reduction		----		362		362
Credit extension at lower stated rate than market rate		561		----		561
Commercial and industrial:
Interest only payments		4,742		----		4,742

Total TDR’s	$	7,887	$	747	$	8,634

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

At September 30, 2019, the balance in TDR loans increased $155, or 1.8%, from year-end 2018. The Company had no specific allocations in reserves to customers whose loan terms have been modified in TDR’s at September 30, 2019, as compared to $98 in reserves at December 31, 2018. At September 30, 2019, the Company had $1,428 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDR’s, as compared to $758 at December 31, 2018.

There were no TDR loan modifications that occurred during the three months ended September 30, 2019. Furthermore, there were no TDR loan modifications that occurred during the three and nine months ended September 30, 2018. The following table presents the pre- and post-modification balances of TDR loan modifications by class of loans that occurred during the nine months ended September 30, 2019:

			TDR’s Performing to Modified Terms				TDR’s Not Performing to Modified Terms
Nine months ended September 30, 2019	Number of Loans		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Residential real estate:
Interest only payments		1	$	292	$	292	$	----	$	----
Commercial and Industrial:
Interest only payments		1		282		282
Total TDR’s		2	$	574	$	574	$	----	$	----

The TDR's described above had no impact on the allowance for loan losses and resulted in no charge-offs during the nine months ended September 30, 2019.

During the third quarter of 2019, the Company had one TDR loan totaling $133 that experienced a payment default within twelve months following its loan modification. This commercial and industrial loan was first modified as a TDR in April 2019 and was converted to nonaccrual status in August 2019. The Company had no additional TDR’s that, during the three and nine months ended September 30, 2019 and 2018, experienced any payment defaults within twelve months following their loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. TDR loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. These risk categories are represented by a loan grading scale from 1 through 11. The Company analyzes loans individually with a higher credit risk rating and groups these loans into categories called “criticized” and ”classified” assets. The Company considers its criticized assets to be loans that are graded 8 and its classified assets to be loans that are graded 9 through 11. The Company’s risk categories are reviewed at least annually on loans that have aggregate borrowing amounts that meet or exceed $750.

The Company uses the following definitions for its criticized loan risk ratings:

Special Mention. Loans classified as special mention indicate considerable risk due to deterioration of repayment (in the earliest stages) due to potential weak primary repayment source, or payment delinquency. These loans will be under constant supervision, are not classified and do not expose the institution to sufficient risks to warrant classification. These deficiencies should be correctable within the normal course of business, although significant changes in company structure or policy may be necessary to correct the deficiencies. These loans are considered bankable assets with no apparent loss of principal or interest envisioned. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. Credits that are defined as a troubled debt restructuring should be graded no higher than special mention until they have been reported as performing over one year after restructuring.

The Company uses the following definitions for its classified loan risk ratings:

Substandard. Loans classified as substandard represent very high risk, serious delinquency, nonaccrual, or unacceptable credit. Repayment through the primary source of repayment is in jeopardy due to the existence of one or more well defined weaknesses and the collateral pledged may inadequately protect collection of the loans. Loss of principal is not likely if weaknesses are corrected, although financial statements normally reveal significant weakness. Loans are still considered collectible, although loss of principal is more likely than with special mention loan grade 8 loans. Collateral liquidation is considered likely to satisfy debt.

Doubtful. Loans classified as doubtful display a high probability of loss, although the amount of actual loss at the time of classification is undetermined. This classification should be temporary until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification. These loans exhibit all substandard characteristics with the addition that weaknesses make collection or liquidation in full highly questionable and improbable. This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain important and reasonable specific pending factors which may strengthen the credit can be more accurately determined. These factors may include proposed acquisitions, liquidation procedures, capital injection, receipt of additional collateral, mergers, or refinancing plans. A doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded substandard.

Loss. Loans classified as loss are considered uncollectible and are of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset yielding such a minimum value even though partial recovery may be affected in the future. Amounts classified as loss should be promptly charged off.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Criticized and classified loans will mostly consist of commercial and industrial and commercial real estate loans. The Company considers its loans that do not meet the criteria for a criticized and classified asset rating as pass rated loans, which will include loans graded from 1 (Prime) to 7 (Watch). All commercial loans are categorized into a risk category either at the time of origination or reevaluation date. As of September 30, 2019 and December 31, 2018, and based on the most recent analysis performed, the risk category of commercial loans by class of loans was as follows:

September 30, 2019	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	50,136	$	4,803	$	3,123	$	58,062
Nonowner-occupied		120,302		----		8,396		128,698
Construction		36,307		----		----		36,307
Commercial and industrial		88,687		1,460		10,362		100,509
Total	$	295,432	$	6,263	$	21,881	$	323,576

December 31, 2018	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	50,474	$	7,724	$	3,496	$	61,694
Nonowner-occupied		115,170		----		2,018		117,188
Construction		37,321		----		157		37,478
Commercial and industrial		92,417		6,536		14,290		113,243
Total	$	295,382	$	14,260	$	19,961	$	329,603

The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau), but the scores are not updated. The Company focuses mostly on the performance and repayment ability of the borrower as an indicator of credit risk and does not consider a borrower's credit score to be a significant influence in the determination of a loan's credit risk grading.

For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment of residential and consumer loans by class of loans based on repayment activity as of September 30, 2019 and December 31, 2018:

September 30, 2019	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	64,895	$	23,251	$	52,475	$	308,429	$	449,050
Nonperforming		300		407		388		6,332		7,427
Total	$	65,195	$	23,658	$	52,863	$	314,761	$	456,477

December 31, 2018	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	69,897	$	22,238	$	50,318	$	297,399	$	439,852
Nonperforming		329		274		314		6,680		7,597
Total	$	70,226	$	22,512	$	50,632	$	304,079	$	447,449

The Company, through its subsidiaries, originates residential, consumer, and commercial loans to customers located primarily in the southeastern areas of Ohio as well as the western counties of West Virginia. Approximately 4.80% of total loans were unsecured at September 30, 2019, down from 5.02% at December 31, 2018.

NOTE 5 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual amount of those instruments. The contract amounts of these instruments are not included in the consolidated financial statements. At September 30, 2019, the contract amounts of these instruments totaled approximately $74,527, compared to $71,026 at December 31, 2018. The Bank uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. Since many of these instruments are expected to expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.

NOTE 6 - OTHER BORROWED FUNDS

Other borrowed funds at September 30, 2019 and December 31, 2018 are comprised of advances from the Federal Home Loan Bank (“FHLB”) of Cincinnati and promissory notes.

