OHIO VALLEY BANC CORP - Quarter Report: 2020 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, 2020

☐ 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)

_____________________

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

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

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

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

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

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

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

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

The number of common shares of the registrant outstanding as of November 9, 2020 was 4,787,446.

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	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	43

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45

Signatures		46

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, 2020			December 31, 2019

ASSETS
Cash and noninterest-bearing deposits with banks	$	13,745		$	12,812
Interest-bearing deposits with banks		69,809			39,544
Total cash and cash equivalents		83,554			52,356

Certificates of deposit in financial institutions		2,745			2,360
Securities available for sale		110,349			105,318
Securities held to maturity (estimated fair value: 2020 - $12,022; 2019 - $12,404)		11,674			12,033
Restricted investments in bank stocks		7,506			7,506

Total loans		853,038			772,774
Less: Allowance for loan losses		(7,730	)		(6,272	)
Net loans		845,308			766,502

Premises and equipment, net		21,332			19,217
Premises and equipment held for sale, net		641			653
Other real estate owned, net		96			540
Accrued interest receivable		3,779			2,564
Goodwill		7,319			7,319
Other intangible assets, net		125			174
Bank owned life insurance and annuity assets		35,796			30,596
Operating lease right-of-use asset, net		918			1,053
Other assets		6,796			5,081
Total assets	$	1,137,938		$	1,013,272

LIABILITIES
Noninterest-bearing deposits	$	270,086		$	222,607
Interest-bearing deposits		674,898			598,864
Total deposits		944,984			821,471

Other borrowed funds		29,321			33,991
Subordinated debentures		8,500			8,500
Operating lease liability		918			1,053
Accrued liabilities		21,317			20,078
Total liabilities		1,005,040			885,093

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

SHAREHOLDERS’ EQUITY
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 2020 - 5,447,185 shares issued; 2019 - 5,447,185 shares issued)		5,447			5,447
Additional paid-in capital		51,165			51,165
Retained earnings		89,294			86,751
Accumulated other comprehensive income		2,704			528
Treasury stock, at cost (659,739 shares)		(15,712	)		(15,712	)
Total shareholders’ equity		132,898			128,179
Total liabilities and shareholders’ equity	$	1,137,938		$	1,013,272

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,
	2020			2019			2020			2019

Interest and dividend income:
Loans, including fees	$	10,877		$	11,362		$	32,389		$	34,576
Securities
Taxable		535			637			1,723			1,911
Tax exempt		73			85			220			253
Dividends		58			91			188			308
Interest-bearing deposits with banks		20			333			200			977
Other Interest		11			13			38			37
		11,574			12,521			34,758			38,062

Interest expense:
Deposits		1,274			1,592			4,150			4,446
Other borrowed funds		174			215			561			676
Subordinated debentures		44			88			166			274
		1,492			1,895			4,877			5,396
Net interest income		10,082			10,626			29,881			32,666
Provision for (recovery of) loan losses		(2	)		444			3,451			2,015
Net interest income after provision for loan losses		10,084			10,182			26,430			30,651

Noninterest income:
Service charges on deposit accounts		423			553			1,249			1,573
Trust fees		64			59			193			195
Income from bank owned life insurance and annuity assets		207			179			616			534
Mortgage banking income		445			80			966			227
Debit / credit card interchange income		1,130			1,049			3,003			2,935
Loss on other real estate owned		(1	)		(15	)		(84	)		(1	)
Tax preparation fees		9			—			643			—
Litigation settlement		—			—			2,000			—
Other		157			202			539			493
		2,434			2,107			9,125			5,956
Noninterest expense:
Salaries and employee benefits		5,973			5,652			16,854			16,715
Occupancy		481			479			1,362			1,370
Furniture and equipment		284			255			824			788
Professional fees		525			598			1,596			1,959
Marketing expense		306			270			867			810
FDIC insurance		69			—			93			113
Data processing		538			540			1,841			1,629
Software		318			362			1,111			1,200
Foreclosed assets		38			62			117			187
Amortization of intangibles		14			27			48			89
Other		1,345			1,493			4,299			4,237
		9,891			9,738			29,012			29,097

Income before income taxes		2,627			2,551			6,543			7,510
Provision for income taxes		333			414			984			1,101

NET INCOME	$	2,294		$	2,137		$	5,559		$	6,409

Earnings per share	$	0.48		$	0.45		$	1.16		$	1.35

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,
	2020			2019			2020			2019

Net Income	$	2,294		$	2,137		$	5,559		$	6,409

Other comprehensive income (loss):
Change in unrealized gain (loss) on available for sale securities		(267	)		(251	)		2,755			3,200
Related tax (expense) benefit		56			52			(579	)		(672	)
Total other comprehensive income (loss), net of tax		(211	)		(199	)		2,176			2,528

Total comprehensive income	$	2,083		$	1,938		$	7,735		$	8,937

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 Income (Loss)			Treasury Stock			Total Shareholders' Equity
Balance at July 1, 2020	$	5,447	$	51,165	$	88,006		$	2,915		$	(15,712	)	$	131,821
Net income		—		—		2,294			—			—			2,294
Other comprehensive loss, net		—		—		—			(211	)		—			(211	)
Cash dividends, $0.21 per share		—		—		(1,006	)		—			—			(1,006	)
Balance at September 30, 2020	$	5,447	$	51,165	$	89,294		$	2,704		$	(15,712	)	$	132,898

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, $0.21 per share		—		—		(1,001	)		—			—			(1,001	)
Balance at September 30, 2019	$	5,437	$	50,826	$	84,257		$	393		$	(15,712	)	$	125,201

Year-to-date	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholders' Equity
Balance at January 1, 2020	$	5,447	$	51,165	$	86,751		$	528		$	(15,712	)	$	128,179
Net income		—		—		5,559			—			—			5,559
Other comprehensive income, net		—		—		—			2,176			—			2,176
Cash dividends, $0.63 per share		—		—		(3,016	)		—			—			(3,016	)
Balance at September 30, 2020	$	5,447	$	51,165	$	89,294		$	2,704		$	(15,712	)	$	132,898

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, $0.63 per share		—		—		(2,996	)		—			—			(2,996	)
Balance at September 30, 2019	$	5,437	$	50,826	$	84,257		$	393		$	(15,712	)	$	125,201

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,
	2020			2019

Net cash provided by operating activities:	$	7,530		$	9,571

Investing activities:
Proceeds from maturities of securities available for sale		23,344			14,145
Purchases of securities available for sale		(25,884	)		(20,127	)
Proceeds from maturities of securities held to maturity		328			2,301
Proceeds from maturities of certificates of deposit in financial institutions		735			—
Purchase of certificates of deposit in financial institutions		(1,120	)		(295	)
Net change in loans		(82,347	)		(5,646	)
Proceeds from sale of other real estate owned		446			393
Purchases of premises and equipment		(3,101	)		(4,828	)
Purchases of bank owned life insurance and annuity assets		(4,583	)		—
Net cash (used in) investing activities		(92,182	)		(14,057	)

Financing activities:
Change in deposits		123,536			10,622
Proceeds from common stock through dividend reinvestment		—			1,058
Cash dividends		(3,016	)		(2,996	)
Repayment of Federal Home Loan Bank borrowings		(3,994	)		(3,017	)
Change in other long-term borrowings		(406	)		(1,899	)
Change in other short-term borrowings		(270	)		—
Net cash provided by financing activities		115,850			3,768

Change in cash and cash equivalents		31,198			(718	)
Cash and cash equivalents at beginning of period		52,356			71,180
Cash and cash equivalents at end of period	$	83,554		$	70,462

Supplemental disclosure:
Cash paid for interest	$	5,117		$	4,791
Cash paid for income taxes		1,950			890
Transfers from loans to other real estate owned		86			112
Initial recognition of operating lease right-of-use asset		—			1,280
Operating lease liability arising from obtaining right-of-use asset		—			1,280

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., a consumer finance company (“Loan Central”), Ohio Valley Financial Services Agency, LLC, an insurance agency, and OVBC Captive, Inc., a limited purpose property and casualty insurance company (the “Captive”). The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC, an Ohio limited liability company (“Ohio Valley REO”), 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, 2020, 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, 2020 are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2020. 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, 2019 contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.

The consolidated financial statements for 2019 have been reclassified to conform to the presentation for 2020. These reclassifications had no effect on net income or shareholders’ equity.

CURRENT EVENTS: In March 2020, the World Health Organization declared the outbreak of the coronavirus (“COVID-19”) as a global pandemic. COVID-19 has continued to negatively impact the global economy, disrupt global supply chains, create significant volatility, disrupt financial markets, and increase unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies has impacted, and may continue to impact, many of the Company’s customers.

