OHIO VALLEY BANC CORP - Quarter Report: 2022 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, 2022

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

For the transition period from ____________ to ____________

Commission file number 000-20914

OHIO VALLEY BANC CORP.

(Exact name of registrant as specified in its charter)

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

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

(740) 446-2631

(Registrant’s telephone number, including area code)

_____________________

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

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, without par value, of the registrant outstanding as of November 14, 2022 was 4,771,774.

OHIO VALLEY BANC CORP.

Index

		Page Number
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39

PART II.	OTHER INFORMATION

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

Signatures		42

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OHIO VALLEY BANC CORP.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

	September 30, 2022			December 31, 2021

ASSETS
Cash and noninterest-bearing deposits with banks	$	13,587		$	14,111
Interest-bearing deposits with banks		99,524			137,923
Total cash and cash equivalents		113,111			152,034

Certificates of deposit in financial institutions		1,868			2,329
Securities available for sale		184,844			177,000
Securities held to maturity (estimated fair value: 2022 - $8,655; 2021 - $10,450)		9,642			10,294
Restricted investments in bank stocks		5,953			7,265

Total loans		855,913			831,191
Less: Allowance for loan losses		(4,811	)		(6,483	)
Net loans		851,102			824,708

Premises and equipment, net		20,490			20,730
Premises and equipment held for sale, net		598			438
Other real estate owned, net		15			15
Accrued interest receivable		3,053			2,695
Goodwill		7,319			7,319
Other intangible assets, net		35			64
Bank owned life insurance and annuity assets		39,417			37,281
Operating lease right-of-use asset, net		1,170			1,195
Deferred tax assets		7,056			2,217
Other assets		6,801			4,185
Total assets	$	1,252,474		$	1,249,769

LIABILITIES
Noninterest-bearing deposits	$	353,352		$	353,578
Interest-bearing deposits		720,973			706,330
Total deposits		1,074,325			1,059,908

Other borrowed funds		18,085			19,614
Subordinated debentures		8,500			8,500
Operating lease liability		1,170			1,195
Other liabilities		21,774			19,196
Total liabilities		1,123,854			1,108,413

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)		—			—

SHAREHOLDERS’ EQUITY
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 2022 - 5,465,707 shares issued; 2021 - 5,447,185 shares issued)		5,465			5,447
Additional paid-in capital		51,722			51,165
Retained earnings		106,799			100,702
Accumulated other comprehensive income (loss)		(18,700	)		708
Treasury stock, at cost (693,933 shares)		(16,666	)		(16,666	)
Total shareholders’ equity		128,620			141,356
Total liabilities and shareholders’ equity	$	1,252,474		$	1,249,769

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,
	2022			2021			2022			2021

Interest and dividend income:
Loans, including fees	$	10,984		$	10,522		$	30,802		$	31,649
Securities
Taxable		889			527			2,435			1,411
Tax exempt		45			61			137			180
Dividends		95			58			222			174
Interest-bearing deposits with banks		516			50			802			111
Other Interest		3			8			12			26
		12,532			11,226			34,410			33,551

Interest expense:
Deposits		504			692			1,530			2,374
Other borrowed funds		101			136			310			436
Subordinated debentures		82			39			182			119
		687			867			2,022			2,929
Net interest income		11,845			10,359			32,388			30,622
Provision for (recovery of) loan losses		(378	)		(93	)		(691	)		(118	)
Net interest income after provision for loan losses		12,223			10,452			33,079			30,740

Noninterest income:
Service charges on deposit accounts		662			514			1,815			1,309
Trust fees		80			70			247			212
Income from bank owned life insurance and annuity assets		205			253			674			701
Mortgage banking income		185			179			640			544
Electronic refund check / deposit fees		—			—			675			675
Debit / credit card interchange income		1,291			1,237			3,603			3,460
Gain on other real estate owned		—			—			7			1
Tax preparation fees		3			3			741			752
Other		189			356			569			803
		2,615			2,612			8,971			8,457
Noninterest expense:
Salaries and employee benefits		5,867			5,476			17,120			16,025
Occupancy		517			483			1,419			1,415
Furniture and equipment		296			287			841			852
Professional fees		418			425			1,405			1,282
Marketing expense		260			128			718			664
FDIC insurance		80			84			250			242
Data processing		776			667			2,136			1,902
Software		561			464			1,620			1,347
Foreclosed assets		11			10			48			32
Amortization of intangibles		8			11			28			38
Other		1,553			1,434			4,573			4,154
		10,347			9,469			30,158			27,953

Income before income taxes		4,491			3,595			11,892			11,244
Provision for income taxes		801			559			2,078			1,816

NET INCOME	$	3,690		$	3,036		$	9,814		$	9,428

Earnings per share	$	0.77		$	0.63		$	2.06		$	1.97

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,
	2022			2021			2022			2021

Net Income	$	3,690		$	3,036		$	9,814		$	9,428

Other comprehensive income (loss):
Change in unrealized gain (loss) on available for sale securities		(8,403	)		(85	)		(24,567	)		(1,706	)
Related tax (expense) benefit		1,764			18			5,159			358
Total other comprehensive income (loss), net of tax		(6,639	)		(67	)		(19,408	)		(1,348	)

Total comprehensive income (loss)	$	(2,949	)	$	2,969		$	(9,594	)	$	8,080

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, 2022	$	5,465	$	51,722	$	104,110		$	(12,061	)	$	(16,666	)	$	132,570
Net income		—		—		3,690			—			—			3,690
Other comprehensive loss, net		—		—		—			(6,639	)		—			(6,639	)
Cash dividends, $0.21 per share		—		—		(1,001	)		—			—			(1,001	)
Balance at September 30, 2022	$	5,465	$	51,722	$	106,799		$	(18,700	)	$	(16,666	)	$	128,620

Balance at July 1, 2021	$	5,447	$	51,165	$	97,369		$	1,155		$	(15,712	)	$	139,424
Net income		—		—		3,036			—			—			3,036
Other comprehensive loss, net		—		—		—			(67	)		—			(67	)
Cash dividends, $0.21 per share		—		—		(1,005	)		—			—			(1,005	)
Shares acquired for treasury, 16,569 shares		—		—		—			—			(458	)		(458	)
Balance at September 30, 2021	$	5,447	$	51,165	$	99,400		$	1,088		$	(16,170	)	$	140,930

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, 2022	$	5,447	$	51,165	$	100,702		$	708		$	(16,666	)	$	141,356
Net income		—		—		9,814			—			—			9,814
Other comprehensive loss, net		—		—		—			(19,408	)		—			(19,408	)
Cash dividends, $0.78 per share		—		—		(3,717	)		—			—			(3,717	)
Common Stock issued to ESOP, 18,522 shares		18		557		—			—			—			575
Balance at September 30, 2022	$	5,465	$	51,722	$	106,799		$	(18,700	)	$	(16,666	)	$	128,620

Balance at January 1, 2021	$	5,447	$	51,165	$	92,988		$	2,436		$	(15,712	)	$	136,324
Net income		—		—		9,428			—			—			9,428
Other comprehensive loss, net		—		—		—			(1,348	)		—			(1,348	)
Cash dividends, $0.63 per share		—		—		(3,016	)		—			—			(3,016	)
Shares acquired for treasury, 16,569 shares		—		—		—			—			(458	)		(458	)
Balance at September 30, 2021	$	5,447	$	51,165	$	99,400		$	1,088		$	(16,170	)	$	140,930

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,
	2022			2021

Net cash provided by operating activities:	$	10,229		$	8,080

Investing activities:
Proceeds from maturities and calls of securities available for sale		22,652			32,814
Purchases of securities available for sale		(54,103	)		(96,240	)
Proceeds from maturities and calls of securities held to maturity		634			1,586
Purchase of securities held to maturity		(1,071	)		(1,341	)
Proceeds from maturities of certificates of deposit in financial institutions		445			735
Purchase of certificates of deposit in financial institutions		—			(735	)
Redemptions of federal home loan bank stock		1,312			241
Net change in loans		(25,695	)		2,548
Proceeds from sale of other real estate owned		7			49
Purchases of premises and equipment		(1,662	)		(797	)
Disposals of premises and equipment		420			486
Proceeds from building grant		200			—
Purchases of bank owned life insurance and annuity assets		(1,462	)		(550	)
Net cash (used in) investing activities		(58,323	)		(61,204	)

Financing activities:
Change in deposits		14,417			57,937
Cash dividends		(3,717	)		(3,016	)
Purchase of treasury stock		—			(458	)
Proceeds from Federal Home Loan Bank borrowings		—			600
Repayment of Federal Home Loan Bank borrowings		(1,529	)		(4,118	)
Change in other short-term borrowings		—			(1,060	)
Net cash provided by financing activities		9,171			49,885

Change in cash and cash equivalents		(38,923	)		(3,239	)
Cash and cash equivalents at beginning of period		152,034			138,303
Cash and cash equivalents at end of period	$	113,111		$	135,064

Supplemental disclosure:
Cash paid for interest	$	2,137		$	3,525
Cash paid for income taxes		1,350			2,400
Proceeds from bank owned life insurance and annuity assets not settled		—			173
Operating lease liability arising from obtaining right-of-use asset		108			570

See accompanying notes to consolidated financial statements

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. (“Ohio Valley”) and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc., a consumer finance company, Ohio Valley Financial Services Agency, LLC, an insurance agency, and OVBC Captive, Inc., a limited purpose property and casualty insurance company. The Bank has two wholly-owned subsidiaries, Race Day Mortgage, Inc., an Ohio corporation that provides online consumer mortgages, and 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, 2022, 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, 2022, are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2022. 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, 2021, contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.

