(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 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 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. In June 2021, COVID-19
related health order restrictions for Ohio and West Virginia were lifted,
resulting in no mask requirements, no social distancing requirements, and no
occupancy limits when inside facilities. However, with the recent rise in
COVID-19 cases again, it is possible that our communities may consider further
health order restrictions. The Bank intends to comply with all health orders
and will continue to encourage health and safety by allowing any employee,
customer or vendor the option of wearing a mask if they so choose.
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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 has supported its
clients who have experienced financial hardship due to COVID-19 through
participation in the PPP, assistance with expedited deposits of CARES Act
stimulus payments, and loan modifications, as needed.
FINANCIAL RESULTS OVERVIEW: Net income totaled $2,861 during the second quarter
of 2021, an increase of $598 over the same period of 2020. Earnings per share
for the second quarter of 2021 finished at $.60 per share, compared to $.47 per
share during the second quarter of 2020. The Company's net income during the six
months ended June 30, 2021 totaled $6,392, an increase of $3,127 over the same
period of 2020. Earnings per share during the first six months of 2021 finished
at $1.34 per share, compared to $.68 per share during the first six months of
2020. Higher earnings during both the quarterly and year-to-date periods were
impacted by minimal provision expense recognized during both periods in 2021, as
well as growth in net interest income and lower noninterest expenses. The impact
of higher net earnings during 2021 also had a direct impact to the Company's
annualized net income to average asset ratio, or return on assets, which
increased to 1.06% at June 30, 2021, compared to 0.62% at June 30, 2020. The
Company's net income to average equity ratio, or return on equity, also
increased to 9.39% at June 30, 2021, compared to 5.07% at June 30, 2020.
During the three months ended June 30, 2021, net interest income increased $420,
or 4.3%, over the same period in 2020. During the six months ended June 30,
2021, net interest income increased $464, or 2.3%, over the same period in 2020.
The increases were impacted by growth in average earning assets, which increased
$145,346 and $157,803 during the three and six months ended June 30, 2021,
compared to the same periods in 2020, respectively. Average earning asset growth
came mostly from loan balance increases and higher balances maintained in the
Company's interest-bearing Federal Reserve clearing account. Growth in loans
benefited from positive commercial loan demand in our markets, as well as 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 earnings contribution from higher
average earning assets was mostly offset by a decline in yields on earning
assets, which led to a decline in the fully tax-equivalent ("FTE") net interest
margin, which decreased 36 basis points and 48 basis points during the three and
six months ended June 30, 2021, compared to the same periods in 2020,
respectively. 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 15 basis points.
During the three months ended June 30, 2021, the Company's provision for loan
loss totaled $27, an increase of $420 in provision expense when compared to the
same period in 2020. The increase was primarily related to the reduction in
specific reserves on collateral-dependent, impaired loans during the second
quarter of 2020 that led to negative provision expense for that quarter. During
the six months ended June 30, 2021, the Company experienced negative provision
for loan loss, which contributed to a $3,478 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 $2,185 during the
first half of 2020 to reflect higher anticipated losses due to the expected
financial impact of COVID-19 on its customers. Further impacting lower
provision expense for the year was a $906 decrease in net charge-offs on loans
that had not been specifically allocated for, primarily from the consumer and
residential real estate loan portfolios.
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During the three months ended June 30, 2021, noninterest income increased $257,
or 11.4%, from the same period in 2020. The increase in quarterly noninterest
revenue resulted primarily from higher interchange income on debit and credit
card transactions and higher electronic refund check/electronic refund deposit
("ERC/ERD") income, partially offset by lower mortgage banking revenue. During
the six months ended June 30, 2021, noninterest income decreased $846, or 12.6%,
from the same period in 2020. While lower mortgage banking income was a factor,
the year-to-date decrease in noninterest revenue came primarily from proceeds of
$2,000 received in a litigation settlement with a third-party during the first
quarter of 2020. As part of the settlement agreement, the Bank is processing a
certain amount of tax items, which started in 2021 and will end in 2025. As a
result, the Bank recognized $675 in ERC/ERD income during the first half of
2021, which included $135 being recognized during the second quarter of 2021.
