OHIO VALLEY BANC CORP.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large“large accelerated filer"filer”, "accelerated filer"“accelerated filer”, "smaller“smaller reporting company"company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
OHIO VALLEY BANC CORP.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHIO VALLEY BANC CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands, except share and per share data) |
| | September 30, 2017 | | | December 31, 2016 | | | March 31, 2020 | | | December 31, 2019 | |
| | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | |
Cash and noninterest-bearing deposits with banks | | $ | 11,610 | | | $ | 12,512 | | | $ | 16,023 | | | $ | 12,812 | |
Interest-bearing deposits with banks | | | 38,792 | | | | 27,654 | | | | 50,648 | | | | 39,544 | |
Total cash and cash equivalents | | | 50,402 | | | | 40,166 | | | 66,671 | | | 52,356 | |
| | | | | | | | | | | | | | |
Certificates of deposit in financial institutions | | | 1,820 | | | | 1,670 | | | 2,360 | | | 2,360 | |
Securities available for sale | | | 106,545 | | | | 96,490 | | | 112,191 | | | 105,318 | |
Securities held to maturity (estimated fair value: 2017 - $18,822; 2016 - $19,171) | | | 18,168 | | | | 18,665 | | |
Securities held to maturity (estimated fair value: 2020 - $12,115; 2019 - $12,404) | | | 11,808 | | | 12,033 | |
Restricted investments in bank stocks | | | 7,506 | | | | 7,506 | | | 7,506 | | | 7,506 | |
| | | | | | | | | | | | | | |
Total loans | | | 777,957 | | | | 734,901 | | | 775,086 | | | 772,774 | |
Less: Allowance for loan losses | | | (7,313 | ) | | | (7,699 | ) | | | (8,729 | ) | | | (6,272 | ) |
Net loans | | | 770,644 | | | | 727,202 | | | 766,357 | | | 766,502 | |
| | | | | | | | | | | | | | |
Premises and equipment, net | | | 13,205 | | | | 12,783 | | | 20,970 | | | 19,217 | |
Other real estate owned | | | 2,219 | | | | 2,129 | | |
Premises and equipment held for sale, net | | | 649 | | | 653 | |
Other real estate owned, net | | | 325 | | | 540 | |
Accrued interest receivable | | | 2,532 | | | | 2,315 | | | 2,650 | | | 2,564 | |
Goodwill | | | 7,371 | | | | 7,801 | | | 7,319 | | | 7,319 | |
Other intangible assets, net | | | 550 | | | | 670 | | | 157 | | | 174 | |
Bank owned life insurance and annuity assets | | | 26,576 | | | | 29,349 | | | 30,813 | | | 30,596 | |
Operating lease right-of-use asset, net | | | 998 | | | 1,053 | |
Other assets | | | 12,076 | | | | 7,894 | | | | 5,067 | | | | 5,081 | |
Total assets | | $ | 1,019,614 | | | $ | 954,640 | | | $ | 1,035,841 | | | $ | 1,013,272 | |
| | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | |
Noninterest-bearing deposits | | $ | 233,178 | | | $ | 209,576 | | | $ | 213,262 | | | $ | 222,607 | |
Interest-bearing deposits | | | 616,003 | | | | 580,876 | | | | 632,617 | | | | 598,864 | |
Total deposits | | | 849,181 | | | | 790,452 | | | 845,879 | | | 821,471 | |
| | | | | | | | | | | | | | |
Other borrowed funds | | | 36,775 | | | | 37,085 | | | 32,459 | | | 33,991 | |
Subordinated debentures | | | 8,500 | | | | 8,500 | | | 8,500 | | | 8,500 | |
Operating lease liability | | | 998 | | | 1,053 | |
Accrued liabilities | | | 15,196 | | | | 14,075 | | | | 17,509 | | | | 20,078 | |
Total liabilities | | | 909,652 | | | | 850,112 | | | | 905,345 | | | | 885,093 | |
| | | | | | | | | | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5) | | | ---- | | | | ---- | | | ---- | | | ---- | |
| | | | | | | | | | | | | | |
SHAREHOLDERS' EQUITY | | | | | | | | | |
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 2017 - 5,352,005 shares issued; 2016 - 5,325,504 shares issued) | | | 5,352 | | | | 5,326 | | |
SHAREHOLDERS’ EQUITY | | | | | | | |
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 2020 - 5,447,185 shares issued; 2019 - 5,447,185 shares issued) | | | 5,447 | | | 5,447 | |
Additional paid-in capital | | | 47,552 | | | | 46,788 | | | 51,165 | | | 51,165 | |
Retained earnings | | | 72,781 | | | | 69,117 | | | 86,748 | | | 86,751 | |
Accumulated other comprehensive loss | | | (11 | ) | | | (991 | ) | |
Accumulated other comprehensive income | | | 2,848 | | | 528 | |
Treasury stock, at cost (659,739 shares) | | | (15,712 | ) | | | (15,712 | ) | | | (15,712 | ) | | | (15,712 | ) |
Total shareholders' equity | | | 109,962 | | | | 104,528 | | |
Total liabilities and shareholders' equity | | $ | 1,019,614 | | | $ | 954,640 | | |
Total shareholders’ equity | | | | 130,496 | | | | 128,179 | |
Total liabilities and shareholders’ equity | | | $ | 1,035,841 | | | $ | 1,013,272 | |
See accompanying notes to consolidated financial statements
OHIO VALLEY BANC CORP. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data) |
| | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended March 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | |
| | | | | | | | | | | | | | | | | | |
Interest and dividend income: | | | | | | | | | | | | | | | | | | |
Loans, including fees | | $ | 10,489 | | | $ | 9,085 | | | $ | 31,410 | | | $ | 26,147 | | | $ | 10,873 | | | $ | 11,912 | |
Securities | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 535 | | | | 486 | | | | 1,559 | | | | 1,465 | | | 597 | | | 618 | |
Tax exempt | | | 104 | | | | 111 | | | | 312 | | | | 337 | | | 73 | | | 84 | |
Dividends | | | 101 | | | | 75 | | | | 287 | | | | 222 | | | 66 | | | 113 | |
Interest-bearing deposits with banks | | | 162 | | | 319 | |
Other Interest | | | 88 | | | | 67 | | | | 476 | | | | 336 | | | | 14 | | | | 12 | |
| | | 11,785 | | | 13,058 | |
| | | 11,317 | | | | 9,824 | | | | 34,044 | | | | 28,507 | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 757 | | | | 597 | | | | 1,985 | | | | 1,605 | | | 1,509 | | | 1,342 | |
Other borrowed funds | | | 228 | | | | 190 | | | | 673 | | | | 462 | | | 200 | | | 235 | |
Subordinated debentures | | | 64 | | | | 52 | | | | 182 | | | | 149 | | | | 72 | | | | 94 | |
| | | 1,049 | | | | 839 | | | | 2,840 | | | | 2,216 | | | | 1,781 | | | | 1,671 | |
Net interest income | | | 10,268 | | | | 8,985 | | | | 31,204 | | | | 26,291 | | | 10,004 | | | 11,387 | |
Provision for loan losses | | | 1,601 | | | | 1,708 | | | | 1,921 | | | | 2,328 | | | | 3,846 | | | | 2,377 | |
Net interest income after provision for loan losses | | | 8,667 | | | | 7,277 | | | | 29,283 | | | | 23,963 | | | 6,158 | | | 9,010 | |
| | | | | | | | | | | | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | | 541 | | | | 575 | | | | 1,575 | | | | 1,414 | | | 493 | | | 503 | |
Trust fees | | | 64 | | | | 58 | | | | 177 | | | | 174 | | | 68 | | | 64 | |
Income from bank owned life insurance and annuity assets | | | 577 | | | | 175 | | | | 981 | | | | 575 | | | 217 | | | 178 | |
Mortgage banking income | | | 59 | | | | 44 | | | | 164 | | | | 162 | | | 90 | | | 69 | |
Electronic refund check / deposit fees | | | ---- | | | | 13 | | | | 1,667 | | | | 2,037 | | |
Debit / credit card interchange income | | | 863 | | | | 653 | | | | 2,506 | | | | 1,864 | | | 943 | | | 914 | |
Gain (loss) on other real estate owned | | | (23 | ) | | | (8 | ) | | | (94 | ) | | | ---- | | |
Loss on other real estate owned | | | (101 | ) | | ---- | |
Tax preparation fees | | | 615 | | | ---- | |
Litigation settlement | | | 2,000 | | | ---- | |
Other | | | 201 | | | | 183 | | | | 531 | | | | 563 | | | | 117 | | | | 118 | |
| | | 2,282 | | | | 1,693 | | | | 7,507 | | | | 6,789 | | | 4,442 | | | 1,846 | |
Noninterest expense: | | | | | | | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 5,019 | | | | 5,032 | | | | 15,528 | | | | 14,130 | | | 5,455 | | | 5,536 | |
Occupancy | | | 449 | | | | 466 | | | | 1,331 | | | | 1,300 | | | 432 | | | 453 | |
Furniture and equipment | | | 269 | | | | 285 | | | | 787 | | | | 671 | | | 262 | | | 263 | |
Professional fees | | | 434 | | | | 342 | | | | 1,338 | | | | 1,020 | | | 598 | | | 672 | |
Marketing expense | | | 273 | | | | 249 | | | | 785 | | | | 744 | | | 268 | | | 270 | |
FDIC insurance | | | 99 | | | | 81 | | | | 366 | | | | 378 | | | ---- | | | 3 | |
Data processing | | | 564 | | | | 380 | | | | 1,652 | | | | 1,069 | | | 599 | | | 535 | |
Software | | | 365 | | | | 368 | | | | 1,102 | | | | 962 | | | 381 | | | 411 | |
Foreclosed assets | | | 158 | | | | 61 | | | | 425 | | | | 247 | | | 43 | | | 106 | |
Amortization of intangibles | | | 38 | | | | ---- | | | | 120 | | | | ---- | | | 17 | | | 31 | |
Merger related expenses | | | 6 | | | | 416 | | | | 33 | | | | 777 | | |
Other | | | 1,548 | | | | 1,148 | | | | 5,006 | | | | 3,272 | | | | 1,464 | | | | 1,288 | |
| | | 9,222 | | | | 8,828 | | | | 28,473 | | | | 24,570 | | | | 9,519 | | | | 9,568 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 1,727 | | | | 142 | | | | 8,317 | | | | 6,182 | | | 1,081 | | | 1,288 | |
Provision for income taxes | | | 74 | | | | (216 | ) | | | 1,706 | | | | 1,286 | | | | 79 | | | | 95 | |
| | | | | | | | | | | | | | | | | | | | | | |
NET INCOME | | $ | 1,653 | | | $ | 358 | | | $ | 6,611 | | | $ | 4,896 | | | $ | 1,002 | | | $ | 1,193 | |
| | | | | | | | | | | | | | | | | | | | | | |
Earnings per share | | $ | .35 | | | $ | .08 | | | $ | 1.41 | | | $ | 1.15 | | | $ | .21 | | | $ | .25 | |
| | | | | | | |
See accompanying notes to consolidated financial statements
OHIO VALLEY BANC CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (dollars in thousands) | |
| |
| | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Net Income | | $ | 1,653 | | | $ | 358 | | | $ | 6,611 | | | $ | 4,896 | |
| | | | | | | | | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | | | | | |
Change in unrealized loss on available for sale securities | | | 20 | | | | 91 | | | | 1,485 | | | | 1,528 | |
Related tax expense | | | (7 | ) | | | (31 | ) | | | (505 | ) | | | (520 | ) |
Total other comprehensive income, net of tax | | | 13 | | | | 60 | | | | 980 | | | | 1,008 | |
| | | | | | | | | | | | | | | | |
Total comprehensive income | | $ | 1,666 | | | $ | 418 | | | $ | 7,591 | | | $ | 5,904 | |
See accompanying notes to consolidated financial statements
OHIO VALLEY BANC CORP. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands, except share and per share data) | |
| |
| | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Balance at beginning of period | | $ | 108,987 | | | $ | 94,796 | | | $ | 104,528 | | | $ | 90,470 | |
| | | | | | | | | | | | | | | | |
Net income | | | 1,653 | | | | 358 | | | | 6,611 | | | | 4,896 | |
| | | | | | | | | | | | | | | | |
Other comprehensive income, net of tax | | | 13 | | | | 60 | | | | 980 | | | | 1,008 | |
| | | | | | | | | | | | | | | | |
Acquisition – Milton Bancorp, Inc., 523,518 shares | | | ---- | | | | 11,444 | | | | ---- | | | | 11,444 | |
| | | | | | | | | | | | | | | | |
Common stock issued through DRIP (2017 – 11,383 shares issued) | | | 293 | | | | ---- | | | | 362 | | | | ---- | |
| | | | | | | | | | | | | | | | |
Common stock issued to ESOP (2017 - 15,118 shares issued; 2016 - 24,572 shares issued) | | | ---- | | | | ---- | | | | 428 | | | | 575 | |
| | | | | | | | | | | | | | | | |
Cash dividends | | | (984 | ) | | | (870 | ) | | | (2,947 | ) | | | (2,605 | ) |
| | | | | | | | | | | | | | | | |
Balance at end of period | | $ | 109,962 | | | $ | 105,788 | | | $ | 109,962 | | | $ | 105,788 | |
| | | | | | | | | | | | | | | | |
Cash dividends per share | | $ | .21 | | | $ | .19 | | | $ | .63 | | | $ | .61 | |
See accompanying notes to consolidated financial statements
OHIO VALLEY BANC CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) | |
| | | | | | |
| | Nine months ended September 30, | |
| | 2017 | | | 2016 | |
| | | | | | |
Net cash provided by operating activities: | | $ | 5,926 | | | $ | 9,761 | |
| | | | | | | | |
Investing activities: | | | | | | | | |
Net cash acquired from Milton Bancorp, Inc., acquisition | | | ---- | | | | 1,686 | |
Proceeds from maturities of securities available for sale | | | 16,358 | | | | 13,818 | |
Purchases of securities available for sale | | | (25,177 | ) | | | (17,691 | ) |
Proceeds from maturities of securities held to maturity | | | 846 | | | | 1,218 | |
Purchases of securities held to maturity | | | (389 | ) | | | (3,193 | ) |
Proceeds from maturities of certificates of deposit in financial institutions | | | 245 | | | | 490 | |
Purchases of certificates of deposit in financial institutions | | | (395 | ) | | | (445 | ) |
Proceeds from restricted investments in bank stocks | | | ---- | | | | 1 | |
Net change in loans | | | (46,281 | ) | | | (24,186 | ) |
Proceeds from sale of other real estate owned | | | 987 | | | | 593 | |
Purchases of premises and equipment | | | (1,247 | ) | | | (633 | ) |
Proceeds from bank owned life insurance | | | 3,754 | | | | ---- | |
Net cash used in investing activities | | | (51,299 | ) | | | (28,342 | ) |
| | | | | | | | |
