Ohio Valley Banc Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Unless noted, dollar amounts are in thousands. Ohio Valley Banc Corp. provides banking and consumer-finance services primarily in southeastern Ohio and western West Virginia.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net interest income | $9,990 | $10,048 |
| Provision for loan losses | $(1,126) (net release) | $(52) (net release) |
| Noninterest income | $3,720 | $3,339 |
| Noninterest expense | $9,788 | $9,187 |
| Net income | $4,125 | $3,531 |
| Diluted/basic earnings per share | $0.87 | $0.74 |
- Net income increased $594, or 16.8%. Management attributed the improvement mainly to lower provision expense and higher noninterest income, partly offset by lower net interest income and higher expenses.
- Net interest margin fell to 3.51% from 3.73%; the efficiency ratio worsened to 70.8% from 68.0%.
- Annualized return on assets was 1.34%, versus 1.20%; return on equity was 11.78%, versus 10.47%.
- Operating cash flow was $2,563, compared with $685. Cash and cash equivalents rose $11,690 during the quarter to $163,724.
Financial position and material changes
- At March 31, total assets were $1.258 billion, up $8.4 million from year-end 2021. Total deposits were $1.074 billion, up $14.5 million; shareholders’ equity was $136.6 million, down $4.7 million.
- Gross loans declined $19.5 million, or 2.4%, to $811.6 million, led by a $14.7 million decrease in commercial real estate loans. Commercial and industrial loans increased $2.6 million. Management cited large commercial real estate payoffs, PPP loan repayments, mortgage payoffs and softer auto lending.
- The allowance for loan losses declined to $5.3 million from $6.5 million; allowance-to-loans coverage was 0.65%, versus 0.78%. The quarter included a $645,000 release of COVID-related reserves. Management considered the allowance adequate but noted future adjustments may be required.
- Nonperforming loans were 0.52% of loans, down from 0.56% at year-end; nonperforming assets were 0.34% of assets, down from 0.37%. Nonaccrual loans were $3.8 million. Criticized commercial loans increased to $4.6 million, while classified commercial loans declined to $6.6 million.
- Available-for-sale securities had a $9.9 million gross unrealized loss at quarter-end, compared with a $0.7 million loss at year-end. The after-tax decline in unrealized gains/losses was $8.4 million and reduced equity through other comprehensive income; management said it did not consider the losses other-than-temporary and did not expect to need to sell before recovery.
- Borrowings totaled $27.4 million: $18.9 million in other borrowed funds and $8.5 million in subordinated debentures. FHLB advances were $16.8 million. The Bank reported $107.9 million of additional FHLB borrowing capacity and $51.3 million available on a Federal Reserve line.
- Liquidity assets identified by management totaled $353.8 million, or 28.1% of assets. The Bank’s Community Bank Leverage Ratio was 10.56%; management said regulatory capital ratios exceeded well-capitalized minimums.
Outlook, commentary and risks
- No numeric earnings or financial guidance was provided. Management intends to pursue higher-yielding assets, particularly loans, and emphasize core-deposit growth and retention. It cautioned that limited loan growth or a continued shift toward lower-yielding securities and cash could pressure net interest income and margin.
- Management cited competition for deposits, inflation and interest-rate changes, economic uncertainty, possible COVID-related disruption, borrower defaults, mortgage-market changes, funding costs and regulatory changes as risks. Rising rates also reduced securities fair values during the quarter.
- Race Day Mortgage, launched in 2021, contributed to higher mortgage banking income and also added staffing, software and other operating costs. Its Q1 loan sales generated $96,000 of mortgage banking revenue.
- CECL was scheduled to take effect for the company in 2023. Management expected adoption to cause a material increase in the allowance for loan losses. The company was assessing the impact of ASU 2022-02, which changes certain modification and credit-loss disclosures.
- Off-balance-sheet commitments to extend credit, standby letters of credit and financial guarantees totaled approximately $94.5 million, versus $89.6 million at year-end; actual funding needs may be lower because many commitments may expire undrawn.
- COVID-related modifications covered 591 loans with $107.1 million outstanding through March 31; 19 loans totaling $378,000 remained under deferral terms. No TDR modifications or TDR defaults were reported in the quarter.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material legal proceedings outside the ordinary course.
Important facts for investors to verify
- Whether loan growth and net interest margin recover as rates, deposit costs and earning-asset mix change.
- Whether the reserve release remains appropriate, including the effects of economic conditions, criticized/classified credits and CECL adoption.
- Whether unrealized securities losses deepen or create a need to sell securities before recovery, and the resulting effect on equity and liquidity.
- Trends in deposit composition and competition, available borrowing capacity, and the potential use of off-balance-sheet commitments.
- Whether Race Day’s revenue growth can offset its added operating costs, and whether management provides further quantified outlook in subsequent filings.