| | Available for Sale | | | Held to Maturity | |
Debt Securities: | | Amortized Cost | | | Estimated Fair Value | | | Amortized Cost | | | Estimated Fair Value | |
| | | | | | | | | | | | |
Due in one year or less | | $ | 0 | | | $ | 0 | | | $ | 2,422 | | | $ | 2,467 | |
Due in over one to five years | | | 10,308 | | | | 10,507 | | | | 3,492 | | | | 3,609 | |
Due in over five to ten years | | | 17,673 | | | | 17,481 | | | | 4,894 | | | | 4,981 | |
Due after ten years | | | 0 | | | | 0 | | | | 327 | | | | 317 | |
Agency mortgage-backed securities, residential | | | 96,734 | | | | 98,406 | | | | 2 | | | | 2 | |
Total debt securities | | $ | 124,715 | | | $ | 126,394 | | | $ | 11,137 | | | $ | 11,376 | |
The following table summarizes securities with unrealized losses at March 31, 20202021 and December 31, 2019,2020, aggregated by major security type and length of time in a continuous unrealized loss position:
March 31, 2020 | | Less Than 12 Months | | | 12 Months or More | | | Total | | |
March 31, 2021 | | | Less Than 12 Months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
Securities Available for Sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government securities | | | $ | 5,166 | | | $ | (7 | ) | | $ | 0 | | | $ | 0 | | | $ | 5,166 | | | $ | (7 | ) |
U.S. Government sponsored entity securities | | | | 14,771 | | | | (227 | ) | | | 0 | | | | 0 | | | | 14,771 | | | | (227 | ) |
Agency mortgage-backed | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities, residential | | $ | ---- | | | $ | ---- | | | $ | 198 | | | $ | (2 | ) | | $ | 198 | | | $ | (2 | ) | | | 33,641 | | | | (478 | ) | | | 0 | | | | 0 | | | | 33,641 | | | | (478 | ) |
Total available for sale | | $ | ---- | | | $ | ---- | | | $ | 198 | | | $ | (2 | ) | | $ | 198 | | | $ | (2 | ) | | $ | 53,578 | | | $ | (712 | ) | | $ | 0 | | | $ | 0 | | | $ | 53,578 | | | $ | (712 | ) |
| | Less Than 12 Months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrecognized Loss | | | Fair Value | | | Unrecognized Loss | | | Fair Value | | | Unrecognized Loss | |
Securities Held to Maturity | | | | | | | | | | | | | | | | | | |
Obligations of states and | | | | | | | | | | | | | | | | | | |
political subdivisions | | $ | 204 | | | $ | (1 | ) | | $ | ---- | | | $ | ---- | | | $ | 204 | | | $ | (1 | ) |
Total held to maturity | | $ | 204 | | | $ | (1 | ) | | $ | ---- | | | $ | ---- | | | $ | 204 | | | $ | (1 | ) |
December 31, 2020 | | Less Than 12 Months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
Securities Available for Sale | | | | | | | | | | | | | | | | | | |
Agency mortgage-backedsecurities, residential | | $ | 14,517 | | | $ | (4 | ) | | $ | 0 | | | $ | 0 | | | $ | 14,517 | | | $ | (4 | ) |
Total available for sale | | $ | 14,517 | | | $ | (4 | ) | | $ | — | | | $ | 0 | | | $ | 14,517 | | | $ | (4 | ) |
NOTE 3 – SECURITIES (Continued)
December 31, 2019 | | Less Than 12 Months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
Securities Available for Sale | | | | | | | | | | | | | | | | | | |
U.S. Government sponsored | | | | | | | | | | | | | | | | | | |
entity securities | | $ | ---- | | | $ | ---- | | | $ | 1,999 | | | $ | (6 | ) | | $ | 1,999 | | | $ | (6 | ) |
Agency mortgage-backed | | | | | | | | | | | | | | | | | | | | | | | | |
securities, residential | | | 15,041 | | | | (84 | ) | | | 21,344 | | | | (212 | ) | | | 36,385 | | | | (296 | ) |
Total available for sale | | $ | 15,041 | | | $ | (84 | ) | | $ | 23,343 | | | $ | (218 | ) | | $ | 38,384 | | | $ | (302 | ) |
March 31, 2021 | | Less Than 12 Months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrecognized Loss | | | Fair Value | | | Unrecognized Loss | | | Fair Value | | | Unrecognized Loss | |
Securities Held to Maturity | | | | | | | | | | | | | | | | | | |
Obligations of states and political subdivisions | | $ | 2,023 | | | $ | (36 | ) | | $ | 0 | | | $ | 0 | | | $ | 2,023 | | | $ | (36 | ) |
Total held to maturity | | $ | 2,023 | | | $ | (36 | ) | | $ | 0 | | | $ | 0 | | | $ | 2,023 | | | $ | (36 | ) |
| | Less Than 12 Months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrecognized Loss | | | Fair Value | | | Unrecognized Loss | | | Fair Value | | | Unrecognized Loss | |
Securities Held to Maturity | | | | | | | | | | | | | | | | | | |
Obligations of states and | | | | | | | | | | | | | | | | | | |
political subdivisions | | $ | 204 | | | $ | (1 | ) | | $ | ---- | | | $ | ---- | | | $ | 204 | | | $ | (1 | ) |
Total held to maturity | | $ | 204 | | | $ | (1 | ) | | $ | ---- | | | $ | ---- | | | $ | 204 | | | $ | (1 | ) |
There were no0 sales of investment securities during the three months ended March 31, 20202021 or 2019.2020. Unrealized losses on the Company’s debt securities have not been recognized into income because the issuers’ securities are of high credit quality as of March 31, 2020,2021, and management does not intend to sell, and it is likely that management will not be required to sell, the securities prior to their anticipated recovery. Management does not0t believe any individual unrealized loss at March 31, 20202021 and December 31, 20192020 represents an other-than-temporary impairment.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are comprised of the following: | | | | | | |
| | | | | | |
Residential real estate | | $ | 307,879 | | | $ | 310,253 | |
Commercial real estate: | | | | | | | | |
Owner-occupied | | | 55,515 | | | | 55,825 | |
Nonowner-occupied | | | 137,141 | | | | 131,398 | |
Construction | | | 34,892 | | | | 34,913 | |
Commercial and industrial | | | 102,570 | | | | 100,023 | |
Consumer: | | | | | | | | |
Automobile | | | 61,729 | | | | 63,770 | |
Home equity | | | 21,894 | | | | 22,882 | |
Other | | | 53,466 | | | | 53,710 | |
| | | 775,086 | | | | 772,774 | |
Less: Allowance for loan losses | | | (8,729 | ) | | | (6,272 | ) |
| | | | | | | | |
Loans, net | | $ | 766,357 | | | $ | 766,502 | |
Loans are comprised of the following:
| | March 31, 2021 | | | December 31, 2020 | |
| | | | | | |
Residential real estate | | $ | 290,587 | | | $ | 305,478 | |
Commercial real estate: | | | | | | | | |
Owner-occupied | | | 54,228 | | | | 51,863 | |
Nonowner-occupied | | | 159,262 | | | | 164,523 | |
Construction | | | 37,656 | | | | 37,063 | |
Commercial and industrial | | | 159,716 | | | | 157,692 | |
Consumer: | | | | | | | | |
Automobile | | | 53,475 | | | | 55,241 | |
Home equity | | | 20,608 | | | | 19,993 | |
Other | | | 55,518 | | | | 56,811 | |
| | | 831,050 | | | | 848,664 | |
Less: Allowance for loan losses | | | (6,887 | ) | | | (7,160 | ) |
| | | | | | | | |
Loans, net | | $ | 824,163 | | | $ | 841,504 | |
Commercial and industrial loans include $25,829 of loans originated under the PPP at March 31, 2021 compared to $27,933 at December 31, 2020. These loans are guaranteed by the SBA.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 20202021 and 2019:2020:
March 31, 2020 | | Residential Real Estate | | | Commercial Real Estate | | | Commercial and Industrial | | | Consumer | | | Total | | |
March 31, 2021 | | | Residential Real Estate | | | Commercial Real Estate | | | Commercial and Industrial | | | Consumer | | | Total | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 1,250 | | | $ | 1,928 | | | $ | 1,447 | | | $ | 1,647 | | | $ | 6,272 | | | $ | 1,480 | | | $ | 2,431 | | | $ | 1,776 | | | $ | 1,473 | | | $ | 7,160 | |
Provision for loan losses | | 926 | | | 1,572 | | | 624 | | | 724 | | | 3,846 | | | | (116 | ) | | | (102 | ) | | | 52 | | | | 114 | | | | (52 | ) |
Loans charged off | | (198 | ) | | (516 | ) | | (33 | ) | | (889 | ) | | (1,636 | ) | | | (1 | ) | | | (10 | ) | | | (71 | ) | | | (359 | ) | | | (441 | ) |
Recoveries | | | 24 | | | | 44 | | | | 7 | | | | 172 | | | | 247 | | | | 14 | | | | 27 | | | | 34 | | | | 145 | | | | 220 | |
Total ending allowance balance | | $ | 2,002 | | | $ | 3,028 | | | $ | 2,045 | | | $ | 1,654 | | | $ | 8,729 | | | $ | 1,377 | | | $ | 2,346 | | | $ | 1,791 | | | $ | 1,373 | | | $ | 6,887 | |
March 31, 2019 | | Residential Real Estate | | | Commercial Real Estate | | | Commercial and Industrial | | | Consumer | | | Total | | |
March 31, 2020 | | | Residential Real Estate | | | Commercial Real Estate | | | Commercial and Industrial | | | Consumer | | | Total | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 1,583 | | | $ | 2,186 | | | $ | 1,063 | | | $ | 1,896 | | | $ | 6,728 | | | $ | 1,250 | | | $ | 1,928 | | | $ | 1,447 | | | $ | 1,647 | | | $ | 6,272 | |
Provision for loan losses | | 813 | | | 393 | | | 473 | | | 699 | | | 2,378 | | | | 926 | | | | 1,572 | | | | 624 | | | | 724 | | | | 3,846 | |
Loans charged-off | | (329 | ) | | (141 | ) | | (233 | ) | | (658 | ) | | (1,361 | ) | | | (198 | ) | | | (516 | ) | | | (33 | ) | | | (889 | ) | | | (1,636 | ) |
Recoveries | | | 12 | | | | 14 | | | | 12 | | | | 230 | | | | 268 | | | | 24 | | | | 44 | | | | 7 | | | | 172 | | | | 247 | |
Total ending allowance balance | | $ | 2,079 | | | $ | 2,452 | | | $ | 1,315 | | | $ | 2,167 | | | $ | 8,013 | | | $ | 2,002 | | | $ | 3,028 | | | $ | 2,045 | | | $ | 1,654 | | | $ | 8,729 | |
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents the balance in the allowance for loan losses and the recorded investment of loans by portfolio segment and based on impairment method as of March 31, 20202021 and December 31, 2019:2020:
March 31, 2020 | | Residential Real Estate | | | Commercial Real Estate | | | Commercial and Industrial | | | Consumer | | | Total | | |
March 31, 2021 | | | Residential Real Estate | | | Commercial Real Estate | | | Commercial and Industrial | | | Consumer | | | Total | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | ---- | | | $ | 409 | | | $ | 445 | | | $ | ---- | | | $ | 854 | | | $ | 0 | | | $ | 8 | | | $ | 32 | | | $ | 50 | | | $ | 90 | |
Collectively evaluated for impairment | | | 2,002 | | | | 2,619 | | | | 1,600 | | | | 1,654 | | | | 7,875 | | | | 1,377 | | | | 2,338 | | | | 1,759 | | | | 1,323 | | | | 6,797 | |
Total ending allowance balance | | $ | 2,002 | | | $ | 3,028 | | | $ | 2,045 | | | $ | 1,654 | | | $ | 8,729 | | | $ | 1,377 | | | $ | 2,346 | | | $ | 1,791 | | | $ | 1,373 | | | $ | 6,887 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 428 | | | $ | 5,088 | | | $ | 5,207 | | | $ | 403 | | | $ | 11,126 | | | $ | 205 | | | $ | 5,606 | | | $ | 3,311 | | | $ | 83 | | | $ | 9,205 | |
Loans collectively evaluated for impairment | | | 307,451 | | | | 222,460 | | | | 97,363 | | | | 136,686 | | | | 763,960 | | | | 290,382 | | | | 245,540 | | | | 156,405 | | | | 129,518 | | | | 821,845 | |
Total ending loans balance | | $ | 307,879 | | | $ | 227,548 | | | $ | 102,570 | | | $ | 137,089 | | | $ | 775,086 | | | $ | 290,587 | | | $ | 251,146 | | | $ | 159,716 | | | $ | 129,601 | | | $ | 831,050 | |
17
December 31, 2019 | | Residential Real Estate | | | Commercial Real Estate | | | Commercial and Industrial | | | Consumer | | | Total | |
Allowance for loan losses: | | | | | | | | | | | | | | | |
Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | ---- | | | $ | 385 | | | $ | 303 | | | $ | 119 | | | $ | 807 | |
Collectively evaluated for impairment | | | 1,250 | | | | 1,543 | | | | 1,144 | | | | 1,528 | | | | 5,465 | |
Total ending allowance balance | | $ | 1,250 | | | $ | 1,928 | | | $ | 1,447 | | | $ | 1,647 | | | $ | 6,272 | |
| | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 438 | | | $ | 11,300 | | | $ | 4,910 | | | $ | 487 | | | $ | 17,135 | |
Loans collectively evaluated for impairment | | | 309,815 | | | | 210,836 | | | | 95,113 | | | | 139,875 | | | | 755,639 | |
Total ending loans balance | | $ | 310,253 | | | $ | 222,136 | | | $ | 100,023 | | | $ | 140,362 | | | $ | 772,774 | |
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
December 31, 2020 | | Residential Real Estate | | | Commercial Real Estate | | | Commercial and Industrial | | | Consumer | | | Total | |
Allowance for loan losses: | | | | | | | | | | | | | | | |
Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Collectively evaluated for impairment | | | 1,480 | | | | 2,431 | | | | 1,776 | | | | 1,473 | | | | 7,160 | |
Total ending allowance balance | | $ | 1,480 | | | $ | 2,431 | | | $ | 1,776 | | | $ | 1,473 | | | $ | 7,160 | |
| | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 411 | | | $ | 5,845 | | | $ | 4,686 | | | $ | 84 | | | $ | 11,026 | |
Loans collectively evaluated for impairment | | | 305,067 | | | | 247,604 | | | | 153,006 | | | | 131,961 | | | | 837,638 | |
Total ending loans balance | | $ | 305,478 | | | $ | 253,449 | | | $ | 157,692 | | | $ | 132,045 | | | $ | 848,664 | |
The following tables present information related to loans individually evaluated for impairment by class of loans as of March 31, 20202021 and December 31, 2019:2020:
March 31, 2020 | | Unpaid Principal Balance | | | Recorded Investment | | | Allowance for Loan Losses Allocated | | |
With an allowance recorded | | | | | | | | | | |
March 31, 2021 | | | Unpaid Principal Balance | | | Recorded Investment | | | Allowance for Loan Losses Allocated | |
