(dollars in thousands, except share and per share data)
Forward Looking Statements
Certain statements contained in this report and other publicly available
documents incorporated herein by reference constitute "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as amended (the
"Exchange Act"), and as defined in the Private Securities Litigation Reform Act
of 1995. Such statements are often, but not always, identified by the use of
such words as "believes," "anticipates," "expects," "intends," "plan," "goal,"
"seek," "project," "estimate," "strategy," "future," "likely," "may," "should,"
"will," and other similar expressions. Such statements involve various important
assumptions, risks, uncertainties, and other factors, many of which are beyond
our control, particularly with regard to developments related to the Coronavirus
("COVID-19") pandemic, and which could cause actual results to differ materially
from those expressed in such forward looking statements. These factors include,
but are not limited to: the effects of COVID-19 on our business, operations,
customers and capital position; higher default rates on loans made to our
customers related to COVID-19 and its impact on our customers' operations and
financial condition; the impact of COVID-19 on local, national and global
economic conditions; unexpected changes in interest rates or disruptions in the
mortgage market; the effects of various governmental responses to COVID-19;
changes in political, economic or other factors, such as inflation rates,
recessionary or expansive trends, taxes, the effects of implementation of
legislation and the continuing economic uncertainty in various parts of the
world; competitive pressures; fluctuations in interest rates; the level of
defaults and prepayment on loans made by the Company; unanticipated litigation,
claims, or assessments; fluctuations in the cost of obtaining funds to make
loans; and regulatory changes. Additional detailed information concerning such
factors is available in the Company's filings with the Securities and Exchange
Commission, under the Exchange Act, including the disclosure under the heading
"Item 1A. Risk Factors" of Part I of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2021. Readers are cautioned not to place
undue reliance on such forward looking statements, which speak only as of the
date hereof. The Company undertakes no obligation and disclaims any intention
to republish revised or updated forward looking statements, whether as a result
of new information, unanticipated future events or otherwise.
BUSINESS OVERVIEW: The accompanying discussion on consolidated financial
statements include the accounts of Ohio Valley Banc Corp. and its wholly-owned
subsidiaries, The Ohio Valley Bank Company (the "Bank"), Loan Central, Inc., a
consumer finance company ("Loan Central"), Ohio Valley Financial Services
Agency, LLC, an insurance agency, and OVBC Captive, Inc., a limited purpose
property and casualty insurance company ("the Captive"). The Bank has two
wholly-owned subsidiaries, Race Day Mortgage, Inc., an Ohio corporation that
provides online consumer mortgages ("Race Day"), and Ohio Valley REO, LLC, an
Ohio limited liability company. Ohio Valley and its subsidiaries are
collectively referred to as the "Company."
The Company is primarily engaged in commercial and retail banking, offering a
blend of commercial and consumer banking services within southeastern Ohio as
well as western West Virginia. The banking services offered by the Bank include
the acceptance of deposits in checking, savings, time and money market accounts;
the making and servicing of personal, commercial, floor plan and student loans;
the making of construction and real estate loans; and credit card services. The
Bank also offers individual retirement accounts, safe deposit boxes, wire
transfers and other standard banking products and services. Furthermore, the
Bank offers Tax Refund Advance Loans ("TALs") to Loan Central tax customers. A
TAL represents a short-term loan offered by the Bank to tax preparation
customers of Loan Central.
IMPACT of COVID-19: COVID-19 has caused significant disruption in the United
States and international economies and financial markets. The primary markets
served by the Company in southeastern Ohio and western West Virginia were
significantly impacted by COVID-19, which has changed the way we live and work.
The continued effects of COVID-19 on the economy, supply chains, financial
markets, unemployment levels, businesses and our customers is unknown and
unpredictable.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act
("CARES Act") was signed into law. The CARES Act provided assistance to small
businesses through the establishment of the Paycheck Protection Program ("PPP").
Pursuant to the CARES Act, PPP funds were provided to small businesses in the
form of loans that would be fully forgiven if certain criteria were met. In
2021, Congress amended the PPP by extending the authority of the Small Business
Administration ("SBA") to guarantee loans and the ability of PPP lenders to
disburse PPP loans until May 31, 2021. The Company supported its clients who
experienced financial hardship due to COVID-19 through participation in the PPP,
assistance with expedited deposits of CARES Act stimulus payments, and loan
modifications, as needed.
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FINANCIAL RESULTS OVERVIEW: Net income totaled $4,125 during the first quarter
of 2022, an increase of $594 over the same period of 2021. Earnings per share
for the first quarter of 2022 finished at $.87 per share, compared to $.74 per
share during the first quarter of 2021. Quarterly earnings improved largely due
to lower provision expense and higher noninterest income being partially offset
by a combination of lower net interest income and higher noninterest expense.
The impact of higher net earnings during the first quarter of 2022 also had a
direct impact to the Company's annualized net income to average asset ratio, or
return on assets, which increased to 1.34% at March 31, 2022, compared to 1.20%
at March 31, 2021. The Company's net income to average equity ratio, or return
on equity, also increased to 11.78% at March 31, 2022, compared to 10.47% at
March 31, 2021.
