OHIO VALLEY BANC CORP

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. The Company earns interest and dividend income from loans, investment securities and short-term investments while incurring interest expense on interest-bearing deposits and short- and long-term borrowings. Net interest income is affected by changes in both the average volume and mix of assets and liabilities and the level of interest rates for financial instruments. Changes in net interest income are measured by net interest margin and net interest spread. Net interest margin is expressed as the percentage of net interest income to average interest-earning assets. Net interest spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Both of these are reported on a fully tax-equivalent (“FTE”) basis. Net interest margin exceeds the net interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and stockholders’ equity, also support interest-earning assets. The following is a discussion of changes in interest-earning assets, interest-bearing liabilities and the associated impact on interest income and interest expense for the two years ended December 31, 2024 and 2023. Tables I and II have been prepared to summarize the significant changes outlined in this analysis.

Net interest income in 2024 totaled $49,340 on an FTE basis, up $2,722, or 5.8%, from 2023. This increase reflects a positive contribution from a 12.6% increase in average earning assets, which was partially offset by a 23 basis point decrease in the net interest margin. The increase in average earning assets came mostly from a 9.2% increase in loans, a 19.0% increase in securities, and a 44.8% increase in interest-bearing balances with banks during 2024, as compared to the same period in 2023. The decrease in the net interest margin was related to the cost of funding sources increasing more than the yield on earning assets. The earning asset yield increased 45 basis points in large part due to rate increases of 100 basis points from the FRB during 2023 that impacted the repricings of loans and interest-bearing FRB clearing account. The increases in the cost of funding was partially linked to the Company’s decision to increase rates on deposit accounts at the end of 2022 and during 2023 to attract deposits amidst heightened market competition for such funds. In addition, the composition of funding sources trended toward CDs, and wholesale funding sources, which generally cost more than other funding sources, such as checking, NOW, savings and money market deposit products. These factors contributed to an increase in the Company’s average interest-bearing liability costs by 88 basis points during 2024. As a result, the net interest margin decreased 23 basis points from 3.94% in 2023 to 3.71% in 2024. The net interest margin decrease of 23 basis points reflects the 88 basis point increase in funding costs impacted by market rate increases and a composition shift to a greater number of higher-costing deposits and wholesale funding sources. These negative effects were partially offset by both a 45 basis point increase from the mix and yield on earning assets and a 20 basis point increase from the use of noninterest-bearing funding (i.e., demand deposits and shareholders’ equity).