Financing activities: | | | | | | | | |
Change in deposits | | | 58,867 | | | | 25,822 | |
Cash dividends | | | (2,947 | ) | | | (2,605 | ) |
Proceeds from Federal Home Loan Bank borrowings | | | 4,785 | | | | 8,202 | |
Repayment of Federal Home Loan Bank borrowings | | | (4,720 | ) | | | (1,450 | ) |
Change in other long-term borrowings | | | (343 | ) | | | 5,000 | |
Change in other short-term borrowings | | | (33 | ) | | | (33 | ) |
Net cash provided by financing activities | | | 55,609 | | | | 34,936 | |
| | | | | | | | |
Change in cash and cash equivalents | | | 10,236 | | | | 16,355 | |
Cash and cash equivalents at beginning of period | | | 40,166 | | | | 45,530 | |
Cash and cash equivalents at end of period | | $ | 50,402 | | | $ | 61,885 | |
| | | | | | | | |
Supplemental disclosure: | | | | | | | | |
| | | | | | | | |
Cash paid for interest | | $ | 2,665 | | | $ | 2,112 | |
Cash paid for income taxes | | | 2,236 | | | | 1,675 | |
Transfers from loans to other real estate owned | | | 1,337 | | | | 851 | |
Other real estate owned sales financed by The Ohio Valley Bank Company | | | 167 | | | | 316 | |
Issuance of common stock for Milton Bancorp, Inc., acquisition | | | ---- | | | | 11,444 | |
| | | | | | | | |
| | | | | | | | |
OHIO VALLEY BANC CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (dollars in thousands) | |
| |
| | Three months ended March 31, | |
| | | | | | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
Other comprehensive income: | | | | | | | | |
Change in unrealized gain on available for sale securities | | | | | | | | |
| | | | | | | | |
Total other comprehensive income, net of tax | | | | | | | | |
| | | | | | | | |
Total comprehensive income | | | | | | | | |
See accompanying notes to consolidated financial statements
OHIO VALLEY BANC CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) | |
(dollars in thousands, except share and per share data) | |
Quarter-to-date | | Common Stock | | | Additional Paid-In Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Treasury Stock | | | Total Shareholders' Equity | |
Balance at January 1, 2020 | | $ | 5,447 | | | $ | 51,165 | | | $ | 86,751 | | | $ | 528 | | | $ | (15,712 | ) | | $ | 128,179 | |
Net income | | | ---- | | | | ---- | | | | 1,002 | | | | ---- | | | | ---- | | | | 1,002 | |
Other comprehensive income, net | | | ---- | | | | ---- | | | | ---- | | | | 2,320 | | | | ---- | | | | 2,320 | |
Cash dividends, $.21 per share | | | ---- | | | | ---- | | | | (1,005 | ) | | | ---- | | | | ---- | | | | (1,005 | ) |
Balance at March 31, 2020 | | $ | 5,447 | | | $ | 51,165 | | | $ | 86,748 | | | $ | 2,848 | | | $ | (15,712 | ) | | $ | 130,496 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2019 | | $ | 5,400 | | | $ | 49,477 | | | $ | 80,844 | | | $ | (2,135 | ) | | $ | (15,712 | ) | | $ | 117,874 | |
Net income | | | ---- | | | | ---- | | | | 1,193 | | | | ---- | | | | ---- | | | | 1,193 | |
Other comprehensive income, net | | | ---- | | | | ---- | | | | ---- | | | | 1,577 | | | | ---- | | | | 1,577 | |
Common stock issued to ESOP, 8,333 shares | | | 8 | | | | 320 | | | | ---- | | | | ---- | | | | ---- | | | | 328 | |
Common stock issued through
dividend reinvestment, 10,000 shares | | | 10 | | | | 365 | | | | ---- | | | | ---- | | | | ---- | | | | 375 | |
Cash dividends, $.21 per share | | | ---- | | | | ---- | | | | (995 | ) | | | ---- | | | | ---- | | | | (995 | ) |
Balance at March 31, 2019 | | $ | 5,418 | | | $ | 50,162 | | | $ | 81,042 | | | $ | (558 | ) | | $ | (15,712 | ) | | $ | 120,352 | |
See accompanying notes to consolidated financial statements
OHIO VALLEY BANC CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) | |
| | | | | | |
| | Three months ended March 31, | |
| | | | | | |
| | | | | | |
Net cash provided by operating activities: | | $ | 1,819 | | | $ | 1,358 | |
| | | | | | | | |
Investing activities: | | | | | | | | |
Proceeds from maturities of securities available for sale | | | 6,310 | | | | 3,881 | |
Purchases of securities available for sale | | | (10,287 | ) | | | (10,035 | ) |
Proceeds from maturities of securities held to maturity | | | 215 | | | | 215 | |
Net change in loans | | | (3,720 | ) | | | (4,717 | ) |
Proceeds from sale of other real estate owned | | | 147 | | | | ---- | |
Purchases of premises and equipment | | | (2,049 | ) | | | (1,246 | ) |
Net cash (used in) investing activities | | | (9,384 | ) | | | (11,902 | ) |
| | | | | | | | |
Financing activities: | | | | | | | | |
Change in deposits | | | 24,417 | | | | 15,017 | |
Proceeds from common stock through dividend reinvestment | | | ---- | | | | 375 | |
Cash dividends | | | (1,005 | ) | | | (995 | ) |
Repayment of Federal Home Loan Bank borrowings | | | (1,383 | ) | | | (1,508 | ) |
Change in other long-term borrowings | | | (149 | ) | | | (628 | ) |
Net cash provided by financing activities | | | 21,880 | | | | 12,261 | |
| | | | | | | | |
Change in cash and cash equivalents | | | 14,315 | | | | 1,717 | |
Cash and cash equivalents at beginning of period | | | 52,356 | | | | 71,180 | |
Cash and cash equivalents at end of period | | $ | 66,671 | | | $ | 72,897 | |
| | | | | | | | |
Supplemental disclosure: | | | | | | | | |
Cash paid for interest | | $ | 1,805 | | | $ | 1,434 | |
Transfers from loans to other real estate owned | | | 33 | | | | 40 | |
Initial recognition of operating lease right-of-use asset | | | ---- | | | | 1,280 | |
Operating lease liability arising from obtaining right-of-use asset | | | ---- | | | | 1,280 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. ("(“Ohio Valley"Valley”) and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the "Bank"“Bank”), Loan Central, Inc. ("(“Loan Central"Central”), a consumer finance company, Ohio Valley Financial Services Agency, LLC, ("Ohio Valley Financial Services"), an insurance agency, and OVBC Captive, Inc. (the "Captive"“Captive”), a limited purpose property and casualty insurance company. The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC ("(“Ohio Valley REO"REO”), an Ohio limited liability company, to which the Bank transfers certain real estate acquired by the Bank through foreclosure for sale by Ohio Valley REO. Ohio Valley and its subsidiaries are collectively referred to as the "Company"“Company”. All material intercompany accounts and transactions have been eliminated in consolidation.
