Ohio Valley Banc Corp. Annual Report 2018

FY2018 Annual Report · Ohio Valley Banc Corp.

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OVBC

Ohio Valley Banc Corp.
Annual Report 2018

Digging in for a bright future...

OVB officers and community leaders break ground for
OVB on the Square, August 7, 2018

will be Ohio Valley Bank’s 4th branch in West
Virginia, joined by Point Pleasant, Barboursville,
and Milton, and is expected to open mid 2019.

How fitting the address is
360 Second Avenue
as we return to our roots.

Behind this growth
is
our Community First
mission, a promise to
help our rural communi-
ties not only survive but
thrive. Your employees
gave generously of them-
selves in 2018 with 3,412
hours in community ser-
vice (that’s 426.5 work days) for their home-
towns.

We will be talking more about our Community
First mission at this year’s Annual Sharehold-
ers Meeting scheduled for Wednesday, May 15,
2019. The meeting will be held at the Morris &
Dorothy Haskins Ariel Theatre at 5 p.m. with
social hour before. We hope to see you there.

Sincerely,

Jeffrey E. Smith
Chairman of the Board President and CEO
Ohio Valley Banc Corp. Ohio Valley Banc Corp.

Thomas E. Wiseman

A Message from Management

Dear Neighbors and Friends,

2018 was certainly a formative year for your
Company with a significant
upgrade to our mobile bank-
ing platform and not one,
but two, major construction
projects breaking ground.

In Gallia County, the Bank’s
commitment to bring back
to life one of its first homes
became reality with the start
of work at OVB on the Square. How fitting the
address is 360 Second Avenue as we return to
our roots. This new facility will not be a branch,
but instead will serve as the new headquarters
for your Company. The Main Office campus on
Third Avenue will remain open and will contin-
ue to house a working branch, our Operations
Center, and administrative offices. Opening of
OVB on the Square is anticipated for 2020.

Upriver, our Bend Area Office is progressing
nicely. Located next to Bob Evans in Mason,
West Virginia, this branch will more convenient-
ly serve our Meigs and Mason customers with
drive-thru service for teller windows, night de-
posit, and ATM, as well as 2,100 square feet of
customer-friendly space. The Bend Area Office

Putting Community First in our hearts and minds
is more than a mission...it’s a way of life.

This Page: Each year, employees from Ohio Valley Bank and Loan
Central help build homes with Habitat for Humanity.

Right Top Row L-R: Brittany Richards and the Oak Hill office staff
throw a back to school party at the Oak Hill Pool. Sara Oberhol-
zer prepares volunteers at the Jackson Office drive-thru for a day of
tasty treats and customer appreciation. OVB Veterans Action Com-
mittee Chairman Stephen Ball with volunteers from the Chillicothe
Veterans Medical Center as he delivers coats collected through the
group’s Fall Coat Drive. More than 360 coats were collected and
distributed to multiple local veterans facilities.

Middle Row L-R: Jennifer Osborne leads a Buy Day Friday lunch-
time local shopping excursion at the Shake Shoppe, Stacie Miller,
Brittney Lybbert, and Melissa Hutchinson greet customers at the
Gallipolis Walmart branch Customer Appreciation Day event.
Heather Kessler and Holli Walker serve up hotdogs for customers
at OVB Milton.

Bottom: Row L-R: Joe Wyant helps Little Miss Apple Festival
cut the ribbon to open her exhibit in the bank lobby. Larry Rus-
sell spends some IMPACT time helping build rail at the Gallipolis
Railroad Freight Station Museum. Jenny Shaffer, Jacqueline Horns-
by, and Mackenzie Hornsby make an impact by sprucing up Davis
Library at the University of Rio Grande in preparation for the new
school year.

2 Community First!

Ohio Valley Banc Corp. 3

4 Community First!

Ohio Valley Banc Corp. 5

OVBC DIRECTORS

OVBC OFFICERS

Jeffrey E. Smith
Chairman, Ohio Valley Banc Corp. and Ohio Valley Bank

Thomas E. Wiseman
President & CEO, Ohio Valley Banc Corp. and Ohio Valley
Bank

David W. Thomas, Lead Director
Former Chief Examiner, Ohio Division of Financial Institu-
tions
bank supervision and regulation

Anna P. Barnitz
Treasurer & CFO, Bob’s Market & Greenhouses, Inc.
wholesale horticultural products and retail landscaping
stores

Brent A. Saunders
Chairman of the Board, Holzer Health System
Attorney, Halliday, Sheets & Saunders
healthcare

Harold A. Howe
Self-employed, Real Estate Investment and Rental Property

Brent R. Eastman
President and Co-owner, Ohio Valley Supermarkets
Partner, Eastman Enterprises

John G. Jones
Retired President, MBD, Ohio Valley Bank

Kimberly A. Canady
Owner, Canady Farms, LLC
agricultural products and agronomy services

Edward J. Robbins
President & CEO, Ohio Valley Veneer, Inc.
wood harvesting, processing and manufacturing of dry
lumber & flooring in Ohio, Kentucky, and Tennessee

OHIO VALLEY BANK DIRECTORS

Jeffrey E. Smith
Thomas E. Wiseman
David W. Thomas
Harold A. Howe
Anna P. Barnitz

Brent A. Saunders
Brent R. Eastman
John G. Jones
Kimberly A. Canady
Edward J. Robbins

6 Community First!

Jeffrey E. Smith, Chairman of the Board
Thomas E. Wiseman, President and Chief Executive Officer
Larry E. Miller, II, Chief Operating Officer and Secretary
Katrinka V. Hart-Harris, Senior Vice President
Scott W. Shockey, Senior Vice President & Chief Financial
Officer

Mario P. Liberatore, Vice President
Cherie A. Elliott, Vice President
Jennifer L. Osborne, Vice President
Tom R. Shepherd, Vice President
Bryan F. Stepp, Vice President
Frank W. Davison, Vice President
Bryan W. Martin, Vice President
Ryan J. Jones, Vice President
Paula W. Clay, Assistant Secretary
Cindy H. Johnston, Assistant Secretary

LOAN CENTRAL DIRECTORS

Larry E. Miller, II
Cherie A. Elliott
Katrinka V. Hart-Harris
Ryan J. Jones

LOAN CENTRAL OFFICERS

Larry E. Miller, II
Cherie A. Elliott
Timothy R. Brumfield

John J. Holtzapfel

Chairman of the Board
President
Vice President & Secretary
Manager, Gallipolis Office
Compliance Officer &
Manager, Wheelersburg Office
Manager, Waverly Office
Manager, South Point Office

T. Joe Wilson
Joseph I. Jones
Gregory G. Kauffman Manager, Chillicothe Office
Steven B. Leach

Manager, Jackson Office

WEST VIRGINIA ADVISORY BOARD

Mario P. Liberatore
Richard L. Handley

Stephen L. Johnson
E. Allen Bell
John A. Myers

DIRECTORS EMERITUS

W. Lowell Call
Steven B. Chapman
Robert E. Daniel

Barney A. Molnar
Wendell B. Thomas
Lannes C. Williamson

OHIO VALLEY BANK OFFICERS

EXECUTIVE OFFICERS
Jeffrey E. Smith
Thomas E. Wiseman President and Chief Executive Officer
Larry E. Miller, II
Chief Operating Officer and Secretary
Katrinka V. Hart-Harris Executive Vice President,

Chairman of the Board

Scott W. Shockey

Mario P. Liberatore

Special Projects
Executive Vice President,
Chief Financial Officer
President, OVB West Virginia

SENIOR VICE PRESIDENTS
Jennifer L. Osborne
Tom R. Shepherd
Bryan F. Stepp
Frank W. Davison
Bryan W. Martin
Ryan J. Jones

Retail Lending
Chief Deposit Officer
Chief Lending Officer
Financial Bank Group
Managed Assets Officer
Chief Risk Officer

Corporate Banking
Director of Human Resources
Business Development Officer
Western Division Branch Manager
Corporate Communications
Branch Administration/CRM

VICE PRESIDENTS
Patrick H. Tackett
Marilyn E. Kearns
Fred K. Mavis
Rick A. Swain
Bryna S. Butler
Tamela D. LeMaster
Christopher L. Preston Branch Administration
Business Development
Consumer Lending
Internal Audit Liaison
Loan Operations
Director of Marketing
Director of Customer Support
Director of Cultural Enhancement
Corporate Banking
Senior Compliance Officer
Lender/
Business Development Officer
Northern Region Manager
Senior Credit Officer
Business Development Officer
Trust

Gregory A. Phillips
Diana L. Parks
John A. Anderson
Kyla R. Carpenter
Allen W. Elliott
E. Kate Cox
Brian E. Hall
Daniel T. Roush
Gary L. Crabtree

Adam D. Massie
Shawn R. Siders
Jay D. Miller
Jody M. DeWees
Christopher S. Petro Comptroller

ASSISTANT VICE PRESIDENTS
Melissa P. Wooten

BSA Officer/Loss Prevention
Facilities Manager
Secondary Market Manager

Assistant Secretary
Assistant Secretary
Region Manager Jackson County
Manager Deposit Services

Shareholder Relations Manager
& Trust Officer
Kimberly R. Williams Systems Officer
Paula W. Clay
Cindy H. Johnston
Joe J. Wyant
Brenda G. Henson
Randall L. Hammond Security Officer/Loss Prevention
Barbara A. Patrick
Richard P. Speirs
Lori A. Edwards
Raymond G. Polcyn Manager of Loan Production Office
Retail Lending Operations Manager
Stephanie L. Stover
Director of IT
Brandon O. Huff
Regional Branch Administrator
Anita M. Good
Customer Support Manager
Angela S. Kinnaird
Risk Administration Officer
Laura F. Conger
Lender/
Lonnie L. Hunt
Business Development Officer
Lender/
Business Development Officer
Human Resources Officer
Business Development Officer
Regional Branch Administrator

Terri M. Camden
Shelly N. Boothe
Stephenie L. Peck

Ruth R. Murphy

ASSISTANT CASHIERS
Lois J. Scherer
Linda K. Roe

EFT Officer
Lead Cultural Engineer &
Talent Development Specialist

Glen P. Arrowood, II Manager of Indirect Lending
Michelle L. Hammond Escrow Supervisor/Lead Mortgage

Patricia G. Hapney
Anthony W. Staley

Jon C. Jones
Daniel F. Short
Pamela K. Smith
William F. Richards
Austin P. Arvon

Loan Documentation Clerk
Retail Lending & Personal Banker
Product Development
Business Sales & Support
Western Cabell Region Manager
Bend Area Region Manager
Eastern Cabell Region Manager
Advertising Manager
Senior Credit Analyst

LEADERSHIP

Ohio Valley Banc Corp. 7

Athens, Ohio
Loan Office - 2097 East State Street Suite C

Gallia County, Ohio
Main Office - 420 Third Avenue
Mini Bank - 437 Fourth Avenue
Inside Walmart - 2145 Eastern Avenue
Jackson Pike - 3035 State Route 160
Inside Holzer - 100 Jackson Pike
Loan Office - Walmart Plaza, 2145 Eastern Avenue
Rio Grande - 27 North College Avenue

Jackson County, Ohio
Upper Main - 740 East Main Street
Downtown - 400 East Main Street
Oak Hill - 116 Jackson Street
Wellston - 123 South Ohio Avenue

Mt. Sterling, Ohio
255 Yankeetown Street

New Holland, Ohio
25 North Main Street

Pomeroy, Ohio
Inside Sav-a-Lot - 700 West Main Street

Waverly, Ohio
507 West Emmitt Avenue

Barboursville, West Virginia
6431 East State Route 60

Milton, West Virginia
280 East Main Street

Point Pleasant, West Virginia
328 Viand Street

8 Community First!

Chillicothe, Ohio
1080 N. Bridge Street, Unit 43

Gallipolis, Ohio
2145 Eastern Avenue

Jackson, Ohio
420 East Main Street

South Point, Ohio
348 County Road 410

Waverly, Ohio
505 West Emmitt Avenue

Wheelersburg, Ohio
326 Center Street

OHIO VALLEY BANC CORP.
ANNUAL REPORT 2018
FINANCIALS

SELECTED FINANCIAL DATA

(dollars in thousands, except share and per share data)

SUMMARY OF OPERATIONS:

2018

Years Ended December 31
2016

2015

2017

2014

Total interest income …………………………………… $
Total interest expense …………………………………...
Net interest income ……………………………………...
Provision for loan losses …………………………….…..
Total other income ……………………………………....
Total other expenses ………………………………….....
Income before income taxes ………………………….....
Income taxes ………………………………………….....
Net income ……………………………………………....

49,197
5,471
43,726
1,039
8,938
37,426
14,199
2,255
11,944

45,708
3,975
41,733
2,564
9,435
36,609
11,995
4,486
7,509

39,348
3,022
36,326
2,826
8,239
32,899
8,840
1,920
6,920

36,334
2,839
33,495
1,090
8,597
29,619
11,383
2,809
8,574

36,355
2,875
33,480
2,787
9,793
29,293
11,193
3,120
8,073

PER SHARE DATA:

Earnings per share ………………………………………. $
Cash dividends declared per share …………….………... $
Book value per share ……………………………………. $
Weighted average number of common shares
outstanding …………………………………………..

AVERAGE BALANCE SUMMARY:

2.53
0.84
24.87

$
$
$

1.60
0.84
23.26

$
$
$

1.59
0.82
22.40

$
$
$

2.08
0.89
21.97

$
$
$

1.97
0.84
20.94

4,725,971

4,685,067

4,351,748

4,117,675

4,099,194

Total loans ………………………………………………. $
773,995
Securities(1) ………………………………………………
223,390
Deposits ………………………………………………….
886,639
Other borrowed funds(2) ………………………………….
48,967
112,393
Shareholders’ equity ……………………………………..
Total assets ……………………………………………… 1,063,256

753,204
193,199
845,227
47,663
108,110
1,014,115

644,690
196,389
749,054
39,553
98,133
899,209

589,953
188,754
694,218
32,878
88,720
828,444

PERIOD END BALANCES:

777,052
Total loans ………………………………………………. $
Securities(1) ………………………………………………
184,925
846,704
Deposits ………………………………………………….
Shareholders’ equity ……………………………………..
117,874
Total assets ……………………………………………… 1,030,493

769,319
189,941
856,724
109,361
1,026,290

734,901
151,985
790,452
104,528
954,640

585,752
155,900
660,746
90,470
796,285

581,690
170,314
673,410
31,225
83,887
799,448

594,768
137,274
646,830
86,216
778,668

KEY RATIOS:

Return on average assets ……………………...…………
Return on average equity ……………………………......
Dividend payout ratio …………………………………...
Average equity to average assets ………………………..

1.12%
10.63%
33.20%
10.57%

0.74%
6.95%
52.36%
10.66%

0.77%
7.05%
51.79%
10.91%

1.03%
9.66%
42.74%
10.71%

1.01%
9.62%
42.62%
10.49%

(1) Securities include interest-bearing deposits with banks and restricted investments in bank stocks.
(2) Other borrowed funds include subordinated debentures.

CONSOLIDATED STATEMENTS OF CONDITION

As of December 31

2018

2017

(dollars in thousands, except share and per share data)

Assets

Cash and noninterest-bearing deposits with banks ………….……………………….
Interest-bearing deposits with banks ..............................................................................
Total cash and cash equivalents ............................................................................

Certificates of deposit in financial institutions……………………………………….....
Securities available for sale …………………………………………………………….
Securities held to maturity (estimated fair value: 2018 - $16,234; 2017 - $18,079)……
Restricted investments in bank stocks ………………………………………………….

Total loans

.....................................................................................................................
Less: Allowance for loan losses ………………………………………………….
Net loans …………………………………………………………………….

Premises and equipment, net …………………………………………………………..
Other real estate owned, net …………………………………………………………..
Accrued interest receivable ……………………………………………………………
Goodwill ………………………………………………………………………………
Other intangible assets, net ..……………………………………………………………
Bank owned life insurance and annuity assets ………………………………………..
Other assets ……………………………………………………………………………
Total assets ……………………………………………………………….....

Liabilities

Noninterest-bearing deposits …………………………………………………………...
Interest-bearing deposits ……………………………………………………………….
Total deposits …..............................................................................................

Other borrowed funds …………………………………………………………………
Subordinated debentures ………………………………………………………………
Accrued liabilities …......................................................................................................
Total liabilities ……………………………………………………………….

Commitments and Contingent Liabilities (See Note L)

Shareholders’ Equity

Common stock ($1.00 stated value per share, 10,000,000 shares authorized;

2018 – 5,400,065 shares issued; 2017 - 5,362,005 shares issued) ………………..
Additional paid-in capital ………………………………………………………………
Retained earnings ………………………………………………………………………
Accumulated other comprehensive loss ….…………………………………………….
Treasury stock, at cost (659,739 shares) ………………………………………………
Total shareholders’ equity ………………….………………………………

13,806
57,374
71,180

2,065
102,164
15,816
7,506

777,052
(6,728)
770,324

14,855
430
2,638
7,371
379
29,392
6,373
1,030,493

237,821
608,883
846,704

39,713
8,500
17,702
912,619

----

5,400
49,477
80,844
(2,135)
(15,712)
117,874

12,664
61,909
74,573

1,820
101,125
17,581
7,506

769,319
(7,499)
761,820

13,281
1,574
2,503
7,371
514
28,675
7,947
1,026,290

253,655
603,069
856,724

35,949
8,500
15,756
916,929

----

5,362
47,895
72,694
(878)
(15,712)
109,361

Total liabilities and shareholders’ equity ……………………………………

1,030,493

1,026,290

See accompanying notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31
(dollars in thousands, except per share data)

2018

2017

2016

Interest and dividend income:
Loans, including fees …………….……………………………………………………... $
Securities:

Taxable ……………………………………………………………………………..
Tax exempt …………………………………………………………………………
Dividends …………………………………………………………………………………
Interest-bearing deposits with banks ……………………………………………………
Other interest …………………………………………………………………………….

Interest expense:
Deposits …………………………………………………………………………………..
Other borrowed funds ………………………………………………………………….
Subordinated debentures …………………………………………………………………

Net interest income ……………………………………………………………………..
Provision for loan losses …………………………………………………………………
Net interest income after provision for loan losses …………………………………

Noninterest income:
Service charges on deposit accounts …………………………………………………….
Trust fees …………………………………………………………………………………
Income from bank owned life insurance and annuity assets …………………………….
Mortgage banking income ………………………………………………………………
Electronic refund check / deposit fees …………………………………………………..
Debit / credit card interchange income ………………………………………………….
Loss on other real estate owned ………………………………………………………….
Other ……………………………………………………………………………………

Noninterest expense:
Salaries and employee benefits ………………………………………………………….
Occupancy ………………………………………………………………………………..
Furniture and equipment ………………………………………………………………..
Professional fees ……..………………………………………………………………..
Marketing expense ……..………………………………………………………………..
FDIC insurance …………………………………………………………………………...
Data processing …………………………………………………………………………..
Software ……..…………………………………………………………………………..
Foreclosed assets ………………………………………………………………………..
Amortization of intangibles ……………………………………………………………..
Merger related expenses…………………………………………………………………..
Other …………………………………………………………………………………….

Income before income taxes ……………………………………………………….
Provision for income taxes …………………………………………………………........
NET INCOME ……………………………………………………………....... $

44,365 $

42,182 $

36,266

2,377
369
440
1,608
38
49,197

4,155
986
330
5,471
43,726
1,039
42,687

2,084
263
717
342
1,579
3,662
(559)
850
8,938

22,191
1,754
1,023
2,016
777
447
2,115
1,533
238
135
6
5,191
37,426
14,199
2,255
11,944 $

2,116
411
392
582

25
45,708

2,843
884
248
3,975
41,733
2,564
39,169

2,137
240
1,226
265
1,692
3,376
(189)
688
9,435

20,809
1,770
1,049
1,792
1,034
465
2,081
1,486
499
156
39
5,429
36,609
11,995
4,486
7,509 $

1,961
445
302
353
21
39,348

2,154
664
204
3,022
36,326
2,826
33,500

1,977
227
725
227
2,048
2,594
(467)
908
8,239

18,874
1,846
922
1,362
915
455
1,455
1,316
357
68
930
4,399
32,899
8,840
1,920
6,920

Earnings per share ………………………………………………………………………. $

2.53 $

1.60 $

1.59

See accompanying notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME

For the years ended December 31
(dollars in thousands)

2018

2017

2016

NET INCOME …………………………………………………………………….......... $

11,944 $

7,509 $

6,920

Other comprehensive income (loss):
Change in unrealized gain (loss) on available for sale securities …………………….
Related tax (expense) benefit ………………………………………………………….

Total other comprehensive income (loss), net of tax …………………………….

(1,373)
289

(1,084)

171
(58)

113

(1,963)
667

(1,296)

Total comprehensive income …………………………………………………………….

10,860 $

7,622 $

5,624

See accompanying notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY

For the years ended December 31, 2018, 2017, and 2016
(dollars in thousands, except share and per share data)

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income(Loss)

Treasury
Stock

Total
Shareholders'
Equity

Balances at January 1, 2016 ……. $

4,777 $

35,318 $

65,782 $

305 $

(15,712 ) $

90,470

Net income …………………………
Other comprehensive

income (loss), net ..........................

Common stock issued to ESOP,
24,572 shares ……………………
Acquisition – Milton Bancorp, Inc.
523,518 shares ………………….
Cash dividends, $.82 per share ……

----

524
----

Balances at December 31, 2016 …

5,326

Net income ………………………..
Other comprehensive

income (loss), net ……………….

Common stock issued to ESOP,
15,118 shares ……………………
Common stock issued through
dividend reinvestment,
21,383 shares ………………….
Cash dividends, $.84 per share ……

----

21
----

----

6,920

----

6,920

----

550

10,920
----

46,788

----

----
(3,585)

69,117

----

7,509

----

413

694
----

----

----
(3,932)

(1,296)

----

(1,296)

----

----
----

----

----
----

575

11,444
(3,585)

(991)

(15,712 )

104,528

----

113

----

----
----

----

----
----

7,509

113

428

715
(3,932)

Balances at December 31, 2017 …

5,362

47,895

72,694

(878)

(15,712 )

109,361

Net income …………………………
Other comprehensive

income (loss), net .........................

Amount reclassified out of
accumulated other comprehensive
income (loss) per ASU 2018-02 ..
Common stock issued to ESOP,
7,294 shares ...…………..………
Common stock issued through
dividend reinvestment,
30,766 shares ………...………….

Cash dividends, $.84 per share ……

----

11,944

----

11,944

----

(1,084)

----

(1,084)

----

288

173

----

(173)

----

295

1,294

----

(3,967)

----

1,325

(3,967)

Balances at December 31, 2018 … $

5,400 $

49,477 $

80,844 $

(2,135) $

(15,712 ) $

117,874

See accompanying notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

2018

2017

2016

11,944 $

7,509 $

6,920

For the years ended December 31
(dollars in thousands)

Cash flows from operating activities:
Net income .………………………………………………………………………………...........
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation of premises and equipment ………………………………………………….....
Net (accretion) of purchase accounting adjustments ………………………………………....
Net amortization of securities ………………………………………………………………...
Proceeds from sale of loans in secondary market ……………………………………………
Loans disbursed for sale in secondary market ………………………………………............
Amortization of mortgage servicing rights …………………………………………………..
Gain on sale of loans …………………………………………………………………………
Amortization of intangible assets ……………………………………………………………
Deferred tax (benefit) expense ……………………………………………………………….
Provision for loan losses ……………………………………………………………………..
Common stock issued to ESOP ………………………………………………………………
Earnings on bank owned life insurance and annuity assets …………………………………
(Gain) loss on sale of other real estate owned ……………………………………………….
Net write-down of other real estate owned …………………………………………………..
Change in accrued interest receivable ……………………………………………………….
Change in accrued liabilities …………………………………………………………………
Change in other assets ……………………………………………………………………….
Net cash provided by operating activities ……………………………………………….