	FHLB Borrowings		Promissory Notes		Totals

September 30, 2019	$	30,417	$	4,381	$	34,798
December 31, 2018	$	33,434	$	6,279	$	39,713

Pursuant to collateral agreements with the FHLB, advances were secured by $305,754 in qualifying mortgage loans, $66,441 in commercial loans and $5,365 in FHLB stock at September 30, 2019. Fixed-rate FHLB advances of $30,417 mature through 2042 and have interest rates ranging from 1.53% to 3.31% and a year-to-date weighted average cost of 2.39%. There were no variable-rate FHLB borrowings at September 30, 2019.

At September 30, 2019, the Company had a cash management line of credit enabling it to borrow up to $80,000 from the FHLB. All cash management advances have an original maturity of 90 days. The line of credit must be renewed on an annual basis. There was $80,000 available on this line of credit at September 30, 2019.

Based on the Company's current FHLB stock ownership, total assets and pledgeable loans, the Company had the ability to obtain borrowings from the FHLB up to a maximum of $206,171 at September 30, 2019. Of this maximum borrowing capacity of $206,171, the Company had $115,754 available to use as additional borrowings, of which $80,000 could be used for short-term, cash management advances, as mentioned above.

Promissory notes, issued primarily by Ohio Valley, are due at various dates through a final maturity date of May 17, 2021, and have fixed rates ranging from 1.75% to 4.09% and a year-to-date weighted average cost of 2.77% at September 30, 2019, as compared to 2.83% at December 31, 2018. There were eight promissory notes payable by Ohio Valley to related parties totaling $3,558 at September 30, 2019, and December 31, 2018. Promissory notes payable to other banks totaled $553 at September 30, 2019, as compared to $2,451 at December 31, 2018.

Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $60,000 at September 30, 2019 and $51,700 at December 31, 2018.

Scheduled principal payments as of September 30, 2019:

	FHLB Borrowings		Promissory Notes		Totals

2019	$	1,000	$	1,615	$	2,615
2020		3,380		2,133		5,513
2021		3,000		633		3,633
2022		2,842		----		2,842
2023		2,705		----		2,705
Thereafter		17,490		----		17,490
	$	30,417	$	4,381	$	34,798

NOTE 7 – SEGMENT INFORMATION

The reportable segments are determined by the products and services offered, primarily distinguished between banking and consumer finance. They are also distinguished by the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business, which are then aggregated if operating performance, products/services, and customers are similar. Loans, investments, and deposits provide the majority of the net revenues from the banking operation, while loans provide the majority of the net revenues for the consumer finance segment. All Company segments are domestic.

Total revenues from the banking segment, which accounted for the majority of the Company's total revenues, totaled 93.9% and 92.6% of total consolidated revenues for the quarters end September 30, 2019 and 2018, respectively.

The accounting policies used for the Company's reportable segments are the same as those described in Note 1 - Summary of Significant Accounting Policies. Income taxes are allocated based on income before tax expense.

Information for the Company’s reportable segments is as follows:

	Three Months Ended September 30, 2019
	Banking		Consumer Finance			Total Company
Net interest income	$	10,048	$	578		$	10,626
Provision expense		450		(6	)		444
Noninterest income		2,043		64			2,107
Noninterest expense		9,115		623			9,738
Tax expense		409		5			414
Net income		2,117		20			2,137
Assets		1,034,209		11,749			1,045,958

	Three Months Ended September 30, 2018
	Banking		Consumer Finance			Total Company
Net interest income	$	10,168	$	595		$	10,763
Provision expense		950		12			962
Noninterest income		1,875		52			1,927
Noninterest expense		9,107		654			9,761
Tax expense		226		(5	)		221
Net income		1,760		(14	)		1,746
Assets		1,021,730		11,786			1,033,516

	Nine Months Ended September 30, 2019
	Banking		Consumer Finance		Total Company
Net interest income	$	30,173	$	2,493	$	32,666
Provision expense		1,900		115		2,015
Noninterest income		5,822		134		5,956
Noninterest expense		27,146		1,951		29,097
Tax expense		984		117		1,101
Net income		5,965		444		6,409
Assets		1,034,209		11,749		1,045,958

	Nine Months Ended September 30, 2018
	Banking		Consumer Finance		Total Company
Net interest income	$	30,289	$	2,624	$	32,913
Provision expense		1,550		145		1,695
Noninterest income		6,916		625		7,541
Noninterest expense		27,236		2,007		29,243
Tax expense		1,199		229		1,428
Net income		7,220		868		8,088
Assets		1,021,730		11,786		1,033,516

NOTE 8 – LEASES

Substantially all of the Company’s operating lease right-of-use (“ROU”) assets and operating lease liabilities represent leases for branch buildings and office space to conduct business. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. The lease expense for these leases are recorded on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as either operating or financing leases on the consolidated balance sheet. The Company has no finance lease arrangements. Operating leases have remaining lease terms ranging from 3 months to 17.8 years, some of which include options to extend the leases for up to 15 years. Operating lease ROU assets and operating lease liabilities are valued based on the present value of future minimum lease payments, discounted with an incremental borrowing rate for the same term as the underlying lease. The Company has one lease arrangement that contains variable lease payments that are adjusted periodically for an index. Upon adoption of the new lease guidance on January 1, 2019, an initial ROU asset of $1,280 was recognized as a non-cash asset addition to the consolidated balance sheet.

Balance sheet information related to leases was as follows:

	As of September 30, 2019
Operating leases:
Operating lease right-of-use assets	$	1,120
Operating lease liabilities	$	1,120

The components of lease cost were as follows:

	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease cost	$	70	$	216
Short-term lease expense	$	14	$	45

Other information was as follows:

	As of September 30, 2019
Weighted-average remaining lease term for operating leases	10.8 years
Weighted-average discount rate for operating leases		2.75%

The following table presents information about the Company’s operating lease maturities as of September 30, 2019:

September 30, 2019	Operating Leases

2019 (remaining)	$	70
2020		180
2021		157
2022		157
2023		116
After 2023		641
Total lease payments		1,321
Less: Imputed Interest		(201	)
Total operating leases	$	1,120

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Forward Looking Statements

Certain statements contained in this report and other publicly available documents incorporated herein by reference constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 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 similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control and which could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to: changes in political, economic or other factors, such as inflation rates, recessionary or expansive trends, taxes, the effects of implementation of legislation and the continuing economic uncertainty in various parts of the world; competitive pressures; fluctuations in interest rates; the level of defaults and prepayment on loans made by the Company; unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in management’s discussion and analysis is available in the Company’s filings with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, including the disclosure under the heading “Item 1A. Risk Factors” of Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements, whether as a result of new information, unanticipated future events or otherwise.