The potential financial impact of COVID-19 is unknown at this time and depends largely on the actions taken by governmental authorities and other third parties. In addition, COVID-19 may adversely impact several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could result in a material adverse effect on our business operations, asset valuations, liquidity, financial condition, and results of operations. Effects may include:

●

Increased provision for loan losses. Continued uncertainty regarding the severity and duration of COVID-19 and related economic effects will continue to affect the accounting for loan losses. It also is possible that asset quality could worsen, and that loan charge-offs could increase. The Company is actively participating in the Paycheck Protection Program (“PPP”) by providing loans to small businesses negatively impacted by COVID-19. PPP loans are fully guaranteed by the U.S. government, and if that should change, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses charged to earnings.

●	Valuation and fair value measurement challenges. Material adverse impacts of COVID-19 may result in valuation impairments on the Company’s securities, impaired loans, goodwill, other real estate owned, and interest rate swap agreements.

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 4,787,446 and 4,773,258 for the three months ended September 30, 2020 and 2019, respectively. The weighted average common shares outstanding were 4,787,446 and 4,761,954 for the nine months ended September 30, 2020 and 2019, 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”): In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of 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. 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. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

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

On an as-needed basis, the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs 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, 2020 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		—	$	15,506			—
Agency mortgage-backed securities, residential		—		94,843			—
Interest rate swap derivatives		—		1,096			—

Liabilities:
Interest rate swap derivatives		—		(1,096	)		—

	Fair Value Measurements at December 31, 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		—		88,582			—
Interest rate swap derivatives		—		465			—

Liabilities:
Interest rate swap derivatives		—		(465	)		—

There were no transfers between Level 1 and Level 2 during 2020 or 2019.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Assets and Liabilities Measured on a Nonrecurring Basis

Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2020 and December 31, 2019 are summarized below:

Fair Value Measurements at September 30, 2020 Using

Quoted Prices in Active

Markets for Identical Assets

(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

Assets:

Impaired loans:

Commercial real estate:

Nonowner-occupied

—

199

—

	Fair Value Measurements at December 31, 2019 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial real estate:
Nonowner-occupied		—		—		$	1,644
Commercial and Industrial		—		—			4,559

At September 30, 2020, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $242, with a corresponding valuation allowance of $43, resulting in an increase of $43 in provision expense during the three and nine months ended September 30, 2020, with no corresponding charge-offs recognized. This is compared to no provision expense during the three and nine months ended September 30, 2019. At December 31, 2019, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $7,010, with a corresponding valuation allowance of $807, resulting in an increase of $807 in provision expense during the year ended December 31, 2019, with no corresponding charge-offs recognized.

There was no other real estate owned that was measured at fair value less costs to sell at September 30, 2020 and December 31, 2019. There were no corresponding write downs during the three and nine months ended September 30, 2020 and 2019.

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, 2019:

December 31, 2019

Fair

Value

Valuation

Technique(s)

Unobservable

Input(s)

Range

(Weighted Average)

Impaired loans:

Commercial real estate:

Owner-occupied

1,644

Sales approach

Adjustment to comparables

0% to 20%

9.7

Commercial and industrial

4,559

Sales approach

Adjustment to comparables

0% to 61%

10.3

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The carrying amounts and estimated fair values of financial instruments at September 30, 2020 and December 31, 2019 are as follows:

	Carrying		Fair Value Measurements at September 30, 2020 Using
	Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	83,554	$	83,554	$	—	$	—	$	83,554
Certificates of deposit in financial institutions		2,745		—		2,745		—		2,745
Securities available for sale		110,349		—		110,349		—		110,349
Securities held to maturity		11,674		—		3,974		8,048		12,022
Loans, net		845,308		—		199		841,318		841,517
Interest rate swap derivatives		1,096		—		1,096		—		1,096
Accrued interest receivable		3,779		—		370		3,409		3,779

Financial liabilities:
Deposits		944,984		270,086		677,187		—		947,273
Other borrowed funds		29,321		—		31,610		—		31,610
Subordinated debentures		8,500		—		5,556		—		5,556
Interest rate swap derivatives		1,096		—		1,096		—		1,096
Accrued interest payable		1,349		1		1,348		—		1,349

	Carrying		Fair Value Measurements at December 31, 2019 Using:
	Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	52,356	$	52,356	$	—	$	—	$	52,356
Certificates of deposit in financial institutions		2,360		—		2,360		—		2,360
Securities available for sale		105,318		—		105,318		—		105,318
Securities held to maturity		12,033		—		6,446		5,958		12,404
Loans, net		766,502		—		—		771,285		771,285
Interest rate swap derivatives		465		—		465		—		465
Accrued interest receivable		2,564		—		315		2,249		2,564

Financial liabilities:
Deposits		821,471		222,607		599,937		—		822,544
Other borrowed funds		33,991		—		34,345		—		34,345
Subordinated debentures		8,500		—		6,275		—		6,275
Interest rate swap derivatives		465		—		465		—		465
Accrued interest payable		1,589		3		1,586		—		1,589

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, 2020 and December 31, 2019, 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, 2020
U.S. Government sponsored entity securities	$	15,111	$	395	$	—		$	15,506
Agency mortgage-backed securities, residential		91,815		3,032		(4	)		94,843
Total securities	$	106,926	$	3,427	$	(4	)	$	110,349

December 31, 2019
U.S. Government sponsored entity securities	$	16,579	$	163	$	(6	)	$	16,736
Agency mortgage-backed securities, residential		88,071		807		(296	)		88,582
Total securities	$	104,650	$	970	$	(302	)	$	105,318

Securities Held to Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Estimated Fair Value
September 30, 2020
Obligations of states and political subdivisions	$	11,672	$	348	$	—		$	12,020
Agency mortgage-backed securities, residential		2		—		—			2
Total securities	$	11,674	$	348	$	—		$	12,022

December 31, 2019
Obligations of states and political subdivisions	$	12,031	$	372	$	(1	)	$	12,402
Agency mortgage-backed securities, residential		2		—		—			2
Total securities	$	12,033	$	372	$	(1	)	$	12,404

The amortized cost and estimated fair value of debt securities at September 30, 2020, 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	$	6,895	$	6,938	$	1,817	$	2,005
Due in over one to five years		8,216		8,568		5,646		5,658
Due in over five to ten years		—		—		4,209		4,357
Agency mortgage-backed securities, residential		91,815		94,843		2		2
Total debt securities	$	106,926	$	110,349	$	11,674	$	12,022

NOTE 3 – SECURITIES (Continued)

The following table summarizes securities with unrealized losses at September 30, 2020 and December 31, 2019, aggregated by major security type and length of time in a continuous unrealized loss position:

September 30, 2020	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
Agency mortgage-backed securities,
residential	$	10,102	$	(4	)	$	—	$	—	$	10,102	$	(4	)
Total available for sale	$	10,102	$	(4	)	$	—	$	—	$	10,102	$	(4	)

There were no securities held to maturity with unrealized losses at September 30, 2020.

December 31, 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	$	—	$	—		$	1,999	$	(6	)	$	1,999	$	(6	)
Agency mortgage-backed securities, residential		15,041		(84	)		21,344		(212	)		36,385		(296	)
Total available for sale	$	15,041	$	(84	)	$	23,343	$	(218	)	$	38,384	$	(302	)

	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	)

There were no sales of investment securities during the three and nine months ended September 30, 2020 or 2019. 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, 2020, 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, 2020 and December 31, 2019 represents an other-than-temporary impairment.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:

	September 30, 2020			December 31, 2019

Residential real estate	$	313,090		$	310,253
Commercial real estate:
Owner-occupied		52,214			55,825
Nonowner-occupied		161,934			131,398
Construction		35,247			34,913
Commercial and industrial		158,833			100,023
Consumer:
Automobile		56,370			63,770
Home equity		19,531			22,882
Other		55,819			53,710
		853,038			772,774
Less: Allowance for loan losses		(7,730	)		(6,272	)

Loans, net	$	845,308		$	766,502

Commercial and industrial loans include $35,114 of loans originated under the PPP at September 30, 2020.

