Ohio Valley Banc Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Unaudited consolidated results cover the company’s banking and consumer-finance businesses, primarily serving southeastern Ohio and western West Virginia. Financial amounts below are in thousands of dollars, except per-share data and ratios.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net income; earnings per share | $3,366; $0.71 | $3,217; $0.69 in Q1 2017 |
| Net interest income | $11,510 | $10,865 in Q1 2017 |
| Provision for loan losses | $756 | $145 in Q1 2017 |
| Noninterest income; noninterest expense | $3,076; $9,808 | $3,113; $9,375 in Q1 2017 |
| Net interest margin; efficiency ratio | 4.38%; 66.8% | 4.52%; 66.2% in Q1 2017 |
| Return on assets; return on equity | 1.20%; 12.41% | 1.23%; 12.41% in Q1 2017 |
| Total assets; total loans | $1,096,421; $768,065 | $1,026,290; $769,319 at December 31, 2017 |
| Deposits; other borrowed funds | $919,508; $42,603 | $856,724; $35,949 at December 31, 2017 |
| Cash and cash equivalents; shareholders’ equity | $144,162; $111,211 | $74,573; $109,361 at December 31, 2017 |
| Operating cash flow | $5,668 | $4,137 in Q1 2017 |
Net interest income rose 5.9%, reflecting higher average loans and interest-bearing bank deposits, as well as higher short-term rates. Net income increased 4.6%, helped by the lower tax provision following the federal corporate tax-rate reduction. The benefit was partly offset by a higher loan-loss provision and increased operating costs. The effective tax rate was 16.3%, versus 27.8% in Q1 2017.
The allowance for loan losses was $7,996, or 1.04% of loans, compared with $7,499, or 0.97%, at year-end. Nonperforming loans were 1.63% of total loans, up from 1.36%; nonperforming assets were 1.27% of total assets, up from 1.17%. Nonaccrual loans increased to $12,130 from $10,112. Net charge-offs were $259. Management stated that the allowance was adequate for probable incurred losses, while noting future adjustments could be required.
Company and bank capital ratios remained above applicable well-capitalized thresholds. At March 31, the company’s total risk-based capital, common equity tier 1, and leverage ratios were 17.0%, 14.7%, and 10.1%; the bank’s were 15.6%, 14.6%, and 9.2%, respectively. Quarterly dividends were $0.21 per share.
Material changes and operating drivers
- Assets increased $70,131 from year-end, largely because seasonal tax-refund processing temporarily increased deposits and cash held at the Federal Reserve. Management expected these excess balances to decline during Q2 as tax settlements progressed.
- Deposits rose $62,784, with noninterest-bearing deposits up $60,758, primarily from seasonal tax-processing balances. The company reported more than $86 million in retained funds associated with this activity and anticipated a seasonal decline.
- Gross loans were nearly flat versus year-end. Commercial and industrial loans increased $6,475, including a $7,961 state and municipal loan origination; declines in residential, commercial real estate, and consumer loans offset much of the growth.
- Unrealized losses on available-for-sale securities contributed to a $1,237 after-tax reduction in other comprehensive income and accumulated other comprehensive loss. Management attributed the change to rising interest rates and said it did not expect to need to sell the securities before recovery.
- Interest expense increased 37.3%, with the weighted-average cost of interest-bearing deposits rising to 0.60% from 0.43% a year earlier. Net interest margin declined as low-yielding Federal Reserve balances diluted returns.
- Noninterest income declined 1.2%, mainly from lower electronic tax-refund processing fees and lower bank-owned life insurance income; higher card interchange income and reduced OREO losses partly offset the decline. Noninterest expense rose 4.6%, driven by compensation, data processing, and professional fees.
Liquidity, outlook, risks and other items
Cash, securities available for sale, and held-to-maturity securities maturing within one year totaled $250,825, or 22.9% of assets. The company reported $145,822 of additional FHLB borrowing capacity, including an $80,000 short-term cash-management line, and $53,552 available through a Federal Reserve borrowing line. FHLB advances were $35,718; fixed-rate advances matured through 2042 and had a 2.34% year-to-date weighted-average cost. The company said it intended to invest excess funds in higher-yielding assets, particularly loans, as opportunities arose.
Management described the company as asset-sensitive: modeled net interest income increased 2.37% under a +100 basis-point shock and declined 3.49% under a -100 basis-point shock. Management expected seasonal cash reductions could alter that sensitivity and said it was comfortable with the risk profile. No specific earnings or financial forecast was provided.
Off-balance-sheet commitments to extend credit, standby letters of credit, and financial guarantees totaled approximately $75,017, up from $68,859 at year-end. Management noted that many commitments may expire undrawn. Other cited risks include loan defaults and prepayments, interest-rate movements, funding costs, competition, economic conditions, litigation, and regulatory changes. The filing reported no applicable legal proceedings and no material change in internal control over financial reporting. The expected-credit-loss standard (CECL) was still being implemented; its financial impact had not been determined. Early adoption of guidance on stranded tax effects was expected to reclassify $173 from accumulated other comprehensive income to retained earnings beginning in the Q2 filing.
Important facts for investors to verify
- Whether seasonal tax-processing deposits and Federal Reserve cash balances unwind as management anticipated, and how quickly those funds are redeployed.
- Whether the rise in nonaccrual loans and provision expense persists, especially given the increase in residential real estate nonaccruals and consumer net charge-offs.
- Whether loan growth and asset mix support net interest income and margin as short-term rates and deposit funding costs change.
- How lower tax-refund processing fees, higher operating costs, and CECL implementation affect future earnings and credit-loss estimates.
- Whether the reported liquidity, borrowing capacity, and capital ratios remain adequate as seasonal balances recede and credit commitments are drawn.