During the three months ended March 31, 2022, net interest income decreased $58,
or 0.6%, from the same period in 2021. Lower net interest income was negatively
impacted by a 2.2% decrease in average loans, which contributed to a 7.3%
decrease in interest and fees on loans. The decrease in average loans was
impacted mostly by lower residential real estate loans and payoffs of PPP
loans. Excluding loans, the Company's remaining average earning assets
increased 29.5%, coming mostly from securities and Federal Reserve Bank
balances. This composition of higher balances in securities and the Federal
Reserve Bank, which yield less than loans, had a dilutive effect on the net
interest margin, which decreased from 3.73% during the quarter ended March 31,
2021, to 3.51% during the quarter ended March 31, 2022.
During the three months ended March 31, 2022, the Company experienced negative
provision for loan loss, which contributed to a $1,074 decrease in provision
expense when compared to the same period in 2021. The decrease from the prior
year was related to improved economic risk factors impacted by lower net
charge-offs and criticized and classified loans, as well as the partial release
of the COVID-19 reserve for the pandemic environment.
During the three months ended March 31, 2022, noninterest income increased $381,
or 11.4%, from the same period in 2021. This growth came largely from increases
in service charges on deposit accounts, interchange income on debit and credit
card transactions, and mortgage banking income in relation to Race Day, the
Company's new online mortgage company.
During the three months ended March 31, 2022, noninterest expense increased
$601, or 6.5%, over the same period in 2021. The increase was primarily related
to higher salaries and employee benefit costs impacted by the staffing of Race
Day, as well as higher annual merit expenses. The Company also experienced
increases in data processing costs, professional fees, and software expense, as
well as various other overhead costs from Race Day.
The Company's provision for income taxes increased $202, or 28.0%, during the
three months ended March 31, 2022, largely due to the changes in taxable income
affected by the factors mentioned above.
At March 31, 2022, total assets were $1,258,176, an increase of $8,407 from
year-end 2021. Higher assets were primarily impacted by increases in cash and
cash equivalents and investment securities, which were collectively up $24,072,
or 7.1%, from year-end 2021. This was in relation to higher deposit balances
during the first quarter of 2022. The growth in assets from year-end 2021 was
partially offset by a $19,545, or 2.4%, decrease in loans. The Company's loan
portfolio experienced decreases in the residential real estate segment (-1.4%),
commercial real estate segment (-5.2%) and consumer loan segment (-2.8%).
At March 31, 2022, total liabilities were $1,121,565, up $13,152 from year-end
2021. Contributing most to this increase were higher deposit balances, which
increased $14,510 from year-end 2021. The increase was impacted mostly from
higher interest-bearing demand deposits, partially offset by lower time deposits
and noninterest bearing demand deposits.
At March 31, 2022, total shareholders' equity was $136,611, down $4,745 since
December 31, 2021. This was from cash dividends paid and a decrease in net
unrealized gains on available for sale securities being partially offset by
quarterly net income. Regulatory capital ratios of the Company remained higher
than the "well capitalized" minimums.
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Comparison of Financial Condition
at March 31, 2022 and December 31, 2021
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at March 31, 2022 compared to December 31, 2021. This
discussion should be read in conjunction with the interim consolidated financial
statements and the footnotes included in this Form 10Q.
Cash and Cash Equivalents
At March 31, 2022, cash and cash equivalents were $163,724, an increase of
$11,690, or 7.7%, from December 31, 2021. The increase in cash and cash
equivalents came mostly from higher interest-bearing deposits on hand with
correspondent banks. Over 90% of cash and cash equivalents consist of the
Company's interest-bearing Federal Reserve Bank clearing account, which
increased $11,516, or 8.5%, from year-end 2021. The Company utilizes its
interest-bearing Federal Reserve Bank clearing account to manage excess funds,
as well as to assist in funding earning asset growth. The factors contributing
to higher clearing account balances include payoffs of larger commercial loans
and growth in interest bearing deposit balances during the quarter. The Company
utilized a portion of its clearing account balances and proceeds from loan
payoffs to reinvest in higher-yielding investment securities during the first
quarter of 2022. This shift into higher-yielding investment securities helped to
minimize the dilutive effect that higher clearing account balances have on the
net interest margin. The interest rate paid on both the required and excess
reserve balances of the Federal Reserve Bank account is based on the targeted
federal funds rate established by the Federal Open Market Committee. During the
first quarter of 2022, the rate associated with the Company's Federal Reserve
Bank clearing account increased 25 basis points due to rising inflationary
concerns, resulting in a target federal funds rate range of 0.25% to 0.50%.
Although interest-bearing deposits in the Federal Reserve Bank are the Company's
lowest-yielding interest-earning asset, the investment rate is higher than the
rate the Company would have received from its investments in federal funds sold.
Furthermore, Federal Reserve balances are 100% secured.
As liquidity levels continuously vary based on consumer activities, amounts of
cash and cash equivalents can vary widely at any given point in time. The
Company's focus during periods of heightened liquidity will be to invest excess
funds into longer-term, higher-yielding assets, primarily loans, when the
opportunities arise.