Financial Overview

The Company is primarily engaged in commercial and retail banking, offering a blend of commercial and consumer banking services within southeastern Ohio as well as western West Virginia. The banking services offered by the Bank include the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; the making of construction and real estate loans; and credit card services. The Bank also offers individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. In addition, the Bank has facilitated the payment of tax refunds through a third-party tax refund product provider through electronic refund check/deposit (“ERC/ERD”) transactions. ERC/ERD transactions involve the payment of a tax refund to the taxpayer after the Bank has received the refund from the federal/state government. ERC/ERD transactions occur primarily during the tax refund season, typically during the first quarter of each year. The Bank ceased receiving tax refunds through its contract with a third-party provider at the end of 2018, but the Bank intends to consider alternative similar relationships for future years. Loan Central also provided refund anticipation loans (“RALs”) to its customers until April 27, 2019. RALs are short-term cash advances against a customer’s anticipated income tax refund. An Ohio law adopted in 2018 now prohibits Loan Central from making such short-term, single-payment loans.

Net income totaled $2,137 during the third quarter of 2019, an increase of $391, or 22.4%, compared to $1,746 during the third quarter of 2018. Earnings per share for the third quarter of 2019 finished at $.45 per share, compared to $.37 per share during the third quarter of 2018. The Company's net income during the nine months ended September 30, 2019 totaled

$6,409, a decrease of $1,679, or 20.8%, compared to $8,088 during the nine months ended September 30, 2018. Earnings per share during the first nine months of 2019 finished at $1.35 per share, compared to $1.71 per share during the first nine months of 2018. Higher earnings during the third quarter of 2019 were largely impacted by lower provision expense. Lower earnings during the first nine months of 2019 were impacted primarily by higher loan provision expense and lower noninterest income.

The negative impact of lower net earnings during the first nine months of 2019 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets (“ROA”), which decreased to 0.83% at September 30, 2019, compared to 1.01% at September 30, 2018. The Company’s net income to average equity ratio, or return on equity (“ROE”), also decreased to 7.07% at September 30, 2019, compared to 9.67% at September 30, 2018.

During the three months ended September 30, 2019, net interest income decreased $137, or 1.3%, from the same period in 2018. While average earning assets were up 0.4% during the third quarter of 2019, the growth consisted mostly of lower-yielding interest-bearing balances with banks and investment securities, while higher-yielding average loans decreased. This contributed to the decrease in net interest income for the quarter. During the nine months ended September 30, 2019, net interest income decreased $247, or 0.8%, from the same period in 2018. The decline in net interest income was largely impacted by a 4.4% decrease in year-to-date average earnings assets due to the Bank not processing tax refunds during 2019. As previously mentioned, the Bank’s third-party tax software product provider ceased utilizing the services of the Bank at the end of 2018. In previous years, the Bank experienced significant levels of excess deposits primarily during the first half of the year by utilizing its interest-bearing Federal Reserve Bank clearing account to facilitate all ERC/ERD transactions. Without this processing activity, the interest revenue earned on balances with the Federal Reserve decreased $344 during the first nine months of 2019, as compared to the same period in 2018. Net interest income was also negatively impacted by higher interest expense on deposits, which increased over 47% and 51% during the third quarter and year-to-date periods ended September 30, 2019, respectively. The interest expense increases were largely from certificates of deposit (“CD’s”) repricing at higher market rates, as well as a consumer shift to higher-costing money market deposit accounts. Partially offsetting the negative effects of lower Federal Reserve interest income and higher deposit interest expense was interest income on loans, which increased over 2% and 4% during both the third quarter and year-to-date periods ended September 30, 2019, respectively. The increase was a combination of average loan growth during the first nine months of 2019 and the benefit of rising rates throughout 2018.

During the three months ended September 30, 2019, the Company’s provision expense decreased $518, while increasing $320 during the nine months ended September 30, 2019, compared to the same periods in 2018. The third quarter of 2019 saw several of the Company’s economic risk factors improve, which contributed to a 16.5% decrease in the general allocation of the allowance for loan losses from June 30, 2019 to September 30, 2019. Lower quarterly provision expense was also impacted by a decrease in specific allocations from identified loan impairments during the three months ended September 30, 2019 compared to the same period in 2018. The benefits of lower general and specific reserves were partially offset by increases in charge-offs during the third quarter of 2019 over the third quarter of 2018, primarily from the commercial and industrial loan portfolio. The increase in provision expense during the nine months ended September 30, 2019 was impacted by higher net charge-offs partially offset by lower specific reserves and lower general reserves in relation to certain economic risk factors.

Total noninterest income during the three months ended September 30, 2019 increased 9.3% over the same period in 2018. The quarterly improvement in noninterest revenue was impacted by growth in interchange income earned from debit and credit card transactions, which increased $106, and lower losses in the sale of other real estate owned (“OREO”), which decreased $67. Conversely, total noninterest income during the nine months ended September 30, 2019 decreased 21.0% over the same period in 2018. In relation to the third-party tax refund product provider terminating its contract with the Bank, the Company experienced virtually no tax processing income in 2019 from the facilitation of ERC/ERD items, as compared to $33 and $1,566 in tax processing fees during the third quarter and year-to-date periods ended September 30, 2018, respectively.

The Company benefited from lower noninterest expense, which decreased 0.2% during the third quarter of 2019, and decreased 0.5% during the nine months ended September 30, 2019, as compared to the same periods in 2018. Both the quarterly and year-to-date periods ended September 30, 2019 have been impacted by lower data processing costs and FDIC premiums, which have collectively decreased 37.9% and 31.6%, respectively, as compared to the same periods in 2018. Lower data processing costs were impacted by a decrease in consulting fees. The decrease in FDIC insurance premiums was a result of the Bank’s lower quarterly assessment rates from last year and the receipt of a portion of the Bank’s premium credit granted by the FDIC during the third quarter of 2019. Professional fee expenses increased over 16% and 27% during both the quarterly and year-to-date periods ended September 30, 2019, as compared to the same periods in 2018, respectively. The cost increase was in relation to higher audit expense and litigation related legal fees. This increase partially offset the expense savings from data processing and FDIC premium costs during both the third quarter and year-to-date periods ended September 30, 2019.

The Company’s provision for income taxes increased $193 during the third quarter of 2019, but decreased $327 during the first nine months of 2019, as compared to the same periods in 2018. This is largely due to the changes in taxable income affected by the factors mentioned above.

At September 30, 2019, total assets were $1,045,958, compared to $1,030,493 at year-end 2018. Higher assets were impacted mostly by growth in the Company’s available for sale investment securities portfolio, which increased $9,078 from year-end 2018. This was due mostly to new purchases of Agency mortgage-backed securities during the first and third quarters of 2019. The Company’s premises and equipment increased $3,936 from year-end 2018, impacted by the construction of its new State Street facility in Gallipolis, Ohio. The facility will consist mostly of executive offices and areas for processing. The Company’s loan portfolio increased $3,001, finishing at $780,053 at September 30, 2019, compared to $777,052 at year-end 2018. The residential and commercial real estate lending segments experienced a combined 3.3% increase from year-end 2018, which was partially offset by a combined 5.6% decrease in both the commercial and industrial and consumer loan portfolios. Asset decreases were also influenced by lower cash and cash equivalents, which decreased $718 from year-end 2018.

