Ohio Valley Banc Corp. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results include the bank, consumer finance, and insurance agency subsidiaries. Dollar amounts are in thousands except per-share data. The company serves southeastern Ohio and western West Virginia.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Interest and dividend income | $8,748 | $9,405 | $26,992 | $29,727 |
| Net interest income | $7,930 | $7,867 | $24,192 | $24,832 |
| Provision for loan losses | $833 | $1,183 | $675 | $3,023 |
| Noninterest income | $1,574 | $1,674 | $7,479 | $7,127 |
| Noninterest expense | $7,320 | $6,957 | $22,585 | $21,451 |
| Net income | $1,061 | $1,107 | $6,226 | $5,448 |
| Earnings per share | $0.26 | $0.27 | $1.53 | $1.35 |
- Management reported net interest margin of 4.57% for Q3, up from 4.23%; for the first nine months it was 4.43%, up 13 basis points year over year.
- Reported return on assets was 1.05% versus 0.87%, and return on equity was 10.72% versus 9.89%, respectively, at September 30, 2013 and September 30, 2012.
- The efficiency ratio worsened to 76.1% for Q3 from 72.0%, and to 70.5% year to date from 66.4%.
Financial position, cash flow and capital
- At September 30, 2013, total assets were $747,506, down 2.8% from December 31, 2012. Total loans were $556,213, down 0.4%; net loans were $548,947.
- Cash and cash equivalents were $32,897, down from $45,651 at year-end 2012. Deposits declined 4.0% to $628,833. Other borrowed funds rose to $18,986 from $14,285; subordinated debentures fell to $8,500 from $13,500 after a $5,000 redemption.
- For the first nine months, operating cash flow was $10,706; investing activities provided $5,182 and financing activities used $28,642. Cash and cash equivalents declined $12,754.
- Shareholders’ equity increased 4.3% to $79,046. Company-reported Tier 1 risk-based, total risk-based and leverage ratios were 15.6%, 16.8% and 11.5%, respectively. The filing states the Bank exceeded the applicable “well capitalized” minimums.
- Liquidity included $121,747 of cash and qualifying securities, equal to 16.3% of assets. Additional FHLB borrowing capacity was $164,491, including a $75,000 short-term cash-management line; Federal Reserve line availability was $40,116.
Material changes and management commentary
- Q3 net income fell 4.2% year over year, while nine-month net income rose 14.3%. Lower loan-loss provision was the largest earnings benefit: down $350 in Q3 and $2,348 year to date versus 2012.
- Net charge-offs were $35 in Q3 and $314 year to date, versus $525 and $2,182 in the corresponding 2012 periods. Nonperforming loans were 0.84% of loans, below 1.27% a year earlier but above 0.71% at year-end 2012.
- Net interest income rose slightly in Q3 but declined 2.6% year to date. Management attributed the year-to-date decline chiefly to lower average earning assets and loan balances. Lower funding costs helped lift the margin.
- Year-to-date noninterest income growth included $452 of net proceeds recognized from two bank-owned life insurance policy settlements, higher tax-refund processing fees and higher card interchange income. Q3 noninterest income declined 6.0%, mainly from lower mortgage banking income and weaker gains on foreclosed property.
- Noninterest expense increased 5.2% in Q3 and 5.3% year to date, including higher compensation, customer incentives and foreclosed-asset costs. A $212 fee accompanied the March redemption of $5,000 in trust-preferred securities; management expected annual interest savings of $530.
- Loan balances were broadly flat, with residential real estate loans down and commercial and consumer categories partly offsetting the decline. Total deposits fell as time deposits matured; management described a strategic shift toward core deposits.
- Total troubled debt restructurings (TDRs) fell to $11,214 from $16,954 at year-end 2012. 89% were performing to modified terms, versus 93% at year-end. One $4,222 commercial real estate loan was removed from TDR status after re-modification at market terms.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management said it would seek to redeploy low-yielding Federal Reserve balances into loans and securities as opportunities arise, while prioritizing core deposits and loan quality. It expected minimal ERC/ERD fee income during the remainder of 2013.
- Management cited subdued local loan demand, competition for deposits and loans, low interest rates, and the risk that further rate declines could pressure net interest income because many deposit rates were near floors. Its interest-rate model showed estimated net interest income declines of 0.76% for a +100-basis-point shock and 2.71% for a -100-basis-point shock.
- Credit risks include local economic conditions and commercial real estate, construction, and consumer lending exposures. Nonperforming loans rose from year-end, and a commercial and industrial relationship required additional specific reserves. Management considered the allowance adequate but noted future adjustments could be necessary.
- Off-balance-sheet commitments to extend credit, standby letters of credit and guarantees totaled approximately $68,781, versus $56,448 at year-end. These amounts are contractual exposures, not expected cash requirements, and many commitments may expire unused.
- New regulatory capital rules were to take effect for the Bank in 2015, with the capital conservation buffer phased in from 2016 through 2019; management was evaluating the impact. The filing reported no material change to internal controls, and no applicable legal proceedings.
Important facts for investors to verify
- Whether lower credit costs and improved asset-quality trends persist, given the increase in nonperforming loans since year-end and higher specific reserves on an impaired commercial and industrial relationship.
- Whether loan demand and earning-asset growth recover enough to offset pressure on net interest income and the weaker efficiency ratio.
- How core-deposit growth, time-deposit runoff and use of wholesale borrowings affect funding costs and liquidity.
- How much reported year-to-date income growth depended on BOLI settlement proceeds and seasonal tax-refund processing fees.
- The eventual effect of revised regulatory capital requirements and securities valuation changes on capital ratios and distributions.