Certificates of Deposit
At March 31, 2022, the Company had $2,124 in certificates of deposit owned by
the Captive, down from $2,329 at year-end 2021. The deposits on hand at March
31, 2022 consist of nine certificates with remaining maturity terms ranging from
less than 6 months up to 18 months.
Securities
The balance of total securities increased $12,382, or 6.6%, compared to year-end
2021. The increase was impacted mostly by investment security purchases funded
by excess funds being maintained within the Federal Reserve Bank clearing
account. The Company's investment securities portfolio is made up mostly of U.S.
Government agency ("Agency") mortgage-backed securities, which represented 68.2%
of total investments at March 31, 2022. During the first three months of 2022,
the Company invested $19,763 in new Agency mortgage-backed securities, while
receiving principal repayments of $6,237. The monthly repayment of principal
has been the primary advantage of Agency mortgage-backed securities as compared
to other types of investment securities, which deliver proceeds upon maturity or
call date. The Company also redeployed a portion of its heightened excess funds
to purchase $9,820 in U.S. Government securities during the first quarter of
2022.
In addition, the continued increases in long-term reinvestment rates during 2022
led to a $10,692 decrease in the net unrealized gain position associated with
the Company's available for sale securities, which decreased the fair value of
securities at March 31, 2022. The fair value of an investment security moves
inversely to interest rates, so as rates increased, the unrealized gain in the
portfolio decreased. These changes in rates are typical and do not impact
earnings of the Company as long as the securities are held to full maturity.
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Loans
The loan portfolio represents the Company's largest asset category and is its
most significant source of interest income. Gross loan balances lowered to
$811,646 at March 31, 2022, representing a decrease of $19,545, or 2.4%, as
compared to $831,191 at December 31, 2021. The decrease in loans came primarily
from the commercial real estate portfolio, with other decreases coming from the
residential real estate, commercial and industrial, and total consumer loan
portfolios from year-end 2021.
The Company's commercial loan portfolio decreased $12,024, or 2.8%, from
year-end 2021. Contributing most to the decrease were lower loan balances within
the commercial real estate portfolio, decreasing $14,659, or 5.2%, from year-end
2021. The commercial real estate segment comprised the largest portion of the
Company's total commercial loan portfolio at March 31, 2022 at 65.0%. Decreases
came primarily from the principal payoffs of a limited number of large
nonowner-occupied loan balances from year-end 2021.
Decreases in commercial real estate loans were partially offset by a $2,635, or
1.9%, increase in the commercial and industrial portfolio from year-end 2021.
Commercial and industrial loans consist of loans to corporate borrowers
primarily in small to mid-sized industrial and commercial companies that include
service, retail and wholesale merchants. Collateral securing these loans
includes equipment, inventory, and stock. The commercial and industrial segment
also includes PPP loan balances that had a significant impact on average earning
asset growth in 2021. The Company's remaining PPP loans of $446 that were
outstanding at year-end 2021 were paid off during the first quarter of 2022.
While management believes lending opportunities exist in the Company's markets,
future commercial lending activities will depend upon economic and other related
conditions, such as general demand for loans in the Company's primary markets,
interest rates offered by the Company, the effects of competitive pressure and
normal underwriting considerations. Management will continue to place emphasis
on its commercial lending, which generally yields a higher return on investment
as compared to other types of loans.
Further decreases in the Company's loan portfolio came from the residential real
estate loan segment, which decreased $3,849, or 1.4%, from year-end 2021.
Although down, the residential real estate loan segment still comprises the
largest portion of the Company's overall loan portfolio at 33.3%, consists
primarily of one- to four-family residential mortgages, and carries many of the
same customer and industry risks as the commercial loan portfolio. The decrease
in residential real estate loans came largely from principal repayments and
payoffs in both long-term fixed-rate and short-term adjustable-rate mortgages.
As refinancing volume has subsided and long-term reinvestment rates have
increased, this has led to a slower demand for mortgage loans during 2022.
The Company's loan portfolio at March 31, 2022 was also impacted by less
consumer loan balances from year-end 2021, decreasing $3,672, or 2.8%. This
change was impacted by a $1,184, or 2.5%, decline in automobile loan balances.
Automobile loans represent the Company's largest consumer loan segment at 36.2%
of total consumer loans. The pandemic environment continued to have a negative
impact on auto loan originations in 2022 in part due to supply constraints that
were impacted by a chip shortage. Further limiting the volume of automobile loan
originations were heightened incentives being offered from the captive auto
finance companies in response to the pandemic. The remaining consumer loan
portfolio decreased $2,488, or 2.9%, from year-end 2021, mostly from decreases
in unsecured loans. The Company will continue to attempt to increase its auto
lending segment while maintaining strict loan underwriting processes to limit
future loss exposure. However, the Company will place more emphasis on loan
portfolios (i.e. commercial and, to a smaller extent, residential real estate)
with higher returns than auto loans. Indirect automobile loans bear additional
costs from dealers that partially offset interest revenue and lower the rate of
return.
