OHIO VALLEY BANC CORP

Previous wording

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 current economic and geopolitical landscape, 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 fluctuating interest rates on our customers’ operations and financial condition; 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; the level of defaults and prepayment on loans made by Ohio Valley Banc Corp. (“Ohio Valley”) and its direct and indirect subsidiaries (collectively, the “Company”); unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Additional detailed information concerning such factors is available in the Company’s filings with the Securities and Exchange Commission, under the Exchange Act, including the disclosure under the heading “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. 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.

Current wording

Certain statements contained in this quarterly report on Form 10-Q (the “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 current economic and geopolitical landscape, and which could cause actual results to differ materially from those expressed in such forward looking-statements. However, it is difficult to predict the effect of known factors, and by Ohio Valley Banc Corp. (“Ohio Valley”) cannot anticipate all factors that could affect future results. Important factors that could cause actual results to differ materially from expectations expressed in or implied in forward-looking statements include, but are not limited to: the effects of fluctuating interest rates on our customers’ operations and financial condition; 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; the level of defaults and prepayment on loans made by Ohio Valley and its direct and indirect subsidiaries (collectively, the “Company”); unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Additional detailed information concerning such factors is available in the Company’s filings with the Securities and Exchange Commission, under the Exchange Act, including the disclosure under the heading “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and elsewhere in this document (including, without limitation, in conjunction with the forward-looking statements themselves and under the heading “Critical Accounting Estimates”). All forward-looking statements are qualified in their entirety by these and other cautionary statements that the Company makes from time to time in its other SEC filings and public communications. 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 duty to update or revise, any forward-looking statements, whether as a result of new information, unan…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

BUSINESS OVERVIEW: The following discussion on consolidated financial statements include the accounts of Ohio Valley and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc., a consumer finance company (“Loan Central”), and Ohio Valley Financial Services Agency, LLC, an insurance agency. The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC, an Ohio limited liability company. In December 2023, Ohio Valley ceased operating Race Day Mortgage, Inc. (“Race Day”), which had been a wholly-owned subsidiary of the Bank since April 2021. The decision to cease operating Race Day was made due to low loan demand, poor employee retention, and lack of profitability. In December 2023, Ohio Valley also ceased operating OVBC Captive, Inc. (the “Captive”), which had been a subsidiary of Ohio Valley since July 2014. The decision to cease operating the Captive was the result of proposed IRS regulations that adversely impacted the taxation of small captives and severely limited the Captive’s ability to operate. Ohio Valley and its subsidiaries are collectively referred to as the “Company.”

Current wording

BUSINESS OVERVIEW: The following discussion on consolidated financial statements include the accounts of Ohio Valley and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc., a consumer finance company (“Loan Central”), and Ohio Valley Financial Services Agency, LLC, an insurance agency. The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC, an Ohio limited liability company. In December 2023, Ohio Valley ceased operating Race Day Mortgage, Inc. (“Race Day”), which had been a wholly-owned subsidiary of the Bank since April 2021. The decision to cease operating Race Day was made due to low loan demand, poor employee retention, and lack of profitability. In December 2023, Ohio Valley also ceased operating OVBC Captive, Inc. (the “Captive”), which had been a subsidiary of Ohio Valley since July 2014. The decision to cease operating the Captive was the result of proposed IRS regulations that adversely impacted the taxation of small captives and severely limited the Captive’s ability to operate.

Previous wording

FINANCIAL RESULTS OVERVIEW: Net income totaled $2,972 during the second quarter of 2024, a decrease of $277 from the same period of 2023. Earnings per share for the second quarter of 2024 finished at $.63 per share, compared to $.68 per share during the second quarter of 2023. Net income totaled $5,765 during the six months ended June 30, 2024, a decrease of $1,392 from the same period of 2023. Earnings per share during the first six months of 2024 finished at $1.21 per share, compared to $1.50 per share during the first six months of 2023. During both the quarterly and year-to-date periods, earnings were negatively impacted by higher provision for credit losses and noninterest expense, which were up collectively by $605 and $1,336 over the same periods in 2023, respectively. During the second quarter of 2024, earnings were positively impacted by a $349 increase in net interest income, while net interest income decreased $183 during the first half of 2024, compared to the same periods in 2023, respectively. The Company’s noninterest income had a minimal impact to the change in net earnings during both the quarterly and year-to-date periods of 2024 compared to 2023. The impact of lower net earnings during 2024 also had a direct impact to the Company’s annualized net income to average asset ratio, or return on assets, which decreased to 0.84% for the six months ended June 30, 2024, compared to 1.16% for the six months ended June 30, 2023. In addition, the Company’s net income to average equity ratio, or return on equity, decreased to 8.01% for the six months ended June 30, 2024, compared to 10.63% for the six months ended June 30, 2023.

Current wording

FINANCIAL RESULTS OVERVIEW: Net income totaled $2,719 during the third quarter of 2024, an increase of $468 from the same period of 2023. Earnings per share for the third quarter of 2024 finished at $.58 per share, compared to $.47 per share during the third quarter of 2023. Net income totaled $8,484 during the nine months ended September 30, 2024, a decrease of $924 from the same period of 2023. Earnings per share during the first nine months of 2024 finished at $1.79 per share, compared to $1.97 per share during the first nine months of 2023. The positive results during the quarterly period were impacted by a 13.4% increase in average earning assets, coming primarily from loans and securities, which contributed to a 10.6% and 2.9% increase in net interest income during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. During both the quarterly and year-to-date periods, earnings were negatively impacted by higher provision for credit loss and noninterest expenses. The negative effects from higher provision and noninterest expenses were partially offset by increases in noninterest income during both the quarterly and year-to-date periods. The contrasting results in net earnings during the quarterly and year-to-date periods of 2024 had a corresponding impact to the Company’s annualized net income to average asset ratio, or return on assets, which increased 5 basis points to 0.75% during the three months ended September 30, 2024, while decreasing 19 basis points to 0.81% during the nine months ended September 30, 2024, compared to the same periods in 2023, respectively. In addition, the Company’s net income to average equity ratio, or return on equity, increased 93 basis points to 7.39% during the three months ended September 30, 2024, while decreasing 141 basis points to 7.80% during the nine months ended September 30, 2023.