These interim financial statements are prepared by the Company without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at September 30, 2017,March 31, 2020, and its results of operations and cash flows for the periods presented. The results of operations for the ninethree months ended September 30, 2017March 31, 2020 are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2017.2020. The accompanying consolidated financial statements do not purport to contain all the necessary financial disclosures required by U.S. generally accepted accounting principles ("(“US GAAP"GAAP”) that might otherwise be necessary in the circumstances. The Annual Report of the Company for the year ended December 31, 20162019 contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.
The consolidated financial statements for 20162019 have been reclassified to conform to the presentation for 2017.2020. These reclassifications had no effect on the net income or shareholders'shareholders’ equity.
RECENT EVENTS: In March 2020, the World Health Organization declared the outbreak of the coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. COVID-19 has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies has, and may continue to impact, many of the Company’s customers. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees and communities during this difficult time.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), was signed into law. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19. Under these provisions, modifications deemed to be COVID-19-related would not be considered a troubled debt restructuring if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. Also under the CARE Act, the Bank is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program that provides assistance to small businesses. The PPP provides small businesses with funds to pay up to 8 weeks of payroll costs, including benefits. The funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities. The payments on these loans will be deferred for six months. Forgiveness of the PPP loans is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The accounting and reporting policies followed by the Company conform to US GAAP established by the Financial Accounting Standards Board ("FASB"(“FASB”). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The potential financial impact of COVID 19 is unknown at this time. However, if these actions are sustained, it may adversely impact several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Effects may include:
• The provision for loan losses could increase. Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for loan losses. It also is possible that asset quality could worsen, and loan charge-offs increase. The Company is actively participating in the PPP program providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government, if that should change, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses charged to earnings.
• Valuation and fair value measurement challenges may occur. Material adverse impacts may include all or a combination of valuation impairments on the Company’s securities, impaired loans, other real estate owned, and interest rate swap agreements.
INDUSTRY SEGMENT INFORMATION: Internal financial information is primarily reported and aggregated in two lines of business,business: banking and consumer finance.
EARNINGS PER SHARE: Earnings per share are computed based on net income divided by the weighted average number of common shares outstanding during the period. The weighted average common shares outstanding were 4,688,2844,787,446 and 4,466,6014,748,474 for the three months ended September 30, 2017March 31, 2020 and 2016, respectively. The weighted average common shares outstanding were 4,680,846 and 4,246,311 for the nine months ended September 30, 2017 and 2016,2019, respectively. Ohio Valley had no dilutive effect and no potential common shares issuable under stock options or other agreements for any period presented.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS:STANDARD UPDATES (“ASU”): In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)". The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, with early adoption permitted on January 1, 2017. Management is currently evaluating the impact of this update on its consolidated financial statements and related disclosures, however, adoption by the Company is not expected to have a material impact. The Company's primary sources of revenues are derived from interest and dividends earned on loans, investment securities and other financial instruments that are not within the scope of ASU 2014-09.
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2016,August 2018, the FASB issued ASU No. 2016-01, "Recognition2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and Measurement of Financial Assets and Financial Liabilities". The update provides updated accounting and reportingmodifies certain disclosure requirements for both public and non-public entities. The most significant provisions that will impact the Company are: 1) equity securities available for sale will be measured at fair value withmeasurements. Among the changes, in fair value recognized in the income statement; 2) eliminate the requiremententities will no longer be required to disclose the method(s)amount of and significant assumptions used to estimatereasons for transfers between Level 1 and Level 2 of the fair value that ishierarchy but will be required to be discloseddisclose the range and weighted average used to develop significant unobservable inputs for financial instruments at amortized cost on the balance sheet; 3) utilization of the exit price notion when measuring theLevel 3 fair value of financial instruments for disclosure purposes; and 4) require separate presentation of both financial assets and liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. The update will be effective for interim and annual periods beginning after December 15, 2017, using a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. Early adoptionmeasurements. ASU 2018-13 is not permitted. Management is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued an update (ASU 2016-02, Leases) which will require lessees to record most leases on their balance sheets and recognize leasing expenses in the income statement. Operating leases, except for short-term leases that are subject to an accounting policy election, will be recorded on the balance sheet for lessees by establishing a lease liability and corresponding right-of-use asset. The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2018, with2019, and early adoption is permitted. ManagementFor non-public entities, this ASU is currently evaluating the impacteffective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this updateASU did not have a material impact on itsthe Company’s consolidated financial statements and related disclosures.position or results of operations.
ACCOUNTING GUIDANCE TO BE ADOPTED IN FUTURE PERIODS:In June 2016, the FASB issued ASU No. 2016-13, "Financial“Financial Instruments - Credit Losses"Losses”. ASU 2016-13 requires entities to report "expected" credit losses on financial instruments and other commitments to extend credit rather thanreplace the current "incurred loss"“incurred loss” model with an “expected loss” model, which is referred to as the current expected credit loss (“CECL”) model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity'sentity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. ThisA CECL steering committee has developed a CECL model and is evaluating the source data, various credit loss methodologies and model results in relation to the new ASU guidance. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effectiveeffective. Management expects the adoption will result in a material increase to the allowance for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, for annual periods and interim periods within those annual periods, beginning after December 15, 2018. Management is currently in the developmental stages, collecting available historical information, in order to assess the expected credit losses. However,loan losses balance. At this time, the impact tois being evaluated. On October 16, 2019, the financial statements are still yet to be determined.
In August 2016, FASB issued an update (ASU 2016-15, "Statementconfirmed it would delay the effective date of Cash Flows") (Topic 230), which addresses eight specific cash flow issues withthis ASU for smaller reporting companies, such as the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update apply to all entities, including business entities and not-for-profit entities that are required to present a statement of cash flows, and are effective for public business entities forCompany, until fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.2022.
In January 2017, the FASB issued an update (ASU 2017-04, Intangibles – Goodwill and Other) which is intended to simplify the measurement of goodwill in periods following the date on which the goodwill is initially recorded. Under the amendments in this update, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. A public business entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.
NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company'scompany’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following is a description of the Company'sCompany’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:
Securities: The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower'sborrower’s financial statements, or aging reports, adjusted or discounted based on management'smanagement’s historical knowledge, changes in market conditions from the time of the valuation, and management'smanagement’s expertise and knowledge of the client and client'sclient’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. In some instances, fair value adjustments can be made based on a quoted price from an observable input, such as a purchase agreement. Such adjustments would be classified as a Level 2 classification.
NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management'smanagement’s own assumptions of fair value based on factors that include recent market data or industry-wide statistics.
On an as-needed basis, the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs that typically approximate 10%.
NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)Interest Rate Swap Agreements: The fair value of interest rate swap agreements is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | Fair Value Measurements at September 30, 2017 Using | | | Fair Value Measurements at March 31, 2020 Using | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | | | | | | | |
U.S. Government sponsored entity securities | | | ---- | | | $ | 13,579 | | | | ---- | | | ---- | | | $ | 16,016 | | | ---- | |
Agency mortgage-backed securities, residential | | | ---- | | | | 92,966 | | | | ---- | | | ---- | | | 96,175 | | | ---- | |
Interest rate swap derivatives | | | ---- | | | 985 | | | ---- | |
Interest rate swap derivatives | | | ---- | | | (985 | ) | | ---- | |
| | Fair Value Measurements at December 31, 2016 Using | | | Fair Value Measurements at December 31, 2019 Using | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | | | | | | | |
U.S. Government sponsored entity securities | | | ---- | | | $ | 10,544 | | | | ---- | | | ---- | | | $ | 16,736 | | | ---- | |
Agency mortgage-backed securities, residential | | | ---- | | | | 85,946 | | | | ---- | | | ---- | | | 88,582 | | | ---- | |
Interest rate swap derivatives | | | ---- | | | 465 | | | ---- | |
Interest rate swap derivatives | | | ---- | | | (465 | ) | | ---- | |
There were no transfers between Level 1 and Level 2 during 20172020 or 2016.2019.
NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Assets and Liabilities Measured on a Nonrecurring Basis
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:
| | Fair Value Measurements at September 30, 2017, Using | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | |
Impaired loans: | | | | | | | | | |
Residential real estate | | | ---- | | | | ---- | | | $ | 94 | |
Commercial real estate: | | | | | | | | | | | | |
Nonowner-occupied | | | ---- | | | | ---- | | | | 2,602 | |
| | | | | | | | | | | | |
Other real estate owned: | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | |
Construction | | | ---- | | | | ---- | | | | 754 | |
| | Fair Value Measurements at December 31, 2016, Using | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Fair Value Measurements at March 31, 2020, Using | |
Assets: | | | | | | | | | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired loans: | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Owner-occupied | | | ---- | | | | ---- | | | $ | 3,536 | | | ---- | | | ---- | | | $ | 459 | |
Nonowner-occupied | | | ---- | | | | ---- | | | | 1,985 | | |
Commercial and industrial | | | ---- | | | | ---- | | | | 298 | | |
| | | | | | | | | | | | | |
Other real estate owned: | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | |
Construction | | | ---- | | | | ---- | | | | 754 | | |
Commercial and Industrial | | | ---- | | | ---- | | | 777 | |
NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
| | Fair Value Measurements at December 31, 2019, Using | |
Assets: | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired loans: | | | | | | | | | |
Commercial real estate: | | | | | | | | | |
Owner-occupied | | | ---- | | | | ---- | | | $ | 1,644 | |
Commercial and Industrial | | | ---- | | | | ---- | | | | 4,559 | |
At September 30, 2017,March 31, 2020, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $2,838,$2,090, with a corresponding valuation allowance of $142. This resulted$854, resulting in an increase of $142 to$854 in provision expense during the three and nine months ended September 30, 2017,March 31, 2020, with no additionalcorresponding charge-offs recognized. This is compared to an increase of $819$163 in provision expense during the three months ended September 30, 2016, and an increase of $2,477 in provision expense during the nine months ended September 30, 2016,March 31, 2019, with no additionalcorresponding charge-offs recognized. At December 31, 2016,2019, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $8,732,$7,010, with a corresponding valuation allowance of $2,913,$807, resulting in an increase of $2,509$807 in provision expense during the year ended December 31, 2016,2019, with no additionalcorresponding charge-offs recognized.
OtherThere was no other real estate owned that was measured at fair value less costs to sell at September 30, 2017March 31, 2020 and December 31, 2016 had a net carrying amount of $754, which is made up of the outstanding balance of $2,217, net of a valuation allowance of $1,463.2019. There were no corresponding write downs during the three and nine months ended September 30, 2017March 31, 2020 and 2016.2019.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2017March 31, 2020 and December 31, 2016:2019:
March 31, 2020 | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range | | (Weighted Average) | |
Impaired loans: | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | |
Owner-occupied | | $ | 459 | | Sales approach | | Adjustment to comparables | | 10% to 50% | | | | 27.8% |
|
Commercial and industrial | | | 777 | | Sales approach | | Adjustment to comparables | | 24% to 50% | | | | 28.9% |
|
September 30, 2017 | | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range | | (Weighted Average) | |
Impaired loans: | | | | | | | | | | | |
Residential real estate: | | $ | 94 | | Sales approach | | Adjustment to comparables | | 10% | | | 10% | |
Commercial real estate: | | | | | | | | | | | | | |
Nonowner-occupied | | | 2,602 | | Sales approach | | Adjustment to comparables | | 0% to 250% | | | 51.4% | |
| | | | | Income approach | | Capitalization Rate | | 8% | | | 8% | |
| | | | | | | | | | | | | |
Other real estate owned: | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | |
Construction | | | 754 | | Sales approach | | Adjustment to comparables | | 0% to 30% | | | 11.7% | |
December 31, 2016 | | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range | | (Weighted Average) | | |
December 31, 2019 | | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range | | (Weighted Average) | |
Impaired loans: | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | |
Owner-occupied | | $ | 3,536 | | Sales approach | | Adjustment to comparables | | 0% to 65% | | | 13.7% | | | $ | 1,644 | | Sales approach | | Adjustment to comparables | | 0% to 20% | | | | 9.7% |
|
| | | | | Cost approach | | Adjustment to comparables | | 0% to 29.5% | | | 14.8% | | |
Nonowner-occupied | | | 1,985 | | Sales approach | | Adjustment to comparables | | 0% to 250% | | | 58.6% | | |
Commercial and industrial | | | 298 | | Sales approach | | Adjustment to comparables | | 0.9% to 9.7% | | | 5.2% | | | | 4,559 | | Sales approach | | Adjustment to comparables | | 0% to 61% | | | | 10.3% |
|
| | | | | | | | | | | | | | |
Other real estate owned: | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | |
Construction | | | 754 | | Sales approach | | Adjustment to comparables | | 0% to 30% | | | 11.7% | | |
Noninterest income for the three months ended September 30, 2017 increased $589, or 34.8%, whenMarch 31, 2020 totaled $4,442, as compared to $1,846 during the three months ended September 30, 2016. NoninterestMarch 31, 2019. The key contributor to the quarterly improvement in noninterest revenue was from proceeds received in a litigation settlement with a third-party. During the first quarter of 2020, the Bank entered into a settlement agreement related to the previously disclosed litigation the Bank had filed against a third-party tax software product provider for breach of contract. Under the settlement agreement, the third-party paid a $2,000 settlement payment to the Bank, which was recorded as noninterest income.
Further growth in noninterest revenue came from tax preparation fee income. As previously discussed, the Company changed its business model in 2020 for assessing fees related to tax refund advance loans. By charging for the tax preparation services, the Company recorded $615 in tax preparation fee income for the nine months ended September 30, 2017 increased $718, or 10.6%, when comparedfirst quarter of 2020.
Limiting noninterest revenue growth during the first quarter of 2020 were higher losses from the sale of OREO, which reduced noninterest earnings by $101. This was primarily from an adjustment to the nine months ended September 30, 2016.The increase in quarterly noninterest revenue was largely due tofair value of one commercial OREO property during the Company's earnings from tax-free bank owned life insurance ("BOLI") investments. BOLI investments are maintained by the Company in association with various benefit plans, including deferred compensation plans, director retirement plans and supplemental retirement plans. During the thirdfirst quarter of 2017, the Company recorded $3,530 in anticipated cash proceeds related to four BOLI policies, which yielded net BOLI proceeds of $399 that was recorded to income. This amount contributed to the quarterly and year-to-date increase in BOLI and annuity asset income of $402 and $406, respectively, as compared to the same periods in 2016. 2020.