This, along with higher interchange income and tax preparation fees, combined
with lower losses on other real estate owned, helped to partially offset the
year-to-date decrease in noninterest income related to 2020's litigation
settlement proceeds and lower mortgage banking income.
During the three months ended June 30, 2021, noninterest expense decreased $305,
or 3.2%, from the same period in 2020. During the six months ended June 30,
2021, noninterest expense decreased $637, or 3.3%, from the same period in 2020.
The decreases were primarily related to the expense savings associated with a
lower number of employees, which contributed to a $147 decrease in salaries and
employee benefits expense from the prior quarter and a $332 decrease from the
prior year. The Company also experienced a decrease in professional fees during
both periods in large part to lower legal fees associated with collecting
troubled loans. Furthermore, other noninterest expense was down for the quarter
and year, 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 decreased $36 during the three months
ended June 30, 2021, and increased $606 during the six months ended June 30,
2021, compared to the same periods in 2020. This was largely due to the changes
in taxable income affected by the factors mentioned above.
At June 30, 2021, total assets were $1,236,988, an increase of $50,056 from
total assets of $1,186,932 at year-end 2020. Higher assets were primarily
impacted by increases in investment securities, which were up $61,058, or 49.9%,
from year-end 2020. The growth in securities was related to investing the
heightened deposit balances received during the first half of 2021 as a result
of the various stimulus payments received by customers. The growth in assets
from year-end 2020 was partially offset by a $12,365, or 10.0%, decrease in
interest-bearing deposits with banks, primarily from the reinvestment of Federal
Reserve Bank clearing account balances into securities. The loan portfolio was
relatively stable from year-end 2020, experiencing decreases in the residential
real estate segment (-7.8%) and commercial and industrial segment (-8.8%),
partially offset by increases in the commercial real estate segment (+12.0%) and
consumer loan segment (+4.9%).
At June 30, 2021, total liabilities were $1,097,564, up $46,956 from year-end
2020. Contributing most to this increase were higher deposit balances, which
increased $51,351 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. The Company also utilized the excess funds to
pay down a portion of its Federal Home Loan Bank borrowings, which contributed
to a $3,559 decrease in other borrowed funds.
At June 30, 2021, total shareholders' equity was $139,424, up $3,100 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 June 30, 2021 and December 31, 2020
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at June 30, 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 10Q.
Cash and Cash Equivalents
At June 30, 2021, cash and cash equivalents were $125,240, a decrease of
$13,063, or 9.4%, from December 31, 2020. The decrease in cash and cash
equivalents came mostly from lower interest-bearing deposits on hand with
correspondent banks. Over 86% of cash and cash equivalents consist of the
Company's interest-bearing Federal Reserve Bank clearing account, which
decreased $12,475, or 10.3%, 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. Prior to the second
quarter of 2021, the clearing account balances had been increasing from year-end
2020, primarily from the investment of heightened deposit balances received
during 2021 as a result of the pandemic environment. This was 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 half 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. During the second quarter of 2021,
the Company utilized a portion of its clearing account balances and proceeds
from the payoffs of PPP loans to reinvest in higher-yielding investment
securities. While this redeployment of assets reduced clearing account balances
from year-end 2020, the shift into higher-yielding investment securities lowered
the dilutive effect that higher clearing account balances was having on the net
interest margin. The interest rate paid on both the required and excess reserve
balances of the Federal Reserve Bank account is based on the targeted federal
funds rate established by the Federal Open Market Committee. During the first
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 guaranteed by the U.S.
Government.
As liquidity levels continuously vary based on consumer activities, amounts of
cash and cash equivalents can vary widely at any given point in time. The
Company's focus during periods of heightened liquidity will be to invest excess
funds into longer-term, higher-yielding assets, primarily loans, when the
opportunities arise.
Certificates of deposit
At June 30, 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 June 30,
2021 consist of ten certificates with remaining maturity terms ranging from less
than 3 months up to 23 months.
