Ohio Valley Banc Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results; amounts below are in thousands of dollars except per-share data. The company provides commercial and retail banking and consumer finance services primarily in southeastern Ohio and western West Virginia.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $10,082 | $10,626 | $29,881 | $32,666 |
| Provision for (recovery of) loan losses | $(2) | $444 | $3,451 | $2,015 |
| Noninterest income | $2,434 | $2,107 | $9,125 | $5,956 |
| Noninterest expense | $9,891 | $9,738 | $29,012 | $29,097 |
| Net income | $2,294 | $2,137 | $5,559 | $6,409 |
| Earnings per share | $0.48 | $0.45 | $1.16 | $1.35 |
| Net interest margin | 3.88% | 4.41% | 4.04% | 4.57% |
- Q3 net income rose 7.3%; nine-month net income fell 13.3%. Return on assets was 0.69% and return on equity 5.70%, versus 0.83% and 7.07%, respectively, at September 30, 2019.
- At September 30, 2020, assets were $1,137,938, up $124,666 from year-end 2019. Gross loans were $853,038, up $80,264 (10.4%); deposits were $944,984, up $123,513 (15.0%). Shareholders’ equity was $132,898, up $4,719.
- Cash and cash equivalents were $83,554, compared with $52,356 at year-end. Cash, qualifying securities and short-term held-to-maturity securities totaled $195,720, or 17.2% of assets. The company reported $109,189 of additional FHLB borrowing capacity and $58,804 available on a Federal Reserve line.
- Other borrowed funds were $29,321, down $4,670 from year-end; subordinated debentures remained $8,500. The allowance for loan losses was $7,730, or 0.91% of loans, versus $6,272 and 0.81% at year-end.
- For the first nine months, operating cash flow was $7,530, investing cash outflow was $92,182, and financing cash inflow was $115,850. Cash increased $31,198. Financing inflows principally reflected deposit growth.
- The company paid $0.63 per share in dividends during the first nine months ($0.21 in Q3). Its CBLR was 11.74% at the company level and 10.70% at the Bank; management said regulatory capital remained above applicable “well capitalized” minimums.
Material changes and operating drivers
- Net interest income declined 5.1% in Q3 and 8.5% year to date as lower market rates reduced asset yields faster than deposit costs repriced. Loan yields fell to 5.24% in Q3 from 5.86%; the fully tax-equivalent net interest margin contracted 53 basis points in both comparison periods.
- Noninterest income increased year to date, principally due to a $2,000 litigation settlement, $643 in tax-preparation fee income following a change in the Loan Central-related business model, and stronger mortgage banking income. Lower deposit service charges partly offset these gains.
- Year-to-date provision expense increased $1,436 from 2019. Management added a COVID-19-related general reserve allocation of $2,287 by September 30. In Q3, a small net recovery of provision compared with $444 expense in the prior-year quarter.
- Commercial and industrial loans grew by $58,810, including $35,114 in SBA-guaranteed PPP loans; commercial real estate loans also grew. Consumer loans declined 6.2%, primarily reflecting lower automobile lending. Deposits rose partly due to stimulus and PPP-related funds.
- Nonperforming loans were 0.75% of total loans, down from 1.30% at year-end 2019; nonperforming assets were 0.57% of assets, down from 1.04%. The allowance nevertheless increased, reflecting management’s COVID-19 and economic-risk estimates.
Outlook, risks and unusual items
- Management said pandemic effects remain uncertain and may adversely affect borrowers, asset valuations, liquidity, financial condition and results. Potential consequences include increased defaults, charge-offs and credit-loss provisions. Management expects to continue monitoring the allowance as conditions evolve; it provided no earnings or margin guidance.
- At September 30, 745 COVID-19-related loans totaling $151,595 had been modified; 231 modifications totaling $38,926 remained outstanding and were not classified as TDRs. PPP loans were government-guaranteed and generally eligible for forgiveness subject to program requirements.
- Off-balance-sheet commitments to extend credit, standby letters of credit and financial guarantees totaled approximately $86,146, compared with $75,178 at year-end. The filing notes that contractual amounts do not necessarily represent future cash needs.
- A new tax-refund processing agreement runs for five tax seasons, 2021–2025; management expects it to materially affect liquidity during the agreement term. The $2,000 third-party litigation settlement was recorded in Q1 2020.
- Management expects CECL adoption, delayed for smaller reporting companies until fiscal years beginning after December 15, 2022, to materially increase the allowance; the amount was still under evaluation.
- Control issue: Disclosure controls were reported ineffective as of September 30, 2020 because of a previously disclosed material weakness involving monitoring of loan information and subsequent events used in credit grading and impairment estimates. Remediation efforts had begun, but the company said it needed to demonstrate their consistent effectiveness. No material control changes during Q3 were reported.
Important facts for investors to verify
- Whether pandemic-related borrower stress, loan modifications and the local economic outlook lead to higher delinquencies, charge-offs or further reserve increases.
- Whether elevated deposits and liquidity persist, and the liquidity implications of the tax-refund processing agreement beginning in 2021.
- How quickly asset yields and deposit costs reprice, and whether loan growth can offset continued pressure on net interest margin.
- PPP forgiveness, repayment and guarantee status, and the concentration and performance of commercial lending growth.
- Progress in remediating the material weakness and whether disclosure controls are ultimately deemed effective.
- The eventual CECL transition impact and the continued capacity to maintain capital and dividends under changing credit conditions.