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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 March 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20914
OHIO VALLEY BANC CORP.
(Exact name of registrant as specified in its charter)

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

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

(740) 446-2631
(Registrant’s telephone number, including area code)
_____________________
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of common shares of the registrant outstanding as of May 7, 2021 was 4,787,446.

OHIO VALLEY BANC CORP.
Index

|  | Page Number
PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements (Unaudited) |
| Consolidated Balance Sheets | 3
| Consolidated Statements of Income | 4
| Consolidated Statements of Comprehensive Income | 5
| Consolidated Statements of Changes in Shareholders’ Equity | 6
| Condensed Consolidated Statements of Cash Flows | 7
| Notes to the Consolidated Financial Statements | 8
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 42
Item 4. | Controls and Procedures | 42
PART II. | OTHER INFORMATION |
Item 1. | Legal Proceedings | 43
Item 1A. | Risk Factors | 43
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 43
Item 3. | Defaults Upon Senior Securities | 43
Item 4. | Mine Safety Disclosures | 43
Item 5. | Other Information | 43
Item 6. | Exhibits | 44
Signatures |  | 45

2

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share and per share data)

|  | March 31, 2021 |  |  | December 31, 2020 |
ASSETS |  |  |  |  |  |
Cash and noninterest-bearing deposits with banks |  | $ | 15,884 |  |  | $ | 14,989 |
Interest-bearing deposits with banks |  |  | 160,536 |  |  |  | 123,314 |
Total cash and cash equivalents |  |  | 176,420 |  |  |  | 138,303 |
Certificates of deposit in financial institutions |  |  | 2,255 |  |  |  | 2,500 |
Securities available for sale |  |  | 126,394 |  |  |  | 112,322 |
Securities held to maturity (estimated fair value: 2021 - $11,376; 2020 - $10,344) |  |  | 11,137 |  |  |  | 10,020 |
Restricted investments in bank stocks |  |  | 7,506 |  |  |  | 7,506 |
Total loans |  |  | 831,050 |  |  |  | 848,664 |
Less: Allowance for loan losses |  |  | (6,887 | ) |  |  | (7,160 | )
Net loans |  |  | 824,163 |  |  |  | 841,504 |
Premises and equipment, net |  |  | 21,127 |  |  |  | 21,312 |
Premises and equipment held for sale, net |  |  | 633 |  |  |  | 637 |
Other real estate owned, net |  |  | — |  |  |  | 49 |
Accrued interest receivable |  |  | 3,257 |  |  |  | 3,319 |
Goodwill |  |  | 7,319 |  |  |  | 7,319 |
Other intangible assets, net |  |  | 99 |  |  |  | 112 |
Bank owned life insurance and annuity assets |  |  | 36,247 |  |  |  | 35,999 |
Operating lease right-of-use asset, net |  |  | 1,133 |  |  |  | 880 |
Other assets |  |  | 7,494 |  |  |  | 5,150 |
Total assets |  | $ | 1,225,184 |  |  | $ | 1,186,932 |
LIABILITIES |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  | $ | 327,976 |  |  | $ | 314,777 |
Interest-bearing deposits |  |  | 704,652 |  |  |  | 678,962 |
Total deposits |  |  | 1,032,628 |  |  |  | 993,739 |
Other borrowed funds |  |  | 26,691 |  |  |  | 27,863 |
Subordinated debentures |  |  | 8,500 |  |  |  | 8,500 |
Operating lease liability |  |  | 1,133 |  |  |  | 880 |
Accrued liabilities |  |  | 18,492 |  |  |  | 19,626 |
Total liabilities |  |  | 1,087,444 |  |  |  | 1,050,608 |
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5) |  |  |  |  |  |  |  |
SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 5,447,185 shares issued) |  |  | 5,447 |  |  |  | 5,447 |
Additional paid-in capital |  |  | 51,165 |  |  |  | 51,165 |
Retained earnings |  |  | 95,514 |  |  |  | 92,988 |
Accumulated other comprehensive income |  |  | 1,326 |  |  |  | 2,436 |
Treasury stock, at cost (659,739 shares) |  |  | (15,712 | ) |  |  | (15,712 | )
Total shareholders’ equity |  |  | 137,740 |  |  |  | 136,324 |
Total liabilities and shareholders’ equity |  | $ | 1,225,184 |  |  | $ | 1,186,932 |

See accompanying notes to consolidated financial statements
3

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

|  | Three months ended March 31, |
|  | 2021 |  |  | 2020 |
Interest and dividend income: |  |  |  |  |  |
Loans, including fees |  | $ | 10,565 |  |  | $ | 10,873 |
Securities |  |  |  |  |  |  |  |
Taxable |  |  | 405 |  |  |  | 597 |
Tax exempt |  |  | 59 |  |  |  | 73 |
Dividends |  |  | 59 |  |  |  | 66 |
Interest-bearing deposits with banks |  |  | 28 |  |  |  | 162 |
Other Interest |  |  | 10 |  |  |  | 14 |
|  |  | 11,126 |  |  |  | 11,785 |
Interest expense: |  |  |  |  |  |  |  |
Deposits |  |  | 883 |  |  |  | 1,509 |
Other borrowed funds |  |  | 155 |  |  |  | 200 |
Subordinated debentures |  |  | 40 |  |  |  | 72 |
|  |  | 1,078 |  |  |  | 1,781 |
Net interest income |  |  | 10,048 |  |  |  | 10,004 |
Provision for loan losses |  |  | (52 | ) |  |  | 3,846 |
Net interest income after provision for loan losses |  |  | 10,100 |  |  |  | 6,158 |
Noninterest income: |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 405 |  |  |  | 493 |
Trust fees |  |  | 72 |  |  |  | 68 |
Income from bank owned life insurance and annuity assets |  |  | 248 |  |  |  | 217 |
Mortgage banking income |  |  | 179 |  |  |  | 90 |
Electronic refund check / deposit fees |  |  | 540 |  |  |  | — |
Debit / credit card interchange income |  |  | 1,050 |  |  |  | 943 |
Gain (loss) on other real estate owned |  |  | 1 |  |  |  | (101 | )
Tax preparation fees |  |  | 694 |  |  |  | 615 |
Litigation settlement |  |  | — |  |  |  | 2,000 |
Other |  |  | 150 |  |  |  | 117 |
|  |  | 3,339 |  |  |  | 4,442 |
Noninterest expense: |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 5,270 |  |  |  | 5,455 |
Occupancy |  |  | 467 |  |  |  | 432 |
Furniture and equipment |  |  | 296 |  |  |  | 262 |
Professional fees |  |  | 430 |  |  |  | 598 |
Marketing expense |  |  | 268 |  |  |  | 268 |
FDIC insurance |  |  | 79 |  |  |  | — |
Data processing |  |  | 575 |  |  |  | 599 |
Software |  |  | 449 |  |  |  | 381 |
Foreclosed assets |  |  | 14 |  |  |  | 43 |
Amortization of intangibles |  |  | 13 |  |  |  | 17 |
Other |  |  | 1,326 |  |  |  | 1,464 |
|  |  | 9,187 |  |  |  | 9,519 |
Income before income taxes |  |  | 4,252 |  |  |  | 1,081 |
Provision for income taxes |  |  | 721 |  |  |  | 79 |
NET INCOME |  | $ | 3,531 |  |  | $ | 1,002 |
Earnings per share |  | $ | 0.74 |  |  | $ | 0.21 |

See accompanying notes to consolidated financial statements
4

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

|  | Three months ended March 31, |
|  | 2021 |  |  | 2020 |
Net Income |  | $ | 3,531 |  |  | $ | 1,002 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |
Change in unrealized gain (loss) on available for sale securities |  |  | (1,404 | ) |  |  | 2,937 |
Related tax (expense) benefit |  |  | 294 |  |  |  | (617 | )
Total other comprehensive income (loss), net of tax |  |  | (1,110 | ) |  |  | 2,320 |
Total comprehensive income |  | $ | 2,421 |  |  | $ | 3,322 |

See accompanying notes to consolidated financial statements
5

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

Quarter-to-date |  | Common Stock |  |  | Additional Paid-In Capital |  |  | Retained Earnings |  |  | Accumulated Other Comprehensive Income (Loss) |  |  | Treasury Stock |  |  | Total Shareholders' Equity |
Balance at January 1, 2021 |  | $ | 5,447 |  |  | $ | 51,165 |  |  | $ | 92,988 |  |  | $ | 2,436 |  |  | $ | (15,712 | ) |  | $ | 136,324 |
Net income |  |  | — |  |  |  | — |  |  |  | 3,531 |  |  |  | — |  |  |  | — |  |  |  | 3,531 |
Other comprehensive loss, net |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1,110 | ) |  |  | — |  |  |  | (1,110 | )
Cash dividends, $0.21 per share |  |  | — |  |  |  | — |  |  |  | (1,005 | ) |  |  | — |  |  |  | — |  |  |  | (1,005 | )
Balance at March 31, 2021 |  | $ | 5,447 |  |  | $ | 51,165 |  |  | $ | 95,514 |  |  | $ | 1,326 |  |  | $ | (15,712 | ) |  | $ | 137,740 |
Balance at January 1, 2020 |  | $ | 5,447 |  |  | $ | 51,165 |  |  | $ | 86,751 |  |  | $ | 528 |  |  | $ | (15,712 | ) |  | $ | 128,179 |
Net income |  |  | — |  |  |  | — |  |  |  | 1,002 |  |  |  | - |  |  |  | — |  |  |  | 1,002 |
Other comprehensive income, net |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,320 |  |  |  | — |  |  |  | 2,320 |
Cash dividends, $0.21 per share |  |  | — |  |  |  | — |  |  |  | (1,005 | ) |  |  | — |  |  |  | — |  |  |  | (1,005 | )
Balance at March 31, 2020 |  | $ | 5,447 |  |  | $ | 51,165 |  |  | $ | 86,748 |  |  | $ | 2,848 |  |  | $ | (15,712 | ) |  | $ | 130,496 |