The consolidated financial statements for 2021 have been reclassified to conform to the presentation for 2022. These reclassifications had no effect on net income or shareholders’ equity.

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

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

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

Interest income is discontinued and the loan moved to non-accrual status when full loan repayment is in doubt, typically when the loan is impaired or payments are past due 90 days or over unless the loan is well-secured or in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days or over and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

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

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Bank also originates long-term, fixed-rate mortgage loans, with the full intention of being sold to the secondary market. These loans are considered held for sale during the period of time after the principal has been advanced to the borrower by the Bank, but before the Bank has been reimbursed by the Federal Home Loan Mortgage Corporation, typically within a few business days. Loans sold to the secondary market are carried at the lower of aggregate cost or fair value. As of September 30, 2022, there were $493 in loans held for sale by the Bank, as compared to $1,682 in loans held for sale at December 31, 2021.

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. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings ("TDRs") and are 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 and Industrial, Commercial Real Estate, Residential Real Estate, and Consumer.

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

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 1-4 family residential properties. Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements. Repayment of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value that may be absorbed by the Company.

Residential real estate loans consist of loans to individuals for the purchase of 1-4 family primary residences with repayment primarily through wage or other income sources of the individual borrower. The Company’s loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.

Consumer loans are 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. 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 associated with such portfolios.

At September 30, 2022, there were no changes to the accounting policies or methodologies within any of the Company’s loan portfolio segments from the prior period.

EARNINGS PER SHARE: Earnings per share are computed based on net income divided by the weighted average number of common shares outstanding during the quarter. The weighted average common shares outstanding were 4,771,774 and 4,783,886 for the three months ended September 30, 2022 and 2021, respectively. The weighted average common shares outstanding were 4,768,246 and 4,786,246 for the nine months ended September 30, 2022 and 2021, respectively. Ohio Valley had no dilutive effect and no potential common shares issuable under stock options or other agreements for any period presented.

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 also requires 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. The Bank’s 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 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. For SEC filers who are smaller reporting companies, such as the Company, ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326). This standard: (i) eliminates the accounting guidance for TDRs, requiring entities to determine whether a modification results in a new loan or a continuation of an existing loan; (ii) expands disclosures related to modifications; and (iii) requires disclosure of current period gross write-offs of financing receivables within the vintage disclosures table. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method. Early adoption of the amendments in this update is permitted if ASU 2016-13 has been previously adopted. An entity may elect to early adopt the amendments regarding TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is assessing the impact that the adoption of ASU 2022-02 will have on its consolidated financial statements.

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.

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

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

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

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).

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements at September 30, 2022 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets:
U.S. Government securities	$	42,790	$	—			—
U.S. Government sponsored entity securities		—		18,717			—
Agency mortgage-backed securities, residential		—		123,337			—
Interest rate swap derivatives		—		1,404			—

Liabilities:
Interest rate swap derivatives		—		(1,404	)		—

	Fair Value Measurements at December 31, 2021 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets:
U.S. Government securities	$	20,143	$	—			—
U.S. Government sponsored entity securities		—		25,916			—
Agency mortgage-backed securities, residential		—		130,941			—
Interest rate swap derivatives		—		599			—

Liabilities:
Interest rate swap derivatives		—		(599	)		—

Assets and Liabilities Measured on a Nonrecurring Basis

There were no assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2022. Assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2021 are summarized below:

Fair Value Measurements at December 31, 2021 Using

December 31, 2021

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 and industrial

—

1,983

At December 31, 2021, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $1,993, with a corresponding valuation allowance of $10, resulting in an increase of $10 in provision expense during the year ended December 31, 2021, 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, 2022 and December 31, 2021. There were no corresponding write-downs during the three and nine months ended September 30, 2022 and 2021.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

There was no quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2022. 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, 2021:

December 31, 2021

Fair

Value

Valuation

Technique(s)

Unobservable

Input(s)

Range

Weighted Average

Impaired loans:

Commercial and industrial

1,983

Sales approach

Adjustment to comparables

and equipment comparables

0% to 25%

18.5%%

The carrying amounts and estimated fair values of financial instruments at September 30, 2022 and December 31, 2021 are as follows:

	Carrying		Fair Value Measurements at September 30, 2022 Using
	Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	113,111	$	113,111	$	—	$	—	$	113,111
Certificates of deposit in financial institutions		1,868		—		1,868		—		1,868
Securities available for sale		184,844		42,790		142,054		—		184,844
Securities held to maturity		9,642		—		5,210		3,445		8,655
Loans, net		851,102		—		—		825,644		825,644
Interest rate swap derivatives		1,404		—		1,404		—		1,404
Accrued interest receivable		3,053		—		552		2,501		3,053

Financial liabilities:
Deposits		1,074,325		920,418		153,807		—		1,074,225
Other borrowed funds		18,085		—		16,646		—		16,646
Subordinated debentures		8,500		—		8,474		—		8,474
Interest rate swap derivatives		1,404		—		1,404		—		1,404
Accrued interest payable		325		—		325		—		325

	Carrying		Fair Value Measurements at December 31, 2021 Using
	Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	152,034	$	152,034	$	—	$	—	$	152,034
Certificates of deposit in financial institutions		2,329		—		2,329		—		2,329
Securities available for sale		177,000		20,143		156,857		—		177,000
Securities held to maturity		10,294		—		6,063		4,387		10,450
Loans, net		824,708		—		—		821,899		821,899
Interest rate swap derivatives		599		—		599		—		599
Accrued interest receivable		2,695		—		363		2,332		2,695

Financial liabilities:
Deposits		1,059,908		870,626		189,796		—		1,060,422
Other borrowed funds		19,614		—		20,279		—		20,279
Subordinated debentures		8,500		—		5,657		—		5,657
Interest rate swap derivatives		599		—		599		—		599
Accrued interest payable		439		1		438		—		439

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, 2022 and December 31, 2021, 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, 2022
U.S. Government securities	$	45,988	$	—	$	(3,198	)	$	42,790
U.S. Government sponsored entity securities		21,344		—		(2,627	)		18,717
Agency mortgage-backed securities, residential		141,183		—		(17,846	)		123,337
Total securities	$	208,515	$	—	$	(23,671	)	$	184,844

December 31, 2021
U.S. Government securities	$	20,182	$	—	$	(39	)	$	20,143
U.S. Government sponsored entity securities		25,980		109		(173	)		25,916
Agency mortgage-backed securities, residential		129,942		1,476		(477	)		130,941
Total securities	$	176,104	$	1,585	$	(689	)	$	177,000

Securities Held to Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Estimated Fair Value
September 30, 2022
Obligations of states and political subdivisions	$	9,641	$	30	$	(1,017	)	$	8,654
Agency mortgage-backed securities, residential		1		—		—			1
Total securities	$	9,642	$	30	$	(1,017	)	$	8,655

December 31, 2021
Obligations of states and political subdivisions	$	10,292	$	200	$	(44	)	$	10,448
Agency mortgage-backed securities, residential		2		—		—			2
Total securities	$	10,294	$	200	$	(44	)	$	10,450

The amortized cost and estimated fair value of debt securities at September 30, 2022, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities. Securities not due at a single maturity are shown separately.

