OHIO VALLEY BANC CORP quarterly report, Q2 FY2022

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

MetricQ2 2022Q2 2021Six months 2022Six 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 margin3.64%3.58%3.58%3.65%
Efficiency ratio75.3%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.