Ohio Valley Banc Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Ohio Valley Banc Corp. provides commercial and retail banking and consumer finance services, primarily in southeastern Ohio and western West Virginia. Financial statement amounts below are in thousands of dollars, except per-share data and ratios.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / December 31, 2019 |
|---|---|---|
| Net interest income | $10,004 | $11,387 in Q1 2019 |
| Provision for loan losses | $3,846 | $2,377 in Q1 2019 |
| Noninterest income | $4,442 | $1,846 in Q1 2019 |
| Noninterest expense | $9,519 | $9,568 in Q1 2019 |
| Net income / diluted EPS | $1,002 / $0.21 | $1,193 / $0.25 in Q1 2019 |
| Net interest margin | 4.34% | 4.89% in Q1 2019 |
| Return on average assets / equity | 0.40% / 3.14% | 0.47% / 4.08% in Q1 2019 |
| Efficiency ratio | 65.4% | 71.7% in Q1 2019 |
| Total assets | $1,035,841 | $1,013,272 at year-end 2019 |
| Total loans / allowance for loan losses | $775,086 / $8,729 | $772,774 / $6,272 at year-end 2019 |
| Total deposits | $845,879 | $821,471 at year-end 2019 |
| Other borrowed funds / subordinated debentures | $32,459 / $8,500 | $33,991 / $8,500 at year-end 2019 |
| Cash and cash equivalents | $66,671 | $52,356 at year-end 2019 |
| Operating cash flow | $1,819 | $1,358 in Q1 2019 |
| Shareholders’ equity | $130,496 | $128,179 at year-end 2019 |
Net income declined 16.0% year over year. Net interest income fell 12.1%, reflecting lower loan fees, reduced earning-asset yields and average earning assets. The allowance for loan losses rose to 1.13% of loans from 0.81% at year-end. The company reported nonperforming loans at 1.31% of total loans and nonperforming assets at 1.01% of total assets, versus 1.30% and 1.04%, respectively, at year-end.
Q1 cash flow included $9,384 used in investing activities and $21,880 provided by financing activities, mainly from a $24,417 increase in deposits, partly offset by dividends and borrowing repayments. The company reported $179,501 of cash and specified securities as available liquidity (17.3% of assets), additional FHLB borrowing capacity of $110,295 and Federal Reserve line availability of $48,136. The Bank’s Community Bank Leverage Ratio was 11.65%; the holding company’s was 12.82%, both above the then-applicable 9% threshold. The quarterly dividend was $0.21 per share.
Material changes versus comparable periods
- Net income fell by $191, while EPS declined from $0.25 to $0.21. Higher credit-loss provision and lower net interest income outweighed lower operating expense and increased noninterest income.
- Provision expense increased $1,469 year over year. Management attributed $1,942 of general reserve allocation to anticipated COVID-19-related losses.
- Noninterest income rose by $2,596, including a $2,000 third-party litigation settlement and $615 in tax-preparation fees. These more than offset a $709 decline in tax-refund advance loan fees, which shifted to a different business model after Ohio law changes.
- Net interest margin contracted 55 basis points. Management cited lower market rates, deposit costs that had not adjusted as quickly, and the loss of tax-refund advance loan fees, which reduced margin by 30 basis points.
- Compared with year-end, deposits increased $24,408 and loans increased $2,312; cash and cash equivalents rose $14,315. Interest-bearing deposits grew while noninterest-bearing deposits declined.
- Accumulated other comprehensive income increased as unrealized gains on available-for-sale securities improved with falling rates; this lifted equity but was not operating income.
Outlook, risks and unusual items
- COVID-19 and credit: Management said the pandemic’s duration and financial impact were uncertain and could adversely affect borrowers, collateral values, asset quality, earnings, liquidity and capital. The company was participating in the SBA Paycheck Protection Program. Under CARES Act provisions, it reported 95 COVID-related loan modifications totaling $15,934 at March 31; by May 7, modifications had increased to 593 loans totaling $128,262. These modifications were not reported as TDRs.
- Loan-loss estimates: Management considered the allowance adequate at quarter-end but warned further deterioration could require additional provision expense. It had not yet recorded COVID-related charge-offs at March 31.
- Operations: Most banking centers operated through drive-through service or appointments, with remote work arrangements. Management noted potential service, technology, cybersecurity and third-party-provider risks.
- Rate and margin outlook: The Federal Reserve reduced its target range to 0%–0.25% in March. Management described pressure from lower asset yields and slower reductions in deposit costs. It provided no specific earnings or financial forecast.
- Tax-related business: Loan Central’s tax-refund advance loan fees declined following Ohio lending-law changes; the company instead recorded tax-preparation fees and began offering bank-originated Tax Refund Advance Loans in 2020. A new tax-refund processing agreement is expected to materially affect liquidity beginning in 2021.
- Controls: Disclosure controls were deemed ineffective at March 31 because of a material weakness previously identified in controls over subsequent-event monitoring of loan grades and impairment. Remediation began during Q1, but effectiveness had not yet been demonstrated for a sufficient period.
- Other items: A $2,000 litigation settlement was recognized in Q1; the company said it was not currently subject to material legal proceedings. CECL adoption was delayed for smaller reporting companies until fiscal years beginning after December 15, 2022; management expected a material increase in the allowance upon adoption, with the amount still under evaluation.
Important facts for investors to verify
- How COVID-related deferrals and the larger modification portfolio perform, and whether further modifications or missed payments emerge.
- Whether the increased allowance proves sufficient as pandemic effects develop, especially for commercial real estate, commercial and industrial, and consumer borrowers.
- How much reported earnings and the efficiency ratio depended on the nonrecurring litigation settlement, and whether recurring revenue can offset lost tax-refund advance fees.
- Whether net interest margin stabilizes as deposit costs reprice and the balance sheet responds to low interest rates.
- Progress in remediating the material weakness in loan monitoring and subsequent-event controls.
- Availability and use of liquidity and capital resources if deposit flows, credit commitments or borrower stress change.