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

Due in one year or less	$	1,998	$	1,987	$	359	$	360
Due in over one to five years		60,334		55,264		3,522		3,376
Due in over five to ten years		5,000		4,256		3,022		2,718
Due after ten years		—		—		2,738		2,200
Agency mortgage-backed securities, residential		141,183		123,337		1		1
Total debt securities	$	208,515	$	184,844	$	9,642	$	8,655

NOTE 3 – SECURITIES (Continued)

The following table summarizes securities with unrealized losses at September 30, 2022 and December 31, 2021, aggregated by major security type and length of time in a continuous unrealized loss position:

September 30, 2022	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 securities	$	42,790	$	(3,198	)	$	—	$	—		$	42,790	$	(3,198	)
U.S. Government sponsored entity securities		8,017		(827	)		10,700		(1,800	)		18,717		(2,627	)
Agency mortgage-backed securities,
residential		87,082		(11,001	)		36,255		(6,845	)		123,337		(17,846	)
Total available for sale	$	137,889	$	(15,026	)	$	46,955	$	(8,645	)	$	184,844	$	(23,671	)

December 31, 2021	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 securities	$	20,143	$	(39	)	$	—	$	—	$	20,143	$	(39	)
U.S Government sponsored entity securities		18,307		(173	)		—		—		18,307		(173	)
Agency mortgage-backed securities,
residential		64,560		(477	)		—		—		64,560		(477	)
Total available for sale	$	103,010	$	(689	)	$	—	$	—	$	103,010	$	(689	)

September 30, 2022	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	$	5,206	$	(652	)	$	1,660	$	(365	)	$	6,866	$	(1,017	)
Total held to maturity	$	5,206	$	(652	)	$	1,660	$	(365	)	$	6,866	$	(1,017	)

December 31, 2021	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	$	2,617	$	(38	)	$	130	$	(6	)	$	2,747	$	(44	)
Total held to maturity	$	2,617	$	(38	)	$	130	$	(6	)	$	2,747	$	(44	)

There were no sales of investment securities during the three and nine months ended September 30, 2022 or 2021. Unrealized losses on the Company’s debt securities have not been recognized into income because the issuers’ securities were of high credit quality as of September 30, 2022, 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, 2022 and December 31, 2021 represents an other-than-temporary impairment.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:

	September 30, 2022			December 31, 2021

Residential real estate	$	272,271		$	274,425
Commercial real estate:
Owner-occupied		70,623			71,979
Nonowner-occupied		173,116			176,100
Construction		41,264			33,718
Commercial and industrial		153,417			141,525
Consumer:
Automobile		54,409			48,206
Home equity		26,755			22,375
Other		64,058			62,863
		855,913			831,191
Less: Allowance for loan losses		(4,811	)		(6,483	)

Loans, net	$	851,102		$	824,708

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law in response to coronavirus ("COVID-19"). The CARES Act provided assistance to small businesses through the establishment of the Paycheck Protection Program ("PPP"). The PPP provided small businesses with funds to use for payroll and certain other expenses. At September 30, 2022, there were no commercial and industrial loans originated under the PPP, as compared to $446 at December 31, 2021. These loans are guaranteed by the Small Business Administration.

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2022 and 2021:

September 30, 2022	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	614		$	1,846		$	1,548		$	1,206		$	5,214
Provision for loan losses		(189	)		42			(308	)		77			(378	)
Loans charged off		(57	)		(20	)		—			(262	)		(339	)
Recoveries		55			29			36			194			314
Total ending allowance balance	$	423		$	1,897		$	1,276		$	1,215		$	4,811

September 30, 2021	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,088		$	2,532		$	1,746		$	1,433		$	6,799
Provision for loan losses		(34	)		10			(263	)		194			(93	)
Loans charged-off		(49	)		(63	)		(25	)		(280	)		(417	)
Recoveries		40			115			113			107			375
Total ending allowance balance	$	1,045		$	2,594		$	1,571		$	1,454		$	6,664

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, 2022 and 2021:

September 30, 2022	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	980		$	2,548		$	1,571		$	1,384		$	6,483
Provision for loan losses		(545	)		(683	)		271			266			(691	)
Loans charged-off		(99	)		(36	)		(618	)		(964	)		(1,717	)
Recoveries		87			68			52			529			736
Total ending allowance balance	$	423		$	1,897		$	1,276		$	1,215		$	4,811

September 30, 2021	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,480		$	2,431		$	1,776		$	1,473		$	7,160
Provision for loan losses		(443	)		121			(260	)		464			(118	)
Loans charged-off		(75	)		(115	)		(96	)		(879	)		(1,165	)
Recoveries		83			157			151			396			787
Total ending allowance balance	$	1,045		$	2,594		$	1,571		$	1,454		$	6,664

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, 2022 and December 31, 2021:

September 30, 2022	Residential Real Estate		Commercial Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		423		1,897		1,276		1,215		4,811
Total ending allowance balance	$	423	$	1,897	$	1,276	$	1,215	$	4,811

Loans:
Loans individually evaluated for impairment	$	—	$	2,020	$	—	$	28	$	2,048
Loans collectively evaluated for impairment		272,271		282,983		153,417		145,194		853,865
Total ending loans balance	$	272,271	$	285,003	$	153,417	$	145,222	$	855,913

December 31, 2021	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	$	—	$	—	$	10	$	—	$	10
Collectively evaluated for impairment		980		2,548		1,561		1,384		6,473
Total ending allowance balance	$	980	$	2,548	$	1,571	$	1,384	$	6,483

Loans:
Loans individually evaluated for impairment	$	—	$	5,411	$	4,531	$	81	$	10,023
Loans collectively evaluated for impairment		274,425		276,386		136,994		133,363		821,168
Total ending loans balance	$	274,425	$	281,797	$	141,525	$	133,444	$	831,191

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, 2022 and December 31, 2021:

September 30, 2022	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:	$	—	$	—	$	—
With no related allowance recorded:
Commercial real estate:
Owner-occupied		1,703		1,640		—
Nonowner-occupied		380		380		—
Consumer:
Home equity		28		28		—
Total	$	2,111	$	2,048	$	—

December 31, 2021	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial and industrial	$	1,993	$	1,993	$	10
With no related allowance recorded:
Commercial real estate:
Owner-occupied		5,052		5,027		—
Nonowner-occupied		384		384		—
Commercial and industrial		2,538		2,538		—
Consumer:
Home equity		31		31		—
Other		50		50		—
Total	$	10,048	$	10,023	$	10

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, 2022 and 2021:

	Three months ended September 30, 2022						Nine months ended September 30, 2022
	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:
Commercial real estate:
Owner-occupied		1,650		18		18		1,676		66		66
Nonowner-occupied		381		8		8		382		22		22
Consumer:
Home equity		14		1		1		22		1		1
Total	$	2,045	$	27	$	27	$	2,080	$	89	$	89

	Three months ended September 30, 2021						Nine months ended September 30, 2021
	Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized		Average Impaired Loans		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Consumer:
Other	$	49	$	1	$	1	$	49	$	2	$	2
With no related allowance recorded:
Commercial real estate:
Owner-occupied		5,128		74		74		5,183		239		239
Nonowner-occupied		386		7		7		388		21		21
Commercial and industrial		3,174		111		111		3,586		200		200
Consumer:
Home equity		32		1		1		33		2		2
Total	$	8,769	$	194	$	194	$	9,239	$	464	$	464

The recorded investment of a loan excludes accrued interest and net deferred origination fees and costs due to immateriality.

