Ohio Valley Banc Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results; dollar amounts are in thousands except per-share data. The company operates banking and consumer-finance businesses primarily in southeastern Ohio and western West Virginia.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $10,653 | $10,640 | $22,040 | $22,150 |
| Provision for loan losses | $(806) | $(23) | $1,571 | $733 |
| Noninterest income | $2,003 | $2,538 | $3,849 | $5,614 |
| Noninterest expense | $9,791 | $9,674 | $19,359 | $19,482 |
| Net income | $3,079 | $2,976 | $4,272 | $6,342 |
| Earnings per share | $0.65 | $0.63 | $0.90 | $1.34 |
| Dividends per share | $0.21 | $0.21 | $0.42 | $0.42 |
- Q2 net income rose 3.5%; first-half net income fell 32.6%. Management attributed the quarterly improvement mainly to lower provision expense, and the first-half decline to higher loan-loss provision and lower noninterest income.
- Net interest margin was 4.43% in Q2 versus 4.35% a year earlier, and 4.66% for the first half versus 4.37%. The company reported a first-half efficiency ratio of 74.2%, compared with 69.6%.
- Six-month operating cash flow was $5,022, down from $9,333. Investing activities used $2,465 and financing activities used $3,491. Cash and equivalents ended at $70,246, down $934 from year-end 2018.
Financial position, liquidity and capital
- Total assets were $1.035 billion at June 30, up $4.5 million from December 31, 2018. Gross loans were $776.1 million, down $0.9 million; deposits were $847.5 million, up $0.8 million.
- Shareholders’ equity increased to $123.9 million from $117.9 million. Other borrowed funds declined to $36.7 million from $39.7 million; subordinated debentures remained $8.5 million.
- Cash, eligible securities and held-to-maturity securities maturing within one year totaled $177.3 million, or 17.1% of assets. Additional disclosed borrowing availability included $138.3 million from the FHLB and $48.9 million under a Federal Reserve line.
- At June 30, the Bank’s total risk-based capital ratio was 16.7%, common equity tier 1 ratio 15.7%, tier 1 ratio 15.7%, and leverage ratio 10.9%. The Bank met the regulatory “well capitalized” thresholds.
Material changes, outlook and risks
- Lost tax-processing business: The Bank’s third-party provider stopped using its services at the end of 2018. Tax-processing fees were virtually nil in 2019 versus $305 in Q2 2018 and $1.533 million in first-half 2018. The related reduction in seasonal Federal Reserve balances also lowered interest income. The Bank is considering alternative arrangements and pursuing payment from the provider for alleged breach of contract.
- Credit costs and asset quality: The first-half loan-loss provision was $1.571 million, up from $733 thousand. The allowance rose to $7.401 million, or 0.95% of loans, from $6.728 million, or 0.87%, at year-end. Nonperforming loans increased to 1.36% of loans from 1.25%; nonperforming assets rose to 1.04% of assets from 0.99%. Classified commercial loans increased to $25.4 million from $20.0 million; management cited downgrades, including two relationships totaling $9.1 million. Second-quarter provision was a net reversal of $806 thousand, supported by net recoveries of $194 thousand.
- Total troubled debt restructurings rose 13.9% from year-end to $9.836 million; $290 thousand were not performing to modified terms. The filing reports no defaults within twelve months following TDR modifications during the periods presented.
- Funding costs: Interest expense increased 41.0% in Q2 and 40.2% in the first half, mainly from higher-cost CDs and money-market accounts. Average cost of interest-bearing deposits increased to 0.94% from 0.62% year over year.
- Branch sale: The company agreed to sell its Mount Sterling and New Holland, Ohio branches, involving approximately $27.2 million of deposits. Closing was expected in the second half of 2019; the agreement provides for a premium equal to 5% of average daily deposits in the 30 days before closing.
- Other notable items: Loan Central stopped making refund-anticipation loans on April 27, 2019 following an Ohio law change. The company adopted lease accounting in 2019, recognizing $1.190 million each in operating lease right-of-use assets and liabilities at June 30. Management expected CECL adoption to materially increase the allowance, but the impact was still being evaluated; the filing notes the effective date for smaller reporting companies had been delayed to fiscal years beginning after December 15, 2022.
- Management emphasized pursuing higher-yielding loan growth while maintaining underwriting discipline and core deposit relationships. It cautioned that margins could face pressure if loans do not continue expanding. No specific earnings or revenue guidance was provided. Risks cited include economic conditions, competition, interest-rate and funding-cost changes, loan defaults and prepayments, litigation, and regulatory changes.
Key facts for investors to verify
- Progress and recoveries, if any, in the dispute with the former tax-processing provider, and whether a replacement relationship is secured.
- Branch-sale closing date, final deposit balances and premium received.
- Developments in classified, impaired and nonperforming loans, charge-offs, recoveries, TDRs and the allowance for loan losses.
- Trends in deposit mix and pricing, loan growth, net interest margin and the impact of the changed seasonal tax-processing business.
- Expected CECL transition effect and any subsequent update to the allowance estimate.