Ohio Valley Banc Corp. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results cover Ohio Valley Banc Corp. and subsidiaries; amounts below are in millions unless noted. The company provides banking and consumer finance services primarily in southeastern Ohio and western West Virginia.
Financial performance and position
- Q2 earnings: Net income was $1.706 million, up 21.0% from $1.410 million a year earlier; diluted earnings per share were $0.41 versus $0.34.
- First-half earnings: Net income was $4.538 million, down 9.9% from $5.034 million; earnings per share were $1.10 versus $1.22.
- Revenue and net interest: Q2 interest and dividend income was $8.913 million and noninterest income was $1.861 million. Net interest income was $8.206 million, up 0.7% year over year. For the first half, interest and dividend income was $18.683 million, noninterest income was $5.096 million, and net interest income was $17.306 million, up 1.3%.
- Margins and efficiency: Net interest margin was 4.22% for Q2 and 4.36% for the first half, compared with 4.24% and 4.35%, respectively, in 2015. The efficiency ratio worsened to 76.0% for Q2 and 69.3% year to date, from 73.8% and 65.6%.
- Credit provision: Provision for loan losses was $0.141 million in Q2 versus $0.799 million a year earlier, and $0.620 million for the first half versus $0.721 million.
- Balance sheet at June 30: Assets were $826.449 million, up from $796.285 million at year-end 2015. Gross loans were $602.936 million versus $585.752 million; deposits were $678.315 million versus $660.746 million. Shareholders’ equity was $94.796 million versus $90.470 million.
- Credit quality: Allowance for loan losses was $6.934 million, or 1.15% of loans, versus $6.648 million and 1.13% at year-end. Nonperforming loans were 1.14% of loans, down from 1.24%; nonperforming assets were 1.08% of assets. Nonaccrual loans were $6.411 million, compared with $7.236 million at year-end. Impaired loans increased 28.8% to $22.187 million.
- Cash flow and liquidity: First-half operating cash flow was $7.176 million; investing cash flow was negative $18.539 million and financing cash flow was positive $23.300 million. Cash and cash equivalents rose to $57.467 million from $45.530 million. Cash, eligible securities and near-term held-to-maturity securities totaled $152.014 million, or 18.4% of assets.
- Borrowings and capital: Other borrowed funds were $31.411 million, up from $23.946 million at year-end; subordinated debentures were $8.500 million. The Bank exceeded “well capitalized” regulatory thresholds: common equity tier 1 15.2%, tier 1 risk-based 15.2%, total risk-based 16.4%, and leverage 10.5%.
Changes, outlook, risks and unusual items
- Q2 earnings improved primarily because loan-loss provision expense fell; first-half earnings declined as merger costs increased and tax refund processing fees fell. First-half return on average assets was 1.05% versus 1.19%; return on average equity was 9.88% versus 11.53%.
- Tax refund processing fees were $2.024 million for the first half, down $0.326 million (13.9%), despite higher transaction volume, due to lower per-item fees under a new provider contract. Management expected only minimal ERC/ERD income in the second half because the business is seasonal.
- Merger-related expenses were $0.361 million in the first half. Management anticipated these expenses would increase during the remainder of 2016. Salary and benefit costs also rose, contributing to higher overhead.
- Loan growth was concentrated in commercial real estate, particularly in the Athens, Ohio market. Management cited loan demand, competitive conditions, interest rates and underwriting standards as factors affecting future commercial lending.
- Credit indicators were mixed: criticized assets declined, but classified commercial loans rose to $19.861 million from $15.177 million at year-end, and impaired loans increased. Total troubled debt restructurings were $16.778 million, up $0.725 million; 83% were performing to modified terms.
- Liquidity included $114.409 million of additional FHLB borrowing capacity, including a $75 million short-term line, and $42.442 million available under a Federal Reserve borrowing line. Seasonal tax-processing balances were expected to decline, potentially reducing excess liquidity and the company’s asset-sensitive interest-rate position.
- On August 5, 2016, after quarter-end, Ohio Valley completed its merger with Milton Bancorp. The transaction added 523,518 shares outstanding; at acquisition Milton had $113.320 million in loans, $119.219 million in deposits and no borrowings. The combined company reported approximately $950 million in assets and 19 branches. Ohio Valley borrowed $5 million to fund part of the cash consideration.
- Management identified integration, customer or employee losses, disruption, costs exceeding expectations and delayed or unrealized merger benefits as risks. It also cited uncertainty following the United Kingdom’s vote to leave the EU, interest-rate movements, credit losses, funding costs, competition and regulatory changes. No formal earnings guidance was provided.
- Management stated the allowance reflected probable incurred losses but warned that borrower circumstances or economic deterioration could require future adjustments. The filing reported no applicable legal proceedings and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Milton merger integrates as planned, what total integration costs prove to be, and how the acquisition affects earnings, capital and share count.
- Whether growth in commercial real estate and construction lending is accompanied by stable delinquencies, classified assets, impaired loans and reserve adequacy.
- Whether tax refund processing revenue and seasonal deposits decline as expected, and how management redeploys excess liquidity into earning assets.
- Whether net interest margin and the efficiency ratio improve as funding costs, loan growth, merger expenses and lower ERC/ERD fees evolve.
- Whether TDR performance and the increased level of classified commercial loans indicate further credit deterioration.