Previous wording

During the three months ended June 30, 2024, net interest income increased $349, or 3.0%, over the same period in 2023. During the six months ended June 30, 2024, net interest income decreased $183, or 0.8%, from the same period in 2023. The quarterly improvement to net interest income was mostly impacted by a $128,928 increase in average earning assets. This was partially offset by a decrease in the net interest margin of 29 basis points. The year-to-date decrease to net interest income was mostly impacted by a decrease in the net interest margin of 44 basis points, which more than offset a $124,072 increase in average earning assets. The growth in average earning assets during both the quarterly and year-to-date periods came primarily from loans and interest-bearing deposits with banks, partially offset by lower securities. Loan increases were led by the commercial and residential real estate loan segments, while interest-bearing deposits with banks consisted mostly of average balances maintained at the Federal Reserve. Average securities decreased as maturities were deployed into higher yielding loans. Decreases to the net interest margin during both the quarterly and year-to-date periods were largely related to the cost of funding sources increasing more than the yield on earning assets. This increase in the cost of funding was partially linked to the Company’s decision to increase rates on deposit accounts to attract deposits amidst heightened market competition for such funds. In addition, the composition of funding sources trended toward certificates of deposit (“CDs”), and wholesale funding sources, which generally cost more than other funding sources, such as checking, NOW, savings and money market deposit products.

Current wording

During the three and nine months ended September 30, 2024, net interest income increased $1,205, or 10.6%, and $1,022, or 2.9%, over the same periods in 2023, respectively. The quarterly and yearly improvement to net interest income was mostly impacted by growth in average earning assets, which increased $158,933 and $135,741 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. This was partially offset by a lower net interest margin, decreasing 9 basis points and 32 basis points during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. The growth in average earning assets during both periods came primarily from loans, interest-bearing deposits with banks, and securities. Loan increases were led by the commercial and residential real estate loan segments, while interest-bearing deposits with banks consisted mostly of average balances maintained at the Federal Reserve. Average securities grew largely in the third quarter of 2024 as a result of increased pledging requirements on public fund deposits, but remained below the prior year’s average balances as maturities continue to be deployed into higher yielding loans. Decreases to the net interest margin during both the quarterly and year-to-date periods were largely related to the cost of funding sources increasing more than the yield on earning assets. This increase in the cost of funding was partially linked to the Company’s decision to increase rates on deposit accounts to attract deposits amidst heightened market competition for such funds. In addition, the composition of funding sources trended toward certificates of deposit (“CDs”), and wholesale funding sources, which generally cost more than other funding sources, such as checking, NOW, savings and money market deposit products.

Previous wording

During the three and six months ended June 30, 2024, the Company’s provision for credit loss expense increased $157 and $419, when compared to the same periods in 2023, respectively. The increases during both the quarterly and year-to-date periods came primarily from a higher historical loss factor and increases in general reserves associated with the growth in loans, partially offset by decreases in both net charge-offs and select qualitative risk factors.

Current wording

During the three and nine months ended September 30, 2024, the Company’s provision for credit loss expense increased $32 and $451, when compared to the same periods in 2023, respectively. The increases during both the quarterly and year-to-date periods came primarily from a specific reserve established on a collateral dependent impaired loan, a higher historical loss factor and an increase in net charge-offs, partially offset by decreases in select qualitative risk factors.

Previous wording

During the three and six months ended June 30, 2024, noninterest income decreased $12, or 0.4%, and $83, or 1.3%, from the same periods in 2023. The decreases were largely due to the closure of Race Day at the end of 2023. Due to the closure, there was no mortgage application referral income earned in 2024 compared to $16 and $247 in commissions earned during the second quarter and first half of 2023, respectively. Other decreases came from losses related to both other real estate owned (“OREO”) and the pending sale of premises, which collectively reduced noninterest income by $92 during both the second quarter and first half of 2024 compared to the same periods in 2023. These decreases were partially offset by a $78 and $192 increase in service charges on deposit accounts during both the quarterly and year-to-date periods.

Current wording

During the three and nine months ended September 30, 2024, noninterest income increased $286, or 11.1%, and $203, or 2.2%, over the same periods in 2023, respectively. The increases were largely due to service charges on deposit accounts, trust fee income, and income from bank owned life insurance (“BOLI”), which collectively increased noninterest income by $134 and $396 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. The increases were partially offset by decreases in mortgage application referral income due to the closure of Race Day at the end of 2023. Due to the closure, there was no mortgage application referral income earned in 2024 compared to $247 in commissions earned in 2023. Other decreases came from losses related to both other real estate owned (“OREO”) and the sale of premises, which collectively reduced noninterest income by $92 during both the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively.

Previous wording

During the three and six months ended June 30, 2024, noninterest expense increased $448, or 4.3%, and $917, or 4.4%, over the same periods in 2023. The increases were primarily related to a $345 and $628 increase in salaries and employee benefit costs during both the second quarter and first half of 2024, impacted by higher annual merit increases and higher health insurance premiums. The Company also experienced increases in both data processing and professional fee expense, which were collectively up $136 and $276 during the second quarter and first half of 2024 compared to the same periods in 2023.

Current wording

During the three and nine months ended September 30, 2024, noninterest expense increased $841, or 8.1%, and $1,758, or 5.7%, over the same periods in 2023. The increases were primarily related to a $687 and $1,315 increase in salaries and employee benefit costs during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. The increase in salaries and employee benefit costs was primarily related to annual merit increases, higher health insurance premiums, and the severance expense associated with a voluntary early retirement program. This voluntary severance package was offered to select employees meeting certain criteria during the third quarter of 2024. As of September 30, 2024, a total of $295 in severance expense had been incurred based on those employees that had accepted the severance package offer, while another $3,043 is expected to be expensed in the fourth quarter of 2024. The Company also experienced increases in both data processing and professional fee expense, which were collectively up $163 and $439 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively.

Previous wording

The changes in the Company’s provision for income taxes during the three and six months ended June 30, 2024, compared to the same periods in 2023, were largely due to the changes in taxable income affected by the factors mentioned above.

Current wording

The changes in the Company’s provision for income taxes during the three and nine months ended September 30, 2024, compared to the same periods in 2023, were largely due to the changes in taxable income affected by the factors mentioned above.

Previous wording

At June 30, 2024, total assets were $1,403,317, an increase of $51,182 from year-end 2023. Higher assets were primarily impacted by an increase in loans, which were up $68,384, or 7.0%, from year-end 2023. Growth in loans came from increases in the residential real estate loan segment (+12.5%), commercial real estate loan segment (+8.9%), and commercial and industrial loan segment (+3.6%), partially offset by a decrease in the consumer loan segment (-3.4%).