Further impacting growth inThe remaining noninterest income were the effects from the Milton Bank merger in the third quarter of 2016. When compared to 2016,the Company benefited from $422 in additional noninterest income during the nine months ended September 30, 2017, impacted by the inclusion of Milton Bank's customer deposit base. The third quarter benefit from Milton Bank was much more comparable, providing $66 in additional noninterest income when compared to 2016. The larger deposit base contributed to year-to-date improvements in debit and credit card interchange income and service charges on deposit accounts, whichcategories increased collectively by $803,$82, or 24.5%4.4%, during the first nine monthsquarter of 2017,2020, as compared to the same period in 2016. The volume of transactions utilizing the Company's2019. This income growth came mostly from higher bank owned life insurance and annuity asset balances, as well as interchange income from growth in debit and credit card transactions. The Company has been successful in promoting the use of both debit and Jeanie Plus debit card continue to increase from a year ago, which are being impactedcredit cards by cash and merchandiseoffering incentives that promote customer use of electronic payments.
During the three months ended September 30, 2017, the Company did not record any seasonal ERC/ERD fees,permit their users to redeem accumulated points for merchandise, as compared to $13 in fees during the same period in 2016. This contributed to a decrease of $370, or 18.2%, in ERC/ERD fees during the nine months ended September 30, 2017,well as compared to the same periods in 2016. In the fourth quarter of 2014, the Bank entered into a new agreement with a third-party tax refund product provider, which lowered the per-item fee associated with each refund facilitated. As a result, the lower fee structure has caused tax processing revenues to be lower than the year before. Furthermore, the Company experienced a decrease in the number of ERC/ERD transactions that were facilitated. As a result of ERC/ERD fee activity being mostly seasonal, a minimal amount of income is expected during the remainder of 2017.cash incentives.
The Company's remaining noninterest income categories were collectively up by $24, or 8.7%, during the third quarter of 2017, and down by $121, or 13.5%, during the first nine months of 2017, when compared to the same periods in 2016. The year-to-date decreases were primarily due to higher losses on OREO.33
Noninterest Expense
Noninterest expense during the thirdfirst quarter of 2017 increased $394,2020 decreased $49, or 4.5%, and increased $3,903, or 15.9%, during the nine months ended September 30, 2017, as compared to the same periods in 2016. The acquisition of Milton Bank contributed to an increase in most of the noninterest expense categories related to having a larger organization after the merger. A significant contributor to noninterest expense was salaries and employee benefits, which increased by $1,398, or 9.9%, during the nine months ended September 30, 2017, as compared to the same period in 2016. Higher employee costs continue to be impacted by the addition of Milton Bank employees, as well as annual merit increases and higher health insurance costs. However, during the three months ended September 30, 2017, salaries and employee benefits decreased $34, or 5.9%0.5%, as compared to the same period in 2016. This was due to a $316 reduction in non-qualified defined benefit expenses associated with the restructuring of2019. The Company’s largest noninterest expense, salaries and accounting for post-retirementemployee benefits, of a former employee.
The Company also experienced increases in data processing expense, which increased $184,decreased $81, or 48.4%, during the third quarter of 2017, and increased $583, or 54.5%1.5%, during the first nine monthsquarter of 2017,2020, as compared to the same periodsperiod in 2016. Data processing charges grew as a result of higher transaction volume2019. The decrease was primarily from the expense savings associated with debit and credit cards, as well as higher processing chargesa lower number of employees from the Company's Big Rewards customer incentive platform.sale of two branches in December 2019 and the voluntary severance program that was completed during the fourth quarter of 2019. The Bank’s average full-time equivalent employee base at March 31, 2020 was 244 employees, down from an average full-time equivalent employee base of 265 employees at March 31, 2019. The impact of a lower employee base more than offset the expense increase associated with annual merit increases in the first quarter of 2020.
Other noninterest expense increased $400,Further impacting lower overhead costs were professional fees, which decreased $74, or 34.8%, during the third quarter of 2017, and increased $1,734, or 53.0%11.0%, during the first nine monthsquarter of 2017,2020, as compared to the same periodsperiod in 2016. The quarterly increase was driven by consulting expenses2019. These decreases include lower litigation costs associated with revenue enhancement and efficiency improvement strategies. The year-to-date increasethe Bank’s lawsuit against the third-party tax software product provider. As previously discussed, a settlement was primarilyreached with the third-party during the first quarter of 2020, which contributed to lower legal costs. Additionally, the Company incurred lower audit-related expenses during the first quarter of 2020. This was related to fraud expensecosts from 2019 associated with the “expected loss” allowance model that was recorded in the second quarter of 2017. At that time, the Company was made aware that the processing of four wire transfers associated with a single account relationshipprepared to adopt in May 2017 totaling $933 were fraudulently initiated. After recovering a portion of the fraudulent wire costs and incurring some additional legal expense, the Company's net loss exposure at September 30, 2017 was $842. Since the fraud event, the Company had been in contact with several insurance providers to determine whether or not existing insurance policies would cover all or part of the remaining losses. Subsequent to the report date, the Company learned that its commercial insurance policy would cover $730 of the fraudulent wire expense. This resulted in the collection of $730 in net insurance proceeds in October 2017, which will be recorded as a recovery during2020. In the fourth quarter of 2017.
2019, it was announced this required accounting guidance would be delayed until 2023.
Overhead expense was further impacted by increases in professional fees,The Company also benefited from lower foreclosed asset costs, which were up $92,decreased $63, or 26.9%, during the third quarter of 2017, and up $318, or 31.2%59.4%, during the first nine monthsquarter of 2017,2020, as compared to the same periodsperiod in 2016. Both period increases were impacted by legal expense2019. In addition to lower foreclosure costs, the Company also recovered $23 in delinquent insurance and real estate taxes associated with one commercial real estate borrower during the recovery efforts on loan deficiency balances.first quarter of 2020.
Partially offsetting decreases in overhead expensescosts were lower merger relatedhigher data processing expenses, which decreased $410 during the three months ended September 30, 2017, and decreased $744increased $64, or 12.0%, during the first nine monthsquarter of 2017,2020, as compared to the same periodsperiod in 2016. During2019. Data processing expense in 2020 was largely impacted by the first quarter of 2016, the Company executed the merger agreementtransaction volume associated with Milton Bancorp. The merger was eventually finalized on August 5, 2016.credit cards. The Company anticipatesalso incurred website maintenance costs in 2020 to improve the remaining merger related expenses in 2017 to be minimal.quality of its internet-based technology.
The remaining noninterest expense categories increased $141,$105, or 9.3%, during the third quarter of 2017, and increased $614, or 14.3%3.9%, during the first nine monthsquarter of 2017,2020, as compared to the same periodsperiod in 2016. The addition2019. These increases were impacted mostly from incentive costs associated with promoting the use of Milton Bank contributed to demand deposit products, as well as the increasesuse of various noninterest expense areas that include software, buildingboth debit and equipment, customer incentives,credit cards with merchandise and intangible asset amortization.cash incentives.