Total liabilities were $920,757 at September 30, 2019, up $8,138 from December 31, 2018. Contributing most to this increase were higher interest-bearing deposits, which increased $13,659 from year-end 2018, mostly from higher public fund account balances, as well as a consumer shift into higher-costing money market accounts. Partially offsetting the growth in interest-bearing deposits were reduced borrowings of $4,915 from the continued principal repayments of long-term advances with the FHLB. Liabilities were also impacted by lower noninterest-bearing deposits, which were down $3,081 from year-end 2018, related to lower business checking account balances.

At September 30, 2019, total shareholders' equity was $125,201, up $7,327 since December 31, 2018. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums.

Comparison of Financial Condition
at September 30, 2019 and December 31, 2018

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at September 30, 2019 compared to December 31, 2018. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10‑Q.

Cash and Cash Equivalents

At September 30, 2019, cash and cash equivalents were $70,462, a decrease of $718 from $71,180 at December 31, 2018. The decrease in cash and cash equivalents came mostly from lower noninterest-bearing deposits on hand with correspondent banks. Over 78% of cash and cash equivalents consist of the Company’s interest-bearing Federal Reserve Bank clearing account. The Company utilizes its interest-bearing Federal Reserve Bank clearing account to manage excess funds, as well as to assist in funding earning asset growth. Prior to 2019, the Federal Reserve clearing account was also used to maintain seasonal tax refund deposits associated with the Bank’s tax processing activity. In 2018, the Company was informed by its third-party tax refund product provider that the provider would cease utilizing the services of the Bank by the end of 2018, before the contract expiration date of December 31, 2019. With the elimination of this seasonal activity in 2019, the amount of excess funds that had traditionally been available to the Bank in previous years was significantly lower during the first nine months of 2019. The interest rate paid on both the required and excess reserve balances of the Federal Reserve Bank account is based on the targeted federal funds rate established by the Federal Open Market Committee. During 2018, the rate associated with the Company’s Federal Reserve Bank clearing account increased 100 basis points to 2.5% as a result of the Federal Reserve’s action to increase short-term market rates. The clearing account’s interest rate remained at 2.5% through the first half of 2019. During the third quarter of 2019, the Federal Reserve took action to reduce short-term market rates by 50 basis points, which lowered the Company’s Federal Reserve clearing account rate down to 2.0% at September 30, 2019. The Federal Reserve has also reduced short-term rates by another 25 basis points during October 2019. Although considered nominal, the Federal Reserve Bank clearing account’s current rate of 1.75% is higher than the rate the Company would have received from its investments in federal funds sold. Furthermore, Federal Reserve Bank balances are 100% secured. However, the positive impact from 2018’s short-term rate increases did not translate to higher interest revenue from the Federal Reserve Bank clearing account due to the significant decline in seasonal tax deposits from a year ago.

The Company’s focus will be to invest excess funds in longer-term, higher-yielding assets, primarily loans, when the opportunities arise. As liquidity levels vary continuously based on consumer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Unless the Bank is able to replace its tax processing agreement with an agreement with another tax refund product provider, the Company’s liquidity levels will continue to be materially affected and the Bank will need to rely on other sources of funding for earning asset growth. The Bank is also pursuing payment from its current provider for breach of contract.

Certificates of deposit

At September 30, 2019, the Company had $2,360 in certificates of deposit owned by the Captive, up 14.3% from year-end 2018. The deposits on hand at September 30, 2019 consist of ten certificates with remaining maturity terms ranging from less than 8 months up to 36 months.

Securities

The balance of total securities increased $6,747, or 5.7%, compared to year-end 2018. The Company’s investment securities portfolio is made up mostly of U.S. Government agency (“Agency”) mortgage-backed securities, which increased $8,972, or 10.5%, from year-end 2018 and represented 75.8% of total investments at September 30, 2019. During the first nine months of 2019, the Company invested $20,127 in new Agency mortgage-backed securities, while receiving principal repayments of $13,884. 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.

In addition, decreasing market rates during 2019 led to a $3,200 decrease in the net unrealized loss position associated with the Company’s available for sale securities, which increased the fair value of securities at September 30, 2019. The fair value of an investment security moves inversely to interest rates, so as rates decreased, the unrealized loss in the portfolio was reduced. 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. Gross loan balances totaled $780,053 at September 30, 2019, representing an increase of $3,001, or 0.4%, as compared to $777,052 at December 31, 2018. Positive loan growth came mostly from the residential and commercial real estate loan portfolios, partially offset by balance decreases in the commercial and industrial and consumer loan portfolios.

The majority of the Company’s increase in loans from year-end 2018 came from the residential real estate loan portfolio, which increased $10,682, or 3.5%. The residential real estate loan segment comprises the largest portion of the Company’s overall loan portfolio at 40.4% and consists primarily of one- to four-family residential mortgages and carries many of the same customer and industry risks as the commercial loan portfolio. The increase in residential real estate loans was largely the result of the Bank's warehouse lending volume. Warehouse lending consists of a line of credit provided by the Bank to another mortgage lender that makes loans for the purchase of one- to four-family residential real estate properties. The mortgage lender eventually sells the loans and repays the Bank. From year-end 2018, warehouse lending balances increased $14,170 to finish at $29,996 at September 30, 2019. The Company continues to experience continued payoffs and maturities of both long-term fixed-rate mortgages and short-term adjustable-rate mortgages from year-end 2018 that have partially offset warehouse lending growth.

Further growth in loans came from the commercial real estate loan portfolio, which increased $6,707, or 3.1%, from year-end 2018. The commercial real estate segment comprised the largest portion of the Company’s total commercial loan portfolio at September 30, 2019 at 68.9%. Leading the growth in commercial real estate were increases in nonowner-occupied loan originations, with balances up $11,510, or 9.8%, from year-end 2018. The growth in nonowner-occupied commercial loans was also the result of lower construction loans, which were down $1,171, or 3.1%, from year-end 2018. The decrease was largely from multi-family residential and land development projects completing their construction phase and being re-classified as commercial real estate loans. While management believes lending opportunities exist in the Company’s markets, future commercial lending activities will depend upon economic and related conditions, such as general demand for loans in the Company’s primary markets, interest rates offered by the Company, 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.