See accompanying notes to consolidated financial statements
6

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

|  | Three months ended March 31, |
|  | 2021 |  |  | 2020 |
Net cash provided by operating activities: |  | $ | 685 |  |  | $ | 1,819 |
Investing activities: |  |  |  |  |  |  |  |
Proceeds from maturities of securities available for sale |  |  | 14,753 |  |  |  | 6,310 |
Purchases of securities available for sale |  |  | (30,421 | ) |  |  | (10,287 | )
Proceeds from maturities of securities held to maturity |  |  | 216 |  |  |  | 215 |
Purchase of securities held to maturity |  |  | (1,341 | ) |  |  | - |
Proceeds from maturities of certificates of deposit in financial institutions |  |  | 245 |  |  |  | — |
Net change in loans |  |  | 17,402 |  |  |  | (3,720 | )
Proceeds from sale of other real estate owned |  |  | 49 |  |  |  | 147 |
Purchases of premises and equipment |  |  | (183 | ) |  |  | (2,049 | )
Net cash (used in) investing activities |  |  | 720 |  |  |  | (9,384 | )
Financing activities: |  |  |  |  |  |  |  |
Change in deposits |  |  | 38,889 |  |  |  | 24,417 |
Cash dividends |  |  | (1,005 | ) |  |  | (1,005 | )
Repayment of Federal Home Loan Bank borrowings |  |  | (1,172 | ) |  |  | (1,383 | )
Change in other long-term borrowings |  |  | — |  |  |  | (149 | )
Net cash provided by financing activities |  |  | 36,712 |  |  |  | 21,880 |
Change in cash and cash equivalents |  |  | 38,117 |  |  |  | 14,315 |
Cash and cash equivalents at beginning of period |  |  | 138,303 |  |  |  | 52,356 |
Cash and cash equivalents at end of period |  | $ | 176,420 |  |  | $ | 66,671 |
Supplemental disclosure: |  |  |  |  |  |  |  |
Cash paid for interest |  | $ | 1,296 |  |  | $ | 1,805 |
Transfers from loans to other real estate owned |  |  | — |  |  |  | 33 |
Operating lease liability arising from obtaining right-of-use asset |  |  | 462 |  |  |  | — |

See accompanying notes to consolidated financial statements
7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. (“Ohio Valley”) and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc., a consumer finance company (“Loan Central”), Ohio Valley Financial Services Agency, LLC, an insurance agency, and OVBC Captive, Inc., a limited purpose property and casualty insurance company (the “Captive”). The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC, an Ohio limited liability company (“Ohio Valley REO”), to which the Bank transfers certain real estate acquired by the Bank through foreclosure for sale by Ohio Valley REO. Ohio Valley and its subsidiaries are collectively referred to as the “Company.” All material intercompany accounts and transactions have been eliminated in consolidation.
These interim financial statements are prepared by the Company without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at March 31, 2021, and its results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2021. 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, 2020 contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.
The consolidated financial statements for 2020 have been reclassified to conform to the presentation for 2021. These reclassifications had no effect on net income or shareholders’ equity.
CURRENT EVENTS: In March 2020, the World Health Organization declared the outbreak of the coronavirus (“COVID-19”) as a global pandemic. COVID-19 has continued to negatively impact the global economy, disrupt global supply chains, create significant volatility, disrupt financial markets, and increase unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies has impacted, and may continue to impact, many of the Company’s customers.
The continued financial impact of COVID-19 depends largely on the actions taken by governmental authorities and other third parties. In addition, COVID-19 may continue to adversely impact several industries within our geographic footprint for some time and impair the ability of our customers to fulfill their contractual obligations to the Company. This could result in a material adverse effect on our business operations, asset valuations, liquidity, financial condition, and results of operations. These effects may include:

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

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

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.
8

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
The Bank also originates long-term, fixed-rate mortgage loans, with 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 March 31, 2021, there were $275 in loans held for sale by the Bank, as compared to $70 in loans held for sale at December 31, 2020.
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 and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and impaired loans that are not individually reviewed for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years for the consumer and real estate portfolio segment and 5 years for the commercial portfolio segment. The total loan portfolio’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: Commercial and Industrial, Commercial Real Estate, Residential Real Estate, and Consumer.
9

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 which 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 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. 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 March 31, 2021, 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 period. The weighted average common shares outstanding were 4,787,446 for both the three months ended March 31, 2021 and 2020, 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 will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. A CECL steering committee has developed a CECL model and is evaluating the source data, various credit loss methodologies and model results in relation to the new ASU guidance. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. Management expects the adoption will result in a material increase to the allowance for loan losses balance. 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.
10

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.
11

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Interest Rate Swap Agreements: The fair value of interest rate swap agreements is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:

|  | Fair Value Measurements at March 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 |  |  | — |  |  | $ | 5,166 |  |  |  | — |
U.S. Government sponsored entity securities |  |  | — |  |  |  | 22,822 |  |  |  | — |
Agency mortgage-backed securities, residential |  |  | — |  |  |  | 98,406 |  |  |  | — |
Interest rate swap derivatives |  |  | — |  |  |  | 765 |  |  |  | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap derivatives |  |  | — |  |  |  | (765 | ) |  |  | — |

|  | Fair Value Measurements at December 31, 2020 Using |
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |
U.S. Government sponsored entity securities |  |  | — |  |  | $ | 18,153 |  |  |  | — |
Agency mortgage-backed securities, residential |  |  | — |  |  |  | 94,169 |  |  |  | — |
Interest rate swap derivatives |  |  | — |  |  |  | 928 |  |  |  | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap derivatives |  |  | — |  |  |  | (928 | ) |  |  | — |

There were no transfers between Level 1 and Level 2 during 2021 or 2020.
Assets and Liabilities Measured on a Nonrecurring Basis
There were no assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2020. Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

|  | Fair Value Measurements at March 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: |  |  |  |  |  |  |  |  |
Impaired loans: |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | — |  |  |  | — |  |  | $ | 2,097 |
Commercial and Industrial |  |  | — |  |  |  | — |  |  |  | 244 |

12

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
At March 31, 2021, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $2,431, with a corresponding valuation allowance of $90, resulting in an increase of $90 in provision expense during the three months ended March 31, 2021, with no corresponding charge-offs recognized. This is compared to an increase of $854 in provision expense during the three months ended March 31, 2020. At December 31, 2020, the Company had no recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans and, therefore, recorded no impact to provision expense during the year ended December 31, 2020.
There was no other real estate owned that was measured at fair value less costs to sell at March 31, 2021 and December 31, 2020. There were no corresponding write downs during the three months ended March 31, 2021 and 2020.
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 March 31, 2021

March 31, 2021 |  | Fair Value |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range |  | Weighted Average
Impaired loans: |  |  |  |  | 1 |  |  |  | 1 |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 2,097 |  | Sales approach |  | Adjustment to comparables |  | 5% to 35% |  |  | 20.8%
Commercial and industrial |  |  | 944 |  | Sales approach |  | Adjustment to comparables |  | 20% to 33% |  |  | 23.4%

The carrying amounts and estimated fair values of financial instruments at March 31, 2021 and December 31, 2020 are as follows:

|  | Carrying |  |  | Fair Value Measurements at March 31, 2021 Using |
|  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 176,420 |  |  | $ | 176,420 |  |  | $ | — |  |  | $ | — |  |  | $ | 176,420 |
Certificates of deposit in financial institutions |  |  | 2,255 |  |  |  | — |  |  |  | 2,255 |  |  |  | — |  |  |  | 2,255 |
Securities available for sale |  |  | 126,394 |  |  |  | — |  |  |  | 126,394 |  |  |  | — |  |  |  | 126,394 |
Securities held to maturity |  |  | 11,137 |  |  |  | — |  |  |  | 6,270 |  |  |  | 5,106 |  |  |  | 11,376 |
Loans, net |  |  | 824,163 |  |  |  | — |  |  |  | — |  |  |  | 821,177 |  |  |  | 821,177 |
Interest rate swap derivatives |  |  | 765 |  |  |  | — |  |  |  | 765 |  |  |  | — |  |  |  | 765 |
Accrued interest receivable |  |  | 3,257 |  |  |  | — |  |  |  | 343 |  |  |  | 2,914 |  |  |  | 3,257 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,032,628 |  |  |  | 327,976 |  |  |  | 706,080 |  |  |  | — |  |  |  | 1,034,056 |
Other borrowed funds |  |  | 26,691 |  |  |  | — |  |  |  | 27,925 |  |  |  | — |  |  |  | 27,925 |
Subordinated debentures |  |  | 8,500 |  |  |  | — |  |  |  | 5,548 |  |  |  | — |  |  |  | 5,548 |
Interest rate swap derivatives |  |  | 765 |  |  |  | — |  |  |  | 765 |  |  |  | — |  |  |  | 765 |
Accrued interest payable |  |  | 882 |  |  |  | 1 |  |  |  | 881 |  |  |  | — |  |  |  | 882 |

|  | Carrying |  |  | Fair Value Measurements at December 31, 2020 Using: |
|  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 138,303 |  |  | $ | 138,303 |  |  | $ | — |  |  | $ | — |  |  | $ | 138,303 |
Certificates of deposit in financial institutions |  |  | 2,500 |  |  |  | — |  |  |  | 2,500 |  |  |  | — |  |  |  | 2,500 |
Securities available for sale |  |  | 112,322 |  |  |  | — |  |  |  | 112,322 |  |  |  | — |  |  |  | 112,322 |
Securities held to maturity |  |  | 10,020 |  |  |  | — |  |  |  | 4,989 |  |  |  | 5,355 |  |  |  | 10,344 |
Loans, net |  |  | 841,504 |  |  |  | — |  |  |  | — |  |  |  | 837,387 |  |  |  | 837,387 |
Interest rate swap derivatives |  |  | 928 |  |  |  | — |  |  |  | 928 |  |  |  | — |  |  |  | 928 |
Accrued interest receivable |  |  | 3,319 |  |  |  | — |  |  |  | 283 |  |  |  | 3,036 |  |  |  | 3,319 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 993,739 |  |  |  | 314,777 |  |  |  | 680,904 |  |  |  | — |  |  |  | 995,681 |
Other borrowed funds |  |  | 27,863 |  |  |  | — |  |  |  | 29,807 |  |  |  | — |  |  |  | 29,807 |
Subordinated debentures |  |  | 8,500 |  |  |  | — |  |  |  | 5,556 |  |  |  | — |  |  |  | 5,556 |
Interest rate swap derivatives |  |  | 928 |  |  |  | — |  |  |  | 928 |  |  |  | — |  |  |  | 928 |
Accrued interest payable |  |  | 1,100 |  |  |  | 1 |  |  |  | 1,099 |  |  |  | — |  |  |  | 1,100 |

13

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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 March 31, 2021 and December 31, 2020 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 |
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government securities |  | $ | 5,173 |  |  | $ | — |  |  | $ | (7 | ) |  | $ | 5,166 |
U.S. Government sponsored entity securities |  |  | 22,808 |  |  |  | 241 |  |  |  | (227 | ) |  |  | 22,822 |
Agency mortgage-backed securities, residential |  |  | 96,734 |  |  |  | 2,150 |  |  |  | (478 | ) |  |  | 98,406 |
Total securities |  | $ | 124,715 |  |  | $ | 2,391 |  |  | $ | (712 | ) |  | $ | 126,394 |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government sponsored entity securities |  | $ | 17,814 |  |  | $ | 339 |  |  | $ | — |  |  | $ | 18,153 |
Agency mortgage-backed securities, residential |  |  | 91,425 |  |  |  | 2,748 |  |  |  | (4 | ) |  |  | 94,169 |
Total securities |  | $ | 109,239 |  |  | $ | 3,087 |  |  | $ | (4 | ) |  | $ | 112,322 |