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2020 and 2019:

September 30, 2020	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	2,024		$	2,700		$	1,649		$	1,608		$	7,981
Provision for loan losses		(275	)		(98	)		230			141			(2	)
Loans charged off		(90	)		—			(96	)		(398	)		(584	)
Recoveries		110			15			44			166			335
Total ending allowance balance	$	1,769		$	2,617		$	1,827		$	1,517		$	7,730

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

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2020 and 2019:

September 30, 2020	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,250		$	1,928		$	1,447		$	1,647		$	6,272
Provision for loan losses		715			1,131			505			1,100			3,451
Loans charged-off		(340	)		(516	)		(185	)		(1,677	)		(2,718	)
Recoveries		144			74			60			447			725
Total ending allowance balance	$	1,769		$	2,617		$	1,827		$	1,517		$	7,730

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

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, 2020 and December 31, 2019:

September 30, 2020	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	$	—	$	43	$	—	$	—	$	43
Collectively evaluated for impairment		1,769		2,574		1,827		1,517		7,687
Total ending allowance balance	$	1,769	$	2,617	$	1,827	$	1,517	$	7,730

Loans:
Loans individually evaluated for impairment	$	417	$	4,130	$	2,536	$	485	$	7,568
Loans collectively evaluated for impairment		312,673		245,265		156,297		131,235		845,470
Total ending loans balance	$	313,090	$	249,395	$	158,833	$	131,720	$	853,038

December 31, 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	$	—	$	385	$	303	$	119	$	807
Collectively evaluated for impairment		1,250		1,543		1,144		1,528		5,465
Total ending allowance balance	$	1,250	$	1,928	$	1,447	$	1,647	$	6,272

Loans:
Loans individually evaluated for impairment	$	438	$	11,300	$	4,910	$	487	$	17,135
Loans collectively evaluated for impairment		309,815		210,836		95,113		139,875		755,639
Total ending loans balance	$	310,253	$	222,136	$	100,023	$	140,362	$	772,774

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 as of September 30, 2020 and December 31, 2019:

September 30, 2020	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial real estate:
Nonowner-occupied	$	242	$	242	$	43
With no related allowance recorded:
Residential real estate		421		417		—
Commercial real estate:
Owner-occupied		3,157		3,157		—
Nonowner-occupied		731		731		—
Commercial and industrial		2,536		2,536		—
Consumer:
Home equity		485		485		—
Total	$	7,572	$	7,568	$	43

December 31, 2019	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial real estate:
Owner-occupied	$	2,030	$	2,030	$	385
Commercial and industrial		4,861		4,861		303
Consumer:
Automobile		8		8		8
Other		111		111		111
With no related allowance recorded:
Residential real estate		438		438		—
Commercial real estate:
Owner-occupied		1,778		1,778		—
Nonowner-occupied		7,492		7,492		—
Commercial and industrial		49		49		—
Consumer:
Home equity		368		368		—
Total	$	17,135	$	17,135	$	807

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, 2020 and 2019:

	Three months ended September 30, 2020						Nine months ended September 30, 2020
	Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized		Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial real estate:
Nonowner-occupied	$	242	$	—	$	—	$	242	$	—	$	—
With no related allowance recorded:
Residential real estate		420		7		7		426		15		15
Commercial real estate:
Owner-occupied		3,161		23		23		2,957		124		124
Nonowner-occupied		753		15		15		772		39		39
Commercial and industrial		2,807		20		20		3,543		149		149
Consumer:
Home equity		444		3		3		415		12		12
Total	$	7,827	$	68	$	68	$	8,355	$	339	$	339

	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
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	$	324	$	324	$	16,058	$	924	$	924

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, 2020, there was $97 in other real estate owned for residential real estate properties, as compared to $68 at December 31, 2019. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $684 and $1,780 as of September 30, 2020 and December 31, 2019, 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, 2020 and December 31, 2019:

September 30, 2020	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	58	$	4,648
Commercial real estate:
Owner-occupied		—		208
Nonowner-occupied		—		597
Construction		—		167
Commercial and industrial		30		150
Consumer:
Automobile		56		155
Home equity		—		211
Other		46		31
Total	$	190	$	6,167

December 31, 2019	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	255	$	6,119
Commercial real estate:
Owner-occupied		—		863
Nonowner-occupied		—		804
Construction		—		229
Commercial and industrial		—		590
Consumer:
Automobile		239		61
Home equity		—		392
Other		395		91
Total	$	889	$	9,149

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, 2020 and December 31, 2019:

September 30, 2020	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	$	2,515	$	1,134	$	1,337	$	4,986	$	308,104	$	313,090
Commercial real estate:
Owner-occupied		2,814		923		195		3,932		48,282		52,214
Nonowner-occupied		157		—		597		754		161,180		161,934
Construction		161		—		—		161		35,086		35,247
Commercial and industrial		104		21		180		305		158,528		158,833
Consumer:
Automobile		705		133		183		1,021		55,349		56,370
Home equity		145		84		112		341		19,190		19,531
Other		365		226		76		667		55,152		55,819
Total	$	6,966	$	2,521	$	2,680	$	12,167	$	840,871	$	853,038

December 31, 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	$	4,015	$	1,314	$	1,782	$	7,111	$	303,142	$	310,253
Commercial real estate:
Owner-occupied		383		59		144		586		55,239		55,825
Nonowner-occupied		12		—		697		709		130,689		131,398
Construction		186		19		49		254		34,659		34,913
Commercial and industrial		1,320		312		241		1,873		98,150		100,023
Consumer:
Automobile		986		329		246		1,561		62,209		63,770
Home equity		106		18		279		403		22,479		22,882
Other		559		139		443		1,141		52,569		53,710
Total	$	7,567	$	2,190	$	3,881	$	13,638	$	759,136	$	772,774

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 TDRs 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 TDRs 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, 2020 and December 31, 2019:

September 30, 2020	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
Residential real estate:
Interest only payments	$	203	$	—	$	203
Commercial real estate:
Owner-occupied
Interest only payments		—		—		—
Reduction of principal and interest payments		1,494		—		1,494
Maturity extension at lower stated rate than market rate		354		—		354
Credit extension at lower stated rate than market rate		386		—		386
Nonowner-occupied
Credit extension at lower stated rate than market rate		391		—		391
Commercial and industrial:
Interest only payments		2,536		—		2,536

Total TDRs	$	5,364	$	—	$	5,364

December 31, 2019	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
Residential real estate:
Interest only payments	$	209	$	—	$	209
Commercial real estate:
Owner-occupied
Interest only payments		882		—		882
Reduction of principal and interest payments		1,521		—		1,521
Maturity extension at lower stated rate than market rate		393		—		393
Credit extension at lower stated rate than market rate		393		—		393
Nonowner-occupied
Credit extension at lower stated rate than market rate		395		—		395
Commercial and industrial:
Interest only payments		4,574		—		4,574
Reduction of principal and interest payments		185		—		185

Total TDRs	$	8,552	$	—	$	8,552

At September 30, 2020, the balance in TDR loans decreased $3,188, or 37.3%, from year-end 2019. The Company had no specific allocations in reserves to customers whose loan terms have been modified in TDRs at September 30, 2020, as compared to $227 in reserves at December 31, 2019. At September 30, 2020, the Company had $2,964 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs, as compared to $941 at December 31, 2019.

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

There were no TDR loan modifications that occurred during the three and nine months ended September 30, 2020. Furthermore, there were no TDR loan modifications that occurred during the three months ended September 30, 2019. 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:

			TDRs Performing to Modified Terms				TDRs 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 TDRs		2	$	574	$	574	$	—	$	—

The TDRs 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 TDRs that, during the three and nine months ended September 30, 2020 and 2019, 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.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and provided guidance on the modification of loans as a result of COVID-19, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of September 30, 2020, the Company had modified 745 loans related to COVID-19 with an aggregate loan balance of $151,595. As of September 30, 2020, the Company had 231 modified loans remaining that were related to COVID-19 with an aggregate loan balance of $38,926 that were not reported as TDRs in the tables presented above.

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 TDR 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 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, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of commercial loans by class of loans was as follows:

September 30, 2020	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	46,934	$	682	$	4,598	$	52,214
Nonowner-occupied		154,757		6,031		1,146		161,934
Construction		35,247		—		—		35,247
Commercial and industrial		154,048		1,773		3,012		158,833
Total	$	390,986	$	8,486	$	8,756	$	408,228

December 31, 2019	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	49,486	$	2,889	$	3,450	$	55,825
Nonowner-occupied		123,847		—		7,551		131,398
Construction		34,864		—		49		34,913
Commercial and industrial		89,749		298		9,976		100,023
Total	$	297,946	$	3,187	$	21,026	$	322,159

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, 2020 and December 31, 2019:

September 30, 2020	Consumer						Residential
	Automobile		Home Equity		Other		Real Estate		Total

Performing	$	56,159	$	19,320	$	55,742	$	308,384	$	439,605
Nonperforming		211		211		77		4,706		5,205
Total	$	56,370	$	19,531	$	55,819	$	313,090	$	444,810

December 31, 2019	Consumer						Residential
	Automobile		Home Equity		Other		Real Estate		Total

Performing	$	63,470	$	22,490	$	53,224	$	303,879	$	443,063
Nonperforming		300		392		486		6,374		7,552
Total	$	63,770	$	22,882	$	53,710	$	310,253	$	450,615

The Company 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 4.33% of total loans were unsecured at September 30, 2020, down from 5.00% at December 31, 2019.