Partially offsetting the increases in both commercial and residential real estate loan portfolios were commercial and industrial loans, which decreased $12,734, or 11.2%, from year-end 2018. Over 60% of the decrease was related to the charge offs and payoffs of several loans from three commercial loan relationships. 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.

Consumer loan balances at September 30, 2019 also decreased $1,654, or 1.2%, from year-end 2018, finishing at $141,716. This change was primarily impacted by a decline in automobile loan balances from year-end 2018. Automobile loans represent the Company’s largest consumer loan segment at 46.0% of total consumer loans. The Company will continue to attempt to increase its auto lending segment while maintaining strict loan underwriting processes to limit future loss exposure.

Allowance for Loan Losses

The Company established a $6,153 allowance for loan losses at September 30, 2019, which was down from the $6,728 allowance at year-end 2018. The allowance was impacted by a decrease of $477 in general allocations from year-end 2018. As part of the Company’s quarterly analysis of the allowance for loan losses, management reviewed various factors that directly impact the general allocation needs of the allowance, which include: historical loan losses, loan delinquency levels, local economic conditions and unemployment rates, criticized/classified asset coverage levels and loan loss recoveries. From year-end 2018, the Company’s historical loss factor was stable, but the economic risk factor decreased by 8 basis points, which contributed to a lower general allocation of the allowance for loan losses at September 30, 2019. This risk factor decrease from year-end 2018 was largely due to various commercial loan upgrades resulting from improvements in the financial performance of certain borrowers’ ability to repay their loans. This contributed to lower criticized assets for the year, particularly within the commercial owner-occupied and commercial and industrial loan segments. Further positive effects to credit risk came from the Company’s lower delinquency levels at September 30, 2019, which saw nonperforming loans to total loans decrease from 1.25% at December 31, 2018 to 1.18% at September 30, 2019, and nonperforming assets to total assets decrease from 0.99% at year-end 2018 to 0.89% at September 30, 2019. In addition to delinquency improvement, the Company also benefited from increases in recoveries and the stabilization of both the average unemployment rate within the Company’s lending areas and average historical loan loss factors.

In addition to lower general allocations, the Company also experienced a decrease in specific allocations from $98 at year-end 2018 to no specific allocations at September 30, 2019. Specific allocations of the allowance for loan losses identify loan impairment by measuring fair value of the underlying collateral and the present value of estimated future cash flows. The change in specific reserves from year-end 2018 to September 30, 2019 was related to one commercial real estate loan borrower.

The Company’s allowance for loan losses to total loans ratio finished at 0.79% at September 30, 2019 and 0.87% at year-end 2018. Management believes that the allowance for loan losses at September 30, 2019 was adequate and reflected probable incurred losses in the loan portfolio. There can be no assurance, however, that adjustments to the allowance for loan losses will not be required in the future. 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 allowance for loan losses as necessary. Asset quality will continue to remain a key focus, as management continues to stress not just loan growth, but quality in loan underwriting as well.

Deposits

Deposits continue to be the most significant source of funds used by the Company to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. Total deposits at September 30, 2019 increased $10,578, or 1.2%, from year-end 2018. This change in deposits came primarily from interest-bearing deposit balances, which were up by $13,659, or 2.2%, from year-end 2018, while noninterest-bearing deposits decreased $3,081, or 1.3%, from year-end 2018.

The increase in interest-bearing deposits came mostly from higher interest-bearing NOW account balances from year-end 2018, which increased $14,105, or 9.1%. This increase was largely driven by higher municipal NOW product balances, particularly within the Gallia County, Ohio and Cabell County, WV market areas. Money market balances also grew from year-end 2018 by $7,372, or 6.1%, primarily from a shift in consumer preference to more competitive, higher-costing deposit accounts. The remaining interest-bearing deposits were down $7,818 from year-end 2018, primarily from lower statement savings and time deposit balances.

The decrease in noninterest-bearing deposits came mostly from the Company’s business checking account balances from year-end 2018.

In April 2019, the Company announced that the Bank had entered into a purchase and assumption agreement to sell its Mount Sterling and New Holland, Ohio branches to North Valley Bank. The purchase and assumption agreement provides for the transfer of $26,675 in deposits and $252 in land and buildings associated with both branches in exchange for the net book value of such other assets and a deposit premium equal to 5.0% of the average daily deposits for the thirty days preceding closing. The sale is expected to close during the fourth quarter of 2019.

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 2019, 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 $34,798 at September 30, 2019, a decrease of $4,915, or 12.4%, from year-end 2018. The decrease was related primarily to the principal repayments applied to various FHLB advances during the first nine months of 2019. While deposits continue to be the primary source of funding for growth in earning assets, management will continue to utilize FHLB advances and promissory notes to help manage interest rate sensitivity and liquidity.

Shareholders’ Equity

Total shareholders' equity at September 30, 2019 of $125,201 increased $7,327, or 6.2%, as compared to $117,874 at December 31, 2018. Net unrealized losses on available for sale securities decreased $2,528 from year-end 2018, as market rates decreased during the first nine months of 2019 causing an increase in the fair value of the Company’s investment portfolio. Capital growth during 2019 also came from year-to-date net income of $6,409, less dividends paid of $2,996.

Comparison of Results of Operations

For the Three and Nine Months Ended

September 30, 2019 and 2018

The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three and nine months ended September 30, 2019 compared to the same periods in 2018. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10‑Q.

Net Interest Income

The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense incurred on interest-bearing liabilities. During the three months ended September 30, 2019, net interest income decreased $137, or 1.3%, as compared to the same period in 2018. During the nine months ended September 30, 2019, net interest income decreased $247, or 0.8%, as compared to the same period in 2018. Net interest income has been primarily impacted by lower average earning assets combined with rising interest costs on deposits, partially offset by interest and fee income growth on loans.

Total interest and fee income recognized on the Company’s earning assets increased $340, or 2.8%, during the third quarter of 2019, and increased $1,234, or 3.4%, during the first nine months of 2019, as compared to the same periods in 2018. The quarterly and year-to-date growth was led by interest and fees on loans, which increased $244, or 2.2%, and $1,442, or 4.4%, during the three and nine months ended September 30, 2019, as compared to the same periods in 2018, respectively. Average loans for the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018 decreased by 0.85%, or $6,304, while the interest rate yield on loans increased from 5.70% to 5.87% during the same periods. Average loans for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 grew by 0.4%, or $2,954, while the interest rate yield on loans increased from 5.78% to 6.01% during the same periods. Throughout most of 2018, the Company experienced a growing trend of loan origination improvement that had a positive impact on loan earnings in 2019. During this time, the West Virginia market areas have been successful in generating $10,000 in average loan growth, mostly from commercial lending. In addition, the Athens, Ohio loan production office has been successful in generating over $7,000 in average commercial and residential real estate loan growth. Average loan growth from a year ago was also impacted by growth within consumer home equity lines of credit and other consumer loan types such as all-terrain and recreational vehicle loans.