Securities
The balance of total securities increased $61,058, or 49.9%, 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
$30,237, or 32.2%, from year-end 2020 and represented 67.9% of total investments
at June 30, 2021. During the first half of 2021, the Company redeployed a
portion of its heightened excess deposits to purchase $50,732 in new Agency
mortgage-backed securities, while receiving principal repayments of $18,682. 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 utilized a
portion of excess deposits to purchase $17,832 in U.S. Government securities, as
well as $12,899 in Agency securities, net of maturities, during the first half
of 2021. The shift from lower-yielding Federal Reserve Bank balances into
higher-yielding securities has contributed positively to the net interest
margin.
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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 were relatively
stable at June 30, 2021 finishing at $847,916, a decrease of $748, or 0.1%, as
compared to $848,664 at December 31, 2020. The decrease in loans came primarily
from the residential real estate and commercial and industrial portfolios, with
increases coming from the total commercial real estate and consumer 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 $23,749, or 7.8%, 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 33.2% 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
to zero at June 30, 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 $555) and less short-term adjustable-rate
mortgages (down $8,825) at June 30, 2021.
The Company's commercial loan portfolio, consisting of commercial real estate
and commercial and industrial loans, increased $16,557, or 4.0%, from year-end
2020. Contributing most to the increase were higher loan balances within the
commercial real estate portfolio, increasing $30,492, or 12.0%, from year-end
2020. The commercial real estate segment comprised the largest portion of the
Company's total commercial loan portfolio at June 30, 2021 at 66.4%. Increases
were largely from new originations of both owner-occupied and nonowner-occupied
loan balances from year-end 2020. In general, commercial real estate loan
demand has been positive in the Company's market areas, particularly in the
counties of Pike and Athens in Ohio and Cabell County in West Virginia.
Increases in commercial real estate loans were partially offset by a $13,935, or
8.8%, decrease 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 have had an 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 a $19,402 decrease 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. As
of June 30, 2021, all of the initial round of PPP originations from 2020 had
been paid off. As a result, the Company's PPP loans totaled $8,531 at June 30,
2021 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 June 30, 2021 was also impacted by higher
consumer loan balances from year-end 2020, increasing $6,444, or 4.9%. This
change was driven by an increase in unsecured loan balances. As part of the
Company's efforts to invest the heightened cash provided by the various stimulus
programs, the Company purchased multiple pools of loans issued to healthcare
professionals during the first half of 2021. In relation to the purchase of
these loans, the other consumer loan segment increased $7,413, or 13.0%, from
year-end 2020. Partially offsetting this increase was a decline in automobile
loan balances. Automobile loans represent the Company's largest consumer loan
segment at 38.6% 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 increased $859, or 4.3%,
from year-end 2020, from 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 $6,799 allowance for loan losses at June 30, 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 half of 2021, the
Company experienced a $421 decrease in its general allocations of the allowance
for loan losses. A lower historical loan loss factor and lower criticized and
classified assets were the key factors to the year-to-date drop in general
allocations. The historical loan loss factor decreased from 0.24% at year-end
2020 to 0.23% at June 30, 2021, while both 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 0.77% at June 30, 2021 compared to 0.82%
at December 31, 2020, and lower nonperforming assets to total assets of 0.53% at
June 30, 2021 compared to 0.59% at year-end 2020.
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 $2,434 at June 30, 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 $60 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 half of 2021.
The Company's allowance for loan losses to total loans ratio finished at 0.80%
at June 30, 2021 and 0.84% at year-end 2020. Management believes that the
allowance for loan losses at June 30, 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.
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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 June 30, 2021
increased $51,351, or 5.2%, from year-end 2020. This change in deposits came
primarily from interest-bearing deposit balances, which were up by $41,552, or
6.1%, from year-end 2020, while noninterest-bearing deposits increased $9,799,
or 3.1%, 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
$32,071, or 17.3%. 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 $15,975, or 13.3%, 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 $3,963, or 2.4%. 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 $2,531, or 1.2%, 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 up $1,366 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 $24,304 at June 30, 2021, a decrease of $3,559, or
12.8%, from year-end 2020. The decrease was related primarily to the principal
repayments applied to various FHLB advances during the first and second quarters
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.