Current wording

At September 30, 2024, total assets were $1,494,023, an increase of $141,888 from year-end 2023. Higher assets were primarily impacted by an increase in securities and loans. Securities increased $108,855, or 63.9%, from year-end 2023, primarily from the Company’s participation in the Ohio Homebuyer Plus program that led to an increase of $100,000 in deposits to a new public fund account during the third quarter of 2024. Since public fund accounts are required to be collateralized, the funds were used to invest in securities to meet pledging requirements and to serve as collateral to the account, which contributed to the increase in securities. Loans were up $77,012, or 7.9%, from year-end 2023. Growth in loans came from increases in the commercial real estate loan segment (+13.2%), residential real estate loan segment (+12.5%), and commercial and industrial loan segment (+2.9%), partially offset by a decrease in the consumer loan segment (-5.7%). The Company’s interest-bearing deposits with banks decreased $50,411, or 44.3%, from year-end 2023, coming mostly from deposits with the Federal Reserve. The Company utilized these funds to assist with funding the growth in loans, which provided a higher rate of return.

Previous wording

At June 30, 2024, total liabilities were $1,257,560, up $49,432 from year-end 2023. Contributing most to this increase were higher deposit balances, which increased $51,292 from year-end 2023. Leading deposit growth were interest-bearing deposit balances, up $30,305 from year-end 2023, consisting of higher balances from savings and money market accounts (+5.6%), NOW accounts (+6.0%), and time deposits (+1.5%). Growth in deposits were also impacted by noninterest-bearing demand deposits, which increased $20,987 from year-end 2023.

Current wording

At September 30, 2024, total liabilities were $1,341,870, up $133,742 from year-end 2023. Contributing most to this increase were higher deposit balances, which increased $134,284 from year-end 2023. Leading deposit growth were interest-bearing deposit balances, up $140,545 from year-end 2023, consisting of higher balances from Negotiable Order of Withdrawal (“NOW”) accounts (+70.5%), savings and money market accounts (+3.5%), and time deposits (+3.0%). The participation in the Ohio Homebuyer Plus program during the third quarter of 2024 contributed to most of the growth in NOW account balances (+$100,000), while also contributing to $5,283 in new savings account deposit balances during the third quarter of 2024. Partially offsetting growth in interest-bearing deposits were noninterest-bearing demand deposits, which decreased $6,261 from year-end 2023.

Previous wording

At June 30, 2024, total shareholders' equity was $145,757, up $1,750 from December 31, 2023. This increase came primarily from year-to-date net income, partially offset by quarterly cash dividends paid and the purchase of treasury shares under the Company’s treasury repurchase program. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums.

Current wording

At September 30, 2024, total shareholders' equity was $152,153, up $8,146 from December 31, 2023. This increase came primarily from year-to-date net income and an increase in net unrealized gains on available for sale securities, partially offset by quarterly cash dividends paid and the purchase of treasury shares under the Company’s treasury repurchase program. Regulatory capital ratios of the Company remained higher than the "well capitalized" minimums.

Previous wording

The following discussion focuses in more detail on the consolidated financial condition of the Company at June 30, 2024 compared to December 31, 2023. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10‑Q.

Current wording

The following discussion focuses in more detail on the consolidated financial condition of the Company at September 30, 2024 compared to December 31, 2023. This discussion should be read in conjunction with the interim consolidated financial statements and the notes included in this Form 10‑Q.

Previous wording

At June 30, 2024, cash and cash equivalents were $107,679, a decrease of $20,447, or 16.0%, from December 31, 2023. The decrease came primarily from interest-bearing deposits with banks, which were down $21,057, or 18.5%, from year-end 2023. Over 85% of cash and cash equivalents is comprised of the Company’s interest-bearing Federal Reserve Bank clearing account, which contributed most to the decrease in interest-bearing deposits with banks. The Company utilizes its interest-bearing Federal Reserve Bank clearing account to manage excess funds, as well as to assist in funding earning asset growth. During the first half of 2024, the Company utilized a portion of its clearing account balances to reinvest in higher-yielding loans, which helped to reduce the negative effects from net interest margin compression. The interest rate paid on both the required and excess reserve balances of the Federal Reserve Bank account is based on the targeted federal funds rate established by the Federal Open Market Committee. During the first half of 2024, the rate associated with the Company’s Federal Reserve Bank clearing account remained at the target federal funds rate range of 5.25% to 5.50%. The interest-bearing deposit balances in the Federal Reserve Bank account are 100% secured by the U.S. Government.

Current wording

At September 30, 2024, cash and cash equivalents were $82,204, a decrease of $45,922, or 35.8%, from December 31, 2023. The decrease came primarily from interest-bearing deposits with banks, which were down $50,411, or 44.3%, from year-end 2023. Over 76% of cash and cash equivalents is comprised of the Company’s interest-bearing Federal Reserve Bank clearing account, which contributed most to the decrease in interest-bearing deposits with banks. The Company utilizes its interest-bearing Federal Reserve Bank clearing account to manage excess funds, as well as to assist in funding earning asset growth. During the first nine months of 2024, the Company utilized a portion of its clearing account balances to reinvest in higher-yielding loans, which helped to reduce the negative effects from net interest margin compression. 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. In September 2024, the Federal Reserve took action to reduce short-term market rates by 50 basis points, in large part to inflationary improvements. The Federal Reserve reduced short-term rates again by another 25 basis points in November 2024. The two rate cuts have resulted in a lower target federal funds rate range of 4.50% to 4.75%. The interest-bearing deposit balances in the Federal Reserve Bank account are 100% secured by the U.S. Government.

Previous wording

Total securities of $170,679 at June 30, 2024 were relatively stable when compared to $170,244 at year-end 2023, increasing $435, or 0.3%. The Company’s U.S. Government securities portfolio increased $9,712, or 19.3%, from year-end 2023. This increase in U.S. Government securities came primarily from $19,357 in purchases partially offset by $10,000 in maturities. Partially offsetting the increase in U.S. Government securities was a decrease in U.S. Government agency (“Agency”) mortgage-backed securities, which were down $9,194, or 8.7%, from year-end 2023. The Company’s investment securities portfolio is made up mostly of Agency mortgage-backed securities, which represented 56.8% of total investments at June 30, 2024. During the first half of 2024, the Company received proceeds from principal repayments of $8,489. 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.