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, 2020, the contract amounts of these instruments totaled approximately $86,146, compared to $75,178 at December 31, 2019. 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, 2020 and December 31, 2019 are comprised of advances from the Federal Home Loan Bank (“FHLB”) of Cincinnati and promissory notes.

	FHLB Borrowings		Promissory Notes		Totals

September 30, 2020	$	25,763	$	3,558	$	29,321
December 31, 2019	$	29,758	$	4,233	$	33,991

Pursuant to collateral agreements with the FHLB, advances were secured by $305,131 in qualifying mortgage loans, $79,447 in commercial loans and $5,365 in FHLB stock at September 30, 2020. Fixed-rate FHLB advances of $25,763 mature through 2042 and have interest rates ranging from 1.53% to 3.31% and a year-to-date weighted average cost of 2.40%. There were no variable-rate FHLB borrowings at September 30, 2020.

At September 30, 2020, the Company had a cash management line of credit enabling it to borrow up to $100,000 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 $100,000 available on this line of credit at September 30, 2020.

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 $203,193 at September 30, 2020. Of this maximum borrowing capacity, the Company had $109,189 available to use as additional borrowings, of which $100,000 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 18, 2021, and have fixed rates ranging from 2.00% to 2.85% and a year-to-date weighted average cost of 2.31% at September 30, 2020, as compared to 2.73% at December 31, 2019. There were seven promissory notes payable by Ohio Valley to related parties totaling $3,558 at September 30, 2020, and December 31, 2019. There were no promissory notes payable to other banks at September 30, 2020, as compared to $405 at December 31, 2019.

Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $68,240 at September 30, 2020 and $56,500 at December 31, 2019.

Scheduled principal payments as of September 30, 2020:

	FHLB Borrowings		Promissory Notes		Totals

2020	$	858	$	1,998	$	2,856
2021		2,888		1,560		4,448
2022		2,727		—		2,727
2023		2,588		—		2,588
2024		2,214		—		2,214
Thereafter		14,488		—		14,488
	$	25,763	$	3,558	$	29,321

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 94.0% and 93.9% of total consolidated revenues for the quarters end September 30, 2020 and 2019, 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, 2020
	Banking		Consumer Finance			Total Company
Net interest income	$	9,562	$	520		$	10,082
Provision expense		—		(2	)		(2	)
Noninterest income		2,385		49			2,434
Noninterest expense		9,295		596			9,891
Tax expense		339		(6	)		333
Net income		2,313		(19	)		2,294
Assets		1,126,202		11,736			1,137,938

	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

	Nine Months Ended September 30, 2020
	Banking		Consumer Finance		Total Company
Net interest income	$	28,350	$	1,531	$	29,881
Provision expense		3,445		6		3,451
Noninterest income		8,073		1,052		9,125
Noninterest expense		27,110		1,902		29,012
Tax expense		843		141		984
Net income		5,025		534		5,559
Assets		1,126,202		11,736		1,137,938

	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

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 12 months to 17 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, 2020		As of December 31, 2019
Operating leases:
Operating lease right-of-use assets	$	918	$	1,053
Operating lease liabilities		918		1,053

The components of lease cost were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Operating lease cost		$	32		$	70		$	127		$	216
Short-term lease expense			7			14			23			45

Future undiscounted lease payments for operating leases with initial terms of one year or more as of September 30, 2020 are as follows:

	Operating Leases
2020 (remaining)	$	40
2021		157
2022		157
2023		116
2024		95
Thereafter		546
Total lease payments		1,111
Less: Imputed Interest		(193	)
Total operating leases	$	918

Other information was as follows:

	As of September 30, 2020			As of December 31, 2019
Weighted-average remaining lease term for operating leases	9.8 years			10.6 years
Weighted-average discount rate for operating leases		2.78	%		2.76	%

ITEM 2.

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

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

Forward Looking Statements

Certain statements contained in this report and other publicly available documents incorporated herein by reference constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, 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, particularly with regard to developments related to COVID-19, and which could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to: the effects of COVID-19 on our business, operations, customers and capital position; higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition; the impact of COVID-19 on local, national and global economic conditions; unexpected changes in interest rates or disruptions in the mortgage market related to COVID-19 or responses to the health crisis; the effects of various governmental responses to COVID-19; political uncertainty caused by, among other things, political parties, tensions surrounding the current socioeconomic landscape, and the 2020 U.S. Presidential election; 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 such factors 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 II of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. 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

BUSINESS 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 January 2020, the Bank began offering Tax Refund Advance Loans (“TALs”) to Loan Central tax customers. A TAL represents a short-term loan offered by the Bank to tax preparation customers of Loan Central. Previously, Loan Central offered and originated tax refund anticipation loans that represented a large composition of its annual earnings. However, new Ohio laws that became effective in April 2019 placed numerous restrictions on short-term and small loans extended by certain non-bank lenders in Ohio. As a result, Loan Central is no longer able to directly offer the service to its tax preparation customers, but it is able to do so through the Bank. After Loan Central prepares a customer’s tax return, the customer is offered the opportunity to have immediate access to a portion of the anticipated tax refund by entering into a TAL with the Bank. As part of the process, the tax customer completes a loan application and authorizes the expected tax refund to be deposited with the Bank once it is issued by the IRS. Once the Bank receives the tax refund, the refund is used to repay the TAL and Loan Central’s tax preparation fees, then the remainder of the refund is remitted to Loan Central’s tax customer.

IMPACT of COVID-19: COVID-19 has continued to cause significant disruption in the United States and international economies and financial markets. The primary markets served by the Company in southeastern Ohio and western West Virginia have been significantly impacted by COVID-19, which has changed the way we live and work. The actions taken by the Governors of the States of Ohio and West Virginia beginning in March of 2020 were imposed to mitigate the spread and lessen the public health impact of COVID-19. During this time, the Bank’s primary channels of serving our customers have primarily consisted of drive-thru, mobile, and online banking services and appointment-only lobby services. Beginning in September 2020, the Bank re-opened lobby services to customers within all of our banking centers. In doing so, the Bank has followed all state mandates to provide a safe environment for all of our customers. While the Bank is excited to be able to fully open its doors to its customers, we understand the accommodations will likely continue to have a negative impact on the Company’s results of operations for the duration of the pandemic, and, depending on how quickly the businesses of our customers rebound after the same, could lead to an increase in nonperforming assets. The Company has also continued to support its clients who have experienced financial hardship due to COVID-19 through participation in the PPP, assistance with expedited deposits of CARES Act stimulus payments, and loan modifications, as needed.

FINANCIAL RESULTS OVERVIEW: Net income totaled $2,294 during the third quarter of 2020, an increase of $157, or 7.3%, compared to $2,137 during the third quarter of 2019. Earnings per share for the third quarter of 2020 finished at $.48 per share, compared to $.45 per share during the third quarter of 2019. The Company’s net income during the nine months ended September 30, 2020 totaled $5,559, a decrease of $850, or 13.3%, compared to $6,409 during the nine months ended September 30, 2019. Earnings per share during the first nine months of 2020 finished at $1.16 per share, compared to $1.35 per share during the first nine months of 2019. Quarterly earnings improved largely due to lower provision expense and higher noninterest revenue being partially offset by a decrease in net interest income and an increase in noninterest expense. The decline in year-to-date earnings continues to be impacted by a decrease in interest and fee loan revenue and higher provision expense, being partially offset by higher noninterest revenue and reduced noninterest expenses.

The negative impact of lower net earnings during the first nine months of 2020 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets, which decreased to 0.69% at September 30, 2020, compared to 0.83% at September 30, 2019. The Company’s net income to average equity ratio, or return on equity, also decreased to 5.70% at September 30, 2020, compared to 7.07% at September 30, 2019.