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). Other real estate owned for residential real estate properties totaled $15 as of September 30, 2022 and December 31, 2021. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $459 and $316 as of September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021:

September 30, 2022	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	203	$	1,531
Commercial real estate:
Owner-occupied		—		981
Nonowner-occupied		—		72
Construction		—		15
Commercial and industrial		148		149
Consumer:
Automobile		65		105
Home equity		—		127
Other		470		75
Total	$	886	$	3,055

December 31, 2021	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	10	$	2,683
Commercial real estate:
Owner-occupied		—		1,055
Nonowner-occupied		—		—
Construction		—		146
Commercial and industrial		65		150
Consumer:
Automobile		55		147
Home equity		—		148
Other		160		17
Total	$	290	$	4,346

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, 2022 and December 31, 2021:

September 30, 2022	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	$	1,514	$	907	$	624	$	3,045	$	269,226	$	272,271
Commercial real estate:
Owner-occupied		188		—		981		1,169		69,454		70,623
Nonowner-occupied		9		6		—		15		173,101		173,116
Construction		34		—		—		34		41,230		41,264
Commercial and industrial		96		—		297		393		153,024		153,417
Consumer:
Automobile		760		156		157		1,073		53,336		54,409
Home equity		35		—		127		162		26,593		26,755
Other		384		368		514		1,266		62,792		64,058
Total	$	3,020	$	1,437	$	2,700	$	7,157	$	848,756	$	855,913

December 31, 2021	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	$	2,208	$	1,218	$	921	$	4,347	$	270,078	$	274,425
Commercial real estate:
Owner-occupied		895		—		153		1,048		70,931		71,979
Nonowner-occupied		100		—		—		100		176,000		176,100
Construction		36		53		33		122		33,596		33,718
Commercial and industrial		517		60		215		792		140,733		141,525
Consumer:
Automobile		656		148		194		998		47,208		48,206
Home equity		35		165		47		247		22,128		22,375
Other		401		133		177		711		62,152		62,863
Total	$	4,848	$	1,777	$	1,740	$	8,365	$	822,826	$	831,191

Troubled Debt Restructurings:

A 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, 2022 and December 31, 2021:

September 30, 2022	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
Commercial real estate:
Owner-occupied
Reduction of principal and interest payments	$	419	$	—	$	419
Credit extension at lower stated rate than market rate		364		—		364
Nonowner-occupied
Credit extension at lower stated rate than market rate		380		—		380

Total TDRs	$	1,163	$	—	$	1,163

December 31, 2021	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
Commercial real estate:
Owner-occupied
Reduction of principal and interest payments	$	1,455	$	—	$	1,455
Maturity extension at lower stated rate than market rate		268		—		268
Credit extension at lower stated rate than market rate		375		—		375
Nonowner-occupied
Credit extension at lower stated rate than market rate		385		—		385
Commercial and industrial
Interest only payments		2,301		—		2,301
Total TDRs	$	4,784	$	—	$	4,784

At September 30, 2022 and December 31, 2021, the Company had no specific allocations in reserves to customers whose loan terms have been modified in TDRs. At September 30, 2022, the Company had no commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs, as compared to $3,199 at December 31, 2021.

There were no TDR loan modifications that occurred during the three and nine months ended September 30, 2022 and 2021, and, therefore, no impact to provision expense or the allowance for loan losses.

During the three and nine months ended September 30, 2022 and 2021, the Company had no TDRs that 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 CARES Act 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 if they are less than 30 days past due on their contractual payments at the time of modification. Through September 30, 2022, the Company had modified 521 loans related to COVID-19 with an outstanding loan balance of $97,236 that were not reported as TDRs. As of September 30, 2022, the Company had 11 of those modified loans still operating under their COVID-19 related deferral terms with an outstanding loan balance of $120 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 $1,000.

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) that results from potential weak primary repayment source or payment delinquency. These loans will be under constant supervision and 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 TDRs 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 that 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, 2022 and December 31, 2021, and based on the most recent analysis performed, the risk category of commercial loans by class of loans was as follows:

September 30, 2022	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	67,110	$	2,532	$	981	$	70,623
Nonowner-occupied		172,926		—		190		173,116
Construction		41,202		—		62		41,264
Commercial and industrial		151,371		276		1,770		153,417
Total	$	432,609	$	2,808	$	3,003	$	438,420

December 31, 2021	Pass		Criticized		Classified		Total
Commercial real estate:
Owner-occupied	$	66,999	$	618	$	4,362	$	71,979
Nonowner-occupied		175,901		—		199		176,100
Construction		33,685		—		33		33,718
Commercial and industrial		134,983		1,862		4,680		141,525
Total	$	411,568	$	2,480	$	9,274	$	423,322

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, 2022 and December 31, 2021:

September 30, 2022	Consumer						Residential
	Automobile		Home Equity		Other		Real Estate		Total

Performing	$	54,239	$	26,628	$	63,513	$	270,537	$	414,917
Nonperforming		170		127		545		1,734		2,576
Total	$	54,409	$	26,755	$	64,058	$	272,271	$	417,493

December 31, 2021	Consumer						Residential
	Automobile		Home Equity		Other		Real Estate		Total

Performing	$	48,004	$	22,227	$	62,686	$	271,732	$	404,649
Nonperforming		202		148		177		2,693		3,220
Total	$	48,206	$	22,375	$	62,863	$	274,425	$	407,869

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 4.76% of total loans were unsecured at September 30, 2022, up from 4.45% at December 31, 2021.

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, 2022, the contract amounts of these instruments totaled approximately $101,706, compared to $89,602 at December 31, 2021. 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, 2022 and December 31, 2021 are comprised of advances from the Federal Home Loan Bank (“FHLB”) of Cincinnati and promissory notes.

	FHLB Borrowings		Promissory Notes		Totals

September 30, 2022	$	15,947	$	2,138	$	18,085
December 31, 2021	$	17,476	$	2,138	$	19,614

Pursuant to collateral agreements with the FHLB, advances are secured by $265,986 in qualifying mortgage loans, $30,420 in commercial loans and $3,813 in FHLB stock at September 30, 2022. Fixed-rate FHLB advances of $15,947 mature through 2042 and have interest rates ranging from 1.53% to 2.97% and a year-to-date weighted average cost of 2.35% at September 30, 2022 and 2.39% at December 31, 2021. There were no variable-rate FHLB borrowings at September 30, 2022.

At September 30, 2022, the Company had a cash management line of credit enabling it to borrow up to $100,000 from the FHLB, subject to the stock ownership and collateral limitations described below. 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, 2022.

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 $183,760 at September 30, 2022. Of this maximum borrowing capacity, the Company had $96,813 available to use as additional borrowings, of which $96,813 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 April 13, 2023, and have fixed rates ranging from 1.25% to 1.30% and a year-to-date weighted average cost of 1.25% at September 30,2022, as compared to 1.23% at December 31, 2021. At September 30, 2022, there were six promissory notes payable by Ohio Valley to related parties totaling $2,138. There were no promissory notes payable to other banks at September 30, 2022 or December 31, 2021.

Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $71,000 at September 30, 2022 and $68,380 at December 31, 2021.

Scheduled principal payments as of September 30, 2022:

	FHLB Borrowings		Promissory Notes		Totals

2022	$	580	$	530	$	1,110
2023		1,784		1,608		3,392
2024		1,693		—		1,693
2025		1,560		—		1,560
2026		1,434		—		1,434
Thereafter		8,896		—		8,896
	$	15,947	$	2,138	$	18,085

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% of total consolidated revenues for the quarters end September 30, 2022 and 2021, 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, 2022
	Banking			Consumer Finance			Total Company
Net interest income	$	11,299		$	546		$	11,845
Provision for loan losses		(400	)		22			(378	)
Noninterest income		2,573			42			2,615
Noninterest expense		9,743			604			10,347
Provision for income taxes		809			(8	)		801
Net income		3,720			(30	)		3,690
Assets		1,238,597			13,877			1,252,474

	Three Months Ended September 30, 2021
	Banking			Consumer Finance			Total Company
Net interest income	$	9,843		$	516		$	10,359
Provision for loan losses		(100	)		7			(93	)
Noninterest income		2,582			30			2,612
Noninterest expense		8,861			608			9,469
Provision for income taxes		574			(15	)		559
Net income		3,090			(54	)		3,036
Assets		1,232,353			13,025			1,245,378

	Nine Months Ended September 30, 2022
	Banking			Consumer Finance		Total Company
Net interest income	$	30,791		$	1,597	$	32,388
Provision for loan losses		(700	)		9		(691	)
Noninterest income		7,987			984		8,971
Noninterest expense		28,296			1,862		30,158
Provision for income taxes		1,930			148		2,078
Net income		9,252			562		9,814
Assets		1,238,597			13,877		1,252,474

	Nine Months Ended September 30, 2021
	Banking			Consumer Finance		Total Company
Net interest income	$	29,124		$	1,498	$	30,622
Provision for loan losses		(150	)		32		(118	)
Noninterest income		7,474			983		8,457
Noninterest expense		26,095			1,858		27,953
Provision for income taxes		1,693			123		1,816
Net income		8,960			468		9,428
Assets		1,232,353			13,025		1,245,378

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 7 months to 19 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.