With an allowance recorded: | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Owner-occupied | | $ | 868 | | | $ | 868 | | | $ | 409 | | | $ | 2,105 | | | $ | 2,105 | | | $ | 8 | |
Commercial and industrial | | 1,222 | | | 1,222 | | | 445 | | | | 276 | | | | 276 | | | | 32 | |
Consumer: | | | | | | | | | | | | | |
Other | | | | 50 | | | | 50 | | | | 50 | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | 428 | | | 428 | | | ---- | | | | 215 | | | | 205 | | | | — | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | |
Owner-occupied | | 3,201 | | | 3,201 | | | ---- | | | | 3,112 | | | | 3,112 | | | | — | |
Nonowner-occupied | | 1,019 | | | 1,019 | | | ---- | | | | 389 | | | | 389 | | | | — | |
Commercial and industrial | | 3,985 | | | 3,985 | | | ---- | | | | 3,035 | | | | 3,035 | | | | — | |
Consumer: | | | | | | | | | | | | | | | | | | | | | |
Home equity | | | 403 | | | | 403 | | | | ---- | | | | 33 | | | | 33 | | | | — | |
Total | | $ | 11,126 | | | $ | 11,126 | | | $ | 854 | | | $ | 9,215 | | | $ | 9,205 | | | $ | 90 | |
December 31, 2020 | | Unpaid Principal Balance | | | Recorded Investment | | | Allowance for Loan Losses Allocated | |
With an allowance recorded: | | $ | ---- | | | $ | ---- | | | $ | --- | |
With no related allowance recorded: | | | | | | | | | | | | |
Residential real estate | | | 418 | | | | 411 | | | | — | |
Commercial real estate: | | | | | | | | | | | | |
Owner-occupied | | | 5,256 | | | | 5,256 | | | | — | |
Nonowner-occupied | | | 632 | | | | 589 | | | | — | |
Commercial and industrial | | | 4,686 | | | | 4,686 | | | | — | |
Consumer: | | | | | | | | | | | | |
Home equity | | | 34 | | | | 34 | | | | — | |
Other | | | 50 | | | | 50 | | | | — | |
Total | | $ | 11,076 | | | $ | 11,026 | | | $ | 0 | |
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
December 31, 2019 | | Unpaid Principal Balance | | | Recorded Investment | | | Allowance for Loan Losses Allocated | |
With an allowance recorded: | | | | | | | | | |
Commercial real estate: | | | | | | | | | |
Owner-occupied | | $ | 2,030 | | | $ | 2,030 | | | $ | 385 | |
Commercial and industrial | | | 4,861 | | | | 4,861 | | | | 303 | |
Consumer: | | | | | | | | | | | | |
Automobile | | | 8 | | | | 8 | | | | 8 | |
Other | | | 111 | | | | 111 | | | | 111 | |
With no related allowance recorded: | | | | | | | | | | | | |
Residential real estate | | | 438 | | | | 438 | | | | ---- | |
Commercial real estate: | | | | | | | | | | | | |
Owner-occupied | | | 1,778 | | | | 1,778 | | | | ---- | |
Nonowner-occupied | | | 7,492 | | | | 7,492 | | | | ---- | |
Commercial and industrial | | | 49 | | | | 49 | | | | ---- | |
Consumer: | | | | | | | | | | | | |
Home equity | | | 368 | | | | 368 | | | | ---- | |
Total | | $ | 17,135 | | | $ | 17,135 | | | $ | 807 | |
The following tables present information related to loans individually evaluated for impairment by class of loans for the three months ended March 31, 20202021 and 2019:2020:
| | Three months ended March 31, 2020 | | | Three months ended March 31, 2021 | |
| | Average Impaired Loans | | | Interest Income Recognized | | | Cash Basis Interest Recognized | | | Average Impaired Loans | | | Interest Income Recognized | | | Cash Basis Interest Recognized | |
With an allowance recorded | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Owner-occupied | | $ | 875 | | | $ | 9 | | | $ | 9 | | | $ | 2,109 | | | $ | 43 | | | $ | 43 | |
Commercial and industrial | | 611 | | | 7 | | | 7 | | | | 281 | | | | 4 | | | | 4 | |
Consumer: | | | | | | | | | | | | | |
Other | | | | 50 | | | | 1 | | | | 1 | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | 433 | | | 4 | | | 4 | | | | 207 | | | | 3 | | | | 3 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | |
Owner-occupied | | 2,754 | | | 48 | | | 48 | | | | 3,128 | | | | 34 | | | | 34 | |
Nonowner-occupied | | 1,033 | | | 11 | | | 11 | | | | 389 | | | | 7 | | | | 7 | |
Commercial and industrial | | 4,279 | | | 66 | | | 66 | | | | 3,718 | | | | 47 | | | | 47 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | |
Home equity | | | 385 | | | | 5 | | | | 5 | | | | 33 | | | | 1 | | | | 1 | |
Total | | $ | 10,370 | | | $ | 150 | | | $ | 150 | | | $ | 9,915 | | | $ | 140 | | | $ | 140 | |
| | Three months ended March 31, 2019 | | | Three months ended March 31, 2020 | |
| | Average Impaired Loans | | | Interest Income Recognized | | | Cash Basis Interest Recognized | | | Average Impaired Loans | | | Interest Income Recognized | | | Cash Basis Interest Recognized | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | |
Owner-occupied | | | $ | 875 | | | $ | 9 | | | $ | 9 | |
Commercial and industrial | | | | 611 | | | | 7 | | | | 7 | |
With no related allowance recorded: | | | | | | | | | | | | | |
Residential real estate | | $ | 1,255 | | | $ | 7 | | | $ | 7 | | | | 433 | | | | 4 | | | | 4 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | |
Owner-occupied | | 78 | | | 2 | | | 2 | | | | 2,754 | | | | 48 | | | | 48 | |
Nonowner-occupied | | 360 | | | ---- | | | ---- | | | | 1,033 | | | | 11 | | | | 11 | |
Commercial and industrial | | 984 | | | 36 | | | 36 | | | | 4,279 | | | | 66 | | | | 66 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | |
Home equity | | 3 | | | ---- | | | ---- | | | | 385 | | | | 5 | | | | 5 | |
With no related allowance recorded: | | | | | | | | | | |
Residential real estate | | 451 | | | 4 | | | 4 | | |
Commercial real estate: | | | | | | | | | | |
Owner-occupied | | 2,862 | | | 52 | | | 52 | | |
Nonowner-occupied | | 4,177 | | | 112 | | | 112 | | |
Commercial and industrial | | | 5,258 | | | | 84 | | | | 84 | | |
Total | | $ | 15,428 | | | $ | 297 | | | $ | 297 | | | $ | 10,370 | | | $ | 150 | | | $ | 150 | |
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees.
Nonaccrual loans and loans past due 90 days or more and still accruing include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified as impaired loans.
The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of March 31, 2020,2021, there were no0 other real estate owned for residential real estate properties, as compared to $68$43 at December 31, 2019.2020. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $831$693 and $1,780$1,097 as of March 31, 20202021 and December 31, 2019,2020, respectively.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents the recorded investment of nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of March 31, 20202021 and December 31, 2019:2020:
March 31, 2020 | | Loans Past Due 90 Days And Still Accruing | | | Nonaccrual | | |
March 31, 2021 | | | Loans Past Due 90 Days And Still Accruing | | | Nonaccrual | |
| | | | | | | | | | | | |
Residential real estate | | $ | 360 | | | $ | 5,867 | | | $ | 39 | | | $ | 4,828 | |
Commercial real estate: | | | | | | | | | | | | | | |
Owner-occupied | | 60 | | | 348 | | | | 0 | | | | 457 | |
Nonowner-occupied | | ---- | | | 724 | | | | 0 | | | | 162 | |
Construction | | ---- | | | 237 | | | | 0 | | | | 153 | |
Commercial and industrial | | 1,192 | | | 534 | | | | 0 | | | | 149 | |
Consumer: | | | | | | | | | | | | | | |
Automobile | | 116 | | | 77 | | | | 59 | | | | 55 | |
Home equity | | ---- | | | 359 | | | | 0 | | | | 160 | |
Other | | | 255 | | | | 49 | | | | 42 | | | | 26 | |
Total | | $ | 1,983 | | | $ | 8,195 | | | $ | 140 | | | $ | 5,990 | |
December 31, 2020 | | Loans Past Due 90 Days And Still Accruing | | | Nonaccrual | |
| | | | | | |
Residential real estate | | $ | 127 | | | $ | 5,256 | |
Commercial real estate: | | | | | | | | |
Owner-occupied | | | 0 | | | | 205 | |
Nonowner-occupied | | | 0 | | | | 362 | |
Construction | | | 0 | | | | 156 | |
Commercial and industrial | | | 15 | | | | 149 | |
Consumer: | | | | | | | | |
Automobile | | | 146 | | | | 129 | |
Home equity | | | 0 | | | | 210 | |
Other | | | 136 | | | | 36 | |
Total | | $ | 424 | | | $ | 6,503 | |
December 31, 2019 | | Loans Past Due 90 Days And Still Accruing | | | Nonaccrual | |
| | | | | | |
Residential real estate | | $ | 255 | | | $ | 6,119 | |
Commercial real estate: | | | | | | | | |
Owner-occupied | | | ---- | | | | 863 | |
Nonowner-occupied | | | ---- | | | | 804 | |
Construction | | | ---- | | | | 229 | |
Commercial and industrial | | | ---- | | | | 590 | |
Consumer: | | | | | | | | |
Automobile | | | 239 | | | | 61 | |
Home equity | | | ---- | | | | 392 | |
Other | | | 395 | | | | 91 | |
Total | | $ | 889 | | | $ | 9,149 | |
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents the aging of the recorded investment of past due loans by class of loans as of March 31, 20202021 and December 31, 2019:2020:
March 31, 2020 | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90 Days Or More Past Due | | | Total Past Due | | | Loans Not Past Due | | | Total | | |
March 31, 2021 | | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90 Days Or More Past Due | | | Total Past Due | | | Loans Not Past Due | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 3,499 | | | $ | 1,153 | | | $ | 2,456 | | | $ | 7,108 | | | $ | 300,771 | | | $ | 307,879 | | | $ | 2,123 | | | $ | 506 | | | $ | 965 | | | $ | 3,594 | | | $ | 286,993 | | | $ | 290,587 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Owner-occupied | | 1,951 | | | ---- | | | 313 | | | 2,264 | | | 53,251 | | | 55,515 | | | | 292 | | | | 923 | | | | 445 | | | | 1,660 | | | | 52,568 | | | | 54,228 | |
Nonowner-occupied | | 1,457 | | | ---- | | | 601 | | | 2,058 | | | 135,083 | | | 137,141 | | | | 2,098 | | | | 0 | | | | 162 | | | | 2,260 | | | | 157,002 | | | | 159,262 | |
Construction | | 52 | | | ---- | | | 68 | | | 120 | | | 34,772 | | | 34,892 | | | | 0 | | | | 29 | | | | 82 | | | | 111 | | | | 37,545 | | | | 37,656 | |
Commercial and industrial | | 287 | | | 47 | | | 1,726 | | | 2,060 | | | 100,510 | | | 102,570 | | | | 140 | | | | 0 | | | | 149 | | | | 289 | | | | 159,427 | | | | 159,716 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Automobile | | 1,200 | | | 275 | | | 190 | | | 1,665 | | | 60,064 | | | 61,729 | | | | 451 | | | | 80 | | | | 99 | | | | 630 | | | | 52,845 | | | | 53,475 | |
Home equity | | 212 | | | 80 | | | 255 | | | 547 | | | 21,347 | | | 21,894 | | | | 61 | | | | 127 | | | | 138 | | | | 326 | | | | 20,282 | | | | 20,608 | |
Other | | | 519 | | | | 205 | | | | 264 | | | | 988 | | | | 52,478 | | | | 53,466 | | | | 161 | | | | 71 | | | | 61 | | | | 293 | | | | 55,225 | | | | 55,518 | |
Total | | $ | 9,177 | | | $ | 1,760 | | | $ | 5,873 | | | $ | 16,810 | | | $ | 758,276 | | | $ | 775,086 | | | $ | 5,326 | | | $ | 1,736 | | | $ | 2,101 | | | $ | 9,163 | | | $ | 821,887 | | | $ | 831,050 | |
December 31, 2019 | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90 Days Or More Past Due | | | Total Past Due | | | Loans Not Past Due | | | Total | | |
December 31, 2020 | | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90 Days Or More Past Due | | | Total Past Due | | | Loans Not Past Due | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 4,015 | | | $ | 1,314 | | | $ | 1,782 | | | $ | 7,111 | | | $ | 303,142 | | | $ | 310,253 | | | $ | 2,845 | | | $ | 496 | | | $ | 1,663 | | | $ | 5,004 | | | $ | 300,474 | | | $ | 305,478 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Owner-occupied | | 383 | | | 59 | | | 144 | | | 586 | | | 55,239 | | | 55,825 | | | | 470 | | | | 1,003 | | | | 193 | | | | 1,666 | | | | 50,197 | | | | 51,863 | |
Nonowner-occupied | | 12 | | | ---- | | | 697 | | | 709 | | | 130,689 | | | 131,398 | | | | 94 | | | | 0 | | | | 362 | | | | 456 | | | | 164,067 | | | | 164,523 | |
Construction | | 186 | | | 19 | | | 49 | | | 254 | | | 34,659 | | | 34,913 | | | | 0 | | | | 82 | | | | 0 | | | | 82 | | | | 36,981 | | | | 37,063 | |
Commercial and industrial | | 1,320 | | | 312 | | | 241 | | | 1,873 | | | 98,150 | | | 100,023 | | | | 1,112 | | | | 11 | | | | 164 | | | | 1,287 | | | | 156,405 | | | | 157,692 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Automobile | | 986 | | | 329 | | | 246 | | | 1,561 | | | 62,209 | | | 63,770 | | | | 831 | | | | 131 | | | | 258 | | | | 1,220 | | | | 54,021 | | | | 55,241 | |
Home equity | | 106 | | | 18 | | | 279 | | | 403 | | | 22,479 | | | 22,882 | | | | 204 | | | | 81 | | | | 113 | | | | 398 | | | | 19,595 | | | | 19,993 | |
Other | | | 559 | | | | 139 | | | | 443 | | | | 1,141 | | | | 52,569 | | | | 53,710 | | | | 446 | | | | 76 | | | | 172 | | | | 694 | | | | 56,117 | | | | 56,811 | |
Total | | $ | 7,567 | | | $ | 2,190 | | | $ | 3,881 | | | $ | 13,638 | | | $ | 759,136 | | | $ | 772,774 | | | $ | 6,002 | | | $ | 1,880 | | | $ | 2,925 | | | $ | 10,807 | | | $ | 837,857 | | | $ | 848,664 | |
Troubled Debt Restructurings:
A troubled debt restructuring (“TDR”) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. All TDRs are considered to be impaired. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a reduction in the contractual principal and interest payments of the loan; or short-term interest-only payment terms.