Allowance for Loan Losses
The Company established a $5,268 allowance for loan losses at March 31, 2022,
which represents a decrease from the $6,483 allowance at year-end 2021. As part
of the Company's quarterly analysis of the allowance for loan losses, management
will review various factors that directly impact the general allocation needs of
the allowance, which include: historical loan losses, loan delinquency levels,
local economic conditions and unemployment rates, criticized/classified asset
coverage levels and loan loss recoveries. During the first quarter of 2022, the
Company experienced a $1,271 decrease in its general allocations of the
allowance for loan losses. The key contributor to this decrease came from lower
reserves associated with the COVID-19 risk factor. The Company added a COVID-19
risk factor in 2020 due to the negative economic outlook of the pandemic. Based
on positive asset quality trends and lower net charge offs, management released
$645 of the COVID-19 risk factor during the first quarter of 2022, resulting in
a corresponding decrease in both provision expense and general allocations of
the allowance for loan loss. As a result, the general reserve allocation related
to COVID-19 totaled $1,936 at March 31, 2022 as compared to $2,633 at December
31, 2021. The Company will continue to monitor the related economic effects of
the pandemic environment and asset quality trends moving forward to determine
the appropriate level of the COVID-19 risk factor.
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Excluding the impact from the COVID-19 risk factor, the Company experienced a
$574 decrease in general allocations of the allowance for loan losses related to
improvements in various economic risk factors. These include risk factors from
lower historical loan losses and lower criticized and classified assets. The
historical loan loss factor decreased from 0.18% at year-end 2021 to 0.17% at
March 31, 2022. Risk factors associated with criticized and classified assets
also decreased as a result of various commercial loan upgrades from improvements
in the financial performance of certain borrowers' ability to repay their loans.
Most recently, the Company upgraded a single commercial loan relationship
totaling $2,232 from a classified to a criticized loan status, which also
contributed to the release of general reserves during the first quarter of 2022.
Additionally, the Company's delinquency levels decreased from year-end 2021,
with nonperforming loans to total loans of 0.52% at March 31, 2022 compared to
0.56% at December 31, 2021, and lower nonperforming assets to total assets of
0.34% at March 31, 2022 compared to 0.37% at year-end 2021. General allocations
during the first quarter of 2022 increased in relation to higher unemployment
rates within the Company's market areas, only partially offsetting the
decreasing allocation factors already discussed.
Decreases in general allocations were partially offset by a $56 increase in
specific allocations from year-end 2021. Specific allocations of the allowance
for loan losses identify loan impairment by measuring fair value of the
underlying collateral and the present value of estimated future cash flows. The
change in specific reserves was primarily related to the loan impairments of one
borrower relationship during the first quarter of 2022.
The Company's allowance for loan losses to total loans ratio finished at 0.65%
at March 31, 2022 and 0.78% at year-end 2021. Management believes that the
allowance for loan losses at March 31, 2022 was adequate and reflected probable
incurred losses in the loan portfolio. There can be no assurance, however, that
adjustments to the allowance for loan losses will not be required in the
future. Changes in the circumstances of particular borrowers, as well as
adverse developments in the economy, particularly with respect to COVID-19, are
factors that could change, and management will make adjustments to the allowance
for loan losses as needed. Asset quality will continue to remain a key focus of
the Company, as management continues to stress not just loan growth, but quality
in loan underwriting.
Deposits
Deposits continue to be the most significant source of funds used by the Company
to meet obligations for depositor withdrawals, to fund the borrowing needs of
loan customers, and to fund ongoing operations. Total deposits at March 31,
2022 increased $14,510, or 1.4%, from year-end 2021. This change in deposits
came primarily from interest-bearing deposit balances, which were up by $22,435,
or 3.2%, from year-end 2021, while noninterest-bearing deposits decreased
$7,925, or 2.2%, from year-end 2021.
The increase in interest-bearing deposits came mostly from higher
interest-bearing NOW account balances from year-end 2021, which increased
$22,891, or 11.2%. This increase was largely driven by higher municipal NOW
product balances, particularly within the Gallia County, Ohio and Mason County,
West Virginia market areas. Growth in interest-bearing deposits also came from
savings deposits, which increased $5,996, or 4.1%, from year-end 2021, primarily
from higher statement savings account balances. Interest-bearing deposit growth
was further impacted by higher money market balances from year-end 2021, which
increased $2,636, or 1.6%.
Partially offsetting the increases in interest-bearing deposits were time
deposit balances, which decreased $9,088, or 4.8%, from year-end 2021. The
decrease came from lower brokered and internet CD issuances as a result of the
heightened liquidity position from year-end 2021. The Company's retail time
deposits also decreased from year-end 2021 in relation to the consumer shift to
savings and money market products.
The decrease in noninterest-bearing deposits came mostly from the Company's
business and incentive-based checking account balances from year-end 2021.
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While facing increased competition for deposits in its market areas, the Company
will continue to emphasize growth and retention in its core deposit
relationships during the remainder of 2022, reflecting the Company's efforts to
reduce its reliance on higher cost funding and improve net interest income.
Other Borrowed Funds
Other borrowed funds were $18,929 at March 31, 2022, a decrease of $685, or
3.5%, from year-end 2021. The decrease was related primarily to the principal
repayments applied to various FHLB advances during the first quarter of 2022.