Current wording

Total balance of total securities increased $108,855, or 63.9% compared to year-end 2023. In relation to the Ohio Homebuyer Plus program, the Company experienced a $100,000 increase in interest-bearing deposits classified as public funds, which are required to be collateralized. To satisfy pledging requirements, the funds were invested in $100,497 of U.S. Government securities to pledge as collateral to the Treasurer. The securities were purchased at a weighted average yield of 4.7% with maturity terms ranging from 6 months to 18 months. As a result, the Company’s U.S. Government securities portfolio increased $118,545 from $50,297 at year-end 2023 to $168,842 at September 30, 2024. Partially offsetting the increase in U.S. Government securities was a decrease in U.S. Government agency (“Agency”) mortgage-backed securities, which were down $9,706, or 9.1%, from year-end 2023. During the first nine months of 2024, the Company received proceeds from principal repayments of $12,913. 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. Prior to the third quarter of 2024, the Company’s investment securities portfolio had been mostly comprised of Agency mortgage-backed securities, which now represent 34.5% of total investments at September 30, 2024, with U.S. Government securities now comprising the most at 60.5%.

Previous wording

Included in the decreasing factors mentioned above were changes in net unrealized losses associated with available for sale securities. During 2024, long-term reinvestment rates increased, which led to a $615 decrease in the fair value of the Company’s available for sale securities. The fair value of an investment security moves inversely to interest rates, so as rates increased, the unrealized loss in the portfolio was increased causing the fair value to decrease. These changes in rates are typical and do not impact earnings of the Company as long as the securities are held to full maturity.

Current wording

Included in the increasing factors mentioned above were changes in net unrealized losses associated with available for sale securities. During the third quarter of 2024, long-term reinvestment rates decreased, which led to a $5,432 increase in the fair value of the Company’s available for sale securities. The fair value of an investment security moves inversely to interest rates, so as rates decreased, the unrealized loss in the portfolio was decreased causing the fair value to increase. These changes in rates are typical and do not impact earnings of the Company as long as the securities are held to full maturity.

Previous wording

The following table provides the composition of commercial real estate loans by industry classification (as defined by the North American Industry Classification System).

Current wording

COMMERCIAL REAL ESTATE BY INDUSTRY As of September 30, 2024 Table I The following table provides the composition of commercial real estate loans by industry classification (as defined by the North American Industry Classification System).

Previous wording

The Company’s loan balances increased to $1,040,284 at June 30, 2024, representing an increase of $68,384, or 7.0%, as compared to $971,900 at December 31, 2023. The increase in loans came primarily from the residential and commercial real estate loan portfolios, partially offset by a decrease in the consumer portfolio from year-end 2023.

Current wording

The Company’s loan balances increased to $1,048,912 at September 30, 2024, representing an increase of $77,012, or 7.9%, as compared to $971,900 at December 31, 2023. The increase in loans came primarily from the commercial and residential real estate loan portfolios, partially offset by a decrease in the consumer portfolio from year-end 2023.

Previous wording

Further increases in loans came from the Company’s commercial loan portfolio, which increased $34,476, or 7.2%, from year-end 2023. Contributing most to this increase were higher loan balances within the commercial real estate portfolio, which increased $28,890, or 8.9%, from year-end 2023. Commercial real estate loans represent the second largest segment of the Company’s total loan portfolio at June 30, 2024, at 33.8%. The increase from year-end 2023 came primarily from new originations within the nonowner-occupied and construction loan segments.

Current wording

The Company’s commercial loan portfolio increased $47,095, or 9.8%, from year-end 2023. Contributing most to this increase were higher loan balances within the commercial real estate portfolio, which increased $42,603, or 13.2%, from year-end 2023. Commercial real estate loans represent the largest segment of the Company’s total loan portfolio at September 30, 2024, at 34.8%. The increase from year-end 2023 came primarily from new originations within the nonowner-occupied and construction loan segments.

Previous wording

Commercial loans were also positively impacted by an increase in the commercial and industrial portfolio, which was up $5,589, or 3.6%, from year-end 2023. The growth was impacted by an increase in larger loan originations during the year.

Current wording

Commercial loans were also positively impacted by an increase in the commercial and industrial portfolio, which was up $4,492, or 2.9%, from year-end 2023. The growth was impacted by an increase in larger loan originations during the year.

Previous wording

The Company’s residential real estate loan portfolio increased $39,844, or 12.5%, from year-end 2023. At June 30, 2024, residential real estate loans represented the largest segment of the Company’s total loan portfolio at 34.5%. During 2024, mortgage rates continued to increase as a result of an elevated interest rate environment, which provided the Company with less opportunities to sell long-term fixed rate loans to the secondary market. With elevated mortgage rates, mortgage customers were selecting more in-house variable rate mortgage products instead of long-term fixed rate mortgage products. This had a direct impact on lowering loan volume within the long-term fixed rate loan portfolio (down $3,734) and contributed to a shift into more short-term variable rate mortgages (up $19,864) at June 30, 2024. Also contributing to the increase in residential real estate loans was the funding of a warehouse line of credit by the Bank for a mortgage lender. The warehouse lending line is used by the mortgage lender to make loans for the purchase of one- to four-family residential real estate properties. The mortgage lender eventually sells the loan and repays the Bank. From year-end 2023, warehouse lending balances increased $18,291 during the first half of 2024.

Current wording

Further increases in loans came from the Company’s residential real estate loan portfolio, which increased $39,805, or 12.5%, from year-end 2023. At September 30, 2024, residential real estate loans represented the second largest segment of the Company’s total loan portfolio at 34.3%. During 2024, mortgage rates continued to increase as a result of an elevated interest rate environment, which provided the Company with less opportunities to sell long-term fixed rate loans to the secondary market. With elevated mortgage rates, mortgage customers were selecting more variable rate mortgage products instead of long-term fixed rate mortgage products. This had a direct impact on lowering loan volume within the long-term fixed rate loan portfolio (down $5,829) and contributed to a shift into more short-term variable rate mortgages (up $27,850) at September 30, 2024. Also contributing to the increase in residential real estate loans was the funding of a warehouse line of credit by the Bank for a mortgage lender. The warehouse lending line is used by the mortgage lender to make loans for the purchase of one- to four-family residential real estate properties. The mortgage lender eventually sells the loan and repays the Bank. From year-end 2023, warehouse lending balances increased $20,047 during the first nine months of 2024.

Previous wording

The increases in the Company’s loan balances at June 30, 2024 were partially offset by a decrease in the consumer loan portfolio, which was down $5,936, or 3.4%, from year-end 2023. This change was impacted by a $5,474, or 7.3%, decrease in other consumer loans, impacted by principal repayments and payoffs. Decreases in consumer loans also came from a $4,746, or 7.7%, decrease in automobile loans from year-end 2023. This was directly impacted by management’s strategy to place more emphasis on higher yielding loan portfolios (i.e. commercial, and to a smaller extent, residential real estate). Indirect automobile loans bear additional costs from dealers that partially offset interest revenue and lower the rate of return. Decreases in consumer loans were partially offset by a $4,284, or 11.9%, increase in home equity lines of credit.