The Company has allocated reserves for a portion of its TDRs to reflect the fair values of the underlying collateral or the present value of the concessionary terms granted to the customer.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents the types of TDR loan modifications by class of loans as of March 31, 20202021 and December 31, 2019:2020:
March 31, 2020 | | TDRs Performing to Modified Terms | | | TDRs Not Performing to Modified Terms | | | Total TDRs | | |
Residential real estate: | | | | | | | | | | |
Interest only payments | | $ | 207 | | | $ | ---- | | | $ | 207 | | |
March 31, 2021 | | | TDRs Performing to Modified Terms | | | TDRs Not Performing to Modified Terms | | | Total TDRs | |
| | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Owner-occupied | | | | | | | | | | | | | | | | | | |
Interest only payments | | 868 | | | ---- | | | 868 | | |
Reduction of principal and interest payments | | 1,509 | | | ---- | | | 1,509 | | | $ | 1,479 | | | $ | 0 | | | $ | 1,479 | |
Maturity extension at lower stated rate than market rate | | 373 | | | ---- | | | 373 | | | | 329 | | | | 0 | | | | 329 | |
Credit extension at lower stated rate than market rate | | 391 | | | ---- | | | 391 | | | | 381 | | | | 0 | | | | 381 | |
Nonowner-occupied | | | | | | | | | | | | | | | | | | | | | |
Credit extension at lower stated rate than market rate | | 394 | | | ---- | | | 394 | | | | 389 | | | | 0 | | | | 389 | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | | |
Interest only payments | | 3,984 | | | ---- | | | 3,984 | | | | 3,035 | | | | 0 | | | | 3,035 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total TDRs | | $ | 7,726 | | | $ | ---- | | | $ | 7,726 | | | $ | 5,613 | | | $ | 0 | | | $ | 5,613 | |
December 31, 2020 | | TDRs Performing to Modified Terms | | | TDRs Not Performing to Modified Terms | | | Total TDRs | |
Residential real estate: | | | | | | | | | |
Interest only payments | | $ | 202 | | | $ | 0 | | | $ | 202 | |
Commercial real estate: | | | | | | | | | | | | |
Owner-occupied | | | | | | | | | | | | |
Reduction of principal and interest payments | | | 1,486 | | | | 0 | | | | 1,486 | |
Maturity extension at lower stated rate than market rate | | | 351 | | | | 0 | | | | 351 | |
Credit extension at lower stated rate than market rate | | | 384 | | | | 0 | | | | 384 | |
Nonowner-occupied | | | | | | | | | | | | |
Credit extension at lower stated rate than market rate | | | 390 | | | | 0 | | | | 390 | |
Commercial and industrial: | | | | | | | | | | | | |
Interest only payments | | | 4,400 | | | | 0 | | | | 4,400 | |
| | | | | | | | | | | | |
Total TDRs | | $ | 7,213 | | | $ | 0 | | | $ | 7,213 | |
December 31, 2019 | | TDRs Performing to Modified Terms | | | TDRs Not Performing to Modified Terms | | | Total TDRs | |
Residential real estate: | | | | | | | | | |
Interest only payments | | $ | 209 | | | $ | ---- | | | $ | 209 | |
Commercial real estate: | | | | | | | | | | | | |
Owner-occupied | | | | | | | | | | | | |
Interest only payments | | | 882 | | | | ---- | | | | 882 | |
Reduction of principal and interest payments | | | 1,521 | | | | ---- | | | | 1,521 | |
Maturity extension at lower stated rate than market rate | | | 393 | | | | ---- | | | | 393 | |
Credit extension at lower stated rate than market rate | | | 393 | | | | ---- | | | | 393 | |
Nonowner-occupied | | | | | | | | | | | | |
Credit extension at lower stated rate than market rate | | | 395 | | | | ---- | | | | 395 | |
Commercial and industrial: | | | | | | | | | | | | |
Interest only payments | | | 4,574 | | | | ---- | | | | 4,574 | |
Reduction of principal and interest payments | | | 185 | | | | ---- | | | | 185 | |
| | | | | | | | | | | | |
Total TDRs | | $ | 8,552 | | | $ | ---- | | | $ | 8,552 | |
At March 31, 2020, the balance in TDR loans decreased $826, or 9.7%, from year-end 2019. The Company’sCompany had 0 specific allocations in reserves to customers whose loan terms have been modified in TDRs totaled $450 at March 31, 2020, as compared to $227 in reserves at2021 and December 31, 2019.2020. At March 31, 2020,2021, the Company had $1,516$2,465 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs, as compared to $941$1,100 at December 31, 2019.2020.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
There were no0 TDR loan modifications that occurred during the three months ended March 31, 2020. The following table presents the pre-2021 and post-modification balances of TDR loan modifications by class of loans2020 that occurred during the three months ended March 31, 2019:
| | | | | TDRs Performing to Modified Terms | | | TDRs Not Performing to Modified Terms | |
Three months ended March 31, 2019 | | Number of Loans | | | Pre-Modification Recorded Investment | | | Post-Modification Recorded Investment | | | Pre-Modification Recorded Investment | | | Post-Modification Recorded Investment | |
Commercial real estate: | | | | | | | | | | | | | | | |
Owner-occupied | | | | | | | | | | | | | | | |
Reduction of principal and interest payments | | | 1 | | | $ | 1,036 | | | $ | 1,036 | | | $ | ---- | | | $ | ---- | |
Commercial and Industrial: | | | | | | | | | | | | | | | | | | | | |
Reduction of principal and interest payments | | | 1 | | | | 199 | | | | 199 | | | | | | | | | |
Total TDRs | | | 2 | | | $ | 1,235 | | | $ | 1,235 | | | $ | ---- | | | $ | ---- | |
The TDRs described above had no impact onimpacted provision expense or the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2019.losses.
The Company had no0 TDRs that occurred during the three months ended March 31, 2021 and 2020 or March 31, 2019 that experienced any payment defaults within twelve months following their loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. TDR loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Under
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and provided guidance on the modification of loans as a result of COVID-19, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief are not TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current if they are less than 30 days past due on their contractual payments at the time of the CARE Act, asmodification. As of March 31, 2020,2021, the Company had modified 95783 loans related to the COVID-19 pandemic with an aggregateoutstanding loan balance of $15,934$147,985 that were not reported as TDRs. As of March 31, 2021, the Company had 56 modified loans that were still in active deferral related to COVID-19 with an outstanding loan balance of $2,395 that were not reported as TDRs in the tables presented above. As of May 7, 2020, the volume of COVID-19 modifications had increased to 593 loans with an aggregate loan balance of $128,262.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. These risk categories are represented by a loan grading scale from 1 through 11. The Company analyzes loans individually with a higher credit risk rating and groups these loans into categories called “criticized” and ”classified” assets. The Company considers its criticized assets to be loans that are graded 8 and its classified assets to be loans that are graded 9 through 11. The Company’s risk categories are reviewed at least annually on loans that have aggregate borrowing amounts that meet or exceed $750.
The Company uses the following definitions for its criticized loan risk ratings:
Special Mention. Loans classified as special mention indicate considerable risk due to deterioration of repayment (in the earliest stages) due to potential weak primary repayment source, or payment delinquency. These loans will be under constant supervision, are not classified and do not expose the institution to sufficient risks to warrant classification. These deficiencies should be correctable within the normal course of business, although significant changes in company structure or policy may be necessary to correct the deficiencies. These loans are considered bankable assets with no apparent loss of principal or interest envisioned. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. Credits that are defined as a TDR should be graded no higher than special mention until they have been reported as performing over one year after restructuring.
|
Special Mention. Loans classified as "special mention" indicate considerable risk due to deterioration of repayment (in the earliest stages) due to potential weak primary repayment source, or payment delinquency. These loans will be under constant supervision, are not classified and do not expose the institution to sufficient risks to warrant classification. These deficiencies should be correctable within the normal course of business, although significant changes in company structure or policy may be necessary to correct the deficiencies. These loans are considered bankable assets with no apparent loss of principal or interest envisioned. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. Credits that are defined as a TDR should be graded no higher than special mention until they have been reported as performing over one year after restructuring.
The Company uses the following definitions for its classified loan risk ratings:
Substandard. Loans classified as "substandard" represent very high risk, serious delinquency, nonaccrual, or unacceptable credit. Repayment through the primary source of repayment is in jeopardy due to the existence of one or more well-defined weaknesses, and the collateral pledged may inadequately protect collection of the loans. Loss of principal is not likely if weaknesses are corrected, although financial statements normally reveal significant weakness. Loans are still considered collectible, although loss of principal is more likely than with special mention loans. Collateral liquidation is considered likely to satisfy debt.
Doubtful. Loans classified as "doubtful" display a high probability of loss, although the amount of actual loss at the time of classification is undetermined. This classification should be temporary until such time that actual loss can be identified, or improvements are made to reduce the seriousness of the classification. These loans exhibit all substandard characteristics with the addition that weaknesses make collection or liquidation in full highly questionable and improbable. This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain important and reasonable specific pending factors that may strengthen the credit can be more accurately determined. These factors may include proposed acquisitions, liquidation procedures, capital injection, receipt of additional collateral, mergers, or refinancing plans. A doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded substandard.
Loss. Loans classified as "loss" are considered uncollectible and are of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset yielding such a minimum value even though partial recovery may be affected in the future. Amounts classified as loss should be promptly charged off.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The Company uses the following definitions for its classified loan risk ratings:
Substandard. Loans classified as substandard represent very high risk, serious delinquency, nonaccrual, or unacceptable credit. Repayment through the primary source of repayment is in jeopardy due to the existence of one or more well defined weaknesses and the collateral pledged may inadequately protect collection of the loans. Loss of principal is not likely if weaknesses are corrected, although financial statements normally reveal significant weakness. Loans are still considered collectible, although loss of principal is more likely than with special mention loan grade 8 loans. Collateral liquidation is considered likely to satisfy debt.
|
Doubtful. Loans classified as doubtful display a high probability of loss, although the amount of actual loss at the time of classification is undetermined. This classification should be temporary until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification. These loans exhibit all substandard characteristics with the addition that weaknesses make collection or liquidation in full highly questionable and improbable. This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain important and reasonable specific pending factors which may strengthen the credit can be more accurately determined. These factors may include proposed acquisitions, liquidation procedures, capital injection, receipt of additional collateral, mergers, or refinancing plans. A doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded substandard.
|
Loss. Loans classified as loss are considered uncollectible and are of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset yielding such a minimum value even though partial recovery may be affected in the future. Amounts classified as loss should be promptly charged off.
