Ohio Valley Banc Corp. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. The unaudited consolidated company operates banking and consumer-finance businesses, primarily in southeastern Ohio and western West Virginia. Figures are in thousands of dollars except per-share data and ratios.
Financial results and key metrics
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $9,100; up 1.9% | $8,930 in Q1 2015 |
| Provision for loan losses | $479 expense | ($78) in Q1 2015, a provision credit |
| Noninterest income | $3,235; down 7.3% | $3,489 in Q1 2015 |
| Noninterest expense | $7,969; up 7.3% | $7,427 in Q1 2015 |
| Income before taxes | $3,887 | $5,070 in Q1 2015 |
| Net income / diluted EPS | $2,832 / $0.69 | $3,624 / $0.88 in Q1 2015 |
| Net interest margin / efficiency ratio | 4.50% / 63.8% | 4.45% / 59.0% in Q1 2015 |
| Return on average assets / equity | 1.29% / 12.50% | 1.67% / 16.94% in Q1 2015 |
| Total assets | $883,517 | $796,285 at December 31, 2015 |
| Gross loans / allowance | $585,845 / $6,946; allowance 1.19% of loans | $585,752 / $6,648; 1.13% at year-end |
| Deposits | $741,005 | $660,746 at year-end |
| Borrowings | $28,133 other borrowed funds; $8,500 subordinated debentures | $23,946 and $8,500, respectively, at year-end |
| Operating cash flow | $5,344 provided | $12,738 provided in Q1 2015 |
Net income fell $792, or 21.9%, year over year. The filing attributes the decline primarily to higher loan-loss provision expense and merger costs, together with lower tax-refund processing fees. The report also states that EPS declined by $0.19 but gives a percentage decline of 78.4%; that percentage does not reconcile with the reported EPS figures of $0.88 and $0.69.
Financial position, liquidity and credit quality
- Cash and cash equivalents rose to $139,304 from $45,530 at year-end, mainly because seasonal tax-refund processing and municipal deposits increased funds held at the Federal Reserve. Management expected these seasonal balances to decline during the rest of 2016.
- Deposits increased $80,259, including $64,143 in noninterest-bearing deposits. The company said business checking balances rose substantially with tax-refund activity and municipal deposits; time deposits declined $4,323.
- Available liquidity included $227,544 in cash, eligible short-maturity held-to-maturity securities and available-for-sale securities, equal to 25.8% of assets. Additional stated borrowing availability was $109,346 at the FHLB, including a $75,000 short-term line, and $41,499 under a Federal Reserve line.
- Net charge-offs were $181, compared with net recoveries of $64 in Q1 2015. Nonaccrual loans were $7,142, versus $7,236 at year-end; loans 90 days past due and still accruing were $141, versus $39. Nonperforming loans were 1.24% of loans, unchanged from year-end; nonperforming assets were 1.07% of assets, down 14 basis points.
- Total troubled debt restructurings were $16,664, up $611 from year-end; 82% were performing to modified terms. Classified assets were reported as $26,402, up from $22,566 at year-end. Management said the allowance was adequate but cautioned that future adjustments may be needed.
- The Bank’s March 31 regulatory ratios were 15.5% common equity tier 1, 15.5% tier 1 risk-based capital, 16.7% total risk-based capital and 10.0% leverage. The filing says the Bank exceeded well-capitalized requirements.
Material developments, outlook and risks
- Milton Bancorp merger: Ohio Valley signed a merger agreement on January 7, 2016, with an amendment effective April 20. The proposed transaction would add Milton’s five branches, $141 million in assets, $110 million in loans and $126 million in deposits. The filing valued consideration at $20 million at signing and expected completion in Q3 2016, subject to regulatory and shareholder approvals and other conditions. Ohio Valley said merger-related expense was $227 in Q1 and expected such costs to increase during the rest of 2016. It intended to finance some or all of the cash consideration with borrowings. The merger could fail to close; the filing identifies August 6, 2016 as a date after which either party may have a termination right if the merger has not closed.
- Tax-refund processing: ERC/ERD fees declined $341 to $1,754 despite increased transaction volume, reflecting lower per-item fees under a new provider contract. The activity is seasonal, with most related income expected in the first half of 2016 and minimal income in the second half.
- Management outlook: Management planned to redeploy seasonal excess cash into higher-yielding assets, particularly loans, as opportunities arose, while continuing to emphasize core deposits and commercial lending. It noted that margin improvement could be pressured unless loan balances grew and remained a larger share of earning assets.
- Interest-rate risk: The company described its position as asset-sensitive at quarter-end, partly because of seasonal Federal Reserve balances, and expected that sensitivity to lessen as those balances ran off. Its modeled 12-month net interest income changes were +2.53% for a 100-basis-point rise and -3.49% for a 100-basis-point decline; results were within board policy limits.
- Other risks and contingencies: Forward-looking results are subject to economic conditions, competition, interest rates, loan defaults and prepayments, funding costs, litigation and regulatory changes. Off-balance-sheet credit commitments and guarantees totaled approximately $64,405; the filing notes that not all are expected to be drawn. No legal proceedings were reported as applicable. Management identified the allowance for loan losses as a critical accounting estimate.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Milton Bancorp merger received all required approvals, closed as expected, and required the anticipated cash financing and integration costs.
- Whether seasonal tax-processing and municipal deposits ran off as expected, and how that affected liquidity, cash balances and interest income.
- Whether lower ERC/ERD fees, higher provision expense and merger-related costs continued to weigh on earnings and the efficiency ratio.
- Trends in classified assets, nonaccrual and past-due loans, restructurings, charge-offs and the adequacy of the loan-loss allowance.
- Reconcile the filing’s stated 78.4% EPS decline with the reported $0.88 and $0.69 per-share results; the percentage does not appear consistent with those values.