Efficiency
The Company'sCompany’s efficiency ratio is defined as noninterest expense as a percentage of fully tax-equivalent net interest income plus noninterest income. The effects from provision expense are excluded from the efficiency ratio. Management continues to place emphasis on managing its balance sheet mix and interest rate sensitivity as well as developing more innovative ways to generate noninterest revenue. DuringComparing the quarterlyfirst quarters of 2020 and year-to-date periods ending September 30, 2017,2019, the Company was successfulCompany’s average loans decreased 1.4%, while loan yields decreased by 51 basis points. This, combined with the $709 decrease in generating moretax refund advance loan fees, caused the Company’s total net interest income primarily due to higher average earning assets while minimizing funding costs. The Company also realized additional earnings in the third quarter from $399 in BOLI proceeds combined with a $316 reduction in benefit expenses for a former employee. These factors havedecrease by 12.1%. However, this was completely offset by a $2,596 increase in noninterest revenue, which was impacted by $2,000 in income from a litigation settlement and $615 in tax preparation fee income. Furthermore, the negative effects fromseverance package offering and the sale of two branch offices in December 2019 contributed to lower tax processing fees, large fraudulent wireoverhead expense and higher personnel costs. This has caused the level of net revenues to outpace overhead expenses during 2017.in 2020. As a result, the Company'sCompany’s efficiency numbers have improved, finishing at 72.3% and 72.5%number decreased (improved) to 65.4% during both the quarterly and year-to-date periodsperiod ended September 30, 2017,March 31, 2020, as compared to 71.7% during the same period in 2019.
Provision for income taxes
The Company’s income tax provision decreased $16, or 16.8%, during the three months ended March 31, 2020, as compared to the 81.5%same period in 2019. The change in tax expense corresponded directly to the change in associated taxable income during 2020 and 73.2% efficiency levels during the same periods in 2016.2019.
BanksFederal regulators have classified and bank holding companies are subject to regulatorydefined capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. In addition, in order for a financial holding company to continue to engage in activities permitted only for financial holding companies, it must be "well capitalized". Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective forinto the Company and the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equityfollowing components: (1) tier 1 capital, to risk-weighted assets ratiowhich includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (2) tier 2 capital, which includes a portion of 4.5%the allowance for loan losses, certain qualifying long-term debt, preferred stock and a capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer began to phase in on January 1, 2016 at 0.625%, and will be phased in over a four-year period, increasing by the same amount on each subsequent January 1, until fully phased-in on January 1, 2019. Further, Basel III rules increased the minimum ratio ofhybrid instruments which do not qualify as tier 1 capital to risk-weighted assets increased from 4.0% to 6.0% and all banks are now subject to a 4.0% minimum leverage ratio. The required total risk-based capital ratio was unchanged. Failure to maintain the required common equity tier 1 capital conservation buffer will result in potential restrictions on a bank's ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.capital.
.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalizedIn September 2019, consistent with Section 201 of the Economic Growth, Regulatory Relief, and critically undercapitalized, althoughConsumer Protection Act, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies). Under the rule, a qualifying community banking organization (“QCBO”) is eligible to opt into the Community Bank Leverage Ratio (“CBLR”) framework in lieu of the Basel III capital requirements if it has less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposure and a leverage ratio greater than 9.0%. The new rule took effect January 1, 2020, and QCBOs were allowed to opt into the new CBLR framework in their call report for the first quarter of 2020.
A QCBO opting into the CBLR framework must maintain a CBLR of 9.0%, subject to a two quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period. A QCBO failing to satisfy these terms arerequirements must comply with the existing Basel III capital requirements as implemented by the banking regulators in July 2013.
The numerator of the CBLR is Tier 1 capital, as calculated under present rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital.
The Bank has opted into the CBLR, and will therefore not used to represent overall financial condition. If adequately capitalized, regulatory approval isbe required to accept brokered deposits. If undercapitalized,comply with the Basel III capital distributions are limited, as is asset growthrequirements. As of March 31, 2020, the Bank’s CBLR was 11.65%, and expansion, and capital restoration plans are required. At September 30, 2017 and year-end 2016, the Bank metCompany’s CBLR was 12.82%.
Pursuant to the capital requirementsCARES Act, the federal banking regulators in April, 2020 issued interim final rules to be deemed well capitalized underset the regulatory framework for prompt corrective action. The Company's capital also metCBLR at 8% beginning in the requirementssecond quarter of 2020 through the end of 2020. Beginning in 2021, the CBLR will increase to 8.5% for the Companycalendar year. Community banks will have until January 1, 2022 before the CBLR requirement will return to be deemed well capitalized9%.
The following table summarizes the capital ratios of the Company and Bank:
| | 9/30/17 | | | 12/31/16 | | | Regulatory Minimum | |
| | | | | | | | | |
Common equity tier 1 risk-based capital ratio | | | | | | | | | |
Company | | | 14.1% | | | | 14.0% | | | | 4.5% | |
Bank | | | 14.1% | | | | 14.2% | | | | 4.5% | |
| | | | | | | | | | | | |
Tier 1 risk-based capital ratio | | | | | | | | | | | | |
Company | | | 15.3% | | | | 15.3% | | | | 6.0% | |
Bank | | | 14.1% | | | | 14.2% | | | | 6.0% | |
| | | | | | | | | | | | |
Total risk-based capital ratio | | | | | | | | | | | | |
Company | | | 16.3% | | | | 16.4% | | | | 8.0% | |
Bank | | | 15.1% | | | | 15.3% | | | | 8.0% | |
| | | | | | | | | | | | |
Leverage ratio | | | | | | | | | | | | |
Company | | | 11.3% | | | | 11.2% | | | | 4.0% | |
Bank | | | 10.5% | | | | 10.4% | | | | 4.0% | |
Cash dividends paid by the Company were $2,947$1,005 during the first ninethree months of 2017.2020. The year-to-date dividends paid totaled $0.63$0.21 per share for 2017.share.
Liquidity
Liquidity relates to the Company's ability to meet the cash demands and credit needs of its customers and is provided by the ability to readily convert assets to cash and raise funds in the marketplace. Total cash and cash equivalents, held to maturity securities maturing within one year and available for sale securities, totaling $157,036,$179,501, represented 15.4%17.3% of total assets at September 30, 2017.March 31, 2020. In addition, the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity demands. At September 30, 2017,March 31, 2020, the Bank could borrow an additional $146,529$110,295 from the FHLB, of which $80,000 could be used for short-term, cash management advances. Furthermore, the Bank has established a borrowing line with the Federal Reserve. At September 30, 2017,March 31, 2020, this line had total availability of $52,433.$48,136. Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank.
Off-Balance Sheet Arrangements
As discussed in Note 5 – Financial Instruments with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet credit-related activities, including commitments to extend credit and standby letters of credit, which could require the Company to make cash payments in the event that specified future events occur. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. While these commitments are necessary to meet the financing needs of the Company'sCompany’s customers, many of these commitments are expected to expire without being drawn upon. Therefore, the total amount of commitments does not necessarily represent future cash requirements.