|
Criticized and classified loans will mostly consist of commercial and industrial and commercial real estate loans. The Company considers its loans that do not meet the criteria for a criticized and classified asset rating as pass rated loans, which will include loans graded from 1 (Prime) to 7 (Watch). All commercial loans are categorized into a risk category either at the time of origination or reevaluation date. As of March 31, 20202021 and December 31, 2019,2020, and based on the most recent analysis performed, the risk category of commercial loans by class of loans was as follows:
March 31, 2020
| | Pass | | | Criticized | | | Classified | | | Total | | |
March 31, 2021 | | | Pass | | | Criticized | | | Classified | | | Total | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Owner-occupied | | $ | 47,876 | | | $ | 1,634 | | | $ | 6,005 | | | $ | 55,515 | | | $ | 48,758 | | | $ | 655 | | | $ | 4,815 | | | $ | 54,228 | |
Nonowner-occupied | | 129,848 | | | 6,309 | | | 984 | | | 137,141 | | | | 155,258 | | | | 3,635 | | | | 369 | | | | 159,262 | |
Construction | | 34,843 | | | ---- | | | 49 | | | 34,892 | | | | 37,574 | | | | 0 | | | | 82 | | | | 37,656 | |
Commercial and industrial | | | 92,468 | | | | 4,071 | | | | 6,031 | | | | 102,570 | | | | 154,244 | | | | 2,012 | | | | 3,460 | | | | 159,716 | |
Total | | $ | 305,035 | | | $ | 12,014 | | | $ | 13,069 | | | $ | 330,118 | | | $ | 395,834 | | | $ | 6,302 | | | $ | 8,726 | | | $ | 410,862 | |
December 31, 2019
| | Pass | | | Criticized | | | Classified | | | Total | | |
December 31, 2020 | | | Pass | | | Criticized | | | Classified | | | Total | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Owner-occupied | | $ | 49,486 | | | $ | 2,889 | | | $ | 3,450 | | | $ | 55,825 | | | $ | 46,604 | | | $ | 669 | | | $ | 4,590 | | | $ | 51,863 | |
Nonowner-occupied | | 123,847 | | | ---- | | | 7,551 | | | 131,398 | | | | 160,324 | | | | 3,629 | | | | 570 | | | | 164,523 | |
Construction | | 34,864 | | | ---- | | | 49 | | | 34,913 | | | | 37,063 | | | | 0 | | | | 0 | | | | 37,063 | |
Commercial and industrial | | | 89,749 | | | | 298 | | | | 9,976 | | | | 100,023 | | | | 150,786 | | | | 2,064 | | | | 4,842 | | | | 157,692 | |
Total | | $ | 297,946 | | | $ | 3,187 | | | $ | 21,026 | | | $ | 322,159 | | | $ | 394,777 | | | $ | 6,362 | | | $ | 10,002 | | | $ | 411,141 | |
The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau), but the scores are not updated. The Company focuses mostly on the performance and repayment ability of the borrower as an indicator of credit risk and does not consider a borrower's credit score to be a significant influence in the determination of a loan's credit risk grading.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment of residential and consumer loans by class of loans based on repayment activity as of March 31, 20202021 and December 31, 2019:2020:
March 31, 2020 | | Consumer | | | | | | | | |
March 31, 2021 | | | Consumer | | | Residential | | | | |
| | Automobile | | | Home Equity | | | Other | | | Residential Real Estate | | | Total | | | Automobile | | | Home Equity | | | Other | | | Real Estate | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Performing | | $ | 61,536 | | | $ | 21,535 | | | $ | 53,162 | | | $ | 301,652 | | | $ | 437,885 | | | $ | 53,361 | | | $ | 20,448 | | | $ | 55,450 | | | $ | 285,720 | | | $ | 414,979 | |
Nonperforming | | | 193 | | | | 359 | | | | 304 | | | | 6,227 | | | | 7,083 | | | | 114 | | | | 160 | | | | 68 | | | | 4,867 | | | | 5,209 | |
Total | | $ | 61,729 | | | $ | 21,894 | | | $ | 53,466 | | | $ | 307,879 | | | $ | 444,968 | | | $ | 53,475 | | | $ | 20,608 | | | $ | 55,518 | | | $ | 290,587 | | | $ | 420,188 | |
December 31, 2019 | | Consumer | | | | | | | | |
December 31, 2020 | | | Consumer | | | Residential | | | | |
| | Automobile | | | Home Equity | | | Other | | | Residential Real Estate | | | Total | | | Automobile | | | Home Equity | | | Other | | | Real Estate | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Performing | | $ | 63,470 | | | $ | 22,490 | | | $ | 53,224 | | | $ | 303,879 | | | $ | 443,063 | | | $ | 54,966 | | | $ | 19,783 | | | $ | 56,639 | | | $ | 300,095 | | | $ | 431,483 | |
Nonperforming | | | 300 | | | | 392 | | | | 486 | | | | 6,374 | | | | 7,552 | | | | 275 | | | | 210 | | | | 172 | | | | 5,383 | | | | 6,040 | |
Total | | $ | 63,770 | | | $ | 22,882 | | | $ | 53,710 | | | $ | 310,253 | | | $ | 450,615 | | | $ | 55,241 | | | $ | 19,993 | | | $ | 56,811 | | | $ | 305,478 | | | $ | 437,523 | |
The Company through its subsidiaries, originates residential, consumer, and commercial loans to customers located primarily in the southeastern areas of Ohio as well as the western counties of West Virginia. Approximately 5.13%4.04% of total loans were unsecured at March 31, 2020, up2021, down from 5.00%4.22% at December 31, 2019.2020.
NOTE 5 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual amount of those instruments. The contract amounts of these instruments are not included in the consolidated financial statements. At March 31, 2020,2021, the contract amounts of these instruments totaled approximately $78,563,$86,859, compared to $75,178$88,456 at December 31, 2019.2020. The Bank uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. Since many of these instruments are expected to expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.
NOTE 6 - OTHER BORROWED FUNDS
Other borrowed funds at March 31, 20202021 and December 31, 20192020 are comprised of advances from the Federal Home Loan Bank (“FHLB”) of Cincinnati and promissory notes.
| FHLB Borrowings | | Promissory Notes | | Totals | |
| | | | | | |
March 31, 2020 | | $ | 28,375 | | | $ | 4,084 | | | $ | 32,459 | |
December 31, 2019 | | $ | 29,758 | | | $ | 4,233 | | | $ | 33,991 | |
| | FHLB Borrowings | | | Promissory Notes | | | Totals | |
| | | | | | | | | |
March 31, 2021 | | $ | 23,493 | | | $ | 3,198 | | | $ | 26,691 | |
December 31, 2020 | | $ | 24,665 | | | $ | 3,198 | | | $ | 27,863 | |
Pursuant to collateral agreements with the FHLB, advances were secured by $299,428$282,889 in qualifying mortgage loans, $65,741$55,701 in commercial loans and $5,365 in FHLB stock at March 31, 2020.2021. Fixed-rate FHLB advances of $28,375$23,493 mature through 2042 and have interest rates ranging from 1.53% to 3.31% and a year-to-date weighted average cost of 2.41%.2.43% at March 31, 2021 and 2.40% at December 31, 2020. There were no0 variable-rate FHLB borrowings at March 31, 2020.2021.
At March 31, 2020,2021, the Company had a cash management line of credit enabling it to borrow up to $80,000$100,000 from the FHLB. All cash management advances have an original maturity of 90 days. The line of credit must be renewed on an annual basis. There was $80,000$92,178 available on this line of credit at March 31, 2020.2021.
NOTE 6 - OTHER BORROWED FUNDS (Continued)
Based on the Company's current FHLB stock ownership, total assets and pledgeable loans, the Company had the ability to obtain borrowings from the FHLB up to a maximum of $202,356$188,666 at March 31, 2020.2021. Of this maximum borrowing capacity, the Company had $110,295$92,178 available to use as additional borrowings, of which $80,000 could be used for short-term, cash management advances, as mentioned above.borrowings.
Promissory notes, issued primarily by Ohio Valley, are due at various dates through a final maturity date of May 17,December 9, 2021, and have fixed rates ranging from 2.00%1.00% to 4.09%2.85% and a year-to-date weighted average cost of 2.56%1.41% at March 31, 2020,2021, as compared to 2.73%2.20% at December 31, 2019. There2020. At March 31, 2021 and December 31, 2020, there were eight6 promissory notes payable by Ohio Valley to related parties totaling $3,558 at March 31, 2020, and December 31, 2019. Promissory$3,198. There were 0 promissory notes payable to other banks totaled $256 at March 31, 2020, as compared to $405 at2021 and December 31, 2019.2020, respectively.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $63,687$72,995 at March 31, 20202021 and $56,500$76,740 at December 31, 2019.2020.
Scheduled principal payments as of March 31, 2020:2021:
| | FHLB Borrowings | | | Promissory Notes | | | Totals | | | FHLB Borrowings | | | Promissory Notes | | | Totals | |
| | | | | | | | | | | | | | | | | | |
2020 | | $ | 2,339 | | | $ | 3,451 | | | $ | 5,790 | | |
2021 | | 3,000 | | | 633 | | | 3,633 | | | $ | 1,962 | | | $ | 3,198 | | | $ | 5,160 | |
2022 | | 2,841 | | | ---- | | | 2,841 | | | | 2,683 | | | | 0 | | | | 2,683 | |
2023 | | 2,705 | | | ---- | | | 2,705 | | | | 2,542 | | | | 0 | | | | 2,542 | |
2024 | | 2,301 | | | ---- | | | 2,301 | | | | 2,173 | | | | 0 | | | | 2,173 | |
2025 | | | | 1,897 | | | | 0 | | | | 1,897 | |
Thereafter | | | 15,189 | | | | ---- | | | | 15,189 | | | | 12,236 | | | | 0 | | | | 12,236 | |
| | $ | 28,375 | | | $ | 4,084 | | | $ | 32,459 | | | $ | 23,493 | | | $ | 3,198 | | | $ | 26,691 | |
NOTE 7 – SEGMENT INFORMATION
The reportable segments are determined by the products and services offered, primarily distinguished between banking and consumer finance. They are also distinguished by the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business, which are then aggregated if operating performance, products/services, and customers are similar. Loans, investments, and deposits provide the majority of the net revenues from the banking operation, while loans provide the majority of the net revenues for the consumer finance segment. All Company segments are domestic.
Total revenues from the banking segment, which accounted for the majority of the Company's total revenues, totaled 90.8%and 90.6% of total consolidated revenues for theboth quarters endended, March 31, 20202021 and 2019, respectively.2020.
The accounting policies used for the Company's reportable segments are the same as those described in Note 1 - Summary of Significant Accounting Policies. Income taxes are allocated based on income before tax expense.
Information for the Company’s reportable segments is as follows:
| | Three Months Ended March 31, 2020 | | | Three months ended March 31, 2021 | |
| | Banking | | | Consumer Finance | | | Total Company | | | Banking | | | Consumer Finance | | | Total Company | |
Net interest income | | $ | 9,471 | | | $ | 533 | | | $ | 10,004 | | | $ | 9,554 | | | $ | 494 | | | $ | 10,048 | |
Provision expense | | 3,845 | | | 1 | | | 3,846 | | | | (50 | ) | | | (2 | ) | | | (52 | ) |
Noninterest income | | 3,487 | | | 955 | | | 4,442 | | | | 2,508 | | | | 831 | | | | 3,339 | |
Noninterest expense | | 8,766 | | | 753 | | | 9,519 | | | | 8,497 | | | | 690 | | | | 9,187 | |
Tax expense | | (75 | ) | | 154 | | | 79 | | | | 588 | | | | 133 | | | | 721 | |
Net income | | 422 | | | 580 | | | 1,002 | | | | 3,027 | | | | 504 | | | | 3,531 | |
Assets | | 1,024,169 | | | 11,672 | | | 1,035,841 | | | | 1,212,129 | | | | 13,055 | | | | 1,225,184 | |
| | Three months ended March 31, 2020 | |
| | Banking | | | Consumer Finance | | | Total Company | |
Net interest income | | $ | 9,471 | | | $ | 533 | | | $ | 10,004 | |
Provision expense | | | 3,845 | | | | 1 | | | | 3,846 | |
Noninterest income | | | 3,487 | | | | 955 | | | | 4,442 | |
Noninterest expense | | | 8,766 | | | | 753 | | | | 9,519 | |
Tax expense | | | (75 | ) | | | 154 | | | | 79 | |
Net income | | | 422 | | | | 580 | | | | 1,002 | |
Assets | | | 1,024,169 | | | | 11,672 | | | | 1,035,841 | |
NOTE 7 – SEGMENT INFORMATION (Continued)
| | Three Months Ended March 31, 2019 | |
| | Banking | | | Consumer Finance | | | Total Company | |
Net interest income | | $ | 10,037 | | | $ | 1,350 | | | $ | 11,387 | |
Provision expense | | | 2,250 | | | | 127 | | | | 2,377 | |
Noninterest income | | | 1,819 | | | | 27 | | | | 1,846 | |
Noninterest expense | | | 8,820 | | | | 748 | | | | 9,568 | |
Tax expense | | | (10 | ) | | | 105 | | | | 95 | |
Net income | | | 796 | | | | 397 | | | | 1,193 | |
Assets | | | 1,033,203 | | | | 11,670 | | | | 1,044,873 | |
NOTE 8 – LEASES
Substantially all of the Company’s operating lease right-of-use (“ROU”) assets and operating lease liabilities represent leases for branch buildings and office space to conduct business. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. The lease expense for these leases are recorded on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as either operating or financing leases on the consolidated balance sheet. The Company has no finance lease arrangements. Operating leases have remaining lease terms ranging from 1 month6 months to 17.320 years, some of which include options to extend the leases for up to 15 years. Operating lease ROU assets and operating lease liabilities are valued based on the present value of future minimum lease payments, discounted with an incremental borrowing rate for the same term as the underlying lease. The Company has one lease arrangement that contains variable lease payments that are adjusted periodically for an index. Upon adoption of the new lease guidance on January 1, 2019, an initial ROU asset of $1,280 was recognized as a non-cash asset addition to the consolidated balance sheet.
