Ohio Valley Banc Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited consolidated results include the bank, consumer finance and other subsidiaries. Dollar amounts below are in thousands unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $11,722 | Up 17.3% from $9,990 |
| Net interest margin | 4.21% | 3.51% in Q1 2022 |
| Provision for credit losses | $489 expense | Compared with $1,126 recovery in Q1 2022 |
| Noninterest income | $3,767 | Up 1.3% from $3,720 |
| Noninterest expense | $10,272 | Up 4.9% from $9,788 |
| Net income / diluted EPS | $3,908 / $0.82 | $4,125 / $0.87 in Q1 2022 |
| Efficiency ratio | 65.7% | Improved from 70.8% |
| Return on average assets / equity | 1.28% / 11.85% | 1.34% / 11.78% in Q1 2022 |
| Operating cash flow | $4,225 provided | $2,570 provided in Q1 2022 |
Interest income growth, particularly from loans and interest-bearing bank deposits, lifted net interest income; higher deposit costs partly offset that benefit. Net income declined 5.3% year over year as the prior-year credit-loss recovery was replaced by an expense and operating costs rose. The filing does not provide a separate conventional operating-profit margin.
Financial condition, liquidity and capital
- Assets: $1.266 billion at March 31, up $55.7 million from year-end 2022. Cash and cash equivalents rose $43.9 million to $89.8 million; gross loans grew 2.4% to $906.3 million.
- Loans and credit: Growth was led by consumer loans, up 10.9%, including a January purchase of unsecured loans with a $14.2 million quarter-end balance, and commercial and industrial loans, up 4.3%. Residential real estate loans declined 2.0%.
- Allowance and asset quality: Loan allowance was $7.6 million, or 0.84% of loans, versus $5.3 million, or 0.60%, at year-end. Nonperforming loans were 0.39% of loans, down from 0.43%; nonperforming assets were 0.28% of assets, down from 0.31%.
- Deposits and funding: Deposits increased $53.5 million to $1.081 billion. Interest-bearing deposits rose $68.4 million while noninterest-bearing deposits fell $14.8 million. Time deposits increased $99.7 million, including $58.7 million in brokered CDs, as deposit competition and liquidity needs prompted a shift to higher-cost funding.
- Borrowings: Other borrowed funds were $17.3 million and subordinated debentures were $8.5 million. The company reported $101.7 million of additional FHLB borrowing capacity and $58.2 million available under a Federal Reserve borrowing line.
- Liquidity: Cash, available-for-sale securities and HTM securities maturing within one year totaled $270.2 million, or 21.3% of assets, versus $230.9 million, or 19.1%, at year-end. Management said it believed liquid assets and borrowing sources were sufficient to meet liquidity needs.
- Capital and equity: Shareholders’ equity was $137.5 million, up $2.5 million from year-end. The Bank’s Community Bank Leverage Ratio was 11.22%, above the 9% threshold. Dividends were $0.21 per share for the quarter.
- Cash flows: Investing activities used $12.3 million, principally reflecting $21.6 million of net loan growth; financing activities provided $51.9 million, principally from deposit growth. Cash and cash equivalents ended at $89.8 million, compared with $163.7 million at March 31, 2022.
Changes, outlook, risks and unusual items
- Net interest margin increased as asset yields repriced faster than funding costs and the balance sheet shifted toward loans. Management said continued margin improvement depends in part on loan growth and maintaining a larger share of higher-yielding loans.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $2.162 million, established $631,000 of reserves for unfunded commitments and a $3,000 HTM securities allowance, and reduced retained earnings by $2.209 million. The company elected the three-year regulatory capital transition.
- Available-for-sale securities had $16.6 million of gross unrealized losses at quarter-end, which management attributed to noncredit factors, primarily interest rates and market conditions. It stated it did not intend, and did not expect to be required, to sell these securities before recovery. The after-tax improvement in their fair value added $1.695 million to quarterly other comprehensive income.
- In February 2023, the company began steps to close Race Day Mortgage due to low loan demand, personnel-retention difficulties and lack of profitability. It planned to complete applications already in progress; no exact closing date was stated. Q1 included $231,000 of Race Day mortgage referral commissions, which management did not expect to continue at that level in Q2.
- Management cited rising deposit competition, brokered-CD funding, changing interest rates, economic uncertainty and potential future deposit volatility as risks. The filing added a risk factor concerning recent bank failures, possible regulatory changes and potential FDIC special assessments. Management said the company had not been directly affected by those failures.
- Forward-looking statements are subject to risks including interest-rate changes, inflation, recession, loan defaults and prepayments, funding costs, competition and regulatory changes. The filing provides no numerical earnings or margin guidance.
- The securities portfolio is primarily agency mortgage-backed securities. Total securities declined 2.4% from year-end, while the fair value of available-for-sale securities improved during the quarter as long-term reinvestment rates decreased.
Most important facts for investors to verify
- Whether deposit growth and liquidity remain stable, particularly as brokered CDs and higher-cost time deposits affect funding costs and margins.
- Subsequent loan performance, charge-offs and allowance adequacy under the new CECL methodology, including exposure from the purchased unsecured loan pool.
- Interest-rate changes and any need to sell securities with significant unrealized losses; management’s no-sale expectation is not a guarantee of recovery.
- Race Day’s closure timing, wind-down costs and the effect of lost mortgage-related revenue.
- Whether capital and available borrowing capacity remain adequate if deposit volatility, credit deterioration or regulatory assessments increase.