Current wording

The increases in the Company’s commercial and residential real estate loan portfolios at September 30, 2024 were partially offset by a decrease in the consumer loan portfolio, which was down $9,888, or 5.7%, from year-end 2023. This change was impacted by a $7,949, or 10.6%, decrease in other consumer loans, impacted by principal repayments and payoffs. Decreases in consumer loans also came from a $7,538, or 12.3%, decrease in automobile loans from year-end 2023. This was directly impacted by management’s strategy to place more emphasis on higher yielding loan portfolios (i.e. commercial, and to a smaller extent, residential real estate). Indirect automobile loans bear additional costs from dealers that partially offset interest revenue and lower the rate of return. As a result, the Company exited the indirect lending business for automobiles and recreational vehicles effective October 11, 2024. Decreases in consumer loans were partially offset by a $5,599, or 15.6%, increase in home equity lines of credit.

Previous wording

For AFS debt securities, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized costs basis is due to credit-related factors or noncredit-related factors. As of June 30, 2024, the Company determined that all AFS securities that experienced a decline in fair value below the amortized cost basis from year-end 2023 were due to non-credit related factors. Furthermore, the Company does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. Therefore, no ACL was recorded, and no provision expense was recognized during the three and six months ended June 30, 2024.

Current wording

For AFS debt securities, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized costs basis is due to credit-related factors or noncredit-related factors. As of September 30, 2024, the Company determined that all AFS securities that experienced a decline in fair value below the amortized cost basis from year-end 2023 were due to non-credit related factors. Furthermore, the Company does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. Therefore, no ACL was recorded, and no provision expense was recognized during the three and nine months ended September 30, 2024.

Previous wording

For HTM debt securities, the Company evaluates the securities collectively by major security type at each measurement date to determine expected credit losses based on issuer’s bond rating, historical loss, financial condition, and timely principal and interest payments. At June 30, 2024, a $2 ACL was recognized based on a .02% cumulative default rate taken from the S&P and Moody’s bond rating index. The $2 ACL for HTM debt securities was unchanged from December 31, 2023, resulting in no provision expense during the three and six months ended June 30, 2024.

Current wording

For HTM debt securities, the Company evaluates the securities collectively by major security type at each measurement date to determine expected credit losses based on issuer’s bond rating, historical loss, financial condition, and timely principal and interest payments. At September 30, 2024, a $2 ACL was recognized based on a .02% cumulative default rate taken from the S&P and Moody’s bond rating index. The $2 ACL for HTM debt securities was unchanged from December 31, 2023, resulting in no provision expense during the three and nine months ended September 30, 2024.

Previous wording

As of June 30, 2024, the ACL for loans totaled $9,431, or 0.91%, of total loans. As of December 31, 2023, the ACL for loans totaled $8,767, or 0.90%, of total loans. The increase in the ACL of $664, or 7.6%, was all from loans collectively evaluated. The increase was impacted by additional reserves from a $68,721 increase in collectively evaluated loan balances during the first half of 2024, primarily from the residential and commercial real estate loan segments. Higher ACL reserves were also impacted by a higher historical loss rate within the commercial and residential real estate loan segments, partially offset by a lower qualitative risk adjustment that decreased reserves within the commercial real estate segment.

Current wording

As of September 30, 2024, the ACL for loans totaled $9,919, or 0.95%, of total loans. As of December 31, 2023, the ACL for loans totaled $8,767, or 0.90%, of total loans. The increase in the ACL of $1,152, or 13.1%, was mostly from loans collectively evaluated, which increased $725. The increase was impacted by additional reserves from a $72,333 increase in collectively evaluated loan balances during the first nine months of 2024, primarily from the residential and commercial real estate loan segments. The increase in ACL reserves was also impacted by a higher historical loss rate within the commercial and residential real estate loan segments, partially offset by a lower qualitative risk adjustment that decreased reserves within the residential real estate segment.

Previous wording

The Company experienced higher delinquency levels from year-end 2023. Nonperforming loans to total loans increased to 0.50% at June 30, 2024, compared to 0.26% at December 31, 2023, and nonperforming assets to total assets increased to 0.38% at June 30, 2024, compared to 0.19% at December 31, 2023. The increase in both delinquency calculations resulted from a $2,230 increase in nonaccrual loans, primarily as a result of one single loan relationship secured primarily by residential real estate property that was placed into nonaccrual status during the first half of 2024.

Current wording

The Company experienced higher delinquency levels from year-end 2023. Nonperforming loans to total loans increased to 0.44% at September 30, 2024, compared to 0.26% at December 31, 2023, and nonperforming assets to total assets increased to 0.32% at September 30, 2024, compared to 0.19% at December 31, 2023. The increase in both delinquency calculations resulted from a $2,138 increase in nonaccrual loans, primarily as a result of a single commercial and industrial loan relationship that was placed into nonaccrual status during the third quarter of 2024.

Previous wording

Deposits are used as part of the Company’s liquidity management strategy to meet obligations for depositor withdrawals, fund the borrowing needs of loan customers, and fund ongoing operations. Deposits continue to be the most significant source of funds used by the Company to support earning assets. Total deposits at June 30, 2024 increased $51,292, or 4.6%, from year-end 2023. This change in deposits came primarily from interest-bearing deposit balances, which were up by $30,305, or 3.8%, from year-end 2023, while noninterest-bearing deposits also increased $20,987, or 6.5%, from year-end 2023.

Current wording

Deposits are used as part of the Company’s liquidity management strategy to meet obligations for depositor withdrawals, fund the borrowing needs of loan customers, and fund ongoing operations. Deposits continue to be the most significant source of funds used by the Company to support earning assets. Total deposits at September 30, 2024 increased $134,284, or 11.9%, from year-end 2023. This change in deposits came primarily from interest-bearing deposit balances, which were up by $140,545, or 17.5%, from year-end 2023, while noninterest-bearing deposits decreased $6,261, or 1.9%, from year-end 2023.

Previous wording

Also impacting deposit balance growth were higher interest-bearing NOW account balances, which increased $10,198, or 6.0%, from year-end 2023. This increase was largely driven by higher municipal NOW product balances, particularly within the Gallia County, Ohio, and Mason County, West Virginia, market areas.

Current wording

The increase in interest-bearing deposits came primarily from higher interest-bearing NOW account balances, which increased $120,194, or 70.5%, from year-end 2023. The increase was largely driven by the Company’s participation with the Ohio Homebuyer Plus program that resulted in $100,000 in deposits to a new municipal NOW account with the State of Ohio Treasurer. Excluding the new Treasurer account, the Company also experienced increases of $24,069 in other municipal NOW product balances, particularly within the Gallia County, Ohio, and Mason County, West Virginia, market areas.