Balance sheet information related to leases was as follows:
| | As of March 31, 2020 | | | As of December 31, 2019 | | | As of March 31, 2021 | | | As of December 31, 2020 | |
Operating leases: | | | | | | | | | | | | |
Operating lease right-of-use assets | | $ | 998 | | | $ | 1,053 | | | $ | 1,133 | | | $ | 880 | |
Operating lease liabilities | | 998 | | | 1,053 | | | | 1,133 | | | | 880 | |
The components of lease cost were as follows:
| | Three Months Ended March 31, | |
| | 2020 | | | 2019 | |
Operating lease cost | | $ | 54 | | | $ | 66 | |
Short-term lease expense | | | 8 | | | | 16 | |
| | Three months ended March 31, | |
| | 2021 | | | 2020 | |
Operating lease cost | | $ | 39 | | | $ | 54 | |
Short-term lease expense | | | 8 | | | | 8 | |
Future undiscounted lease payments for operating leases with initial terms of one year or more as of March 31, 20202021 are as follows:
| | Operating Leases | | | Operating Leases | |
2020 (remaining) | | $ | 123 | | |
2021 | | 157 | | |
2021 (remaining) | | | $ | 118 | |
2022 | | 157 | | | | 157 | |
2023 | | 116 | | | | 116 | |
2024 | | 95 | | | | 95 | |
2025 | | | | 95 | |
Thereafter | | | 546 | | | | 805 | |
Total lease payments | | 1,194 | | | | 1,386 | |
Less: Imputed Interest | | | (196 | ) | | | (253 | ) |
Total operating leases | | $ | 998 | | | $ | 1,133 | |
Other information was as follows:
| | As of March 31, 2020 | | | As of December 31, 2019 | |
Weighted-average remaining lease term for operating leases | | 10.3 years | | | 10.6 years | |
Weighted-average discount rate for operating leases | | | 2.77% |
| | | 2.76% |
|
| | As of March 31, 2021 | | | As of December 31, 2020 | |
Weighted-average remaining lease term for operating leases | | 12.7 years | | | 9.6 years | |
Weighted-average discount rate for operating leases | | | 2.38 | % | | | 2.79 | % |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(dollars in thousands, except share and per share data)
Forward Looking Statements
Certain statements contained in this report and other publicly available documents incorporated herein by reference constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as “believes,” “anticipates,” “expects,” “intends,” “plan,” “goal,” “seek,” “project,” “estimate,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and other similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control, particularly with regard to developments related to the coronavirusCoronavirus (“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 the COVID-19 pandemic on our business, operations, customers and capital position; higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition; the impact of COVID-19 on local, national and global economic conditions; unexpected changes in interest rates or disruptions in the mortgage market related to COVID-19 or responses to the health crisis;COVID-19; the effects of various governmental responses to the COVID-19 pandemic;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 Securities Exchange Act, of 1934, including the disclosure under the heading “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q and Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020. 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. In January 2020,Furthermore, the Bank began offeringoffers Tax Refund Advance Loans (“TALs”) to Loan Central tax customers. A TAL represents a short-term loan offered by the Bank to tax preparation customers of Loan Central. Previously,TAL originations began in 2020 in response to a state law enacted in 2019 that placed various restrictions on Loan Central offered and originated tax refund anticipation loans that represented a large composition of its annual earnings. However, new Ohio laws that became effective in April 2019 placed numerous restrictions onCentral’s short-term and small loans extended by certain non-bank lenders in Ohio.loan originations. As a result, Loan Central is no longer ablethe Company changed its business model beginning in 2020 from assessing TAL fees to directly offer the service to itsassessing tax preparation customers, but it is able to do so through the Bank. After Loan Central prepares a customer’s tax return, the customer is offered the opportunity to have immediate access to a portion of the anticipated tax refund by entering into a TAL with the Bank. As part of the process, the tax customer completes a loan application and authorizes the expected tax refund to be deposited with the Bank once it is issued by the IRS. Once the Bank receives the tax refund, the refund is used to repay the TAL and Loan Central’s tax preparation fees, then the remainder of the refund is remitted to Loan Central’s tax customer.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 the Coronavirus ("COVID-19") epidemic andCOVID-19, which has changed the way we live and work. In March 2020,The actions taken by the Governors for bothof the StateStates of Ohio and West Virginia issued Executive Orders for all non-essential businessesbeginning in March of 2020 were imposed to closemitigate the spread and banned large scale gatherings. These Governors issued orders for a slow, phased-in reopeninglessen the public health impact of certain businesses beginning atCOVID-19. During this time, the endBank’s primary channels of April. We remain committed to ensuringserving our associates, clients,customers have primarily consisted of drive-thru, mobile, and communities are receiving the support they need during these challenging times. All of ouronline banking centers, with the exception of our Holzer and Gallipolis Wal-Mart offices, remain operational through our drive-thru services and on an appointment-only basis in the lobbies.lobby services. We have leveraged our digital banking platform with our customers, and we have implemented company-wide remote working arrangements. These accommodations are likelyIn March 2021, the Company re-opened the lobbies of all the Bank’s financial service centers, stressing the importance of safety to have a negative impact on the Company’s results of operations during the duration of the epidemic,its customers and depending on how quickly the businesses of our customers rebound after the emergency, could lead to an increaseemployees. As per state mandates in nonperforming assets.
Ohio and West Virginia, masks will be required and social distancing measures will be maintained.
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 pay up to 8 weeks ofuse for payroll costs, including benefits.and certain other expenses. The funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities. The payments on these loans will be deferred for six months. Forgivenessif 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 is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Most small businesses with 500 or fewer employees are eligible. Our teams are working diligentlyuntil May 31, 2021. The Company continues to support ourits clients who are experiencinghave 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.
The length of the pandemic and the effectiveness of the extraordinary government-mandated measures that have been put into place to address it are unknown, but have already had, and are likely to continue to have, a significantly negative impact to the U.S. labor market, consumer spending and business operations. Several actions have been taken by governmental authorities to address the economic impact of the pandemic, including the Federal Reserve reducing the federal funds rate by 1.5% to a target range of 0 to 0.25% as well as taking additional actions, such as providing up to $2.3 trillion in loans to support the economy, and the passage of the CARES Act, which provides over $2 trillion in economic assistance for American workers, families and small businesses.
FINANCIAL RESULTS OVERVIEW:Net income totaled $1,002$3,531 during the first quarter of 2020, a decrease2021, an increase of $191, or 16.0%, compared to $1,193 during$2,529 over the first quartersame period of 2019.2020. Earnings per share for the first quarter of 20202021 finished at $.21$.74 per share, compared to $.25$.21 per share during the first quarter of 2019. Earnings2020. Quarterly earnings improved largely due to lower provision expense and lower noninterest expense being partially offset by a decrease in noninterest income, while net interest income remained relatively stable. The impact of higher net earnings during the first quarter of 2020 were largely impacted by decreases in interest and fee loan revenue and higher provision expense being partially offset by higher noninterest revenue and lower noninterest expenses.
The negative impact of lower net earnings during the first three months of 20202021 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets, which decreasedincreased to 1.20% at March 31, 2021, compared to 0.40% at March 31, 2020, compared to 0.47% at March 31, 2019.2020. The Company’s net income to average equity ratio, or return on equity, also decreasedincreased to 10.47% at March 31, 2021, compared to 3.14% at March 31, 2020, compared to 4.08% at March 31, 2019.2020.
During the three months ended March 31, 2020,2021, net interest income decreased $1,383,increased $44, or 12.1%0.4%, fromover the same period in 2019. The decrease was mostly attributable to lower loan fees, net interest margin compression, and2020. This increase reflected the benefit of a decrease$169,976, or 18.2%, increase in average earning assets. Theassets, which fully offset a 61 basis point decrease in loan fees was primarilythe fully tax-equivalent (“FTE”) net interest margin. Average earning assets were mostly impacted by growth in loans and higher balances maintained in the Company’s interest-bearing Federal Reserve clearing account. Growth in loans benefited from the Company’s participation in the PPP to assist various businesses in our market during the pandemic. Higher Federal Reserve balances were the result of Loan Central not being able to offer tax refund anticipation loans in 2020 due to changes in Ohio lending regulations, as previously described above. As a result, fees related to tax refund anticipation loans decreased $709 during the first quarter of 2020, as compared to the same period last year. As discussed below, Loan Central’s tax preparation fee income from TAL offerings during the first quarter of 2020 was recorded to noninterest income. For the first quarter ended March 31, 2020, the net interest margin finished at 4.34%, a decrease of 55 basis points from 4.89% during the first quarter of 2019.various stimulus payments received by customers. The decrease in quarterly margin was heavilynegatively impacted by lower tax refund loan advance fees, which made up 30 basis pointsthe actions of the overall decrease. Margin compression was also impacted by decreasing market rates that contributed to lower asset yields during the first quarter of 2020. Since the second half of 2019, the Federal Reserve Bank has lowered the federal funds rate by 225 basis points through March 31, 2020. Most recently,to reduce interest rates were reduced by 150 basis points in March 2020 due to concerns about the impact of COVID-19 on the economy. Although the effects of lower market rates have reduced earning asset yields, the effects have not yet fully impacted the Company’s interest-bearing deposit costs. The Company’s interest rates on time deposits have repriced downward, which will only have an impact of lowering interest expense when new time deposits are issued going forward. Furthermore, certain interest-bearing deposits were already at or near their interest rate floors, which also limited the Company’s ability to reduce deposit costs during the first quarter of 2020. This lagging effect of deposit cost reduction combined with a more rate-sensitive earning asset portfolio further contributedhas led to a lowersustained 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, duringwith PPP loans carrying a 1.0% interest rate and the first quarter of 2020. Also impacting net interest income wasrate on balances maintained at the Company’s average earning assets, which decreased $17,327, or 1.8%, during the first quarter of 2020 from the same period the prior year. Average asset decreases came mostly from the commercial and installment loan segments of the loan portfolio.Federal Reserve currently at 10 basis points.
During the three months ended March 31, 2020,2021, the Company’sCompany experienced negative provision for loan loss, which contributed to a $3,898 decrease in provision expense increased $1,469, or 61.8%,when compared to the same period in 2019.2020. The increasedecrease 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 $1,942$2,287 during the first quarter of 2020 to reflect higher anticipated losses due to the expected financial impact of COVID-19 on its customers. The Company benefited fromFurther impacting lower classified assets and lower net charge-offs on loans with no specific allocation that helped to partially offset the provision expense impact of COVID-19. The Company will continue to closely monitor COVID-19was a $1,168 decrease in net loan charge-offs, primarily from the commercial real estate and expects to make the appropriate adjustments within the allowance forconsumer loan losses in response to the pandemic as the situation evolves.portfolios.
During the three months ended March 31, 2020, the Company finished with $4,442 in total2021, noninterest income as compared to $1,846 duringdecreased $1,103, or 24.8%, from the three months ended March 31, 2019.same period in 2020. The improvement in noninterest revenue waslarge decline came primarily attributable to proceedsfrom the one-time payment of $2,000 received in a litigation settlement with a third-party. Noninterest revenue was also derived from a $615 increase in tax preparation fee income. This was the result of the Company changing its business model in 2020 from assessing tax refund advance loan fees to now assessing tax preparation fees in response to a state law enacted in 2019. Higher losses from the sale of other real estate owned (“OREO”)third-party during the first quarter of 2020, limited revenue growth, which reduced earnings by $101. All other remaining noninterestdid not reoccur in 2021. As part of the settlement agreement, the Bank is scheduled to process a certain amount of tax items starting in 2021 and ending in 2025. As a result of this agreed processing, the Bank recognized $540 in electronic refund check/electronic refund deposit (“ERC/ERD”) income activity during the first quarter of 2020 increased $82,2021. This, along with higher interchange income, mortgage banking income, tax preparation fees, and lower losses on other real estate owned, helped to partially offset the decrease in noninterest income related to 2020’s litigation settlement.
During the three months ended March 31, 2021, noninterest expense decreased $332, or 4.4%3.5%, as compared tofrom the same period from 2019. This income growth came mostly from bank owned life insurance and annuity assets, as well as debit and credit card interchange income.
The Company benefited from lower noninterest expense during the first quarter of 2020, finishing at $9,519, a decrease of $49, or 0.5%, from the first quarter of 2019. The Company’s largest noninterest expense, salaries and employee benefits, decreased $81, or 1.5%, from the first quarter of 2019.in 2020. The decrease was primarily fromrelated to the expense savings associated with a lower number of employees, which contributed to a $185, or 3.4%, decrease in salaries and employee benefits expense from the sale of two branches in December 2019 and the voluntary severance program that was completed during the fourth quarter of 2019, which more than offset the expense increase associated with annual merit increases in 2020. Also contributing toprior year. The Company also experienced lower overhead costs were professional fees, which decreased $74,decreasing $168, or 11.0%28.1%, from the first quarter of 2019.prior year. This expense savings was relatedin large part due to lower audit expense and litigation related legal fees. Foreclosed asset costs were also down $63, or 59.4%, from the first quarter of 2019, in relation to a lower volume of foreclosures combinedfees associated with recoveries of previously paid real estate taxes and insurance on certain foreclosed properties. Partially offsetting overhead expense reductions was an increase in data processing expense, which increased $64, or 12.0%, from the first quarter of 2019, largely from credit card processing and website maintenance costs. Also, customer incentive costs that are included incollecting troubled loans. Furthermore, other noninterest expense was down $138, or 9.4%, in large part due to lower incentives paid on customer deposit accounts. Partially offsetting the expense decreases were up $53, or 18.4%, from the first quarter of 2019.higher FDIC insurance, software, and occupancy and equipment costs during 2021.
The Company’s provision for income taxes decreased $16increased $642 during the first quarter of 2020, as compared to the same period in 2019. This isthree months ended March 31, 2021, largely due to the changes in taxable income affected by the factors mentioned above.
At March 31, 2020,2021, total assets were $1,035,841, compared to $1,013,272$1,225,184, an increase of $38,252 from total assets of $1,186,932 at year-end 2019.2020. Higher assets were primarily impacted mostly by increases in cash and cash equivalents and investment securities, which were collectively up $14,315,$53,306, or 27.3%20.4%, from year-end 2019. The increase2020. This was driven by excess funds from growth in retail deposits. Asset growth was alsorelated to the investment of heightened deposit balances impacted by the Company’s available for sale investment securities portfolio, which increased $6,873various stimulus payments received by customers. The growth in assets from year-end 2019. This was due mostly to new purchases of Agency mortgage-backed securities during the first quarter of 2020. The Company’s loan portfolio increased $2,312, finishing at $775,086 at March 31, 2020 compared to $772,774 at year-end 2019. The commercial real estate and commercial and industrial lending segments experienced a combined 2.5% increase from year-end 2019, which was partially offset by a combined 1.3%$17,614, or 2.1%, decrease in bothloans. The loan portfolio experienced decreases in the residential real estate segment (-4.9%), commercial real estate segment (-0.9%) and consumer loan portfolios. The Company’s premises and equipment increased $1,749segment (-1.9%).
At March 31, 2021, total liabilities were $1,087,444, up $36,836 from year-end 2019, impacted by the construction of its new Second and State Street facility in Gallipolis, Ohio. The facility officially opened in the first quarter of 2020 and consists mostly of executive offices and areas for processing.
Total liabilities were $905,345 at March 31, 2020, up $20,252 from December 31, 2019.2020. Contributing most to this increase were higher interest-bearing deposits,deposit balances, which increased $33,753$38,889 from year-end 2019,2020. The increase was impacted mostly from seasonal tax collections contributingby customers receiving stimulus funds and their desire to higher public fund account balances, as well as a consumer shift into higher-costing money market accounts. Partially offsetting the growth in interest-bearing deposits were reduced borrowings of $1,532 from the continued principal repayments of long-term advances with the FHLB. Liabilities were also impacted by lower noninterest-bearing deposits, which were down $9,345 from year-end 2019, related to lower business checking account balances.preserve cash during this uncertain economic environment.
At March 31, 2020,2021, total shareholders' equity was $130,496,$137,740, up $2,317$1,416 since December 31, 2019.2020. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums.