Cash flows from investing activities:
Net cash acquired from Milton Bancorp, Inc. acquisition ……………………………………….
Proceeds from sales of securities available for sale ………………………………………...
Proceeds from maturities and paydowns of securities available for sale ………………………...
Purchases of securities available for sale …………………………………………………………
Proceeds from maturities of securities held to maturity ……………………………………........
Purchases of securities held to maturity ……………………………………………………….....
Proceeds from maturities of certificates of deposit in financial institutions……………………...
Purchases of certificates of deposit in financial institutions……………………………………...
Purchases of restricted investments in bank stocks ………………………………………………
Net change in loans ……………………………………………………………………………….
Proceeds from sale of other real estate owned …………………………………………………..
Purchases of premises and equipment ………………………………………………………….
Proceeds from bank owned life insurance and annuity assets ……………………………………
Purchases of bank owned life insurance and annuity assets ……………………………………...
Net cash (used in) investing activities ……………………………………………………

Cash flows from financing activities:
Change in deposits ……………………………………………………………………………….
Proceeds from common stock through dividend reinvestment …………………………………
Cash dividends …………………………………………………………………………………....
Proceeds from Federal Home Loan Bank borrowings ……………………………………………
Repayment of Federal Home Loan Bank borrowings ……………………………………………
Change in other long-term borrowings ………………………………………………………….
Change in other short-term borrowings ………………………………………………………….
Net cash provided by (used in) by financing activities ………………….……………….

Cash and cash equivalents:
Change in cash and cash equivalents ……………………………………………………………
Cash and cash equivalents at beginning of year ………………………………………………...
Cash and cash equivalents at end of year ………………………………………………..

Supplemental disclosure:
Cash paid for interest ……………………………………………………………………………...
Cash paid for income taxes ………………………………………………………………………..
Proceeds from bank owned life insurance and annuity assets not settled …………………………
Transfers from loans to other real estate owned …………………………………………………..
Other real estate owned sales financed by The Ohio Valley Bank Company ……………………..
Issuance of common stock for Milton Bancorp, Inc. acquisition …………………………………
Net assets acquired from Milton Bancorp, Inc. acquisition, excluding cash and cash equivalents..

(3,393)
74,573
71,180 $

34,407
40,166
74,573 $

5,008 $
2,050
----
547
----
----
----

3,724 $
2,236
1,993
1,337
237
----
----

See accompanying notes to consolidated financial statements

1,141
(188)
260
11,034
(10,692)
55
(397)
135
(134)
1,039
295
(717)
21
538
(135)
1,946
1,996
18,141

----
----
21,139
(23,757)
1,711
----
----

(245)
----
(9,981)
1,132
(2,725)
----
----
(12,726)

(9,930)
1,325
(3,967)
8,000
(3,162)
(989)

(85)
(8,808)

1,277
(526)
378
7,857
(7,592)
71
(336)
156
1,907
2,564
428
(1,226)
134
55
(188)
1,681
347
14,496

----
----
20,389
(25,177)
1,419
(389)
245
(395)
----
(37,918)
1,466
(1,727)
2,107
(2,200)
(42,180)

66,444

715
(3,932)
4,785
(5,318)
(459)
(144)

62,091

1,126
(255)
407
6,455
(6,228)
79
(306)
68
(725)
2,826
575
(725)
(22)
489
(496)
1,461
1,717
13,366

1,770
----
18,591
(20,256)
3,089
(1,528)
490
(445)
(566)
(38,299)
403
(1,683)
----
----
(38,434)

10,150
----
(3,585)
11,102
(1,883)
3,899
21
19,704

(5,364)
45,530
40,166

2,930
1,725
----
957
316
11,444
3,140

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in thousands, except share and per share data.

Note A - Summary of Significant Accounting Policies

Description of Business: Ohio Valley Banc Corp. (”Ohio Valley”) is a financial holding company registered under the Bank
Holding Company Act of 1956. Ohio Valley has one banking subsidiary, The Ohio Valley Bank Company (the “Bank”), an
Ohio state-chartered bank that is a member of the Federal Reserve Bank and is regulated primarily by the Ohio Division of
Financial Institutions and the Federal Reserve Board. Ohio Valley also has a subsidiary that engages in consumer lending
generally to individuals with higher credit risk history, Loan Central, Inc.; a subsidiary insurance agency that facilitates the
receipts of insurance commissions, Ohio Valley Financial Services Agency, LLC; and a limited purpose property and casualty
insurance company, OVBC Captive, Inc. The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC ("Ohio Valley
REO"), an Ohio limited liability company, to which the Bank transfers certain real estate acquired by the Bank through
foreclosure for sale by Ohio Valley REO. Ohio Valley and its subsidiaries are collectively referred to as the “Company.”

The Company provides a full range of commercial and retail banking services from 25 offices located in southeastern
Ohio and western West Virginia. It accepts deposits in checking, savings, time and money market accounts and makes
personal, commercial, floor plan, student, construction and real estate loans. Substantially all loans are secured by specific
items of collateral, including business assets, consumer assets, and commercial and residential real estate. Commercial loans
are expected to be repaid from cash flow from business operations. The Company also offers safe deposit boxes, wire transfers
and other standard banking products and services. The Bank’s deposits are insured by the Federal Deposit Insurance
Corporation. In addition to accepting deposits and making loans, the Bank invests in U. S. Government and agency obligations,
interest-bearing deposits in other financial institutions and investments permitted by applicable law.

The Bank’s trust department provides a wide variety of fiduciary services for trusts, estates and benefit plans and also

provides investment and security services as an agent for its customers.

Principles of Consolidation: The consolidated financial statements include the accounts of Ohio Valley and its wholly-owned
subsidiaries, the Bank, Loan Central, Inc., Ohio Valley Financial Services Agency, LLC, and OVBC Captive, Inc. All material
intercompany accounts and transactions have been eliminated.

Industry Segment Information: Internal financial information is primarily reported and aggregated in two lines of business,
banking and consumer finance.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the U.S.,
management makes estimates and assumptions based on available information. These estimates and assumptions affect the
amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, noninterest-bearing deposits with banks, federal
funds sold and interest-bearing deposits with banks with maturity terms of less than 90 days. Generally, federal funds are
purchased and sold for one-day periods. The Company reports net cash flows for customer loan transactions, deposit
transactions, short-term borrowings and interest-bearing deposits with other financial institutions.

Certificates of deposit in financial institutions: Certificates of deposit in financial institutions are carried at cost and have
maturity terms of 90 days or greater. The longest maturity date is September 27, 2021.

Securities: The Company classifies securities into held to maturity and available for sale categories. Held to maturity securities
are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Securities
classified as available for sale include securities that could be sold for liquidity, investment management or similar reasons
even if there is not a present intention of such a sale. Available for sale securities are reported at fair value, with unrealized
gains or losses included in other comprehensive income, net of tax.

Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the
level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are
anticipated. Gains and losses are recognized upon the sale of specific identified securities on the completed trade date.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note A - Summary of Significant Accounting Policies (continued)

Other-Than-Temporary Impairments of Securities: In determining an other-than-temporary
impairment (“OTTI”),
management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be
required to sell the debt security before its anticipated recovery. The assessment of whether an OTTI decline exists involves a
high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When an OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell
the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less
any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before
recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the
entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not
intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery
of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss
and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the
present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to
other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the
OTTI recognized in earnings becomes the new amortized cost basis of the investment.

Restricted Investments in Bank Stocks: The Bank is a member of the Federal Home Loan Bank (“FHLB”)
system. Additionally, the Bank is a member of the Federal Reserve Bank (“FRB”) system. Members are required to own a
certain amount of stock based on their level of borrowings and other factors and may invest in additional amounts. FHLB stock
and FRB stock are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate
recovery of par value. Both cash and stock dividends are reported as income. The Company has additional investments in other
restricted bank stocks that are not material to the financial statements.

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

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

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

The Bank also originates long-term, fixed-rate mortgage loans, with full intention of being sold to the secondary
market. These loans are considered held for sale during the period of time after the principal has been advanced to the borrower
by the Bank, but before the Bank has been reimbursed by the Federal Home Loan Mortgage Corporation, typically within a
few business days. As of December 31, 2018, loans held for sale by the Bank totaled $108, as compared to no loans held for
sale at December 31, 2017.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note A - Summary of Significant Accounting Policies (continued)

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan
losses are charged against the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which
the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt
restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of
shortfall in relation to the principal and interest owed.

Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using
the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance
homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and
accordingly, they are not separately identified for impairment disclosure. Troubled debt restructurings are measured at the
present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is
considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt
restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting
policy for the allowance for loan losses.

The general component covers non-impaired loans and impaired loans that are not individually reviewed for
impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined
by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years for the
consumer and real estate portfolio segment and 5 years for the commercial portfolio segment. The total loan portfolio’s actual
loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These
economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of
and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending
management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of
changes in credit concentrations. The following portfolio segments have been identified: Commercial and Industrial,
Commercial Real Estate, Residential Real Estate, and Consumer.

Commercial and industrial loans consist of borrowings for commercial purposes to individuals, corporations,
partnerships, sole proprietorships, and other business enterprises. Commercial and industrial loans are generally secured by
business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made
to finance capital expenditures or operations. The Company’s risk exposure is related to deterioration in the value of collateral
securing the loan should foreclosure become necessary. Generally, business assets used or produced in operations do not
maintain their value upon foreclosure, which may require the Company to write down the value significantly to sell.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note A - Summary of Significant Accounting Policies (continued)

occupied loan is a property loan for which the repayment of principal is dependent upon rental income associated with the
property or the subsequent sale of the property. Nonowner-occupied loans that are dependent upon rental income are primarily
impacted by local economic conditions which dictate occupancy rates and the amount of rent charged. Commercial
construction loans consist of borrowings to purchase and develop raw land into 1-4 family residential properties. Construction
loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are
secured by raw land and the subsequent improvements. Repayment of the loans to real estate developers is dependent upon
the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn
in the market for those properties, there may be significant erosion in value which may be absorbed by the Company.

Residential real estate loans consist of loans to individuals for the purchase of 1-4 family primary residences with
repayment primarily through wage or other income sources of the individual borrower. The Company’s loss exposure to these
loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair
value of the property at origination.

Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other
loans to individuals for household, family, and other personal expenditures, both secured and unsecured. These loans typically
have maturities of 6 years or less with repayment dependent on individual wages and income. The risk of loss on consumer
loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult
to locate if repossession is necessary. The Company has allocated the highest percentage of its allowance for loan losses as a
percentage of loans to the other identified loan portfolio segments due to the larger dollar balances associated with such
portfolios.

At December 31, 2018, there were no changes to the accounting policies or methodologies within any of the

Company’s loan portfolio segments from the prior period.

Concentrations of Credit Risk: The Company grants residential, consumer and commercial loans to customers located
primarily in the southeastern Ohio and western West Virginia areas.

The following represents the composition of the Company’s loan portfolio as of December 31:

% of Total Loans
2017
2018

Residential real estate loans ………………………. 39.13%
40.19 %
27.74 %
27.84%
Commercial real estate loans ……………………..
18.46% 18.15 %
Consumer loans ………………………………….
13.92 %
14.57%
Commercial and industrial loans ……………........
100.00 %
100.00%

Approximately 5.02% of total loans were unsecured at December 31, 2018, up from 4.86% at December 31, 2017.

The Bank, in the normal course of its operations, conducts business with correspondent financial institutions. Balances
in correspondent accounts, investments in federal funds, certificates of deposit and other short-term securities are closely
monitored to ensure that prudent levels of credit and liquidity risks are maintained. At December 31, 2018, the Bank’s primary
correspondent balance was $56,071 on deposit at the Federal Reserve Bank, Cleveland, Ohio.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation,
which is computed using the straight-line method over the estimated useful life of the owned asset and, for leasehold
improvement, over the remaining term of the leased facility, whichever is shorter. The useful lives range from 3 to 8 years for
equipment, furniture and fixtures and 7 to 39 years for buildings and improvements.

Foreclosed assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell
when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer
mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in
the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note A - Summary of Significant Accounting Policies (continued)

assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent
to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Foreclosed
assets totaled $430 and $1,574 at December 31, 2018 and 2017.

Goodwill: Goodwill arises from business combinations and is generally determined as the excess of the fair value of the
consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets
acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. Goodwill is the only
intangible asset with an indefinite life on our balance sheet. The Company has selected December 31 as the date to perform its
annual qualitative impairment test. Given that the Company has been profitable and had positive equity, the qualitative
assessment indicated that it was more likely than not that the fair value of goodwill was more than the carrying amount, resulting
in no impairment.

Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Mortgage Servicing Rights: A mortgage servicing right (“MSR”) is a contractual agreement where the right to service a
mortgage loan is sold by the original lender to another party. When the Company sells mortgage loans to the secondary market,
it retains the servicing rights to these loans. The Company’s MSR is recognized separately when acquired through sales of
loans and is initially recorded at fair value with the income statement effect recorded in mortgage banking income.
Subsequently, the MSR is then amortized in proportion to and over the period of estimated future servicing income of the
underlying loan. The MSR is then evaluated for impairment periodically based upon the fair value of the rights as compared to
the carrying amount, with any impairment being recognized through a valuation allowance. Fair value of the MSR is based on
market prices for comparable mortgage servicing contracts. Impairment is determined by stratifying rights into groupings based
on predominant risk characteristics, such as interest rate, loan type and investor type. If the Company later determines that all
or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an
increase to income. At December 31, 2018 and 2017, the Company’s MSR assets were $368 and $360, respectively.

Earnings Per Share: Earnings per share is based on net income divided by the following weighted average number of common
shares outstanding during the periods: 4,725,971 for 2018; 4,685,067 for 2017; 4,351,748 for 2016. Ohio Valley had no dilutive
effect and no potential common shares issuable under stock options or other agreements for any period presented.

Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized at the time of enactment of such change in tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be realized. On December 22, 2017, the Tax Cuts
and Jobs Act (“TCJA”) was enacted, which among other things, reduced the federal income tax rate from 34% to 21% effective
January 1, 2018. This required the Company’s deferred tax assets and liabilities to be revalued using the 21% federal tax rate
enacted. The effect was recorded in the fourth quarter tax provision of 2017.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in
a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit
that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test,
no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax
expense.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other
comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as
separate components of equity, net of tax.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there now are such matters that will have a material effect on the financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note A - Summary of Significant Accounting Policies (continued)

Bank Owned Life Insurance and Annuity Assets: The Company has purchased life insurance policies on certain key
executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance
sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
The Company also purchased an annuity investment for a certain key executive that earns interest.

Employee Stock Ownership Plan: Compensation expense is based on the market price of shares as they are committed to be
allocated to participant accounts.

Dividend Reinvestment Plan: The Company maintains a Dividend Reinvestment Plan. The plan enables shareholders to elect
to have their cash dividends on all or a portion of shares held automatically reinvested in additional shares of the Company’s
common stock. The stock is issued out of the Company’s authorized shares and credited to participant accounts at fair market
value. Dividends are reinvested on a quarterly basis.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments,
such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face
amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. These
financial instruments are recorded when they are funded. See Note L for more specific disclosure related to loan commitments.

Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the
Bank to Ohio Valley or by Ohio Valley to its shareholders. See Note P for more specific disclosure related to dividend
restrictions.

Restrictions on Cash: Cash on hand or on deposit with a third-party correspondent and the Federal Reserve Bank of $60,167
and $61,915 was required to meet regulatory reserve and clearing requirements at year-end 2018 and 2017. The balances on
deposit with a third-party correspondent do not earn interest.

Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on
the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of
a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”),
or (3) an instrument with no hedging designation (“stand-alone derivative”).

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest
expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are
reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of
the items being hedged.

At December 31, 2018 and 2017, the Company’s only derivatives on hand were interest rate swaps, which are

classified as stand-alone derivatives. See Note H for more specific disclosures related to interest rate swaps.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in Note O. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Reclassifications: The consolidated financial statements for 2017 and 2016 have been reclassified to conform with the
presentation for 2018. These reclassifications had no effect on the net results of operations or shareholders’ equity.

Adoption of New Accounting Standards: In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No.
2014-09, which was then adopted by the Company as of January 1, 2018 and all subsequent amendments to the ASU
(collectively, “ASC 606”). ASC 606 (i) creates a single framework for recognizing revenue from contracts with customers that
fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets,
such as other real estate owned. The guidance establishes a five-step model which entities must follow to recognize revenue
and removes inconsistencies and weaknesses in existing guidance. Additional disclosures providing information about
contracts with customers are required. Adoption did not have a material impact on the Company’s results of operations or

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note A - Summary of Significant Accounting Policies (continued)

financial position. The Company adopted ASC 606 using the modified retrospective transition method. As of December 31,
2017, the Company had no uncompleted customer contracts and as a result, no cumulative transition adjustment was posted to
the Company’s accumulated deficit during 2018.

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and
Financial Liabilities". The update provided updated accounting and reporting requirements for both public and non-public
entities effective for interim and annual periods beginning after December 15, 2017, using a cumulative-effect adjustment to
the balance sheet as of the beginning of the year of adoption. The most significant provisions that impacted the Company were:
1) measurement of equity securities at fair value, with the changes in fair value recognized in the income statement; 2)
elimination of the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is
required to be disclosed for financial instruments at amortized cost on the balance sheet; 3) utilization of the exit price notion
when measuring the fair value of financial instruments for disclosure purposes; and 4) requirement of separate presentation
of both financial assets and liabilities by measurement category and form of financial asset on the balance sheet or
accompanying notes to the financial statements. The Company adopted ASU No. 2016-01 effective January 1, 2018 and
determined the impact to be not material to the Company’s financial statements. The amendments did change the method
utilized to disclose the fair value of the loan portfolio to reflect an exit price notion as opposed to an entry price. For additional
information on fair value of assets and liabilities, see Note O.

In August 2016, FASB issued an update (ASU 2016-15, “Statement of Cash Flows”) (Topic 230), which addressed
eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and
cash payments are presented and classified in the statement of cash flows. The amendments in this update applied to all entities,
including business entities and not-for-profit entities that were required to present a statement of cash flows, and were effective
for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
The Company adopted ASU 2016-15 effective January 1, 2018, which had no impact to the consolidated financial statements
and related disclosures.

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income”. The purpose of this Update is to allow a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act that was enacted on December,
22, 2017. The Update is effective for public business entities for annual periods beginning after December 15, 2018, and
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company
elected to early adopt this accounting guidance effective April 1, 2018. This resulted in the reclassification of $173 in stranded
tax effects from accumulated other comprehensive income to retained earnings within the June 30, 2018 Form 10-Q.

Revenue Recognition: ASU No. 2014-09, “Revenue from Contracts with Customers” ASC 606 provides that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that
entities should follow in achieving this core principle. Revenue generated from financial instruments, such as interest and
dividends on loans and investment securities, are not included in the scope of ASC 606. The adoption of ASC 606 did not result
in a change to the accounting for any of the Company’s revenue streams that are within the scope of the amendments. The
Company’s services that fall within the scope of ASC 606 are recognized as revenue as the Company satisfies its obligation to
the customer. All of the Company’s revenue from contracts with customers within the scope of ASC 606 are presented in the
Company’s consolidated statements of income as components of non-interest income. The list below describes the specific
revenue stream under ASC 606, which corresponds directly to the line item within the statement of income in which it is being
included:

 Service charges on deposit accounts – these include general service fees charged for deposit account maintenance and activity
and transaction-based fees charged for certain services, such as debit card, wire transfer, or overdraft activities. Revenue is
recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for
account maintenance services.

 Trust fees - this includes periodic fees due from trust customers for managing the customers' financial assets. Fees are generally
charged on a quarterly or annual basis and are recognized ratably throughout the period, as the services are provided on an
ongoing basis.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note A - Summary of Significant Accounting Policies (continued)

 Electronic refund check/deposit fees – A tax refund clearing agreement between the Bank and a tax refund product provider
requires the Bank to process electronic refund checks and electronic refund deposits presented for payment on behalf of
taxpayers through accounts containing taxpayer refunds. The Bank, in turn, receives a fee paid by the third-party tax software
provider for each transaction that is processed. The amount of fees received are tiered based on the tax refund product selected.
Since the Bank acts as a sub servicer in the tax process relationship, a portion of the fee collected is passed on to the tax refund
product provider.

 Debit/credit card interchange income – includes interchange income from cardholder transactions conducted with merchants,
throughout various interchange networks with which the Company participates. Interchange fees from cardholder transactions
represent a percentage of the underlying transaction value and are recognized daily, as transaction processing services are
provided to the deposit customer. Gross fees from interchange are recorded in operating income separately from gross network
costs, which are recorded in operating expense.

 Gain (loss) on other real estate owned – the Company records a gain or loss from the sale of other real estate owned (“OREO”)
when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company
finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations
under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset
is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining
the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing
component is present.

All of the Company’s revenue from contracts with customers within the scope of ASC 606 listed above pertained to

the banking segment, with no revenue impact recognized from the consumer finance segment during the periods presented.

Accounting Guidance to be Adopted in Future Periods: In February 2016, the FASB issued an update (ASU 2016-02, Leases)
which will require lessees to recognize the following for all leases (with the exception of short-term leases) at the
commencement date (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured
on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use
of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted
improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606,
Revenue from Contracts with Customers. The new guidance also requires enhanced disclosure about an entity’s leasing
arrangements. As allowed under ASU 2018-11, the Company will use the optional transition method that eliminates
comparative period reporting in the year of adoption. Under the optional transition method, only the most recent period
presented will reflect the adoption and comparative periods will be reported under the old guidance. The effect of adopting
this standard in the first quarter of 2019 is estimated to increase both assets and liabilities by $1,484 on the Company’s
consolidated statements of condition.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses”. ASU 2016-13 requires
entities to replace the current “incurred loss” model with an “expected loss” model, which is referred to as the current expected
credit loss (“CECL”) model. These expected credit losses for financial assets held at the reporting date are to be based on
historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced
disclosures to help investors and other financial statement users better understand significant estimates and judgments used in
estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures
include qualitative and quantitative requirements that provide additional information about the amounts recorded in the
financial statements. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2019. Early adoption is permitted, for annual periods and interim periods within those annual periods, beginning
after December 15, 2018. A CECL steering committee has developed a CECL model and is evaluating the source data, various
credit loss methodologies and model results in relation to the new ASU guidance. Management expects to recognize a one-
time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the
new standard is effective. Management expects the adoption will result in a material increase to the allowance for loan losses
balance. At this time, the impact is being evaluated.

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities
Receivables”, which requires the amortization of the premium on callable debt securities to the earliest call date. The
amortization period for callable debt securities purchased at a discount would not be impacted by the ASU. This ASU will be
applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2018. The ASU is not
expected to have a material impact on the Company’s consolidated financial position or results of operations.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note B – Business Combinations

As of the close of business on August 5, 2016, Ohio Valley completed its merger with Milton Bancorp, Inc. (“Milton
Bancorp”) pursuant to the terms of the Agreement and Plan of Merger dated as of January 7, 2016, by and between Ohio Valley
and Milton Bancorp, as amended (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, Milton Bancorp
was merged with and into Ohio Valley. Immediately following the Merger, The Milton Banking Company (“Milton Bank”)
was merged with and into the Bank. As a result of the Merger and in accordance with the terms of the Merger Agreement,
each Milton Bancorp share was converted into the right to receive either 1,636 Ohio Valley common shares, no par value, or
cash in the amount of $37,219, subject to certain allocation procedures set forth in the Merger Agreement pursuant to which
80% of the 400 outstanding Milton Bancorp common shares were converted into the right to receive Ohio Valley common
shares and the remaining 20% of the outstanding Milton Bancorp common shares were converted into the right to receive cash.
Each of the 1,237 Milton Bancorp preferred shares issued and outstanding were converted into the right to receive a cash
payment in the amount of $3,600 per preferred share. The consideration paid for Milton Bancorp totaled $18,875, of which
$11,444 was the market value of the Company’s common shares and $7,431 was cash. Ohio Valley financed part of the cash
portion of the purchase price through $5,000 in borrowed funds. Milton Bank's results of operations were included in the
Company's results beginning August 6, 2016. Merger-related expenses of $930 were recorded to the Company’s income
statement for the year ended December 31, 2016. The fair value of the common shares issued as part of the consideration paid
for Milton Bancorp was determined in the basis of the closing price of the Company's common shares on the acquisition date.
After the Merger, the Company's assets totaled approximately $950 million and branches increased to 25 locations.