Balance sheet information related to leases is as follows:

	As of September 30, 2022		As of December 31, 2021
Operating leases:
Operating lease right-of-use assets	$	1,170	$	1,195
Operating lease liabilities		1,170		1,195

The components of lease cost are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating lease cost	$	51	$	41	$	135	$	119
Short-term lease expense		10		8		28		24

Future undiscounted lease payments for operating leases with initial terms of one year or more as of September 30, 2022 are as follows:

	Operating Leases
2022 (remaining)	$	49
2023		153
2024		133
2025		133
2026		119
Thereafter		866
Total lease payments		1,453
Less: Imputed Interest		(283	)
Total operating leases	$	1,170

Other information is as follows:

	As of September 30, 2022			As of December 31, 2021
Weighted-average remaining lease term for operating leases	12.6 years			13.7 years
Weighted-average discount rate for operating leases		2.36	%		2.29	%

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 (the “Exchange Act”), and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as “believes,” “anticipates,” “expects,” “intends,” “plan,” “goal,” “seek,” “project,” “estimate,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and other similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control 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; the effects of various governmental responses to COVID-19; unexpected changes in interest rates or disruptions in the mortgage market; the effects of various governmental responses to COVID-19; 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 Ohio Valley Banc Corp. (“Ohio Valley”) and its direct and indirect subsidiaries (collectively, the “Company”); unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Additional detailed information concerning such factors is available in the Company’s filings with the Securities and Exchange Commission, under the Exchange Act, including the disclosure under the heading “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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.

BUSINESS OVERVIEW: The following discussion on consolidated financial statements include the accounts of Ohio Valley and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc., a consumer finance company (“Loan Central”), 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 two wholly-owned subsidiaries, Race Day Mortgage, Inc., an Ohio corporation that provides online consumer mortgages (“Race Day”), and Ohio Valley REO, LLC, an Ohio limited liability company. Ohio Valley and its subsidiaries are collectively referred to as the “Company.”

The Company is primarily engaged in commercial and retail banking, offering a blend of commercial and consumer banking services within southeastern Ohio as well as western West Virginia. The banking services offered by the Bank include the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; the making of construction and real estate loans; and credit card services. The Bank also offers individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. Furthermore, the Bank offers Tax Refund Advance Loans (“TALs”) to Loan Central tax customers. A TAL represents a short-term loan offered by the Bank to tax preparation customers of Loan Central.

IMPACT of COVID-19:

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act provided assistance to small businesses through the establishment of the Paycheck Protection Program ("PPP"). The PPP provided small businesses with funds to use for payroll and certain other expenses. The funds were provided in the form of loans that would be fully forgiven if certain criteria were met. In 2021, Congress amended the PPP by extending the authority of the Small Business Administration (“SBA”) to guarantee loans and the ability of PPP lenders to disburse PPP loans until May 31, 2021. The Company supported its clients who 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 $3,690 during the third quarter of 2022, an increase of $654 over the same period of 2021. Earnings per share for the third quarter of 2022 finished at $.77 per share, compared to $.63 per share during the third quarter of 2021. Net income totaled $9,814 during the nine months ended September 30, 2022, an increase of $386 over the same period of 2021. Earnings per share during the first nine months of 2022 finished at $2.06 per share, compared to $1.97 per share during the first nine months of 2021. Earnings during both the quarterly and yearly periods were positively impacted by growth in both net interest income and noninterest income, and decreases in provision expense, partially offset by increases in noninterest expense. The impact of higher net earnings during 2022 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets, which increased to 1.04% for the nine months ended September 30, 2022, compared to 1.03% for the nine months ended September 30, 2021. The Company’s net income to average equity ratio, or return on equity, also increased to 9.56% for the nine months ended September 30, 2022, compared to 9.13% for the nine months ended September 30, 2021.

During the three months ended September 30, 2022, net interest income increased $1,486, or 14.3%, over the same period in 2021. During the nine months ended September 30, 2022, net interest income increased $1,766, or 5.8%, over the same period in 2021. Growth in net interest income was impacted by an increase in the net interest margin and higher average earning assets. In relation to the Federal Reserve’s actions of increasing market interest rates during 2022, the net interest margin has responded positively due to the yield on earning assets increasing more than the cost of interest-bearing liabilities. Growth in earning asset yields has positively impacted interest earnings during both the quarter and year-to-date periods ended September 30, 2022. Net interest income growth was further impacted by lower interest expense on deposits, decreasing 20.8% and 31.0% during both the quarterly and year-to-date periods ended September 30, 2022, respectively, compared to the same periods in 2021. This is largely the result of a lower average cost of funds, as well as a composition shift from higher-costing time deposits to lower-costing demand and savings account balances. The increase in average earning assets came primarily from growth in average investment securities in relation to higher average deposit balances. Average loans also increased during the third quarter of 2022 by 1.6%, which helped limit the year-to-date average loan decline to just 0.6% during the year-to-date period. The quarterly increase in average loans was impacted by higher average commercial and consumer loans, while the year-to-date decrease in average loans was impacted by decreased residential real estate loans and payoffs of PPP loans.

During the three months ended September 30, 2022, the Company’s provision for loan loss was negative $378, which contributed to a $285 decrease in provision expense when compared to the same period in 2021. This decrease in provision expense was impacted by the elimination of a specific reserve on a collateral dependent impaired loan due to the full collection of the loan balance. During the nine months ended September 30, 2022, the Company’s provision for loan loss was negative $691, which contributed to a $573 decrease in provision expense when compared to the same period in 2021. The decrease from the prior year was related to improved economic risk factors such as lower criticized and classified loans, as well as the partial release of the COVID-19 reserve for the pandemic environment.

During the three months ended September 30, 2022, noninterest income was relatively stable, increasing $3, or 0.1%, over the same period in 2021. This increase came largely from increases in service charges on deposit accounts. During the nine months ended September 30, 2022, noninterest income increased $514, or 6.1%, from the same period in 2021. This increase came largely from increases in service charges on deposit accounts, interchange income on debit and credit card transactions, and mortgage banking income in relation to Race Day.

During the three months ended September 30, 2022, noninterest expense increased $878, or 9.3%, over the same period in 2021. During the nine months ended September 30, 2022, noninterest expense increased $2,205, or 7.9%, over the same period in 2021. The increases during both periods were primarily related to higher salaries and employee benefit costs impacted by the staffing of Race Day, as well as higher annual merit expenses. The Company also experienced increases in data processing costs, professional fees, and software expense, as well as various other overhead costs from Race Day.

The Company’s provision for income taxes increased $242, or 43.3%, during the three months ended September 30, 2022, and increased $262, or 14.4%, during the nine months ended September 30, 2022, compared to the same periods in 2021. This was largely due to the changes in taxable income affected by the factors mentioned above.

At September 30, 2022, total assets were $1,252,474, an increase of $2,705 from year-end 2021. Higher assets were primarily impacted by increases in loans and investment securities, which were collectively up $31,914, or 3.1%, from year-end 2021. This was largely the result of the deployment of a portion of the Company’s heightened cash balance to higher yielding earning assets during the first nine months of 2022 and resulted in a decrease of $38,298 in Federal Reserve Bank balances from year-end 2021. The Company’s loan portfolio experienced increases in the commercial segment (+3.6%) and the consumer loan segment (+8.8%), partially offset by a decrease in the residential real estate segment (-0.8%).

At September 30, 2022, total liabilities were $1,123,854, up $15,441 from year-end 2021. Contributing most to this increase were higher deposit balances, which increased $14,417 from year-end 2021. The increase was impacted mostly from higher interest-bearing demand deposits, partially offset by lower time deposits and noninterest bearing demand deposits.

At September 30, 2022, total shareholders' equity was $128,620, down $12,736 since December 31, 2021. This was largely the result of cash dividends paid and a decrease in net unrealized gains on available for sale securities, being partially offset by improved quarterly net income. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums.

Comparison of Financial Condition
at September 30, 2022 and December 31, 2021

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at September 30, 2022 compared to December 31, 2021. 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, 2022, cash and cash equivalents were $113,111, a decrease of $38,923, or 25.6%, from December 31, 2021. The decrease in cash and cash equivalents came mostly from lower interest-bearing deposits on hand with correspondent banks. Over 86% of cash and cash equivalents consisted of the Company’s interest-bearing Federal Reserve Bank clearing account, which decreased $38,298, or 28.2%, from year-end 2021. The Company utilizes its interest-bearing Federal Reserve Bank clearing account to manage excess funds, as well as to assist in funding earning asset growth. During the first nine months of 2022, the Company utilized a portion of its clearing account balances to reinvest in higher-yielding loans and investment securities. This shift into higher-yielding earning assets helped to minimize the dilutive effect that higher clearing account balances have on the net interest margin. 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 first nine months of 2022, the rate associated with the Company’s Federal Reserve Bank clearing account increased 300 basis points due to rising inflationary concerns, resulting in a target federal funds rate range of 3.00% to 3.25%. 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 balances are 100% secured by the U.S. Government.