Shareholders' Equity
Total shareholders' equity at June 30, 2021 increased $3,100, or 2.3%, to finish
at $139,424, as compared to $136,324 at December 31, 2020. This was from
year-to-date 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 and Six Months Ended
June 30, 2021 and 2020
The following discussion focuses, in more detail, on the consolidated results of
operations of the Company for the three and six months ended June 30, 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 10Q.
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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 June 30, 2021, net interest income increased $420, or 4.3%,
compared to the same period in 2020. During the six months ended June 30, 2021,
net interest income increased $464, or 2.3%, compared to the same period in
2020. The increases during both periods were mostly attributable to higher
average earning assets providing favorable increases to interest revenue being
partially 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 $200, or 1.8%, during the second quarter of 2021, and decreased $859,
or 3.7%, during the first half of 2021, compared to the same periods in 2020.
The quarterly and year-to-date decreases were impacted by interest and fees on
loans, which decreased $77, or 0.7%, and $385, or 1.8%, during the three and six
months ended June 30, 2021, compared to the same periods in 2020. These results
were directly related to the decline in loan yields, which decreased from 5.41%
to 5.05% when comparing the second quarters of 2020 to 2021, and decreased from
5.58% to 5.11% when comparing the first half 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 second
quarter of 2021 compared to the second quarter of 2020 increased $48,601, or
6.1%, while average loans for the first half of 2021 compared to the first half
of 2020 increased $60,403, or 7.7%. These increases came mostly from the growing
commercial loan demand within the Company's market areas. Commercial loan growth
was also impacted by 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 decreases of $191 and $861 in loan interest
income during the three and six months ended June 30, 2021, compared to the same
periods in 2020.
Loan revenue was positively impacted by loan fees, which increased $114 during
the second quarter of 2021, and $476 during the first half of 2021, compared to
the same periods in 2020. The increases were largely impacted by loan fees
earned on the origination of government-guaranteed PPP loans, which increased
$14 and $382 during the second quarter and first half of 2021, as a result of
normal amortization and loan forgiveness.
During the three months ended June 30, 2021, interest income from
interest-bearing deposits with banks increased $15, or 83.3%, when compared to
the same period in 2020. During the six months ended June 30, 2021, interest
income from interest-bearing deposits with banks decreased $119, or 66.1%, when
compared to the same period in 2020. These changes in interest revenue came
primarily from the Company's interest-bearing Federal Reserve Bank clearing
account. The year-to-date decrease in interest income was primarily due to the
interest rate tied to this interest-bearing clearing account, which was 0.15% at
June 30, 2021 compared to 0.25% at June 30, 2020. The increase in liquidity from
the surge in deposit liabilities allowed the Company to maintain higher average
balances within the account, which increased $71,424 during the first half of
2021, compared to the same period in 2020. The quarterly increase in interest
income was the result of a $59,566 increase in average clearing balances during
the second quarter of 2021, as well as a more comparable quarterly interest rate
tied to the account after the Federal Reserve reduced rates during the first
quarter of 2020.
Total interest on securities decreased $126, or 18.9%, during the second quarter
of 2021, and $332, or 24.9%, during the first half of 2021, compared to the same
periods 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 $25,528 increase in average securities during the
first half of 2021 over the first half of 2020. However, the increase in
average securities was completely offset by a decline in securities yield of 87
basis points from 2.27% to 1.40%.