During the three and nine months ended September 30, 2019, interest income from interest-bearing deposits with banks increased $68, or 25.7%, and decreased $344, or 26.0%, when compared to the same periods in 2018. These changes in interest revenue come primarily from the Company’s interest-bearing Federal Reserve Bank clearing account. The quarterly growth in interest income was due to average clearing account balances increasing $4,765, or 9.1%, due to higher amounts invested in the Federal Reserve unrelated to tax deposits. The decrease in year-to-date interest income was impacted by no tax processing activity for the year. As previously mentioned, the termination of a contract between the Bank and a third party resulted in a significant reduction of excess deposits from ERC/ERD transactions during 2019. As a result, average Federal Reserve Bank clearing account balances decreased $49,767, or 47.2% during the first nine months of 2019, as compared to the first nine months of 2018, which contributed to lower interest income. The quarter-to-date increase in average balances completely offset the negative effects of a 50 basis point interest rate reduction by the Federal Reserve during the third quarter of 2019. Conversely, the year-to-date decrease in average balances completely offset the positive effects of a higher average interest rate tied to the interest-bearing clearing account during the first nine months of 2019, as compared to the same period in 2018.

Total interest expense incurred on the Company’s interest-bearing liabilities increased $477, or 33.6%, during the third quarter of 2019, and increased $1,481, or 37.8%, during the first nine months of 2019, as compared to the same periods in 2018. The upward movement in interest expense was primarily from interest expense on deposits, particularly time deposits and money market accounts. With average year-to-date loan balances still up over the previous year, the Company utilized more CD balances as a funding source to help keep pace with earning assets. Short-term rate increases have had an impact on the repricing of CD rates and have generated more of a consumer demand to invest in a CD product as compared to money markets. As a result, average time deposits through September 30, 2019 have grown over $7,000 when compared to average time deposits through September 30, 2018. The Company has also experienced a composition shift within money market accounts, which has led to higher interest expense. In the fourth quarter of 2018, a new money market product was introduced in an effort to attract new deposits. The account offers a more competitive rate and is at a higher interest rate than our prior money market account. In addition to attracting new deposits, existing money market accounts have migrated to the new product. As a result, the interest expense on money market accounts has increased as new and existing deposit balances have moved into the new money market account. The Company’s use of higher-costing time deposits combined with the composition shift to higher-costing money market deposits caused the Company’s total weighted average costs on interest-bearing deposits to increase by 32 basis points from 0.65% at September 30, 2018 to 0.97% at September 30, 2019. The higher average costs associated with time deposits and the new competitive money market account contributed to over 80% of the interest expense increase during the first nine months of 2019, as compared to the same period in 2018.

The Company’s net interest margin is defined as fully tax-equivalent net interest income as a percentage of average earning assets. During 2019, the Company’s third quarter net interest margin finished at 4.41%, compared to 2018’s third quarter net interest margin of 4.49%. The year-to-date net interest margin at September 30, 2019 finished at 4.57%, compared to 4.41% at September 30, 2018. The changes in margin are largely related to the average balance movements associated with higher-yielding loans combined with the average balance movements associated with lower-yielding Federal Reserve balances. In prior years, the higher balances being maintained at the Federal Reserve diluted the net interest margin due to the yield on those balances being less than other earning assets, such as loans and securities. The quarter-to-date margin decrease in 2019 was primarily the result of a higher composition of Federal Reserve balances and lower average loans. The year-to-date margin increase in 2019 was primarily the result of a higher composition of loans and less Federal Reserve balances completely offsetting the negative effects of rising average costs on deposits, particularly time deposits. 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 Loan Losses

For the three months ended September 30, 2019, the Company’s provision expense decreased $518, and for the nine months ended September 30, 2019, provision expense increased $320, from the same respective periods in 2018. During the third quarter, the Company decreased its general allocation from $7,367 at June 30, 2019 to $6,153 at September 30, 2019. This is compared to a $267 general allocation increase during the same period in 2018. The release of general reserves during the third quarter of 2019 was caused by various improvements within the economic risk factor calculation that included: lower criticized and classified assets, lower delinquency levels, and lower unemployment rates. The Company also experienced lower specific reserve allocations during the third quarter of 2019 versus the third quarter of 2018. Further contributing to lower quarter-to-date provision expense was a decrease in specific reserves. This was related to the collateral impairment of one residential real estate loan relationship that generated provision expense of $409 during the third quarter of 2018. This is compared to a $34 decrease in specific reserves during the third quarter of 2019. The combination of both general and specific allocation decreases more than offset the quarter-to-date increase in net charge-offs, which were up $1,406 during the quarter, primarily from charge-offs recorded on one commercial and industrial loan relationship in September 2019. The year-to-date rise in provision expense was impacted by a $1,711 increase in net charge-offs, primarily from the commercial and industrial loan segment previously mentioned. This was partially offset by improvements in various economic risk factors that contributed to a $477 decrease in the general allocation of the allowance for loan losses during the first nine months of 2019, as compared to a $411 increase in general reserves during the first nine months of 2018. Also partially offsetting higher net charge-offs for the year were lower specific reserves related to the $409 specific impairment allocation recorded during 2018 previously mentioned.

Future provisions to the allowance for loan losses will continue to be based on management’s quarterly in-depth evaluation that is discussed in further detail under the caption “Critical Accounting Policies - Allowance for Loan Losses” within this Management’s Discussion and Analysis.

Noninterest Income

Noninterest income for the three months ended September 30, 2019 increased $180, or 9.3%, when compared to the three months ended September 30, 2018. Noninterest income for the nine months ended September 30, 2019 decreased $1,585, or 21.0%, when compared to the nine months ended September 30, 2018. Lower noninterest revenue was largely impacted by the loss of a tax refund processing contract in 2019 that generated $33 in tax processing fees during the third quarter of 2018 and $1,566 in tax processing fees during the first nine months of 2018.

Noninterest revenue was positively impacted by increases to interchange income, particularly with debit cards, as the transaction volume continues to grow. Card transactions came mostly from restaurant, gasoline and retail store purchases. The Company has also been successful in promoting the use of both debit and credit cards by offering incentives that permit their users to redeem accumulated points for merchandise, as well as cash incentives. As a result, interchange income was key in partially offsetting the loss of tax processing income by increasing $106 during the third quarter of 2019, and $199 during the first nine months of 2019, as compared to the same periods in 2018.

Also impacting the changes in noninterest income were gains and losses on OREO. The sales of OREO generated a $67 increase in income during the three months ended September 30, 2019, while OREO sales during the year-to-date period ended September 30, 2019 generated a $76 decrease in income, as compared to the same periods in 2018.