Goodwill of $6,534 arising from the acquisition consisted largely of synergies from combining the operations of the
companies. As the acquisition was treated as a nontaxable stock acquisition transaction, the goodwill was not deductible for
tax purposes. The following table summarizes the consideration paid for Milton Bancorp and the amounts of the assets acquired
and liabilities assumed recognized at the acquisition date:

Consideration:

Cash …………………………………………………………………………………… $
Equity instruments ………..…………………………………………………………...

7,431
11,444
Fair value of total consideration transferred …………………………………………….. $ 18,875

Recognized amounts of identifiable assets acquired and liabilities assumed:

9,201
Cash and cash equivalents ……………………………………………………………. $
5,868
Securities ………..………………………………………………………….................
Restricted investments in bank stock……………………………………………….....
364
Loans ………..…………………………………………………………....................... 112,479
1,826
Premises and equipment .……………………………………………………..............
641
Other real estate owned .………………………………………………………..........
272
Bank owned life insurance ………..………………………………………………......
738
Core deposit intangible asset ………..……………………………………………......
612
Other assets ………..……………………………………………….............................
132,001

Total assets acquired ………..…………………………………………………..

Deposits ………..……………………………………………….................................. 119,669
(9)
Other liabilities ………..……………………………………………….......................
Total liabilities assumed ………..……………………………………………..... 119,660

Total identifiable net assets ………..………………………………………

12,341

Goodwill ………………………………………………………………………………..

6,534

$ 18,875

The fair value of net assets acquired included fair value adjustments to certain receivables that were not considered
impaired as of the acquisition date. This consisted of non-impaired loans with a fair value of $111,558 and gross contractual
amounts receivable of $112,249 on the date of acquisition. The fair value adjustments were determined using discounted
contractual cash flows. The Company also acquired purchase credit impaired loans that management deemed to be not material
for disclosure.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Securities

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to
maturity at December 31, 2018 and 2017 and the corresponding amounts of gross unrealized gains and losses recognized in
accumulated other comprehensive income (loss) and gross unrecognized gains and losses:

Securities Available for Sale
December 31, 2018
U.S. Government sponsored entity securities …………………
Agency mortgage-backed securities, residential ………………
Total securities …………………………………………..

December 31, 2017
U.S. Government sponsored entity securities …………………
Agency mortgage-backed securities, residential ………………
Total securities …………………………………………..

Securities Held to Maturity
December 31, 2018
Obligations of states and political subdivisions ……………….
Agency mortgage-backed securities, residential ………………
Total securities …………………………………………..

December 31, 2017

Obligations of states and political subdivisions ……………….
Agency mortgage-backed securities, residential ………………
Total securities ……………………………………………

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

16,837 $
88,030
104,867 $

13,622 $
88,833
102,455 $

8 $
92
100 $

---- $
300
300 $

(215) $
(2,588)
(2,803) $

16,630
85,534
102,164

(149) $
(1,481)
(1,630) $

13,473
87,652
101,125

Amortized
Cost

Gross
Unrecognized
Gains

Gross
Unrecognized
Losses

Estimated
Fair Value

15,813 $
3
15,816 $

17,577 $
4
17,581 $

502 $
----
502 $

533 $
----
533 $

(84) $
----
(84) $

16,231
3
16,234

(35) $
----
(35) $

18,075
4
18,079

At year-end 2018 and 2017, there were no holdings of securities of any one issuer, other than the U.S. Government

and its agencies, in an amount greater than 10% of shareholders’ equity.

There were no sales of debt securities during 2018, 2017 and 2016.

Securities with a carrying value of approximately $79,443 at December 31, 2018 and $70,078 at December 31, 2017

were pledged to secure public deposits and repurchase agreements and for other purposes as required or permitted by law.

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 December 31, 2018, 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 not believe any
individual unrealized loss at December 31, 2018 and 2017 represents an other-than-temporary impairment.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Securities (continued)

The amortized cost and estimated fair value of debt securities at December 31, 2018, by contractual maturity, are
shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or
prepay the debt obligations prior to their contractual maturities. Securities not due at a single maturity are shown separately.

Debt Securities:

Available for Sale

Held to Maturity

Amortized
Cost

Estimated
Fair
Value

Amortized
Cost

Estimated
Fair
Value

Due in one year or less ………………………………………..
Due in one to five years ………………………………………
Due in five to ten years ……………………………………….
Due after ten years ……………………………………………
Agency mortgage-backed securities, residential ……………..
Total debt securities …………………………………….

---- $
16,837
----
----
88,030
104,867 $

---- $
16,630
----
----
85,534
102,164 $

926 $
6,884
8,003
----
3
15,816 $

931
7,052
8,248
----
3
16,234

The following table summarizes securities with unrealized losses at December 31, 2018 and December 31, 2017,

aggregated by major security type and length of time in a continuous unrealized loss position:

December 31, 2018

Securities Available for Sale
U.S. Government sponsored entity

Less than 12 Months
Fair
Value

Unrealized
Loss

12 Months or More
Fair
Value

Unrealized
Loss

Total

Fair
Value

Unrealized
Loss

securities ………………………. $

1,981 $

(1) $

8,679 $

(214) $

10,660 $

(215)

Agency mortgage-backed securities,

residential ……………………...
Total available for sale …... $

8,564
10,545 $

(43)
(44) $

62,619
71,298 $

(2,545)
(2,759) $

71,183
81,843 $

(2,588)
(2,803)

Securities Held to Maturity
Obligations of states and political

Less than 12 Months
Fair
Value

Unrecognized
Loss

12 Months or More
Fair
Value

Unrecognized
Loss

Total

Fair
Value

Unrecognized
Loss

subdivisions …………………… $
Total held to maturity ……. $

484 $
484 $

(3) $
(3) $

1,312 $
1,312 $

(81) $
(81) $

1,796 $
1,796 $

(84)
(84)

December 31, 2017

Securities Available for Sale
U.S. Government sponsored entity

Less than 12 Months
Fair
Value

Unrealized
Loss

12 Months or More
Fair
Value

Unrealized
Loss

Total

Fair
Value

Unrealized
Loss

securities ………………………. $

6,910 $

(97 ) $

6,563 $

(52) $

13,473 $

(149)

Agency mortgage-backed securities,

residential ……………………...
Total available for sale …... $

(434 )
37,421
44,331 $ (531 ) $

31,763
38,326 $

(1,047)
(1,099) $

69,184
82,657 $

(1,481)
(1,630)

Securities Held to Maturity
Obligations of states and political

Less than 12 Months
Fair
Value

Unrecognized
Loss

12 Months or More
Fair
Value

Unrecognized
Loss

Total

Fair
Value

Unrecognized
Loss

subdivisions …………………… $
Total held to maturity ……. $

362 $
362 $

(2) $
(2) $

1,502 $
1,502 $

(33) $
(33) $

1,864 $
1,864 $

(35)
(35)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note D - Loans and Allowance for Loan Losses

Loans are comprised of the following at December 31:

Residential real estate …………………………………………………………………………..
Commercial real estate:

Owner-occupied ……………………………………………………………………………..
Nonowner-occupied …………………………………………………………………………
Construction …………………………………………………………………………………
Commercial and industrial …………………………………………………………………….
Consumer:

Automobile ……………………………………………………………………………………
Home equity …………………………………………………………………………………
Other …………………………………………………………………………………………

Less: Allowance for loan losses ………………………………………………………………

2018

2017

304,079 $

309,163

61,694
117,188
37,478
113,243

70,226
22,512
50,632
777,052
(6,728)

73,573
101,571
38,302
107,089

68,626
21,431
49,564
769,319
(7,499)

Loans, net ………………………………………………………………………………………

770,324 $

761,820

The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended

December 31, 2018, 2017 and 2016:

December 31, 2018
Allowance for loan losses:
Beginning balance ……………………………….
Provision for loan losses ……...............................
Loans charged off ……………………………….
Recoveries ……………………………………….
Total ending allowance balance ……………

Residential
Real Estate

Commercial
Real Estate

Commercial
& Industrial Consumer

Total

1,470 $
772
(874)
215
1,583 $

2,978 $
(1,311)
(4)
523
2,186 $

1,024 $
(80)
(208)
327
1,063 $

2,027 $
1,658
(2,514)
725
1,896 $

7,499
1,039
(3,600)
1,790
6,728

December 31, 2017
Allowance for loan losses:
Beginning balance ……………………………….
Provision for loan losses ……...............................
Loans charged off ……………………………….
Recoveries ……………………………………….
Total ending allowance balance ……………

Residential
Real Estate

Commercial
Real Estate

Commercial
& Industrial Consumer

Total

939 $
1,016
(745)
260
1,470 $

4,315 $
(632)
(1,067)
362
2,978 $

907 $
658
(627)
86
1,024 $

1,538 $
1,522
(1,642)
609
2,027 $

7,699
2,564
(4,081)
1,317
7,499

December 31, 2016
Allowance for loan losses:
Beginning balance ……………………………….
Provision for loan losses ………………………..
Loans charged off ……………………………….
Recoveries ………………………………………
Total ending allowance balance ……………

Residential
Real Estate

Commercial
Real Estate

Commercial
& Industrial Consumer

Total

1,087 $
(63)
(384)
299
939 $

1,959 $
2,287
(63)
132
4,315 $

2,589 $
(1,112)
(586)
16
907 $

1,013 $
1,714
(2,170)
981
1,538 $

6,648
2,826
(3,203)
1,428
7,699

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note D - 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 December 31, 2018 and 2017:

December 31, 2018
Allowance for loan losses:
Ending allowance balance attributable to loans:

Residential
Real Estate

Commercial
Real Estate

Commercial
& Industrial Consumer

Total

Individually evaluated for impairment….……...... $
Collectively evaluated for impairment……….......
Total ending allowance balance………………. $

---- $
1,583
1,583 $

98 $
2,088
2,186 $

---- $
1,063
1,063 $

---- $
1,896
1,896 $

98
6,630
6,728

Loans:
Loans individually evaluated for impairment ……… $
Loans collectively evaluated for impairment ………
Total ending loans balance…….……………… $

1,667 $
302,412
304,079 $

3,835 $
212,525
216,360 $

7,116 $
106,127
113,243 $

---- $
143,370
143,370 $

12,618
764,434
777,052

December 31, 2017
Allowance for loan losses:
Ending allowance balance attributable to loans:

Residential
Real Estate

Commercial
Real Estate

Commercial
& Industrial Consumer

Total

Individually evaluated for impairment ….……...... $
Collectively evaluated for impairment ……….......
Total ending allowance balance ………………. $

---- $
1,470
1,470 $

94 $
2,884
2,978 $

---- $
1,024
1,024 $

---- $
2,027
2,027 $

94
7,405
7,499

Loans:
Loans individually evaluated for impairment ……… $
Loans collectively evaluated for impairment ………
Total ending loans balance …….……………… $

1,420 $
307,743
309,163 $

7,333 $
206,113
213,446 $

9,154 $
97,935
107,089 $

201 $
139,420
139,621 $

18,108
751,211
769,319

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note D – Loans and Allowance for Loan Losses (continued)

The following table presents information related to loans individually evaluated for impairment by class of loans as

of the years ended December 31, 2018, 2017 and 2016:

December 31, 2018
With an allowance recorded:
Commercial real estate:
Nonowner-occupied ……………. $

With no related allowance recorded:
Residential real estate ……………
Commercial real estate:
Owner-occupied ………………
Nonowner-occupied …………..
Construction …………………..
Commercial and industrial ……….

Unpaid
Principal
Balance

Recorded
Investment

Allowance
for
Loan Losses
Allocated

Average
Impaired
Loans

Interest
Income

Recognized

Cash Basis
Interest
Recognized

362 $

98 $

367 $

15 $

1,667

----

511

101

2,527
2,368
336
7,116

2,527
946
----
7,116

----
----
----
----

2,475
1,912
----
5,802

141
57
20
414

Total ………………………………… $

14,376 $

12,618 $

98 $

11,067 $

748 $

748

December 31, 2017
With an allowance recorded:
Commercial real estate:
Nonowner-occupied ……………. $

Unpaid
Principal
Balance

Recorded
Investment

Allowance
for
Loan Losses
Allocated

Average
Impaired
Loans

Interest
Income

Recognized

Cash Basis
Interest
Recognized

372 $

94 $

378 $

17 $

1,420

----

851

3,427
4,989
352
9,154

3,427
3,534
----
9,154

----
----
----
----

2,456
3,521
----
8,544

184
81
19
481

203

201

----

208

184
81
19
481

Total ………………………………… $

19,917 $

18,108 $

94 $

15,958 $

855 $

855

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note D – Loans and Allowance for Loan Losses (continued)

December 31, 2016
With an allowance recorded:
Commercial real estate:
Owner-occupied ………………. $
Nonowner-occupied …………..
Commercial and industrial ……….
Consumer:
Home equity ……………………

Unpaid
Principal
Balance

Recorded
Investment

Allowance
for
Loan Losses
Allocated

Average
Impaired
Loans

Interest
Income

Recognized

Cash Basis
Interest
Recognized

5,477 $
384
392

2,435 $
100
241

3,185 $
390
391

300 $
19
----

416

205

421

300
19
----

717

----

726

3,638
5,078
1,001
8,073

3,091
3,632
527
8,073

----
----
----
----

3,005
3,572
522
7,681

178
79
136
381

Total ………………………………… $

25,176 $

22,709 $

2,981 $

19,893 $

1,145 $

1,145

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 December 31, 2018 and
December 31, 2017, other real estate owned for residential real estate properties totaled $134 and $262, respectively. In
addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $2,375 and
$2,410 as of December 31, 2018 and December 31, 2017, respectively.

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 December 31, 2018 and 2017:

Loans Past Due 90 Days
And Still Accruing

Nonaccrual

December 31, 2018
Residential real estate …………………………………………………... $
Commercial real estate:

Owner-occupied ………………………………………………………
Nonowner-occupied …………………………………………………
Construction ………………………………………………………….
Commercial and industrial …………………………………………….
Consumer:

Automobile ………………………………………………………….
Home equity …………………………………………………………..
Other ………………………………………………………………….
Total ……………………………………………………………………… $

----
362
66
31

270
91
228
1,067

6,661

470
574
416
228

59
183
86
8,677

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note D – Loans and Allowance for Loan Losses (continued)

Loans Past Due 90 Days
And Still Accruing

Nonaccrual

December 31, 2017
Residential real estate …………………………………………………... $
Commercial real estate:

131

----
----
----
----

127
----
76
334

5,906

476
2,454
444
337

86
283
126
10,112

The following table presents the aging of the recorded investment of past due loans by class of loans as of December

31, 2018 and 2017:

December 31, 2018
Residential real estate ……………. $
Commercial real estate:

Owner-occupied ……………….
Nonowner-occupied …………..
Construction …………………..
Commercial and industrial ……….
Consumer:

Automobile ……………………
Home equity …………………..
Other ………………………….

30-59
Days
Past Due

60-89
Days
Past Due

90 Days
Or More
Past Due

Total
Past Due

Loans Not
Past Due

Total

3,369 $

1,183 $

1,642 $

6,194 $

297,885 $

304,079

298
299
31
428

1,287
171
593

----
----
----
192

286
92
291

129
747
265
110

289
260
228

427
1,046
296
730

1,862
523
1,112

61,267
116,142
37,182
112,513

68,364
21,989
49,520

61,694
117,188
37,478
113,243

70,226
22,512
50,632

Total ……………………………….. $

6,476 $

2,044 $

3,670 $

12,190 $

764,862 $

777,052

December 31, 2017
Residential real estate ……………. $
Commercial real estate:

Owner-occupied ……………….
Nonowner-occupied …………..
Construction …………………..
Commercial and industrial ……….
Consumer:

Automobile ……………………
Home equity …………………..
Other ………………………….

30-59
Days
Past Due

60-89
Days
Past Due

90 Days
Or More
Past Due

Total
Past Due

Loans Not
Past Due

Total

5,383 $

671 $

1,673 $

7,727 $

301,436 $

309,163

194
140
----
303

1,257
90
865

161
----
----
243

346
272
218

160
2,238
169
191

151
27
76

515
2,378
169
737

1,754
389
1,159

73,058
99,193
38,133
106,352

66,872
21,042
48,405

73,573
101,571
38,302
107,089

68,626
21,431
49,564

Total ……………………………….. $

8,232 $

1,911 $

4,685 $

14,828 $

754,491 $

769,319

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 TDR’s 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note D – Loans and Allowance for Loan Losses (continued)

The Company has allocated reserves for a portion of its TDR’s to reflect the fair values of the underlying collateral or

the present value of the concessionary terms granted to the customer.

The following table presents the types of TDR loan modifications by class of loans as of December 31, 2018 and

December 31, 2017:

December 31, 2018
Residential real estate:

TDR’s
Performing to
Modified
Terms

TDR’s Not
Performing to
Modified
Terms

Total
TDR’s

Interest only payments ………………………………………………………..

216 $

---- $

216

Commercial real estate:
Owner-occupied

Interest only payments ……………………………………………………….
Reduction of principal and interest payments …………………………………
Maturity extension at lower stated rate than market rate ……………………..
Credit extension at lower stated rate than market rate ………………………..

Nonowner-occupied

Interest only payments ………………………………………………………..
Rate reduction ………………………………………………………………..
Credit extension at lower stated rate than market rate ………………………..
Commercial and industrial

968
529
469
402

----
----
561

----
----
----

385
362
----

968
529
469
402

385
362
561

Interest only payments ………………………………………………………
Total TDR’s ……………………………………………………………………………

4,742
7,887 $

----
747 $

4,742
8,634

TDR’s
Performing to
Modified
Terms

TDR’s Not
Performing to
Modified
Terms

Total
TDR’s

December 31, 2017
Residential real estate:

Interest only payments ………………………………………………………..

697 $

---- $

697

Commercial real estate:
Owner-occupied

Nonowner-occupied

997
554
1,466
410

560
372
570

----
----
----

1,961
----
----

997
554
1,466
410

2,521
372
570

Interest only payments ………………………………………………………

9,154

----

9,154

Consumer:

Home equity

Maturity extension at lower stated rate than market rate ……………………..
Total TDR’s ……………………………………………………………………………

----
14,780 $

201
2,162 $

201
16,942

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note D – Loans and Allowance for Loan Losses (continued)

At December 31, 2018, the balance in TDR loans decreased $8,308, or 49.0%, from year-end 2017. The Company’s
specific allocations in reserves to customers whose loan terms have been modified in TDR’s totaled $98 at December 31, 2018,
as compared to $94 in reserves at December 31, 2017. At December 31, 2018, the Company had $758 in commitments to lend
additional amounts to customers with outstanding loans that are classified as TDR’s, as compared to $846 at December 31,
2017.

There were no TDR loan modifications that occurred during the year ended December 31, 2018. The following tables
present the pre- and post-modification balances of TDR loan modifications by class of loans that occurred during the years
ended December 31, 2017 and 2016:

TDR’s
Performing to Modified
Terms

TDR’s Not
Performing to Modified
Terms

Number
of
Loans

Pre-
Modification
Recorded
Investment

Post-
Modification
Recorded
Investment

Pre-
Modification
Recorded
Investment

Post-
Modification
Recorded
Investment

December 31, 2017

Commercial real estate:
Owner-occupied

Interest only payments …………………………………….
Credit extension at lower stated rate than market rate …….

1
1

997 $
412

---- $
----

Total TDR’s ……………....……………………………………….

1,409 $

---- $

----
----

----

The troubled debt restructurings described above had no impact on the allowance for loan losses and resulted in no

charge-offs during the year ended December 31, 2017.

TDR’s
Performing to Modified
Terms

TDR’s Not
Performing to Modified
Terms

Number
of
Loans

Pre-
Modification
Recorded
Investment

Post-
Modification
Recorded
Investment

Pre-
Modification
Recorded
Investment

Post-
Modification
Recorded
Investment

December 31, 2016

Commercial real estate:
Nonowner-occupied

Interest only payments …………………………………….
Credit extension at lower stated rate than market rate …….

1
1

---- $
574

226 $
----

Total TDR’s ……………....……………………………………….

574 $

226 $

226
----

226

The troubled debt restructurings described above increased the allowance for loan losses by $11 and resulted in charge-

offs of $11 during the year ended December 31, 2016

During the twelve months ended December 31, 2018, a commercial real estate TDR totaling $362 became past due
90 days or more. Excluding this $362 commercial real estate loan, there were no other TDR's described above at December 31,
2018 that experienced any payment defaults within twelve months following their loan modification. During the twelve months
ended December 31, 2016, the Company placed one commercial real estate TDR totaling $226 on nonaccrual status. Excluding
this $226 commercial real estate loan, there were no other TDR's at December 31, 2016 that experienced any payment defaults
within twelve months following their loan modification. The Company had no TDR's that occurred during the year ended
December 31, 2017 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note D - Loans and Allowance for Loan Losses (continued)

The terms of certain other loans were modified during the years ended December 31, 2018 and 2017 that did not meet
the definition of a TDR. These loans have a total recorded investment of $28,738 as of December 31, 2018 and $29,331 as of
December 31, 2017. The modification of these loans primarily involved the modification of the terms of a loan to borrowers
who were not experiencing financial difficulties.

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 $500.

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 troubled debt restructuring 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 loan grade 8 loans. Collateral liquidation 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 should be a temporary category 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, and 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 re-evaluation date.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note D - Loans and Allowance for Loan Losses (continued)

As of December 31, 2018 and December 31, 2017, and based on the most recent analysis performed, the risk category

of commercial loans by class of loans is as follows:

December 31, 2018
Commercial real estate:

Owner-occupied …………………………………………………
Nonowner-occupied …………………………………………….
Construction …………………………………………………….
Commercial and industrial ………………………………………..
Total …………………………………………………………………

December 31, 2017
Commercial real estate:

Pass

Criticized

Classified

Total

50,474 $
115,170
37,321
92,417
295,382 $

7,724 $
----
----
6,536
14,260 $

3,496 $
2,018
157
14,290
19,961 $

61,694
117,188
37,478
113,243
329,603

Pass

Criticized

Classified

Total

64,993 $
93,197
37,735
91,097
287,022 $

934 $
3,776
156
6,058
10,924 $

7,646 $
4,598
411
9,934
22,589 $

73,573
101,571
38,302
107,089
320,535

The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau) but
not thereafter. 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.

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 payment activity as of December 31, 2018 and December 31, 2017:

Consumer

December 31, 2018

Performing ………………………………………
Nonperforming ………………………………….
Total …………………………………………….

December 31, 2017

Performing ………………………………………
Nonperforming ………………………………….
Total …………………………………………….

