Ohio Valley Banc Corp. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited consolidated results. Ohio Valley is a community banking and consumer finance company serving southeastern Ohio and western West Virginia. Amounts below are in thousands of dollars, except per-share data and ratios.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $10,763 | $10,268 | $32,913 | $31,204 |
| Provision for loan losses | $962 | $1,601 | $1,695 | $1,921 |
| Noninterest income | $1,927 | $2,282 | $7,541 | $7,507 |
| Noninterest expense | $9,761 | $9,222 | $29,243 | $28,473 |
| Income before taxes | $1,967 | $1,727 | $9,516 | $8,317 |
| Net income | $1,746 | $1,653 | $8,088 | $6,611 |
| Earnings per share | $0.37 | $0.35 | $1.71 | $1.41 |
- Q3 net income increased 5.6%; nine-month net income increased 22.3%. Management attributed the improvement mainly to higher interest income, lower loan-loss provision, and a lower year-to-date tax rate.
- Net interest income rose 4.8% for the quarter and 5.5% year to date. Net interest margin was 4.49% in Q3 versus 4.52%; year-to-date margin was 4.41% versus 4.50%. The filing cites higher deposit costs and relatively lower-yielding Federal Reserve balances as sources of margin pressure. Interest-bearing deposit cost increased to 0.65% from 0.46%.
- Q3 noninterest income fell 15.6%, largely because the prior-year quarter included BOLI proceeds and related income. Nine-month noninterest income was up 0.5%. Salaries and benefits and data processing costs increased; lower fraud-related and foreclosed-asset expenses partly offset the increases. The efficiency ratio worsened to 76.23% for Q3 from 72.33%, but improved year to date to 71.7% from 72.5%.
- The nine-month effective tax rate was 15.0%, down from 20.5%, reflecting the Tax Cuts and Jobs Act federal rate reduction. Q3 tax expense increased year over year to $221 from $74.
Financial position, cash flow and capital
- Total assets were $1.034 billion at September 30, 2018, up $7.2 million from year-end 2017. Gross loans grew $13.1 million (1.7%) to $782.4 million, led by commercial lending; total deposits declined $3.8 million (0.4%) to $852.9 million.
- Cash and cash equivalents were $65.1 million, down $9.5 million from year-end. For the first nine months, operating cash flow was $13.2 million, investing cash outflow was $21.6 million, financing cash outflow was $1.1 million, and cash declined $9.5 million.
- Other borrowed funds were $40.5 million, versus $35.9 million at year-end; subordinated debentures were $8.5 million. The Bank reported $151.5 million of additional FHLB borrowing capacity, including an $80 million short-term cash-management line, and $57.7 million available under a Federal Reserve borrowing line.
- Shareholders’ equity was $113.8 million, up $4.5 million. The Bank’s total risk-based capital ratio was 15.8% and leverage ratio 10.5%; management said regulatory capital ratios remained above well-capitalized minimums. The Company qualified for the Small Bank Holding Company Policy exemption from consolidated holding-company capital requirements.
- Cash, eligible securities and short-term held-to-maturity securities totaled $172.4 million, or 16.7% of assets. The company paid $0.63 per share in dividends year to date; the quarterly dividend was $0.21 per share.
Credit quality and other material changes
- The allowance for loan losses increased to $8.3 million from $7.5 million; allowance-to-loans rose to 1.06% from 0.97%. Nine-month net charge-offs were $879, down $1.4 million from the prior-year period. Nonperforming loans were 1.36% of loans, unchanged from year-end; nonperforming assets were 1.16% of assets versus 1.17%.
- Nonaccrual loans totaled $9.6 million, compared with $10.1 million at year-end. Total troubled debt restructurings declined 41.4% to $9.9 million; no TDR modifications were made during the 2018 periods presented.
- A specific reserve of $409 was recorded in Q3 for collateral impairment of one residential real estate loan relationship. Commercial criticized loans increased to $13.0 million from $10.9 million at year-end, while classified loans decreased to $19.7 million from $22.6 million.
- Rising rates increased unrealized losses on available-for-sale securities; the nine-month after-tax loss in other comprehensive income was $2.0 million. Management stated it did not intend, and was not likely to be required, to sell the securities before recovery.
Outlook, risks and contingencies
- Tax refund processing: The third-party provider plans to end its relationship with the Bank by the end of 2018. The Bank said it cannot replace the arrangement for the 2019 tax season. The program generated $1.566 million of 2018 ERC/ERD fees and approximately $894,000 of interest income on temporary refund balances. Management expects adverse effects on liquidity and net income and is pursuing payment from the provider for alleged breach of contract.
- Ohio lending law: A new law effective for covered loans made on or after April 27, 2019 may restrict Loan Central’s short-term and small-loan business. The company was still evaluating the effect, possible exemptions and alternatives; management then believed the consolidated impact would not be material.
- Management plans to pursue higher-yielding assets, particularly loans, while emphasizing core deposit growth and loan quality. Loan growth, deposit competition, funding costs, interest rates and local economic conditions remain relevant uncertainties. The filing provides no formal earnings or financial guidance.
- Off-balance-sheet commitments, including commitments to extend credit and standby letters of credit, totaled approximately $72.0 million. The filing notes that many are expected to expire undrawn. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting; legal proceedings were reported as not applicable.
Important facts for investors to verify
- How the end of the tax refund provider relationship affects 2019 liquidity, fee income and interest income, and the status of any recovery claim.
- Whether loan growth and core deposit retention can offset deposit mix shifts, higher funding costs and margin compression.
- Developments in the collateral-impaired residential loan, nonaccrual balances, criticized/classified loans and allowance adequacy.
- The eventual effect of Ohio’s lending law on Loan Central, and whether any exemption or structural alternative is available.
- Exposure to securities valuation losses, future interest-rate changes, and the company’s capacity and cost of borrowing.