Securities Held to Maturity |  | Amortized Cost |  |  | Gross Unrecognized Gains |  |  | Gross Unrecognized Losses |  |  | Estimated Fair Value |
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 11,135 |  |  | $ | 275 |  |  | $ | (36 | ) |  | $ | 11,374 |
Agency mortgage-backed securities, residential |  |  | 2 |  |  |  | — |  |  |  | — |  |  |  | 2 |
Total securities |  | $ | 11,137 |  |  | $ | 275 |  |  | $ | (36 | ) |  | $ | 11,376 |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 10,018 |  |  | $ | 324 |  |  | $ | — |  |  | $ | 10,342 |
Agency mortgage-backed securities, residential |  |  | 2 |  |  |  | — |  |  |  | — |  |  |  | 2 |
Total securities |  | $ | 10,020 |  |  | $ | 324 |  |  | $ | - |  |  | $ | 10,344 |

The amortized cost and estimated fair value of debt securities at March 31, 2021, 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.
14

NOTE 3 – SECURITIES (Continued)

|  | Available for Sale |  |  | Held to Maturity |
Debt Securities: |  | Amortized Cost |  |  | Estimated Fair Value |  |  | Amortized Cost |  |  | Estimated Fair Value |
Due in one year or less |  | $ | - |  |  | $ | - |  |  | $ | 2,422 |  |  | $ | 2,467 |
Due in over one to five years |  |  | 10,308 |  |  |  | 10,507 |  |  |  | 3,492 |  |  |  | 3,609 |
Due in over five to ten years |  |  | 17,673 |  |  |  | 17,481 |  |  |  | 4,894 |  |  |  | 4,981 |
Due after ten years |  |  | — |  |  |  | — |  |  |  | 327 |  |  |  | 317 |
Agency mortgage-backed securities, residential |  |  | 96,734 |  |  |  | 98,406 |  |  |  | 2 |  |  |  | 2 |
Total debt securities |  | $ | 124,715 |  |  | $ | 126,394 |  |  | $ | 11,137 |  |  | $ | 11,376 |

The following table summarizes securities with unrealized losses at March 31, 2021 and December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position:

March 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 |  | $ | 5,166 |  |  | $ | (7 | ) |  | $ | — |  |  | $ | — |  |  | $ | 5,166 |  |  | $ | (7 | )
U.S. Government sponsored entity securities |  |  | 14,771 |  |  |  | (227 | ) |  |  | — |  |  |  | — |  |  |  | 14,771 |  |  |  | (227 | )
Agency mortgage-backed |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
securities, residential |  |  | 33,641 |  |  |  | (478 | ) |  |  | — |  |  |  | — |  |  |  | 33,641 |  |  |  | (478 | )
Total available for sale |  | $ | 53,578 |  |  | $ | (712 | ) |  | $ | — |  |  | $ | — |  |  | $ | 53,578 |  |  | $ | (712 | )

December 31, 2020 |  | Less Than 12 Months |  |  | 12 Months or More |  |  | Total |
|  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |
Securities Available for Sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agency mortgage-backedsecurities, residential |  | $ | 14,517 |  |  | $ | (4 | ) |  | $ | — |  |  | $ | — |  |  | $ | 14,517 |  |  | $ | (4 | )
Total available for sale |  | $ | 14,517 |  |  | $ | (4 | ) |  | $ | — |  |  | $ | — |  |  | $ | 14,517 |  |  | $ | (4 | )

15

NOTE 3 – SECURITIES (Continued)

March 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 |  | $ | 2,023 |  |  | $ | (36 | ) |  | $ | — |  |  | $ | — |  |  | $ | 2,023 |  |  | $ | (36 | )
Total held to maturity |  | $ | 2,023 |  |  | $ | (36 | ) |  | $ | — |  |  | $ | — |  |  | $ | 2,023 |  |  | $ | (36 | )

There were no sales of investment securities during the three months ended March 31, 2021 or 2020. Unrealized losses on the Company’s debt securities have not been recognized into income because the issuers’ securities are of high credit quality as of March 31, 2021, 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 March 31, 2021 and December 31, 2020 represents an other-than-temporary impairment.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are comprised of the following:

|  | March 31, 2021 |  |  | December 31, 2020 |
Residential real estate |  | $ | 290,587 |  |  | $ | 305,478 |
Commercial real estate: |  |  |  |  |  |  |  |
Owner-occupied |  |  | 54,228 |  |  |  | 51,863 |
Nonowner-occupied |  |  | 159,262 |  |  |  | 164,523 |
Construction |  |  | 37,656 |  |  |  | 37,063 |
Commercial and industrial |  |  | 159,716 |  |  |  | 157,692 |
Consumer: |  |  |  |  |  |  |  |
Automobile |  |  | 53,475 |  |  |  | 55,241 |
Home equity |  |  | 20,608 |  |  |  | 19,993 |
Other |  |  | 55,518 |  |  |  | 56,811 |
|  |  | 831,050 |  |  |  | 848,664 |
Less: Allowance for loan losses |  |  | (6,887 | ) |  |  | (7,160 | )
Loans, net |  | $ | 824,163 |  |  | $ | 841,504 |

Commercial and industrial loans include $25,829 of loans originated under the PPP at March 31, 2021 compared to $27,933 at December 31, 2020. These loans are guaranteed by the SBA.
16

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 three months ended March 31, 2021 and 2020:

March 31, 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 |  |  | (116 | ) |  |  | (102 | ) |  |  | 52 |  |  |  | 114 |  |  |  | (52 | )
Loans charged off |  |  | (1 | ) |  |  | (10 | ) |  |  | (71 | ) |  |  | (359 | ) |  |  | (441 | )
Recoveries |  |  | 14 |  |  |  | 27 |  |  |  | 34 |  |  |  | 145 |  |  |  | 220 |
Total ending allowance balance |  | $ | 1,377 |  |  | $ | 2,346 |  |  | $ | 1,791 |  |  | $ | 1,373 |  |  | $ | 6,887 |

March 31, 2020 |  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial and Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 1,250 |  |  | $ | 1,928 |  |  | $ | 1,447 |  |  | $ | 1,647 |  |  | $ | 6,272 |
Provision for loan losses |  |  | 926 |  |  |  | 1,572 |  |  |  | 624 |  |  |  | 724 |  |  |  | 3,846 |
Loans charged-off |  |  | (198 | ) |  |  | (516 | ) |  |  | (33 | ) |  |  | (889 | ) |  |  | (1,636 | )
Recoveries |  |  | 24 |  |  |  | 44 |  |  |  | 7 |  |  |  | 172 |  |  |  | 247 |
Total ending allowance balance |  | $ | 2,002 |  |  | $ | 3,028 |  |  | $ | 2,045 |  |  | $ | 1,654 |  |  | $ | 8,729 |

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 March 31, 2021 and December 31, 2020:

March 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 |  | $ | — |  |  | $ | 8 |  |  | $ | 32 |  |  | $ | 50 |  |  | $ | 90 |
Collectively evaluated for impairment |  |  | 1,377 |  |  |  | 2,338 |  |  |  | 1,759 |  |  |  | 1,323 |  |  |  | 6,797 |
Total ending allowance balance |  | $ | 1,377 |  |  | $ | 2,346 |  |  | $ | 1,791 |  |  | $ | 1,373 |  |  | $ | 6,887 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 205 |  |  | $ | 5,606 |  |  | $ | 3,311 |  |  | $ | 83 |  |  | $ | 9,205 |
Loans collectively evaluated for impairment |  |  | 290,382 |  |  |  | 245,540 |  |  |  | 156,405 |  |  |  | 129,518 |  |  |  | 821,845 |
Total ending loans balance |  | $ | 290,587 |  |  | $ | 251,146 |  |  | $ | 159,716 |  |  | $ | 129,601 |  |  | $ | 831,050 |

17

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

December 31, 2020 |  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial and Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Collectively evaluated for impairment |  |  | 1,480 |  |  |  | 2,431 |  |  |  | 1,776 |  |  |  | 1,473 |  |  |  | 7,160 |
Total ending allowance balance |  | $ | 1,480 |  |  | $ | 2,431 |  |  | $ | 1,776 |  |  | $ | 1,473 |  |  | $ | 7,160 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 411 |  |  | $ | 5,845 |  |  | $ | 4,686 |  |  | $ | 84 |  |  | $ | 11,026 |
Loans collectively evaluated for impairment |  |  | 305,067 |  |  |  | 247,604 |  |  |  | 153,006 |  |  |  | 131,961 |  |  |  | 837,638 |
Total ending loans balance |  | $ | 305,478 |  |  | $ | 253,449 |  |  | $ | 157,692 |  |  | $ | 132,045 |  |  | $ | 848,664 |

The following tables present information related to loans individually evaluated for impairment by class of loans as of March 31, 2021 and December 31, 2020:

March 31, 2021 |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance for Loan Losses Allocated |
With an allowance recorded: |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 2,105 |  |  | $ | 2,105 |  |  | $ | 8 |
Commercial and industrial |  |  | 276 |  |  |  | 276 |  |  |  | 32 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Other |  |  | 50 |  |  |  | 50 |  |  |  | 50 |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 215 |  |  |  | 205 |  |  |  | — |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 3,112 |  |  |  | 3,112 |  |  |  | — |
Nonowner-occupied |  |  | 389 |  |  |  | 389 |  |  |  | — |
Commercial and industrial |  |  | 3,035 |  |  |  | 3,035 |  |  |  | — |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 33 |  |  |  | 33 |  |  |  | — |
Total |  | $ | 9,215 |  |  | $ | 9,205 |  |  | $ | 90 |

December 31, 2020 |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance for Loan Losses Allocated |
With an allowance recorded: |  | $ | ---- |  |  | $ | ---- |  |  | $ | --- |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 418 |  |  |  | 411 |  |  |  | — |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 5,256 |  |  |  | 5,256 |  |  |  | — |
Nonowner-occupied |  |  | 632 |  |  |  | 589 |  |  |  | — |
Commercial and industrial |  |  | 4,686 |  |  |  | 4,686 |  |  |  | — |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 34 |  |  |  | 34 |  |  |  | — |
Other |  |  | 50 |  |  |  | 50 |  |  |  | — |
Total |  | $ | 11,076 |  |  | $ | 11,026 |  |  | $ | — |