Automobile Home Equity
$

69,897 $
329
70,226 $

22,238 $
274
22,512 $

Consumer

Automobile Home Equity
$

68,413 $
213
68,626 $

21,148 $
283
21,431 $

Other

Residential
Real Estate

50,318 $
314
50,632 $

297,399 $
6,680
304,079 $

Total

439,852
7,597
447,449

Other

Residential
Real Estate

49,362 $
202
49,564 $

303,126 $
6,037
309,163 $

Total

442,049
6,735
448,784

The Company, through its subsidiaries, grants residential, consumer, and commercial loans to customers located
primarily in the southeastern area of Ohio as well as the western counties of West Virginia. Approximately 5.02% of total
loans were unsecured at December 31, 2018, up from 4.86% at December 31, 2017.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note E - Premises and Equipment

Following is a summary of premises and equipment at December 31:

Land ………………………………………………………………………………………...
Buildings …………………………………………………………………………………..
Leasehold improvements …………………………………………………………………..
Furniture and equipment …………………………………………………………………..

Less accumulated depreciation ……………………………………………………………..
Total premises and equipment ………………………………………………………..

2018

2017

2,744 $
16,154
1,267
6,039
26,204
11,349
14,855 $

2,641
13,913
1,267
5,675
23,496
10,215
13,281

The following is a summary of the future minimum operating lease payments for facilities leased by the Company.

Operating lease expense was $315 in 2018, $344 in 2017, and $464 in 2016.

2019 ………………………………………………………………………………………………………………
2020 ………………………………………………………………………………………………………………
2021 ………………………………………………………………………………………………………………
2022 ………………………………………………………………………………………………………………
2023 ………………………………………………………………………………………………………………
Thereafter …………………………………………………………………………………………………………

266
166
121
83
29
----
665

Note F – Goodwill and Intangible Assets

Goodwill: The change in goodwill during the year is as follows:

Beginning of year………………………………….…………………………………………… $
Acquired goodwill ………………………………….………………………………..………
Impairment …………………………………………………………………………………..
Finalization of Milton acquisition accounting ………………………………………….……
End of year………………………………………………………................................................ $

7,371 $
----
----
----
7,371 $

7,801 $
----
----
(430)
7,371 $

1,267
6,534
----
----
7,801

2018

2017

2016

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2018
and 2017, the Company’s reporting unit had positive equity and the Company elected to perform a qualitative assessment to
determine if it was more likely than not that fair value of the reporting unit exceeded its carrying value, including goodwill.
The qualitative assessment indicated that it is more likely than not that fair value of goodwill is more than the carrying value,
resulting in no impairment. Therefore, the Company did not proceed to step one of the annual goodwill impairment testing
requirement.

Acquired intangible assets: Acquired intangible assets were as follows at year-end:

Amortized intangible assets:

Core deposit intangibles …………..…………………………….......

738 $

359 $

738 $

224

Aggregate amortization expense was $135 for 2018, $156 for 2017and $68 for 2016.

2018

2017

Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
Amortization

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note F – Goodwill and Intangible Assets (continued)

Estimated amortization expense for each of the next five years:

114
94
74
53
32
12
379

Note G - Deposits

Following is a summary of interest-bearing deposits at December 31:

2018

2017

NOW accounts ……………………………………………………………………………….
Savings and Money Market …………………………………………………………………..
Time:

In denominations of $250,000 or less …………………………………………………….
In denominations of more than $250,000 …………………………………………………
Total time deposits ……………………………………………………………………...
Total interest-bearing deposits ………………………………………………………….

155,166 $
237,868

178,736
37,113
215,849
608,883 $

Following is a summary of total time deposits by remaining maturity at December 31, 2018:

158,650
241,018

181,690
21,711
203,401
603,069

107,432
60,025
24,396
17,901
5,633
462
215,849

Brokered deposits, included in time deposits, were $30,838 and $34,363 at December 31, 2018 and 2017, respectively.

Note H - Interest Rate Swaps

The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the
amount, sources, and duration of its assets and liabilities. The Company utilizes interest rate swap agreements as part of its
asset/liability management strategy to help manage its interest rate risk position. As part of this strategy, the Company provides
its customer with a fixed-rate loan while creating a variable-rate asset for the Company by the customer entering into an interest
rate swap with the Company on terms that match the loan. The Company offsets its risk exposure by entering into an offsetting
interest rate swap with an unaffiliated institution. These interest rate swaps do not qualify as designated hedges; therefore, each
swap is accounted for as a standalone derivative. At December 31, 2018, the Company had interest rate swaps associated with
commercial loans with a notional value of $9,219 and a fair value of $101. This is compared to interest rate swaps with a
notional value of $7,234 and a fair value of $59 at December 31, 2017. The notional amount of the interest rate swaps does
not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and
the other terms of the individual interest rate swap agreement. To further offset the risk exposure related to market value
fluctuations of its interest rate swaps, the Company maintains collateral deposits on hand with a third-party correspondent,
which totaled $350 at December 31, 2018 and December 31, 2017.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note I - Other Borrowed Funds

Other borrowed funds at December 31, 2018 and 2017 are comprised of advances from the Federal Home Loan Bank
(“FHLB”) of Cincinnati and promissory notes. At December 31, 2017, FHLB Borrowings included $29 in capitalized lease
obligations.

FHLB Borrowings

Promissory Notes

Totals

2018 …………………………

2017 …………………………

$33,434

$28,625

$6,279

$7,324

$ 39,713

$ 35,949

Pursuant to collateral agreements with the FHLB, advances are secured by $294,575 in qualifying mortgage loans,
$68,979 in commercial loans and $5,365 in FHLB stock at December 31, 2018. Fixed-rate FHLB advances of $33,434 mature
through 2042 and have interest rates ranging from 1.53% to 3.31% and a year-to-date weighted average cost of 2.36% and
2.15% at December 31, 2018 and 2017, respectively. There were no variable-rate FHLB borrowings at December 31, 2018.

At December 31, 2018, the Company had a cash management line of credit enabling it to borrow up to $80,000 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 available on this line of credit at December 31, 2018.

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 $233,432 at December 31, 2018. Of this maximum borrowing
capacity of $233,432, the Company had $148,298 available to use as additional borrowings, of which $80,000 could be used
for short-term, cash management advances, as mentioned above.

Promissory notes, issued primarily by Ohio Valley, are due at various dates through a final maturity date of May 1,
2023, and have fixed rates ranging from 1.50% to 4.09% and a year-to-date weighted average cost of 2.83% at December 31,
2018, as compared to 2.77% at December 31, 2017. At December 31, 2018, there were eight promissory notes payable by Ohio
Valley to related parties totaling $3,558. See Note M for further discussion of related party transactions. Promissory notes
payable to other banks totaled $2,451 at December 31, 2018.

Letters of credit issued on the Bank’s behalf by the FHLB to collateralize certain public unit deposits as required by

law totaled $51,700 at December 31, 2018 and $60,000 at December 31, 2017.

Scheduled principal payments over the next five years:

2019 ………………………………………………………………………………..
2020 ………………………………………………………………………………..
2021 ………………………………………………………………………………..
2022 ………………………………………………………………………………..
2023 ………………………………………………………………………………..
Thereafter ………………………………………………………………………….

FHLB

Borrowings

Promissory
Notes

Totals

4,018 $
3,380
3,000
2,842
2,704
17,490
33,434 $

3,290 $
1,599
565
588
237
----
6,279 $

7,308
4,979
3,565
3,430
2,941
17,490
39,713

Note J - Subordinated Debentures and Trust Preferred Securities

On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of adjustable-rate trust preferred securities as part
of a pooled offering of such securities. The rate on these trust preferred securities was fixed at 6.58% for five years, and then
converted to a floating-rate term on March 15, 2012, based on a rate equal to the 3-month LIBOR plus 1.68%. The interest
rate on these trust preferred securities was 4.47% at December 31, 2018 and 3.27% at December 31, 2017. There were no debt
issuance costs incurred with these trust preferred securities. The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering. The subordinated debentures must be redeemed no later than June 15, 2037.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note J - Subordinated Debentures and Trust Preferred Securities (continued)

Under the provisions of the related indenture agreements, the interest payable on the trust preferred securities is
deferrable for up to five years and any such deferral is not considered a default. During any period of deferral, the Company
would be precluded from declaring or paying dividends to shareholders or repurchasing any of the Company’s common
stock. Under generally accepted accounting principles, the trusts are not consolidated with the Company. Accordingly, the
Company does not report the securities issued by the trust as liabilities, and instead reports as liabilities the subordinated
debentures issued by the Company and held by the trust. Since the Company’s equity interest in the trusts cannot be
received until the subordinated debentures are repaid, these amounts have been netted. The subordinated debentures may be
included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

Note K - Income Taxes

On December 22, 2017, the TCJA was signed into law, which included several provisions that affected the Company’s
federal income tax expense, which reduced the federal income tax rate to 21% effective January 1, 2018. As a result of the rate
reduction, the Company was required to re-measure, through income tax expense in the period of enactment, the deferred tax
assets and liabilities using the enacted rate at which these items are expected to be recovered or settled. The re-measurement
of the Company’s net deferred tax asset resulted in additional 2017 income tax expense of $1.8 million

The provision for income taxes consists of the following components:

Current tax expense ……………………………………………………………….
Deferred tax (benefit) expense …………………………………………………….
Total income taxes …………………………………………………………..

2,389 $
(134)
2,255 $

2,579
1,907
4,486

2,645
(725 )
1,920

2018

2017

2016

The source of deferred tax assets and deferred tax liabilities at December 31:

Items giving rise to deferred tax assets:
Allowance for loan losses ………………………………………………………………..
Unrealized loss on securities available for sale …………………………………………
Deferred compensation ………………………………………………………………….
Deferred loan fees/costs …………………………………………………………………
Other real estate owned …………………………………………………………………
Accrued bonus …………..………………………………………………………………
Purchase accounting adjustments ………………………………………………………
Net operating loss …………………………………………………………………………
Other ……………………………………………………………………………………..
Items giving rise to deferred tax liabilities:
Mortgage servicing rights ……………………………………………………………….
FHLB stock dividends ………………………………………………………………….
Prepaid expenses ………………………………………………………………………..
Depreciation and amortization ………………………………………………………….
Other ……………………………………………………………………………………
Net deferred tax asset ……………………………………………………………………….

2018

2017

1,463 $
568
1,580
119
434
280
61
132
257

(80)
(676)
(191)
(656)
(3)
3,288 $

1,631
279
1,466
130
377
234
56
148
212

(78)
(676)
(149)
(627)
(3)
3,000

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note K - Income Taxes (continued)

The Company determined that it was not required to establish a valuation allowance for deferred tax assets since
management believes that the deferred tax assets are likely to be realized through the future reversals of existing taxable
temporary differences, deductions against forecasted income and tax planning strategies.

At December 31, 2018, the Company’s deferred tax asset related to Section 382 net operating loss carryforwards was

$629, which will expire in 2026.

The difference between the financial statement tax provision and amounts computed by applying the statutory federal

income tax rate of 21% in 2018 and 34% in 2017 and 2016 to income before taxes is as follows:

2018

2017

2016

Statutory tax ……………………………………………………..
Effect of nontaxable interest …………………………………….
Effect of nontaxable insurance premiums ……………………….
Income from bank owned insurance, net ………………………..
Effect of postretirement benefits …………………………………
Effect of nontaxable life insurance death proceeds ……………..
Impact from TCJA ………………………………………………..
Effect of state income tax ………………………………………..
Tax credits ……………………………………………………….
Milton Merger Costs ……………………………………………..
Other items ……………………………………………………….

2,982 $
(352)
(218)
(142)
20
----
----
33
(217)
----
149

4,078 $
(514)
(303)
(230)
(78)
(175)
1,783

70
(191)
4
42

Total income taxes ……………………………………………….

2,255 $

4,486 $

3,006
(433)
(340)
(239)
(19)
----
----
64
(211)
73
19

1,920

At December 31, 2018 and December 31, 2017, the Company had no unrecognized tax benefits. The Company does
not expect the amount of unrecognized tax benefits to significantly change within the next twelve months. As previously
reported, the Internal Revenue Service (“IRS”) had proposed that Loan Central, as a tax return preparer, be assessed a penalty
for allegedly negotiating or endorsing checks issued by the U.S. Treasury to taxpayers. Loan Central consequently appealed
this matter within the IRS, and felt confident that it was highly unlikely that the penalty recommendation would be sustained. In
the third quarter of 2018, Loan Central was notified by the IRS that their penalties had been abated and that no liability exists
regarding the case against them. As a result, the Company did not recognize any interest and/or penalties related to this matter.

The Company is subject to U.S. federal income tax as well as West Virginia state income tax. The Company is no
longer subject to federal or state examination for years prior to 2015. The tax years 2015-2017 remain open to federal and state
examinations.

Note L - Commitments and Contingent Liabilities

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 Bank uses the same credit policies in making commitments and conditional
obligations as it does for instruments recorded on the balance sheet.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note L - Commitments and Contingent Liabilities (continued)

Following is a summary of such commitments at December 31:

Fixed rate ……………………………………………………………………………………...
Variable rate ………………………………………………………………………………......
Standby letters of credit ………………………………………………………………………

121 $
66,580
4,325

96
64,624
4,139

2018

2017

At December 31, 2018, the fixed-rate commitments have interest rates ranging from 3.75% to 7.00% and maturities

ranging from 15 years to 30 years.

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 issued by the Bank to guarantee the performance of a
customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income-producing commercial properties.

During the years covered by these consolidated financial statements, the Company participated as a facilitator of tax
refunds pursuant to a clearing agreement with a third-party tax refund product provider. The clearing agreement required the
Bank to process electronic refund checks (“ERC’s”) and electronic refund deposits (“ERD’s”) presented for payment on behalf
of taxpayers containing taxpayer refunds. The Bank received a fee paid by the third-party tax refund product provider for each
transaction that is processed. In 2018, the third-party tax refund product provider ceased utilizing the services of the Bank.

There are various contingent liabilities that are not reflected in the financial statements, including claims and legal
actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations.

Note M - Related Party Transactions

Certain directors, executive officers and companies with which they are affiliated were loan customers during 2018.

A summary of activity on these borrower relationships with aggregate debt greater than $120 is as follows:

Total loans at January 1, 2018 ……………………………………………………………………………………………. $
New loans ……………………………………………………………………………………………………………
Repayments ………………………………………………………………………………………………………….
Other changes ………………………………………………………………………………………………………..
$

Total loans at December 31, 2018

8,619
77
(4,860)
(162)
3,674

Other changes include adjustments for loans applicable to one reporting period that are excludable from the other

reporting period, such as changes in persons classified as directors, executive officers and companies’ affiliates.

Deposits from principal officers, directors, and their affiliates at year-end 2018 and 2017 were $52,877 and $44,877.
In addition, the Company had promissory notes outstanding with directors and their affiliates totaling $3,558 at year-end 2018
and $3,593 at year-end 2017. The interest rates ranged from 1.25% to 2.85%, with terms ranging from 12 to 36 months.

Note N - Employee Benefits

The Bank has a profit-sharing plan for the benefit of its employees and their beneficiaries. Contributions to the plan
are determined by the Board of Directors of Ohio Valley. Contributions charged to expense were $352, $340, and $290 for
2018, 2017 and 2016.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note N - Employee Benefits (continued)

Ohio Valley maintains an Employee Stock Ownership Plan (ESOP) covering substantially all employees of the
Company. Ohio Valley issues shares to the ESOP, purchased by the ESOP with subsidiary cash contributions, which are
allocated to ESOP participants based on relative compensation. The total number of shares held by the ESOP, all of which have
been allocated to participant accounts, were 360,669 and 361,584 at December 31, 2018 and 2017. In addition, the subsidiaries
made contributions to its ESOP Trust as follows:

Years ended December 31
2017

2018

2016

Number of shares issued ……………………………………………………………

7,294

15,118

24,572

Fair value of stock contributed ………………………………………………………

295 $

428 $

Cash contributed ……………………………………………………………………..

500

250

Total expense …………………………………………………………………………

795 $

678 $

575

----

575

Life insurance contracts with a cash surrender value of $27,312 and annuity assets of $2,080 at December 31, 2018
have been purchased by the Company, the owner of the policies. The purpose of these contracts was to replace a current group
life insurance program for executive officers, implement a deferred compensation plan for directors and executive officers,
implement a director retirement plan and implement supplemental retirement plans for certain officers. Under the deferred
compensation plan, Ohio Valley pays each participant the amount of fees deferred plus interest over the participant’s desired
term, upon termination of service. Under the director retirement plan, participants are eligible to receive ongoing compensation
payments upon retirement subject to length of service. The supplemental retirement plans provide payments to select executive
officers upon retirement based upon a compensation formula determined by Ohio Valley’s Board of Directors. The present
value of payments expected to be provided are accrued during the service period of the covered individuals and amounted to
$7,267 and $6,740 at December 31, 2018 and 2017. Expenses related to the plans for each of the last three years amounted to
$602, $490, and $399. In association with the split-dollar life insurance plan, the present value of the postretirement benefit
totaled $2,873 at December 31, 2018 and $2,776 at December 31, 2017.

During 2017, the Company collected $2,107 in proceeds on two BOLI policies and recorded $1,993 in proceeds
expected to be received from the settlement of two other BOLI policies. This resulted in a $3,586 reduction to BOLI assets
and a net gain of $514 that was recorded to income. The proceeds of $1,993 had not yet been collected by year-end 2017 and,
therefore, were recorded as other assets at December 31, 2017.

Note O - Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access
as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities,
quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market
data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note O - Fair Value of Financial Instruments (continued)

The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values

of its financial assets and liabilities on a recurring or nonrecurring basis:

Securities: The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where
quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities
where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash
flows or other market indicators (Level 3). During times when trading is more liquid, broker quotes are used (if available) to
validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are
reviewed and incorporated into the calculations.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried
at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is
commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by
the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments
are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate
collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted
or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and
management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.
Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general
appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and
licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions
and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management’s own
assumptions of fair value based on factors that include recent market data or industry-wide statistics. On an as-needed basis,
the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs that
typically approximate 10%.

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note O - Fair Value of Financial Instruments (continued)

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

Fair Value Measurements at December 31, 2018, Using

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets:
U.S. Government sponsored entity securities ……………………….......
Agency mortgage-backed securities, residential ………………………..
Interest rate swap derivatives ………………………….………………….
Interest rate swap derivatives ………………………….………………….

---- $
----
----
----

16,630
85,534
101
(101 )

----
----
----
----

Fair Value Measurements at December 31, 2017, Using

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

---- $
----
----
----

13,473
87,652
59
(59 )

----
----
----
----

There were no transfers between Level 1 and Level 2 during 2018 or 2017.

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

Fair Value Measurements at December 31, 2018, Using

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets:
Impaired loans:

Commercial real estate:

Nonowner-occupied ……………………………………….

---- $

264

Other real estate owned:

Commercial real estate:

Construction ……………………………………………….

----

228

----

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note O - Fair Value of Financial Instruments (continued)

Fair Value Measurements at December 31, 2017, Using

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets:
Impaired loans:

Residential real estate ……………………………………………
Commercial real estate:

Nonowner-occupied ……………………………………….

----

---- $

----

756

216

Other real estate owned:

Commercial real estate:

Construction ……………………………………………….

----

822

At December 31, 2018, the recorded investment of impaired loans measured for impairment using the fair value of
collateral for collateral-dependent loans totaled $362, with a corresponding valuation allowance of $98, resulting in an increase
of $4 in provision expense during the year ended December 31, 2018, with no corresponding charge-offs recognized. At
December 31, 2017, the recorded investment of impaired loans measured for impairment using the fair value of collateral for
collateral-dependent loans totaled $972, with no corresponding valuation allowance, resulting in no impact to provision expense
during the year ended December 31, 2017, with no corresponding charge-offs recognized.

Other real estate owned that was measured at fair value less costs to sell at December 31, 2018 had a net carrying
amount of $228, which is made up of the outstanding balance of $2,217, net of a valuation allowance of $1,989 at December
31, 2018. There were $594 in corresponding write-downs during 2018. Other real estate owned that was measured at fair value
less costs to sell at December 31, 2017 had a net carrying amount of $822, which is made up of the outstanding balance of
$2,217, net of a valuation allowance of $1,395 at December 31, 2017. There was $68 in net appreciation during 2017.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments

measured at fair value on a non-recurring basis at December 31, 2018 and December 31, 2017:

December 31, 2018

Impaired loans:
Commercial real estate:

Fair
Value

Valuation
Technique(s)

Unobservable
Input(s)

Range

(Weighted
Average)

Nonowner-occupied …………………..... $

264 Sales approach

Adjustment to comparables 6.8% to 66.7%

18.0%

December 31, 2017

Fair
Value

Valuation
Technique(s)

Unobservable
Input(s)

Range

(Weighted
Average)

Impaired loans:
Residential real estate ……………………... $
Commercial real estate:

756 Sales approach

Adjustment to comparables 1.3% to 55.9%

32.9%

Nonowner-occupied ………………….....

216 Sales approach

Adjustment to comparables 1.6% to 50%

26.7%

Other real estate owned:
Commercial real estate:

Construction ……….……..…………….

822 Sales approach

Adjustment to comparables

5% to 40%

18.1%

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note O - Fair Value of Financial Instruments (continued)

The carrying amounts and estimated fair values of financial instruments at December 31, 2018 and December 31,

2017 are as follows:

Financial Assets:
Cash and cash equivalents ……………………….....
Certificates of deposit in financial institutions……....
Securities available for sale …………………………
Securities held to maturity ………………………….
Loans, net …………………………………………..
Accrued interest receivable …………………………

Financial Liabilities:
Deposits …………………………………………….
Other borrowed funds ………………………………
Subordinated debentures ……………………………
Accrued interest payable ……………………………

Fair Value Measurements at December 31, 2018 Using:

Carrying
Value

Level 1

Level 2

Level 3

Total

71,180 $
2,065
102,164
15,816
770,324
2,638

71,180 $
----
----
----
----
----

---- $
2,065
102,164
7,625
----
312

---- $
----
----
8,609
766,784
2,326

71,180
2,065
102,164
16,234
766,784
2,638

846,704
39,713
8,500
1,255

237,821
----
----
3

607,593
37,644
7,054
1,252

----
----
----
----

845,414
37,644
7,054
1,255

Fair Value Measurements at December 31, 2017 Using:

Carrying
Value

Level 1

Level 2

Level 3

Total

74,573 $
1,820
101,125
17,581
761,820
2,503

74,573 $
----
----
----
----
----

---- $
1,820
101,125
9,020
----
268

---- $
----
----
9,059
760,746
2,235

74,573
1,820
101,125
18,079
760,746
2,503

856,724
35,949
8,500
792

253,655
----
----
4

602,268
34,810
6,678
788

----
----
----
----

855,923
34,810
6,678
792

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Loans: The fair values of loans as of December 31, 2018 follows the guidance in ASU 2016-01, which prescribes an “exit
price” approach in estimating and disclosing fair value of financial instruments resulting in a Level 3 classification. The fair
value calculation at that date discounted estimated future cash flows using rates that incorporated discounts for credit, liquidity,
and marketability factors. The fair values of loans as of December 31, 2017 used an “entry price” approach resulting in a Level
3 classification. The fair value calculation for that date discounted estimated future cash flows using current rates at which
similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Fair value estimates are made at a specific point in time, based on relevant market information and information about
the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one
time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of
the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note P - Regulatory Matters

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking
agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can
initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S.
banks (Basel III rules) became effective for the Company and the Bank on January 1, 2015 with full compliance with all of the
requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Minimum requirements
increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common
equity tier 1 capital to risk-weighted assets ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets. The
capital conservation buffer began to phase in on January 1, 2016 at 0.625%, and increased by the same amount on each
subsequent January 1 over a four-year period. The fully phased-in capital conservation buffer as of January 1, 2019 is 2.5%.
For 2018 and 2017, the phase-in transition portion of that buffer was 1.875% and 1.25%, respectively. Further, Basel III rules
increased the minimum ratio of tier 1 capital to risk-weighted assets from 4.0% to 6.0%, and all banks are now subject to a
4.0% minimum leverage ratio. The required total risk-based capital ratio was unchanged. Failure to maintain the required
common equity tier 1 capital conservation buffer will result in potential restrictions on a bank's ability to pay dividends,
repurchase stock and/or pay discretionary compensation to its employees.