As liquidity levels continuously vary based on consumer activities, amounts of cash and cash equivalents can vary widely at any given point in time. The Company’s focus during periods of heightened liquidity will be to invest excess funds into longer-term, higher-yielding assets, primarily loans, when opportunities arise.

Certificates of Deposit

At September 30, 2022, the Company had $1,868 in certificates of deposit owned by the Captive, down from $2,329 at year-end 2021. The deposits on hand at September 30, 2022 consisted of eight certificates with remaining maturity terms ranging from less than 7 months up to 12 months.

Securities

The balance of total securities increased $7,192, or 3.8%, compared to year-end 2021. The increase was primarily the result of investment security purchases funded by excess funds being maintained within the Federal Reserve Bank clearing account. The Company’s investment securities portfolio is made up mostly of U.S. Government agency (“Agency”) mortgage-backed securities, which represented 63.4% of total investments at September 30, 2022. During the first nine months of 2022, the Company invested $29,470 in new Agency mortgage-backed securities, while receiving proceeds from maturities and principal repayments of $18,019. 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. The Company also redeployed a portion of its heightened excess funds to purchase $24,633 in U.S. Government securities during the first nine months of 2022.

In addition, the continued increases in long-term reinvestment rates during 2022 led to a $24,567 decrease in the fair value of the Company’s available for sale securities. The fair value of an investment security moves inversely to interest rates, so as rates increased, the unrealized gain in the portfolio decreased. 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 increased to $855,913 at September 30, 2022, representing an increase of $24,722, or 3.0%, as compared to $831,191 at December 31, 2021. The increase in loans came primarily from the commercial and consumer loan portfolios, partially offset by a decrease in the residential real estate portfolio from year-end 2021.

The Company’s total commercial loan portfolio increased $15,098, or 3.6%, from year-end 2021. Contributing most to this increase were higher loan balances within the commercial and industrial portfolio, up $11,892, or 8.4%, from year-end 2021. The growth was impacted by an increase in larger loan originations for the first nine months of 2022. 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. The commercial and industrial segment also includes PPP loan balances that had a significant impact on average earning asset growth in 2021. The Company’s remaining PPP loans of $446 that were outstanding at year-end 2021 were paid off during the first quarter of 2022.

Commercial loans were also positively impacted by an increase in the commercial real estate portfolio, which increased $3,206, or 1.1%, from year-end 2021. The commercial real estate segment comprised the largest portion of the Company’s total commercial loan portfolio at September 30, 2022 at 65.0%. The increase came from construction loans, which offset the decreases in both the owner- and nonowner-occupied loan segments from year-end 2021.

While management believes lending opportunities exist in the Company’s markets, future commercial lending activities will depend upon economic and other related conditions, such as general demand for loans in the Company’s primary markets, interest rates offered by the Company, and the effects of competitive pressure and normal underwriting considerations. Management will continue to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans.

Further increases in loans came from the Company’s consumer loan balances from year-end 2021, increasing $11,778, or 8.8%. This change was impacted by a $6,203, or 12.9%, increase in automobile loans, and a $4,380, or 19.6%, increase in home equity lines of credit. The remaining consumer loan portfolio increased $1,195, or 1.9%, from year-end 2021, mostly from unsecured consumer loans.

The Company’s residential real estate loan portfolio decreased $2,154, or 0.8%, from year-end 2021. The residential real estate loan segment comprises the largest portion of the Company’s overall loan portfolio at 31.8% and consists primarily of one- to four-family residential mortgages and carries many of the same customer and industry risks as the commercial loan portfolio. The decrease in residential real estate loans was largely related to the principal repayments and payoffs in both long-term fixed-rate and short-term adjustable-rate mortgages. A decrease in refinancing volume and an increase in long-term reinvestment rates have led to a slower demand for mortgage loans during 2022.

Allowance for Loan Losses

The Company established a $4,811 allowance for loan losses at September 30, 2022, which represents a decrease from the $6,483 allowance at year-end 2021. 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 nine months of 2022, the Company experienced a $1,662 decrease in its general allocations of the allowance for loan losses. Contributing to this decrease were lower reserves associated with the COVID-19 risk factor. The Company added a COVID-19 risk factor in 2020 due to the negative economic outlook of the pandemic. Based on positive asset quality trends and lower net charge offs, management released $645 of the reserve related to the COVID-19 risk factor during the first nine months of 2022, resulting in a corresponding decrease in both provision expense and general allocations of the allowance for loan loss.

Excluding the impact from the COVID-19 risk factor, the Company experienced a $1,017 decrease in general allocations of the allowance for loan losses related to improvements in various economic risk factors, including those associated with criticized and classified assets. During the second and third quarters of 2022, the Company experienced payoffs on two commercial loan relationships that had $8,019 in loans and committed balances, which reduced classified assets and released general reserves during the first nine months of 2022. Furthermore, the Company upgraded a single commercial loan relationship during the first quarter of 2022 totaling $2,232 from a classified to a criticized loan status, which also contributed to the release of general reserves during the first nine months of 2022. The loan upgrade came as a result of improvements in the borrower’s financial performance and ability to repay their loans. Additionally, the Company’s delinquency levels decreased from year-end 2021, with nonperforming loans to total loans of 0.46% at September 30, 2022, compared to 0.56% at December 31, 2021, and lower nonperforming assets to total assets of 0.32% at September 30, 2022, compared to 0.37% at year-end 2021. Lower general allocations during the first nine months of 2022 were also impacted by higher loan recoveries.

The Company’s specific allocations decreased $10 from year-end 2021. 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 was related to the payoff on one commercial borrower during the third quarter of 2022 that led to the release of specific reserves.

The Company’s allowance for loan losses to total loans ratio finished at 0.56% at September 30, 2022, and 0.78% at year-end 2021. Management believes that the allowance for loan losses at September 30, 2022 was adequate and reflected probable incurred losses in the loan portfolio. Changes in the circumstances of particular borrowers, as well as adverse developments in the economy, particularly with respect to inflation, are factors that could change, and management will make adjustments to the allowance for loan losses as needed. Asset quality will continue to remain a key focus of the Company, as management continues to stress not just loan growth, but quality in loan underwriting.

Deposits

Deposits continue to be the most significant source of funds used by the Company to meet obligations for depositor withdrawals, fund the borrowing needs of loan customers, and fund ongoing operations. Total deposits at September 30, 2022 increased $14,417, or 1.4%, from year-end 2021. This change in deposits came primarily from interest-bearing deposit balances, which were up by $14,643, or 2.1%, from year-end 2021, while noninterest-bearing deposits decreased $226, or 0.1%, from year-end 2021.

The increase in interest-bearing deposits was primarily a result of higher interest-bearing NOW account balances from year-end 2021, which increased $34,322, 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. Growth in interest-bearing deposits also came from savings deposits, which increased $8,642, or 5.9%, from year-end 2021, primarily from higher statement savings account balances. Interest-bearing deposit growth was further impacted by higher money market balances from year-end 2021, which increased $7,054, or 4.3%.

Partially offsetting the increases in interest-bearing deposits were time deposit balances, which decreased $35,375, or 18.7%, from year-end 2021. The decrease came primarily from the Company’s retail time deposits, which decreased $22,709 from year-end 2021 due to the consumer shift to savings and money market products. Time deposits were also impacted by a $12,666 decrease in brokered and internet CD issuances, which was primarily the result of the heightened liquidity position from year-end 2021.

The decrease in noninterest-bearing deposits was primarily in the Company’s business and incentive-based checking account balances from year-end 2021.

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 2022, 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 $18,085 at September 30, 2022, a decrease of $1,529, or 7.8%, from year-end 2021. The decrease was related primarily to the principal repayments applied to various FHLB advances during the first quarter of 2022. 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, 2022 decreased $12,736, or 9.0%, to $128,620, as compared to $141,356 at December 31, 2021. This decrease was primarily the result of quarterly net income being completely offset by cash dividends paid and a decrease in the fair value of available for sale securities. The after-tax change in fair value totaled $19,408 from year-end 2021, as market rate increases continued during the first nine months of 2022, causing a decrease in the fair value of the Company’s available for sale investment portfolio.