18

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 months ended March 31, 2021 and 2020:

|  | Three months ended March 31, 2021 |
|  | Average Impaired Loans |  |  | Interest Income Recognized |  |  | Cash Basis Interest Recognized |
With an allowance recorded: |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 2,109 |  |  | $ | 43 |  |  | $ | 43 |
Commercial and industrial |  |  | 281 |  |  |  | 4 |  |  |  | 4 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Other |  |  | 50 |  |  |  | 1 |  |  |  | 1 |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 207 |  |  |  | 3 |  |  |  | 3 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 3,128 |  |  |  | 34 |  |  |  | 34 |
Nonowner-occupied |  |  | 389 |  |  |  | 7 |  |  |  | 7 |
Commercial and industrial |  |  | 3,718 |  |  |  | 47 |  |  |  | 47 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 33 |  |  |  | 1 |  |  |  | 1 |
Total |  | $ | 9,915 |  |  | $ | 140 |  |  | $ | 140 |

|  | Three months ended March 31, 2020 |
|  | Average Impaired Loans |  |  | Interest Income Recognized |  |  | Cash Basis Interest Recognized |
With an allowance recorded: |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 875 |  |  | $ | 9 |  |  | $ | 9 |
Commercial and industrial |  |  | 611 |  |  |  | 7 |  |  |  | 7 |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 433 |  |  |  | 4 |  |  |  | 4 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 2,754 |  |  |  | 48 |  |  |  | 48 |
Nonowner-occupied |  |  | 1,033 |  |  |  | 11 |  |  |  | 11 |
Commercial and industrial |  |  | 4,279 |  |  |  | 66 |  |  |  | 66 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 385 |  |  |  | 5 |  |  |  | 5 |
Total |  | $ | 10,370 |  |  | $ | 150 |  |  | $ | 150 |

The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees.
Nonaccrual loans and loans past due 90 days or more and still accruing include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified as impaired loans.
The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of March 31, 2021, there were no other real estate owned for residential real estate properties, as compared to $43 at December 31, 2020. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $693 and $1,097 as of March 31, 2021 and December 31, 2020, respectively.
19

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 March 31, 2021 and December 31, 2020:

March 31, 2021 |  | Loans Past Due 90 Days And Still Accruing |  |  | Nonaccrual |
Residential real estate |  | $ | 39 |  |  | $ | 4,828 |
Commercial real estate: |  |  |  |  |  |  |  |
Owner-occupied |  |  | — |  |  |  | 457 |
Nonowner-occupied |  |  | — |  |  |  | 162 |
Construction |  |  | — |  |  |  | 153 |
Commercial and industrial |  |  | — |  |  |  | 149 |
Consumer: |  |  |  |  |  |  |  |
Automobile |  |  | 59 |  |  |  | 55 |
Home equity |  |  | — |  |  |  | 160 |
Other |  |  | 42 |  |  |  | 26 |
Total |  | $ | 140 |  |  | $ | 5,990 |

December 31, 2020 |  | Loans Past Due 90 Days And Still Accruing |  |  | Nonaccrual |
Residential real estate |  | $ | 127 |  |  | $ | 5,256 |
Commercial real estate: |  |  |  |  |  |  |  |
Owner-occupied |  |  | — |  |  |  | 205 |
Nonowner-occupied |  |  | — |  |  |  | 362 |
Construction |  |  | — |  |  |  | 156 |
Commercial and industrial |  |  | 15 |  |  |  | 149 |
Consumer: |  |  |  |  |  |  |  |
Automobile |  |  | 146 |  |  |  | 129 |
Home equity |  |  | — |  |  |  | 210 |
Other |  |  | 136 |  |  |  | 36 |
Total |  | $ | 424 |  |  | $ | 6,503 |

20

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 March 31, 2021 and December 31, 2020:

March 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 |  | $ | 2,123 |  |  | $ | 506 |  |  | $ | 965 |  |  | $ | 3,594 |  |  | $ | 286,993 |  |  | $ | 290,587 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 292 |  |  |  | 923 |  |  |  | 445 |  |  |  | 1,660 |  |  |  | 52,568 |  |  |  | 54,228 |
Nonowner-occupied |  |  | 2,098 |  |  |  | — |  |  |  | 162 |  |  |  | 2,260 |  |  |  | 157,002 |  |  |  | 159,262 |
Construction |  |  | - |  |  |  | 29 |  |  |  | 82 |  |  |  | 111 |  |  |  | 37,545 |  |  |  | 37,656 |
Commercial and industrial |  |  | 140 |  |  |  | - |  |  |  | 149 |  |  |  | 289 |  |  |  | 159,427 |  |  |  | 159,716 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | 451 |  |  |  | 80 |  |  |  | 99 |  |  |  | 630 |  |  |  | 52,845 |  |  |  | 53,475 |
Home equity |  |  | 61 |  |  |  | 127 |  |  |  | 138 |  |  |  | 326 |  |  |  | 20,282 |  |  |  | 20,608 |
Other |  |  | 161 |  |  |  | 71 |  |  |  | 61 |  |  |  | 293 |  |  |  | 55,225 |  |  |  | 55,518 |
Total |  | $ | 5,326 |  |  | $ | 1,736 |  |  | $ | 2,101 |  |  | $ | 9,163 |  |  | $ | 821,887 |  |  | $ | 831,050 |

December 31, 2020 |  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | 90 Days Or More Past Due |  |  | Total Past Due |  |  | Loans Not Past Due |  |  | Total |
Residential real estate |  | $ | 2,845 |  |  | $ | 496 |  |  | $ | 1,663 |  |  | $ | 5,004 |  |  | $ | 300,474 |  |  | $ | 305,478 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 470 |  |  |  | 1,003 |  |  |  | 193 |  |  |  | 1,666 |  |  |  | 50,197 |  |  |  | 51,863 |
Nonowner-occupied |  |  | 94 |  |  |  | — |  |  |  | 362 |  |  |  | 456 |  |  |  | 164,067 |  |  |  | 164,523 |
Construction |  |  | — |  |  |  | 82 |  |  |  | — |  |  |  | 82 |  |  |  | 36,981 |  |  |  | 37,063 |
Commercial and industrial |  |  | 1,112 |  |  |  | 11 |  |  |  | 164 |  |  |  | 1,287 |  |  |  | 156,405 |  |  |  | 157,692 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | 831 |  |  |  | 131 |  |  |  | 258 |  |  |  | 1,220 |  |  |  | 54,021 |  |  |  | 55,241 |
Home equity |  |  | 204 |  |  |  | 81 |  |  |  | 113 |  |  |  | 398 |  |  |  | 19,595 |  |  |  | 19,993 |
Other |  |  | 446 |  |  |  | 76 |  |  |  | 172 |  |  |  | 694 |  |  |  | 56,117 |  |  |  | 56,811 |
Total |  | $ | 6,002 |  |  | $ | 1,880 |  |  | $ | 2,925 |  |  | $ | 10,807 |  |  | $ | 837,857 |  |  | $ | 848,664 |

Troubled Debt Restructurings:
A troubled debt restructuring (“TDR”) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. All TDRs are considered to be impaired. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a reduction in the contractual principal and interest payments of the loan; or short-term interest-only payment terms.
The Company has allocated reserves for a portion of its TDRs to reflect the fair values of the underlying collateral or the present value of the concessionary terms granted to the customer.
21

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 March 31, 2021 and December 31, 2020:

March 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 |  | $ | 1,479 |  |  | $ | — |  |  | $ | 1,479 |
Maturity extension at lower stated rate than market rate |  |  | 329 |  |  |  | — |  |  |  | 329 |
Credit extension at lower stated rate than market rate |  |  | 381 |  |  |  | — |  |  |  | 381 |
Nonowner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Credit extension at lower stated rate than market rate |  |  | 389 |  |  |  | — |  |  |  | 389 |
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 3,035 |  |  |  | — |  |  |  | 3,035 |
Total TDRs |  | $ | 5,613 |  |  | $ | — |  |  | $ | 5,613 |

December 31, 2020 |  | TDRs Performing to Modified Terms |  |  | TDRs Not Performing to Modified Terms |  |  | Total TDRs |
Residential real estate: |  |  |  |  |  |  |  |  |
Interest only payments |  | $ | 202 |  |  | $ | — |  |  | $ | 202 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Reduction of principal and interest payments |  |  | 1,486 |  |  |  | — |  |  |  | 1,486 |
Maturity extension at lower stated rate than market rate |  |  | 351 |  |  |  | — |  |  |  | 351 |
Credit extension at lower stated rate than market rate |  |  | 384 |  |  |  | — |  |  |  | 384 |
Nonowner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Credit extension at lower stated rate than market rate |  |  | 390 |  |  |  | — |  |  |  | 390 |
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 4,400 |  |  |  | — |  |  |  | 4,400 |
Total TDRs |  | $ | 7,213 |  |  | $ | — |  |  | $ | 7,213 |

The Company had no specific allocations in reserves to customers whose loan terms have been modified in TDRs at March 31, 2021 and December 31, 2020. At March 31, 2021, the Company had $2,465 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs, as compared to $1,100 at December 31, 2020.
There were no TDR loan modifications that occurred during the three months ended March 31, 2021 and 2020 that impacted provision expense or the allowance for loan losses.
The Company had no TDRs that occurred during the three months ended March 31, 2021 and 2020 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.
22

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and provided guidance on the modification of loans as a result of COVID-19, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief are not TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current if they are less than 30 days past due on their contractual payments at the time of modification. As of March 31, 2021, the Company had modified 783 loans related to COVID-19 with an outstanding loan balance of $147,985 that were not reported as TDRs. As of March 31, 2021, the Company had 56 modified loans that were still in active deferral related to COVID-19 with an outstanding loan balance of $2,395 that were not reported as TDRs in the tables presented above.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. These risk categories are represented by a loan grading scale from 1 through 11. The Company analyzes loans individually with a higher credit risk rating and groups these loans into categories called “criticized” and ”classified” assets. The Company considers its criticized assets to be loans that are graded 8 and its classified assets to be loans that are graded 9 through 11. The Company’s risk categories are reviewed at least annually on loans that have aggregate borrowing amounts that meet or exceed $750.
The Company uses the following definitions for its criticized loan risk ratings:
Special Mention. Loans classified as "special mention" indicate considerable risk due to deterioration of repayment (in the earliest stages) due to potential weak primary repayment source, or payment delinquency. These loans will be under constant supervision, are not classified and do not expose the institution to sufficient risks to warrant classification. These deficiencies should be correctable within the normal course of business, although significant changes in company structure or policy may be necessary to correct the deficiencies. These loans are considered bankable assets with no apparent loss of principal or interest envisioned. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. Credits that are defined as a TDR should be graded no higher than special mention until they have been reported as performing over one year after restructuring.
The Company uses the following definitions for its classified loan risk ratings:
Substandard. Loans classified as "substandard" represent very high risk, serious delinquency, nonaccrual, or unacceptable credit. Repayment through the primary source of repayment is in jeopardy due to the existence of one or more well-defined weaknesses, and the collateral pledged may inadequately protect collection of the loans. Loss of principal is not likely if weaknesses are corrected, although financial statements normally reveal significant weakness. Loans are still considered collectible, although loss of principal is more likely than with special mention loans. Collateral liquidation is considered likely to satisfy debt.
Doubtful. Loans classified as "doubtful" display a high probability of loss, although the amount of actual loss at the time of classification is undetermined. This classification should be temporary until such time that actual loss can be identified, or improvements are 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.
23

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 March 31, 2021 and December 31, 2020, and based on the most recent analysis performed, the risk category of commercial loans by class of loans was as follows:

March 31, 2021 |  | Pass |  |  | Criticized |  |  | Classified |  |  | Total |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 48,758 |  |  | $ | 655 |  |  | $ | 4,815 |  |  | $ | 54,228 |
Nonowner-occupied |  |  | 155,258 |  |  |  | 3,635 |  |  |  | 369 |  |  |  | 159,262 |
Construction |  |  | 37,574 |  |  |  | — |  |  |  | 82 |  |  |  | 37,656 |
Commercial and industrial |  |  | 154,244 |  |  |  | 2,012 |  |  |  | 3,460 |  |  |  | 159,716 |
Total |  | $ | 395,834 |  |  | $ | 6,302 |  |  | $ | 8,726 |  |  | $ | 410,862 |

December 31, 2020 |  | Pass |  |  | Criticized |  |  | Classified |  |  | Total |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 46,604 |  |  | $ | 669 |  |  | $ | 4,590 |  |  | $ | 51,863 |
Nonowner-occupied |  |  | 160,324 |  |  |  | 3,629 |  |  |  | 570 |  |  |  | 164,523 |
Construction |  |  | 37,063 |  |  |  | — |  |  |  | — |  |  |  | 37,063 |
Commercial and industrial |  |  | 150,786 |  |  |  | 2,064 |  |  |  | 4,842 |  |  |  | 157,692 |
Total |  | $ | 394,777 |  |  | $ | 6,362 |  |  | $ | 10,002 |  |  | $ | 411,141 |

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 March 31, 2021 and December 31, 2020:

March 31, 2021 |  | Consumer |  |  | Residential |  |  |  |
|  | Automobile |  |  | Home Equity |  |  | Other |  |  | Real Estate |  |  | Total |
Performing |  | $ | 53,361 |  |  | $ | 20,448 |  |  | $ | 55,450 |  |  | $ | 285,720 |  |  | $ | 414,979 |
Nonperforming |  |  | 114 |  |  |  | 160 |  |  |  | 68 |  |  |  | 4,867 |  |  |  | 5,209 |
Total |  | $ | 53,475 |  |  | $ | 20,608 |  |  | $ | 55,518 |  |  | $ | 290,587 |  |  | $ | 420,188 |

December 31, 2020 |  | Consumer |  |  | Residential |  |  |  |
|  | Automobile |  |  | Home Equity |  |  | Other |  |  | Real Estate |  |  | Total |
Performing |  | $ | 54,966 |  |  | $ | 19,783 |  |  | $ | 56,639 |  |  | $ | 300,095 |  |  | $ | 431,483 |
Nonperforming |  |  | 275 |  |  |  | 210 |  |  |  | 172 |  |  |  | 5,383 |  |  |  | 6,040 |
Total |  | $ | 55,241 |  |  | $ | 19,993 |  |  | $ | 56,811 |  |  | $ | 305,478 |  |  | $ | 437,523 |

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 4.04% of total loans were unsecured at March 31, 2021, down from 4.22% at December 31, 2020.
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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 March 31, 2021, the contract amounts of these instruments totaled approximately $86,859, compared to $88,456 at December 31, 2020. 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 March 31, 2021 and December 31, 2020 are comprised of advances from the Federal Home Loan Bank (“FHLB”) of Cincinnati and promissory notes.

|  | FHLB Borrowings |  |  | Promissory Notes |  |  | Totals |
March 31, 2021 |  | $ | 23,493 |  |  | $ | 3,198 |  |  | $ | 26,691 |
December 31, 2020 |  | $ | 24,665 |  |  | $ | 3,198 |  |  | $ | 27,863 |

Pursuant to collateral agreements with the FHLB, advances were secured by $282,889 in qualifying mortgage loans, $55,701 in commercial loans and $5,365 in FHLB stock at March 31, 2021. Fixed-rate FHLB advances of $23,493 mature through 2042 and have interest rates ranging from 1.53% to 3.31% and a year-to-date weighted average cost of 2.43% at March 31, 2021 and 2.40% at December 31, 2020. There were no variable-rate FHLB borrowings at March 31, 2021.
At March 31, 2021, the Company had a cash management line of credit enabling it to borrow up to $100,000 from the FHLB. All cash management advances have an original maturity of 90 days. The line of credit must be renewed on an annual basis. There was $92,178 available on this line of credit at March 31, 2021.
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 $188,666 at March 31, 2021. Of this maximum borrowing capacity, the Company had $92,178 available to use as additional borrowings.
Promissory notes, issued primarily by Ohio Valley, are due at various dates through a final maturity date of December 9, 2021, and have fixed rates ranging from 1.00% to 2.85% and a year-to-date weighted average cost of 1.41% at March 31, 2021, as compared to 2.20% at December 31, 2020. At March 31, 2021 and December 31, 2020, there were six promissory notes payable by Ohio Valley to related parties totaling $3,198. There were no promissory notes payable to other banks at March 31, 2021 and December 31, 2020, respectively.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $72,995 at March 31, 2021 and $76,740 at December 31, 2020.
Scheduled principal payments as of March 31, 2021:

|  | FHLB Borrowings |  |  | Promissory Notes |  |  | Totals |
2021 |  | $ | 1,962 |  |  | $ | 3,198 |  |  | $ | 5,160 |
2022 |  |  | 2,683 |  |  |  | — |  |  |  | 2,683 |
2023 |  |  | 2,542 |  |  |  | — |  |  |  | 2,542 |
2024 |  |  | 2,173 |  |  |  | — |  |  |  | 2,173 |
2025 |  |  | 1,897 |  |  |  | — |  |  |  | 1,897 |
Thereafter |  |  | 12,236 |  |  |  | — |  |  |  | 12,236 |
|  | $ | 23,493 |  |  | $ | 3,198 |  |  | $ | 26,691 |

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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 90.8% of total consolidated revenues for both quarters ended, March 31, 2021 and 2020.
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 March 31, 2021 |
|  | Banking |  |  | Consumer Finance |  |  | Total Company |
Net interest income |  | $ | 9,554 |  |  | $ | 494 |  |  | $ | 10,048 |
Provision expense |  |  | (50 | ) |  |  | (2 | ) |  |  | (52 | )
Noninterest income |  |  | 2,508 |  |  |  | 831 |  |  |  | 3,339 |
Noninterest expense |  |  | 8,497 |  |  |  | 690 |  |  |  | 9,187 |
Tax expense |  |  | 588 |  |  |  | 133 |  |  |  | 721 |
Net income |  |  | 3,027 |  |  |  | 504 |  |  |  | 3,531 |
Assets |  |  | 1,212,129 |  |  |  | 13,055 |  |  |  | 1,225,184 |

|  | Three months ended March 31, 2020 |
|  | Banking |  |  | Consumer Finance |  |  | Total Company |
Net interest income |  | $ | 9,471 |  |  | $ | 533 |  |  | $ | 10,004 |
Provision expense |  |  | 3,845 |  |  |  | 1 |  |  |  | 3,846 |
Noninterest income |  |  | 3,487 |  |  |  | 955 |  |  |  | 4,442 |
Noninterest expense |  |  | 8,766 |  |  |  | 753 |  |  |  | 9,519 |
Tax expense |  |  | (75 | ) |  |  | 154 |  |  |  | 79 |
Net income |  |  | 422 |  |  |  | 580 |  |  |  | 1,002 |
Assets |  |  | 1,024,169 |  |  |  | 11,672 |  |  |  | 1,035,841 |

26

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 6 months to 20 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 was as follows:

|  | As of March 31, 2021 |  |  | As of December 31, 2020 |
Operating leases: |  |  |  |  |  |
Operating lease right-of-use assets |  | $ | 1,133 |  |  | $ | 880 |
Operating lease liabilities |  |  | 1,133 |  |  |  | 880 |

The components of lease cost were as follows:

|  | Three months ended March 31, |
|  | 2021 |  |  | 2020 |
Operating lease cost |  | $ | 39 |  |  | $ | 54 |
Short-term lease expense |  |  | 8 |  |  |  | 8 |

Future undiscounted lease payments for operating leases with initial terms of one year or more as of March 31, 2021 are as follows:

|  | Operating Leases |
2021 (remaining) |  | $ | 118 |
2022 |  |  | 157 |
2023 |  |  | 116 |
2024 |  |  | 95 |
2025 |  |  | 95 |
Thereafter |  |  | 805 |
Total lease payments |  |  | 1,386 |
Less: Imputed Interest |  |  | (253 | )
Total operating leases |  | $ | 1,133 |

Other information was as follows:

|  | As of March 31, 2021 |  |  | As of December 31, 2020 |
Weighted-average remaining lease term for operating leases |  | 12.7 years |  |  | 9.6 years |
Weighted-average discount rate for operating leases |  |  | 2.38 | % |  |  | 2.79 | %

