Ohio Valley Banc Corp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results include banking, consumer finance, and related subsidiaries. Dollar amounts below are in thousands unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $10,553 | $10,215 | $20,543 | $20,263 |
| Provision for loan losses | $813 | $27 | $(313) recovery | $(25) recovery |
| Noninterest income | $2,636 | $2,506 | $6,356 | $5,845 |
| Noninterest expense | $10,023 | $9,297 | $19,811 | $18,484 |
| Net income | $1,999 | $2,861 | $6,124 | $6,392 |
| Earnings per share | $0.42 | $0.60 | $1.29 | $1.34 |
| Net interest margin | 3.64% | 3.58% | 3.58% | 3.65% |
| Efficiency ratio | 75.3% | 72.4% | 73.0% | 70.2% |
Q2 net income fell $862 (30.1%) year over year; first-half net income fell $268 (4.2%). Return on assets was 0.98% and return on equity 8.87% for the first half, versus 1.06% and 9.39%, respectively, in 2021.
- Net interest income rose 3.3% in Q2 and 1.4% year to date. Lower deposit costs and higher securities and bank-deposit income helped; lower loan balances, loan yields, and PPP fees partly offset those gains.
- Q2 provision expense increased $786 year over year, reflecting higher net charge-offs, including $613 charged off on two C&I loans in one borrower relationship. First-half provision was a net recovery, aided by reserve releases.
- Noninterest income increased 5.2% in Q2 and 8.7% year to date, led by deposit service charges, with contributions from Race Day mortgage banking and card interchange income.
- Noninterest expense increased 7.8% in Q2 and 7.2% year to date, mainly from salaries and benefits, software, professional fees, data processing, and other Race Day costs.
Financial position, cash flow and liquidity
- At June 30, total assets were $1.254 billion, up $4.1 million from year-end 2021. Gross loans were $870.3 million, up 4.7%; deposits were $1.073 billion, up 1.3%.
- Cash and cash equivalents were $94.1 million, down $57.9 million from year-end as funds were deployed into loans and securities. First-half cash flows: $5.1 million provided by operations, $72.7 million used in investing, and $9.6 million provided by financing.
- Borrowings totaled $27.0 million: $18.5 million of other borrowed funds and $8.5 million of subordinated debentures. The company reported $116.1 million of additional FHLB borrowing capacity and $51.6 million available on a Federal Reserve line. The FHLB cash-management line had $100 million available.
- Liquidity assets identified by management totaled $288.1 million, or 23.0% of assets, versus $329.3 million, or 26.3%, at year-end. Bank CBLR was 10.43%; management said regulatory capital ratios remained above “well capitalized” minimums.
- Shareholders’ equity declined $8.8 million to $132.6 million. The main factor was a $12.8 million after-tax decline in unrealized gains on available-for-sale securities, partly offset by earnings and affected by $2.7 million of dividends paid. Available-for-sale securities had $15.3 million of gross unrealized losses at quarter-end; management said it did not intend, and was not likely to be required, to sell them before recovery.
Material changes, outlook and risks
- Loan growth was concentrated in residential real estate, up $33.7 million from year-end, including a $37.2 million increase in warehouse lending balances. Commercial real estate declined $5.3 million. All remaining PPP loans were paid off in Q1.
- The allowance for loan losses was $5.2 million, or 0.60% of loans, versus $6.5 million, or 0.78%, at year-end. First-half releases included $645 of COVID-related reserves; management cited improved asset-quality factors. Nonperforming loans were 0.46% of loans versus 0.56% at year-end. Classified commercial loans were $2.9 million versus $9.3 million at year-end.
- Management provided no specific earnings or financial guidance. It plans to pursue core deposit growth and retain deposits, deploy excess liquidity into higher-yielding assets, and emphasize commercial lending subject to demand, competition, rates, and underwriting standards. Management cautioned that limited loan growth could pressure net interest income and margin.
- Risks identified include inflation, rising interest rates, recession or weaker local conditions, loan defaults and prepayments, funding costs, competition, mortgage-market changes, COVID-19 effects, and regulatory or litigation developments. In Q2, the company added an allowance risk factor addressing elevated inflation, rising rates, slower housing starts, declining GDP, and negative employment trends.
- Off-balance-sheet commitments to extend credit, standby letters of credit, and financial guarantees totaled approximately $98.5 million, versus $89.6 million at year-end; actual funding needs may be lower because commitments can expire undrawn. No material legal proceedings outside the ordinary course were reported, and management reported effective disclosure controls.
- CECL adoption was expected to begin in 2023 for the company; management anticipated a one-time cumulative-effect allowance adjustment but did not quantify it. The company was evaluating the impact of related loan-modification disclosure guidance.
Important facts for investors to verify
- How the large residential warehouse-line balance and borrower concentration evolve, and whether the growth is temporary or recurring.
- Credit quality and reserve adequacy following the $613 thousand C&I charge-off, lower allowance ratio, and new macroeconomic risk factor.
- Whether deposit costs rise as rates change, and the resulting effect on net interest margin and earnings.
- The recovery, duration, and potential capital implications of unrealized securities losses, alongside liquidity and borrowing capacity.
- Race Day’s revenue contribution and whether its elevated staffing and operating costs improve efficiency over time.
- The eventual CECL transition adjustment and the drawdown risk on the $98.5 million of off-balance-sheet commitments.