While deposits continue to be the primary source of funding for growth in
earning assets, management will continue to utilize FHLB advances and promissory
notes to help manage interest rate sensitivity and liquidity.
Shareholders' Equity
Total shareholders' equity at March 31, 2022 decreased $4,745, or 3.4%, to
finish at $136,611, as compared to $141,356 at December 31, 2021. This was from
quarterly net income being completely offset by cash dividends paid and a
decrease in net unrealized gain on available for sale securities. The after-tax
decrease in net unrealized gain totaled $8,447 from year-end 2021, as market
rate increases continued during the first quarter of 2022 causing a decrease in
the fair value of the Company's available for sale investment portfolio.
Comparison of Results of Operations
For the Three Months Ended
March 31, 2022 and 2021
The following discussion focuses, in more detail, on the consolidated results of
operations of the Company for the three months ended March 31, 2022, compared to
the same period in 2021. This discussion should be read in conjunction with the
interim consolidated financial statements and the footnotes included in this
Form 10Q.
Net Interest Income
The most significant portion of the Company's revenue, net interest income,
results from properly managing the spread between interest income on earning
assets and interest expense incurred on interest-bearing liabilities. During the
three months ended March 31, 2022, net interest income was down $58, or 0.6%,
compared to the same period in 2021. The moderate decline was mostly
attributable to lower earning asset yields and lower loan fees being partially
offset by an increase in average earning assets combined with a decrease in the
average costs paid on deposits.
Total interest and fee income recognized on the Company's earning assets
decreased $469, or 4.2%, during the first quarter of 2022 compared to the same
period in 2021. The decrease was impacted by interest and fees on loans, which
decreased $767, or 7.3%. The decrease was partially the result of a decline in
loan fees of $340, or 32.0%, impacted by PPP fees. PPP fees decreased from $367
during the first quarter of 2021 to only $15 during the first quarter of 2022,
due to loan payoffs. Total interest and fee income also decreased due to
interest on loans, which decreased $427, or 4.5%, during the first quarter of
2022 as a result of lower loan yields and lower average balances. Average loan
yields decreased from 5.18% to 4.91% when comparing the first quarters of 2021
to 2022. Loan yields continued to be impacted by the interest rate reductions
from the Federal Reserve Bank in 2020, which led to lower loan interest revenue.
Average loans for the quarter ended March 31, 2022, compared to the quarter
ended March 31, 2021 decreased $18,141, or 2.2%. The decrease came mostly from
the payoffs of all the Company's PPP loans during 2021 and 2022, which resulted
in a decrease of $27,430 in average loan balances. Average real estate loan
balances also decreased during the first quarter of 2022 impacted by principal
repayments and payoffs combined with a lower volume of new originations as the
trend of increased mortgage refinancings have slowed since the heavy refinancing
period of 2020 and, to a lesser extent, 2021.
During the three months ended March 31, 2022, interest income from
interest-bearing deposits with banks increased $26, or 92.9%, when compared to
the same period in 2021. The impact came from higher average balances maintained
within the Company's interest-bearing Federal Reserve Bank clearing account,
which increased $11,147 during the first quarter of 2022 compared to the same
period in 2021. Furthermore, during the first quarter of 2022, the Federal
Reserve raised the target federal funds rate by 25 basis points due to rising
inflationary concerns. This had a corresponding effect on the interest rate tied
to the Federal Reserve clearing account, which also increased by 25 basis
points.
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Total interest on securities increased $278, or 59.9%, during the first quarter
of 2022 compared to the same period in 2021. Due to the surge in deposits and
proceeds from PPP loan payoffs, the Company has taken opportunities to reinvest
a portion of these excess funds into new U.S. Government, Agency and Agency
mortgage-backed securities, contributing to a $69,277 increase in average
securities during the first quarter of 2022 over the first quarter of 2021. The
average yield on securities also increased from 1.47% to 1.50% to further
enhance the growth in interest income. The change was partly impacted by the
Company's decision to sell $48,732 in lower yielding securities during the
fourth quarter of 2021 that carried an average yield of 0.89% and replace them
with similar securities at an average yield of 1.30%.
Total interest expense incurred on the Company's interest-bearing liabilities
decreased $411, or 38.1%, during the first quarter of 2021 compared to the same
period in 2022. Interest expense decreased despite an increase in average
interest-bearing deposits of $31,586 during the first quarter of 2022 compared
to the same period in 2021. The converse relationship between increasing average
interest-bearing liabilities to lower interest expense is related to the
repricing efforts in a lower rate environment which drove down average costs
during 2021. Lower deposit expense was mostly impacted by the continued decline
in CD rates, which contributed to a $350 decrease in time deposit interest
expense during the first quarter of 2022 compared to the same period in 2021.
As CD rates have repriced downward, the Company has benefited from lower
interest expense on newly issued CDs at lower rates. As a result of the rate
repricing on time deposits, the Company's total weighted average costs on
interest-bearing deposits has decreased by 23 basis points from 0.52% at March
31, 2021 to 0.29% at March 31, 2022.