The remaining noninterest income categories increased $40, or 3.9%, during the third quarter of 2019, and decreased $147, or 4.7%, during the first nine months of 2019, as compared to the same periods in 2018. The quarterly increase was primarily from service charge fees on deposits. The year-to-date decrease was primarily from the Company’s interest rate swap agreements. The Company utilizes interest rate swaps to satisfy the desire of large commercial customers to have a fixed-rate loan while permitting the Company to originate a variable-rate loan, which helps mitigate interest rate risk. In association with establishing an interest rate swap agreement, the Company earns a swap fee at the time of origination. For 2019, the Company’s year-to-date swap fee revenue decreased $129, largely from a new origination that was recorded in April 2018.

Noninterest Expense

Noninterest expense during the third quarter of 2019 decreased $23, or 0.2%, as compared to the same period in 2018. Noninterest expense during the first nine months of 2019 decreased $146, or 0.5%, as compared to the same period in 2018. The Company’s largest noninterest expense, salaries and employee benefits, increased $115, or 2.1%, and decreased $65, or 0.4%, during the three and nine months ended September 30, 2019, as compared to the same periods in 2018, respectively. The limited growth in salary and employee benefit costs have been the result of a decrease in the number of employees. The salary and employee benefit expense associated with the reduced number of employees largely offset the expense increases associated with annual merit adjustments for 2019.

Further impacting overhead costs were data processing expenses, which decreased $219, or 28.9%, during the third quarter of 2019, and decreased $551, or 25.3%, during the first nine months of 2019, as compared to the same periods in 2018. The Company’s total data processing expense is largely impacted by the transaction volume associated with debit and credit cards. However, the decrease from 2018 to 2019 came mostly from consulting costs in 2018 that were associated with the improvement of operating system efficiencies to enhance opportunities for noninterest revenue improvement. These expenses were not repeated in 2019.

Further overhead expense savings came from FDIC premium costs, which finished the third quarter of 2019 with no recorded expense versus $110 in premium expense during the third quarter of 2018. FDIC premium expense also decreased $255, or 69.3%, during the first nine months of 2019, as compared to the same period in 2018. The year-to-date decrease in premium expense has been primarily impacted by lower assessment rates by the FDIC in 2019 versus 2018. However, the quarter-to-date decrease was primarily due to the receipt of a portion of the Bank’s premium credit granted by the FDIC. In the third quarter of 2018, the FDIC announced the Deposit Insurance Fund (“DIF”) had exceeded the statutory minimum of 1.35%, and that assessment credits would be given to smaller banks with assets less than $10 billion. The credits were based on the portion of bank assessments that had contributed to the successful DIF level. The FDIC calculated the Bank’s associated credit to be $253. In September 2019, the Bank was able to utilize $70 of its FDIC credit to fully absorb its third quarter FDIC assessment, which is the reason for no premium expense in the third quarter of 2019. The Bank will look to utilize its remaining FDIC credits in upcoming quarterly assessments.

The change in overhead expense was also impacted by higher professional fees. Professional fees increased $84, or 16.3%, during the third quarter of 2019, and increased $422, or 27.5%, during the first nine months of 2019, as compared to the same periods in 2018. These increases include litigation costs associated with the Bank’s lawsuit against the third-party tax software product provider.

The remaining noninterest expense categories increased $107, or 3.8%, during the third quarter of 2019, and increased $303, or 3.6%, during the first nine months of 2019, as compared to the same periods in 2018. These increases were impacted mostly from customer incentives, loan costs, software related expenses and other consulting fees.

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 third quarters of 2019 and 2018, the Company’s average earning assets increased 0.4%, but the growth consisted mostly of lower-yielding assets (i.e. Federal Reserve Bank, investment securities) while average loans decreased 0.9%. As a result, interest expense outpaced earning asset income. However, the Company’s quarterly noninterest income grew 9.3% due to interchange income and OREO gains, which completely offset lower net interest income. This, combined with lower quarterly overhead expense, allowed the Company’s efficiency number to decrease (improve) to 75.8% during the quarterly period ended September 30, 2019, as compared to 76.2% during the same period in 2018. Comparing the first nine months of 2019 and 2018, the Company was successful in generating more loan revenue primarily due to higher average earning loans and market rate increases. Furthermore, the Company has exercised good cost control in reducing overhead expense by 0.5% year-over-year. However, the Bank’s loss of tax refund processing revenue during 2019 produced a significant income decrease from its Federal Reserve Bank asset account and tax processing fees. These decreases caused net interest and noninterest revenue to decrease at a higher pace than the changes in overhead expense. As a result, the Company’s efficiency number increased (regressed) to 74.7% during the year-to-date period ended September 30, 2019, as compared to 71.7% during the same period in 2018.

Provision for income taxes

The Company’s income tax provision increased $193, or 87.3%, during the three months ended September 30, 2019, as compared to the same period in 2018. The Company’s income tax provision decreased $327, or 22.9%, during the nine months ended September 30, 2019, as compared to the same period in 2018. The changes in tax expense corresponded directly to the change in associated taxable income during 2019 and 2018.

Capital Resources

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. New rules became effective for the Company and the Bank on January 1, 2015, with full compliance with all of the requirements being fully phased in on January 1, 2019. Minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer began to phase in on January 1, 2016 at 0.625%, and increased by the same amount on each subsequent January 1 over a four-year period. The fully phased-in capital conservation buffer as of January 1, 2019, is 2.5%. Failure to maintain the required common equity tier 1 capital conservation buffer will result in potential restrictions on a bank’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.

Prompt corrective action regulations applicable to insured depository institutions provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2019 and year-end 2018, the Bank met the capital requirements to be deemed well capitalized under the regulatory framework for prompt corrective action. Regulations of the Board of Governors of the Federal Reserve System (the “FRB”) require a state-chartered bank that is a member of a Federal Reserve Bank to maintain certain amounts and types of capital and generally also require bank holding companies to meet such requirements on a consolidated basis. The FRB generally requires bank holding companies that have chosen to become financial holding companies to be “well capitalized,” as defined by FRB regulations, in order to continue engaging in activities permissible only to bank holding companies that are registered as financial holding companies. If, however, a bank holding company, whether or not also a financial holding company, satisfies the requirements of the Federal Reserve’s Small Bank Holding Company Policy (the “SBHCP”), the holding company is not required to meet the consolidated capital requirements. As amended effective in September 2018, the SBHCP requires that the holding company have assets of less than $3 billion, that it meet certain qualitative requirements, and that all of the holding company’s bank subsidiaries meet all bank capital requirements. As of September 30, 2019, the Company was deemed to meet the SBHCP requirements and so was not required to meet consolidated capital requirements at the holding company level.

