Ohio Valley Banc Corp. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated statements; dollar amounts are in thousands except per-share data. The company provides banking and consumer-finance services, primarily in southeastern Ohio and western West Virginia. Comparisons with 2016 are affected by the August 2016 Milton Bancorp merger; Milton Bank’s results are included from August 6, 2016.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $10,071 | $8,206 | $20,936 | $17,306 |
| Provision for loan losses | $175 | $141 | $320 | $620 |
| Noninterest income | $2,112 | $1,861 | $5,225 | $5,096 |
| Noninterest expense | $9,876 | $7,773 | $19,251 | $15,742 |
| Net income | $1,741 | $1,706 | $4,958 | $4,538 |
| Earnings per share | $0.37 | $0.41 | $1.06 | $1.10 |
- Net income increased 2.1% for Q2 and 9.3% year to date. EPS declined versus 2016 despite higher net income.
- Net interest margin improved to 4.45% for Q2 (4.22% prior year) and 4.49% for the first half (4.36%). Reported ROA was 0.97% and ROE 9.40%, down from 1.05% and 9.88%, respectively, at June 30, 2016.
- The reported efficiency ratio worsened to 79.8% for Q2 and 72.5% year to date, versus 76.0% and 69.3% in the comparable 2016 periods.
- Operating cash flow was $4,978 for the first half, versus $7,176 in 2016. Investing activities used $29,105, chiefly reflecting loan growth and securities purchases; financing activities provided $19,447. Cash and equivalents declined $4,680 to $35,486.
- At June 30, total assets were $980,156, up $25,516 from year-end 2016. Gross loans were $756,905, up $22,004; deposits were $808,192, up $17,740. Shareholders’ equity was $108,987, up $4,459.
- Borrowings comprised $40,655 of other borrowed funds and $8,500 of subordinated debentures. Other borrowed funds increased $3,570 from year-end. Cash, short-term held-to-maturity securities and available-for-sale securities totaled $138,272, or 14.1% of assets. Additional stated borrowing availability included $143,081 from the FHLB and $49,612 under a Federal Reserve line.
- Bank capital ratios remained above well-capitalized thresholds: common equity tier 1 14.4%, total risk-based capital 15.3%, and leverage 10.3% at June 30.
Changes, outlook and risks
- Revenue and expenses: Management attributed stronger net interest income mainly to the Milton acquisition, growth in average earning assets and higher short-term rates. Deposit-service and card-interchange fees increased, while first-half tax-refund processing fees fell 17.6% because of fewer transactions and lower per-item fees under a new provider contract. Expense growth reflected the enlarged organization, payroll and benefits, data processing, and other costs.
- Unusual item: Four fraudulent wire transfers tied to one customer relationship totaled $933. The company recovered $103 and recorded $830 of net fraud expense in Q2 and the first half. Insurance coverage remained undetermined as of the report date.
- Credit quality: The allowance for loan losses fell to $6,952, or 0.92% of loans, from $7,699, or 1.05%, at year-end. Management cited lower specific reserves following improvement in one commercial real estate relationship, partly offset by higher general reserves reflecting economic and underwriting risks. Nonperforming loans were 1.09% of loans, versus 1.26% at year-end; nonperforming assets were 1.09% of assets, versus 1.20%. Nonaccrual loans totaled $7,483, compared with $8,961 at year-end. Management considered the allowance adequate but cautioned future adjustments may be needed.
- Troubled debt restructurings totaled $16,369, up $326 from year-end; 85% were performing on modified terms, versus 82% at year-end. Commercial criticized loans increased to $5,719 from $2,980, while classified loans declined to $19,581 from $22,602.
- Loans grew in residential real estate and automobile lending; residential warehouse lending increased to $15,928. Management said future lending depends on market demand, competition, interest rates and underwriting, and emphasized credit quality alongside growth. Seasonal business-checking balances associated with tax processing were expected to decline during the remainder of 2017.
- No earnings or other quantitative financial guidance was provided. Management said remaining merger expenses in 2017 were expected to be minimal. It noted that margin improvement could face pressure if loan growth does not continue and that deposit competition, credit losses, interest-rate changes, funding costs, economic conditions, litigation and regulation could affect results.
- Interest-rate simulations showed a modest asset-sensitive position and changes within board policy limits: net interest income sensitivity was +0.18% for a 100-basis-point increase and -1.26% for a 100-basis-point decrease. Management described overall exposure as limited.
- Off-balance-sheet commitments, standby letters of credit and financial guarantees totaled approximately $69,364. The filing says many commitments are expected to expire undrawn; contract amounts do not necessarily represent future cash requirements.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. Legal proceedings were reported as not applicable.
Important facts for investors to verify
- Whether insurance reimburses any portion of the $830 net wire-fraud loss, and whether further recovery or related costs arise.
- Whether loan growth, net interest margin and core deposit retention continue as seasonal tax-related balances unwind and market rates or funding costs change.
- Credit trends behind the lower allowance ratio, including the rise in criticized commercial loans, nonaccrual exposures, charge-offs and TDR performance.
- Whether expense growth moderates after the Milton integration and whether the efficiency ratio improves.
- How much of year-over-year performance reflects the Milton acquisition versus organic growth; the filing notes the periods are not directly comparable.
- The timing and financial effect of pending accounting standards, particularly expected credit-loss accounting; management had not yet determined that standard’s impact.