27

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, particularly with regard to developments related to the Coronavirus (“COVID-19”) pandemic, and which could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to: the effects of COVID-19 on our business, operations, customers and capital position; higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition; the impact of COVID-19 on local, national and global economic conditions; unexpected changes in interest rates or disruptions in the mortgage market related to COVID-19; 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 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, 2020. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements, whether as a result of new information, unanticipated future events or otherwise.
Financial Overview
BUSINESS OVERVIEW: The Company is primarily engaged in commercial and retail banking, offering a blend of commercial and consumer banking services within southeastern Ohio as well as western West Virginia. The banking services offered by the Bank include the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; the making of construction and real estate loans; and credit card services. The Bank also offers individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. 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. TAL originations began in 2020 in response to a state law enacted in 2019 that placed various restrictions on Loan Central’s short-term and small loan originations. As a result, the Company changed its business model beginning in 2020 from assessing TAL fees to assessing tax preparation fees.
IMPACT of COVID-19: COVID-19 has continued to cause significant disruption in the United States and international economies and financial markets. The primary markets served by the Company in southeastern Ohio and western West Virginia have been significantly impacted by COVID-19, which has changed the way we live and work. The actions taken by the Governors of the States of Ohio and West Virginia beginning in March of 2020 were imposed to mitigate the spread and lessen the public health impact of COVID-19. During this time, the Bank’s primary channels of serving our customers have primarily consisted of drive-thru, mobile, and online banking services and appointment-only lobby services. We have leveraged our digital banking platform with our customers, and we have implemented company-wide remote working arrangements. In March 2021, the Company re-opened the lobbies of all the Bank’s financial service centers, stressing the importance of safety to its customers and employees. As per state mandates in Ohio and West Virginia, masks will be required and social distancing measures will be maintained.
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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act provides assistance to small businesses through the establishment of the Paycheck Protection Program ("PPP"). The PPP provides small businesses with funds to use for payroll and certain other expenses. The funds are provided in the form of loans that will be fully forgiven if certain criteria are met. In 2021, Congress amended the PPP by extending the authority of the SBA to guarantee loans and the ability of PPP lenders to disburse PPP loans until May 31, 2021. The Company continues to support its clients who have experienced financial hardship due to COVID-19 through participation in the PPP, assistance with expedited deposits of CARES Act stimulus payments, and loan modifications, as needed.
FINANCIAL RESULTS OVERVIEW: Net income totaled $3,531 during the first quarter of 2021, an increase of $2,529 over the same period of 2020. Earnings per share for the first quarter of 2021 finished at $.74 per share, compared to $.21 per share during the first quarter of 2020. Quarterly earnings improved largely due to lower provision expense and lower noninterest expense being partially offset by a decrease in noninterest income, while net interest income remained relatively stable. The impact of higher net earnings during the first quarter of 2021 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets, which increased to 1.20% at March 31, 2021, compared to 0.40% at March 31, 2020. The Company’s net income to average equity ratio, or return on equity, also increased to 10.47% at March 31, 2021, compared to 3.14% at March 31, 2020.
During the three months ended March 31, 2021, net interest income increased $44, or 0.4%, over the same period in 2020. This increase reflected the benefit of a $169,976, or 18.2%, increase in average earning assets, which fully offset a 61 basis point decrease in the fully tax-equivalent (“FTE”) net interest margin. Average earning assets were mostly impacted by growth in loans and higher balances maintained in the Company’s interest-bearing Federal Reserve clearing account. Growth in loans benefited from the Company’s participation in the PPP to assist various businesses in our market during the pandemic. Higher Federal Reserve balances were the result of various stimulus payments received by customers. The margin was negatively impacted by the actions of the Federal Reserve to reduce interest rates by 150 basis points in March 2020 due to concerns about the impact of COVID-19 on the economy. This has led to a sustained low-rate interest environment over the past year. The change in asset mix during 2020 and 2021 into more PPP loans and elevated deposits at the Federal Reserve has had a dilutive effect on the net interest margin, with PPP loans carrying a 1.0% interest rate and the rate on balances maintained at the Federal Reserve currently at 10 basis points.
During the three months ended March 31, 2021, the Company experienced negative provision for loan loss, which contributed to a $3,898 decrease in provision expense when compared to the same period in 2020. The decrease from the prior year was largely impacted by the economic effects of the COVID-19 pandemic, which resulted in a higher general allocation of the allowance for loan losses during the first quarter of 2020. Based on declining economic conditions and increasing unemployment levels, management increased general reserves by $2,287 during the first quarter of 2020 to reflect higher anticipated losses due to the expected financial impact of COVID-19 on its customers. Further impacting lower provision expense was a $1,168 decrease in net loan charge-offs, primarily from the commercial real estate and consumer loan portfolios.
During the three months ended March 31, 2021, noninterest income decreased $1,103, or 24.8%, from the same period in 2020. The large decline came primarily from the one-time payment of $2,000 received in a litigation settlement with a third-party during the first quarter of 2020, which did not reoccur in 2021. As part of the settlement agreement, the Bank is scheduled to process a certain amount of tax items starting in 2021 and ending in 2025. As a result of this agreed processing, the Bank recognized $540 in electronic refund check/electronic refund deposit (“ERC/ERD”) income during the first quarter of 2021. This, along with higher interchange income, mortgage banking income, tax preparation fees, and lower losses on other real estate owned, helped to partially offset the decrease in noninterest income related to 2020’s litigation settlement.
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During the three months ended March 31, 2021, noninterest expense decreased $332, or 3.5%, from the same period in 2020. The decrease was primarily related to the expense savings associated with a lower number of employees, which contributed to a $185, or 3.4%, decrease in salaries and employee benefits expense from the prior year. The Company also experienced lower professional fees, decreasing $168, or 28.1%, from the prior year. This was in large part due to lower legal fees associated with collecting troubled loans. Furthermore, other noninterest expense was down $138, or 9.4%, in large part due to lower incentives paid on customer deposit accounts. Partially offsetting the expense decreases were higher FDIC insurance, software, and occupancy and equipment costs during 2021.
The Company’s provision for income taxes increased $642 during the three months ended March 31, 2021, largely due to the changes in taxable income affected by the factors mentioned above.
At March 31, 2021, total assets were $1,225,184, an increase of $38,252 from total assets of $1,186,932 at year-end 2020. Higher assets were primarily impacted by increases in cash and cash equivalents and investment securities, which were collectively up $53,306, or 20.4%, from year-end 2020. This was related to the investment of heightened deposit balances impacted by the various stimulus payments received by customers. The growth in assets from year-end 2020 was partially offset by a $17,614, or 2.1%, decrease in loans. The loan portfolio experienced decreases in the residential real estate segment (-4.9%), commercial real estate segment (-0.9%) and consumer loan segment (-1.9%).
At March 31, 2021, total liabilities were $1,087,444, up $36,836 from year-end 2020. Contributing most to this increase were higher deposit balances, which increased $38,889 from year-end 2020. The increase was impacted mostly by customers receiving stimulus funds and their desire to preserve cash during this uncertain economic environment.
At March 31, 2021, total shareholders' equity was $137,740, up $1,416 since December 31, 2020. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums.
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Comparison of Financial Condition
at March 31, 2021 and December 31, 2020
The following discussion focuses, in more detail, on the consolidated financial condition of the Company at March 31, 2021 compared to December 31, 2020. 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 March 31, 2021, cash and cash equivalents were $176,420, an increase of $38,117, or 27.6%, from December 31, 2020. The increase in cash and cash equivalents came mostly from higher interest-bearing deposits on hand with correspondent banks. Over 89% of cash and cash equivalents consist of the Company’s interest-bearing Federal Reserve Bank clearing account, which increased $37,111, or 30.6%, from year-end 2020. The Company utilizes its interest-bearing Federal Reserve Bank clearing account to manage excess funds, as well as to assist in funding earning asset growth. The primary factor for the significant influx in clearing account balances was the investment of heightened deposit balances received during 2021 as a result of the pandemic environment. Total deposits increased 27.6% from year-end 2020 in relation to customers receiving stimulus funds from various government programs and their desire to preserve cash during this uncertain economic environment. Furthermore, several congressional acts led to the extension of the PPP loan program during the first quarter of 2021. Under the reopened PPP, commercial business customers received loan proceeds, which helped to generate higher levels of investable deposits during the first quarter of 2021. 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 quarter of 2020, the rate associated with the Company’s Federal Reserve Bank clearing account decreased 150 basis points due to concerns about the impact of COVID-19 on the economy, resulting in a target federal funds rate range of 0% to 0.25%. Although interest-bearing deposits in the Federal Reserve Bank are the Company's lowest-yielding interest-earning asset, the investment rate is higher than the rate the Company would have received from its investments in federal funds sold. Furthermore, Federal Reserve balances are 100% secured.
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 the opportunities arise.
Certificates of deposit
At March 31, 2021, the Company had $2,255 in certificates of deposit owned by the Captive, down from $2,500 at year-end 2020. The deposits on hand at March 31, 2021 consist of ten certificates with remaining maturity terms ranging from less than 3 months up to 26 months.
Securities
The balance of total securities increased $15,189, or 12.4%, compared to year-end 2020. The Company’s investment securities portfolio is made up mostly of U.S. Government agency (“Agency”) mortgage-backed securities, which increased $4,237, or 4.5%, from year-end 2020 and represented 71.6% of total investments at March 31, 2021. During the first three months of 2021, the Company invested $15,248 in new Agency mortgage-backed securities, while receiving principal repayments of $9,752. 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 $5,174 in U.S. Government securities, as well as $5,399 in Agency securities, net of maturities, during the first quarter of 2021.
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Loans
The loan portfolio represents the Company’s largest asset category and is its most significant source of interest income. Gross loan balances lowered to $831,050 at March 31, 2021, representing a decrease of $17,614, or 2.1%, as compared to $848,664 at December 31, 2020. The decrease in loans came primarily from the residential real estate portfolio, with other decreases coming from the total consumer and commercial loan portfolios from year-end 2020.
The majority of the Company’s decrease in loans came from the residential real estate loan segment, which decreased $14,891, or 4.9%, from year-end 2020. Although down, the residential real estate loan segment still comprises the largest portion of the Company’s overall loan portfolio at 35.0% 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 came largely from the Bank's warehouse lending volume. Warehouse lending consists of a line of credit provided by the Bank to another mortgage lender that makes loans for the purchase of one- to four-family residential real estate properties. The mortgage lender eventually sells the loans and repays the Bank. As mortgage refinancings reached their peak during the second half of 2020, the volume of warehouse lending balances have decreased during the first quarter of 2021, finishing at $3,720 at March 31, 2021, as compared to $19,365 at December 31, 2020. Furthermore, the low rate environment has contributed to a shift into more long-term fixed-rate mortgages (up $1,064) and less short-term adjustable-rate mortgages (down $3,519) at March 31, 2021.
The Company’s commercial loan portfolio, consisting of commercial real estate and commercial and industrial loans, decreased $279, or 0.1%, from year-end 2020. Contributing most to the decrease were lower loan balances within the commercial real estate portfolio, decreasing $2,303, or 0.9%, from year-end 2020. The commercial real estate segment comprised the largest portion of the Company’s total commercial loan portfolio at March 31, 2021 at 61.1%. Decreases were largely from the principal repayments and payoffs of nonowner-occupied loan balances from year-end 2020.
Decreases in commercial real estate loans were partially offset by a $2,024, or 1.3%, increase in the commercial and industrial portfolio from year-end 2020. 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. Although a second round of PPP loans were initiated by the Bank during the first quarter of 2021, the Bank experienced no net loan growth in its PPP loan portfolio from year-end 2020. This was because the payoffs of PPP loans from the initial round of originations in 2020 completely offset the new PPP loan originations in 2021. PPP loans are forgiven by the SBA as long as the small business borrower meets certain criteria on the use of loan proceeds. At March 31, 2021, the Company’s PPP loans totaled $25,829 as compared to $27,933 at year-end 2020.