Prompt corrective action regulations applicable to insured depository institutions provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although
these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to
accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital
restoration plans are required. At year-end 2018 and 2017, the Bank met the capital requirements to be deemed well capitalized
under the regulatory framework for prompt corrective action. Regulations of the Board of Governors of the Federal Reserve
System (the “FRB”) require a state-chartered bank that is a member of a Federal Reserve Bank to maintain certain amounts
and types of capital and generally also require bank holding companies to meet such requirements on a consolidated basis. The
FRB generally requires bank holding companies that have chosen to become financial holding companies to be “well
capitalized,” as defined by FRB regulations, in order to continue engaging in activities permissible only to bank holding
companies that are registered as financial holding companies. If, however, a bank holding company, whether or not also a
financial holding company, satisfies the requirements of the Federal Reserve’s Small Bank Holding Company and Small
Savings and Loan Holding Company Policy (the “SBHCP”), the holding company is not required to meet the consolidated
capital requirements. As amended effective in September 2018, the SBHCP requires that the holding company have assets of
less than $3 billion, that it meet certain qualitative requirements, and that all of the holding company’s bank subsidiaries meet
all bank capital requirements. As of December 31, 2018, the Company was deemed to meet the SBHCP requirements and so
was not required to meet consolidated capital requirements at the holding company level.

The following table summarizes the capital ratios (excluding the capital conservation buffer) of the Company and the
Bank. The minimums for the Company are those that would have been required if the Company was not a small bank holding
company under the SBHCP.

2018
Total capital (to risk weighted assets)
Consolidated ……………………
Bank …………………………….
Common equity Tier 1 capital (to risk
weighted assets)

Consolidated ……………………
Bank …………………………….
Tier 1 capital (to risk weighted assets)
Consolidated ……………………
Bank …………………………….

Tier 1 capital (to average assets)

Consolidated ……………………
Bank …………………………….

Actual

Amount

Ratio

Minimum
Regulatory
Capital Ratio

127,487
114,947

17.7%
16.2

8.0%

8.0

Minimum
To Be Well
Capitalized (1)

10.0%
10.0

112,259
108,547

120,759
108,547

15.6
15.3

16.7
15.3

11.8
10.7

4.5
4.5

6.0
6.0

4.0
4.0

N/A
6.5

6.0
8.0

N/A
5.0

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note P – Regulatory Matters (continued)

2017
Total capital (to risk weighted assets)
Consolidated ……………………
Bank …………………………….
Common equity Tier 1 capital (to risk
weighted assets)

Consolidated ……………………
Bank …………………………….
Tier 1 capital (to risk weighted assets)
Consolidated ……………………
Bank …………………………….

Tier 1 capital (to average assets)

Consolidated ……………………
Bank …………………………….

Actual

Amount

Ratio

Minimum
Regulatory
Capital Ratio

118,456
107,929

16.6%
15.3

8.0%

8.0

Minimum
To Be Well
Capitalized (1)

10.0%
10.0

102,457
100,759

110,957
100,759

14.3
14.3

15.5
14.3

11.0
10.1

4.5
4.5

6.0
6.0

4.0
4.0

N/A
6.5

6.0
8.0

N/A
5.0

(1)

For the Company, these amounts would be required for the Company to engage in activities permissible only for a bank holding company that meets the financial
holding company requirements if the Company were not subject to the SBHCP. For the Bank, these are the amounts required for the Bank to be deemed well capitalized
under the prompt corrective action regulations.

Dividends paid by the subsidiaries are the primary source of funds available to Ohio Valley for payment of dividends
to shareholders and for other working capital needs. The payment of dividends by the subsidiaries to Ohio Valley is subject to
restrictions by regulatory authorities and state law. These restrictions generally limit dividends to the current and prior two
years retained earnings of the Bank and Loan Central, Inc., and 90% of the prior year’s net income of OVBC Captive, Inc. At
January 1, 2019 approximately $12,480 of the subsidiaries’ retained earnings were available for dividends under these
guidelines. In addition to these restrictions, dividend payments cannot reduce regulatory capital levels below minimum
regulatory guidelines. The amount of dividends payable by the Bank is also restricted if the Bank does not hold a capital
conservation buffer. The ability of Ohio Valley to borrow funds from the Bank is limited as to amount and terms by banking
regulations. The Board of Governors of the Federal Reserve System also has a policy requiring Ohio Valley to provide notice
to the FRB in advance of the payment of a dividend to Ohio Valley’s shareholders under certain circumstances, and the FRB
may disapprove of such dividend payment if the FRB determines the payment would be an unsafe or unsound practice.

Note Q - Parent Company Only Condensed Financial Information

Below is condensed financial information of Ohio Valley. In this information, Ohio Valley’s investment in its
subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries since acquisition. This information should
be read in conjunction with the consolidated financial statements of the Company.

CONDENSED STATEMENTS OF CONDITION

Assets

Cash and cash equivalents ………………………………………………………………..
Investment in subsidiaries ………………………………………………………………..
Notes receivable – subsidiaries ……………………………………………………………
Other assets ………………………………………………………………………………..
Total assets …………………………………………………………………………..

Liabilities

Notes payable ……………………………………………………………………………..
Subordinated debentures …………………………………………………………………
Other liabilities ……………………………………………………………………………
Total liabilities ……………………………………………………………………....

Years ended December 31:
2017
2018

$
4,032
126,059
3,000
93
133,184 $

6,279 $
8,500
531
15,310

3,292
118,775
3,320
67
125,454

7,324
8,500
269
16,093

Shareholders’ Equity

Total shareholders’ equity ……………………………………………………………
Total liabilities and shareholders’ equity ……………………………………………

117,874
133,184 $

109,361
125,454

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note Q - Parent Company Only Condensed Financial Information (continued)

CONDENSED STATEMENTS OF INCOME

Income:

Years ended December 31:
2017

2018

2016

Interest on notes …………………………………………………………………
Dividends from subsidiaries ……………………………………………………..

53 $
4,225

51 $
4,400

52
6,900

Expenses:

Interest on notes ………..………………………………………………………..
Interest on subordinated debentures ……………………………………………..
Operating expenses ………………………………………………………………
Income before income taxes and equity in undistributed earnings of subsidiaries..
Income tax benefit ………………………………………………………………..
Equity in undistributed earnings of subsidiaries …………………………………
Net Income …………………………………………………………………
Comprehensive Income ……………………………………………………

$
$

185
330
351
3,412
164
8,368
11,944 $
10,860 $

211
248
332
3,660
244
3,605
7,509 $
7,622 $

136
204
667
5,945
256
719
6,920
5,624

CONDENSED STATEMENTS OF CASH FLOWS

Cash flows from operating activities:

Net Income …………………………………………………………………........
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries …………………………….
Common stock issued to ESOP
……………………………………………..
Change in other assets …………………………………………………........
Change in other liabilities …………………………………………………..
Net cash provided by operating activities ………………………………….

Years ended December 31:
2017

2018

2016

11,944 $

7,509 $

6,920

(8,368)

295
(26)
262
4,107

(3,605)
428
(15)
(97)
4,220

Cash flows from investing activities:

Cash paid for Milton Bancorp, Inc. acquisition ………………………………….
Change in notes receivable …………………………………………………........
Net cash provided by (used in) investing activities …………………………

----
320
320

----
100
100

Cash flows from financing activities:

Change in notes payable …………………………………………………….........
Proceeds from common stock through dividend reinvestment ……………………
Cash dividends paid ………………………………………………………………
Net cash provided by (used in) financing activities …………………………...

(1,045)
1,325
(3,967)
(3,687)

(558)
715
(3,932)
(3,775)

Cash and cash equivalents:

Change in cash and cash equivalents …………………………………………….
Cash and cash equivalents at beginning of year ………………………………….
Cash and cash equivalents at end of year …………………………………….

740
3,292
4,032 $

545
2,747
3,292 $

(719)
575
11
318
7,105

(7,431)
461
(6,970)

3,964
----
(3,585)
379

514
2,233
2,747

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note R - 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
92.9%, 92.7%, and 91.6% of total consolidated revenues for the years ended December 31, 2018, 2017 and 2016, respectively.

The accounting policies used for the Company’s reportable segments are the same as those described in Note A -
Summary of Significant Accounting Policies. Income taxes are allocated based on income before tax expense. All goodwill
is in the Banking segment.

Segment information is as follows:

Year Ended December 31, 2018
Consumer
Finance

Total
Company

Banking
$

40,380 $
850
8,243
34,841
1,990
10,942
1,017,902

3,346 $
189
695
2,585
265
1,002
12,591

43,726
1,039
8,938
37,426
2,255
11,944
1,030,493

Year Ended December 31, 2017
Consumer
Finance

Total
Company

Banking
$

38,366 $
2,415
8,834
34,079
3,973
6,733
1,013,386

3,367 $
149
601
2,530
513
776
12,904

41,733
2,564
9,435
36,609
4,486
7,509
1,026,290

Banking
$

Year Ended December 31, 2016
Consumer
Finance

Total
Company

33,019 $
2,665
7,589
30,257
1,530
6,156
941,907

3,307 $
161
650
2,642
390
764
12,733

36,326
2,826
8,239
32,899
1,920
6,920
954,640

Net interest income …………………………………………………………………...
Provision expense …………………………………………………………………….
Noninterest income ………………………………………………………………......
Noninterest expense …………………………………………………………………..
Tax expense …………………………………………………………………………..
Net income ……………………………………………………………………………
Assets ………………………………………………………………………………...

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note S - Consolidated Quarterly Financial Information (unaudited)

Mar. 31

Jun. 30

Sept. 30

Dec. 31

Quarters Ended

2018
Total interest income ………………………………………………
Total interest expense ………………………………………………
Net interest income ………………………………………………..
Provision for loan losses (1) ………………………………………..
Noninterest income (3) ……………………………………………..
Noninterest expense ……………………………………………….
Net income ………………………………………………………

11,938 $
12,709 $
1,298
1,199
10,640
11,510
(23)
756
3,076
2,538
9,808 9,674
2,976
3,366

12,181 $
1,418
10,763
962
1,927
9,761
1,746

12,369
1,556
10,813
(656)
1,397
8,183
3,856

Earnings per share …………………………………………………

0.71 $

0.63 $

0.37 $

0.82

2017
Total interest income ………………………………………………
Total interest expense ……………………………………………..
Net interest income ………………………………………………..
Provision for loan losses (2) ………………………………………..
Noninterest income (3) ……………………………………………..
Noninterest expense ……………………………………………….
Net income ……………………………………………………

11,738 $
873
10,865
145
3,113
9,375
3,217

10,989 $
918
10,071
175
2,112
9,876
1,741

11,317 $
1,049
10,268
1,601
2,282
9,222
1,653

11,664
1,135
10,529
643
1,928
8,136
898

Earnings per share …………………………………………………

0.69 $

0.37 $

0.35 $

0.19

(1) During the second and fourth quarters of 2018, the Company experienced negative provision expense in large part to the
improvement in certain economic risk factors during those periods. This included lower classified loans, as well as the
improvements in historical loan loss rates, loan delinquency, and regional unemployment conditions.

(2) During the third quarter of 2017, the Company experienced higher provision expense that was primarily related to general
increases in specific allocations and increases in charge-offs within the commercial and residential real estate portfolios.

(3) The Company’s noninterest income was significantly impacted by seasonal tax refund processing fees. The Bank serves
as a facilitator for the clearing of tax refunds for a single tax refund product provider. The Bank processes electronic refund
checks/deposits associated with taxpayer refunds, and will, in turn, receive a fee paid by the third-party tax refund product
provider for each transaction processed. Due to the seasonal nature of tax refund transactions, the majority of income was
recorded during the first quarter.

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Ohio Valley Banc Corp.
Gallipolis, Ohio

Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of condition of Ohio Valley Banc Corp. (the "Company") as of December 31,
2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). We also
have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established
in Internal Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an
opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.

We have served as the Company’s auditor since 1992.

Louisville, Kentucky
March 18, 2019

Crowe LLP

MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

Board of Directors and Shareholders
Ohio Valley Banc Corp.

The management of Ohio Valley Banc Corp. (the Company) is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The
Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. The Company's internal control over financial reporting includes those policies and procedures that: (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.

The system of internal control over financial reporting as it relates to the consolidated financial statements is evaluated for
effectiveness by management. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Management assessed Ohio Valley Banc Corp.’s system of internal control over financial reporting as of December 31, 2018,
in relation to criteria for effective internal control over financial reporting as described in the 2013 “Internal Control Integrated
Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
assessment, management concluded that, as of December 31, 2018, its system of internal control over financial reporting is
effective and meets the criteria of the “Internal Control Integrated Framework.”

Crowe LLP, independent registered public accounting firm, has issued an audit report dated March 18, 2019 on the Company's
consolidated financial statements and internal control over financial reporting. That report is contained in Ohio Valley's Annual
Report to Shareholders under the heading "Report of Independent Registered Public Accounting Firm.”

Ohio Valley Banc Corp.

Thomas E. Wiseman
President, CEO

Scott W. Shockey
Senior Vice President, CFO

March 18, 2019

PERFORMANCE GRAPH

OHIO VALLEY BANC CORP.
Year ended December 31, 2018

The following graph sets forth a comparison of five-year cumulative total returns among the Company's
common shares (indicated “Ohio Valley Banc Corp.” on the Performance Graph), the S & P 500 Index (indicated
“S & P 500” on the Performance Graph), and SNL Securities SNL $1 Billion-$5 Billion Bank Asset-Size Index
(indicated “SNL $1 Billion-$5 Billion Bank Index) for fiscal years indicated. Information reflected on the graph
assumes an investment of $100 on December 31, 2013 in each of the common shares of the Company, the S & P
500 Index, and the SNL Index. Cumulative total return assumes reinvestment of dividends. The SNL $1 Billion-$5
Billion Bank Index represents stock performance of 156 of the nation's banks located throughout the United States
within the respective asset range as selected by SNL Securities of Charlottesville, Virginia. The Company is
included as one of the 156 banks in the SNL $1 Billion-$5 Billion Bank Index.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

Except for the historical statements and discussions contained herein, statements contained in this
report constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Act of 1934 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," and similar expressions. Such statements involve various important
assumptions, risks, uncertainties, and other factors, many of which are beyond our control 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: 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 a number of important factors which could cause
actual results to differ materially from the forward-looking statements contained in management’s
discussion and analysis 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 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2018. 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.

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion is to provide an analysis of the financial condition and results of
operations of Ohio Valley Banc Corp. (“Ohio Valley” or the “Company”) that is not otherwise apparent
from the audited consolidated financial statements included in this report. The accompanying
consolidated financial information has been prepared by management in conformity with U.S. generally
accepted accounting principles (“US GAAP”) and is consistent with that reported in the consolidated
financial statements. Reference should be made to those statements and the selected financial data
presented elsewhere in this report for an understanding of the following tables and related discussion. All
dollars are reported in thousands, except share and per share data.

RESULTS OF OPERATIONS:

SUMMARY

Ohio Valley generated net income of $11,944 for 2018, an increase of $4,435, or 59.1%, from
2017. Earnings per share were $2.53 for 2018, an increase of 58.1% from 2017. The increase in net
income and earnings per share for 2018 was impacted by higher net interest income and lower provision
expense, which collectively contributed to a $3,518 increase in earnings over 2017. Net interest income
was positively affected by successful growth in interest earnings for both loans and interest-bearing
deposits with banks driven by increases in average balances. The reduction in provision expense from the
prior year of 2017 was the result of lower general allocations in the allowance for loan losses impacted by
the improvement in various economic risk factors, as well as a decline in historical loan losses. The
positive contributions from net interest income and provision expense were further enhanced by a decrease
54

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

in tax expense of $2,231, or 49.7%, from 2017. This was a result of the Tax Cuts and Jobs Act (“TCJA”),
which was enacted on December 22, 2017, that made broad and complex changes to the Internal Revenue
Code, including a reduction of the federal income tax rate from 34% to 21%. These positive contributions
to earnings growth were partially offset by lower noninterest income and higher noninterest expense
during 2018, as compared to 2017. Noninterest income was negatively impacted by lower bank owned
life insurance (“BOLI”) earnings and higher losses on the sale of other real estate owned (“OREO”)
properties. Increases in noninterest expense were primarily from salaries and employee benefits.

During 2018, the Company’s net interest income finished strong at $43,726, representing an
increase of $1,993, or 4.8%, from 2017. Average earning assets increased during 2018 by $50,982, or
5.4%, as compared to 2017, coming primarily from loans and interest-bearing balances with banks. The
Company’s average interest-bearing Federal Reserve clearing account grew $30,488, or 48.3%, during
2018, as a result of growth in average deposits exceeding the growth in loans, as well as growth from
seasonal tax refund processing activity. Furthermore, the Federal Reserve's action to increase short-term
interest rates by 100 basis points from December 2017 to December 2018 contributed to interest revenue
growth. The Company’s average loans during 2018 grew $20,791, or 2.8%, led by growth within the
commercial loan segment. Loan growth came mostly from the Company’s West Virginia and Athens,
Ohio locations. While earning assets were up, the Company’s net interest margin declined in 2018,
finishing at 4.43% in 2018, as compared to 4.49% in 2017. Contributing to the decrease in net interest
margin was higher balances maintained at the Federal Reserve, which diluted the net interest margin due
to the yield on those balances being less than other earning assets, such as loans and securities.

The Company’s provision expense was reduced to $1,039 in 2018, as compared to $2,564 in 2017.
During 2018, the level of classified loans, or those loans demonstrating financial weakness, decreased
from the prior year due to the improvement in financial performance by certain loan relationships. In
addition, the Company’s historical loss rates on loans, overall loan delinquency, and regional
unemployment conditions improved from the prior year. As a result of these lower risk factors, the general
allocations of the allowance for loan losses decreased by 10.5%.

The Company’s noninterest income decreased $497, or 5.3%, from 2017. The year-to-date
decrease in noninterest income was impacted by BOLI and annuity asset earnings, which decreased over
41% during 2018, largely as a result of $514 in net bank owned life insurance proceeds that were collected
during the prior year of 2017 in conjunction with the Company's investment in various benefit plans for
its directors and key employees. Decreases in noninterest income were also impacted by a $370 increase
in losses on the sale of OREO, which was primarily impacted by the lower appraised value on one land
development property during the fourth quarter of 2018. Further contributing to lower noninterest income
was lower tax processing fees through the Bank’s electronic refund check/deposit (“ERC/ERD”)
transactions, which decreased 6.7%. ERC/ERD transactions involve the payment of a tax refund to the
taxpayer after the Bank has received the refund from the federal/state government. Partially offsetting
these decreasing factors was an increase in interchange income, which was up 8.5% from 2017, driven by
the rising volume of debit and credit card transactions during 2018.

The Company’s noninterest expenses during 2018 increased $817, or 2.2%, over 2017. The
increase was impacted by salary and employee benefit expense, which grew $1,382, or 6.6%, during 2018,
as compared to 2017. The increase was largely the result of annual merit increases and higher health
insurance costs. Noninterest expense growth was also affected by increases to professional fees, data
processing costs, and software expense. Noninterest expense increases were partially offset by lower costs
associated with foreclosed assets, marketing, and “other” noninterest expenses that included costs to
maintain OREO properties and third-party consulting fees.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s provision for income taxes totaled $2,255 in 2018, compared to $4,486 in 2017,
which further contributed to growth in net income. The TCJA reduced the Company’s statutory federal
income tax rate from 34% to 21%, resulting in lower tax expense during 2018. Furthermore, in December
2017, the reduction of the federal tax rate required the Company’s deferred tax assets and liabilities to be
revalued using the enacted 21% federal tax rate. The revaluation resulted in a $1,783 one-time adjustment
that increased tax expense in the fourth quarter of 2017.

For 2017, Ohio Valley generated net income of $7,509, an increase of $589, or 8.5% from 2016.
Earnings per share were $1.60 for 2017, an increase of 0.6% from 2016. The increase in net income and
earnings per share for 2017 was largely impacted by higher net interest and noninterest income, which
were collectively up $6,603, or 14.8%, over 2016. The positive contributions from gross revenue were
partially offset by an increase in noninterest expense of $3,710, or 11.3%, over 2016. The Company’s
comparative earnings during 2017 and 2016 were greatly impacted by the acquisition of Milton Bancorp,
Inc. (“Milton Bancorp”) on August 5, 2016. Immediately following the merger, Milton Bancorp's wholly-
owned subsidiary, The Milton Banking Company (“Milton Bank”), was merged with and into the Bank.
The acquisition resulted in the addition of $132,001 in assets and 5 branch locations in Jackson, Madison
and Pickaway counties in Ohio. Having Milton Bank’s operations for a full twelve months in 2017 versus
just five months in 2016 contributed to increases within most of the Company’s income and expense
categories.

In 2017, the Company’s net interest income finished strong at $41,733, representing an increase
of $5,407, or 14.9%, from 2016. Average earning assets increased during 2017 by $105,324, or 12.5%,
as compared to 2016, coming primarily from loans and taxable investment securities. The growth in
average earning assets was primarily attributable to the acquisition of Milton Bank during the third quarter
of 2016. Milton Bank branches were responsible for over 56% of the average loan growth experienced
during 2017, benefiting largely from the full-year effect. During 2017, the Company also experienced
organic loan growth within its existing markets, impacted mostly from its West Virginia and Athens, Ohio
locations. Complementing average earning asset growth was an increase in the Company’s net interest
margin, which finished at 4.49% in 2017, as compared to 4.40% in 2016. Contributing to the increase in
net interest margin was a general increase in interest rates and higher loan balances relative to total earning
assets.

The Company’s noninterest income also finished strong during 2017, increasing $1,196, or 14.5%,
from 2016. The increase in noninterest income was impacted by a larger customer deposit base associated
with the Milton Bank acquisition. As a result, the volume of debit and credit card transactions grew during
2017, which helped to generate a 30.1% increase in interchange income. A larger customer base also
contributed to an 8.1% increase in service charges on deposit accounts. Noninterest income growth was
further impacted by BOLI and annuity assets, which grew over 69% during 2017. This was largely the
result of $514 in net bank owned life insurance proceeds that were collected during 2017 in conjunction
with the Company's investment in various benefit plans for its directors and key employees. Increases in
noninterest income were also impacted by lower losses on the sale of OREO, related to the lower appraised
value on one land development property during the fourth quarter of 2016. Partially offsetting increases
in noninterest income were lower tax processing fees through the Company’s ERC/ERD transactions,
which decreased 17.4%. In addition to a reduced number of tax refunds being processed in 2017, the per
item fees received by the Company were lower under the new contract entered into with the third-party
tax refund product provider in October 2014 that impacted 2017’s tax season.

The Company’s noninterest expenses during 2017 increased $3,710, or 11.3%, over 2016. The
increase was impacted by the acquisition of Milton Bank, which contributed to general increases in most
noninterest expense categories related to having a larger organization after the merger. The Company saw
56

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

its salary and employee benefit expense grow by $1,935, or 10.3%, during 2017, as compared to 2016.
The increase was largely the result of adding Milton Bank employees, as well as annual merit increases
and higher health insurance costs. Noninterest expense growth was also affected by increases to
professional fees, data processing costs, and various “other” noninterest expenses that included costs to
maintain OREO properties, customer incentive costs and consulting fees. Noninterest expense increases
were partially offset by the effects of lower merger costs during 2017, as compared to 2016. As part of
the Milton Bank acquisition in 2016, the Company incurred $930 in merger-related expenses that
consisted largely of services to combine the operating systems of both companies, as well as investment
banking, accounting, and legal services. As a result, merger expenses were down $891, or 95.8%, in 2017.
The Company’s provision for income taxes totaled $4,486 in 2017, compared to $1,920 in 2016,
which further reduced operating income. The increase was related to the TCJA, which reduced the federal
income tax rate from 34% to 21%, as well as other business-related exclusions, deductions and credits.
The reduction of the federal tax rate required the Company’s deferred tax assets and liabilities to be
revalued using the 21% federal tax rate enacted. The revaluation resulted in a $1,783 adjustment to tax
expense that was recorded in the fourth quarter of 2017.

