United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 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, without par value, of the registrant outstanding as of August 13, 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
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4.
Controls and Procedures
44
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
44
Item 1A.
Risk Factors
44
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
44
Item 3.
Defaults Upon Senior Securities
44
Item 4.
Mine Safety Disclosures
44
Item 5.
Other Information
44
Item 6.
Exhibits
45
     
Signatures
 
46

2


PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

 
June 30,
2021
   
December 31,
2020
 
             
ASSETS
           
Cash and noninterest-bearing deposits with banks
 
$
14,291
   
$
14,989
 
Interest-bearing deposits with banks
   
110,949
     
123,314
 
Total cash and cash equivalents
   
125,240
     
138,303
 
                 
Certificates of deposit in financial institutions
   
2,255
     
2,500
 
Securities available for sale
   
172,555
     
112,322
 
Securities held to maturity (estimated fair value: 2021 - $11,069; 2020 - $10,344)
   
10,845
     
10,020
 
Restricted investments in bank stocks
   
7,385
     
7,506
 
                 
Total loans
   
847,916
     
848,664
 
Less: Allowance for loan losses
   
(6,799
)
   
(7,160
)
Net loans
   
841,117
     
841,504
 
                 
Premises and equipment, net
   
20,972
     
21,312
 
Premises and equipment held for sale, net
   
443
     
637
 
Other real estate owned, net
   
     
49
 
Accrued interest receivable
   
2,987
     
3,319
 
Goodwill
   
7,319
     
7,319
 
Other intangible assets, net
   
85
     
112
 
Bank owned life insurance and annuity assets
   
36,998
     
35,999
 
Operating lease right-of-use asset, net
   
1,095
     
880
 
Other assets
   
7,692
     
5,150
 
Total assets
 
$
1,236,988
   
$
1,186,932
 
                 
LIABILITIES
               
Noninterest-bearing deposits
 
$
324,576
   
$
314,777
 
Interest-bearing deposits
   
720,514
     
678,962
 
Total deposits
   
1,045,090
     
993,739
 
                 
Other borrowed funds
   
24,304
     
27,863
 
Subordinated debentures
   
8,500
     
8,500
 
Operating lease liability
   
1,095
     
880
 
Accrued liabilities
   
18,575
     
19,626
 
Total liabilities
   
1,097,564
     
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
   
97,369
     
92,988
 
Accumulated other comprehensive income
   
1,155
     
2,436
 
Treasury stock, at cost (659,739 shares)
   
(15,712
)
   
(15,712
)
Total shareholders’ equity
   
139,424
     
136,324
 
Total liabilities and shareholders’ equity
 
$
1,236,988
   
$
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
June 30,
   
Six months ended
June 30,
 
   
2021
   
2020
   
2021
   
2020
 
                         
Interest and dividend income:
                       
Loans, including fees
 
$
10,562
   
$
10,639
   
$
21,127
   
$
21,512
 
Securities
                               
Taxable
   
479
     
591
     
884
     
1,188
 
Tax exempt
   
60
     
74
     
119
     
147
 
Dividends
   
57
     
64
     
116
     
130
 
Interest-bearing deposits with banks
   
33
     
18
     
61
     
180
 
Other Interest
   
8
     
13
     
18
     
27
 
     
11,199
     
11,399
     
22,325
     
23,184
 
                                 
Interest expense:
                               
Deposits
   
799
     
1,367
     
1,682
     
2,876
 
Other borrowed funds
   
145
     
187
     
300
     
387
 
Subordinated debentures
   
40
     
50
     
80
     
122
 
     
984
     
1,604
     
2,062
     
3,385
 
Net interest income
   
10,215
     
9,795
     
20,263
     
19,799
 
Provision for loan losses
   
27
     
(393
)
   
(25
)
   
3,453
 
Net interest income after provision for loan losses
   
10,188
     
10,188
     
20,288
     
16,346
 
                                 
Noninterest income:
                               
Service charges on deposit accounts
   
390
     
333
     
795
     
826
 
Trust fees
   
70
     
61
     
142
     
129
 
Income from bank owned life insurance and annuity assets
   
200
     
192
     
448
     
409
 
Mortgage banking income
   
186
     
431
     
365
     
521
 
Electronic refund check / deposit fees
   
135
     
     
675
     
 
Debit / credit card interchange income
   
1,173
     
930
     
2,223
     
1,873
 
Gain (loss) on other real estate owned
   
     
18
     
1
     
(83
)
Tax preparation fees
   
55
     
19
     
749
     
634
 
Litigation settlement
   
     
     
     
2,000
 
Other
   
297
     
265
     
447
     
382
 
     
2,506
     
2,249
     
5,845
     
6,691
 
Noninterest expense:
                               