The Company's net interest margin is defined as fully tax-equivalent net
interest income as a percentage of average earning assets. During 2022, the
Company's first quarter net interest margin finished at 3.51%, compared to
2021's first quarter net interest margin of 3.73%. The decrease in margin was
largely impacted by the decrease in PPP loan fees and a low interest rate
environment that impacted lower earning asset yields during 2022. While average
earning assets were up during the first quarter of 2022, the increase came
largely from lower yielding securities and Federal Reserve clearing account
balances, which had a dilutive effect to the net interest margin during the
first quarter of 2022. The Company's primary focus is to invest its funds into
higher yielding assets, particularly loans, as opportunities arise. However, if
loan balances do not continue to expand and remain a larger component of overall
earning assets, the Company will face pressure within its net interest income
and margin improvement.
Provision for Loan Losses
For the three months ended March 31, 2022, the Company's provision expense
decreased $1,074 from the same period in 2021. The quarterly improvement came
primarily from a decrease in general allocations. As previously discussed, the
Company's general allocations of the allowance for loan losses were impacted by
the release of $645 in COVID-19 general reserves during the first quarter of
2022. The Company removed a portion of its COVID-19 reserves due to positive
asset quality trends and lower net charge offs, which resulted in a
corresponding decrease of $645 to provision expense in March 2022. Further
contributing to lower provision expense were the impacts of the Company's other
general reserve allocations. During the first quarter of 2022, the Company
decreased its general allocations, excluding the COVID-19 risk factor, from
$3,840 at December 31, 2021 to $3,266 at March 31, 2022. Lower general reserves
have been affected by various improvements within the economic risk factor
calculation that included: lower criticized and classified assets, lower
delinquency levels, and higher annualized level of loan recoveries. Further
reducing provision expense was a decrease of $132 in net charge-offs during the
three months ended March 31, 2022 compared to the same period in 2021. This was
primarily from lower charge-offs recorded within the commercial real estate
portfolio. Lower provision expense was also impacted by a decrease in specific
allocations that totaled $90 at March 31, 2021 compared to $66 in specific
allocations at March 31, 2022.
Future provisions to the allowance for loan losses will continue to be based on
management's quarterly in-depth evaluation that is discussed in further detail
under the caption "Critical Accounting Policies - Allowance for Loan Losses"
within this Management's Discussion and Analysis.
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Noninterest Income
Noninterest income for the three months ended March 31, 2022 increased $381, or
11.4%, when compared to the three months ended March 31, 2021. The increase in
noninterest revenue was largely impacted by a $153, or 37.8%, increase in
service charges on deposit accounts. This included a higher volume of overdraft
transactions during the 2022 first quarter period.
Increases in noninterest income also came from interchange income, which
increased $85, or 8.1%, during the first quarter of 2022. This was impacted by
an increase in consumer spending that led to a higher volume of transactions
associated with the Company's debit and credit card products.
Further impacting growth in noninterest revenue was mortgage banking income,
which increased $56, or 31.3%, during the first quarter of 2022. Mortgage
banking income increased largely due to Race Day, the Bank's new online mortgage
company. Race Day was formed in April 2021 and began conducting business during
the third quarter of 2021. During the first quarter of 2022, Race Day
experienced loan sales that yielded $96 in mortgage banking revenue. This
increase was partially offset by a $40 decrease in the Bank's secondary market
income due to less volume of mortgage refinancings.
Other noninterest income also increased $52, or 34.7%, during the first quarter
of 2022. This came largely from higher servicing fees on a select number of
commercial loans.
The remaining noninterest income categories increased $35, or 2.3%, during the
first quarter of 2022 compared to the same period in 2021, primarily from higher
earnings on bank owned life insurance and annuity assets.
Noninterest Expense
Noninterest expense during the first quarter of 2022 increased $601, or 6.5%
compared to the same period in 2021. Contributing most to the increase in
noninterest expense were salaries and employee benefits, which increased $300,
or 5.7%, during the three months ended March 31, 2022 compared to the same
period in 2021. The expense increase was largely from the staffing of Race Day
employees in 2021, which led to higher salaries expense in 2022. Other expense
increases in this category also came from annual merit increases and higher
retirement plan costs in 2022.
Higher noninterest expense also came from data processing expense, which
increased $97, or 16.9%, during the first quarter of 2022 compared to the same
period in 2021. Higher costs in this category were the direct result of the
volume increase in debit and credit card transactions, which increased
processing costs.
Further impacting higher overhead costs were professional fees, which increased
$59, or 13.7%, during the first quarter of 2022 compared to the same period in
2021. Professional fees were impacted by accounting expenses associated with
adhering to regulatory guidance, as well as higher legal expenses.
Noninterest expense was also impacted by higher software costs, which increased
$54, or 12.0%, during the first quarter of 2022 compared to the same period in
2021. This increase was largely impacted by the associated software costs from
Race Day, which included various software platforms and resources that were
necessary to begin conducting business.
Other noninterest expense also increased $162, or 12.2%, during the first
quarter of 2022 compared to the same period in 2021. This was primarily
impacted by various other overhead costs associated with Race Day, including
loan expenses and employee recruiting costs.