During the three months ended September 30, 2020, net interest income decreased $544, or 5.1%, from the same period in 2019. During the nine months ended September 30, 2020, net interest income decreased $2,785, or 8.5%, from the same period in 2019. The decreases were mostly attributable to continued net interest margin compression in relation to decreases in market rates that contributed to lower earning asset yields during the first nine months of 2020. During the second half of 2019, the Federal Reserve reduced interest rates by 75 basis points, followed by another reduction of 150 basis points in March 2020 due to concerns about the impact of COVID-19 on the economy. Although the effects of lower market rates have reduced earning asset yields, the effects have not yet fully impacted the Company’s interest-bearing deposit costs. The Company’s interest rates on time deposits have repriced downward, which will continue to have an impact of lowering interest expense when new time deposits are issued going forward. Furthermore, certain interest-bearing deposits were already at or near their interest rate floors, which also limited the Company’s ability to reduce deposit costs during the first nine months of 2020. Due to this lagging effect of deposit cost reduction combined with a more rate-sensitive earning asset portfolio, the Company’s net interest margin decreased 53 basis points during both the three and nine months ended September 30, 2020, as compared to the same periods in 2019. Net interest income was also affected by lower loan fees impacted by the change in the Company’s business model for Loan Central’s assessment of fees for TALs as described above. This resulted in a $727 decrease in loan fees during the first nine months of 2020, as compared to the same period in 2019. Loan Central’s tax preparation fee income from TAL offerings during the first nine months of 2020 was recorded to noninterest income, as discussed below. Since the tax refund business is seasonal, there was minimal impact from fee revenue during the third quarter of 2020. Partially offsetting the negative impact from lower asset yields and fee revenue was growth in average earning assets, up $78,298 during the third quarter of 2020 and $33,172 during the first nine months of 2020, as compared to the same periods in 2019, respectively. The growth came largely from the impact of $35,114 in PPP loans that were originated mostly during the end of the second quarter of 2020, contributing to higher commercial and industrial loans at September 30, 2020. Average earning asset growth also came from the Company’s interest-bearing deposit account at the Federal Reserve Bank, driven by heightened deposit balances received during the second quarter of 2020.

During the three months ended September 30, 2020, the Company experienced negative provision for loan loss, which contributed to a $446 decrease in provision expense when compared to the same period in 2019. The quarterly improvement came primarily from lower net charge-offs partially offset by the changes in general allocations during the three months ended September 30, 2020, as compared to the same period in 2019. During the nine months ended September 30, 2020, Company’s provision expense increased $1,436 compared to the same period in 2019. The increase in provision expense during the first nine months of 2020 was largely impacted by the economic effects of COVID-19, which resulted in a higher general allocation of the allowance for loan losses during the first quarter of 2020. Based on declining economic conditions and increasing unemployment levels, management increased general reserves by $2,287 to reflect higher anticipated losses due to the expected financial impact of COVID-19 on its customers. The Company will continue to closely monitor COVID-19 and make the appropriate adjustments within the allowance for loan losses in response to the pandemic as the situation evolves.

Total noninterest income during the three and nine months ended September 30, 2020 increased $327 and $3,169 compared to the same respective periods in 2019. The year-over-year improvement in noninterest revenue came primarily from proceeds of $2,000 received in a litigation settlement with a third-party, while further growth also came from tax preparation fee income, which was up $643 over the prior year. Tax preparation fee income was the result of the Company changing its business model in 2020 from assessing TAL fees to now assessing tax preparation fees in response to a state law enacted in 2019. Noninterest revenue was also impacted by surging growth in mortgage banking income, which was up $365 and $739 during the three and nine months ended September 30, 2020, as compared to the same periods in 2019. Mortgage banking income has grown in response to the record low mortgage rates that have generated a significant volume of mortgages being refinanced in 2020. Partially offsetting these factors was lower service charges on deposit accounts, which decreased $130 and $324 during the three and nine months ended September 30, 2020, as compared to the same periods in 2019, respectively. The decline came mostly from overdraft fees.

Although noninterest expense increased $153 during the third quarter of 2020, the Company still benefited from having lower noninterest expense for the year, which was down $85 during the nine months ended September 30, 2020, as compared to the same period in 2019. The quarterly increase was mostly impacted by salaries and employee benefit expense, which increased $321 over the third quarter of 2019. The increase was primarily related to the expense associated with the severance package payout of an employee, as well as costs associated with select non-qualified benefit plans. The expense required to maintain the benefit plan accruals continues to increase in association with the decrease in market interest rates. Salaries and employee benefit expense for the year was up $139 over the nine months ended September 30, 2020, compared to the same period in 2019. This increase was offset by expense savings associated with a lower number of employees from the sale of two branches in December 2019 and the voluntary severance program that was completed during the fourth quarter of 2019. These expense savings also more than offset the expense increase associated with annual merit increases in 2020. Changes in noninterest expense were impacted by professional fees, which decreased $73 and $363 during the three and nine months ended September 30, 2020, as compared to the same periods in 2019. This expense savings is attributable to lower audit expense and litigation-related legal fees. Further impacting noninterest costs in 2020 was data processing expense, which was stable during the third quarter of 2020 and up $212 over 2019. The increase was primarily from costs associated with the platform used to facilitate PPP loans, credit card processing and website maintenance costs.

The Company’s provision for income taxes decreased $81 and $117 during the three and nine months ended September 30, 2020, as compared to the same periods in 2019. This is largely due to the changes in taxable income affected by the factors mentioned above.

At September 30, 2020, total assets were $1,137,938, an increase of $124,666 from total assets of $1,013,272 at year-end 2019. Higher assets were impacted mostly by increases in loans, cash and cash equivalents, and investment securities, which were collectively up $116,134, or 12.3%, from year-end 2019. The Company’s loan portfolio increased $80,264, finishing at $853,038 at September 30, 2020, compared to $772,774 at year-end 2019. The commercial loan segment experienced a 26.7% increase from year-end 2019, which was partially related to the origination of $35,114 in PPP loans. The residential real estate segment grew 0.9% from year-end 2019, while the consumer loan segment decreased 6.2% from year-end 2019. The increase in both cash and cash equivalents and securities was related to the investment of the heightened deposit balances received primarily during the second quarter of 2020. Further asset increases came from bank owned life insurance (“BOLI”) and annuity assets, which increased $5,200 from year-end 2019, impacted by new BOLI plan purchases in the second quarter of 2020. Premises and equipment also increased $2,103 from year-end 2019, impacted by the construction of the Company’s new Second and State Street facility in Gallipolis, Ohio. The facility officially opened in the first quarter of 2020 and consists mostly of executive offices and areas for loan processing.

Total liabilities were $1,005,040 at September 30, 2020, up $119,947 from year-end 2019. This increase is mostly attributable to higher deposit balances, which increased $123,513 from year-end 2019, which were largely impacted by customers receiving stimulus funds. Partially offsetting the growth in deposits were reduced borrowings of $4,670 from the continued principal repayments of long-term advances with the FHLB.

At September 30, 2020, total shareholders' equity was $132,898, up $4,719 since December 31, 2019. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums.

Comparison of Financial Condition
at September 30, 2020 and December 31, 2019

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at September 30, 2020, compared to December 31, 2019. 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, 2020, cash and cash equivalents were $83,554, an increase of $31,198 from $52,356 at December 31, 2019. The increase in cash and cash equivalents came mostly from higher interest-bearing deposits on hand with correspondent banks. Over 80% 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. The interest rate paid on both the required and excess reserve balances of the Federal Reserve Bank account is based on the targeted federal funds rate established by the Federal Open Market Committee. During the second half of 2019, the rate associated with the Company’s Federal Reserve Bank clearing account decreased 75 basis points to 1.75% as a result of the Federal Reserve’s action to decrease short-term market rates. The Federal Reserve again reduced short-term rates by 150 basis points in March 2020 due to concerns about the impact of COVID-19 on the economy, resulting in a target federal funds rate range of 0% to 0.25%. Although interest-bearing deposits in the Federal Reserve Bank are the Company's lowest-yielding interest-earning asset, the investment rate 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.

The Company’s focus during periods of heightened liquidity 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.

As previously mentioned, the Bank settled a lawsuit filed against a third-party tax refund provider for breach of contract in March 2020. In addition, the Bank entered into a new agreement with the third-party to process future electronic refund checks and deposits presented for payment on behalf of taxpayers through accounts containing taxpayer refunds. The new agreement provides that the Bank will process refunds for five tax seasons, beginning with the 2021 tax season and continuing through the 2025 tax season. As a result, the Bank anticipates this new tax agreement will materially impact its liquidity levels during the term of the agreement beginning in 2021.

Certificates of deposit

At September 30, 2020, the Company had $2,745 in certificates of deposit owned by the Captive, up from $2,360 at year-end 2019. The deposits on hand at September 30, 2020 consist of twelve certificates with remaining maturity terms ranging from less than 3 months up to 32 months.