Salaries and employee benefits
   
5,279
     
5,426
     
10,549
     
10,881
 
Occupancy
   
465
     
449
     
932
     
881
 
Furniture and equipment
   
269
     
278
     
565
     
540
 
Professional fees
   
427
     
473
     
857
     
1,071
 
Marketing expense
   
268
     
293
     
536
     
561
 
FDIC insurance
   
79
     
24
     
158
     
24
 
Data processing
   
660
     
704
     
1,235
     
1,303
 
Software
   
434
     
412
     
883
     
793
 
Foreclosed assets
   
8
     
36
     
22
     
79
 
Amortization of intangibles
   
14
     
17
     
27
     
34
 
Other
   
1,394
     
1,490
     
2,720
     
2,954
 
     
9,297
     
9,602
     
18,484
     
19,121
 
                                 
Income before income taxes
   
3,397
     
2,835
     
7,649
     
3,916
 
Provision for income taxes
   
536
     
572
     
1,257
     
651
 
                                 
NET INCOME
 
$
2,861
   
$
2,263
   
$
6,392
   
$
3,265
 
                                 
Earnings per share
 
$
0.60
   
$
0.47
   
$
1.34
   
$
0.68
 

See accompanying notes to consolidated financial statements
4


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

 
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2021
   
2020
   
2021
   
2020
 
                         
Net Income
 
$
2,861
   
$
2,263
   
$
6,392
   
$
3,265
 
                                 
Other comprehensive income (loss):
                               
Change in unrealized gain (loss) on available for sale securities
   
(217
)
   
85
     
(1,621
)
   
3,022
 
Related tax (expense) benefit
   
46
     
(18
)
   
340
     
(635
)
Total other comprehensive income (loss), net of tax
   
(171
)
   
67
     
(1,281
)
   
2,387
 
                                 
Total comprehensive income
 
$
2,690
   
$
2,330
   
$
5,111
   
$
5,652
 

See accompanying notes to consolidated financial statements

5


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

Quarter-to-date
 
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Total
Shareholders'
Equity
 
Balance at April 1, 2021
 
$
5,447
   
$
51,165
   
$
95,514
   
$
1,326
   
$
(15,712
)
 
$
137,740
 
Net income
   
     
     
2,861
     
     
     
2,861
 
Other comprehensive loss, net
   
     
     
     
(171
)
   
     
(171
)
Cash dividends, $0.21 per share
   
     
     
(1,006
)
   
     
     
(1,006
)
Balance at June 30, 2021
 
$
5,447
   
$
51,165
   
$
97,369
   
$
1,155
   
$
(15,712
)
 
$
139,424
 
                                                 
Balance at April 1, 2020
 
$
5,447
   
$
51,165
   
$
86,748
   
$
2,848
   
$
(15,712
)
 
$
130,496
 
Net income
   
     
     
2,263
     
     
     
2,263
 
Other comprehensive loss, net
   
     
     
     
67
     
     
67
 
Cash dividends, $0.21 per share
   
     
     
(1,005
)
   
     
     
(1,005
)
Balance at June 30, 2020
 
$
5,447
   
$
51,165
   
$
88,006
   
$
2,915
   
$
(15,712
)
 
$
131,821
 

Year-to-date
 
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Total
Shareholders'
Equity
 
Balance at January 1, 2021
 
$
5,447
   
$
51,165
   
$
92,988
   
$
2,436
   
$
(15,712
)
 
$
136,324
 
Net income
   
     
     
6,392
     
     
     
6,392
 
Other comprehensive income, net
   
     
     
     
(1,281
)
   
     
(1,281
)
Cash dividends, $0.42 per share
   
     
     
(2,011
)
   
     
     
(2,011
)
Balance at June 30, 2021
 
$
5,447
   
$
51,165
   
$
97,369
   
$
1,155
   
$
(15,712
)
 
$
139,424
 
                                                 
Balance at January 1, 2020
 
$
5,447
   
$
51,165
   
$
86,751
   
$
528
   
$
(15,712
)
 
$
128,179
 
Net income
   
     
     
3,265
     
     
     
3,265
 
Other comprehensive income, net
   
     
     
     
2,387
     
     
2,387
 
Cash dividends, $0.42 per share
   
     
     
(2,010
)
   
     
     
(2,010
)
Balance at June 30, 2020
 
$
5,447
   
$
51,165
   
$
88,006
   
$
2,915
   
$
(15,712
)
 
$
131,821
 

See accompanying notes to consolidated financial statements

6


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

 
Six months ended
June 30,
 
   
2021
   
2020
 
             
Net cash provided by operating activities:
 
$
4,072
   
$
4,881
 
                 
Investing activities:
               
Proceeds from maturities of securities available for sale
   
23,815
     
13,980
 
Purchases of securities available for sale
   
(86,063
)
   
(20,772
)
Proceeds from maturities of securities held to maturity
   
501
     
244
 
Purchase of securities held to maturity
   
(1,341
)
   