The remaining noninterest expense categories decreased $71, or 6.2%, during the
first quarter of 2022 compared to the same period in 2021. These decreases were
impacted mostly from expense savings related to lower marketing and furniture
and equipment costs.
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Efficiency
The Company's efficiency ratio is defined as noninterest expense as a percentage
of fully tax-equivalent net interest income plus noninterest income. The effects
from provision expense are excluded from the efficiency ratio. Management
continues to place emphasis on managing its balance sheet mix and interest rate
sensitivity as well as developing more innovative ways to generate noninterest
revenue. Comparing the first quarters of 2022 and 2021, the Company benefited
from a larger decrease in the average cost on interest-bearing liabilities than
the decrease on earning asset yields. However, this benefit was completely
offset by the significant decrease in PPP loan fees that were more impactful
during the first quarter of 2021 than 2022. Furthermore, the Company's $601
increase in overhead expense was only partially offset by the $381 increase in
noninterest income. As a result, the Company's efficiency number increased
(regressed) to 70.8% during the quarterly period ended March 31, 2022 compared
to 68.0% during the same period in 2021.
Provision for income taxes
The Company's income tax provision increased $202 during the three months ended
March 31, 2022 compared to the same period in 2021. The change in tax expense
corresponded directly to the change in associated taxable income during 2022 and
2021.
Capital Resources
Federal regulators have classified and defined capital into the following
components: (i) Tier 1 capital, which includes tangible shareholders' equity for
common stock, qualifying preferred stock and certain qualifying hybrid
instruments, and (ii) Tier 2 capital, which includes a portion of the allowance
for loan losses, certain qualifying long-term debt, preferred stock and hybrid
instruments which do not qualify as Tier 1 capital.
In September 2019, consistent with Section 201 of the Economic Growth,
Regulatory Relief, and Consumer Protection Act, the federal banking agencies
issued a final rule providing simplified capital requirements for certain
community banking organizations (banks and holding companies). Under the rule, a
qualifying community banking organization ("QCBO") is eligible to opt into the
Community Bank Leverage Ratio ("CBLR") framework in lieu of the Basel III
capital requirements if it has less than $10 billion in total consolidated
assets, limited amounts of certain trading assets and liabilities, limited
amounts of off-balance sheet exposure and a leverage ratio greater than 9.0%.
The new rule took effect January 1, 2020, and QCBOs were allowed to opt into the
new CBLR framework in their Call Report beginning the first quarter of 2020.
A QCBO opting into the CBLR framework must maintain a CBLR of 9.0%, subject to a
two quarter grace period to come back into compliance, provided that the QCBO
maintains a leverage ratio of more than 8.0% during the grace period. A QCBO
failing to satisfy these requirements must comply with the existing Basel III
capital requirements as implemented by the banking regulators in July 2013.
The numerator of the CBLR is Tier 1 capital, as calculated under present rules.
The denominator of the CBLR is the QCBO's average assets, calculated in
accordance with the QCBO's Call Report instructions and less assets deducted
from Tier 1 capital.
The Bank opted into the CBLR, and will, therefore, not be required to comply
with the Basel III capital requirements. As of March 31, 2022, the Bank's CBLR
was 10.56%.
Pursuant to the CARES Act, the federal banking regulators in April 2020 issued
interim final rules to set the CBLR at 8% beginning in the second quarter of
2020 through the end of 2020. The CBLR was then increased to 8.5% in 2021 until
it was returned to 9% for all community banks beginning January 1, 2022.
Cash dividends paid by the Company were $998 during the first three months of
2022. The year-to-date dividends paid totaled $0.21 per share.
Liquidity
Liquidity relates to the Company's ability to meet the cash demands and credit
needs of its customers and is provided by the ability to readily convert assets
to cash and raise funds in the market place. Total cash and cash equivalents,
held to maturity securities maturing within one year, and available for sale
securities, which totaled $353,763, represented 28.1% of total assets at March
31, 2022 compared to $329,264 and 26.3% of total assets at December 31, 2021. To
further enhance the Bank's ability to meet liquidity demands, the FHLB offers
advances to the Bank. At March 31, 2022, the Bank could borrow an additional
$107,949 from the FHLB. Furthermore, the Bank has established a borrowing line
with the Federal Reserve. At March 31, 2022, this line had total availability of
$51,344. Lastly, the Bank also has the ability to purchase federal funds from a
correspondent bank. For further cash flow information, see the condensed
consolidated statement of cash flows above. Management does not rely on any
single source of liquidity and monitors the level of liquidity based on many
factors affecting the Company's financial condition.