Securities

The balance of total securities increased $4,672, or 4.0%, compared to year-end 2019. The Company’s investment securities portfolio is made up mostly of U.S. Government agency (“Agency”) mortgage-backed securities, which increased $6,261, or 7.1%, from year-end 2019 and represented 77.7% of total investments at September 30, 2020. During the first nine months of 2020, the Company invested $25,884 in new Agency mortgage-backed securities, while receiving principal repayments of $21,873. 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 2020 led to a $2,755 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, 2020. 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 grew to $853,038 at September 30, 2020, representing an increase of $80,264, or 10.4%, as compared to $772,774 at December 31, 2019. Loan growth has been largely influenced by PPP loan originations within the commercial and industrial loan segment. Additional growth also came from the commercial and residential real estate portfolios, which were partially offset by decreases in the consumer loan portfolio from year-end 2019.

The majority of the Company’s increase in loans from year-end 2019 came from the commercial and industrial portfolio, which increased $58,810, or 58.8%, from year-end 2019. 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. Furthermore, in response to COVID-19 during the first quarter of 2020, the Company was authorized to originate PPP loans under the CARES Act. PPP loans are guaranteed by the Small Business Administration (“SBA”) and have an interest rate of 1.0%, a two-year loan term to maturity, and principal and interest payments are deferred for six months from the date of disbursement. As long as the small business borrower meets certain criteria on the use of loan proceeds, the entire principal and accrued interest is eligible to be forgiven by the SBA. As of September 30, 2020, the Company had 362 PPP loans outstanding that totaled $35,114.

Additional loan growth came from the commercial real estate loan portfolio, which increased $27,259, or 12.3%, from year-end 2019. The commercial real estate segment comprised the largest portion of the Company’s total commercial loan portfolio at September 30, 2020, at 61.1%. Leading the growth in commercial real estate were increases in nonowner-occupied loan originations, with balances up $30,536, or 23.2%, from year-end 2019, primarily due to continued demand from new customers. While management believes lending opportunities exist in the Company’s markets, future commercial lending activities will depend upon economic and other related conditions, such as general demand for loans in the Company’s primary markets, interest rates offered by the Company, the effects of competitive pressure and normal underwriting considerations. Management will continue to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans.

Further loan growth also came from the Company’s residential real estate loan segment, which increased $2,837, or 0.9%, from year-end 2019. The residential real estate loan segment comprises the largest portion of the Company’s overall loan portfolio at 36.7% and consists primarily of one- to four-family residential mortgages, carrying many of the same customer and industry risks as the commercial loan portfolio. The growth in residential real estate loans came largely from 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. With record low mortgage rates during 2020, real estate refinancings began to significantly increase during the second quarter of 2020. This not only contributed to the rise in warehouse lending volume, but also impacted an increase in volume of long-term fixed-rate mortgages being sold to the secondary market.

Partially offsetting the increases in both the commercial and residential real estate loan portfolios were consumer loan balances, which were down $8,642, or 6.2%, from year-end 2019, finishing at $131,720. This change was primarily impacted by a decline in automobile loan balances from year-end 2019. Automobile loans represent the Company’s largest consumer loan segment at 42.8% of total consumer loans. Automobile loans decreased primarily as a result of COVID-19 and the stay-at-home orders that limited automobile sales within the Company’s market areas. Further limiting the volume of automobile loan originations are heightened incentives being offered from the captive auto finance companies in response to the pandemic.

Allowance for Loan Losses

The Company established a $7,730 allowance for loan losses at September 30, 2020, which represents an increase from the $6,272 allowance at year-end 2019. The allowance was impacted by an increase of $2,222 in general allocations from year-end 2019. As part of the Company’s quarterly analysis of the allowance for loan losses, management will review 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. During the first quarter of 2020, the Company added a new risk factor to the evaluation of the allowance for loan losses pertaining to COVID-19. The risk factor was necessary to account for the changes in economic conditions resulting from increases in unemployment that would produce higher anticipated losses as a result of COVID-19. Given that the economic scenarios had deteriorated significantly since the pandemic was declared in early March, it was determined the credit risk in the loan portfolio had increased, resulting in the need for an additional reserve for credit loss. As a result, the general reserve allocation related to COVID-19 totaled $2,287 at September 30, 2020, which had a corresponding impact to provision expense during the first nine months of 2020. While the Company has yet to experience any significant charge-offs related to COVID-19, the continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to impact the Company’s estimate of its allowance for loan losses and resulting provision expense.

Excluding the risk factors from COVID-19, the Company also experienced increases in general allocations from its historical loan loss factor, which grew from 0.23% at year-end 2019 to 0.25% at September 30, 2020. Increases also came from higher unemployment rates within the Company’s market areas, as well as lower annualized loan recoveries at September 30, 2020 compared to year-end 2019. The impact from these risk factors were offset by a lower classified asset risk factor from year-end 2019, impacted by various commercial loan upgrades as a result of improvements in the financial performance of certain borrowers’ ability to repay their loans. This contributed to lower classified assets from year-end 2019, particularly within the commercial nonowner-occupied and commercial and industrial loan segments. Furthermore, the Company’s delinquency levels decreased from year-end 2019, with nonperforming loans to total loans of 0.75% at September 30, 2020, compared to 1.30% at December 31, 2019, and lower nonperforming assets to total assets of 0.57% at September 30, 2020, compared to 1.04% at year-end 2019. The large increase in PPP loans during the first nine months of 2020 will have minimal to no impact on the general allocations of the allowance for loan losses due to these loans being fully guaranteed by the SBA.

Increases in general allocations were partially offset by a $764 decrease in specific allocations from year-end 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 2019 was primarily related to the loan payoff of one commercial borrower during the first quarter of 2020.

The Company’s allowance for loan losses to total loans ratio finished at 0.91% at September 30, 2020, and 0.81% at year-end 2019. Management believes that the allowance for loan losses at September 30, 2020 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, particularly with respect to COVID-19, could cause further increases in the required allowance for loan losses and require additional provision expense. 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, 2020 increased $123,513, or 15.0%, from year-end 2019. This change in deposits came primarily from interest-bearing deposit balances, which were up by $76,034, or 12.7%, from year-end 2019, while noninterest-bearing deposits increased $47,479, or 21.3%, from year-end 2019. The significant increase in deposits was largely impacted by funds from government stimulus programs such as the PPP and consumer economic impact payments received.

The increase in interest-bearing deposits came mostly from money market balances from year-end 2019, which increased $35,532, or 27.3%, primarily from a shift in consumer preference to more competitive, higher-costing deposit accounts. This increase was partially offset by a decrease in brokered money market balances due to a favorable liquidity position from elevated retail deposits. Growth in interest-bearing deposits also came from higher interest-bearing NOW account balances from year-end 2019, which increased $26,429, or 16.7%. This increase was largely driven by higher municipal NOW product balances, particularly within the Gallia County, Ohio, and Mason County, West Virginia market areas. Savings deposits also increased $15,297, or 15.3%, from year-end 2019, primarily from higher statement savings account balances impacted by the government stimulus proceeds previously mentioned. Partially offsetting the increases in interest-bearing deposits were time deposit balances, which decreased $1,225, or 0.6%, from year-end 2019. The decrease was a result of reduced demand for retail time deposits from year-end 2019 due to the decline in product rate offerings, while wholesale certificates of deposit issuances were relatively stable from year-end 2019.

The increase in noninterest-bearing deposits came mostly from the Company’s business and incentive-based checking account balances from year-end 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 2020, 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 $29,321 at September 30, 2020, a decrease of $4,670, or 13.7%, from year-end 2019. The decrease was related primarily to the principal repayments applied to various FHLB advances during the first nine months of 2020. Particularly, the Company took advantage of its heightened liquidity position in the second quarter of 2020 to apply an additional $1,195 in principal prepayments to various FHLB advances to further reduce interest expense on higher-cost funding sources. 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, 2020 increased $4,719, or 3.7%, to finish at $132,898, as compared to $128,179 at December 31, 2019. Net unrealized gains on available for sale securities increased $2,176 from year-end 2019, as market rate decreases continued during the first nine months of 2020, causing an increase in the fair value of the Company’s investment portfolio.

Comparison of Results of Operations

For the Three and Nine Months Ended

September 30, 2020 and 2019

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, 2020, compared to the same periods in 2019. 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, 2020, net interest income decreased $544, or 5.1%, as compared to the same period in 2019. During the nine months ended September 30, 2020, net interest income decreased $2,785, or 8.5%, as compared to the same period in 2019. The decreases during both periods were mostly attributable to a net interest margin compression in relation to decreases in market rates that contributed to lower earning asset yields during the first nine months of 2020.