Previous wording

Further increases in interest-bearing deposits came from time deposit balances, which increased $5,695, or 1.5%, from year-end 2023. The increase came from retail time deposits, which increased $23,481 from year-end 2023. As deposit competition increased in 2023 due to the elevated market rate environment, prices on the Company’s retail CDs adjusted upward and influenced a consumer shift away from lower-cost savings products, and into a greater number of higher-cost time deposit products, such as CDs. During the second quarter of 2024, the Company experienced $16,546 in brokered CD maturities, which contributed to a $17,787, or 22.9%, decrease in wholesale time deposit balances from year-end 2023.

Current wording

Also impacting deposit balance growth were time deposit balances, which increased $11,459, or 3.0%, from year-end 2023. The increase came from retail time deposits, which increased $28,252 from year-end 2023. As deposit competition increased in 2023 due to the elevated market rate environment, prices on the Company’s retail CDs adjusted upward and influenced a consumer shift away from lower-cost savings products, and into a greater number of higher-cost time deposit products, such as CDs. During the second quarter of 2024, the Company experienced $16,546 in brokered CD maturities, which contributed to a $16,793, or 21.7%, decrease in wholesale time deposit balances from year-end 2023.

Previous wording

The increase in interest-bearing deposits came primarily from savings and money market account balances, which increased $14,412, or 5.6%, from year-end 2023. The increase came from money market accounts, particularly the Company’s tiered money market product (Money Fund) that was introduced in 2023 and offers a higher rate on tiered deposit balances. The Company’s savings account balances were down from year-end 2023.

Current wording

Further increases in interest-bearing deposits came from savings and money market account balances, which increased $8,892, or 3.5%, from year-end 2023. The increase came from money market accounts, particularly the Company’s tiered money market product (Money Fund) that was introduced in 2023 and offers a higher rate on tiered deposit balances. The Company also experienced a $5,283 increase in its new Sweet Home Ohio savings account balances as part of the Ohio Homebuyer Plus program. The Company’s remaining savings account balances were down from year-end 2023.

Previous wording

The increase in noninterest-bearing demand deposits came primarily from the Company’s incentive-based checking account balances.

Current wording

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

Previous wording

Other borrowed funds were $42,056 at June 30, 2024, a decrease of $2,537, or 5.7%, from year-end 2023. The decrease was related to the ongoing monthly principal repayments of FHLB advances. 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.

Current wording

Other borrowed funds were $40,888 at September 30, 2024, a decrease of $3,705, or 8.3%, from year-end 2023. The decrease was related to the ongoing monthly principal repayments of FHLB advances. 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.

Previous wording

Total shareholders' equity at June 30, 2024 increased $1,750, or 1.2%, to finish at $145,757, as compared to $144,007 at December 31, 2023. This was primarily from quarterly net income, partially offset by cash dividends paid and the purchase of 82,673 treasury shares under the Company’s treasury repurchase program. The repurchase program was originally approved in 2021 to allow the Company to repurchase up to $5,000 in additional common shares from time to time up to the plan’s expiration date of August 31, 2024. As of August 14, 2024, the Company had repurchased approximately $2,967 in common stock.

Current wording

Total shareholders' equity at September 30, 2024 increased $8,146, or 5.7%, to finish at $152,153, as compared to $144,007 at December 31, 2023. This was primarily from year-to-date net income and an increase in net unrealized gains on available for sale securities, partially offset by cash dividends paid and the purchase of 82,673 treasury shares under the Company’s treasury repurchase program. The repurchase program was originally approved in 2021 to allow the Company to repurchase up to $5,000 in additional common shares from time to time up to the plan’s expiration date of August 31, 2025. As of November 14, 2024, the Company had repurchased approximately $2,967 in common stock.

Previous wording

The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three and six months ended June 30, 2024, compared to the same period in 2023. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10‑Q.

Current wording

The following discussion focuses, in more detail, on the consolidated results of operations of the Company for the three and nine months ended September 30, 2024, compared to the same period in 2023. This discussion should be read in conjunction with the interim consolidated financial statements and the notes included in this Form 10‑Q.

Previous wording

The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense incurred on interest-bearing liabilities. During the three months ended June 30, 2024, net interest income increased $349, or 3.0%, compared to the same period in 2023. Conversely, net interest income decreased $183, or 0.8%, during the six months ended June 30, 2024, compared to the same period in 2023. The quarterly improvement was mostly impacted by a composition shift into higher-yielding loans, which increased earning asset yields that completely offset the negative effects of higher average costs paid on deposits and borrowings. The year-to-date decrease was largely related to the negative impact of higher average costs paid on deposits and borrowings completely offsetting higher earning asset yields, which contributed to a 44 basis point decrease in the net interest margin. These negative effects were partially offset by a composition shift into higher-yielding loans during the first half of 2024.

Current wording

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 and nine months ended September 30, 2024, net interest income increased $1,205, or 10.6%, and $1,022, of 2.9%, compared to the same periods in 2023, respectively. The improvement during both periods came from average earning asset growth impacted by a composition shift into higher-yielding loans, which increased earning asset yields that completely offset the negative effects of higher average costs paid on deposits and borrowings.

Previous wording

Total interest and fee income recognized on the Company’s earning assets increased $3,635, or 24.2%, during the second quarter of 2024, and $7,525, or 26.1%, during the first half of 2024, compared to the same periods in 2023. The earnings growth was impacted by interest on loans, which increased $2,858, or 22.6%, and $5,770, or 23.8%, during the three and six months ended June 30, 2024, compared to the same periods in 2023, respectively. This improvement was impacted by increases in both loan yields and average loan balances. Particularly in the second quarter of 2024, the Company experienced a 9.2% increase in higher-yielding loans, with average loan balances increasing from $928,418 during the three months ended June 30, 2023 to $1,013,845 during the three months ended June 30, 2024. This large composition shift to higher-yielding loans contributed to most of the loan interest and fee revenue improvement during the second quarter of 2024. Overall, average loans have increased $85,427 and $82,124 during the three and six months ended June 30, 2024, compared to the same periods in 2023. The increases during both periods came primarily from loans secured by residential and commercial real estate properties, including average balance increases in the Bank’s warehouse line of credit for a mortgage lender. Loan revenue improvement also came from average loan yield increases impacted by the aggressive actions taken by the Federal Reserve to increase rates by 425 basis points during 2022 and another 100 basis points during 2023. This has contributed to the repricing of a portion of the Company’s loan portfolio. As a result, the average interest rate yield on loans increased 64 basis points to 6.46% during the second quarter of 2024 and increased 69 basis points to 6.40% during the first half of 2024, compared to the same periods in 2023.

