Ohio Valley Banc Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results include the bank, consumer finance, insurance agency and other subsidiaries. Financial amounts below are in thousands of dollars unless otherwise noted.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $10,626 | $10,763 | $32,666 | $32,913 |
| Provision for loan losses | $444 | $962 | $2,015 | $1,695 |
| Noninterest income | $2,107 | $1,927 | $5,956 | $7,541 |
| Noninterest expense | $9,738 | $9,761 | $29,097 | $29,243 |
| Net income | $2,137 | $1,746 | $6,409 | $8,088 |
| Earnings per share | $0.45 | $0.37 | $1.35 | $1.71 |
- Third-quarter net income rose 22.4%, principally reflecting lower loan-loss provision expense. Nine-month net income fell 20.8%, mainly due to higher provision expense and lower noninterest income.
- Net interest margin was 4.41% for Q3 2019 versus 4.49% a year earlier; year-to-date margin was 4.57% versus 4.41%. The efficiency ratio was 75.8% for the quarter versus 76.2%, and 74.7% year to date versus 71.7%.
- Annualized return on assets was 0.83% and return on equity 7.07% at September 30, 2019, compared with 1.01% and 9.67%, respectively, a year earlier.
- Operating cash flow was $9,571 for the first nine months, compared with $13,239 in 2018. Investing activities used $14,057; financing activities provided $3,768. Cash and cash equivalents ended at $70,462, down $718 from year-end 2018.
- Total assets were $1,045,958, up $15,465 from year-end. Gross loans were $780,053, up $3,001; deposits were $857,282, up $10,578; and shareholders’ equity was $125,201, up $7,327.
- Other borrowed funds declined to $34,798 from $39,713; subordinated debentures remained $8,500. The filing reports $181,704 in cash and specified securities, or 17.4% of assets, and $115,754 of additional FHLB borrowing capacity, including an $80,000 short-term line. Federal Reserve borrowing availability was $49,110.
- The allowance for loan losses was $6,153, or 0.79% of loans, compared with $6,728, or 0.87%, at year-end 2018. Nonperforming loans were 1.18% of loans versus 1.25% at year-end; nonperforming assets were 0.89% of assets versus 0.99%.
Material changes and management commentary
- Deposit interest expense increased 47% in Q3 and 51% year to date, reflecting higher-cost certificates of deposit and money-market balances. Interest-bearing deposit cost rose to 0.97% from 0.65% a year earlier. Loan interest income increased, partly offsetting funding-cost pressure.
- The Bank’s tax-refund processing provider stopped using the Bank’s services after 2018. This eliminated most related processing income and reduced seasonal Federal Reserve balances; year-to-date tax-processing fees were $5 versus $1,566 in 2018. The Bank is considering alternative relationships and is pursuing payment from the provider for alleged breach of contract.
- Management attributed lower quarterly provision expense to improving credit risk factors and reduced specific reserves, partly offset by higher charge-offs. Gross loan charge-offs were $4,575 and recoveries were $1,985 year to date. A commercial and industrial relationship was a significant source of Q3 charge-offs.
- One $133 commercial and industrial troubled-debt-restructured loan defaulted within 12 months of modification and moved to nonaccrual in August. Total TDR loans were $8,789 at September 30, up $155 from year-end; $391 was not performing to modified terms.
- Commercial real estate and residential real estate balances grew, while commercial and industrial loans declined $12,734 from year-end, partly due to charge-offs and payoffs involving several relationships. Residential lending growth included higher warehouse lending balances.
- The Company entered an agreement to sell its Mount Sterling and New Holland, Ohio branches. The transaction includes approximately $26,675 of deposits and was expected to close in Q4 2019; the filing does not report a completed sale as of September 30.
- Capital ratios exceeded applicable well-capitalized minimums. The Company stated it met the Small Bank Holding Company Policy criteria and therefore was not required to meet consolidated holding-company capital requirements.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management said it intends to pursue higher-yielding assets, particularly loans, while emphasizing core deposit growth and loan underwriting quality. It cautioned that net interest income and margin may be pressured if loan growth does not continue and higher-cost deposits persist.
- Liquidity may be affected by the loss of tax-refund-related deposits; management noted that alternative funding may be needed to support earning-asset growth if a replacement processing arrangement is not obtained.
- Management expects adoption of the current expected credit loss standard (CECL) to materially increase the allowance for loan losses. The impact was still under evaluation; the filing noted the effective date for smaller reporting companies had been delayed to fiscal years beginning after December 15, 2022.
- Other risks identified include interest-rate changes, competition, loan defaults and prepayments, funding costs, economic conditions, regulatory changes, and litigation. The Company reported no material legal proceedings, but disclosed litigation-related legal fees connected with its claim against the former tax-processing provider.
- The Company adopted lease accounting in 2019, recognizing a $1,120 operating lease asset and liability at September 30. This changed balance-sheet presentation; prior-year balances were not restated.
Important facts for investors to verify
- Whether the branch sale closed as expected, and its final proceeds, deposit premium and effect on funding.
- Progress and potential recovery in the dispute with the former tax-refund processing provider, and whether a replacement relationship is secured.
- Further C&I charge-offs, nonaccrual trends, TDR performance and adequacy of the allowance, particularly given its decline despite higher year-to-date charge-offs.
- Deposit pricing, deposit mix and net interest margin as rates and customer preferences change.
- The eventual CECL transition date and quantified effect on the allowance and capital.
- Execution costs and timing for the new Gallipolis facility; premises and equipment increased during the period.