Ohio Valley Banc Corp. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results; dollar amounts are in thousands unless stated otherwise. The August 2016 Milton Bancorp acquisition affects year-over-year comparability, as its results were included beginning August 6, 2016.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $10,268 | $8,985 | $31,204 | $26,291 |
| Provision for loan losses | $1,601 | $1,708 | $1,921 | $2,328 |
| Noninterest income | $2,282 | $1,693 | $7,507 | $6,789 |
| Noninterest expense | $9,222 | $8,828 | $28,473 | $24,570 |
| Net income | $1,653 | $358 | $6,611 | $4,896 |
| Earnings per share | $0.35 | $0.08 | $1.41 | $1.15 |
- Q3 net interest income rose 14.3%; nine-month net interest income rose 18.7%. Management attributed growth chiefly to higher average earning assets, loan growth and the Milton acquisition.
- Net interest margin improved to 4.52% for Q3 from 4.29%, and to 4.50% for the nine months from 4.34%. The efficiency ratio improved to 72.3% for Q3 and 72.5% year to date, versus 81.5% and 73.2%, respectively.
- Reported annualized return on assets was 0.87%, versus 0.74%, and return on equity was 8.24%, versus 6.85%, for the comparable prior-year period.
- Operating cash flow was $5,926 for the nine months, compared with $9,761 in 2016. Investing activities used $51,299 and financing activities provided $55,609; cash and cash equivalents increased $10,236 to $50,402.
Financial position, funding and credit
- Total assets were $1.020 billion at September 30, up $65.0 million from year-end 2016. Loans grew 5.9% to $777.957 million; deposits grew 7.4% to $849.181 million.
- Shareholders’ equity was $109.962 million, up 5.2% from year-end. The company and bank exceeded regulatory “well capitalized” thresholds; the company’s common equity tier 1 ratio was 14.1% and leverage ratio was 11.3%.
- Other borrowed funds were $36.775 million and subordinated debentures were $8.500 million. Available additional FHLB borrowing capacity was $146.529 million, and Federal Reserve borrowing availability was $52.433 million.
- Cash, available-for-sale securities and held-to-maturity securities due within one year totaled $157.036 million, or 15.4% of assets. The company reported $73.460 million of off-balance-sheet credit commitments and guarantees; contractual amounts are not necessarily future cash requirements.
- The allowance for loan losses was $7.313 million, or 0.94% of loans, versus 1.05% at year-end. Nonperforming loans were 1.20% of loans versus 1.26%; nonperforming assets were 1.13% of assets versus 1.20%.
- Nonaccrual loans were $8.351 million, down from $8.961 million at year-end. Troubled debt restructurings totaled $16.845 million, up 5.0%; 86% were performing to modified terms. Classified commercial loans declined to $17.571 million from $22.602 million, while criticized loans increased to $4.528 million from $2.980 million.
Material changes, outlook and risks
- Profit growth reflected higher net interest and noninterest income and lower provision expense, partly offset by higher overhead. Noninterest expense rose 15.9% year to date, including higher personnel, data-processing and professional costs, as well as fraud expense and costs associated with a larger post-acquisition organization.
- Q3 noninterest income included $399 of income from proceeds related to four bank-owned life insurance policies. ERC/ERD tax-processing revenue declined year to date due to fewer transactions and lower per-item fees under a new provider contract.
- Four fraudulent wire transfers totaling $933 were identified in May 2017. After an earlier $103 recovery, the company reported net fraud expense/exposure of $842 at September 30. On October 6 it received $730 in insurance proceeds, which management said would be recorded in Q4 and increase pretax earnings by $730.
- Management provided no specific earnings or financial guidance. It intends to emphasize core-deposit growth and invest excess funds in higher-yielding assets, particularly loans. Management cautioned that net interest income and margin improvement could face pressure if loan balances do not continue to expand.
- Key risks cited include interest-rate changes, loan defaults and prepayments, funding costs, competition, economic conditions and regulation. Management considered the allowance adequate but noted future adjustments may be needed. The expected-credit-loss accounting standard (CECL) was still under evaluation, and its financial impact had not been determined.
- Interest-rate modeling showed a modest asset-sensitive position: estimated net interest income changes were +0.50% for a +100 basis-point shock and -1.54% for a -100 basis-point shock. Management stated the results were within board policy limits.
Important facts for investors to verify
- Whether loan growth and improved net interest margin persist as acquisition-related comparisons become less significant, and how funding costs respond to rate changes.
- Credit quality trends, including nonaccrual loans, classified commercial credits, TDR performance, charge-offs and the adequacy of the allowance.
- The final Q4 recognition and earnings effect of the $730 insurance recovery, and any remaining costs or exposure from the wire fraud.
- The sustainability of earnings excluding the unusual BOLI proceeds and the reported reduction in former-employee benefit expense.
- Reliance on wholesale deposits and the availability and terms of contingent borrowing sources; management reported $21.688 million of wholesale deposit growth year to date.