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. The Company earns interest and dividend income from loans, investment securities
and short-term investments while incurring interest expense on interest-bearing deposits and short- and
long-term borrowings. Net interest income is affected by changes in both the average volume and mix of
assets and liabilities and the level of interest rates for financial instruments. Changes in net interest income
are measured by net interest margin and net interest spread. Net interest margin is expressed as the
percentage of net interest income to average interest-earning assets. Net interest spread is the difference
between the average yield earned on interest-earning assets and the average rate paid on interest-bearing
liabilities. Both of these are reported on a fully tax-equivalent (“FTE”) basis. Net interest margin exceeds
the net interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing
demand deposits and stockholders' equity, also support interest-earning assets. Following is a discussion
of changes in interest-earning assets, interest-bearing liabilities and the associated impact on interest
income and interest expense for the three years ended December 31, 2018. Tables I and II have been
prepared to summarize the significant changes outlined in this analysis.

Comparing 2018 to 2017, net interest income of $44,172 on an FTE basis increased $1,661, or
3.9%. This change reflects the impact of a 5.4% increase in average earning assets and a 7 basis point
increase in earning asset yield, partially offset by a 20 basis point cost increase in average interest-bearing
liabilities. Average earning asset growth included a $30,610, or 46.3%, increase in average interest-
bearing balances with banks and a $20,791, or 2.8%, increase in average loans. Earning asset yields were
largely impacted by the rise in short-term rates during 2018, which affected loans and deposits with banks.
Market rate increases during 2018 also had a corresponding impact to higher average deposit costs,
primarily within time deposits. The rate increases in time deposits during 2018 contributed to a higher
consumer demand for those products, particularly certificates of deposit (“CDs”), which generated most
of the average interest-bearing liability increase. The net interest margin decrease reflected a 20 basis
point negative impact in funding costs partially offset by a 7 basis point positive impact from the mix and
yield on earning assets and a 7 basis point increase in the benefit from noninterest-bearing funding (i.e.,
demand deposits and shareholders' equity).

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The increase in average volume and yield of earning assets partially offset by the increase in
average cost of interest-bearing liabilities was key to the success of 2018’s net interest income
improvement. The volume increase in average earning assets was responsible for producing $1,527 in
additional FTE interest income during 2018 over 2017, while the average yield increase generated an
additional $1,630 in FTE interest income during the same periods. These effects were partially offset by
$1,243 in additional interest expense from the average cost increase in average interest-bearing liabilities.
Average earning assets for 2018 increased $50,982, or 5.4%, from the prior year, led by interest-bearing
balances with banks, which increased $30,610, or 46.3%. More so, the average yield on interest-bearing
balances with banks contributed most to the $1,039 increase in interest income from these earning asset
deposits during 2018. Balances within interest-bearing deposits with banks are driven primarily by the
Company’s interest-bearing Federal Reserve Bank clearing account. The Company continues to utilize
its Federal Reserve clearing account to manage seasonal tax refund deposits and fund earning asset growth.
Average Federal Reserve Bank clearing account balances grew 48.3% during 2018, which contributed to
higher interest income. Furthermore, this interest-bearing account carried an interest rate of 1.50% at
December 2017. During 2018, the Federal Reserve increased short-term rates by 25 basis points in each
of March, June, September and December to reach 2.50% at December 31, 2018. The timing of the
December 2017 and March 2018 rate adjustments benefited the Company, as it entered into the first
quarter of 2018 experiencing significant levels of excess funds impacted by the large volume of ERC/ERD
transactions that were maintained within the Federal Reserve clearing account. These ERC/ERD deposits
occur primarily during the first half of the year and are the result of the Bank’s relationship with a third-
party tax refund product provider. The Bank acts as the facilitator for these ERC/ERD transactions and
earns a fee for each cleared item. For the short time the Bank holds such refunds, constituting noninterest-
bearing deposits, the Bank increases its deposits with the Federal Reserve. This causes interest-bearing
balances with banks to represent a large percentage of earning assets during the time the Bank holds the
refunds, although such balances decrease at year-end. The Bank was able to redeploy some of these excess
funds from its Federal Reserve Bank clearing account to help manage the loan growth that was evident in
2018. However, the average growth in total deposits exceeded the average growth in loans, which
produced a higher composition of average interest-bearing balances with banks, finishing at 9.7% of
average earning assets in 2018, as compared to 7.0% in 2017.

The Bank’s third-party tax refund product provider ceased utilizing the services of the Bank at the
end of 2018. The termination of this relationship, unless and until replaced, will adversely affect the
Company’s liquidity and net income. The Bank will be unable to replace the relationship for the 2019 tax
season but will consider alternatives for future years. Further, the Bank has filed a lawsuit against the
third-party tax refund provider alleging breach of contract. There can be no assurance of the timing and
extent of damages recovered through such litigation, and the costs of the litigation will have an adverse
effect on Ohio Valley’s liquidity and net income. In 2018, when all of the tax refund processing had been
completed and temporary deposits had been disbursed by the Bank, the Company earned approximately
$949 in interest from tax refunds held in the Bank’s Federal Reserve Bank clearing account.

Average earning asset growth also came from loans, which increased $20,791, or 2.8%, during
2018. This growth in loans came mostly from the commercial and consumer loan segments, driven by
the West Virginia and Athens, Ohio market locations. The Company’s West Virginia offices, located in
Mason and Cabell counties, generated over $10,600 in average loans during 2018, particularly within the
commercial loan portfolio segment. Further impacting average loan growth was the Company’s Athens,
Ohio loan production office, which opened in late 2015. This office has served to enhance the Company’s
market presence in Athens County, which generated over $11,800 in average loans during 2018. The
average volume growth in loans contributed to $1,193 in additional FTE interest income during 2018 over
58

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2017. Furthermore, the rise in short-term rates during 2018 also contributed to the repricings of a portion
of the Company’s loan portfolio. This led to a higher average loan yield of 5.78% at year-end 2018, as
compared to 5.68% at year-end 2017, and also contributed to $769 in additional FTE interest income
during 2018 over 2017. While average loans were up in 2018, the Company experienced a higher level
of average deposit liabilities that contributed to larger excess fund balances that were maintained within
its Federal Reserve Bank clearing account. As a result, the Company finished with a smaller composition
of average loans to average earning assets at year-end 2018 of 77.6%, as compared to 79.6% for 2017.

Average securities of $126,621 at year-end 2018 represented a 0.3% decrease from the $127,040
in average securities at year-end 2017. Average tax exempt securities were down 7.5% from the prior
year, largely related to maturities of state and municipal investments, while average taxable securities
increased 0.5%, particularly from purchases within the U.S. Government sponsored entity and Agency
mortgage-backed investment segments. The Company has focused on growing earning assets primarily
through loans, which has contributed to a lower asset composition of securities. Management continues
to focus on generating loan growth as loans provide the greatest return to the Company. Management
maintains securities at a dollar level adequate enough to provide ample liquidity and cover pledging
requirements.

The Company believes that it may experience a reduction in interest income as a result of a new
state law, signed into law on July 30, 2018, which places numerous restrictions on short-term and small
loans extended by certain non-bank lenders in Ohio. The new law, which will not apply to loans made
before April 27, 2019, will apply to much of the lending of Loan Central. The Company is still attempting
to determine the effect of the law on Loan Central and the Company, including the loans that would no
longer be offered, increased expenses of loans offered, and whether the Company might make such loans
pursuant to an exemption. The Company estimates the loss of pre-tax operating income could be $1,053,
which is based on the actual income earned during 2018 by Loan Central on such loans that would be
affected by the new state law.

Average interest-bearing liabilities increased $23,842, or 3.8%, from 2017 to 2018. The growth
in interest-bearing deposits during 2018 was mostly from average time deposits, which grew $20,679, or
10.9%, during 2018, impacted by a consumer demand increase for CD’s and a special CD offering during
the second half of 2017 that impacted additional average retail funds in 2018. The growth in time deposits
resulted in the composition of average time deposits to interest-bearing liabilities trending upward to
31.9% and 29.8% of total interest-bearing liabilities at year-end 2018 and 2017, respectively. The growth
in earning assets during 2017 and 2018 caused the Company to use more of its time deposits as funding
sources, which contributed to higher composition levels. The higher average cost associated with time
deposits, combined with higher portfolio balances in 2018, contributed to the majority of the interest
expense increase of 2018.

The Company’s core deposit segment of interest-bearing liabilities consists of NOW, savings and
money market accounts. During 2018, average balances on these deposits increased $1,859, or 0.5%, but
together represented 60.7% of average interest-bearing liabilities in 2018, as compared to 62.7% in 2017.
This decreasing shift in composition was impacted by a higher composition of time deposits during 2018,
which were used to help fund earning asset growth. This overall composition shift to lower NOW, savings
and money market balances combined with a higher composition of time deposits from 2017 to 2018
contributed to a 20 basis point increase in the average cost of funds from 0.63% at year-end 2017 to 0.83%
at year-end 2018.

In addition, the Company’s other borrowings and subordinated debentures collectively increased
$1,304, or 2.7%, during 2018. The increase was related to management's decision to fund specific fixed-
rate loans with like-term FHLB advances during the first quarter of 2018. Borrowings and subordinated
59

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

debentures continue to represent the smallest composition of average interest-bearing liabilities, finishing
at 7.5% at the end of both 2018 and 2017.

Comparing 2017 to 2016, net interest income of $42,511 on an FTE basis increased $5,526, or
14.9%. This change reflected the impact of 12.5% average earning asset growth and a 9 basis point
increase in the net interest margin to 4.49%, partially offset by 12.0% average interest-bearing liability
growth. Average earning asset growth included a $108,514, or 16.8%, increase in average loans and a
$5,925, or 5.5%, increase in average taxable securities. Average interest-bearing liability growth included
a $59,543, or 11.3%, increase in average interest-bearing deposits and an $8,110, or 26.1%, increase in
average other borrowed funds. The net interest margin expansion reflected a 15 basis point positive impact
from the mix and yield on earning assets and a 4 basis point increase in the benefit from noninterest-
bearing funding, partially offset by a 10 basis point increase in funding costs.

The increase in average volume of earning assets partially offset by the increase in interest-bearing
liabilities was key to the success of 2017’s net interest income improvement. The volume increase in
average earning assets was responsible for producing $6,205 in additional FTE interest income during
2017 over 2016, partially offset by $456 in additional interest expense from the volume increase in average
interest-bearing liabilities. Average earning assets for 2017 increased $105,324, or 12.5%, from the prior
year, reflecting the full-year impact of the Milton Bank acquisition. This growth in earning assets
contributed to average balance growth in the commercial, residential real estate, and consumer loan
portfolios, which were collectively up $108,514, or 16.8%, during 2017. The Milton Bank branches were
responsible for over $60,900 in average loan growth during 2017. During 2017, the Company also
experienced organic loan growth within its existing markets, impacted mostly from its West Virginia and
Athens, Ohio locations. The Company’s West Virginia offices generated over $21,500 in average loans
during 2017, particularly within the commercial loan portfolio segment. Further impacting average loan
growth was the Company’s Athens, Ohio loan production office, which generated over $12,900 in average
loans during 2017. The acquisition of Milton Bank loans combined with the success in West Virginia and
Athens County contributed to a larger composition of average loans to average earning assets at year-end
2017 of 79.6%, as compared to 76.7% for 2016.

Further impacting growth in average earning assets during 2017 was a higher level of average
securities. While average tax exempt securities were down 5.6% from the prior year, average taxable
securities increased $5,925, or 5.5%, particularly from purchases within the U.S. Government sponsored
entity and Agency mortgage-backed investment segments. While the Company’s average net investment
securities increased 4.2% during 2017, their percentage of earning assets declined, averaging 13.4% for
2017, compared to 14.5% for 2016. The Company focused on growing earning assets primarily through
loans, which contributed to this lower asset composition of securities.

The Company’s earnings from interest-bearing deposits with banks also contributed to the growth
in interest income for 2017. Average interest-bearing deposits with banks were down $8,327, or 11.2%,
from 2016, which had a negative impact on earnings based on volume. These effects from lower volume
were completely offset by positive effects from the average yield, which contributed to most of the $233,
or 62.3%, increase in interest income from deposits with banks during 2017. The Company’s Federal
Reserve Clearing account carried an interest rate of 0.50% during most of 2016. In December 2016, the
Federal Reserve increased short-term rates by 25 basis points, and then again in each of March, June and
December 2017 by another 25 basis points. The timing of the December 2016 and March 2017 rate
adjustments benefited the Company, as it entered into the first quarter of 2017 experiencing significant
levels of excess funds impacted by the large volume of ERC/ERD transactions that were maintained in

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME

Table I

(dollars in thousands)

Assets

Interest-earning assets:
Interest-bearing balances with banks

Securities:

2018

December 31

2017

2016

Average
Balance

Income/
Expense

Yield/
Average

Average
Balance

Income/
Expense

Yield/
Average

Average
Balance

Income/
Expense

Yield/
Average

96,769 $

1,646

1.70%

66,159 $

607

0.92 % $

74,486

374

0.50%

Taxable ......................................

Tax exempt ................................

114,278
12,343

2,817
464

Loans ............................................

773,995

44,716

2.46
3.76

5.78

113,699

2,508

13,341

617

753,204

42,754

2.21

4.63

5.68

107,774

14,129

644,690

Total interest-earning assets ..........

997,385

49,643

4.98%

946,403

46,486

4.91 %

841,079

2,263

671

36,699

40,007

2.10

4.75

5.69

4.76%

Noninterest-earning assets:

Cash and due from banks ..............

Other nonearning assets ................
Allowance for loan losses .............

Total noninterest-earning assets …

13,027

60,825
(7,981)

65,871

12,235

62,867
(7,390)

67,712

11,014

54,195
(7,079)

58,130

Total assets .....................................

$ 1,063,256

$ 1,014,115

$ 899,209

Liabilities and Shareholders’ Equity

Interest-bearing liabilities:

NOW accounts ..............................

162,899 $

Savings and money market ...........

235,992

508

657

Time deposits ................................

209,714

2,990

Other borrowed money .................

Subordinated debentures ...............

40,467

8,500

986

330

0.31%

$ 157,796 $

0.28
1.43

2.44

3.89

464

575

239,236

189,035

1,804

39,163

8,500

884

248

0.29 % $ 143,180

0.24

0.95

2.26

2.91

215,760

167,584

31,053

8,500

383

464

1,307

664

204

Total int.-bearing liabilities ...........

657,572

5,471

0.83%

633,730

3,975

0.63 %

566,077

3,022

Noninterest-bearing liabilities:

Demand deposit accounts ..............

Other liabilities .............................

278,034

15,257

Total noninterest-bearing liabilities

293,291

Shareholders’ equity .....................

112,393

Total liabilities and shareholders’
equity ...........................................

$ 1,063,256

259,160

13,115

272,275

108,110

222,530

12,469

234,999

98,133

$ 1,014,115

$ 899,209

Net interest earnings ......................

44,172

42,511

36,985

Net interest earnings as a percent of
interest-earning assets ...................

Net interest rate spread .................

Average interest-bearing liabilities to
average earning assets ......................

4.43%

4.15%

65.93%

4.49 %

4.28 %

66.96 %

0.27%

0.21

0.78

2.14

2.40

0.53%

4.40%

4.23%

67.30%

Fully taxable equivalent yields are reported for tax exempt securities and loans and calculated assuming a 21% tax rate in 2018 and
a 34% tax rate in 2017 and 2016, net of nondeductible interest expense. Tax-equivalent adjustments for securities during the years ended
December 31, 2018, 2017 and 2016 totaled $95, $206, and $226, respectively. Tax-equivalent adjustments for loans during the years ended
December 31, 2018, 2017 and 2016 totaled $351, $572, and $433, respectively. Average balances are computed on an average daily basis.
The average balance for available for sale securities includes the market value adjustment. However, the calculated yield is based on the
securities’ amortized cost. Average loan balances include nonaccruing loans. Loan income includes cash received on nonaccruing loans.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE

Table II
(dollars in thousands)

Interest income
Interest-bearing balances with banks ............
Securities:
Taxable ..........................................................
Tax exempt ....................................................
Loans .............................................................
Total interest income ...................................

Interest expense
NOW accounts ..............................................
Savings and money market ...........................
Time deposits ................................................
Other borrowed money .................................
Subordinated debentures ...............................
Total interest expense .................................
Net interest earnings ...................................

2018
Increase (Decrease)
From Previous Year Due to

2017
Increase (Decrease)
From Previous Year Due to

Volume Yield/Rate Total

365 $

674 $

1,039 $

(46) $

279 $

233

13
(44)
1,193
1,527

296
(109)
769
1,630

309
(153)
1,962
3,157

128
(37)
6,160
6,205

117
(17)
(105)
274

245
(54)
6,055
6,479

16
(8)
215
30
----
253
1,274 $

28
90
971
72
82
1,243
387 $

44
41
82
53
1,186
181
102
181
82
----
456
1,496
1,661 $ 5,749 $

40
58
316
39
44
497
(223) $

81
111
497
220
44
953
5,526

The change in interest due to volume and rate is determined as follows: Volume Variance - change in volume multiplied
by the previous year's rate; Yield/Rate Variance - change in rate multiplied by the previous year's volume; Total Variance –
change in volume multiplied by the change in rate. The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The tax
exempt securities and loan income is presented on an FTE basis. FTE yield assumes a 21% tax rate in 2018 and a 34% tax
rate in 2017 and 2016, net of related nondeductible interest expense.

the Federal Reserve clearing account. However, this short-term average balance growth in deposits was
completely offset by the need to fund loan growth during 2017. The Company experienced a 16.8%
increase in average loans during 2017, part of which included organic loan originations from the West
Virginia and Athens, Ohio markets. The Company was able to redeploy funds from its Federal Reserve
Bank clearing account to help manage the earning asset growth that was evident in 2017, which fits within
management’s strategy of investing assets into higher yielding products while minimizing interest
expense. With the Company using more of its short-term Federal Reserve funds to satisfy loan demand,
this led to a lower composition of average interest-bearing balances with banks, finishing at 7.0% of
average earning assets in 2017, as compared to 8.9% in 2016.

Average interest-bearing liabilities increased $67,653, or 12.0%, from 2016 to 2017. The growth
in interest-bearing deposits during 2017 was mostly impacted by the Milton Bank merger, which resulted
in the acquisition of $119,215 in deposits from 2016. Average time deposits grew $21,451, or 12.8%,
during 2017, impacted mostly by the Milton Bank time deposits from 2016 and a special CD offering
during the second half of 2017 that generated additional retail funds. The composition of average time
deposits to interest-bearing liabilities trended upward, representing 29.8% and 29.6% of total interest-
bearing liabilities at year-end 2017 and 2016, respectively. The growth in earning assets during 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

caused the Company to use more of its time deposits as funding sources, which contributed to higher
composition levels. The higher average cost associated with time deposits, combined with higher portfolio
balances in 2017, contributed to over half of the interest expense increase of 2017.

The Company’s core deposit segment of interest-bearing liabilities consist of NOW, savings and
money market accounts. During 2017, average balances on these deposits increased $38,092, or 10.6%,
and together represented 62.7% of average interest-bearing liabilities in 2017, as compared to 63.4% in
2016. This decreasing shift in composition was impacted by a higher composition of time deposits and
borrowed funds during 2017. This overall composition shift to lower NOW, savings and money market
balances combined with a higher composition of time deposits from 2016 to 2017 contributed to a 10 basis
point increase in the average cost of funds from 0.53% at year-end 2016 to 0.63% at year-end 2017.

In addition, the Company’s other borrowings and subordinated debentures collectively increased
$8,110, or 20.5%, during 2017. The increase was primarily from the use of FHLB borrowings to fund the
purchases of specific earning assets that were originated during both 2017 and 2016. Borrowings and
subordinated debentures represented the smallest composition of average interest-bearing liabilities,
finishing at 7.5% and 7.0% at year-end 2017 and 2016, respectively. This shift to more higher-costing
liabilities contributed to more interest expense in 2017.

During 2018, total interest income on average earning assets increased $3,489, or 7.6%, as
compared to 2017. During 2017, total interest income on average earning assets increased $6,360, or
16.2%, as compared to 2016. The changes in interest income during both comparison periods were
impacted most by the commercial loan portfolio. Management has been pleased with the growing
commercial loan demand within its West Virginia locations and loan production office. Furthermore,
36% of the loans acquired in the Milton Bank merger were comprised of commercial loans. These positive
contributions helped to generate increases of 4.7% and 22.1% in average commercial loan balances during
2018 and 2017, respectively. As a result, commercial interest and fee revenue grew by $1,729, or 9.8%,
and $3,634, or 25.9%, during 2018 and 2017, respectively.

The Company’s interest and fees from its residential real estate loan portfolio decreased by $33,
or 0.3%, during 2018, but increased $891, or 7.2%, during 2017. A contributing factor to the decline in
real estate revenue during 2018 was a composition shift from higher-yielding, long-term, fixed-rate loan
balances to lower-yielding, adjustable-rate mortgage originations. This shift to more lower-yielding loans
has placed additional pressure on asset yields. Furthermore, the Company continues to sell a portion of
its long-term, fixed-rate real estate loans to the Federal Home Loan Mortgage Corporation, while retaining
the servicing rights for those mortgages. While this strategy has generated loan sale and servicing fee
revenue within noninterest income, it has also contributed to lower interest and fee revenues during 2018.
Conversely, the elevated residential real estate revenue during 2017 was primarily from the acquired loan
balances of Milton Bank in 2016, which consisted of 42% in residential real estate loan balances.
However, when excluding the real estate revenue generated by the Milton Bank branches during 2017, the
Company’s real estate revenue represented a decrease of $113, or 0.99%, during 2017. This was in large
part due to the composition shift from long-term, fixed-rate loans to short-term, adjustable-rate loans
previously discussed.

In 2018, consumer loan interest and fees increased $487, or 4.3%, as compared to 2017, and
increased $1,391, or 14.0%, during 2017, as compared to 2016, impacted by the average balance growth
associated with increased auto loan financings and home equity loan balances. Further impacting
consumer loan revenue during 2017 was the acquisition of Milton Bank’s loans, 22% of which were
consumer loan balances at the time of acquisition.

The Company’s interest income from taxable investment securities increased $309, or 12.3%, in
2018 and $245, or 10.8%, in 2017. Average balances grew during 2018 and 2017 from increased
63

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

purchases of U.S. Government sponsored entity securities and Agency mortgage-backed securities during
both periods. Interest income during 2018 was positively affected by a 25 basis point increase in yield
from 2017, primarily due to investment purchases, and reinvestment of maturities at market rates higher
than the average portfolio yield, compared to an 11 basis point increase in yield on taxable securities from
2016 to 2017.

