OHIO VALLEY BANC CORP

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A transition away from the London Interbank Offered Rate (“LIBOR”) as a reference rate for financial contracts could negatively affect our income and expenses and the value of various financial contracts.

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LIBOR was used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivative financial instruments. LIBOR is set based on interest rate information reported by certain banks, which are to stop reporting such information after June 30, 2023. In the U.S., the Alternative Reference Rate Committee (“ARRC”) has recommended the use of a Secured Overnight Funding Rate (“SOFR”) as the set of alternative U.S. dollar reference interest rates. SOFR is different from LIBOR in that it is a backward-looking secured rate rather than a forward-looking unsecured rate.

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These differences could lead to a greater disconnect between our costs to raise funds for SOFR as compared to LIBOR. For cash products and loans, ARRC has also recommended Term SOFR, which is a forward-looking SOFR based on SOFR futures and may in part reduce differences between SOFR and LIBOR. There are operational issues which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry. These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit.

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During 2023, the Company’s limited number of loans, derivative contracts, borrowings and other financial instruments transitioned from LIBOR to using a SOFR rate. The change to SOFR did not have any adverse effect on our business, financial condition and results of operations.

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Recent bank failures have created significant market volatility, regulatory uncertainty, and decreased confidence in the U.S. banking system.

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The recent failures of several high-profile banking institutions in 2023 have caused significant market volatility, regulatory uncertainty, and decreased confidence in the U.S. banking system. These bank failures occurred during a period of rapidly rising interest rates, which among other things, has resulted in unrealized losses in longer duration securities and more competition for bank deposits, and may increase the risk of a potential economic recession in the United States. Given the current environment, we may experience more deposit volatility as customers react to adverse events or market speculation involving financial institutions.

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In response to the bank failures, the United States government may adopt a variety of measures and new regulations designed to strengthen capital levels, liquidity standards, and risk management practices and otherwise restore confidence in financial institutions. Any reforms, if adopted, could have a significant impact on banks and bank holding companies, including us. We may also be subject to any special assessment that the FDIC adopts to recover the loss to the DIF, and such assessment, if significant, could have an adverse effect on our business, financial condition, and results of operations.

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Unrealized losses in the Bank’s investment portfolio could affect liquidity.

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As a result of market interest rates increasing during 2022 and 2023, the unrealized losses on the Bank’s investment portfolio also increased. The increase in unrealized losses is reflected in Accumulated Other Comprehensive Income on the balance sheet and reduces book capital and therefore its tangible common equity ratio. Unrealized losses do not affect regulatory capital ratios. The majority of the Bank’s securities portfolio is classified as AFS and therefore could be sold for liquidity, investment management or similar reasons even if there is not an intention of such a sale. Unrealized losses on the AFS debt securities portfolio amounted to $14,661 and $18,751 at December 31, 2023 and 2022, respectively. While we do not currently intend to sell these securities, if it was required to sell such securities to meet liquidity needs, we may incur losses, which could impair our capital, financial condition, and results of operations and, in the event that our other funding sources are insufficient, could require us to raise additional capital. While we have taken actions to maximize our funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs.

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In June 2016, FASB issued a new accounting standard for recognizing current expected credit losses, commonly referred to as CECL. CECL will result in earlier recognition of credit losses and requires consideration of not only past and current events but also reasonable and supportable forecasts that affect collectability. In October 2019, FASB announced it would delay the effective date of CECL for smaller companies, such as Ohio Valley, until fiscal years beginning after December 15, 2022. The Bank has developed a CECL model and is evaluating model results in relation to the new ASU guidance. The Company adopted the new accounting standard effective January 1, 2023, and recorded a net charge to retained earnings of $2,209,000 for the cumulative effect. Upon adoption, the Company increased the allowance for credit losses by $2,162,000. In addition, a reserve for unfunded commitments and held to maturity securities was established totaling $631,000 and $3,000, respectively. The Company elected to utilize the three-year phase in option of the day-one impact of this standard to regulatory capital. If the methodologies and assumptions used in our CECL model prove to be incorrect, inadequate or we fail to properly transition internal processes or systems, the allowance for credit losses may be insufficient, resulting in the need for additional allowance for credit losses to be established, which could have a material adverse impact on Ohio Valley’s financial condition and results of operations. Additionally, the time horizon over which we are required to estimate future credit losses has expanded under CECL, which could result in increased volatility in future allowances for credit losses. If weak or deteriorating economic conditions are forecasted, our expectations for credit losses may be altered under CECL, with the potential to negatively affect our financial condition.