OHIO VALLEY BANC CORP quarterly report, Q2 FY2021

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Ohio Valley Banc Corp. — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results include the bank and consumer finance and related subsidiaries. Dollar amounts are in thousands, except per-share data. The company primarily serves southeastern Ohio and western West Virginia.

Financial performance and position

  • Quarterly earnings: Q2 net income was $2.861 million, up $598,000 (26.4%) from Q2 2020; EPS was $0.60 versus $0.47. Net interest income rose 4.3% to $10.215 million. Noninterest income increased 11.4% to $2.506 million, while noninterest expense fell 3.2% to $9.297 million. Loan-loss provision was $27,000, compared with a $393,000 provision credit in Q2 2020.
  • First-half earnings: Net income was $6.392 million, up $3.127 million from $3.265 million; EPS was $1.34 versus $0.68. Net interest income increased 2.3% to $20.263 million. Provision was a $25,000 credit, compared with $3.453 million of expense in the first half of 2020. Noninterest income declined 12.6% to $5.845 million, chiefly because the prior-year period included a $2.0 million litigation settlement; expenses declined 3.3% to $18.484 million.
  • Margins and returns: Fully tax-equivalent net interest margin was 3.58% in Q2 versus 3.94% a year earlier, and 3.65% for the first half versus 4.13%. Management reported return on average assets of 1.06% and return on average equity of 9.39% at June 30, 2021, compared with 0.62% and 5.07%, respectively, a year earlier. The efficiency ratio improved to 72.4% for Q2 and 70.2% for the first half.
  • Balance sheet and liquidity: Assets were $1.237 billion, up $50.1 million from year-end 2020. Deposits rose $51.4 million to $1.045 billion. Cash and cash equivalents were $125.2 million, down $13.1 million; securities totaled $183.4 million, up $61.1 million. Management attributed deposit growth largely to stimulus-related funds and customers’ precautionary cash holdings, and said some excess cash was reinvested in securities.
  • Loans and credit: Gross loans were $847.9 million, essentially unchanged from year-end; commercial real estate grew 12.0%, while residential real estate fell 7.8% and commercial and industrial loans fell 8.8%. The allowance was $6.8 million, or 0.80% of loans, versus $7.2 million, or 0.84%, at year-end. Nonperforming loans were 0.77% of loans versus 0.82% at year-end. Nonaccrual loans were $6.4 million; loans past due 90 days or more and still accruing were $171,000.
  • Cash flow and debt: First-half operating cash flow was $4.1 million, investing cash outflow was $62.9 million, and financing cash inflow was $45.8 million; cash and equivalents decreased $13.1 million. Other borrowed funds were $24.3 million, down $3.6 million from year-end, plus $8.5 million of subordinated debentures. The company reported $99.3 million of available FHLB capacity and $57.8 million available under its Federal Reserve borrowing line.
  • Capital and shareholder returns: Shareholders’ equity was $139.4 million, up $3.1 million from year-end. The company’s community bank leverage ratio was 11.28% and the bank’s was 10.31%, above the then-applicable 8.5% threshold. First-half dividends totaled $0.42 per share.

Material changes versus comparable periods

  • Q2 and first-half net income increased substantially, driven in significant part by much lower loan-loss provision expense than in 2020, alongside higher net interest income and reduced operating expenses.
  • Net interest margin contracted as lower market rates and the mix of low-yielding PPP loans and Federal Reserve balances weighed on asset yields. Lower funding costs partly offset the effect.
  • First-half noninterest income was lower because 2020 included the $2.0 million litigation settlement. The related tax-item processing agreement generated $675,000 of electronic refund check/deposit income in the first half of 2021; the filing says this processing revenue will continue through 2025.
  • Assets and deposits expanded, while cash balances declined as the company deployed liquidity into securities. Total loans remained broadly stable, with material shifts among portfolio categories.

Outlook, commentary, risks and unusual items

  • The filing provides no quantified earnings or revenue guidance. Management said it would emphasize core deposit growth and retention, pursue commercial lending opportunities subject to demand and underwriting, and invest excess liquidity in higher-yielding assets where opportunities arise.
  • COVID-19 remains a risk to borrowers, asset values, liquidity and results. Management cautioned that renewed effects could increase delinquencies, charge-offs and loan-loss provision. The company had $2.434 million of COVID-related general reserves at June 30, 2021.
  • At June 30, 2021, 13 COVID-related modified loans remained, totaling $183,000; these were not classified as troubled debt restructurings. Total TDRs were $4.785 million, all reported as performing to modified terms. PPP loans outstanding were $8.531 million and SBA-guaranteed.
  • The company expects adoption of the current expected credit loss (CECL) standard, effective for it in fiscal years beginning after December 15, 2022, to materially increase the allowance; the amount is not provided.
  • Other risks cited include interest-rate and mortgage-market changes, competition, credit performance, funding costs, regulatory changes, and litigation or claims. Management reported no material legal proceedings, no material risk-factor changes from the 2020 Form 10-K, and effective disclosure controls as of June 30, 2021.
  • Unusual items include the $2.0 million settlement recognized in Q1 2020 and a $70,000 gain on sale of a branch building in June 2021. The company stated interim results are not necessarily indicative of full-year performance.

Important facts for investors to verify

  • Whether lower provision expense and improving asset-quality indicators persist, and how COVID-related borrower performance affects future reserves and charge-offs.
  • The sustainability of earnings amid net interest margin compression, low interest rates, and the changing mix of loans, securities and cash.
  • Deposit stability and the extent to which stimulus-driven balances remain, alongside actual liquidity needs and borrowing capacity.
  • The eventual CECL allowance increase and assumptions underlying management’s estimate.
  • How much of future noninterest income comes from recurring operations versus settlement-related processing revenue, and the effects of lower mortgage banking activity.