The following table summarizes the capital ratios (excluding the capital conservation buffer) of the Company and the Bank. The minimums for the Company are those that would have been required if the Company was not a small bank holding company under the SBHCP.

	9/30/19		12/31/18		Minimum Regulatory Capital Ratio		Minimum To Be Well Capitalized (1)
Total risk-based capital ratio
Company		18.2%		17.7%		8.0%		10.0%
Bank		16.5%		16.2%		8.0%		10.0%

Common equity tier 1 risk-based capital ratio
Company		16.1%		15.6%		4.5%		N/A
Bank		15.7%		15.3%		4.5%		6.5%

Tier 1 risk-based capital ratio
Company		17.3%		16.7%		6.0%		6.0%
Bank		15.7%		15.3%		6.0%		8.0%

Leverage ratio
Company		12.2%		11.8%		4.0%		N/A
Bank		11.1%		10.7%		4.0%		5.0%

(1) For the Company, these amounts would be required for the Company to engage in activities permissible only for a bank holding company that meets the financial holding company requirements if the Company were not subject to the SBHCP. For the Bank, these are the amounts required for the Bank to be deemed well capitalized under the prompt corrective action regulations.

Cash dividends paid by the Company were $2,996 during the first nine months of 2019. The year-to-date dividends paid totaled $0.63 per share for 2019.

Liquidity

Liquidity relates to the Company's ability to meet the cash demands and credit needs of its customers and is provided by the ability to readily convert assets to cash and raise funds in the marketplace. Total cash and cash equivalents, held to maturity securities maturing within one year and available for sale securities, totaling $181,704, represented 17.4% of total assets at September 30, 2019. In addition, the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity demands. At September 30, 2019, the Bank could borrow an additional $115,754 from the FHLB, of which $80,000 could be used for short-term, cash management advances. Furthermore, the Bank has established a borrowing line with the Federal Reserve. At September 30, 2019, this line had total availability of $49,110. Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank.

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 Policies

The most significant accounting policies followed by the Company are presented in Note A to the financial statements in the Company’s 2018 Annual Report to Shareholders. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the adequacy of the allowance for loan losses to be a critical accounting policy.

Allowance for loan losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans generally consist of loans with balances of $200 or more on nonaccrual status or nonperforming in nature. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and impaired loans that are not individually reviewed for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years for the consumer and real estate portfolio segment and 5 years for the commercial portfolio segment. The total loan portfolio’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: Commercial Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer.

Commercial and industrial loans consist of borrowings for commercial purposes by 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 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 local economic conditions which dictate occupancy rates and the amount of rent charged. Commercial construction loans consist of borrowings to purchase and develop raw land into one- to four-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 which may be absorbed by the Company.

Residential real estate loans consist of loans to individuals for the purchase of one- to four-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 comprised 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 6 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. During the last several years, one of the most significant portions of the Company’s net loan charge-offs have been from consumer loans. Nevertheless, the Company has allocated the highest percentage of its allowance for loan losses as a percentage of loans to the other identified loan portfolio segments due to the larger dollar balances and inherent risk associated with such portfolios.

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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

With the participation of the Chief Executive Officer (the principal executive officer) and the Senior Vice President and Chief Financial Officer (the principal financial officer) of Ohio Valley, Ohio Valley’s management has evaluated the effectiveness of Ohio Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10‑Q. Based on that evaluation, Ohio Valley’s Chief Executive Officer and Senior Vice President and Chief Financial Officer have concluded that Ohio Valley’s disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10‑Q to ensure that information required to be disclosed by Ohio Valley in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Ohio Valley in the reports that it files or submits under the Exchange Act is accumulated and communicated to Ohio Valley’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in Ohio Valley’s internal control over financial reporting (as defined in Rule 13a‑15(f) under the Exchange Act) that occurred during Ohio Valley’s fiscal quarter ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, Ohio Valley’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Ohio Valley is not currently subject to any material legal proceedings.

ITEM 1A. RISK FACTORS

You should carefully consider the risk factors disclosed in Part I, Item 1.A. “Risk Factors” in Ohio Valley’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission. These risk factors could materially affect the Company’s business, financial condition or future results. The risk factors described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward looking statements contained in such risk factors or in any other statement made at any time by any director, officer, employee or other representative of the Company unless and until any such revisions or updates are expressly required to be disclosed by applicable securities laws or regulations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Ohio Valley did not sell any unregistered equity securities during the three months ended September 30, 2019.

Ohio Valley did not purchase any of its shares during the three months ended September 30, 2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

(a)

Exhibits:

Exhibit Number		Exhibit Description

3.1		Amended Articles of Incorporation of Ohio Valley (reflects amendments through April 7, 1999) [for SEC reporting compliance only - - not filed with the Ohio Secretary of State]. Incorporated herein by reference to Exhibit 3(a) to Ohio Valley’s Annual Report on Form 10-K for fiscal year ended December 31, 2007 (SEC File No. 0-20914).

3.2		Code of Regulations of Ohio Valley (as amended by the shareholders on May 12, 2010): Incorporated herein by reference to Exhibit 3(b) to Ohio Valley’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 (SEC File No. 0-20914).

4		Agreement to furnish instruments and agreements defining rights of holders of long-term debt: Filed herewith.

31.1		Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer): Filed herewith.

31.2		Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer): Filed herewith.

32		Section 1350 Certifications (Principal Executive Officer and Principal Accounting Officer): Filed herewith.

101.INS #		XBRL Instance Document: Filed herewith. #

101.SCH #		XBRL Taxonomy Extension Schema: Filed herewith. #

101.CAL #		XBRL Taxonomy Extension Calculation Linkbase: Filed herewith. #

101.DEF #		XBRL Taxonomy Extension Definition Linkbase: Filed herewith. #

101.LAB #		XBRL Taxonomy Extension Label Linkbase: Filed herewith. #

101.PRE #		XBRL Taxonomy Extension Presentation Linkbase: Filed herewith. #

# Attached as Exhibit 101 are the following documents formatted in XBRL (eXtensive Business Reporting Language): (i) Unaudited Consolidated Balance Sheets; (ii) Unaudited Consolidated Statements of Income; (iii) Unaudited Consolidated Statements of Comprehensive Income; (iv) Unaudited Consolidated Statements of Changes in Shareholders’ Equity; (v) Unaudited Condensed Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			OHIO VALLEY BANC CORP.

Date:	November 12, 2019	By:	/s/Thomas E. Wiseman
			Thomas E. Wiseman
			Chief Executive Officer

Date:	November 12, 2019	By:	/s/Scott W. Shockey
			Scott W. Shockey
			Senior Vice President and Chief Financial Officer