 
Proceeds from maturities of certificates of deposit in financial institutions
   
245
     
490
 
Purchase of certificates of deposit in financial institutions
   
     
(453
)
Redemptions of federal home loan bank stock
   
121
     
 
Net change in loans
   
417
     
(3,720
)
Proceeds from sale of other real estate owned
   
49
     
147
 
Purchases of premises and equipment
   
(396
)
   
(2,049
)
   Disposals of premises and equipment
   
285
     
 
   Purchases of bank owned life insurance and annuity assets
   
(550
)
   
(4,583
)
Net cash (used in) investing activities
   
(62,917
)
   
(16,716
)
                 
Financing activities:
               
Change in deposits
   
51,352
     
90,393
 
Cash dividends
   
(2,011
)
   
(2,010
)
Proceeds from Federal Home Loan Bank borrowings
   
600
     
 
Repayment of Federal Home Loan Bank borrowings
   
(3,099
)
   
(3,312
)
Change in other long-term borrowings
   
     
(300
)
   Change in other short-term borrowings
   
(1,060
)
   
(269
)
Net cash provided by financing activities
   
45,782
     
84,502
 
                 
Change in cash and cash equivalents
   
(13,063
)
   
72,667
 
Cash and cash equivalents at beginning of period
   
138,303
     
52,356
 
Cash and cash equivalents at end of period
 
$
125,240
   
$
125,023
 
                 
Supplemental disclosure:
               
Cash paid for interest
 
$
2,519
   
$
3,533
 
Cash paid for income taxes
   
2,300
     
 
Transfers from loans to other real estate owned
   
     
33
 

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 two wholly-owned subsidiaries, Race Day Mortgage, Inc., a mortgage banking company, and Ohio Valley REO, LLC, an Ohio limited liability company (“Ohio Valley REO”), to which the Bank transfers certain real estate acquired by the Bank through foreclosure for sale by Ohio Valley REO.  Ohio Valley and its subsidiaries are collectively referred to as the “Company.”  All material intercompany accounts and transactions have been eliminated in consolidation.
 
These interim financial statements are prepared by the Company without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at June 30, 2021, and its results of operations and cash flows for the periods presented.  The results of operations for the three and six months ended June 30, 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 has  participated 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.
8


NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

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

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 June 30, 2021, there were $409 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.
9



NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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 June 30, 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 and six months ended June 30, 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.
10


NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.


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.

11


NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

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

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

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

Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:

 
Fair Value Measurements at June 30, 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
   
   
$
17,748
     
 
U.S. Government sponsored entity securities
   
     
30,285
     
 
Agency mortgage-backed securities, residential
   
     
124,522
     
 
Interest rate swap derivatives
   
     
717
     
 
                         
Liabilities:
                       
Interest rate swap derivatives
   
     
(717
)
   
 

 
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.


12


NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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 at June 30, 2021 are summarized below:

 
Fair Value Measurements at June 30, 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 and industrial
   
     
   
$
250
 


At June 30, 2021, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $310, with a corresponding valuation allowance of $60, resulting in a decrease of $30 in provision expense during the three months ended June 30, 2021 and an increase of $60 in provision expense during the six months ended June 30, 2021, with no corresponding charge-offs recognized.  This is compared to no impact to provision expense during the three and six months ended June 30, 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 June 30, 2021 and December 31, 2020. There were no corresponding write downs during the three and six months ended June 30, 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 June 30, 2021:

June 30, 2021
 
Fair
Value
   
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range
   
Weighted Average
 
Impaired loans:
         
1
       
1
       
Commercial and industrial
 
$
250
   
Sales approach
 
Adjustment to comparables
 
20% to 33%
     
23.4
%


13


NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The carrying amounts and estimated fair values of financial instruments at June 30, 2021 and December 31, 2020 are as follows:

 
Carrying
   
Fair Value Measurements at June 30, 2021 Using
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial Assets:
                             
Cash and cash equivalents
 
$
125,240
   
$
125,240
   
$
   
$
   
$
125,240
 
Certificates of deposit in financial institutions
   
2,255
     
     
2,255
     
     
2,255
 
Securities available for sale
   
172,555
     
     
172,555
     
     
172,555
 
Securities held to maturity
   
10,845
     
     
6,009
     
5,060
     
11,069
 
Loans, net
   
841,117
     
     
     
837,979
     
837,979
 
Interest rate swap derivatives
   
717
     
     
717
     
     
717
 
Accrued interest receivable
   
2,987
     
     
373
     
2,614
     
2,987
 
                                         
Financial liabilities:
                                       
Deposits
   
1,045,090
     
324,576
     
721,619
     
     
1,046,195
 
Other borrowed funds
   
24,304
     
     
25,447
     
     
25,447
 
Subordinated debentures
   
8,500
     
     
5,522
     
     
5,522
 
Interest rate swap derivatives
   
717
     
     
717
     
     
717
 
Accrued interest payable
   
643
     
1
     
642
     
     
643
 

 
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