While management believes lending opportunities exist in the Company’s markets, future commercial lending activities will depend upon economic and other related conditions, such as general demand for loans in the Company’s primary markets, interest rates offered by the Company, the effects of competitive pressure and normal underwriting considerations. Management will continue to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans.
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The Company’s loan portfolio at March 31, 2021 was also impacted by less consumer loan balances from year-end 2020, decreasing $2,444, or 1.9%. This change was primarily impacted by a decline in automobile loan balances. Automobile loans represent the Company’s largest consumer loan segment at 41.3% of total consumer loans. Automobile loans decreased primarily as a result of COVID-19 and the stay-at-home orders that resulted in limited automobile sales within the Company’s market areas during 2020. The pandemic environment continued to have a negative impact on consumer loan demand in 2021. Further limiting the volume of automobile loan originations were heightened incentives being offered from the captive auto finance companies in response to the pandemic. The remaining consumer loan portfolio decreased $678, or 0.9%, from year-end 2020, mostly from decreases in unsecured loans, partially offset by higher home equity lines of credit. The Company will continue to attempt to increase its auto lending segment while maintaining strict loan underwriting processes to limit future loss exposure. However, the Company will place more emphasis on loan portfolios (i.e. commercial and, to a smaller extent, residential real estate) with higher returns than auto loans. Indirect automobile loans bear additional costs from dealers that partially offset interest revenue and lower the rate of return.
Allowance for Loan Losses
The Company established a $6,887 allowance for loan losses at March 31, 2021, which represents a decrease from the $7,160 allowance at year-end 2020. As part of the Company’s quarterly analysis of the allowance for loan losses, management will review various factors that directly impact the general allocation needs of the allowance, which include: historical loan losses, loan delinquency levels, local economic conditions and unemployment rates, criticized/classified asset coverage levels and loan loss recoveries. During the first quarter of 2021, the Company experienced a $363 decrease in its general allocations of the allowance for loan losses. A stable historical loan loss factor combined with lower criticized and classified assets and higher annualized loan recoveries were the key factors to the first quarter drop in general allocations. The historical loan loss factor remain unchanged at 0.24% from year-end 2020 to March 31, 2021, while the criticized and classified risk factors decreased as a result of various commercial loan upgrades from improvements in the financial performance of certain borrowers’ ability to repay their loans. This contributed to lower classified assets from year-end 2020, particularly within the commercial and industrial loan segment. Additionally, the Company’s delinquency levels decreased from year-end 2020, with nonperforming loans to total loans of 0.74% at March 31, 2021 compared to 0.82% at December 31, 2020, and lower nonperforming assets to total assets of 0.50% at March 31, 2021 compared to 0.59% at year-end 2020. General allocations during the first quarter of 2021 increased in relation to higher unemployment rates within the Company’s market areas, only partially offsetting the decreasing allocation factors already discussed.
During the first quarter of 2020, the Company added a new risk factor to the evaluation of the allowance for loan losses pertaining to the COVID-19 pandemic. The risk factor was necessary to account for the changes in economic conditions resulting from increases in unemployment that would produce higher anticipated losses as a result of COVID-19. The general reserve allocation related to COVID-19 totaled $2,233 at March 31, 2021 as compared to $2,315 at December 31, 2020. While the Company has yet to experience any significant charge-offs related to COVID-19, the continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to impact the Company’s estimate of its allowance for loan losses and resulting provision expense going forward.
Decreases in general allocations were partially offset by a $90 increase in specific allocations from year-end 2020. 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 primarily related to the loan impairments of one borrower relationship during the first quarter of 2021.
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The Company’s allowance for loan losses to total loans ratio finished at 0.83% at March 31, 2021 and 0.84% at year-end 2020. Management believes that the allowance for loan losses at March 31, 2021 was adequate and reflected probable incurred losses in the loan portfolio. There can be no assurance, however, that adjustments to the allowance for loan losses will not be required in the future. Changes in the circumstances of particular borrowers, as well as adverse developments in the economy, particularly with respect to COVID-19, 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, to fund the borrowing needs of loan customers, and to fund ongoing operations. Total deposits at March 31, 2021 increased $38,889, or 3.9%, from year-end 2020. This change in deposits came primarily from interest-bearing deposit balances, which were up by $27,072, or 5.7%, from year-end 2020, while noninterest-bearing deposits increased $13,199, or 4.2%, from year-end 2020. The Company attributes much of this increase to retention of proceeds from government stimulus programs, such as the PPP and consumer economic impact payments received, and a more cautious consumer.
The increase in interest-bearing deposits came mostly from higher interest-bearing NOW account balances from year-end 2020, which increased $19,552, or 10.6%. 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 $11,280, or 9.4%, from year-end 2020, primarily from higher statement savings account balances impacted by the government stimulus proceeds previously mentioned. Interest-bearing deposit growth was partially offset by lower money market balances from year-end 2020, which decreased $3,760, or 2.3%. The deposit rate on the Company’s Prime Investment money market account was reduced during the first quarter of 2021 in response to decreasing market rates in 2020. This contributed to a consumer shift from money market deposits into savings and noninterest-bearing deposit accounts.
Partially offsetting the increases in interest-bearing deposits were time deposit balances, which decreased $1,382, or 0.7%, from year-end 2020. The decrease came from lower brokered and internet CD issuances as a result of the heightened liquidity position from year-end 2020. The Company’s retail time deposits were relatively stable from year-end 2020.
The increase in noninterest-bearing deposits came mostly from the Company’s business and incentive-based checking account balances from year-end 2020.
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 2021, 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 $26,691 at March 31, 2021, a decrease of $1,172, or 4.2%, from year-end 2020. The decrease was related primarily to the principal repayments applied to various FHLB advances during the first quarter of 2021. 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.
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Shareholders’ Equity
Total shareholders' equity at March 31, 2021 increased $1,416, or 1.0%, to finish at $137,740, as compared to $136,324 at December 31, 2020. This was from quarterly net income being partially offset by cash dividends paid and a decrease in net unrealized gain on available for sale securities.
Comparison of Results of Operations
For the Three Months Ended
March 31, 2021 and 2020
The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three months ended March 31, 2021 compared to the same period in 2020. 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 March 31, 2021, net interest income remained relatively stable at $10,048 compared to $10,004 at March 31, 2020. The moderate change was mostly attributable to higher average earning assets providing favorable increases to interest revenue being offset by a net interest margin compression in relation to decreases in market rates that contributed to lower earning asset yields.
Total interest and fee income recognized on the Company’s earning assets decreased $659, or 5.6%, during the first quarter of 2021 compared to the same period in 2020. The decrease was impacted by interest and fees on loans, which decreased $308, or 2.8%. This result was directly related to the decline in loan yields, which decreased from 5.78% to 5.18% when comparing the first quarters of 2020 to 2021. Loan yields were impacted by interest rate reductions from the Federal Reserve Bank in March 2020. This trend of decreasing market rates led to lower yields on the Company’s loan portfolio and lower loan interest revenue. Partially offsetting the effects from lower loan yields was average growth in loans. Average loans for the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020 increased $72,151, or 9.4%, which came mostly from the origination of PPP loans during 2020 and 2021. While PPP loans contributed to higher earning asset balances, they also had a dilutive effect to loan yields as a result of the 1% interest rate associated with each loan. These factors contributed to a decrease of $670 in loan interest income during the three months ended March 31, 2021 compared to the same period in 2020.
Loan revenue was positively impacted by loan fees, which increased $362 during the first quarter of 2021 compared to the same period in 2020. The increase came largely from $367 in loan fees earned on the origination of government-guaranteed PPP loans as a result of normal amortization and loan forgiveness.
During the three months ended March 31, 2021, interest income from interest-bearing deposits with banks decreased $134, or 82.7% when compared to the same period in 2020. This change in interest revenue came primarily from the Company’s interest-bearing Federal Reserve Bank clearing account. The quarterly decrease in interest income was primarily due to the interest rate tied to this interest-bearing clearing account, which was 0.10% at March 31, 2021 compared to 0.25% at March 31, 2020. The increase in liquidity from the surge in deposit liabilities allowed the Company to maintain higher average balances within the account, which increased $83,223 during the first quarter of 2021compared to the same period in 2020.
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Total interest on securities decreased $206, or 30.7%, during the first quarter of 2021 compared to the same period in 2020. The Company has taken opportunities to reinvest a portion of excess deposits into new U.S. Government, Agency and Agency mortgage-backed securities, contributing to a $14,038 increase in average securities during the first quarter of 2021 over the first quarter of 2020. However, the increase in average securities was completely offset by a decline in securities yield of 87 basis points from 2.33% to 1.46%.
Total interest expense incurred on the Company’s interest-bearing liabilities decreased $703, or 39.5%, during the first quarter of 2020 compared to the same period in 2020. Interest expense decreased despite an increase in average interest-bearing deposits of $76,252 during the first quarter of 2021 compared to the same period in 2020. The converse relationship between increasing average interest-bearing liabilities to lower interest expense is related to the repricing efforts in a lower rate environment which drove down average costs during 2020. This included the rate reduction to the Company’s Prime Investment deposit account, which contributed to a $213 decrease in money market interest expense during the first quarter of 2021 compared to the same period in 2020. Deposit expense was further impacted by lower CD rates, which have contributed to a $394 decrease in time deposit interest expense during the first quarter of 2021 compared to the same period in 2020. 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 money market accounts and time deposits, the Company’s total weighted average costs on interest-bearing deposits has decreased by 48 basis points from 1.00% at March 31, 2020 to 0.52% at March 31, 2021.
The Company’s net interest margin is defined as fully tax-equivalent net interest income as a percentage of average earning assets. During 2021, the Company’s first quarter net interest margin finished at 3.73%, compared to 2020’s first quarter net interest margin of 4.34%. The decrease in margin was largely impacted by the decreasing market rates that impacted lower earning asset yields primarily during 2020. Interest rates were reduced at the end of the first quarter of 2020 because of the growing concern of the COVID-19 pandemic. 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 March 31, 2021, the Company’s provision expense decreased $3,898 from the same period in 2020. The quarterly improvement came primarily from the addition of a new risk reserve allocation in 2020 that was less impactful in 2021. As previously discussed, the Company’s general reserves during the first quarter of 2020 were significantly impacted by a $1,942 allocation of the allowance for loan losses as a result of the expected financial impact of COVID-19 on its customers. The allocation resulted in a corresponding entry to provision expense in March 2020. Further reducing provision expense was a decrease of $1,168 in net charge-offs during the three months ended March 31, 2021 compared to the same period in 2020. This was primarily from lower charge-offs recorded within the commercial real estate and consumer loan portfolios. Further contributing to lower provision expense were the impacts of lower general reserve allocations. During the first quarter of 2021, the Company decreased its general allocation from $7,160 at December 31, 2020 to $6,797 at March 31, 2021. Conversely, this is compared to a $468 general allocation increase during the same period in 2020, excluding the COVID-19 risk factor. Lower general reserves have been affected by 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. Lower provision expense was also impacted by a decrease in specific allocations that totaled $90 at March 31, 2021 compared to $854 in specific allocations at March 31, 2020.
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Future provisions to the allowance for loan losses will continue to be based on management’s quarterly in-depth evaluation that is discussed in further detail under the caption “Critical Accounting Policies - Allowance for Loan Losses” within this Management’s Discussion and Analysis.
Noninterest Income
Noninterest income for the three months ended March 31, 2021 decreased $1,103, or 24.8%, when compared to the three months ended March 31, 2020. The key contributor to the decrease in noninterest revenue was the one-time payment received in a litigation settlement with a third-party in 2020. During the first quarter of 2020, the Bank entered into a settlement agreement related to the previously disclosed litigation the Bank had filed against a third-party tax software product provider for breach of contract. Under the settlement agreement, the third-party paid a $2,000 settlement payment to the Bank in March 2020, which was recorded as noninterest income. As part of the settlement agreement, the Bank is scheduled to process a certain amount of tax items starting in 2021 and ending in 2025. As a result of this processing agreement, the Bank recognized $540 in ERC/ERD income during the first quarter of 2021, which helped to partially offset the effects of the settlement proceeds received in 2020.