Current wording

Total interest and fee income recognized on the Company’s earning assets increased $3,473, or 21.8%, during the third quarter of 2024, and $10,998, or 24.6%, during the first nine months of 2024, compared to the same periods in 2023. The earnings growth was impacted by interest on loans, which increased $2,395, or 16.7%, and $8,206, or 20.6%, during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. This improvement was impacted by increases in both loan yields and average loan balances. Particularly in the third quarter of 2024, the Company experienced a 9.1% increase in higher-yielding loans, with average loan balances increasing from $952,452 during the three months ended September 30, 2023 to $1,038,784 during the three months ended September 30, 2024. This large composition shift to higher-yielding loans contributed to most of the loan interest and fee revenue improvement during the third quarter of 2024. Overall, average loans have increased $86,332 and $83,488 during the three and nine months ended September 30, 2024, compared to the same periods in 2023. The increases during both periods came primarily from loans secured by residential and commercial real estate properties, including average balance increases in the Bank’s warehouse line of credit for a mortgage lender. Loan revenue improvement also came from average loan yield increases impacted by the aggressive actions taken by the Federal Reserve to increase rates by 425 basis points during 2022 and another 100 basis points during 2023. This contributed to the repricing of a portion of the Company’s loan portfolio. As a result, the average interest rate yield on loans increased 43 basis points to 6.45% during the third quarter of 2024 and increased 59 basis points to 6.41% during the first nine months of 2024, compared to the same periods in 2023.

Previous wording

Total interest on securities increased $6, or 0.6%, during the second quarter of 2024, but decreased $75, or 3.8%, during the first half of 2024, compared to the same periods in 2023. The minimal to declining impact to security earnings during 2024 was largely from decreases in average security balances, which were down $12,831 and $14,907 during the three and six months ended June 30, 2024, compared to the same periods in 2023, respectively. During 2023 and 2024, the Company placed more emphasis on growing its higher-yielding loan portfolio and utilized proceeds from various maturities and repayments of securities to help fund loan growth. Earnings from securities were positively impacted by increases in the average yield on securities as a result of the elevated market rate environment during both 2023 and 2024. Average security yields increased 19 basis points to 2.10% during the second quarter of 2024, which completely offset the negative impact from lower average balances during the quarter. Average security yields increased 13 basis points to 2.04% during the first half of 2024, which only partially offset the negative impact from lower average security balances during the year.

Current wording

Total interest on securities increased $869, or 90.8%, during the third quarter of 2024, and $794, or 27.1%, during the first nine months of 2024, compared to the same periods in 2023. The earnings growth was primarily from the purchase of $100,497 in U.S. Government securities during the third quarter of 2024 as part of the Company’s participation in the state’s Homebuyer Plus program. The securities were purchased at a weighted average yield of 4.7% with maturity terms ranging from 6 months to 18 months. The security purchases were used to collateralize $100,00 in public fund deposits received by the State Treasurer as part of the program. This contributed to increases in average security balances, which were up $59,752 and $9,272 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. While securities have grown in large part due to the security purchases from the Homebuyer Plus program, the Company has placed more emphasis on growing its higher-yielding loan portfolio during 2023 and 2024, utilizing proceeds from various maturities and repayments of securities to help fund loan growth. Earnings from securities were positively impacted by increases in the average yield on securities, impacted by the $100,497 purchase of U.S Government securities at a weighted average yield of 4.7% that was higher than the 2.39% average yield on the total securities portfolio. Average security yields have also been positively impacted by the elevated market rate environment during both 2023 and 2024. As a result, average security yields increased 98 basis points to 2.89% during the third quarter of 2024 and increased 48 basis points to 2.39% during the first nine months of 2024, compared to the same periods in 2023.

Previous wording

Total interest income from interest-bearing deposits with banks increased $775 during the second quarter of 2024, and $1,766 during the first half of 2024, compared to the same periods in 2023. This was largely from average balance increases with the Company’s interest-bearing Federal Reserve Bank clearing account, which grew $58,747 and $59,518 during the three and six months ended June 30, 2024, compared to the same periods in 2023, respectively. Increases in Federal Reserve Bank clearing balances were impacted by the growth in interest-bearing Bank deposits, influenced by product rate increases during 2023 and 2024. Excess funds also came from the maturities and paydowns on investment securities, as well as new FHLB advances. The Company utilized a portion of these proceeds to fund the growth in loans. Further impacting interest income from interest-bearing deposits with banks were rate increases associated with the Federal Reserve Bank clearing account. As previously mentioned, the Federal Reserve took action during 2022 and 2023 to increase short-term rates due to rising inflationary concerns. Since the end of June 2023, the target federal funds rate increased by another 25 basis points, which had a corresponding effect to the interest rate tied to the Federal Reserve clearing account.

Current wording

Total interest income from interest-bearing deposits with banks increased $189 during the third quarter of 2024, and $1,955 during the first nine months of 2024, compared to the same periods in 2023. This was largely from average balance increases with the Company’s interest-bearing Federal Reserve Bank clearing account, which grew $14,099 and $44,271 during the three and nine months ended September 30, 2024, compared to the same periods in 2023, respectively. Increases in Federal Reserve Bank clearing balances were impacted by the growth in interest-bearing Bank deposits, influenced by product rate increases during 2023 and 2024. Excess funds also came from the maturities and paydowns on investment securities, as well as new FHLB advances. The Company utilized a portion of these proceeds to fund the growth in loans. Further impacting interest income from interest-bearing deposits with banks were rate increases associated with the Federal Reserve Bank clearing account. The rate increases were the result of the Federal Reserve increasing short-term rates during 2022 and 2023 due to rising inflationary concerns at that time. However, in September 2024, the Federal Reserve took action to reduce short-term rates by 50 basis points due in large part to the improvement in the inflationary pressures that had negatively impacted the economy in 2022 and 2023. This lowered the target federal funds rate to a range of 4.75% to 5.00%, which is expected to have a negative impact on the Federal Reserve Bank clearing account’s interest earnings.