Comparison of Results of Operations

For the Three and Nine Months Ended

September 30, 2022 and 2021

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, 2022, compared to the same period in 2021. 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, 2022, net interest income increased $1,486, or 14.3%, compared to the same period in 2021. During the nine months ended September 30, 2022, net interest income increased $1,766, or 5.8%, compared to the same period in 2021. The improvement during both periods came from an increase in average earning assets, as well as a combination of higher earning asset yields and lower average costs paid on deposits, partially offset by lower loan fees.

Total interest and fee income recognized on the Company’s earning assets increased $1,306, or 11.6%, during the third quarter of 2022, and increased $859, or 2.6%, during the first nine months of 2022, compared to the same periods in 2021. The earnings growth during both periods was impacted by interest on loans, which increased $705, or 7.3%, during the third quarter of 2022, and $45, or 0.2%, during the first nine months of 2022, compared to the same periods in 2021. This improvement was largely related to average loan yield increases impacted by the aggressive actions taken by the Federal Reserve to increase rates during the first nine months of 2022. Since March 2022, the Federal Reserve has increased rates by 300 basis points, which has led to the repricing of a portion of the Company’s loan portfolio. As a result, the average interest rate yield on loans increased 25 basis points during the third quarter of 2022, and increased 3 basis points during the first nine months of 2022, compared to the same periods in 2021. Partially offsetting the growth in interest income on loans were decreases in loan fees, which were down $243 and $892 during the quarterly and year-to-date periods ended September 30, 2022, respectively, compared to the same periods in 2021. The decreases in loan fees were primarily a result of decreased PPP fees during both periods as a result of the payoffs of all PPP loans by the end of the first quarter of 2022. Average loans increased $13,106 during the third quarter of 2022, while decreasing $4,987 during the first nine months of 2022, compared to the same periods in 2021. The quarter-to-date increase was largely impacted by growth in average commercial and industrial loans, as well as average consumer automobile loans. The year-to-date decrease was primarily the result of the payoff of all of the Company’s PPP loans during 2021 and 2022, a decrease in average residential real estate loan balances impacted by principal repayments and payoffs, and a lower volume of new loan originations.

Total interest income from interest-bearing deposits with banks increased $466, or 932.0%, during the third quarter of 2022, and increased $691, or 622.5%, during the first nine months of 2022, compared to the same periods in 2021. The increases during both periods were largely attributable to the rate increases associated with the Company’s interest-bearing Federal Reserve Bank clearing account. As previously mentioned, the Federal Reserve took action during the first nine months of 2022 to increase the target federal funds rate by 300 basis points due to rising inflationary concerns. This had a corresponding effect on the interest rate tied to the Federal Reserve clearing account, which also increased by 300 basis points. The impact from higher rates was partially offset by lower average Federal Reserve Bank balances, which decreased $20,473 during the third quarter of 2022, and $9,115 during the first nine months of 2022, compared to the same periods in 2021. The Company utilized Federal Reserve Bank balances to help fund new loans and security purchases during the first nine months of 2022.

Total interest on securities increased $346, or 58.8%, during the third quarter of 2022, and increased $981, or 61.7%, during the first nine months of 2022, compared to the same periods in 2021. Due to the surge in deposits and proceeds from PPP loan payoffs, the Company has taken opportunities to reinvest a portion of these excess funds into new U.S. Government, Agency and Agency mortgage-backed securities. This contributed to average security balance increases of $23,753 during the third quarter of 2022 and $46,699 during the first nine months of 2022, compared to the same periods in 2021. The average yield on securities also increased 52 basis points during the third quarter of 2022 and 33 basis points during the first nine months of 2022, which contributed to growth in interest income. This change was partly impacted by the Company’s decision to sell $48,732 in lower yielding securities during the fourth quarter of 2021 that carried an average yield of 0.89% and replace them with similar securities at an average yield of 1.30%.

Total interest expense incurred on the Company’s interest-bearing liabilities decreased $180, or 20.8%, during the third quarter of 2022, and decreased $907, or 31.0%, during the first nine months of 2022, compared to the same periods in 2021. Interest expense decreased despite increases in average interest-bearing deposits of $5,217 during the third quarter of 2022, and $15,894 during the first nine months of 2022, compared to the same periods in 2021. 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 2021 and 2022. Lower deposit expense was mostly impacted by the continued decline in CD rates, which contributed to a $217 decrease in time deposit interest expense during the third quarter of 2022, and an $863 decrease during the first nine months of 2022, compared to the same periods in 2021. As CD rates have repriced downward, the Company has benefited from lower interest expense on newly issued CDs at lower rates. As a result of the rate repricings on time deposits, the Company’s total weighted average costs on interest-bearing deposits has decreased by 17 basis points from 0.45% during the nine months ended September 30, 2021, to 0.28% during the nine months ended September 30, 2022.

The Company’s net interest margin is defined as fully tax-equivalent net interest income as a percentage of average earning assets. During 2022, the Company’s third quarter net interest margin improved to 4.03%, compared to 2021’s third quarter net interest margin of 3.57%. The Company’s year-to-date net interest margin improved to 3.73% at September 30, 2022, compared to 2021’s year-to-date net interest margin of 3.62%. The quarterly and year-to-date margin increases were impacted by the actions taken by the Federal Reserve to increase rates by 300 basis points during the third quarter and nine months ended September 30, 2022. This had a direct impact to the rate repricings of the Federal Reserve Bank account and a portion of the loan portfolio, which had a positive impact on the margin. Margin enhancement also came from the redeployment of lower yielding Federal Reserve Bank balances into higher yielding loans and securities. This composition shift from lower yielding Federal Reserve clearing account balances has reduced the dilutive effect to the net interest margin during 2022. Partially offsetting these positive effects to the margin were decreases in PPP loan fees and lower average year-to-date loan balances. 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, 2022, the Company’s provision expense decreased $285 when compared to the same period in 2021. The quarterly decrease was directly related to the elimination of a specific reserve on a collateral dependent impaired loan due to the full collection of the loan balance. Upon payoff of the impaired loan, the Company reduced provision expense by $297, which represented the specific reserves that had been allocated to the collateral deficiency of the loan. For the nine months ended September 30, 2022, the Company’s provision expense decreased $573 when compared to the same period in 2021. The year-to-date improvement came primarily from a decrease in general allocations. As previously discussed, the Company’s general allocations of the allowance for loan losses were impacted by the release of $645 in COVID-19 general reserves during the first quarter of 2022. The Company removed a portion of its COVID-19 reserves due to positive asset quality trends and lower net charge offs, which resulted in a corresponding decrease of $645 to provision expense during the first nine months of 2022. Further contributing to lower provision expense were the impacts of the Company’s other general reserve allocations. During the first nine months of 2022, the Company decreased its general allocations, excluding the COVID-19 risk factor, from $3,840 at December 31, 2021, to $2,715 at September 30, 2022. Lower general reserves were a result of various improvements within the economic risk factor calculation that included: lower criticized and classified assets, lower delinquency levels, and higher annualized level of loan recoveries. Decreases in provision expense were partially offset by increases in net charge offs during the year, which required corresponding increases to provision expense. During the first nine months of 2022, net charge offs increased $603 compared to the same period in 2021, due in large part to the charge off of two commercial and industrial loans in June 2022 totaling $613 as part of a single borrower relationship, which required a corresponding increase to provision expense.

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 increased $3, or 0.1%, during the three months ended September 30, 2022, and increased $514, or 6.1%, during the nine months ended September 30, 2022, when compared to the same periods in 2021. Higher noninterest revenue was largely impacted by increases in service charges on deposit accounts, which were up $148 and $506 during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. This included a higher volume of overdraft transactions during both the quarterly and year-to-date periods of 2022.

Further impacting growth in noninterest revenue was interchange income, which increased $54 during the third quarter of 2022, and increased $143 during the first nine months of 2022, compared to the same periods in 2021. This was impacted by an increase in consumer spending that led to a higher volume of transactions associated with the Company’s debit and credit card products.

Increases in noninterest revenue also came from mortgage banking income, which increased $6 and $96 during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Mortgage banking income increased largely due to Race Day. Race Day was formed in April 2021 and began conducting business during the third quarter of 2021. During the third quarter of 2022, Race Day experienced loan sales that yielded $108 in mortgage banking revenue, which contributed to $332 in mortgage banking revenue during the first nine months of 2022. These increases were partially offset by decreases in the Bank’s secondary market income due to less volume of mortgage refinancings.

