Ohio Valley Banc Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Ohio Valley Banc Corp. is a bank holding company serving southeastern Ohio and western West Virginia, with banking and consumer-finance segments. Unless otherwise stated, dollar amounts are in thousands.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparison |
|---|---|---|
| Net income | $1,193; $0.25 per share | Down 64.6% from $3,366 and $0.71 per share in Q1 2018 |
| Interest and dividend income | $13,058 | Up 2.7% from $12,709 |
| Net interest income | $11,387 | Down 1.1% from $11,510 |
| Provision for loan losses | $2,377 | Up from $756 |
| Noninterest income | $1,846 | Down 40.0% from $3,076 |
| Noninterest expense | $9,568 | Down 2.4% from $9,808 |
| Net interest margin | 4.89% | Up from 4.38% |
| Efficiency ratio | 71.72% | Worsened from 66.76% |
| Assets | $1,044,873 | Up from $1,030,493 at year-end 2018 |
| Gross loans / allowance | $780,644 / $8,013 | Loans up 0.5%; allowance was $6,728 at year-end |
| Deposits | $861,704 | $846,704 at year-end; March figure includes deposits held for sale |
| Borrowings | $37,577 other borrowed funds; $8,500 subordinated debentures | Other borrowed funds down from $39,713 |
| Shareholders’ equity | $120,352 | Up from $117,874 |
| Cash flow | $1,358 operating; $(11,902) investing; $12,261 financing | Cash and equivalents ended at $72,897, up $1,717 |
Reported return on assets was 0.47%, versus 1.20% in Q1 2018. Return on equity was 4.08%; the MD&A gives 12.41% as the comparison but appears to contain a date typo. The quarterly dividend was $0.21 per share, unchanged from Q1 2018.
Liquidity included $184,104 in cash and cash equivalents, eligible securities and held-to-maturity securities maturing within one year, equal to 17.6% of assets. The Bank reported $134,714 of additional FHLB borrowing capacity, including an $80,000 short-term line, and $59,520 available under a Federal Reserve borrowing line.
Material changes and drivers
- Net income fell primarily because loan-loss provision expense rose and noninterest income declined. The allowance-to-loans ratio increased to 1.03% from 0.87% at year-end.
- Noninterest income declined mainly because the Bank’s tax-refund processing provider stopped using its services after 2018. The lost activity reduced Q1 2019 tax-processing fees by $1,228 versus Q1 2018 and also reduced interest income from Federal Reserve balances by $366.
- Loan interest and fees increased 5.9%, supported by higher average loan balances and yield. Deposit interest expense rose 50.4%, chiefly from higher-cost time deposits and repricing.
- Commercial lending grew 2.6% from year-end, while residential and consumer balances declined. Total loans grew 0.5%.
- Provision expense reflected higher net charge-offs, commercial loan downgrades, increased general reserves and collateral-related specific reserves. Classified commercial assets rose to $25,042 from $19,961 at year-end; the classified-asset ratio increased to 27.8% from 22.9%.
- Nonperforming loans were 1.23% of loans, down slightly from 1.25% at year-end; nonperforming assets were 0.96% of assets, down from 0.99%. Nonaccrual loans were $9,085, up from $8,677.
- Available-for-sale securities increased to $110,281. The reduction in unrealized losses contributed to higher comprehensive income and equity; management stated it did not consider the securities losses other-than-temporary.
Outlook, risks and unusual items
- Management emphasized pursuing higher-yielding assets, particularly loans, while maintaining underwriting standards. It cautioned that net interest income and margin improvement could face pressure if loans do not continue to grow as a share of earning assets. No numerical earnings or revenue guidance was provided.
- The Bank is pursuing payment from its former tax-refund processing provider for alleged breach of contract and may seek an alternative provider for future tax seasons. The filing does not quantify any recovery or establish a replacement arrangement.
- In April 2019, the Bank agreed to sell its Mount Sterling and New Holland, Ohio branches to North Valley Bank. The transaction is expected to close in the second half of 2019 and involves $27.2 million of deposits plus associated land and buildings, with a 5.0% deposit premium based on the specified pre-closing period.
- An Ohio law effective for relevant loans beginning April 27, 2019 restricts certain short-term, single-payment lending offered by Loan Central. Management was assessing the effects and expected no material consolidated annual impact, while noting the assessment was ongoing.
- Management expects adoption of CECL, effective for the Company in 2020, to materially increase the allowance for loan losses; the amount was still under evaluation.
- Off-balance-sheet commitments and standby letters of credit were reported at approximately $70.5 million in the note text; the note labels the comparison date inconsistently, so the precise period comparison is unclear. Such commitments may expire undrawn.
- The Company adopted lease accounting on January 1, 2019, recognizing a $1,280 operating lease right-of-use asset and liability. At March 31, the balances were each $1,214.
- Management identified interest-rate movements, loan defaults and prepayments, funding costs, competition, economic conditions, litigation and regulatory changes among forward-looking risks. Disclosure controls were judged effective, and no material change in internal control was reported.
Most important facts for investors to verify
- Whether the former tax-refund provider is replaced, whether the Bank recovers amounts in its contract dispute, and the resulting effect on earnings and liquidity.
- Loan-credit trends behind the sharp increase in provision expense, classified assets and impaired loans, including subsequent performance of downgraded relationships.
- The eventual CECL allowance increase and implementation assumptions.
- Completion, economics and deposit treatment of the planned branch sale.
- The effects of Ohio’s short-term lending law on Loan Central and consolidated results.
- Deposit stability and funding costs as seasonal municipal balances change and higher-cost time deposits reprice.