Previous wording

Total interest expense incurred on the Company’s interest-bearing liabilities increased $3,286 during the second quarter of 2024, and $7,708 during the first half of 2024, compared to the same periods in 2023. Increases in interest expense were impacted by a rise in average costs combined with increases in higher-costing average deposit balances. As market competition continued to increase, rate offerings on CDs continued to adjust up in 2023. The Company increased CD rates during this time to attract and retain deposits, which has led to more of a consumer demand to reinvest from lower-cost NOW, savings and money market account deposit products (down $45,269 at an average cost of 1.36% during the year) into more higher-cost time deposit products (up $150,970 at an average cost of 4.67% during the year). Furthermore, the Company’s average wholesale funding balances increased $34,747 during the year, which included the use of brokered CDs (average cost of 4.87%) and FHLB advances (average cost of 4.03%). These higher-cost wholesale deposits were used to fund asset growth, but also contributed to the growth in interest expense over 2023. As a result of the rate repricings on time deposits and the deposit shift into higher-cost funding sources, the Company’s total weighted average costs on interest-bearing liabilities increased by 155 basis points from 1.40% at June 30, 2023, to 2.95% at June 30, 2024.

Current wording

Total interest expense incurred on the Company’s interest-bearing liabilities increased $2,268 during the third quarter of 2024, and $9,976 during the first nine months of 2024, compared to the same periods in 2023. Increases in interest expense were impacted by a rise in average costs combined with increases in higher-costing average deposit balances. As market competition continued to increase, rate offerings on CDs continued to adjust up in 2023. The Company increased CD rates during this time to attract and retain deposits, which has led to more of a consumer demand to reinvest from lower-cost NOW, savings and money market account deposit products (down $9,782 at an average cost of 1.37% during the year) into more higher-cost time deposit products (up $129,211 at an average cost of 4.67% during the year). Furthermore, the Company’s average wholesale funding balances increased $20,053 during the year, which included the use of brokered CDs (average cost of 4.88%) and FHLB advances (average cost of 4.03%). These higher-cost wholesale deposits were used to fund asset growth, but also contributed to the growth in interest expense over 2023. As a result of the rate repricings on time deposits and the deposit shift into higher-cost funding sources, the Company’s total weighted average costs on interest-bearing liabilities increased by 123 basis points from 1.68% at September 30, 2023, to 2.91% at September 30, 2024.

Previous wording

The Company’s net interest margin is defined as fully tax-equivalent net interest income as a percentage of average earning assets. During 2024, the Company’s second quarter net interest margin decreased to 3.74%, compared to 2023’s second quarter net interest margin of 4.03%. The Company’s year-to-date net interest margin decreased to 3.68% at June 30, 2024, compared to 2023’s year-to-date net interest margin of 4.12% at June 30, 2023. The margin decreases were impacted by higher average costs associated with the Bank’s interest-bearing liabilities due to customer pricing pressures, deposit competition, and a higher utilization of wholesale funding sources. Furthermore, the Bank continues to experience a deposit composition shift into more higher-cost retail CDs and less lower-cost NOW, savings, money market, and checking account deposits, which put increased pressure on margin growth during the three and six months ended June 30, 2024. Although the net interest margin has decreased from the prior year’s quarterly and year-to-date periods, the net interest margin has improved during 2024 when comparing linked quarters. When comparing the second quarter net interest margin of 3.74% to the first quarter net interest margin of 3.61% from 2024, this represents an increase of 13 basis points. The increase was related to increases in earning asset yields and a higher composition of average loan balances due to the 9.2% quarterly increase in average loans. Positive contributions to the margin have also come from an average deposit mix that is trending back towards checking, NOW, savings and money market deposit accounts during the second quarter of 2024. This, along with the benefits of higher-yielding loan growth, contributed to the quarterly increase in net interest income during the three months ended June 30, 2024. 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 continue to face pressure within its net interest income and margin improvement.

Current wording

The Company’s net interest margin is defined as fully tax-equivalent net interest income as a percentage of average earning assets. During 2024, the Company’s third quarter net interest margin decreased to 3.76%, compared to 2023’s third quarter net interest margin of 3.85%. The Company’s year-to-date net interest margin decreased to 3.71% at September 30, 2024, compared to 2023’s year-to-date net interest margin of 4.03% at September 30, 2023. The margin decreases were impacted by higher average costs associated with the Bank’s interest-bearing liabilities due to customer pricing pressures, deposit competition, and a higher utilization of wholesale funding sources. Furthermore, the Bank continues to experience a deposit composition shift into more higher-cost retail CDs and less lower-cost NOW, savings, money market, and checking account deposits, which put increased pressure on margin growth during the three and nine months ended September 30, 2024. Although the net interest margin has decreased from the prior year’s quarterly and year-to-date periods, the net interest margin has improved during 2024 when comparing linked quarters. From the first quarter to the second quarter of 2024, the net interest margin increased 13 basis points from 3.61% to 3.74% and from the second quarter to the third quarter of 2024, the net interest margin increased 2 basis points from 3.74% to 3.76%. These margin improvements were related to increases in earning asset yields and a higher composition of average loan balances due to the 9.0% increase in average year-to-date loans. Positive contributions to the margin have also come from an average deposit mix that is trending back towards checking, NOW, savings and money market deposit accounts during the second and third quarters of 2024. This, along with the benefits of higher-yielding loan growth, contributed to the increase in net interest income during the three and nine months ended September 30, 2024. 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 continue to face pressure within its net interest income and margin improvement.

Previous wording

Provision for credit losses is recorded to achieve an ACL that is adequate to absorb estimated losses inherent in the Company’s loan portfolio, unfunded loans, and held to maturity debt securities. Management performs, on a quarterly basis, a detailed analysis of the ACL that encompasses asset portfolio composition, asset quality, loss experience and other relevant economic factors. For the three months ended June 30, 2024, the Company’s provision for credit losses expense totaled $181, an increase of $157 when compared to $24 in provision expense during the three months ended June 30, 2023. For the six months ended June 30, 2024, the Company’s provision for credit losses expense totaled $932, an increase of $419 when compared to $513 in provision expense during the six months ended June 30, 2023.

Current wording

Provision for credit losses is recorded to achieve an ACL that is adequate to absorb estimated losses inherent in the Company’s loan portfolio, unfunded loans, and held to maturity debt securities. Management performs, on a quarterly basis, a detailed analysis of the ACL that encompasses asset portfolio composition, asset quality, loss experience and other relevant economic factors. For the three months ended September 30, 2024, the Company’s provision for credit losses expense totaled $920, an increase of $32 when compared to $888 in provision expense during the three months ended September 30, 2023. For the nine months ended September 30, 2024, the Company’s provision for credit losses expense totaled $1,852, an increase of $451 when compared to $1,401 in provision expense during the nine months ended September 30, 2023.