Ohio Valley Banc Corp. — Q2 2020 Form 10-Q
Business context and reporting period. Regional banking and consumer finance company serving southeastern Ohio and western West Virginia. This unaudited report covers the quarter and six months ended June 30, 2020; dollar amounts are in thousands except per-share data. Results reflect the COVID-19 pandemic and related economic uncertainty.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net income | $2,263 | $3,079 | $3,265 | $4,272 |
| Earnings per share | $0.47 | $0.65 | $0.68 | $0.90 |
| Net interest income | $9,795 | $10,653 | $19,799 | $22,040 |
| Net interest margin | 3.94% | 4.43% | 4.13% | 4.66% |
| Net provision for (recovery of) loan losses | $(393) recovery | $(806) recovery | $3,453 expense | $1,571 expense |
| Noninterest income | $2,249 | $2,003 | $6,691 | $3,849 |
| Noninterest expense | $9,602 | $9,791 | $19,121 | $19,359 |
- Q2 net income declined 26.5%; six-month net income declined 23.6%. Management attributed the declines chiefly to lower loan interest and fee income and higher year-to-date loan-loss provision, partly offset by increased noninterest income and lower expenses.
- Reported return on average assets was 0.62% and return on average equity was 5.07% at June 30, 2020, compared with 0.83% and 7.20%, respectively, a year earlier. The efficiency ratio was 79.0% for Q2 versus 76.7%; for the first half it improved to 71.6% from 74.2%.
- At June 30, total assets were $1.103 billion, up $89.7 million from year-end 2019. Gross loans were $830.8 million, up 7.5%; deposits were $911.8 million, up 11.0%. Cash and cash equivalents totaled $68.3 million, versus $52.4 million at year-end.
- Shareholders’ equity was $131.8 million, compared with $128.2 million at year-end. The Bank’s Community Bank Leverage Ratio was 10.92%, and the Company’s was 12.00%; both exceeded the applicable 8% threshold for 2020. First-half cash dividends were $0.42 per share.
- Six-month operating cash flow was $4.9 million. Investing activities used $73.5 million, largely reflecting $59.8 million of net loan growth and securities purchases; financing activities provided $84.5 million, principally from a $90.4 million increase in deposits. Cash increased $15.9 million.
- Other borrowed funds were $30.1 million, down from $34.0 million at year-end; subordinated debentures remained $8.5 million. The Company reported $109.3 million of additional FHLB borrowing capacity and $46.9 million available under a Federal Reserve borrowing line.
Material changes and operating drivers
- Lower market rates reduced loan yields and asset returns faster than deposit costs repriced, compressing net interest margin. Average earning assets grew, including from PPP lending, but PPP loans carry a 1% interest rate and diluted loan yields.
- The allowance for loan losses increased to $8.0 million from $6.3 million at year-end; allowance-to-loans rose to 0.96% from 0.81%. Management added $2.185 million of COVID-related general reserves. Six-month net charge-offs were $1.744 million.
- Noninterest income included a $2.0 million litigation settlement and $634,000 of tax-preparation fees after a change in the tax-refund advance business model. Mortgage banking income rose with refinancing activity; deposit service charges declined, mainly due to lower overdraft fees.
- Expense reductions reflected lower staffing after two branch sales and a voluntary severance program, as well as lower professional fees. Data-processing expense increased, including costs to facilitate PPP loans.
- Loans included $34.1 million of PPP originations. The Company had modified 692 COVID-related loans totaling $139.3 million; these were not classified as troubled debt restructurings under the cited relief provisions. Total TDRs were $6.8 million, all performing to modified terms.
Outlook, risks and unusual items
- No specific earnings or financial guidance is provided. Management said the pandemic’s financial impact remains uncertain and depends on economic developments and governmental actions. It expects to continue adjusting loan-loss reserves as conditions evolve.
- Risks include borrower distress, worsening asset quality, higher defaults and charge-offs, valuation impairments, interest-rate and funding pressures, and effects on local businesses. Nonperforming loans were 1.00% of loans and nonperforming assets 0.78% of assets, both lower than at year-end 2019; management cautioned that future reserve increases may be needed.
- A new agreement to process taxpayer refund payments for five tax seasons, beginning in 2021, is expected by management to materially affect liquidity during its term.
- The Company expects CECL adoption, delayed for smaller reporting companies until 2023, to materially increase the allowance at adoption; the amount is still being evaluated.
- Disclosure controls and procedures were reported ineffective at June 30 due to a material weakness involving monitoring of subsequent loan information and its effect on loan grades and impairment assessments. Remediation began in Q1 2020, but management said effectiveness must be demonstrated consistently over time.
- The Bank reported no material legal proceedings at quarter-end. The $2.0 million settlement received in Q1 resolved a previously disclosed breach-of-contract lawsuit against a third-party tax software provider.
Investor verification priorities
- Track COVID-related loan modifications, borrower performance, delinquencies, criticized/classified loans, charge-offs and the adequacy of the allowance.
- Verify the sustainability of earnings excluding the one-time $2.0 million settlement, and assess continued effects of margin compression, PPP balances and mortgage refinancing activity.
- Monitor deposit growth and composition, liquidity needs associated with the tax-refund processing agreement beginning in 2021, and available borrowing capacity.
- Review progress in remediating the material weakness and the eventual quantified impact of CECL adoption.
- Assess whether regulatory capital ratios and dividend payments remain supported if credit or economic conditions deteriorate.