Total interest expense incurred on the Company’s interest-bearing liabilities increased $1,496, or
37.6%, during 2018, and increased $953, or 31.5%, during 2017, primarily from interest expense on
deposits, particularly time deposits. The Company’s strategy continues to focus on funding earning asset
growth with lower cost, core deposit funding sources to further reduce, or limit growth in, interest expense.
However, with loan demand up and average loan balances growing, the Company utilized more CD
balances as a funding source. In addition, the market rates on the Company’s CD’s repriced at higher rates
impacted by the ongoing short-term rate increases, contributing to consumer demand for more CD’s,
which led to a composition shift into more time deposits during 2018. The Company was also successful
in marketing a short-term CD special during the fourth quarter of 2017 that helped generate additional
retail funds. Furthermore, the Company utilized more brokered CD deposits as an additional funding
source during the second half of 2017 that impacted 2018 interest costs. Time deposits were also impacted
by the acquired Milton Bank time deposits. Interest-bearing deposits for 2018 and 2017 continued to be
comprised more of average core deposit balances in NOW, savings and money market balances, which
are lower in cost. But due to the funding needs for asset growth in 2017 and 2018, the Company’s
composition of higher-cost average time deposits increased from 2017 to 2018, while the average
composition of NOW, savings and money market balances decreased during the same period. This change
in deposit composition contributed to an increase in the Company’s weighted average costs from 0.63%
at year-end 2017 to 0.83% at year-end 2018.

The Company’s interest expenses were also impacted by other borrowed money and subordinated
debentures, which were up collectively by $184, or 16.3%, during the year ended 2018, and $220, or
30.4%, during the year ended 2017. The increase was primarily from the average growth in FHLB
borrowings, which were used to fund the purchases of specific earning assets that were originated during
both 2018 and 2017.

During 2018 and 2017, the Company benefited from a large composition of higher-yielding,
average loan balances while maintaining most of its deposit mix in lower-costing core deposits. This
contributed to net interest margin improvement from 4.40% in 2016 to 4.49% in 2017. However, the
Company utilized more of its higher-costing time deposits in 2018 to fund earning asset growth causing
the average cost of funds to grow by 20 basis points during that time. Also during 2018, the Company’s
average earning assets were significantly impacted by growth of over 46% in interest-bearing balances
maintained at the Federal Reserve yielding just 2.5% at year-end 2018. As a result, the net interest margin
for 2018 compressed from 4.49% in 2017 to 4.43% in 2018. The Company will continue to face pressure
on its net interest income and margin improvement if loan balances do not continue to expand and become
a larger component of overall earning assets. The Company’s CDs are continuing to reprice to market
rates that are trending up. The Company will continue to focus on growing the average loan portfolio and
re-deploying the excess liquidity retained within the Federal Reserve account into higher yielding assets
as opportunities arise.

With the Bank’s third-party tax refund product provider terminating its tax processing relationship
at the end of 2018, the Company expects the average excess funds in the Federal Reserve clearing account
to decrease in 2019. As a result, the Company expects both its interest and noninterest income to be
negatively affected in 2019, as compared to prior periods.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PROVISION EXPENSE

Credit risk is inherent in the business of originating loans. The Company sets aside an allowance
for loan losses through charges to income, which are reflected in the consolidated statement of income as
the provision for loan losses. Provision for loan loss is recorded to achieve an allowance for loan losses
that is adequate to absorb losses in the Company’s loan portfolio. Management performs, on a quarterly
basis, a detailed analysis of the allowance for loan losses that encompasses loan portfolio composition,
loan quality, loan loss experience and other relevant economic factors.

The Company’s provision expense during the years ended 2018, 2017 and 2016 totaled $1,039,
$2,564 and $2,826, respectively. These results yielded a $1,525 decrease in provision expense from 2017
to 2018, and a $262 decrease in provision expense from 2016 to 2017. Lower provision expense during
2018 was mostly impacted by reduced general allocations of the allowance for loan losses. The Company’s
general allocation evaluates several factors that include: average historical loan loss trends, credit risk,
regional unemployment conditions, asset quality, and changes in classified and criticized assets. The
Company’s historical loan loss factors continue to trend down while its classified asset risk factor
decreased in 2018, as well. Furthermore, the Company’s nonperforming loans to total loans improved
from 1.36% to at year-end 2017 to 1.25% at year-end 2018, while nonperforming assets to total assets
improved from 1.17% to 0.99% during the same period. As a result, general allocations totaled $6,630 at
December 31, 2018, as compared to $7,405 at December 31, 2017, with the decrease coming primarily
within the commercial real estate loan portfolio segment. Specific allocations of the allowance for loan
losses remained comparable from 2017 to 2018.

Lower provision expense during 2017 was impacted by a decrease in specific allocations partially
offset by an increase in general allocations. 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. Specific allocations during 2017 decreased by $2,887 from December 31, 2016 as a
result of the financial performance improvement of one commercial real estate loan relationship. Prior to
2017, specific reserves of $1,681 were necessary as a result of collateral impairment. During the first
quarter of 2017, a re-evaluation of this borrower’s financial performance identified significant
improvement, which resulted in a credit quality upgrade to the borrower relationship and no identified
collateral impairment at December 31, 2017. Further contributing to lower specific reserves at year-end
2017 were the charge-offs of several collateral dependent specific allocations. Total charge-offs of $612
on one commercial real estate loan relationship and $399 on one commercial and industrial loan
relationship were recorded as a result of asset impairment. However, these specific reserves had already
been allocated for prior to 2017, which resulted in no corresponding provision expense impact in 2017.

The decreases in provision expense during 2017 from lower specific allocations were partially
offset by a $2,687 increase in general allocations, largely impacted by the addition of new risk factors.
During the first quarter of 2017, the Company continued to experience lower historical loan loss factors,
which prompted management to evaluate the exposure to losses incurred during an economic downturn.
Based on historical losses incurred outside the Company's lookback period, management determined it
would be necessary to include an economic risk factor to add general reserves for losses based upon the
difference in the Company's current historical loss factors and risks in the portfolio. Furthermore,
management evaluated recent changes in loan underwriting standards, which may expose the loan
portfolio to additional credit risk. As a result, an economic risk factor was added, which contributed to
additional general reserves.

During 2018, the Company’s net charge-offs totaled $1,810, as compared to $2,764 in net charge-
offs recognized during 2017. The decrease was largely due to the 2017 charge-offs of $612 on one
commercial real estate loan relationship and $399 on one commercial and industrial loan relationship that
65

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

both contained specific allocations. These charge-offs from 2017 did not have a corresponding impact to
provision expense since the allocations had already been provided for prior to 2017. Excluding these
specific allocation charge-offs from the previous year, net charge-offs during 2018 would have been up
just $57, or 3.3%, as compared to 2017. During 2017, the Company’s net charge-offs totaled $2,764, as
compared to $1,775 in net charge-offs recognized during 2016. The increase was due to the charge-offs
of specific allocations previously mentioned. Excluding these specific allocation charge-offs, net charge-
offs during 2017 would have been down $22, or 1.2%, as compared to 2016.

Management believes that the allowance for loan losses was adequate at December 31, 2018 and
reflected probable incurred losses in the portfolio. The allowance for loan losses was 0.87% of total loans
at December 31, 2018, as compared to 0.98% at December 31, 2017 and 1.05% at December 31, 2016.
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

During 2018, total noninterest income decreased $497, or 5.3%, as compared to 2017. The
decrease in noninterest revenue was impacted by earnings from tax-free BOLI investments. BOLI
investments are maintained by the Company in association with various benefit plans, including deferred
compensation plans, director retirement plans and supplemental retirement plans. During 2017, the
Company recorded $2,107 in cash proceeds and $1,993 in anticipated cash proceeds related to three BOLI
participants, which yielded net BOLI proceeds of $514 that were recorded to income. Those 2017 BOLI
proceeds contributed most to the 41.5% decrease in BOLI and annuity asset income, which finished at
$717 for 2018, as compared to $1,226 in 2017.

Also contributing to the decrease in noninterest income were higher losses on OREO properties,
which finished with a net loss of $559 at year-end 2018, as compared to a net loss of $189 at year-end
2017. OREO losses were elevated in 2018 mostly from the liquidation of one foreclosed land development
property during the fourth quarter of 2018 that resulted in a loss on sale of $594.

Noninterest income was also negatively impacted in 2018 by a reduction in seasonal tax refund
processing revenue classified as ERC/ERD fees. During the year ended 2018, the Company’s ERC/ERD
fees decreased by $113, or 6.7%, as compared to the same period in 2017, largely due to reduced
transaction fees associated with each refund facilitated pursuant to the Company’s contract with a third-
party tax refund product provider. Furthermore, the Company experienced a decrease in the number of
ERC/ERD transactions that were facilitated. As a result of ERC/ERD fee activity being mostly seasonal,
the majority of income was recorded during the first half of 2018, accounting for 17.7% of total noninterest
income for the year. As previously mentioned, the Bank’s third-party tax refund product provider ceased
utilizing the services of the Bank at the end of 2018. Going forward, the Company’s ERC/ERD fees and
non-interest income will be negatively affected.

Partially offsetting the negative effects to noninterest income was an increase in the Company’s
interchange income, as the transaction volume associated with its debit and credit card products continues
to grow. Card transactions came mostly from restaurant, gasoline and retail store purchases. The
Company has also been successful in promoting the use of both debit and credit cards by offering
incentives that permit their users to redeem accumulated points for merchandise, as well as cash incentives
paid. As a result, debit and credit card interchange income increased $286, or 8.5%, during 2018, as
compared to 2017. While incenting debit and credit card customers has increased customer use of
electronic payments, which has contributed to higher interchange revenue, the strategy also fits well with
the Company's emphasis on growing and enhancing its customer relationships.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Positive increases to noninterest income also came from the Company’s interest rate swap revenue.
The Company utilizes interest rate swaps to satisfy the desire of large commercial customers to have a
fixed-rate loan while permitting the Company to originate a variable-rate loan, which helps mitigate
interest rate risk. In association with establishing an interest rate swap agreement, the Company earns a
swap fee at the time of origination. The increase in transactions involving an interest rate swap during
2018 led to swap fees totaling $114 during the year ended December 31, 2018. As a result, interest rate
swap revenue improved to $139 during 2018, as compared to $42 during 2017.

The Company’s remaining noninterest income categories were up $112, or 3.4%, during the year

ended 2018 as compared to 2017, in large part due to higher mortgage banking income.

During 2017, total noninterest income increased $1,196, or 14.5%, as compared to 2016. The
increase in noninterest revenue was impacted by the inclusion of Milton Bank's customer deposit base for
a full year. The larger deposit base contributed to year-to-date improvements in debit and credit card
interchange income and service charges on deposit accounts, which increased collectively by $942, or
20.6%, during 2017, as compared to 2016.

Also contributing to noninterest income growth for 2017 was earnings from tax-free BOLI
investments. During 2017, the Company recorded $2,107 in cash proceeds and $1,993 in anticipated cash
proceeds related to three BOLI participants, which yielded net BOLI proceeds of $514 that were recorded
to income. This amount contributed to the 69.1% year-to-date increase in BOLI and annuity asset income
of $501 during 2017, as compared to 2016.

Further increasing noninterest income for 2017 were lower losses on OREO properties, which
finished with a net loss of $189 at year-end 2017, as compared to a net loss of $467 at year-end 2016.
OREO losses were elevated in 2016 mostly from the lower appraised value of one land development
property during the fourth quarter of 2016. A re-evaluation of this property resulted in a $393 impairment
charge that was recorded as a write-down to the OREO property’s carrying value.

Partially offsetting growth in noninterest income during 2017 was a reduction in seasonal tax
refund processing revenue classified as ERC/ERD fees. During the year ended 2017, the Company’s
ERC/ERD fees decreased by $356, or 17.4%, as compared to the same period in 2016. The decrease was
largely due to reduced transaction fees associated with each refund facilitated, as well as a lower volume
of ERC/ERD transactions that were facilitated.

The Company’s remaining noninterest income categories were down $169, or 12.4%, during the
year ended 2017 as compared to 2016. The decrease was in large part due to higher loss reserves and
claims paid associated with the Company’s limited purpose property and casualty insurance company
subsidiary, (the “Captive”).

NONINTEREST EXPENSE

Management continues to work diligently to minimize the growth in noninterest expense. For
2018, total noninterest expense increased $817, or 2.2%. The increase was mostly from salaries and
employee benefits, the Company’s largest noninterest expense item. During the year ended December 31,
2018, salaries and employee benefits increased $1,382, or 6.6%, as compared to the same period in 2017.
The increase was largely from employee compensation costs associated with annual merit increases and
higher insurance expense.

The Company also experienced an increase in professional fees, which grew $224, or 12.5%,
during 2018, as compared to 2017. Professional fees were impacted by accounting expenses associated
with adhering to regulatory guidance and legal expenses associated with the recovery efforts on loan
deficiency balances.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Partially offsetting the negative impacts to noninterest expense was lower foreclosure expense,
which decreased $261, or 52.3%, during 2018, as compared to 2017. Costs associated with foreclosed
assets include the costs of maintaining various commercial real estate properties, such as taxes,
management fees and general maintenance.

Marketing expense also decreased $257, or 24.9%, during 2018, as compared to 2017. The
Company’s marketing activities include costs associated with advertising, donation and public relations.
Other noninterest expenses decreased $238, or 4.3%, during 2018, as compared to 2017. This
decrease was impacted by various activities, including OREO maintenance (down $288) and consulting
fees (down $81), partially offset by customer incentives (up $114) and state examination costs (up $45).
OREO maintenance deals with the costs associated with property assets that have been acquired through
foreclosure. For 2018, these expenses included the costs of maintaining various commercial real estate
properties, which consist of taxes, management fees and general maintenance. Decreases in consulting
fees were associated with credit card revenue enhancement strategies that were incurred during 2017.
Customer incentive costs continued to trend higher during 2018 as part of management’s emphasis on
further building and maintaining core deposit relationships while increasing interchange revenue. Higher
state examination costs were impacted by the reinstatement of annual assessments on Ohio-chartered
banks during the fourth quarter of 2017. Due to the timing of reinstatement, the annual assessment by the
Ohio Division of Financial Institutions covered all of 2018, as compared to just the second half of 2017.
The remaining noninterest expense categories decreased $33, or 0.5%, during the year-ended 2018,
as compared to 2017. The decreases were primarily due to lower building and equipment costs, as well
as lower costs related to assets in process of foreclosure.

For 2017, total noninterest expense increased $3,710, or 11.3%. The increase was impacted by
the acquisition of Milton Bank, which contributed to general increases in most noninterest expense
categories related to having a larger organization after the merger for a full year. Milton Bank’s
noninterest expense was $2,415 during 2017 as compared to $1,174 during 2016, coming mostly from
salaries and employee benefits, as well as building and equipment costs.

Salaries and employee benefits increased $1,935, or 10.3%, during 2017 as compared to 2016.
The increase was largely from the personnel costs associated with Milton Bank, which contributed $1,694
to this line item during 2017 as compared to $754 during 2016. The remaining increase of $622 to salaries
and employee benefit expense was largely due to annual merit increases and higher health insurance
expense.

The Company also experienced increases in data processing expense, which increased $626, or
43.0%, during 2017, as compared to 2016. Data processing charges grew as a result of higher transaction
volume associated with debit and credit cards, as well as higher processing charges from the Company's
Big Rewards customer incentive platform. Higher transaction volume was impacted by the addition of
Milton Bank customers.

Noninterest expense was further impacted by increases in professional fees, which were up $430,
or 31.6%, during 2017, as compared to 2016. This increase was impacted by legal expense associated with
the recovery efforts on loan deficiency balances.

Other noninterest expenses increased $1,030, or 23.4%, during 2017, as compared to 2016. This
increase was impacted by various activities, including OREO maintenance (up $386), consulting fees (up
$223), customer incentives (up $154), and state examination costs (up $134).

Partially offsetting overhead expense increases were lower merger related expenses, which
decreased $891, or 95.8%, during 2017, as compared to 2016. Merger expenses were related to the 2016
acquisition of Milton Bancorp and Milton Bank. Merger expenses consisted largely of services to combine
the operating systems of both companies, as well as investment banking, accounting, and legal services.
68

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company incurred the majority of its merger related expenses during 2016. The remaining merger
related expenses were minimal in 2017.

The remaining noninterest expense categories increased $580, or 9.9%, during the year-ended
2017, as compared to 2016. The increases were primarily due to higher software and marketing expenses,
as well as higher costs related to assets in process of foreclosure.

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.
During 2018, the Company was successful in generating more net interest income primarily due to higher
average earning assets and increases in short-term market rates, but experienced margin compression due
to larger amounts of excess deposits being maintained in lower-yielding asset accounts. Furthermore,
noninterest revenue decreased 5.3% during 2018, which, when combined with net interest income,
lowered the overall revenue growth pace to a level comparable to the pace of growth in overhead expense.
As a result, the Company's efficiency number improved just slightly to 70.47% at December 31, 2018, as
compared to 70.48% at December 31, 2017. During 2017, the Company was successful in generating more
net interest income primarily due to higher average earning assets while minimizing funding costs, which
contributed to a 9 basis point improvement in the net interest margin. Income growth from interchange
income and BOLI and annuity asset investments caused noninterest revenues to grow by 14.5%, while
overhead expenses were up 11.3% from the prior year. These factors have caused the level of net revenues
to outpace overhead expenses during 2017. As a result, the Company's efficiency number improved to
70.48% at December 31, 2017, as compared to 72.75% at December 31, 2016.

PROVISION FOR INCOME TAXES

The provision for income taxes during 2018 totaled $2,255 compared to $4,486 in 2017 and $1,920
in 2016. The effective tax rates for 2018, 2017 and 2016 were 15.9%, 37.4% and 21.7%, respectively.
The decline in the effective tax rate in 2018 reflects the changes made by the TCJA, which was enacted
on December 22, 2017. The TCJA provided for a reduction in the corporate federal income tax rate from
34% to 21% effective January 1, 2018, as well as the introduction of business-related exclusions,
deductions and credits. The higher effective tax rate from 2017 was the result of a $1,783 tax expense
adjustment related to the TCJA. During the fourth quarter of 2017, the Company’s deferred tax assets and
liabilities had to be revalued using the 21% federal tax rate.

FINANCIAL CONDITION:

CASH AND CASH EQUIVALENTS

The Company’s cash and cash equivalents consist of cash, as well as interest- and non-interest
bearing balances due from banks. The amounts of cash and cash equivalents fluctuate on a daily basis
due to customer activity and liquidity needs. At December 31, 2018, cash and cash equivalents had
decreased $3,393, or 4.6%, to $71,180, as compared to $74,573 at December 31, 2017. The decrease in
cash and cash equivalents was impacted mostly from the Company’s interest-bearing Federal Reserve
Bank clearing account, impacted by the funding need associated with growth in loans from year-end 2017.
The Company utilizes its interest-bearing Federal Reserve Bank clearing account to maintain seasonal tax
refund deposits, as well as to fund earning asset growth and maturities of retail CD’s. The interest rate
paid on both the required and excess reserve balances is based on the targeted federal funds rate established
by the Federal Open Market Committee. Short-term rate increases of 25 basis points during each of
69

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

March, June, September and December 2018 caused the federal funds rate to finish at 2.50% at December
31, 2018. The interest rate increases had a corresponding effect on the interest revenue growth
experienced during 2018 on Federal Reserve Bank clearing account balances. The 2.50% interest 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 also experienced a
significant decrease in business checking deposits from year-end 2017 related to one depositor relationship
during the first quarter of 2018.

As liquidity levels vary continuously based on consumer activities, amounts of cash and cash
equivalents can vary widely at any given point in time. The Company’s focus will be to invest available
funds into longer-term, higher-yielding assets, primarily loans, when the opportunities arise. Further
information regarding the Company’s liquidity can be found under the caption “Liquidity” in this
Management’s Discussion and Analysis.

CERTIFICATES OF DEPOSIT IN FINANCIAL INSTITUTIONS

At December 31, 2018, the Company had $2,065 in certificates of deposit owned by the Captive,
up from year-end 2017. The deposits on hand at December 31, 2018 consist of nine certificates with
remaining maturity terms ranging from less than 12 months up to 33 months.

SECURITIES

Municipals
13.40%

Mtg-backed
72.50%

at December 31, 2017

US Government sponsored entities
14.10%

Investment Portfolio Composition
at December 31, 2018

Management's goal in structuring the
portfolio is to maintain a prudent level of
liquidity while providing an acceptable rate of
return without sacrificing asset quality.
During 2018, the balance of total securities
decreased $726, or 0.6%, compared to year-
end 2017. The Company’s
investment
securities portfolio is made up mostly of
Agency
securities,
mortgage-backed
representing 72.5% of total investments at
December 31, 2018. During the year ended
2018, the Company invested $15,826 in new
Agency mortgage-backed securities, while
receiving principal repayments of $16,430.
The monthly repayment of principal has been
the primary advantage of Agency mortgage-
backed securities as compared to other types
of
investment securities, which deliver
proceeds upon maturity or call date. The
also
increased
Company
maturities
repayments
and
associated with
its state and municipal
security portfolio, which decreased $1,764, or
10.0%, compared to year-end 2017. Conversely, the Company invested into more U.S. Government
sponsored entity securities during 2018, which increased $3,157, or 23.4%, during 2018.

US Government sponsored entities
11.35%

experienced
principal

Mtg-backed
73.84%

Municipals
14.81%

In addition, increasing market rates during 2018 led to a $1,373 increase in the net unrealized loss
position associated with the Company’s available for sale securities, which lowered the fair value of
70

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECURITIES
Table III

As of December 31, 2018
(dollars in thousands)

Within
One Year

After One but Within
Five Years

After Five but Within
Ten Years

MATURING

Amount Yield

After Ten Years
Amount Yield

U.S. Government
sponsored entity
securities ....................... $
Obligations of states and
political subdivisions .....
Agency mortgage-backed
securities, residential .....
Total securities ................ $

----

$ 16,630

2.31% $

----

931

5.54%

7,052

4.86%

8,248

5.72%

1,059
1,990

3.94% 51,150
4.69% $ 74,832

2.48%
33,328
2.67% $ 41,576

2.55%
3.18% $

----

----
----

----

----
----

Tax-equivalent adjustments of $95 have been made in calculating yields on obligations of states and political
subdivisions using a 21% rate. Weighted average yields are calculated on the basis of the cost and effective yields
weighted for the scheduled maturity of each security. Mortgage-backed securities, which have prepayment provisions,
are assigned to a maturity category based on estimated average lives. Securities are shown at their fair values, which
include the market value adjustments for available for sale securities.

securities at December 31, 2018. The fair value of an investment security moves inversely to interest
rates, so as rates increased, the unrealized loss in the portfolio was further affected. These changes in rates
are typical and do not impact earnings of the Company as long as the securities are held to full maturity.
Management has not had to sell a debt security during 2018 and 2017 in order to maintain

sufficient liquidity, as maturing securities have historically accomplished this.

Prior to 2017, the reinvestment rates on debt securities had shown limited returns due to a sustained
low rate environment. The weighted average FTE yield on debt securities was 2.29% at both year-end
2017 and year-end 2016. Short-term rate increases of 75 basis points in 2017 and 100 basis points in 2018
have had a lagging, but positive impact to the yield on average securities. At December 31, 2018, the
weighted average FTE yield on debt securities increased 10 basis points to 2.39% from 2.29% the year
before. While the return performance of debt securities has improved, the Company’s focus will still be
to generate interest revenue primarily through loan growth, as loans generate the highest yields of total
earning assets. Table III provides a summary of the securities portfolio by category and remaining
contractual maturity. Issues classified as equity securities have no stated maturity date and are not
included in Table III.

LOANS

In 2018, the Company's primary category of earning assets and most significant source of interest
income, total loans, increased $7,733, or 1.0%, to finish at $777,052. The increase in loan balances from
year-end 2017 came primarily from the commercial and consumer loan portfolios, being partially offset
by balance decreases in the residential real estate loan portfolio.