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Total interest expense incurred on the Company's interest-bearing liabilities
decreased $620, or 38.7%, during the second quarter of 2021, and decreased
$1,323, or 39.1%, during the first half of 2021, compared to the same periods in
2020. Interest expense decreased despite increases in average interest-bearing
deposits of $73,358 during the second quarter of 2021, and $74,909 during the
second half of 2021, compared to the same periods 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 $148
decrease in money market interest expense during the second quarter of 2021, and
a $361 decrease during the first half of 2021, compared to the same periods in
2020. Deposit expense was further impacted by lower CD rates, which have
contributed to a $434 decrease in time deposit interest expense during the
second quarter of 2021, and a $828 decrease during the first half of 2021,
compared to the same periods 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 44 basis points from 0.92% at June 30, 2020 to 0.48%
at June 30, 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 second quarter net interest margin finished at 3.58%, compared to
2020's second quarter net interest margin of 3.94%. The year-to-date net
interest margin at June 30, 2021 finished at 3.65%, compared to 4.13% at June
30, 2020. The decreases in margin were largely impacted by the decreasing market
rates that impacted lower earning asset yields primarily during 2020. Market
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 June 30, 2021, the Company's provision expense
increased $420, and for the six months ended June 30, 2021, provision expense
decreased $3,478, compared to the same periods in 2020. The quarterly provision
increase came primarily from the reduction in specific reserves on
collateral-dependent, impaired loans during the second quarter of 2020,
particularly within the commercial real estate and commercial and industrial
loan portfolios. The year-to-date provision decrease was largely impacted by 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 impacting lower provision expense was a
$906 decrease in net loan charge-offs during the six months ended June 30, 2021,
compared to the same period in 2020. This was primarily from lower charge-offs
on loans that were not previously allocated for within the residential real
estate and consumer loan portfolios. Further contributing to lower provision
expense were the impacts of lower general reserve allocations. During the first
half of 2021, the Company decreased its general allocation from $7,160 at
December 31, 2020 to $6,739 at June 30, 2021. Conversely, this is compared to a
$574 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 a lower
historical loan loss factor.
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.
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Noninterest Income
Noninterest income for the three months ended June 30, 2021 increased $257, or
11.4%, when compared to the three months ended June 30, 2020. Conversely,
noninterest income for the six months ended June 30, 2021 decreased $846, or
12.6%, when compared to the six months ended June 30, 2020. A significant factor
to both period comparisons was from the proceeds 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 began
earning revenue for the processing of a certain amount of tax items, which
started in 2021 and will end in 2025. As a result, the Bank recognized $540 in
ERC/ERD income during the first quarter of 2021, and $135 in ERC/ERD income
during the second quarter of 2021. This revenue also helped to partially offset
the effects of the settlement proceeds received in 2020.
Noninterest revenue was also impacted by interchange income, which increased
$243, or 26.1%, during the second quarter of 2021, and $350, or 18.7%, during
the first half of 2021 compared to the same periods in 2020. This was largely
impacted by the economic stimulus proceeds received by customers due to the
COVID-19 pandemic that increased consumer spending.
Tax preparation fee income also increased noninterest revenue during 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 increases of $36 and $115 in tax
preparation fee income for the second quarter and first half of 2021, compared
to the same periods in 2020.
Lower losses on the sales of foreclosed assets also improved noninterest income
during the first half of 2021. The Company experienced $83 in losses on the sale
of valuation of foreclosed assets during the first half of 2020 compared to a $1
gain during the first half of 2021. This was primarily from an adjustment to
the fair value of one foreclosed commercial property during the first quarter of
2020. During the second quarter of 2021, the Company recorded no gains or
losses on OREO properties compared to an $18 gain from the second quarter of
2021.
Partially offsetting increases to noninterest revenue was lower 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. With the heavy volume
of refinancing having slowed since 2020, the amount of loans sold during the
three and six months ended June 30, 2021 has decreased from the volume of loan
sales experienced during the same periods in 2020. As a result, mortgage banking
income decreased $245, or 56.8%, during the second quarter of 2021, and
decreased $156, or 29.9%, during the first half of 2021, compared to the same
periods in 2020.
The remaining noninterest income categories increased $106, or 12.5%, during the
second quarter of 2021, and $86, or 4.9%, during the first half of 2021,
compared to the same periods in 2020. The increases were largely impacted by a
$70 gain on the sale of a branch building in Jackson, Ohio. The building was
sold in June 2021 and had been acquired as part of the merger with the Milton
Banking Company in 2016.