Critical Accounting Policies
The most significant accounting policies followed by the Company are presented in Note A to the financial statements in the Company's 2016Company’s 2019 Annual Report to Shareholders. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the adequacy of the allowance for loan losses and business combinations to be a critical accounting policies.policy.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management'smanagement’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans generally consist of loans with balances of $200 or more on nonaccrual status or nonperforming in nature. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructuringsTDRs and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower'sborrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan'sloan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure. Troubled debt restructuringsTDRs are measured at the present value of estimated future cash flows using the loan'sloan’s effective rate at inception. If a troubled debt restructuringTDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructuringsTDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and impaired loans that are not individually reviewed for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years for the consumer and real estate portfolio segment and 5 years for the commercial portfolio segment. The total loan portfolio'sportfolio’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: Commercial Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer.
Commercial and industrial loans consist of borrowings for commercial purposes by individuals, corporations, partnerships, sole proprietorships, and other business enterprises. Commercial and industrial loans are generally secured by business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or operations. The Company'sCompany’s risk exposure is related to deterioration in the value of collateral securing the loan should foreclosure become necessary. Generally, business assets used or produced in operations do not maintain their value upon foreclosure, which may require the Company to write down the value significantly to sell.
Commercial real estate consists of nonfarm, nonresidential loans secured by owner-occupied and nonowner-occupied commercial real estate as well as commercial construction loans. An owner-occupied loan relates to a borrower purchased building or space for which the repayment of principal is dependent upon cash flows from the ongoing business operations conducted by the party, or an affiliate of the party, who owns the property. Owner-occupied loans that are dependent on cash flows from operations can be adversely affected by current market conditions for their product or service. A nonowner-occupied loan is a property loan for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property. Nonowner-occupied loans that are dependent upon rental income are primarily impacted by local economic conditions which dictate occupancy rates and the amount of rent charged. Commercial construction loans consist of borrowings to purchase and develop raw land into one- to four-family residential properties. Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements. Repayment of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value which may be absorbed by the Company.
Residential real estate loans consist of loans to individuals for the purchase of one- to four-family primary residences with repayment primarily through wage or other income sources of the individual borrower. The Company'sCompany’s loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.
Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other loans to individuals for household, family, and other personal expenditures, both secured and unsecured. These loans typically have maturities of 6 years or less with repayment dependent on individual wages and income. The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary. During the last several years, one of the most significant portions of the Company'sCompany’s net loan charge-offs have been from consumer loans. Nevertheless, the Company has allocated the highest percentage of its allowance for loan losses as a percentage of loans to the other identified loan portfolio segments due to the larger dollar balances and inherent risk associated with such portfolios.
Business combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred and the amount of any noncontrolling interest in the acquiree. Acquisition related transaction costs are expensed and included in other operational result. When a business is acquired, the Company assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. We are required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective. Under FASB ASC 350 (SFAS No. 142 Goodwill and Other Intangible Assets), goodwill and indefinite-lived assets recorded must be reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill or the indefinite-lived intangible asset.
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with residential real estate loans currently comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in southeastern Ohio and western West Virginia. Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group. To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's goal for interest rate sensitivity management is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the Company's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability, but excessive levels of IRR can threaten the Company's earnings and capital.
The Company evaluates IRR through the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The modeling process starts with a base case simulation, which assumes a static balance sheet and flat interest rates. The base case scenario is compared to rising and falling interest rate scenarios assuming a parallel shift in all interest rates. Comparisons of net interest income and net income fluctuations from the flat rate scenario illustrate the risks associated with the current balance sheet structure.Not applicable.
The Company's Asset/Liability Committee monitors and manages IRR within Board approved policy limits. The current IRR policy limits anticipated changes in net interest income to an instantaneous increase or decrease in market interest rates over a 12 month horizon to +/- 5% for a 100 basis point rate shock, +/- 7.5% for a 200 basis point rate shock and +/- 10% for a 300 basis point rate shock. Based on the level of interest rates, management did not test interest rates down 200 or 300 basis points.
The following table presents the Company's estimated net interest income sensitivity:
Change in Interest Rates in Basis Points | | September 30, 2017 Percentage Change in Net Interest Income | | December 31, 2016 Percentage Change in Net Interest Income |
+300 | | .93% | | (.39%) |
+200 | | .81% | | (.05%) |
+100 | | .50% | | .09% |
-100 | | (1.54%) | | (1.72%) |
The estimated percentage change in net interest income due to a change in interest rates was within the policy guidelines established by the Board. With the historical low interest rate environment, management generally has been focused on limiting the duration of assets, while trying to extend the duration of our funding sources to the extent customer preferences will permit the Company to do so. At September 30, 2017, the interest rate risk profile reflects a modest asset sensitive position, which produces higher net interest income due to an increase in interest rates. In a declining rate environment, net interest income is impacted by the interest rate on many deposit accounts not being able to adjust downward. With interest rates so low, deposit accounts are perceived to be at or near an interest rate floor. As a result, net interest income decreases in a declining interest rate environment. Overall, management is comfortable with the current interest rate risk profile which reflects minimal exposure to interest rate changes.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of the Chief Executive Officer (the principal executive officer) and the Senior Vice President and Chief Financial Officer (the principal financial officer) of Ohio Valley, Ohio Valley'sValley’s management has evaluated the effectiveness of Ohio Valley'sValley’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10‑Q. Based on that evaluation, Ohio Valley's Chief Executive Officer and Vice President and Chief Financial Officer have concluded that Ohio Valley's disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10‑Q to ensure that information required to be disclosed by Ohio Valley in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.March 31, 2020. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Ohio Valley in the reports that it files or submits under the Exchange Act is accumulated and communicated to Ohio Valley'sValley’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, Ohio Valley’s Chief Executive Officer and Senior Vice President and Chief Financial Officer have concluded that Ohio Valley’s disclosure controls and procedures were not effective as of March 31, 2020 due to a material weakness described in Management’s Report on Internal Control Over Financial Reporting in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 Form 10-K”).
Changes in Internal Control over Financial Reporting
There was no change in Ohio Valley'sBased on the assessment of the effectiveness of our internal control over financial reporting (as definedas of December 31, 2019, as described in Rule 13a‑15(f) underour 2019 Form 10-K, management concluded that Ohio Valley did not maintain effective internal control over financial reporting as of December 31, 2019 due to the Exchange Act)effectiveness of the Company’s control over appropriate monitoring of loans through the subsequent events period, including not timely evaluating information received after the fiscal year end that occurredaffected the appropriateness of loan grades and impairment classification used in the allowance for loan losses estimate.. A material weakness is a deficiency in internal control over financial reporting such that there is a reasonable possibility that a material misstatement would not be prevented or detected in a timely manner. With regard to the material weakness, our remediation efforts began during Ohio Valley's fiscalthe quarter ended September 30, 2017,March 31, 2020. We are changing how certain controls are designed, performed and documented. Our credit administration department, in conjunction with an expanded group of the management team, have heightened the monitoring of troubled credits during the subsequent event period up and until the report filing date.This included training around timely identifying and communicating subsequent events and increasing the management staff involved with monitoring the control around subsequent events that may impact the assessment of loan grades or impairment valuations.We must now demonstrate the effectiveness of these changes with an appropriate amount of consistency and for a sufficient period of time to conclude that the control is functioning properly. Other than these changes, there were no significant changes during the quarter ended March 31, 2020 in Ohio Valley’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Ohio Valley'sValley’s internal control over financial reporting.
Not applicable.
Not applicable.
Not applicable.