Ohio Valley Banc Corp. — Q2 2013 Form 10-Q
Period: Quarter and six months ended June 30, 2013. Unaudited consolidated results include Ohio Valley Banc Corp. and its banking, consumer-finance, and insurance-agency subsidiaries. Dollar figures are in thousands, except per-share data and percentages.
Financial performance and condition
| Metric | Q2 2013 / June 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1,942; diluted/basic EPS $0.48 | Q2 2012: $1,719; $0.43 per share |
| Six-month net income | $5,165; EPS $1.27 | First half 2012: $4,341; EPS $1.08 |
| Net interest income | Q2 $7,841; six months $16,262 | Down 2.6% and 4.1%, respectively, year over year |
| Net interest margin | Q2 4.33%; first half 4.37% | Improved 8 and 4 basis points, respectively, year over year |
| Noninterest income | Q2 $1,965; six months $5,905 | Q2 approximately flat; first half up 8.3% year over year |
| Noninterest expense | Q2 $7,317; six months $15,265 | Up 2.2% and 5.3%, respectively, year over year |
| Total assets | $752,112 | $769,223 at December 31, 2012 |
| Total loans / allowance | $551,445 / $6,468 | $558,288 / $6,905 at year-end |
| Total deposits | $634,557 | $655,064 at year-end |
| Cash and cash equivalents | $39,974 | $45,651 at year-end |
| Shareholders’ equity | $78,141 | $75,820 at year-end |
For the first six months, operating activities provided $7,212 cash and investing activities provided $8,398; financing activities used $21,287. Cash and cash equivalents declined $5,677. The allowance was 1.17% of loans, versus 1.24% at year-end. Q2 return on average assets was reported at 1.28% and return on average equity at 13.45% (the filing compares these with 1.03% and 11.97% at June 2012).
Reported regulatory capital ratios at June 30 were 15.9% Tier 1 risk-based, 17.1% total risk-based, and 10.9% leverage; management said the Bank exceeded well-capitalized minimums. Cash, short-term securities, and available-for-sale securities totaled $129,923, or 17.3% of assets. Additional stated borrowing availability included $172,519 from the FHLB and $40,359 through a Federal Reserve line.
Material changes and drivers
- Net income rose 13.0% in Q2 and 19.0% for the first half. Lower loan-loss provision was the principal driver: the company recorded negative provision expense of $189 in Q2 and $158 for the first half, versus provisions of $524 and $1,840 in the 2012 periods.
- Six-month net charge-offs were $279, compared with $1,657 in 2012. Nonperforming loans were $4,224, or 0.77% of loans, versus $3,985 and 0.71% at year-end 2012. The allowance declined to $6,468; management considered it adequate but cautioned future adjustments may be necessary.
- Loans declined 1.2% from year-end, largely due to residential mortgage and consumer balances; commercial loans were broadly stable. Deposits fell 3.1%, mainly as higher-priced time deposits matured, while management emphasized core deposits.
- Net interest income declined despite lower funding costs, reflecting lower average earning assets and asset yields. Net interest margin improved as funding costs fell more sharply. The efficiency ratio worsened to 73.7% for Q2 from 70.7%, and to 68.1% for the first half from 64.0%.
- First-half noninterest income benefited from $452 of net proceeds recognized as income from settlement of two bank-owned life insurance policies and higher electronic tax-refund processing and card interchange fees. ERC/ERD fees represented 42.5% of first-half noninterest income and are seasonal.
- Other borrowed funds rose to $19,764 from $14,285 at year-end. The company redeemed $5,000 of trust-preferred-related subordinated debentures in March at a 104.24% redemption price, recording a $212 fee; management expects approximately $530 in annual interest savings. Remaining subordinated debentures were $8,500.
- Accumulated other comprehensive income fell to $22 from $1,607, principally reflecting lower available-for-sale securities values as interest rates rose. The decline reduced comprehensive income but was not reported as a realized earnings loss.
Outlook, risks, and contingencies
Management gave no specific earnings guidance. It expects loan growth to remain challenging in 2013 and plans to seek loan and securities reinvestment opportunities for excess cash, while continuing to favor core deposits and sound underwriting. It noted that excess Federal Reserve balances earn 0.25%, and that low loan growth and low rates pressure interest income and margin.
Interest-rate modeling showed estimated net interest income declines under both rising and falling rate shocks: down 0.71% for +100 basis points, 1.76% for +200, 3.02% for +300, and 2.56% for -100. Management described the company as liability-sensitive, while stating modeled results were within Board policy limits.
Key risks include local economic and borrower conditions, commercial real estate and consumer credit performance, loan-loss estimate uncertainty, competition for loans and deposits, interest-rate movements, funding costs, regulatory changes, and litigation or other claims. Off-balance-sheet commitments and letters of credit totaled approximately $67,957, compared with $56,448 at year-end; amounts drawn may be lower, as many commitments expire unused. Management reported no material change in internal control over financial reporting and stated disclosure controls were effective. The filing reported no applicable legal proceedings.
A July 2013 final regulatory capital rule is scheduled to become effective for the Bank on January 1, 2015, with the capital conservation buffer phased in through 2019. Management was evaluating its effect. The filing states interim results are not necessarily indicative of full-year 2013 results.
Important facts for investors to verify
- Whether lower credit costs and negative provisions are sustainable, and how nonperforming loans, criticized/classified loans, TDRs, and collateral-dependent impaired loans evolve.
- Whether the allowance remains adequate given the decline in its coverage ratio and the specific $878 impairment allocation on a commercial and industrial relationship.
- Whether loan and deposit trends stabilize, particularly time-deposit runoff, seasonal tax-related deposits and fees, and commercial real estate exposure.
- Whether margin improvement can persist despite lower earning assets, interest-rate sensitivity, and the company’s ability to redeploy low-yielding cash.
- The recurring earnings contribution of BOLI settlement proceeds and seasonal ERC/ERD fees, and the realized benefit from subordinated-debt redemption.
- How rising rates affect securities values, accumulated other comprehensive income, regulatory capital, and compliance with the forthcoming capital rules.