Noninterest Expense
Noninterest expense during the second quarter of 2021 decreased $305, or 3.2%
compared to the same period in 2020. Noninterest expense during the first half
of 2021 decreased $637, or 3.3% compared to the same period in 2020.
Contributing most to the decline in noninterest expense was salaries and
employee benefits, which decreased $147, or 2.7%, and $332, or 3.1%, during the
three and six months ended June 30, 2021, compared to the same periods 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 June 30, 2021
compared to 244 employees at June 30, 2020. The impact of a lower employee base
has more than offset the expense increases associated with annual merit
increases in 2021.
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Further impacting lower overhead costs were professional fees, which decreased
$46, or 9.7%, during the second quarter of 2021, and $214, or 20.0%, during the
first half of 2021, compared to the same periods 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 $96, or 6.4%, during the second quarter
of 2021, and $234, or 7.9%, during the first half of 2021, compared to the same
periods 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. During 2020, the Bank had continued to utilize a portion of
its remaining FDIC credits that had been issued in September 2019. The Bank's
FDIC assessments during the first half of 2020 were reduced by $115 in credits.
At June 30, 2020, the Bank had fully exhausted all of its credits and did not
recognize any premium expense discounts during the rest of 2020. This
contributed to increases of $55 and $134 in assessment costs during the three
and six months ended June 30, 2021, compared to the same periods in 2020.
Further impacting overhead costs were higher occupancy, furniture, equipment and
software expenses, which were collectively up $29, or 2.6%, during the second
quarter of 2021, and $166, or 7.5%, during the first half of 2021, compared the
same periods 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 increase loan
processing efficiencies.
The remaining noninterest expense categories decreased $100, or 9.5%, during the
second quarter of 2021, and $157, or 7.9%, during the first half of 2021,
compared to the same periods in 2020. These decreases were impacted mostly from
expense savings related to lower marketing, 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 second 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. However, average earning asset growth,
including a composition shift from less Federal Reserve Bank balances to
higher-yielding investment securities, helped to completely offset the negative
effects from the net interest margin compression. Further positive contributions
came from noninterest expense savings of 3.2% combined with noninterest revenue
improvement of 11.4% for the quarter. As a result, the Company's efficiency
number decreased (improved) to 72.4% during the quarterly period ended June 30,
2021 compared to 79.0% during the same period in 2020. Comparing the first half
of 2021 to the first half of 2020, average earning asset yields remained lower
due to the reduction in market rates. Growth in average earning assets, higher
loan fees, and redeploying excess Federal Reserve Bank balances into securities
helped to generate a 2.3% increase in net interest income. Combining the net
interest income improvement with the 3.3% savings in noninterest expense was
enough to completely offset the 12.6% decrease in noninterest income. As a
result, the Company's efficiency number decreased (improved) to 70.2% during the
first half of 2021 compared to 71.6% during the same period in 2020.
Provision for income taxes
The Company's income tax provision decreased $36 during the three months ended
June 30, 2021 compared to the same period in 2020. The Company's income tax
provision increased $606 during the six months ended June 30, 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.
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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 June 30, 2021, the Bank's CBLR
was 10.31%, and the Company's CBLR was 11.28%.
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 $2,011 during the first half of 2021.
The year-to-date dividends paid totaled $0.42 per share.
Liquidity
Liquidity relates to the Company's ability to meet the cash demands and credit
needs of its customers and is provided by the ability to readily convert assets
to cash and raise funds in the marketplace. Total cash and cash equivalents,
held to maturity securities maturing within one year and available for sale
securities, totaling $299,961, represented 24.3% of total assets at June 30,
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 June 30,
2021, the Bank could borrow an additional $99,332 from the FHLB. Furthermore,
the Bank has established a borrowing line with the Federal Reserve. At June 30,
2021, this line had total availability of $57,773. Lastly, the Bank also has the
ability to purchase federal funds from a correspondent bank.