Total interest and fee income recognized on the Company’s earning assets decreased $947, or 7.6%, during the third quarter of 2020, and decreased $3,304, or 8.7%, during the first nine months of 2020, as compared to the same periods in 2019. The quarterly and year-to-date decreases were impacted by interest and fees on loans, which decreased $485, or 4.3%, and $2,187, or 6.3%, during the three and nine months ended September 30, 2020, as compared to the same periods in 2019. These results are directly related to the decline in loan yields, which decreased from 5.86% to 5.24% when comparing the third quarters of 2019 to 2020, and decreased from 5.99% to 5.46% when comparing the first nine months of 2019 to 2020, respectively. Loan yields were impacted by interest rate reductions from the Federal Reserve Bank in the second half of 2019 and in March 2020. This trend of decreasing market rates led to lower yields on the Company’s loan portfolio and lower loan interest revenue. Partially offsetting the effects from lower loan yields was average growth in loans. Average loans for the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019, increased $58,428, or 7.5%. Average loans for the first nine months of 2020, compared to the first nine months of 2019, increased $21,874, or 2.8%. The increase in average loans for both the quarterly and year-to-date periods came mostly from the origination of $35,114 in PPP loans primarily during the end of the second quarter of 2020. While PPP loans contributed to higher earning asset balances, they also had a dilutive effect on loan yields as a result of the 1% interest rate associated with each loan. These factors contributed to decreases of $661 and $2,038 in loan interest income during the three and nine months ended September 30, 2020, as compared to the same periods in 2019.

Loan revenue was also impacted by loan fees, which increased $176 during the three months ended September 30, 2020, but decreased $149 during the nine months ended September 30, 2020, as compared to the same periods in 2019. The quarterly increase was largely impacted by $126 in loan fees earned on the origination of government-guaranteed PPP loans. The year-to-date change came mostly from lower fees associated with TALs. As previously mentioned, beginning in 2020, the Company changed its business model for Loan Central’s assessment of fees from assessing TAL fees to now assessing tax preparation fees. This fundamental change in the fee structure was necessary to comply with new Ohio lending regulations. As a result, TAL fees decreased $727 during the first nine months of 2020 from the same period last year, with minimal impact during the third quarters of both 2020 and 2019.

During the three and nine months ended September 30, 2020, interest income from interest-bearing deposits with banks decreased $313, or 94.0%, and $777, or 79.5%, when compared to the same periods in 2019, respectively. These changes in interest revenue come primarily from the Company’s interest-bearing Federal Reserve Bank clearing account. The quarterly and year-to-date decreases in interest income was primarily due to the interest rate tied to this interest-bearing clearing account, which was 0.25% at September 30, 2020, compared to 2.0% at September 30, 2019. The increase in liquidity from the surge in deposit liabilities allowed the Company to maintain higher average balances within the account, which increased $17,823 during the third quarter of 2020, and $10,349 during the first nine months of 2020, as compared to the same periods in 2019, respectively.

Total interest expense incurred on the Company’s interest-bearing liabilities decreased $403, or 21.3%, during the third quarter of 2020, and decreased $519, or 9.6%, during the first nine months of 2020, as compared to the same periods in 2019. Interest expense decreased during both periods despite an increase in average interest-bearing deposits of $49,296 during the third quarter of 2020 and an increase of $25,010 during the first nine months of 2020, as compared to the same periods in 2019, respectively. The converse relationship between increasing average interest-bearing liabilities to lower interest expense is related to the repricing efforts in a lower rate environment which drove down average costs during 2020. The Company also continues to experience a composition shift to a higher-costing money market account that has generated more interest expense during 2020. However, the pace of interest expense savings has been slowed due to a lag in repricing on deposits. Given the Company’s asset-sensitivity, decreases in short-term interest rates have had a negative impact on net interest income in that interest-earning assets have repriced faster than interest-bearing liabilities. This has caused a lagging effect to the impact that decreasing market rates have had on reducing deposit expense, particularly with CDs. As CD rates reprice downward, the Company will benefit from lower interest expense only to the extent that new CDs at lower rates are issued. As CDs continued to rollover into lower rates during the second and third quarters of 2020, along with the rate reductions of other interest-bearing deposit products, the interest expense on deposits decreased $318, or 20.0%, during the three months ended September 30, 2020, as compared to the same period in 2019. This is compared to a $145 decrease in deposit interest during the three months ended June 30, 2020, and a $167 increase in deposit interest during the three months ended March 31, 2020, as compared to the same periods in 2019. As a result, the Company’s total weighted average costs on interest-bearing deposits has decreased by 10 basis points from 0.97% at September 30, 2019 to 0.87% at September 30, 2020.

The Company’s net interest margin is defined as fully tax-equivalent net interest income as a percentage of average earning assets. During 2020, the Company’s third quarter net interest margin finished at 3.88%, compared to 2019’s third quarter net interest margin of 4.41%. The year-to-date net interest margin at September 30, 2020 finished at 4.04%, compared to 4.57% at September 30, 2019. The decrease in margin was largely impacted by the decreasing market rates that contributed to lower earning asset yields during 2020. Interest rates were reduced in the first quarter of 2020 primarily as a result of the growing concern that COVID-19 would have a significant negative impact on the economy. Furthermore, the Company’s ability to reduce deposit expenses in a low rate environment has been limited by a lagging effect in CD rates, along with an increased composition of higher-costing deposits, such as time deposits and money market accounts. 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, 2020, the Company’s provision expense decreased $446, and for the nine months ended September 30, 2020, provision expense increased $1,436, over the same respective periods in 2019. The quarterly improvement came primarily from a decrease of $1,443 in net charge-offs during the three months ended September 30, 2020, as compared to the same period in 2019. This was primarily related to the charge-offs recorded on one commercial and industrial loan relationship in September 2019. The impact of lower net charge-offs was partially offset by the changes in general reserve allocations. During the third quarter of 2020, the Company decreased its general allocation from $7,981 at June 30, 2020 to $7,687 at September 30, 2020. This is compared to a $1,214 general allocation decrease during the same period in 2019. The release of general reserves during the third quarters of 2020 and 2019 were caused by various improvements within the economic risk factor calculation that included: lower criticized and classified assets, lower delinquency levels, and lower unemployment rates. Provision expense during the nine months ended September 30, 2020 increased in large part to the addition of a new risk reserve allocation. As previously discussed, the Company’s general reserves during the first quarter of 2020 were significantly impacted by a $1,942 allocation of the allowance for loan losses as a result of the expected financial impact of COVID-19. The allocation resulted in a corresponding entry to provision expense. Due to growing risk concerns impacted by rising unemployment trends related to COVID-19, this allocation has grown to $2,287 at September 30, 2020. The impact from this new risk factor was partially offset by the release of general reserves associated with lower classified assets.

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, 2020 increased $327, or 15.5%, when compared to the three months ended September 30, 2019. Noninterest income for the nine months ended September 30, 2020 increased $3,169, or 53.2%, when compared to the nine months ended September 30, 2019. The key contributor to the yearly improvement in noninterest revenue was from proceeds received in a litigation settlement with a third-party. During the first quarter of 2020, the Bank entered into a settlement agreement related to the previously disclosed litigation the Bank had filed against a third-party tax software product provider for breach of contract. Under the settlement agreement, the third-party paid a $2,000 settlement payment to the Bank, which was recorded as noninterest income.

Further growth in noninterest revenue for the year came from tax preparation fee income. As previously discussed, the Company changed its business model in 2020 for assessing fees related to TALs. By charging for the tax preparation services, the Company recorded $643 in tax preparation fee income for the first nine months of 2020, which includes $9 in tax preparation fee income recorded during the third quarter of 2020.

Mortgage banking income also contributed to the increase in noninterest revenue. Mortgage banking income is highly influenced by mortgage interest rates and housing market conditions. With mortgage rates at record lows as a result of COVID-19, the consumer demand to refinance long-term, fixed-rate real estate mortgages significantly increased. This led to increased sales of loans to the secondary market, which generated increases of $365 and $739 in mortgage banking income during the three and nine months ended September 30, 2020, when compared to the same periods in 2019.

Partially offsetting growth in noninterest income was less service charge fees recorded in 2020. During the three months ended September 30, 2020, service charges on deposit accounts decreased $130, or 23.5%, while also decreasing $324, or 20.6%, during the first nine months of 2020, as compared to the same periods in 2019. This was largely due to lower overdraft fees impacted by economic stimulus proceeds received by customers, along with growing uncertainties of COVID-19 that has disrupted consumer spending.

The remaining noninterest income categories increased $83, or 5.6%, during the third quarter of 2020, and $111, or 2.7%, during the first nine months of 2020, as compared to the same periods in 2019, respectively. This income growth came mostly from interest rate swap agreements and debit and credit interchange income during both periods, partially offset by losses incurred on the sale of other real estate owned during the first nine months of 2020.