Comparison of Financial Condition
at March 31, 20202021 and December 31, 20192020
The following discussion focuses, in more detail, on the consolidated financial condition of the Company at March 31, 20202021 compared to December 31, 2019.2020. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10‑Q.
Cash and Cash Equivalents
At March 31, 2020,2021, cash and cash equivalents were $66,671,$176,420, an increase of $14,315$38,117, or 27.6%, from $52,356 at December 31, 2019.2020. The increase in cash and cash equivalents came mostly from higher interest-bearing deposits on hand with correspondent banks. Over 73%89% of cash and cash equivalents consist of the Company’s interest-bearing Federal Reserve Bank clearing account.account, which increased $37,111, or 30.6%, from year-end 2020. The Company utilizes its interest-bearing Federal Reserve Bank clearing account to manage excess funds, as well as to assist in funding earning asset growth. The primary factor for the significant influx in clearing account balances was the investment of heightened deposit balances received during 2021 as a result of the pandemic environment. Total deposits increased 27.6% from year-end 2020 in relation to customers receiving stimulus funds from various government programs and their desire to preserve cash during this uncertain economic environment. Furthermore, several congressional acts led to the extension of the PPP loan program during the first quarter of 2021. Under the reopened PPP, commercial business customers received loan proceeds, which helped to generate higher levels of investable deposits during the first quarter of 2021. The interest rate paid on both the required and excess reserve balances of the Federal Reserve Bank account is based on the targeted federal funds rate established by the Federal Open Market Committee. During the second halffirst quarter of 2019,2020, the rate associated with the Company’s Federal Reserve Bank clearing account decreased 75 basis points to 1.75% as a result of the Federal Reserve’s action to decrease short-term market rates. The Federal Reserve again reduced short-term rates by 150 basis points during March 2020 due to concerns about the impact of COVID-19 on the economy, resulting in a target federal funds rate range of 0% to 0.25%. Although interest-bearing deposits in the Federal Reserve Bank are the Company's lowest-yielding interest-earning asset, the investment rate is higher than the rate the Company would have received from its investments in federal funds sold. Furthermore, Federal Reserve Bank balances are 100% secured.
The Company’s focus will be to invest excess funds in longer-term, higher-yielding assets, primarily loans, when the opportunities arise. As liquidity levels continuously vary continuously based on consumer activities, amounts of cash and cash equivalents can vary widely at any given point in time. As previously mentioned,The Company’s focus during periods of heightened liquidity will be to invest excess funds into longer-term, higher-yielding assets, primarily loans, when the Bank settled the lawsuit filed against a third-party tax refund provider for breach of contract in March 2020. In addition, the Bank entered into a new agreement with the third-party to process future electronic refund checks and deposits presented for payment on behalf of taxpayers through accounts containing taxpayer refunds. The new agreement provides that the Bank will process refunds for five tax seasons, beginning with the 2021 tax season and going through the 2025 tax season. As a result, the Bank anticipates this new tax agreement will materially impact its liquidity levels during the term of the agreement beginning in 2021.opportunities arise.
Certificates of deposit
At March 31, 2020,2021, the Company had $2,360$2,255 in certificates of deposit owned by the Captive, unchangeddown from $2,500 at year-end 2019.2020. The deposits on hand at March 31, 20202021 consist of ten certificates with remaining maturity terms ranging from less than 3 months up to 3026 months.
Securities
The balance of total securities increased $6,648,$15,189, or 5.7%12.4%, compared to year-end 2019.2020. The Company’s investment securities portfolio is made up mostly of U.S. Government agency (“Agency”) mortgage-backed securities, which increased $7,593,$4,237, or 8.6%4.5%, from year-end 20192020 and represented 77.6%71.6% of total investments at March 31, 2020.2021. During the first three months of 2020,2021, the Company invested $10,287$15,248 in new Agency mortgage-backed securities, while receiving principal repayments of $5,352.$9,752. The monthly repayment of principal has been the primary advantage of Agency mortgage-backed securities as compared to other types of investment securities, which deliver proceeds upon maturity or call date.
In addition, decreasing market rates The Company also redeployed a portion of its heightened excess funds to purchase $5,174 in U.S. Government securities, as well as $5,399 in Agency securities, net of maturities, during 2020 led to a $2,937 decrease in the net unrealized loss position associated with the Company’s available for sale securities, which increased the fair valuefirst quarter of securities at March 31, 2020. The fair value of an investment security moves inversely to interest rates, so as rates decreased, the unrealized loss in the portfolio was reduced. These changes in rates are typical and do not impact earnings of the Company as long as the securities are held to full maturity.2021.
Loans
Loans
The loan portfolio represents the Company’s largest asset category and is its most significant source of interest income. Gross loan balances totaled $775,086lowered to $831,050 at March 31, 2020,2021, representing an increasea decrease of $2,312,$17,614, or 0.3%2.1%, as compared to $772,774$848,664 at December 31, 2019. Positive2020. The decrease in loans came primarily from the residential real estate portfolio, with other decreases coming from the total consumer and commercial loan growthportfolios from year-end 2020.
The majority of the Company’s decrease in loans came mostly from the residential real estate loan segment, which decreased $14,891, or 4.9%, from year-end 2020. Although down, the residential real estate loan segment still comprises the largest portion of the Company’s overall loan portfolio at 35.0% and consists primarily of one- to four-family residential mortgages and carries many of the same customer and industry risks as the commercial loan portfolio. The decrease in residential real estate loans came largely from the Bank's warehouse lending volume. Warehouse lending consists of a line of credit provided by the Bank to another mortgage lender that makes loans for the purchase of one- to four-family residential real estate properties. The mortgage lender eventually sells the loans and repays the Bank. As mortgage refinancings reached their peak during the second half of 2020, the volume of warehouse lending balances have decreased during the first quarter of 2021, finishing at $3,720 at March 31, 2021, as compared to $19,365 at December 31, 2020. Furthermore, the low rate environment has contributed to a shift into more long-term fixed-rate mortgages (up $1,064) and less short-term adjustable-rate mortgages (down $3,519) at March 31, 2021.
The Company’s commercial loan portfolio, consisting of commercial real estate and commercial and industrial loan portfolios, partially offset by balance decreases in the residential real estate and consumer loan portfolios.
The majority of the Company’s increase in loans, decreased $279, or 0.1%, from year-end 2019 came from2020. Contributing most to the decrease were lower loan balances within the commercial real estate loan portfolio, which increased $5,412,decreasing $2,303, or 2.4%0.9%, from year-end 2019.2020. The commercial real estate segment comprised the largest portion of the Company’s total commercial loan portfolio at March 31, 20202021 at 68.9%61.1%. LeadingDecreases were largely from the growthprincipal repayments and payoffs of nonowner-occupied loan balances from year-end 2020.
Decreases in commercial real estate loans were increasespartially offset by a $2,024, or 1.3%, increase in nonowner-occupied loan originations, with balances up $5,743, or 4.4%, from year-end 2019. Further growth in loans came fromthe commercial and industrial loans, which increased $2,547, or 2.5%,portfolio from year-end 2019.2020. Commercial and industrial loans consist of loans to corporate borrowers primarily in small to mid-sized industrial and commercial companies that include service, retail and wholesale merchants. Collateral securing these loans includes equipment, inventory, and stock. The commercial and industrial segment also includes PPP loan balances that had a significant impact on average earning asset growth in 2021. Although a second round of PPP loans were initiated by the Bank during the first quarter of 2021, the Bank experienced no net loan growth in its PPP loan portfolio from year-end 2020. This was because the payoffs of PPP loans from the initial round of originations in 2020 completely offset the new PPP loan originations in 2021. PPP loans are forgiven by the SBA as long as the small business borrower meets certain criteria on the use of loan proceeds. At March 31, 2021, the Company’s PPP loans totaled $25,829 as compared to $27,933 at year-end 2020.
While management believes lending opportunities exist in the Company’s markets, future commercial lending activities will depend upon economic and other related conditions, such as general demand for loans in the Company’s primary markets, interest rates offered by the Company, the effects of competitive pressure and normal underwriting considerations. Management will continue to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans.
Partially offsetting the increases in both commercial loan portfolios were lower residential real estate loans, which decreased $2,374, or 0.8%, from year-end 2019.
The residential real estate loan segment comprises the largest portion of the Company’s overall loan portfolio at 39.7% 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 loansMarch 31, 2021 was largely the result of the Bank's warehouse lending volume. Warehouse lending consists of a line of credit providedalso impacted 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. Furthermore, the Company continues to experience continued payoffs and maturities of both long-term fixed-rate mortgages and short-term adjustable-rate mortgages from year-end 2019 that have contributed to the decline in total residential real estate loans.
Also decreasing wereless consumer loan balances which were down $3,273, or 2.3%, from year-end 2019, finishing at $137,089.2020, decreasing $2,444, or 1.9%. This change was primarily impacted by a decline in automobile loan balances from year-end 2019.balances. Automobile loans represent the Company’s largest consumer loan segment at 45.0%41.3% of total consumer loans. Automobile loans decreased primarily as a result of COVID-19 and the stay-at-home orders that resulted in limited automobile sales within the Company’s market areas during 2020. The pandemic environment continued to have a negative impact on consumer loan demand in 2021. Further limiting the volume of automobile loan originations were heightened incentives being offered from the captive auto finance companies in response to the pandemic. The remaining consumer loan portfolio decreased $678, or 0.9%, from year-end 2020, mostly from decreases in unsecured loans, partially offset by higher home equity lines of credit. The Company will continue to attempt to increase its auto lending segment while maintaining strict loan underwriting processes to limit future loss exposure. However, the Company will place more emphasis on loan portfolios (i.e. commercial and, to a smaller extent, residential real estate) with higher returns than auto loans. Indirect automobile loans bear additional costs from dealers that partially offset interest revenue and lower the rate of return.
Allowance for Loan Losses
The Company established an $8,729a $6,887 allowance for loan losses at March 31, 2020,2021, which represents an increasea decrease from the $6,272$7,160 allowance at year-end 2019. The allowance was impacted by an increase of $2,410 in general allocations from year-end 2019.2020. As part of the Company’s quarterly analysis of the allowance for loan losses, management will review various factors that directly impact the general allocation needs of the allowance, which include: historical loan losses, loan delinquency levels, local economic conditions and unemployment rates, criticized/classified asset coverage levels and loan loss recoveries. During the first quarter of 2021, the Company experienced a $363 decrease in its general allocations of the allowance for loan losses. A stable historical loan loss factor combined with lower criticized and classified assets and higher annualized loan recoveries were the key factors to the first quarter drop in general allocations. The historical loan loss factor remain unchanged at 0.24% from year-end 2020 to March 31, 2021, while the criticized and classified risk factors decreased as a result of various commercial loan upgrades from improvements in the financial performance of certain borrowers’ ability to repay their loans. This contributed to lower classified assets from year-end 2020, particularly within the commercial and industrial loan segment. Additionally, the Company’s delinquency levels decreased from year-end 2020, with nonperforming loans to total loans of 0.74% at March 31, 2021 compared to 0.82% at December 31, 2020, and lower nonperforming assets to total assets of 0.50% at March 31, 2021 compared to 0.59% at year-end 2020. General allocations during the first quarter of 2021 increased in relation to higher unemployment rates within the Company’s market areas, only partially offsetting the decreasing allocation factors already discussed.
During the first quarter of 2020, the Company added a new risk factor to the evaluation of the allowance for loan losses pertaining to the COVID-19 pandemic. While the Company had not yet experienced any charge-offs relatedThe risk factor was necessary to COVID-19 at March 31, 2020, management determined account for the changes in economic conditions resulting from increases in unemployment that would produce higher anticipated losses as a result of COVID-19. Given that the economic scenarios had deteriorated significantly since the pandemic was declared in early March, it was determined the credit risk in the loan portfolio had increased, resulting in the need for an additional reserve for credit loss. As a result, theThe general reserve allocation related to COVID-19 totaled $1,942, which had a corresponding impact to provision expense during the first quarter of 2020.
Excluding the risk factors from COVID-19, the Company also experienced increases in general allocations from its historical loan loss factor, which grew from 0.23% at year-end 2019 to 0.28%$2,233 at March 31, 2021 as compared to $2,315 at December 31, 2020. Increases also came from higher unemployment rates withinWhile 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 market areas, as well as lower annualizedestimate of its allowance for loan recoveries at March 31, 2020 compared to year-end 2019. The impact from these risk factorslosses and resulting provision expense going forward.
Decreases in general allocations were partially offset by a lower classified asset risk factor from year-end 2019, impacted by various commercial loan upgrades as a result of improvements in the financial performance of certain borrowers’ ability to repay their loans. This contributed to lower classified assets from year-end 2019, particularly within the commercial nonowner-occupied and commercial and industrial loan segments. Furthermore, the Company’s delinquency levels remained relatively stable from year-end 2019, with nonperforming loans to total loans of 1.31% at March 31, 2020 compared to 1.30% at December 31, 2019, and lower nonperforming assets to total assets of 1.01% at March 31, 2020 compared to 1.04% at year-end 2019.
The Company also experienced an$90 increase in specific allocations from $807 at year-end 2019 to $854 at March 31, 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 from year-end 2019 to March 31, 2020 was primarily related to the loan impairments of one commercial and industrial loan borrower.borrower relationship during the first quarter of 2021.
The Company’s allowance for loan losses to total loans ratio finished at 1.13%0.83% at March 31, 20202021 and 0.81%0.84% at year-end 2019.2020. Management believes that the allowance for loan losses at March 31, 20202021 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 therespect to COVID-19, pandemic, are factors that could change, and cause further increases inmanagement will make adjustments to the required allowance for loan losses and require additional provision expense.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 as well.underwriting.