Increases in noninterest revenue also came from interchange income, which increased $107, or 11.4%, during the first quarter of 2021. This was largely impacted by the economic stimulus proceeds received by customers due to the COVID-19 pandemic that increased consumer spending.
Lower losses on the sales of foreclosed assets also improved noninterest income during the first quarter of 2021. The Company experienced $101 in losses on the sale of foreclosed assets during the first quarter of 2020 compared to a $1 gain during the first quarter of 2021. This was primarily from an adjustment to the fair value of one foreclosed commercial property during the first quarter of 2020.
Increases to noninterest revenue also came from mortgage banking income. Mortgage banking income is highly influenced by mortgage interest rates and housing market conditions. With mortgage rates at record lows during 2020 impacted by the COVID-19 pandemic, the consumer demand to refinance long-term, fixed-rate real estate mortgages significantly increased. While the heavy volume of refinancing has slowed since 2020, the amount of loans sold during the first quarter of 2021 still exceeded the volume of loan sales experienced during the first quarter of 2020. This led to an increase of $89 in mortgage banking income during the first quarter of 2021 over the same period in 2020.
Tax preparation fee income also increased during the first quarter of 2021. As previously discussed, the Company changed its business model in 2020 for assessing fees related to tax refund advance loans. By charging for the tax preparation services, the Company recorded $694 in tax preparation fee income for the first three months of 2021 compared to $615 during the same period in 2020.
The remaining noninterest income categories decreased $20, or 2.2%, during the first quarter of 2021 compared to the same period in 2020, largely from lower service charges on deposit accounts as a result of less overdraft fees impacted by economic stimulus proceeds received by customers.
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Noninterest Expense
Noninterest expense during the first quarter of 2021 decreased $332, or 3.5% compared to the same period in 2020. Contributing most to the decline in noninterest expense was salaries and employee benefits, which decreased $185, or 3.4%, during the three months ended March 31, 2021 compared to the same period in 2020. The expense savings can be related to a lower employee base, with the Bank’s average full-time equivalent employee base at 234 employees for March 31, 2021 compared to 244 employees at March 31, 2020. The impact of a lower employee base has more than offset the expense increases associated with annual merit increases in 2021.
Further impacting lower overhead costs were professional fees, which decreased $168, or 28.1%, during the first quarter of 2021 compared to the same period in 2020. These decreases were largely from lower litigation costs related to a fewer number of bankruptcy-related loan cases in 2021 impacted by the COVID-19 pandemic environment.
Other noninterest expense also decreased $138, or 9.4%, during the first quarter of 2021 compared to the same period in 2020. This was primarily impacted by lower customer incentive expenses paid on deposit accounts and use of credit cards.
Decreases in noninterest expense were partially offset by an increase in FDIC assessment costs. The Bank’s FDIC assessment at March 31, 2021 was $79 compared to no assessment cost at March 31, 2020. During 2020, the Bank had continued to utilize a portion of its remaining FDIC credits that had been issued in September 2019. Excluding the credit, the Bank’s first quarter 2020 assessment would have been $68.
Further impacting overhead costs were higher occupancy, furniture, equipment and software expenses, which were collectively up $137, or 12.7%, during the first quarter of 2020 over the same period in 2020. Building and equipment costs were driven by increases in depreciable assets associated with the new OVB On the Square facility. Higher software costs were associated with the platform used to facilitate the second round of PPP loans during the first quarter of 2021.
The remaining noninterest expense categories decreased $57, or 6.2%, during the first quarter of 2021 compared to the same period in 2020. These decreases were impacted mostly from expense savings related to lower data processing and foreclosure 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 first quarters of 2021 and 2020, the Company’s asset yields were negatively impacted by market rate reductions related to COVID-19, which resulted in a greater decrease in yield on earning assets than the average cost on interest-bearing liabilities. Loan fee increases in 2021 impacted by PPP loans were able to bring net interest income back more in line with 2020. However, the Company’s noninterest expense savings of 3.5% was not enough to offset a 24.8% decrease in noninterest income. As a result, the Company’s efficiency number increased (regressed) to 68.0% during the quarterly period ended March 31, 2021 compared to 65.4% during the same period in 2020.
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Provision for income taxes
The Company’s income tax provision increased $642 during the three months ended March 31, 2021 compared to the same period in 2020. The change in tax expense corresponded directly to the change in associated taxable income during 2021 and 2020.
Capital Resources
Federal regulators have classified and defined capital into the following components: (1) tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (2) tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt, preferred stock and hybrid instruments which do not qualify as tier 1 capital.
In September 2019, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies). Under the rule, a qualifying community banking organization (“QCBO”) is eligible to opt into the Community Bank Leverage Ratio (“CBLR”) framework in lieu of the Basel III capital requirements if it has less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposure and a leverage ratio greater than 9.0%. The new rule took effect January 1, 2020, and QCBOs were allowed to opt into the new CBLR framework in their call report beginning the first quarter of 2020.
A QCBO opting into the CBLR framework must maintain a CBLR of 9.0%, subject to a two quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period. A QCBO failing to satisfy these requirements must comply with the existing Basel III capital requirements as implemented by the banking regulators in July 2013.
The numerator of the CBLR is Tier 1 capital, as calculated under present rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital.
The Bank has opted into the CBLR, and will therefore not be required to comply with the Basel III capital requirements. As of March 31, 2021, the Bank’s CBLR was 10.65%, and the Company’s CBLR was 11.64%.
Pursuant to the CARES Act, the federal banking regulators in April 2020 issued interim final rules to set the CBLR at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the CBLR increased to 8.5% for the calendar year. Community banks will have until January 1, 2022 before the CBLR requirement will return to 9%.
Cash dividends paid by the Company were $1,005 during the first three months of 2021. The year-to-date dividends paid totaled $0.21 per share.
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Liquidity
Liquidity relates to the Company's ability to meet the cash demands and credit needs of its customers and is provided by the ability to readily convert assets to cash and raise funds in the marketplace. Total cash and cash equivalents, held to maturity securities maturing within one year and available for sale securities, totaling $305,236, represented 24.9% of total assets at March 31, 2021. The COVID-19 pandemic had a significant impact on higher levels of excess funds in 2021, which included customer deposits of stimulus monies from various government relief programs. In addition, the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity demands. At March 31, 2021, the Bank could borrow an additional $92,178 from the FHLB. Furthermore, the Bank has established a borrowing line with the Federal Reserve. At March 31, 2021, this line had total availability of $57,389. Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank.
Off-Balance Sheet Arrangements
As discussed in Note 5 – Financial Instruments with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet credit-related activities, including commitments to extend credit and standby letters of credit, which could require the Company to make cash payments in the event that specified future events occur. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. While these commitments are necessary to meet the financing needs of the Company’s customers, many of these commitments are expected to expire without being drawn upon. Therefore, the total amount of commitments does not necessarily represent future cash requirements.
Critical Accounting Policies
The most significant accounting policies followed by the Company are presented in Note A to the financial statements in the Company’s 2020 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.
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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 3 years for the consumer and real estate portfolio segment and 5 years for the commercial portfolio segment. The total loan portfolio’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: Commercial Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer.
Commercial and industrial loans consist of borrowings for commercial purposes by individuals, corporations, partnerships, sole proprietorships, and other business enterprises. Commercial and industrial loans are generally secured by business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or operations. The Company’s risk exposure is related to deterioration in the value of collateral securing the loan should foreclosure become necessary. Generally, business assets used or produced in operations do not maintain their value upon foreclosure, which may require the Company to write down the value significantly to sell.
Commercial real estate consists of nonfarm, nonresidential loans secured by owner-occupied and nonowner-occupied commercial real estate as well as commercial construction loans. An owner-occupied loan relates to a borrower purchased building or space for which the repayment of principal is dependent upon cash flows from the ongoing business operations conducted by the party, or an affiliate of the party, who owns the property. Owner-occupied loans that are dependent on cash flows from operations can be adversely affected by current market conditions for their product or service. A nonowner-occupied loan is a property loan for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property. Nonowner-occupied loans that are dependent upon rental income are primarily impacted by local economic conditions which dictate occupancy rates and the amount of rent charged. Commercial construction loans consist of borrowings to purchase and develop raw land into one- to four-family residential properties. Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements. Repayment of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value which may be absorbed by the Company.
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Residential real estate loans consist of loans to individuals for the purchase of one- to four-family primary residences with repayment primarily through wage or other income sources of the individual borrower. The Company’s loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.
Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other loans to individuals for household, family, and other personal expenditures, both secured and unsecured. These loans typically have maturities of 6 years or less with repayment dependent on individual wages and income. The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary. During the last several years, one of the most significant portions of the Company’s net loan charge-offs have been from consumer loans. Nevertheless, the Company has allocated the highest percentage of its allowance for loan losses as a percentage of loans to the other identified loan portfolio segments due to the larger dollar balances and inherent risk associated with such portfolios.
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with residential real estate loans currently comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in southeastern Ohio and western West Virginia. Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group. To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of the Chief Executive Officer (the principal executive officer) and the Senior Vice President and Chief Financial Officer (the principal financial officer) of Ohio Valley, Ohio Valley’s management has evaluated the effectiveness of Ohio Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2021. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Ohio Valley in the reports that it files or submits under the Exchange Act is accumulated and communicated to Ohio Valley’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Ohio Valley’s Chief Executive Officer and Senior Vice President and Chief Financial Officer have concluded that Ohio Valley’s disclosure controls and procedures were effective as of March 31, 2021 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 March 31, 2021, that has materially affected, or is reasonably likely to materially affect, Ohio Valley’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ohio Valley is not currently subject to any material legal proceedings.
ITEM 1A. RISK FACTORS
There are no material changes from the risk factors set forth under Part I, Item 1A, “Risk Factors” in the 2020 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 March 31, 2021.
Ohio Valley did not purchase any of its shares during the three months ended March 31, 2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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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 Accounting Officer): Filed herewith.
101.INS # |  | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH # |  | XBRL Taxonomy Extension Schema: Filed herewith. #
101.CAL # |  | XBRL Taxonomy Extension Calculation Linkbase: Filed herewith. #
101.DEF # |  | XBRL Taxonomy Extension Definition Linkbase: Filed herewith. #
101.LAB # |  | XBRL Taxonomy Extension Label Linkbase: Filed herewith. #
101.PRE # |  | XBRL Taxonomy Extension Presentation Linkbase: Filed herewith. #
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) Filed herewith #

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

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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: | May 10, 2021 | By: | /s/Thomas E. Wiseman
|  |  | Thomas E. Wiseman
|  |  | Chief Executive Officer
Date: | May 10, 2021 | By: | /s/Scott W. Shockey
|  |  | Scott W. Shockey
|  |  | Senior Vice President and Chief Financial Officer

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