Noninterest Expense

Noninterest expense during the third quarter of 2020 increased $153, or 1.6%, as compared to the same period in 2019. Noninterest expense during the first nine months of 2020 decreased $85, or 0.3%, as compared to the same period in 2019. Contributing most to higher noninterest expense during the quarter were salaries and employee benefits, which increased $321, or 5.7%, during the three months ended September 30, 2020, as compared to the same period in 2019. As previously mentioned, the quarterly increase was primarily related to a severance package payout and higher non-qualified benefit plan costs that have been impacted by lower market rates. These quarter-to-date factors contributed to a year-to-date increase in salaries and employee benefits of $139, or 0.8%, when comparing the nine months ended September 30, 2020 to the same period in 2019. Limiting the cost increase to salaries and employee benefits has been the expense savings associated with a lower number of employees from the sale of two branches in December 2019 and the voluntary severance program that was completed during the fourth quarter of 2019. The Bank’s average full-time equivalent employee base at September 30, 2020 was 243 employees, down from an average full-time equivalent employee base of 265 employees at September 30, 2019. The impact of a lower employee base has more than offset the expense increases associated with annual merit increases in 2020.

Further impacting overhead costs were higher data processing expenses, which decreased $2, or 0.4%, during the third quarter of 2020, but increased $212, or 13.0%, during the first nine months of 2020, as compared to the same periods in 2019. The increase during the year-to-date period was primarily due to a $186 expense associated with the platform used to facilitate PPP loans during the second quarter of 2020. Further expenses also came from the processing of credit cards, as well as website maintenance costs to improve the quality of the Company’s internet-based technology.

Partially offsetting increases in overhead costs were professional fees, which decreased $73, or 12.2%, during the third quarter of 2020, and $363, or 18.5%, during the first nine months of 2020, as compared to the same periods in 2019. These decreases include lower litigation costs associated with the Bank’s lawsuit against the third-party tax software product provider. As previously discussed, a settlement was reached with the third-party during the first quarter of 2020, which contributed to lower legal costs. Furthermore, the number of bankruptcy-related loan cases has decreased significantly due to the effects of COVID-19, which has shut down municipal courts at various times during the pandemic. Additionally, the Company incurred lower audit-related expenses during the quarterly and year-to-date periods ended September 30, 2020. This was related to costs from 2019 associated with the “expected loss” allowance model that the Company was prepared to adopt in 2020. In the fourth quarter of 2019, it was announced this required accounting guidance would be delayed until 2023.

The remaining noninterest expense categories decreased $93, or 3.2%, during the third quarter of 2020, and $73, or 0.8%, during the first nine months of 2020, as compared to the same periods in 2019. These decreases were impacted mostly from expense savings related to lower software, foreclosure, travel and seminar costs.

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 2020 and 2019, the Company’s asset yields were negatively impacted by market rate reductions related to COVID-19, which led to a 5.1% decrease in net interest income. This more than offset the positive effects of a 15.5% improvement in noninterest income less a 1.6% increase in overhead costs for the quarter. As a result, the Company’s efficiency number increased to 78.3% during the quarterly period ended September 30, 2020, as compared to 75.8% during the same period in 2019. Comparing the first nine months of 2020 to the first nine months of 2019, average earning asset yields remained lower due to the reduction in market rates. This, combined with the $727 decrease in TAL fees, caused the Company’s net interest income to decrease by 8.5%. However, this was completely offset by a $3,169 increase in noninterest revenue, which was impacted by $2,000 in income from a litigation settlement and $643 in tax preparation fee income. Furthermore, the severance package offering and the sale of two branch offices in December 2019 has helped to minimize the growth in salaries and employee benefit costs in 2020. As a result, the Company’s efficiency number decreased to 73.8% during the first nine months of September 30, 2020, as compared to 74.7% during the same period in 2019.

Provision for income taxes

The Company’s income tax provision decreased $81, or 19.6%, during the three months ended September 30, 2020, while also decreasing $117, or 10.6%, during the nine months ended September 30, 2020, as compared to the same periods in 2019. The change in tax expense corresponded directly to the change in associated taxable income during 2020 and 2019.

Capital Resources

Federal regulators have classified and defined capital into the following components: (i) Tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (ii) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt, preferred stock and hybrid instruments which do not qualify as Tier 1 capital.

In September 2019, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies). Under the rule, a qualifying community banking organization (“QCBO”) is eligible to opt into the Community Bank Leverage Ratio (“CBLR”) framework in lieu of the Basel III capital requirements if it has less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposure and a leverage ratio greater than 9.0%. The new rule took effect January 1, 2020, and QCBOs were allowed to opt into the new CBLR framework in their call report beginning the first quarter of 2020.

A QCBO opting into the CBLR framework must maintain a CBLR of 9.0%, subject to a two quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period. A QCBO failing to satisfy these requirements must comply with the existing Basel III capital requirements as implemented by the banking regulators in July 2013.

The numerator of the CBLR is Tier 1 capital, as calculated under present rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital.

The Bank has opted into the CBLR, and will therefore not be required to comply with the Basel III capital requirements. As of September 30, 2020, the Bank’s CBLR was 10.70%, and the Company’s CBLR was 11.74%.

Pursuant to the CARES Act, the federal banking regulators in April 2020 issued interim final rules to set the CBLR at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. QCBOs will have until January 1, 2022 before the CBLR requirement will return to 9%.

Cash dividends paid by the Company were $3,016 during the first nine months of 2020. The year-to-date dividends paid totaled $0.63 per share.

Liquidity

Liquidity relates to the Company's ability to meet the cash demands and credit needs of its customers and is provided by the ability to readily convert assets to cash and raise funds in the marketplace. Total cash and cash equivalents, held to maturity securities maturing within one year and available for sale securities, totaling $195,720, represented 17.2% of total assets at September 30, 2020. In addition, the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity demands. At September 30, 2020, the Bank could borrow an additional $109,189 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, 2020, this line had total availability of $58,804. 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 2019 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 TDRs 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. TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs 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 three years for the consumer and real estate portfolio segment and five 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 six years or less with repayment dependent on individual wages and income. The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary. 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 September 30, 2020. 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. 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 were not effective as of September 30, 2020, due to a material weakness described in Management’s Report on Internal Control Over Financial Reporting in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 Form 10-K”).

Changes in Internal Control over Financial Reporting

Based on the assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019, as described in our 2019 Form 10-K, management concluded that Ohio Valley did not maintain effective internal control over financial reporting as of December 31, 2019, due to the effectiveness of the Company’s control over appropriate monitoring of loans through the subsequent events period, including not timely evaluating information received after the fiscal year end that affected the appropriateness of loan grades and impairment classification used in the allowance for loan losses estimate. A material weakness is a deficiency in internal control over financial reporting such that there is a reasonable possibility that a material misstatement would not be prevented or detected in a timely manner. With regard to the material weakness, our remediation efforts began during the quarter ended March 31, 2020. We changed how certain controls are designed, performed and documented. Our credit administration department, in conjunction with an expanded group of the management team, have heightened the monitoring of troubled credits during the subsequent event period up and until the report filing date. This included training around timely identifying and communicating subsequent events and increasing the management staff involved with monitoring the control around subsequent events that may impact the assessment of loan grades or impairment valuations. We must now demonstrate the effectiveness of these changes with an appropriate amount of consistency and for a sufficient period of time to conclude that the control is functioning properly. There were no changes during the quarter ended September 30, 2020 in Ohio Valley’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Ohio Valley’s internal control over financial reporting. We are also continually monitoring and assessing the impact, if any, that COVID-19 could have on the design and operating effectiveness of our internal controls.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors set forth under Part I, Item 1A, “Risk Factors” in the 2019 Form 10-K and Part II, Item 1A, “Risk Factors” in the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2020.

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, 2020.

Ohio Valley did not purchase any of its shares during the three months ended September 30, 2020.

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 Banc Corp. [for SEC reporting compliance only not filed with the Ohio Secretary of State]. Incorporated herein by reference to Exhibit 3(a) of Registrant’s Annual Report on Form 10-K filed March 17, 2008 (File No. 000-20914).

3.2		Code of Regulations of Ohio Valley Banc Corp. Incorporated herein by reference to Exhibit 3(b) of Registrant’s Quarterly Report on Form 10-Q filed August 9, 2010 (File No. 000-20914).

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 Financial Officer): Filed herewith.

101.INS #		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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. #

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) Filed herewith #

# Attached as Exhibit 101 are the following documents formatted in Inline 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 9, 2020	By:	/s/Thomas E. Wiseman
			Thomas E. Wiseman
			Chief Executive Officer

Date:	November 9, 2020	By:	/s/Scott W. Shockey
			Scott W. Shockey
			Senior Vice President and Chief Financial Officer