Deposits
Deposits continue to be the most significant source of funds used by the Company to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. Total deposits at March 31, 20202021 increased $24,408,$38,889, or 3.0%3.9%, from year-end 2019.2020. This change in deposits came primarily from interest-bearing deposit balances, which were up by $33,753,$27,072, or 5.6%5.7%, from year-end 2019,2020, while noninterest-bearing deposits decreased $9,345,increased $13,199, or 4.2%, from year-end 2019.2020. 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 2019,2020, which increased $20,476,$19,552, or 12.9%10.6%. This increase was largely driven by higher municipal NOW product balances, particularly within the Gallia County, Ohio and Mason County, WVWest Virginia market areas. Time deposit balancesGrowth in interest-bearing deposits also came from savings deposits, which increased $6,155,$11,280, or 2.9%9.4%, from year-end 2019, as a result of consumer preference for 1-2 year certificates of deposit (“CDs”). Money market balances also grew from year-end 2019 by $4,478, or 3.4%, primarily from a shift in consumer preference to more competitive, higher-costing deposit accounts. The remaining interest-bearing deposits were up $2,644 from year-end 2019,2020, primarily from higher statement savings account balances.balances impacted by the government stimulus proceeds previously mentioned. Interest-bearing deposit growth was partially offset by lower money market balances from year-end 2020, which decreased $3,760, or 2.3%. The deposit rate on the Company’s Prime Investment money market account was reduced during the first quarter of 2021 in response to decreasing market rates in 2020. This contributed to a consumer shift from money market deposits into savings and noninterest-bearing deposit accounts.
Partially offsetting the increases in interest-bearing deposits were time deposit balances, which decreased $1,382, or 0.7%, from year-end 2020. The decrease came from lower brokered and internet CD issuances as a result of the heightened liquidity position from year-end 2020. The Company’s retail time deposits were relatively stable from year-end 2020.
The decreaseincrease in noninterest-bearing deposits came mostly from the Company’s business and incentive-based checking account balances from year-end 2019.2020.
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 2020,2021, 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 $32,459$26,691 at March 31, 2020,2021, a decrease of $1,532,$1,172, or 4.5%4.2%, from year-end 2019.2020. The decrease was related primarily to the principal repayments applied to various FHLB advances during the first three monthsquarter of 2020.2021. 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 March 31, 20202021 increased $2,317,$1,416, or 1.8%1.0%, to finish at $130,496,$137,740, as compared to $128,179$136,324 at December 31, 2019. Net2020. This was from quarterly net income being partially offset by cash dividends paid and a decrease in net unrealized gainsgain on available for sale securities increased $2,320 from year-end 2019, as market rate decreases continued during the first three months of 2020 causing an increase in the fair value of the Company’s investment portfolio.securities.
Comparison of Results of Operations
For the Three Months Ended
March 31, 20202021 and 20192020
The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three months ended March 31, 20202021 compared to the same periodsperiod in 2019.2020. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10‑Q.
Net Interest Income
The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense incurred on interest-bearing liabilities. During the three months ended March 31, 2020,2021, net interest income decreased $1,383, or 12.1%, asremained relatively stable at $10,048 compared to the same period in 2019. Net$10,004 at March 31, 2020. The moderate change was mostly attributable to higher average earning assets providing favorable increases to interest income was negatively impactedrevenue being offset by lower loan fees, market rate decreases causinga net interest margin compression and a decrease in averagerelation to decreases in market rates that contributed to lower earning assets.asset yields.
Total interest and fee income recognized on the Company’s earning assets decreased $1,273,$659, or 9.7%5.6%, during the first quarter of 2020, as2021 compared to the same period in 2019.2020. The quarterly decrease was impacted by interest and fees on loans, which decreased $1,039,$308, or 8.7%, as compared2.8%. This result was directly related to the same perioddecline in 2019. As previously mentioned, beginning in 2020, the Company changed its business model for Loan Central’s assessment of feesloan yields, which decreased from assessing tax refund advance loan fees5.78% to now assessing tax preparation fees. This fundamental change in the fee structure was necessary to comply with new Ohio lending regulations. As a result, tax refund advance loan fees for5.18% when comparing the first quarterquarters of 2020 decreased $709 from the same period last year. Furthermore, average loans for the quarter ended March 31, 2019 compared to the quarter ended March 31, 2020 decreased $11,040, or 1.4%, while the interest rate yield on loans decreased from 6.29% to 5.78% during the same periods. The decrease in average quarterly loans came mostly from the commercial and installment loan segments of the loan portfolio.2021. Loan yields were impacted by interest rate reductions from the Federal Reserve Bank. InBank in March 2020, the Federal Reserve Bank took aggressive action by lowering the federal funds rate by 150 basis points to a target range of 0 to 0.25% due to concerns about the impact of COVID-19 on the economy. Prior to this, the Federal Reserve Bank had lowered the federal funds rate by 75 basis points during the second half of 2019.2020. This trend of decreasing market rates led to lower yields on the Company’s loan portfolio and lower loan interest revenue. Partially offsetting the effects from lower loan yields was average growth in loans. Average loans for the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020 increased $72,151, or 9.4%, which came mostly from the origination of PPP loans during 2020 and 2021. While PPP loans contributed to higher earning asset balances, they also had a dilutive effect to loan yields as a result of the 1% interest rate associated with each loan. These factors contributed to a decrease of $670 in loan interest income during the three months ended March 31, 2021 compared to the same period in 2020.
Loan revenue was positively impacted by loan fees, which increased $362 during the first quarter of 2021 compared to the same period in 2020. The increase came largely from $367 in loan fees earned on the origination of government-guaranteed PPP loans as a result of normal amortization and loan forgiveness.
During the three months ended March 31, 2020,2021, interest income from interest-bearing deposits with banks decreased $157,$134, or 49.2%,82.7% when compared to the same period in 2019. These changes2020. This change in interest revenue comecame primarily from the Company’s interest-bearing Federal Reserve Bank clearing account. The quarterly decrease in interest income was primarily due to decreases in both the interest rate and average balance oftied to this interest-bearing clearing account. Average Federal Reserve Bankaccount, which was 0.10% at March 31, 2021 compared to 0.25% at March 31, 2020. The increase in liquidity from the surge in deposit liabilities allowed the Company to maintain higher average balances were down $5,467,within the account, which increased $83,223 during the first quarter of 2021compared to the same period in 2020.
Total interest on securities decreased $206, or 10.9%30.7%, during the first quarter of 2020, as2021 compared to the same period in 2019.2020. The interest rate tiedCompany has taken opportunities to reinvest a portion of excess deposits into new U.S. Government, Agency and Agency mortgage-backed securities, contributing to a $14,038 increase in average securities during the Federal Reserve Bank clearing accountfirst quarter of 2021 over the first quarter of 2020. However, the increase in average securities was 0.25% at March 31, 2020 comparedcompletely offset by a decline in securities yield of 87 basis points from 2.33% to 2.25% at March 31, 2019.1.46%.
Total interest expense incurred on the Company’s interest-bearing liabilities increased $110,decreased $703, or 6.6%39.5%, during the first quarter of 2020 as compared to the same period in 2019. The upward movement2020. Interest expense decreased despite an increase in interest expense was primarily from interest expense on deposits, particularly time deposits and money market accounts. The Company’s average interest-bearing deposits were relatively stable at $605,828 and $605,474of $76,252 during the first quarter of 2020 and 2019, respectively. In December 2019,2021 compared to the Company sold its Mount Sterling and New Holland branches that were previously acquired as part of the merger with Milton Bancorp, Inc.same period in 2016. Excluding the impact of the branch sale,2020. The converse relationship between increasing average interest-bearing deposits would show an increase of $18,559, or 3.2%,liabilities to lower interest expense is related to the repricing efforts in a lower rate environment which drove down average costs during 2020. This included the rate reduction to the Company’s Prime Investment deposit account, which contributed to a $213 decrease in money market interest expense during the first quarter of 2020 over2021 compared to the same period in 2019. This growth came mostly from money market, NOW and2020. Deposit expense was further impacted by lower CD rates, which have contributed to a $394 decrease in time deposit balances. As previously discussed, short-term market rates have significantly decreased sinceinterest expense during the second halffirst quarter of 2019 causing asset yields to decrease. However, there is a lagging effect2021 compared to the impact that decreasing market rates are having on reducing deposit expense.same period in 2020. As CD rates have repriced downward, the Company will benefit inhas benefited from lower interest expense only to the extent that newon newly issued CDs at lower rates are issued. The consumer demand for CDs has eased since interest rates began to decrease inrates. As a result of the second half of 2019, which has limited opportunities for lower interest expense. Furthermore, other interest-bearing deposits were already at or near their interest rate floors, which has also limited the Company’s ability to reduce deposit costs during the first quarter of 2020. The Company also continues to experience a composition shift to a higher-costingrepricings on money market account that has generated more interest expense. The account offers a more competitive rateaccounts and is at a higher interest rate than other money market account products. The Company’s use of higher-costing time deposits, combined with the composition shift to higher-costing money market deposits caused the Company’s total weighted average costs on interest-bearing deposits to increasehas decreased by 1048 basis points from 0.90% at March 31, 2019 to 1.00% at March 31, 2020. The higher average costs associated with time deposits and the new competitive money market account contributed2020 to over 86% of the interest expense increase during the first three months of 2020, as compared to the same period in 2019.0.52% at March 31, 2021.
The Company’s net interest margin is defined as fully tax-equivalent net interest income as a percentage of average earning assets. During 2020,2021, the Company’s first quarter net interest margin finished at 4.34%3.73%, compared to 2019’s2020’s first quarter net interest margin of 4.89%4.34%. The decrease in margin was largely impacted by the significant decrease in tax refund anticipation loan fees, which lowered the margin by 30 basis points in the first quarter of 2020. Margin compression was also influenced by decreasing market rates that contributed toimpacted lower earning asset yields primarily during the first quarter of 2020. Interest rates were reduced inat the end of the first quarter of 2020 primarily bybecause of the growing concern of the COVID-19 pandemic that has had a significant impact to a weakening economy. Furthermore, the Company’s deposit costs remain higher in relation to an increased composition of higher-costing deposits, such as time deposits and money market accounts. This, along with the lagging effect of deposit costs benefiting from decreasing market rates, has further contributed to a lower margin during the first quarter of 2020.pandemic. The Company’s primary focus is to invest its funds into higher yielding assets, particularly loans, as opportunities arise. However, if loan balances do not continue to expand and remain a larger component of overall earning assets, the Company will face pressure within its net interest income and margin improvement.
Provision for Loan Losses
For the three months ended March 31, 2020,2021, the Company’s provision expense increased $1,469, or 61.8%, overdecreased $3,898 from the same period in 2019.2020. The quarterly improvement came primarily from the addition of a new risk reserve allocation in 2020 that was less impactful in 2021. As previously discussed, the Company’s general reserves during the first quarter of 2020 were significantly impacted by a $1,942 allocation of the allowance for loan losses as a result of the expected financial impact of COVID-19 on its customers. The allocation resulted in a corresponding entry to provision expense. The impact from this new risk factorexpense in March 2020. Further reducing provision expense was partially offset by the releasea decrease of general reserves associated with lower classified assets. Furthermore,$1,168 in net charge-offs on loans containing no specific allocation were down from the prior year, which helped to reduce provision expense during the first quarter of 2020, asthree months ended March 31, 2021 compared to the same period in 2019.2020. This was primarily from lower charge-offs recorded within the commercial real estate and consumer loan portfolios. Further contributing to lower provision expense were the impacts of lower general reserve allocations. During the first quarter of 2021, the Company decreased its general allocation from $7,160 at December 31, 2020 to $6,797 at March 31, 2021. Conversely, this is compared to a $468 general allocation increase during the same period in 2020, excluding the COVID-19 risk factor. Lower general reserves have been affected by various improvements within the economic risk factor calculation that included: lower criticized and classified assets, lower delinquency levels, and higher annualized level of loan recoveries. Lower provision expense was also impacted by a decrease in specific allocations that totaled $90 at March 31, 2021 compared to $854 in specific allocations at March 31, 2020.
Future provisions to the allowance for loan losses will continue to be based on management’s quarterly in-depth evaluation that is discussed in further detail under the caption “Critical Accounting Policies - Allowance for Loan Losses” within this Management’s Discussion and Analysis.
Noninterest Income
Noninterest income for the three months ended March 31, 2020 totaled $4,442, as2021 decreased $1,103, or 24.8%, when compared to $1,846 during the three months ended March 31, 2019.2020. The key contributor to the quarterly improvementdecrease in noninterest revenue was from proceedsthe one-time payment received in a litigation settlement with a third-party.third-party in 2020. During the first quarter of 2020, the Bank entered into a settlement agreement related to the previously disclosed litigation the Bank had filed against a third-party tax software product provider for breach of contract. Under the settlement agreement, the third-party paid a $2,000 settlement payment to the Bank in March 2020, which was recorded as noninterest income. As part of the settlement agreement, the Bank is scheduled to process a certain amount of tax items starting in 2021 and ending in 2025. As a result of this processing agreement, the Bank recognized $540 in ERC/ERD income during the first quarter of 2021, which helped to partially offset the effects of the settlement proceeds received in 2020.
Further growthIncreases in noninterest revenue also came from taxinterchange income, which increased $107, or 11.4%, during the first quarter of 2021. This was largely impacted by the economic stimulus proceeds received by customers due to the COVID-19 pandemic that increased consumer spending.
Lower losses on the sales of foreclosed assets also improved noninterest income during the first quarter of 2021. The Company experienced $101 in losses on the sale of foreclosed assets during the first quarter of 2020 compared to a $1 gain during the first quarter of 2021. This was primarily from an adjustment to the fair value of one foreclosed commercial property during the first quarter of 2020.
Increases to noninterest revenue also came from mortgage banking income. Mortgage banking income is highly influenced by mortgage interest rates and housing market conditions. With mortgage rates at record lows during 2020 impacted by the COVID-19 pandemic, the consumer demand to refinance long-term, fixed-rate real estate mortgages significantly increased. While the heavy volume of refinancing has slowed since 2020, the amount of loans sold during the first quarter of 2021 still exceeded the volume of loan sales experienced during the first quarter of 2020. This led to an increase of $89 in mortgage banking income during the first quarter of 2021 over the same period in 2020.
Tax preparation fee income.income also increased during the first quarter of 2021. As previously discussed, the Company changed its business model in 2020 for assessing fees related to tax refund advance loans. By charging for the tax preparation services, the Company recorded $615$694 in tax preparation fee income for the first quarterthree months of 2020.
Limiting noninterest revenue growth2021 compared to $615 during the first quarter of 2020 were higher losses from the sale of OREO, which reduced noninterest earnings by $101. This was primarily from an adjustment to the fair value of one commercial OREO property during the first quarter ofsame period in 2020.