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Critical Accounting Policies
The most significant accounting policies followed by the Company are presented
in Note A to the financial statements in the Company's 2021 Annual Report to
Shareholders. These policies, along with the disclosures presented in the other
financial statement notes, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are
determined. Management views critical accounting policies to be those which are
highly dependent on subjective or complex judgments, estimates and assumptions,
and where changes in those estimates and assumptions could have a significant
impact on the financial statements. Management currently views the adequacy of
the allowance for loan losses to be a critical accounting policy.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable incurred
credit losses. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the
allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired. A loan
is impaired when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans generally consist of
loans with balances of $200 or more on nonaccrual status or nonperforming in
nature. Loans for which the terms have been modified, and for which the borrower
is experiencing financial difficulties, are considered TDRs and classified as
impaired.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length and reasons for the
delay, the borrower's prior payment record, and the amount of shortfall in
relation to the principal and interest owed.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Smaller balance homogeneous
loans, such as consumer and most residential real estate, are collectively
evaluated for impairment, and accordingly, they are not separately identified
for impairment disclosure. TDRs are measured at the present value of estimated
future cash flows using the loan's effective rate at inception. If a TDR is
considered to be a collateral dependent loan, the loan is reported, net, at the
fair value of the collateral. For TDRs that subsequently default, the Company
determines the amount of reserve in accordance with the accounting policy for
the allowance for loan losses.
The general component covers non-impaired loans and impaired loans that are not
individually reviewed for impairment and is based on historical loss experience
adjusted for current factors. The historical loss experience is determined by
portfolio segment and is based on the actual loss history experienced by the
Company over the most recent 3 years for the consumer and real estate portfolio
segment and 5 years for the commercial portfolio segment. The total loan
portfolio's actual loss experience is supplemented with other economic factors
based on the risks present for each portfolio segment. These economic factors
include consideration of the following: levels of and trends in delinquencies
and impaired loans; levels of and trends in charge-offs and recoveries; trends
in volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and
practices; experience, ability, and depth of lending management and other
relevant staff; national and local economic trends and conditions; industry
conditions; and effects of changes in credit concentrations. During 2020, the
Company established a new economic risk factor in relation to the COVID-19
pandemic. The risk factor captures the exposure of our current historical loss
metrics to the heightened losses experienced following the Great Recession that
occurred from 2007 to 2009. To the extent the loss history incurred during an
economic downturn exceeded our current loss history, a general allocation to the
allowance for loan losses was made. The COVID-19 risk factor allocation amount
is subject to change based on the actual loss history experienced and may be
removed when the risk of loss in relation to the pandemic environment
diminishes. The following portfolio segments have been identified: Commercial
Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer.
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Commercial and industrial loans consist of borrowings for commercial purposes by
individuals, corporations, partnerships, sole proprietorships, and other
business enterprises. Commercial and industrial loans are generally secured by
business assets such as equipment, accounts receivable, inventory, or any other
asset excluding real estate and generally made to finance capital expenditures
or operations. The Company's risk exposure is related to deterioration in the
value of collateral securing the loan should foreclosure become necessary.
Generally, business assets used or produced in operations do not maintain their
value upon foreclosure, which may require the Company to write down the value
significantly to sell.
Commercial real estate consists of nonfarm, nonresidential loans secured by
owner-occupied and nonowner-occupied commercial real estate as well as
commercial construction loans. An owner-occupied loan relates to a borrower
purchased building or space for which the repayment of principal is dependent
upon cash flows from the ongoing business operations conducted by the party, or
an affiliate of the party, who owns the property. Owner-occupied loans that are
dependent on cash flows from operations can be adversely affected by current
market conditions for their product or service. A nonowner-occupied loan is a
property loan for which the repayment of principal is dependent upon rental
income associated with the property or the subsequent sale of the property.
Nonowner-occupied loans that are dependent upon rental income are primarily
impacted by local economic conditions which dictate occupancy rates and the
amount of rent charged. Commercial construction loans consist of borrowings to
purchase and develop raw land into one- to four-family residential properties.
Construction loans are extended to individuals as well as corporations for the
construction of an individual or multiple properties and are secured by raw land
and the subsequent improvements. Repayment of the loans to real estate
developers is dependent upon the sale of properties to third parties in a timely
fashion upon completion. Should there be delays in construction or a downturn in
the market for those properties, there may be significant erosion in value which
may be absorbed by the Company.
Residential real estate loans consist of loans to individuals for the purchase
of one- to four-family primary residences with repayment primarily through wage
or other income sources of the individual borrower. The Company's loss exposure
to these loans is dependent on local market conditions for residential
properties as loan amounts are determined, in part, by the fair value of the
property at origination.
Consumer loans are comprised of loans to individuals secured by automobiles,
open-end home equity loans and other loans to individuals for household, family,
and other personal expenditures, both secured and unsecured. These loans
typically have maturities of 6 years or less with repayment dependent on
individual wages and income. The risk of loss on consumer loans is elevated as
the collateral securing these loans, if any, rapidly depreciate in value or may
be worthless and/or difficult to locate if repossession is necessary. During the
last several years, one of the most significant portions of the Company's net
loan charge-offs have been from consumer loans. Nevertheless, the Company has
allocated the highest percentage of its allowance for loan losses as a
percentage of loans to the other identified loan portfolio segments due to the
larger dollar balances and inherent risk associated with such portfolios.
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with residential real
estate loans currently comprising the most significant portion. Credit risk is
primarily subject to loans made to businesses and individuals in southeastern
Ohio and western West Virginia. Management believes this risk to be general in
nature, as there are no material concentrations of loans to any industry or
consumer group. To the extent possible, the Company diversifies its loan
portfolio to limit credit risk by avoiding industry concentrations.
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