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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.
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.
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The general component covers non-impaired loans and impaired loans that are not
individually reviewed for impairment and is based on historical loss experience
adjusted for current factors. The historical loss experience is determined by
portfolio segment and is based on the actual loss history experienced by the
Company over the most recent 3 years for the consumer and real estate portfolio
segment and 5 years for the commercial portfolio segment. The total loan
portfolio's actual loss experience is supplemented with other economic factors
based on the risks present for each portfolio segment. These economic factors
include consideration of the following: levels of and trends in delinquencies
and impaired loans; levels of and trends in charge-offs and recoveries; trends
in volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and
practices; experience, ability, and depth of lending management and other
relevant staff; national and local economic trends and conditions; industry
conditions; and effects of changes in credit concentrations. The following
portfolio segments have been identified: Commercial Real Estate, Commercial and
Industrial, Residential Real Estate, and Consumer.
Commercial and industrial loans consist of borrowings for commercial purposes by
individuals, corporations, partnerships, sole proprietorships, and other
business enterprises. Commercial and industrial loans are generally secured by
business assets such as equipment, accounts receivable, inventory, or any other
asset excluding real estate and generally made to finance capital expenditures
or operations. The Company's risk exposure is related to deterioration in the
value of collateral securing the loan should foreclosure become necessary.
Generally, business assets used or produced in operations do not maintain their
value upon foreclosure, which may require the Company to write down the value
significantly to sell.
Commercial real estate consists of nonfarm, nonresidential loans secured by
owner-occupied and nonowner-occupied commercial real estate as well as
commercial construction loans. An owner-occupied loan relates to a borrower
purchased building or space for which the repayment of principal is dependent
upon cash flows from the ongoing business operations conducted by the party, or
an affiliate of the party, who owns the property. Owner-occupied loans that are
dependent on cash flows from operations can be adversely affected by current
market conditions for their product or service. A nonowner-occupied loan is a
property loan for which the repayment of principal is dependent upon rental
income associated with the property or the subsequent sale of the property.
Nonowner-occupied loans that are dependent upon rental income are primarily
impacted by local economic conditions which dictate occupancy rates and the
amount of rent charged. Commercial construction loans consist of borrowings to
purchase and develop raw land into one- to four-family residential properties.
Construction loans are extended to individuals as well as corporations for the
construction of an individual or multiple properties and are secured by raw land
and the subsequent improvements. Repayment of the loans to real estate
developers is dependent upon the sale of properties to third parties in a timely
fashion upon completion. Should there be delays in construction or a downturn in
the market for those properties, there may be significant erosion in value which
may be absorbed by the Company.
Residential real estate loans consist of loans to individuals for the purchase
of one- to four-family primary residences with repayment primarily through wage
or other income sources of the individual borrower. The Company's loss exposure
to these loans is dependent on local market conditions for residential
properties as loan amounts are determined, in part, by the fair value of the
property at origination.
Consumer loans are comprised of loans to individuals secured by automobiles,
open-end home equity loans and other loans to individuals for household, family,
and other personal expenditures, both secured and unsecured. These loans
typically have maturities of 6 years or less with repayment dependent on
individual wages and income. The risk of loss on consumer loans is elevated as
the collateral securing these loans, if any, rapidly depreciate in value or may
be worthless and/or difficult to locate if repossession is necessary. During the
last several years, one of the most significant portions of the Company's net
loan charge-offs have been from consumer loans. Nevertheless, the Company has
allocated the highest percentage of its allowance for loan losses as a
percentage of loans to the other identified loan portfolio segments due to the
larger dollar balances and inherent risk associated with such portfolios.
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with residential real
estate loans currently comprising the most significant portion. Credit risk is
primarily subject to loans made to businesses and individuals in southeastern
Ohio and western West Virginia. Management believes this risk to be general in
nature, as there are no material concentrations of loans to any industry or
consumer group. To the extent possible, the Company diversifies its loan
portfolio to limit credit risk by avoiding industry concentrations.
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