The remaining noninterest income categories increased $82,decreased $20, or 4.4%2.2%, during the first quarter of 2020, as2021 compared to the same period in 2019. This income growth came mostly2020, largely from higher bank owned life insurance and annuity asset balances,lower service charges on deposit accounts as well as interchange income from growth in debit and credit card transactions. The Company has been successful in promoting the usea result of both debit and credit cardsless overdraft fees impacted by offering incentives that permit their users to redeem accumulated points for merchandise, as well as cash incentives.
economic stimulus proceeds received by customers.
Noninterest Expense
Noninterest expense during the first quarter of 20202021 decreased $49,$332, or 0.5%, as3.5% compared to the same period in 2019. The Company’s largest2020. Contributing most to the decline in noninterest expense was salaries and employee benefits, which decreased $81,$185, or 1.5%3.4%, during the first quarter of 2020, asthree months ended March 31, 2021 compared to the same period in 2019.2020. The decrease was primarily from the expense savings associated withcan be related to a lower number of employees fromemployee base, with the sale of two branches in December 2019 and the voluntary severance program that was completed during the fourth quarter of 2019. The Bank’s average full-time equivalent employee base at 234 employees for March 31, 2020 was2021 compared to 244 employees, down from an average full-time equivalent employee base of 265 employees at March 31, 2019.2020. The impact of a lower employee base has more than offset the expense increaseincreases associated with annual merit increases in the first quarter of 2020.2021.
Further impacting lower overhead costs were professional fees, which decreased $74,$168, or 11.0%28.1%, during the first quarter of 2021 compared to the same period in 2020. These decreases were largely from lower litigation costs related to a fewer number of bankruptcy-related loan cases in 2021 impacted by the COVID-19 pandemic environment.
Other noninterest expense also decreased $138, or 9.4%, during the first quarter of 2021 compared to the same period in 2020. This was primarily impacted by lower customer incentive expenses paid on deposit accounts and use of credit cards.
Decreases in noninterest expense were partially offset by an increase in FDIC assessment costs. The Bank’s FDIC assessment at March 31, 2021 was $79 compared to no assessment cost at March 31, 2020. During 2020, the Bank had continued to utilize a portion of its remaining FDIC credits that had been issued in September 2019. Excluding the credit, the Bank’s first quarter 2020 assessment would have been $68.
Further impacting overhead costs were higher occupancy, furniture, equipment and software expenses, which were collectively up $137, or 12.7%, during the first quarter of 2020 asover the same period in 2020. Building and equipment costs were driven by increases in depreciable assets associated with the new OVB On the Square facility. Higher software costs were associated with the platform used to facilitate the second round of PPP loans during the first quarter of 2021.
The remaining noninterest expense categories decreased $57, or 6.2%, during the first quarter of 2021 compared to the same period in 2019.2020. These decreases include lower litigation costs associated with the Bank’s lawsuit against the third-party tax software product provider. As previously discussed, a settlement was reached with the third-party during the first quarter of 2020, which contributed to lower legal costs. Additionally, the Company incurred lower audit-related expenses during the first quarter of 2020. This was related to costs from 2019 associated with the “expected loss” allowance model that the Company was prepared to adopt in 2020. In the fourth quarter of 2019, it was announced this required accounting guidance would be delayed until 2023.
The Company also benefited from lower foreclosed asset costs, which decreased $63, or 59.4%, during the first quarter of 2020, as compared to the same period in 2019. In addition to lower foreclosure costs, the Company also recovered $23 in delinquent insurance and real estate taxes associated with one commercial real estate borrower during the first quarter of 2020.
Partially offsetting decreases in overhead costs were higher data processing expenses, which increased $64, or 12.0%, during the first quarter of 2020, as compared to the same period in 2019. Data processing expense in 2020 was largely impacted by the transaction volume associated with credit cards. The Company also incurred website maintenance costs in 2020 to improve the quality of its internet-based technology.
The remaining noninterest expense categories increased $105, or 3.9%, during the first quarter of 2020, as compared to the same period in 2019. These increases were impacted mostly from incentive costs associated with promoting the use of demand deposit products, as well as the use of both debitexpense savings related to lower data processing and credit cards with merchandise and cash incentives.foreclosure costs.
Efficiency
The Company’s efficiency ratio is defined as noninterest expense as a percentage of fully tax-equivalent net interest income plus noninterest income. The effects from provision expense are excluded from the efficiency ratio. Management continues to place emphasis on managing its balance sheet mix and interest rate sensitivity as well as developing more innovative ways to generate noninterest revenue. Comparing the first quarters of 20202021 and 2019,2020, the Company’s average loans decreased 1.4%, while loanasset yields decreasedwere negatively impacted by 51 basis points. This, combined with the $709market rate reductions related to COVID-19, which resulted in a greater decrease in tax refund advance loan fees, causedyield on earning assets than the Company’s totalaverage cost on interest-bearing liabilities. Loan fee increases in 2021 impacted by PPP loans were able to bring net interest income back more in line with 2020. However, the Company’s noninterest expense savings of 3.5% was not enough to decrease by 12.1%. However, this was completely offset by a $2,596 increase24.8% decrease in noninterest revenue, which was impacted by $2,000 in income from a litigation settlement and $615 in tax preparation fee income. Furthermore, the severance package offering and the sale of two branch offices in December 2019 contributed to lower overhead expense in 2020. As a result, the Company’s efficiency number decreased (improved)increased (regressed) to 65.4%68.0% during the quarterly period ended March 31, 2020, as2021 compared to 71.7%65.4% during the same period in 2019.2020.
Provision for income taxes
The Company’s income tax provision decreased $16, or 16.8%,increased $642 during the three months ended March 31, 2020, as2021 compared to the same period in 2019.2020. The change in tax expense corresponded directly to the change in associated taxable income during 20202021 and 2019.2020.
Capital Resources
Federal regulators have classified and defined capital into the following components: (1) tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (2) tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt, preferred stock and hybrid instruments which do not qualify as tier 1 capital.
In September 2019, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies). Under the rule, a qualifying community banking organization (“QCBO”) is eligible to opt into the Community Bank Leverage Ratio (“CBLR”) framework in lieu of the Basel III capital requirements if it has less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposure and a leverage ratio greater than 9.0%. The new rule took effect January 1, 2020, and QCBOs were allowed to opt into the new CBLR framework in their call report forbeginning the first quarter of 2020.
A QCBO opting into the CBLR framework must maintain a CBLR of 9.0%, subject to a two quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period. A QCBO failing to satisfy these requirements must comply with the existing Basel III capital requirements as implemented by the banking regulators in July 2013.
The numerator of the CBLR is Tier 1 capital, as calculated under present rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital.
The Bank has opted into the CBLR, and will therefore not be required to comply with the Basel III capital requirements. As of March 31, 2020,2021, the Bank’s CBLR was 11.65%10.65%, and the Company’s CBLR was 12.82%11.64%.
Pursuant to the CARES Act, the federal banking regulators in April 2020 issued interim final rules to set the CBLR at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the CBLR will increaseincreased to 8.5% for the calendar year. Community banks will have until January 1, 2022 before the CBLR requirement will return to 9%.
Cash dividends paid by the Company were $1,005 during the first three months of 2020.2021. The year-to-date dividends paid totaled $0.21 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 $179,501,$305,236, represented 17.3%24.9% of total assets at March 31, 2020.2021. The COVID-19 pandemic had a significant impact on higher levels of excess funds in 2021, which included customer deposits of stimulus monies from various government relief programs. In addition, the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity demands. At March 31, 2020,2021, the Bank could borrow an additional $110,295$92,178 from the FHLB, of which $80,000 could be used for short-term, cash management advances.FHLB. Furthermore, the Bank has established a borrowing line with the Federal Reserve. At March 31, 2020,2021, this line had total availability of $48,136.$57,389. Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank.
Off-Balance Sheet Arrangements
As discussed in Note 5 – Financial Instruments with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet credit-related activities, including commitments to extend credit and standby letters of credit, which could require the Company to make cash payments in the event that specified future events occur. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. While these commitments are necessary to meet the financing needs of the Company’s customers, many of these commitments are expected to expire without being drawn upon. Therefore, the total amount of commitments does not necessarily represent future cash requirements.
Critical Accounting Policies
The most significant accounting policies followed by the Company are presented in Note A to the financial statements in the Company’s 20192020 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 inthose estimates and assumptions could have a significant impact on the financial statements. Management currently views the adequacy of the allowance for loan losses to be a critical accounting policy.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans generally consist of loans with balances of $200 or more on nonaccrual status or nonperforming in nature. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure. TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and impaired loans that are not individually reviewed for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of the Chief Executive Officer (the principal executive officer) and the Senior Vice President and Chief Financial Officer (the principal financial officer)officer) of Ohio Valley, Ohio Valley’s management has evaluated the effectiveness of Ohio Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2020.2021. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Ohio Valley in the reports that it files or submits under the Exchange Act is accumulated and communicated to Ohio Valley’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Ohio Valley’s Chief Executive Officer and Senior Vice President and Chief Financial Officer have concluded that Ohio Valley’s disclosure controls and procedures were not effective as of March 31, 2020 due2021 to a material weakness describedensure that information required to be disclosed by Ohio Valley in Management’s Report on Internal Control Over Financial Reportingthe reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 Form 10-K”). SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
Based on the assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019, as described in our 2019 Form 10-K, management concluded that Ohio Valley did not maintain effective internal control over financial reporting as of December 31, 2019 due to the effectiveness of the Company’s control over appropriate monitoring of loans through the subsequent events period, including not timely evaluating information received after the fiscal year end that affected the appropriateness of loan grades and impairment classification used in the allowance for loan losses estimate.. A material weakness is a deficiency in internal control over financial reporting such that there is a reasonable possibility that a material misstatement would not be prevented or detected in a timely manner. With regard to the material weakness, our remediation efforts began during the quarter ended March 31, 2020. We are changing how certain controls are designed, performed and documented. Our credit administration department, in conjunction with an expanded group of the management team, have heightened the monitoring of troubled credits during the subsequent event period up and until the report filing date.This included training around timely identifying and communicating subsequent events and increasing the management staff involved with monitoring the control around subsequent events that may impact the assessment of loan grades or impairment valuations.We must now demonstrate the effectiveness of these changes with an appropriate amount of consistency and for a sufficient period of time to conclude that the control is functioning properly. Other than these changes, there wereThere was no significant changes during the quarter ended March 31, 2020change in Ohio Valley’s internal control over financial reporting (as defined in Rule 13a‑15(f) under the Exchange Act) that occurred during Ohio Valley’s fiscal quarter ended March 31, 2021, that has materially affected, or is reasonably likely to materially affect, Ohio Valley’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ohio Valley is not currently subject to any material legal proceedings.
ITEM 1A. RISK FACTORS
In addition toThere are no material changes from the risk factors disclosed inset forth under Part I, Item 1.A.1A, “Risk Factors” in Ohio Valley’s Annual Report onthe 2020 Form 10-K for the fiscal year ended December 31, 2019, in the first quarter of 2020 we identified the following additional risk factor:10-K.
The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus and legislation designed to deliver monetary aid and other relief. While the scope, duration and full effects of the pandemic are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be significantly impacted and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, capital, customer demand, funding, liquidity, operations, interest rate risk, human capital and self-insurance, as described in more detail below.
Credit Risk: Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrowers’ businesses. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. Many customers have requested and have been granted hardship relief in the form of payment deferrals and modifications as well as loans through the CARES Act. If customers are unable to repay their loans in a timely manner following hardship relief, it could result in a deterioration of asset quality, an increase in delinquency, reversal of accrued interest income, and an increase in credit losses. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. Significant loan losses could adversely impact the Bank’s capital ratios, which could prevent the Bank from paying dividends to us, which dividends – along with cash on hand – are used by us to service our debt obligations. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, our ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment like now, our customers are more dependent on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity.
Strategic Risk: Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates or sentiment of our deposit customers that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. In the Company’s core market areas, the local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in the origination of loans.
Operational Risk: Current and future restrictions on how we operate our bank offices and operational departments could limit our ability to meet customer service expectations and have a material adverse effect on our operations. Key employees could become sick from COVID-19. We rely on business processes and bank office activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include increased phishing, malware and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.
Moreover, we rely on many third parties in our business operations, including the appraiser(s) of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.
Interest Rate Risk: Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25% , citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results and financial condition.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home program, third-party providers’ ability to support our operation and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity and capital levels.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Ohio Valley did not sell any unregistered equity securities during the three months ended March 31, 2020.2021.
Ohio Valley did not purchase any of its shares during the three months ended March 31, 2020.2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
None.
ITEM 6. EXHIBITS
Exhibit Number | | Exhibit Description |
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3.1 | | |
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3.2 | | |
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4 | | |
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101.INS # | | XBRL Instance Document: Filed herewith. #Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH # | | XBRL Taxonomy Extension Schema: Filed herewith. # |
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101.CAL # | | XBRL Taxonomy Extension Calculation Linkbase: Filed herewith. # |
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101.DEF # | | XBRL Taxonomy Extension Definition Linkbase: Filed herewith. # |
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101.LAB # | | XBRL Taxonomy Extension Label Linkbase: Filed herewith. # |
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101.PRE # | | XBRL Taxonomy Extension Presentation Linkbase: Filed herewith. # |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) Filed herewith # |
# | Attached as Exhibit 101 are the following documents formatted in Inline XBRL (eXtensive Business Reporting Language): (i) Unaudited Consolidated Balance Sheets; (ii) Unaudited Consolidated Statements of Income; (iii) Unaudited Consolidated Statements of Comprehensive Income; (iv) Unaudited Consolidated Statements of Changes in Shareholders’ Equity; (v) Unaudited Condensed Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | OHIO VALLEY BANC CORP. |
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Date: | May 11, 202010, 2021 | By: | /s/Thomas E. Wiseman
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| | | Thomas E. Wiseman |
| | | Chief Executive Officer |
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Date: | May 11, 202010, 2021 | By: | /s/Scott W. Shockey
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| | | Scott W. Shockey |
| | | Senior Vice President and Chief Financial Officer |
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