Ohio Valley Banc Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; amounts are in thousands of dollars except per-share data and percentages. The company provides banking and consumer finance services, primarily in southeastern Ohio and western West Virginia.
Financial performance
- Third quarter: Net interest income was $8,985, up 8.4% year over year; net income was $358, down 78.2%; diluted and basic earnings per share were $0.08 versus $0.40. The quarter included a $1,708 loan-loss provision, compared with a $11 provision benefit in Q3 2015, and $416 of merger expense.
- First nine months: Net interest income was $26,291, up 3.7%; net income was $4,896, down 26.7%; earnings per share were $1.15 versus $1.62. Provision expense was $2,328 versus $710; merger expense was $777.
- Revenue and expenses: Noninterest income was $1,693 in Q3, up 6.9%, but $6,789 year to date, down 2.9%. Noninterest expense rose 14.2% in Q3 to $8,828 and 8.2% year to date to $24,570. Lower tax-refund processing fees weighed on year-to-date income; higher personnel and merger costs contributed to expense growth.
- Margins and returns: Net interest margin was 4.29% in Q3 and 4.34% year to date, versus 4.46% and 4.38%, respectively, in 2015. The efficiency ratio worsened to 81.5% for Q3 and 73.2% year to date, from 77.0% and 69.1%. Management reported return on assets of 0.74% and return on equity of 6.85% at September 30, versus 1.06% and 10.10% a year earlier.
- Cash flow: For the first nine months, operating activities provided $9,761; investing activities used $28,342; and financing activities provided $34,936. Cash and cash equivalents rose $16,355 to $61,885.
Financial position and material changes
- Total assets were $970,230 at September 30, up from $796,285 at December 31, 2015. Gross loans grew 23.2% to $721,587; deposits increased 22.0% to $805,783. Growth reflects both the Milton acquisition and organic lending and deposit growth.
- The company completed its Milton Bancorp acquisition on August 5, 2016. Consideration was $18,875, comprising $11,444 in Ohio Valley shares and $7,431 cash. The transaction added $132,296 of assets, including $113,298 of loans, and $119,206 of liabilities, primarily deposits. Milton results were consolidated from August 6; five branches were added. Purchase accounting remained preliminary, with further adjustments expected in Q4.
- Shareholders’ equity was $105,788, up from $90,470 at year-end, reflecting acquisition shares, earnings, and other comprehensive income, partly offset by dividends. The company had $8,500 of subordinated debentures and $35,665 of other borrowed funds, versus $23,946 of other borrowed funds at year-end. A $5,000 bank promissory note helped fund the acquisition.
- Liquidity included $61,885 of cash and cash equivalents. Cash, available-for-sale securities, and held-to-maturity securities due within one year totaled $167,140, or 17.2% of assets. The company reported $115,976 of additional FHLB borrowing capacity, including a $75,000 cash-management line.
Credit quality, outlook, and risks
- The allowance for loan losses was $7,537, or 1.04% of loans, versus $6,648, or 1.13%, at year-end. Management attributed elevated 2016 provisions principally to specific reserves on two impaired commercial real estate relationships; it stated that the allowance was adequate but could require future adjustment.
- Nonperforming loans were 1.31% of loans and nonperforming assets were 1.25% of assets. Nonaccrual loans totaled $9,027; loans 90 days past due and still accruing totaled $443. Troubled debt restructurings totaled $16,922, of which 82% were performing under modified terms. One $226 commercial real estate TDR was placed on nonaccrual and entered foreclosure proceedings.
- Management expected remaining merger expenses to be immaterial and to decrease in Q4; recurring costs such as salaries, occupancy, furniture, and equipment were expected to rise following the acquisition. No formal earnings or revenue guidance was provided. Management identified continued pressure on net interest income and margin if loan growth does not increase or remain a larger share of earning assets.
- Interest-rate sensitivity modeling showed estimated 12-month net interest income changes of +0.19% for a 100-basis-point increase and −2.16% for a 100-basis-point decrease. Management said the exposure was within policy limits. Key risks include credit losses, interest-rate and funding-cost changes, competition, economic conditions, regulatory changes, and integration and valuation judgments related to the acquisition.
- The Bank’s September 30 capital ratios exceeded stated regulatory minimums: common equity tier 1 14.4%, tier 1 14.4%, total risk-based capital 15.4%, and leverage 11.0%. Management expected company assets to exceed $1 billion in 2017 and believed capital requirements would be met at the holding-company level then.
Important facts for investors to verify
- Whether subsequent credit reviews, collateral valuations, or charge-offs require additional loan-loss provisions, particularly for the two impaired commercial real estate relationships and the TDR portfolio.
- Final Milton purchase-accounting adjustments, including loan and deposit fair values and any core-deposit intangible, and the realized costs and benefits of integration.
- Whether organic loan growth and funding mix support net interest margin, given lower reported margins and management’s stated deployment plans for excess cash.
- Whether tax-refund processing revenue, recurring post-merger expenses, and the efficiency ratio develop as management anticipated.
- Progress toward the $1 billion asset threshold and the related holding-company capital and regulatory implications. The filing reports off-balance-sheet credit commitments and standby letters of credit totaling approximately $67,556.