Partially offsetting increases to noninterest income were decreases in other noninterest income. During the third quarter of 2022, other noninterest income decreased $167, or 46.9%, compared to the same period in 2021. During the first nine months of 2022, other noninterest income decreased $234, or 29.1%, compared to the same period in 2021. The decreases were largely impacted by the sale of bank owned property during 2021. The property sales from 2021 resulted in a $194 non-recurring gain, which included the sales of vacant land in Lawrence County, Ohio and a branch building in Jackson, Ohio, that had been acquired as part of the merger with the Milton Banking Company in 2016.

The remaining noninterest income categories decreased $38, or 11.7%, during the third quarter of 2022, and increased $3, or 0.1%, during the first nine months of 2022, compared to the same periods in 2021. The quarter-to-date decrease was largely impacted by lower earnings on bank owned life insurance and annuity assets. The year-to-date increase came primarily from growth in trust division income.

Noninterest Expense

Noninterest expense increased $878, or 9.3%, during the three months ended September 30, 2022, and increased $2,205, or 7.9%, during the nine months ended September 30, 2022, compared to the same periods in 2021. Contributing most to the increases in noninterest expense were salaries and employee benefits, which increased $391 and $1,095 during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The expense increase was largely from the staffing of Race Day employees in 2021, which led to higher salaries expense in 2022. Other expense increases in this category also came from annual merit increases and higher retirement plan costs in 2022.

Higher noninterest expense also came from software costs, which increased $97 and $273 during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increases were largely impacted by the associated software costs from Race Day, which included various software platforms and resources that were necessary to begin conducting business.

Further impacting higher overhead costs were data processing expenses, which increased $109 and $234 during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Higher costs in this category were the direct result of the volume increase in debit and credit card transactions, which increased processing costs.

Professional fees also increased $123 during the nine months ended September 30, 2022, while decreasing $7 during the three months ended September 30, 2022, compared to the same periods in 2021. Professional fees for the year were impacted by higher accounting expenses associated with regulatory compliance. The Company also experienced a lower volume of collection costs during the third quarter of 2022.

Other noninterest expense also increased $119 and $419 during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. This was primarily impacted by various other overhead costs associated with Race Day, including the expense associated with purchasing mortgage loan marketing leads and employee recruiting costs.

The remaining noninterest expense categories increased $169 and $61 during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. These increases were mostly a result of higher marketing 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 three and nine months ended September 30, 2022, to the same periods in 2021, the Company has benefited from an increase in earning asset yields and a decrease in the average costs on interest-bearing liabilities. The actions of the Federal Reserve to increase market rates have contributed to the asset yield improvement. Furthermore, the composition shift from lower yielding Federal Reserve Bank balances to higher yielding loans and securities has also had a positive impact to the net interest margin. These factors more than offset the decrease in PPP loan fees that were more impactful during 2021 than 2022. As a result, net interest income during the three and nine months ended September 30, 2022, has outperformed the net interest income results during the same periods in 2021. Increases in overhead costs associated with Race Day have contributed to higher noninterest expense, which have increased 9.3% and 7.9% during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increases in overhead expense, net of noninterest revenue, during the third quarter of 2022 are only partially offsetting the benefits of higher net interest earnings. As a result, the Company’s quarterly efficiency number during the quarter decreased (improved) to 71.0% during the three months ended September 30, 2022, from 72.3% during the same period in 2021. While the margin continues to improve, increasing overhead costs has completely offset net interest earnings on a year-to-date basis. As a result, the Company’s year-to-date efficiency number increased (regressed) to 72.3% during the first nine months of 2022 from 70.9% during the same period in 2021.

Provision for income taxes

The Company’s income tax provision increased $242 during the three months ended September 30, 2022, and increased $262 during the nine months ended September 30, 2022, when compared to the same periods in 2021. The changes in tax expense corresponded directly to the change in associated taxable income during 2022 and 2021.

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 opted into the CBLR, and will, therefore, not be required to comply with the Basel III capital requirements. As of September 30, 2022, the Bank’s CBLR was 10.55%.

Pursuant to the CARES Act, the federal banking regulators in April 2020 issued interim final rules to set the CBLR at 8.0% beginning in the second quarter of 2020 through the end of 2020. The CBLR was then increased to 8.5% in 2021 until it was returned to 9.0% for all community banks beginning January 1, 2022.

Cash dividends paid by the Company were $3,717 during the first nine months of 2022. The year-to-date dividends paid totaled $0.78 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 market place. Total cash and cash equivalents, held to maturity securities maturing within one year, and available for sale securities, which totaled $298,314, represented 23.8% of total assets at September 30, 2022 compared to $329,264 and 26.3% of total assets at December 31, 2021. To further enhance the Bank’s ability to meet liquidity demands, the FHLB offers advances to the Bank. At September 30, 2022, the Bank could borrow an additional $96,813 from the FHLB. Furthermore, the Bank has established a borrowing line with the Federal Reserve. At September 30, 2022, this line had total availability of $55,203. Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank. For further cash flow information, see the condensed consolidated statement of cash flows above. Management does not rely on any single source of liquidity and monitors the level of liquidity based on many factors affecting the Company’s financial condition.

Off-Balance Sheet Arrangements

As discussed in Note 5 – Financial Instruments with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet credit-related activities, including commitments to extend credit and standby letters of credit, which could require the Company to make cash payments in the event that specified future events occur. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. While these commitments are necessary to meet the financing needs of the Company’s customers, many of these commitments are expected to expire without being drawn upon. Therefore, the total amount of commitments does not necessarily represent future cash requirements.

Critical Accounting Policies

The most significant accounting policies followed by the Company are presented in Note A to the financial statements in the Company’s 2021 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.

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 5 years for the commercial portfolio segment. The total loan portfolio’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. During the second quarter of 2022, the Company established a new economic risk factor for certain risks that may impact the loan portfolio, such as elevated inflation, increasing interest rates, slowing housing starts, declining GDP, and negative employment trends. The following portfolio segments have been identified: Commercial Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer.

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

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

Residential real estate loans consist of loans to individuals for the purchase of one- to four-family primary residences with repayment primarily through wage or other income sources of the individual borrower. The Company’s loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.

Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other loans to individuals for household, family, and other personal expenditures, both secured and unsecured. These loans typically have maturities of 6 years or less with repayment dependent on individual wages and income. The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary. During the last several years, one of the most significant portions of the Company’s net loan charge-offs have been from consumer loans. Nevertheless, the Company has allocated the highest percentage of its allowance for loan losses as a percentage of loans to the other identified loan portfolio segments due to the larger dollar balances and inherent risk associated with such portfolios.

Concentration of Credit Risk

The Company maintains a diversified credit portfolio, with residential real estate loans currently comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in southeastern Ohio and western West Virginia. Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group. To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

With the participation of the President and 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 Exchange Act) as of September 30, 2022. 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 President and Chief Executive Officer and Senior Vice President and Chief Financial Officer have concluded that Ohio Valley’s disclosure controls and procedures were effective as of September 30, 2022 to ensure that information required to be disclosed by Ohio Valley in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There was no change in Ohio Valley’s internal control over financial reporting (as defined in Rule 13a‑15(f) under the Exchange Act) that occurred during Ohio Valley’s fiscal quarter ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, Ohio Valley’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business. The Company is not currently involved in any material legal proceedings outside the ordinary course of the Company’s business.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors set forth under Part I, Item 1A, “Risk Factors” in the 2021 Form 10-K.

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, 2022.

Ohio Valley did not purchase any of its common shares during the three months ended September 30, 2022.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits:

Exhibit Number		Exhibit Description

3.1		Amended Articles of Incorporation of Ohio Valley (reflects amendments through April 7, 1999) [for SEC reporting compliance only - - not filed with the Ohio Secretary of State]: Incorporated herein by reference to Exhibit 3(a) to Ohio Valley’s Annual Report on Form 10-K for fiscal year ended December 31, 2007 (File No. 000-20914).

3.2		Code of Regulations of Ohio Valley: Incorporated herein by reference to Exhibit 3(b) to Ohio Valley’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 000-20914).

4.1		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 Unaudited 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 14, 2022	By:	/s/Larry E. Miller, II
			Larry E. Miller, II
			President and Chief Executive Officer

Date:	November 14, 2022	By:	/s/Scott W. Shockey
			Scott W. Shockey
			Senior Vice President and Chief Financial Officer