Ohio Valley Banc Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context
Ohio Valley Banc Corp. provides commercial and retail banking, consumer finance, mortgage, and related services, primarily in southeastern Ohio and western West Virginia. Banking generated the majority of consolidated revenue.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $11.845 | $10.359 | $32.388 | $30.622 |
| Provision for loan losses | $(0.378) recovery | $(0.093) recovery | $(0.691) recovery | $(0.118) recovery |
| Noninterest income | $2.615 | $2.612 | $8.971 | $8.457 |
| Noninterest expense | $10.347 | $9.469 | $30.158 | $27.953 |
| Net income | $3.690 | $3.036 | $9.814 | $9.428 |
| Earnings per share | $0.77 | $0.63 | $2.06 | $1.97 |
- Quarterly net income rose 21.5%; nine-month net income rose 4.1%. Management attributed improvement to higher net interest income and noninterest income and lower provision expense, partly offset by higher operating expenses.
- Net interest margin was 4.03% for Q3 versus 3.57% a year earlier, and 3.73% year to date versus 3.62%. The filing reports quarterly efficiency ratio of 71.0% versus 72.3%; year-to-date ratio worsened to 72.3% from 70.9%.
- Management reported nine-month return on assets of 1.04% versus 1.03%, and return on equity of 9.56% versus 9.13%.
Financial position, liquidity, and debt
- At September 30, total assets were $1,252.5, up $2.7 from year-end 2021. Gross loans were $855.9, up $24.7 (3.0%); total deposits were $1,074.3, up $14.4 (1.4%). Commercial and consumer lending grew, while residential real estate loans declined slightly.
- Cash and cash equivalents were $113.1, down $38.9 from year-end, as funds were deployed into loans and securities. Management reported $298.3 of cash and specified securities available for liquidity, equal to 23.8% of assets. Additional borrowing availability included $96.8 from the FHLB and $55.2 from the Federal Reserve.
- Other borrowed funds were $18.1, down $1.5 from year-end; subordinated debentures were $8.5. The Bank’s Community Bank Leverage Ratio was 10.55%, above the 9.0% applicable minimum stated in the filing.
- Nine-month operating cash flow was $10.2; investing cash outflow was $58.3 and financing cash inflow was $9.2. Cash and cash equivalents decreased $38.9 over the period.
- Shareholders’ equity fell $12.7 to $128.6. A $19.4 after-tax unrealized loss on available-for-sale securities was a major factor; accumulated other comprehensive loss was $18.7. The available-for-sale portfolio had $23.7 of gross unrealized losses at quarter-end. Management said the securities were high credit quality and it did not expect to need to sell them before recovery.
Material changes, outlook, and risks
- Higher market rates benefited asset yields and interest income, while deposit interest expense fell year over year. The company noted that loan growth is important to sustaining net interest income and margin improvement; limited loan growth could put pressure on both.
- Operating expenses increased 9.3% for Q3 and 7.9% year to date, primarily from salaries and benefits, Race Day Mortgage staffing and overhead, software, and data processing.
- The allowance for loan losses declined to $4.8 from $6.5 at year-end, or 0.56% of loans versus 0.78%. The company cited releases of COVID-related and other general reserves, improved credit indicators, and payoff of an impaired loan. Nine-month net charge-offs increased $0.6 year over year, including $0.6 of charge-offs tied to two commercial and industrial loans.
- Nonperforming loans were 0.46% of loans, down from 0.56% at year-end. Total criticized and classified commercial loans were $5.8, versus $11.8 at year-end. The filing identifies inflation, rising interest rates, economic slowdown, local market conditions, borrower performance, and deposit competition as risks.
- Management’s stated priorities include pursuing higher-yielding loans, emphasizing core deposit relationships, and maintaining underwriting quality. No numerical earnings or growth guidance is provided.
- The company expected to adopt CECL in 2023 and anticipated a one-time cumulative-effect adjustment to the allowance; the amount was not provided. It was assessing the impact of ASU 2022-02.
- Off-balance-sheet commitments to extend credit, standby letters of credit, and financial guarantees totaled approximately $101.7, versus $89.6 at year-end; contractual totals are not necessarily expected cash requirements. The company reported no material legal proceedings outside the ordinary course and no material risk-factor changes from its 2021 Form 10-K.
Most important facts for investors to verify
- Whether higher rates continue to improve net interest margin as funding costs and deposit competition evolve.
- Loan growth and credit quality, including the adequacy of the reduced allowance, charge-offs, classified exposures, and local economic sensitivity.
- The scale and sustainability of Race Day Mortgage’s contribution relative to its rising personnel and operating costs.
- Available-for-sale securities’ unrealized losses, potential effects on capital and equity, and the company’s ability to hold securities through recovery.
- CECL adoption timing and the eventual opening allowance adjustment, which was not quantified in this filing.
- Liquidity and capital coverage relative to deposit movements, off-balance-sheet commitments, and available borrowing capacity.