Management continues to place emphasis on its commercial lending, which generally yields a
higher return on investment as compared to other types of loans. The commercial lending segment
increased $9,068, or 2.8%, from year-end 2017, which came mostly from the commercial and industrial
loan portfolio, which increased $6,154, or 5.7%, from year-end 2017. The increase was mostly impacted
by a $7,961 state and municipal loan origination from the West Virginia market area during the first

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Residential Real
Estate
39.13%

loan

nonfarm,

Consumer
18.46%

Commercial
Real Estate
27.84%

Commercial &
Industrial
14.57%

at December 31, 2017

Loan Portfolio Composition
at December 31, 2018

quarter of 2018. 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 real
estate loan segment comprises the largest portion of the Company's total commercial loan portfolio at
December 31, 2018, representing
65.6%.
Commercial real estate
owner-occupied,
consists
nonowner-occupied and construction
loans. Owner-occupied loans consist
nonresidential
of
properties. A commercial owner-
occupied
a borrower
purchased building or space for
which the repayment of principal is
dependent upon cash flows from the
ongoing operations conducted by the
party, or an affiliate of the party, who
owns the property. Owner-occupied
loans of the Company include loans
secured by hospitals, churches, and
hardware and convenience stores.
are
Nonowner-occupied
property
the
repayment of principal is dependent
upon rental income associated with
the property or the subsequent sale
of the property, such as apartment
buildings, condominiums, hotels and
motels. These loans are primarily
impacted
economic
conditions, which dictate occupancy
rates and the amount of rent charged.
Commercial construction loans are
extended to individuals as well as corporations for the construction of an individual property or multiple
properties and are secured by raw land and the subsequent improvements. Commercial real estate also
includes loan participations with other banks outside the Company’s primary market area. Although the
Company is not actively seeking to participate in loans originated outside its primary market area, it has
taken advantage of the relationships it has with certain lenders in those areas where the Company believes
it can profitably participate with an acceptable level of risk. Commercial real estate loans totaled $216,360
at December 31, 2018, an increase of $2,914, or 1.4%, over the balance of commercial real estate loans at
year-end 2017. Most of this growth came from nonowner-occupied loan originations, with balances
increasing $15,617, or 15.4%, from year-end 2018. Nonowner-occupied loan originations during 2018
came mostly from the Waverly and Athens, Ohio markets. Partially offsetting these increases within the
commercial real estate loan segment were larger payoffs from the owner-occupied loan segment, which
decreased $11,879, or 16.1%, from year-end 2018. Construction loans related to one- to four-family

Residential Real
Estate
40.19%

Commercial &
Industrial
13.92%

loans
for which

Commercial
Real Estate
27.74%

Consumer
18.15%

loans

local

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

residential homes, as well as multi-family residential and land development properties, decreased $824,
or 2.2%, from year-end 2017.

While management believes lending opportunities exist in the Company's markets, future
commercial lending activities will depend upon economic and 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.

Total loans also received positive contributions from the Company’s consumer loan portfolio,
which increased $3,749, or 2.7%, from year-end 2017. The Company’s consumer loans are primarily
secured by automobiles, mobile homes, recreational vehicles and other personal property. Personal loans
and unsecured credit card receivables are also included as consumer loans. The consumer loan portfolio
during 2018 benefited mostly from automobile loans, which increased $1,600, or 2.3%, from year-end
2017. Automobile loans represent the Company's largest consumer loan segment at 49.0% of total
consumer loans. The Company continues to target more auto dealers within its market areas and offer
interest rates that are more competitive with local banks. Growth in automobile loans was further enhanced
by increases in both home equity and other consumer type loans, which collectively were up $2,149, or
3.03%, from year-end 2017. Other consumer loan types include all-terrain and recreational vehicles, as
well as unsecured loans. 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.

As previously mentioned, the Company believes that it may experience a reduction in consumer
loan balances as a result of a new state law signed on July 30, 2018. The new law places numerous
restrictions on short-term and small loans that would apply to much of the lending of Loan Central. The
Company will continue to determine the effect of the law on Loan Central and the Company, including
whether Loan Central might qualify for an exemption from the law, which will not apply to loans prior to
April 27, 2019.

Generating residential real estate loans remains a significant focus of the Company’s lending
efforts. The residential real estate loan segment comprises the largest portion of the Company's overall
loan portfolio at 39.1% 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. During 2018, total
residential real estate loan balances decreased $5,084, or 1.6%, from year-end 2017. This decrease was
largely the result of increasing short-term adjustable-rate mortgages, which were up $638, being
completely offset by decreasing long-term fixed-rate mortgages, which decreased $8,556, from year-end
2017. As part of management’s interest rate risk strategy, the Company continues to sell most of its long-
term fixed-rate residential mortgages to the Federal Home Loan Mortgage Corporation, while maintaining
the servicing rights for those mortgages. A customer which does not qualify for a long-term, secondary
market loan may choose from one of the Company's other adjustable-rate mortgage products, which has
contributed to higher balances of adjustable-rate mortgages from year-end 2017. The decrease in
residential real estate loans was partially offset by 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. From year-end 2017, warehouse lending balances increased $6,795 to
finish at $15,826 at year-end 2018.

The Company will continue to follow its secondary market strategy until long-term interest rates
increase back to a range that falls within an acceptable level of interest rate risk for the Company.
73

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Furthermore, the Company will continue to monitor the pace of its loan volume and remain consistent in
its approach to sound underwriting practices and a focus on asset quality.

ALLOWANCE FOR LOAN LOSSES

Tables IV and V have been provided to enhance the understanding of the loan portfolio and the
allowance for loan losses. Management evaluates the adequacy of the allowance for loan losses quarterly
based on several factors, including, but not limited to, general economic conditions, loan portfolio
composition, prior loan loss experience, and management's estimate of probable incurred losses.
Management continually monitors the loan portfolio to identify potential portfolio risks and to detect
potential credit deterioration in the early stages, and then establishes reserves based upon its evaluation of
these inherent risks. Actual losses on loans are reflected as reductions in the reserve and are referred to as
charge-offs. The amount of the provision for loan losses charged to operating expenses is the amount
necessary, in management's opinion, to maintain the allowance for loan losses at an adequate level that is
reflective of probable and inherent loss. The allowance required is primarily a function of the relative
quality of the loans in the loan portfolio, the mix of loans in the portfolio and the rate of growth of
outstanding loans. Impaired loans, which include loans classified as TDR’s, are considered in the
determination of the overall adequacy of the allowance for loan losses.

Management continues to focus on improving asset quality and lowering credit risk while working
to maintain its relationships with its borrowers. During 2018, the Company’s allowance for loan losses
decreased $771, or 10.3%, to finish at $6,728, compared to $7,499 at year-end 2017. The allowance was
impacted by a decrease of $775 in general allocations from year-end 2017. As part of the Company’s
quarterly analysis of the allowance for loan losses, management reviewed 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. From year-end 2017, the historical loss factor decreased by 1
basis point and the economic risk factor decreased by 11 basis points, which contributed to a lower general
allocation of the allowance for loan losses at December 31, 2018. The Company’s improved delinquency
levels at year-end 2018 had a positive impact to reducing risk factors, with both nonperforming loans and
nonperforming assets finishing lower than the year before. A contributing factor to this was a 14.2%
decrease in nonaccruing loans from year-end 2017, primarily within the commercial real estate segment.
Nonperforming loans and nonperforming assets at December 31, 2018 continue to be in various stages of
resolution for which management believes loans are adequately collateralized or otherwise appropriately
considered in its determination of the adequacy of the allowance for loan losses. General risks in the
portfolio were also positively impacted by lower impaired loans at December 31, 2018, which decreased
$5,490, or 30.3%, from year-end 2017, while criticized and classified loans from the commercial loan
segment were comparable at $34 million at year-end 2018 and 2017.

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. At year-end 2018,
the Company continued to maintain a single specific allocation on a commercial real estate loan that
remained relatively unchanged from year-end 2017. This change in specific reserves during 2018
generated a $4 increase to provision expense.

At December 31, 2018, the ratio of the allowance for loan losses decreased to 0.87%, compared to
0.98% at December 31, 2017. Management believes that the allowance for loan losses at December 31,
2018 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, are factors
74

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Table IV
(dollars in thousands)

Years Ended December 31

2018

2017

2016

2015

2014

Commercial loans(1) ....................... $
Percentage of loans to total loans .

3,249 $
42.41%

4,002
41.66%

5,222
42.81%

4,548
42.89%

Residential real estate loans ...........
Percentage of loans to total loans .

1,583
39.13%

Consumer loans(2)...........................
Percentage of loans to total loans .

1,896
18.46%

1,470
40.19%

2,027
18.15%

939
38.92%

1,538
18.27%

1,087
38.22%

1,013
18.89%

5,797
43.98%

1,426
37.60%

1,111
18.42%

Allowance for loan losses ........... $

6,728 $
100.00%

7,499
100.00%

7,699
100.00%

6,648
100.00%

8,334
100.00%

Ratio of net charge-offs to average
loans

.23%

.37%

.28%

.47%

.10%

The above allocation is based on estimates and subjective judgments and is not necessarily indicative of the specific amounts
or loan categories in which losses may ultimately occur.

(1) Includes commercial and industrial and commercial real estate loans.
(2) Includes automobile, home equity and other consumer loans.

SUMMARY OF NONPERFORMING, PAST DUE AND RESTRUCTURED LOANS
Table V

(dollars in thousands)

At December 31

Impaired loans............................................. $
Past due 90 days or more and still accruing
Nonaccrual ..................................................
Accruing loans past due 90 days or more to
total loans ..................................................
Nonaccrual loans as a % of total loans........
Impaired loans as a % of total loans ...........
Allowance for loan losses as a % of total
loans ..........................................................

2018

2017

2016

2015

2014

12,618 $
1,067
8,677

18,108 $
334
10,112

22,709 $
327
8,961

17,228 $
39
7,236

20,169
73
9,549

.14%
1.11%
1.62%

.04%
1.32%
2.35%

.04%
1.22%
3.09%

.01%
1.23%
2.94%

.01%
1.61%
3.39%

.87%

.97%

1.05%

1.13%

1.40%

The impaired loan disclosures are comparable to the nonperforming loan disclosures except that the impaired loan
disclosures do not include single-family residential or consumer loans which are analyzed in the aggregate for loan impairment
purposes. All of the Company’s troubled debt restructurings are classified as impaired.

Management formally considers placing a loan on nonaccrual status when collection of principal or interest has become
doubtful. Furthermore, a loan should not be returned to the accrual status unless either all delinquent principal or interest has
been brought current or the loan becomes well secured and is in the process of collection.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MATURITY AND REPRICING DATA OF LOANS
As of December 31, 2018
Table VI
(dollars in thousands)

MATURING / REPRICING

Residential real estate loans ............................................... $
Commercial loans(1)............................................................
Consumer loans(2) ...............................................................
Total loans ........................................................................ $

Within One
Year
100,451 $
134,212
45,843
280,506 $

After One
but Within
Five Years
120,975 $
143,734
69,110
333,819 $

After Five
Years

82,653 $
51,657
28,417
162,727 $

Total
304,079
329,603
143,370
777,052

Loans maturing or repricing after one year with:
Variable interest rates .................................................................................................................................. $
Fixed interest rates .......................................................................................................................................
Total ............................................................................................................................................................ $

267,628
228,918
496,546

(1) Includes commercial and industrial and commercial real estate loans.
(2) Includes automobile, home equity and other consumer loans.

that could change and make adjustments to the allowance for loan losses necessary. Asset quality will
continue to remain a key focus, as management continues to stress not just loan growth, but quality in loan
underwriting as well. 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.

DEPOSITS

Deposits are used as part of the Company’s liquidity management strategy to meet obligations for
depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations.
Deposits, both interest- and noninterest-bearing, continue to be the most significant source of funds used
by the Company to support earning assets. Deposits are attractive sources of funding because of their
stability and generally low cost as compared with other funding sources. The Company seeks to maintain
a proper balance of core deposit relationships on hand while also utilizing various wholesale deposit
sources, such as brokered and internet CD balances, as an alternative funding source to manage efficiently
the net interest margin. Deposits are influenced by changes in interest rates, economic conditions and
competition from other banks. The accompanying table VII shows the composition of total deposits as of
December 31, 2018, 2017 and 2016. Total deposits decreased $10,020, or 1.2%, from year-end 2017 to
finish at $846,704 at December 31, 2018. The decrease came largely from “core” deposits, which include
noninterest-bearing deposits, as well as interest-bearing demand, savings, and money market deposits.
The Bank focuses on core deposit relationships with consumers from local markets who can maintain
multiple accounts and services at the Bank. The Company believes such core deposits are more stable and
less sensitive to changing interest rates and other economic factors. The decrease in total deposits came
primarily from noninterest-bearing balances, which decreased $15,834, or 6.2%, from year-end 2017.
This change came mostly from lower business checking accounts, in particular a $15 million decrease on

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

one commercial depositor relationship that occurred during the first quarter of 2018. The change was
related to the settlement of temporary funds that had accumulated during the fourth quarter of 2017. Also
during 2018, the Company saw more of its business checking account balances shift into more incentive
based checking account balances from year-end 2017.

Composition of Total Deposits
at December 31, 2018

NOW Accounts
18.33%

Savings & Money Market
28.09%

Demand
28.09%

CDs of 250M
or less
12.85%

IRA Accounts
5.11%

CDs over 250M
7.53%

at December 31, 2017

NOW Accounts
18.52%

Savings & Money Market
28.13%

Demand
29.61%

CDs of 250M
or less
12.36%

IRA Accounts
5.29%

CDs over 250M
6.09%

Partially offsetting the decrease in
noninterest-bearing deposits were higher
interest-bearing deposits from year-end 2017.
Net growth
interest-bearing deposit
balances came mostly from the Company’s
time deposits, which include CD’s and
individual retirement accounts. Total time
deposits increased $12,448, or 6.1%, from
year-end 2017. This was largely driven by
the Company's retail CD’s, which increased
9.8% from year-end 2017. The growth in
retail CD’s was affected by a short-term
promotional CD offering by the Bank during
the fourth quarter of 2017 that carried a
competitive rate to attract additional retail
Furthermore, with market
funding.
investment rates increasing, management has
adjusted its CD rates upward, which have
generated more of a consumer preference to
invest in a 1- to 2-year CD, as compared to a
tiered money market product. While the
Company's preference is to fund earning
asset demand with retail core deposits,
wholesale deposits are utilized to help satisfy
earning asset growth. With consumers
investing more into CD balances during
2018, the Company’s brokered CD issuances
decreased $3,941, or 11.0%, from year-end
2017.
The Company will continue to
evaluate its use of brokered CD’s to manage
the Company’s liquidity position and interest

rate risk associated with longer-term, fixed-rate asset loan demand.

Partially offsetting higher time deposit balances was a net decrease in NOW, savings and money
market account balances. NOW account balances were down $3,484, or 2.2%, from year-end 2017.
Money market account balances decreased $11,925, or 8.9%, from year-end 2017. The reduction in NOW
and money market balances was affected by a consumer preference for CD’s during 2018. These

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DEPOSITS
Table VII

(dollars in thousands)
Interest-bearing deposits:
NOW accounts …………………………………………………
Money market …………………………………………………
Savings accounts ……………………………………………….
IRA accounts ……………………………………………………
Certificates of deposit ………………………………………….

2018

As of December 31
2017

2016

155,166 $
121,294
116,574
43,249
172,600
608,883

158,650 $
133,220
107,798
45,312
158,089
603,069

155,051
134,308
103,453
47,099
140,965
580,876

209,576
790,452

Noninterest-bearing deposits:
Demand deposits ………………………………………………
Total deposits …………………………………………………

237,821
846,704 $

253,655
856,724 $

decreases were partially offset by growth in savings account balances, which increased $8,776, or 8.1%,
from year-end 2017.

The Company will continue to experience increased competition for deposits in its market areas,
which should challenge its net growth. The Company will continue to emphasize growth and retention
within its core deposit relationships during 2018, reflecting the Company’s efforts to reduce its reliance
on higher cost funding and improving net interest income.

OTHER BORROWED FUNDS

The Company also accesses other funding sources, including short-term and long-term
borrowings, to fund potential asset growth and satisfy short-term liquidity needs. Other borrowed funds
consist primarily of FHLB advances and promissory notes. During 2018, other borrowed funds were up
$3,764, or 10.5%, from year-end 2017. The increase was related to management's decision to fund specific
fixed-rate loans with like-term FHLB advances during the first quarter of 2018. While deposits continue
to be the primary source of funding for growth in earning assets, management will continue to utilize
Federal Home Loan Bank advances and promissory notes to help manage interest rate sensitivity and
liquidity.

SUBORDINATED DEBENTURES

The Company received proceeds from the issuance of one trust preferred security on March 22,
2007 totaling $8,500 at a fixed rate of 6.58%. The trust preferred security is now at an adjustable rate
equal to the 3-month LIBOR plus 1.68%. The Company does not report the securities issued by the trust
as a liability, but instead, reports as a liability the subordinated debenture issued by the Company and held
by the trust.

OFF-BALANCE SHEET ARRANGEMENTS

As discussed in Notes I and L, 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
78

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. Management does not anticipate that the Company’s current off-balance sheet activities
will have a material impact on the results of operations and financial condition.

CAPITAL RESOURCES

The Company maintains a capital level that exceeds regulatory requirements as a margin of safety
for its depositors. Regulations of the Board of Governors of the Federal Reserve System (the “FRB”)
require a state-chartered bank that is a member of a Federal Reserve Bank to maintain certain amounts
and types of capital and generally also require bank holding companies to meet such requirements on a
consolidated basis. The FRB generally requires bank holding companies that have chosen to become
financial holding companies to be “well capitalized,” as defined by FRB regulations, in order to continue
engaging in activities permissible only to bank holding companies that are registered as financial holding
companies. If, however, a bank holding company, whether or not also a financial holding company,
satisfies the requirements of the Federal Reserve’s Small Bank Holding Company and Small Savings and
Loan Holding Company Policy (the “SBHCP”), the holding company is not required to meet the
consolidated capital requirements. As amended effective in September, the SBHCP requires that the
holding company have assets of less than $3 billion, that it meet certain qualitative requirements, and that
all of the holding company’s bank subsidiaries meet all bank capital requirements. As of December 31,
2018, the Company was deemed to meet the SBHCP requirements and so was not required to meet
consolidated capital requirements at the holding company level.

As detailed in Note P to the financial statements at December 31, 2018, the Bank’s capital
exceeded the requirements to be deemed “well capitalized” under applicable prompt corrective action
regulations. Total shareholders' equity at December 31, 2018 of $117,874 increased $8,513, or 7.8%, as
compared to $109,361 at December 31, 2017. Capital growth during 2018 came primarily from year-to-
date net income of $11,944, less dividends paid of $3,967.

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 market
place. Total cash and cash equivalents, held to maturity securities maturing within one year and available
for sale securities, totaling $174,270, represented 16.9% of total assets at December 31, 2018. In addition,
the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity
demands. At December 31, 2018, the Bank could borrow an additional $148,298 from the FHLB, of which
$80,000 could be used for short-term, cash management advances. Furthermore, the Bank has established
a borrowing line with the Federal Reserve. At December 31, 2018, this line had total availability of
$59,014. Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank. For
further cash flow information, see the condensed consolidated statement of cash flows. Management does
not rely on any single source of liquidity and monitors the level of liquidity based on many factors
affecting the Company’s financial condition.

INFLATION

Consolidated financial data included herein has been prepared in accordance with US GAAP.
Presently, US GAAP requires the Company to measure financial position and operating results in terms

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

of historical dollars with the exception of securities available for sale, which are carried at fair value.
Changes in the relative value of money due to inflation or deflation are generally not considered.

In management's opinion, changes in interest rates affect the financial institution to a far greater
degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather,
interest rate volatility is based on changes in the expected rate of inflation, as well as monetary and fiscal
policies. A financial institution's ability to be relatively unaffected by changes in interest rates is a good
indicator of its capability to perform in today's volatile economic environment. The Company seeks to
insulate itself from interest rate volatility by ensuring that rate sensitive assets and rate sensitive liabilities
respond to changes in interest rates in a similar time frame and to a similar degree.

CRITICAL ACCOUNTING POLICIES

The most significant accounting policies followed by the Company are presented in Note A to the
consolidated financial statements. 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 that are highly dependent on subjective or complex judgments, estimates and assumptions, and
where changes in those estimates and assumptions could have a significant impact on the financial
statements. Management currently views the adequacy of the allowance for loan losses and business
combinations to be critical accounting policies.

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 troubled debt
restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-
by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
including the length and reasons for the delay, the borrower’s prior payment record, and the amount of
shortfall in relation to the principal and interest owed.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Commercial and commercial real estate loans are individually evaluated for impairment. If a loan
is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Smaller balance homogeneous loans, such as consumer and most
residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosure. Troubled debt restructurings are measured at the present value of
estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is
considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For
troubled debt restructurings that subsequently default, the Company determines the amount of reserve in
accordance with the accounting policy for the allowance for loan losses.

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 to individuals,
corporations, partnerships, sole proprietorships, and other business enterprises. Commercial and
industrial loans are generally secured by business assets such as equipment, accounts receivable,
inventory, or any other asset excluding real estate and generally made to finance capital expenditures or
operations. The Company’s risk exposure is related to deterioration in the value of collateral securing the
loan should foreclosure become necessary. Generally, business assets used or produced in operations do

CONTRACTUAL OBLIGATIONS
Table VIII
The following table presents, as of December 31, 2018, significant fixed and determinable contractual obligations to
third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the
consolidated financial statements.

Payments Due In

(dollars in thousands)
Deposits without a stated maturity ..
Consumer and brokered time
deposits ...........................................
Other borrowed funds .....................
Subordinated debentures .................
Lease obligations ............................

Note
Reference
G

Less than
One Year
$ 630,855 $

One to
Three Years
---- $

Three to
Five Years

Over Five
Years

---- $

Total
630,855

G
I
J
E

107,432
7,308
----
266

84,421
8,544
----
287

23,534
6,371
----
112

462
17,490
8,500
----

215,849
39,713
8,500
665

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 associated with such portfolios.

KEY RATIOS
Table IX

2018

2017

2016

2015

2014

Return on average assets .................
Return on average equity ................
Dividend payout ratio .....................
Average equity to average assets ....

1.12%
10.63%
33.20%
10.57%

.74%
6.95%
52.36%
10.66%

.77%
7.05%
51.79%
10.91%

1.03%
9.66%
42.74%
10.71%

1.01%
9.62%
42.62%
10.49%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Combinations:

Business combinations are accounted for using the acquisition method. The cost of an acquisition
is measured as the aggregate of the consideration transferred and the amount of any noncontrolling interest
in the acquiree. Acquisition related transaction costs are expensed and included in other operational
results. When a business is acquired, the Company assesses the financial assets and liabilities assumed for
appropriate classification and designation in accordance with the contractual terms, economic
circumstances and pertinent conditions as of the acquisition date. We are required to record the assets
acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often
involve estimates based on third party valuations, such as appraisals, or internal valuations based on
discounted cash flow analyses or other valuation techniques that may include estimates of attrition,
inflation, asset growth rates, or other relevant factors. In addition, the determination of the useful lives
over which an intangible asset will be amortized is subjective. Under FASB ASC 350 (SFAS No. 142
Goodwill and Other Intangible Assets), goodwill and indefinite-lived assets recorded must be reviewed
for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the
asset might be impaired. An impairment loss must be recognized for any excess of carrying value over
fair value of the goodwill or the indefinite-lived intangible asset.

CONCENTRATIONS 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.

Ohio Valley Banc Corp.
Email: investorrelations@ovbc.com
Web: www.ovbc.com
Phone: 1-800-468-6682
Headquarters: 420 Third Avenue, Gallipolis, Ohio
Traded on The NASDAQ Global Market
Symbol OVBC

Front Cover:
OVB’s Stephanie Stover and grandson,
Hayes, watch with anticipation during
the demolition phase of the OVB on
the Square project.