UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 0-20914
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OHIO VALLEY BANC CORP.
------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1359191
-------- ------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
420 Third Avenue, Gallipolis, Ohio 45631
------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 446-2631
----------------
(Registrant's telephone number, including area code)
Not Applicable
----------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|_| Yes |X| No
The number of common shares of the registrant outstanding as of November 7, 2008
was 3,982,009.
OHIO VALLEY BANC CORP.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements (Unaudited)....................................3
Consolidated Balance Sheets.........................................3
Consolidated Statements of Income...................................4
Condensed Consolidated Statements of Changes in
Shareholders' Equity................................................5
Condensed Consolidated Statements of Cash Flows.....................6
Notes to the Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................13
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........26
Item 4. Controls and Procedures............................................27
PART II - OTHER INFORMATION...................................................27
Item 1. Legal Proceedings.................................................27
Item 1A. Risk Factors......................................................27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......29
Item 3. Defaults Upon Senior Securities...................................29
Item 4. Submission of Matters to a Vote of Security Holders...............29
Item 5. Other Information.................................................29
Item 6. Exhibits and Reports on Form 8-K..................................29
SIGNATURES....................................................................30
EXHIBIT INDEX.................................................................31
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share data)
--------------------------------------------------------------------------------
September 30, December 31,
2008 2007
----------------- -----------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 20,098 $ 15,584
Federal funds sold 614 1,310
----------------- -----------------
Total cash and cash equivalents 20,712 16,894
Interest-bearing deposits in other financial institutions 8,026 633
Securities available-for-sale 70,233 78,063
Securities held-to-maturity
(estimated fair value: 2008 - $17,495; 2007 - $15,764) 17,608 15,981
Federal Home Loan Bank stock 6,280 6,036
Total loans 619,993 637,103
Less: Allowance for loan losses (6,797) (6,737)
----------------- -----------------
Net loans 613,196 630,366
Premises and equipment, net 9,950 9,871
Accrued income receivable 3,326 3,254
Goodwill 1,267 1,267
Bank owned life insurance 17,219 16,339
Other assets 8,748 4,714
----------------- -----------------
Total assets $ 776,565 $ 783,418
================= =================
LIABILITIES
Noninterest-bearing deposits $ 77,226 $ 78,589
Interest-bearing deposits 516,773 510,437
----------------- -----------------
Total deposits 593,999 589,026
Securities sold under agreements to repurchase 34,534 40,390
Other borrowed funds 59,760 67,002
Subordinated debentures 13,500 13,500
Accrued liabilities 12,949 11,989
----------------- -----------------
Total liabilities 714,742 721,907
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000 shares
authorized; 2008 - 4,641,748 shares issued;
2007 - 4,641,747 shares issued) 4,642 4,642
Additional paid-in capital 32,665 32,664
Retained earnings 39,962 37,763
Accumulated other comprehensive income (loss) 267 (115)
Treasury stock, at cost (2008 - 659,739 shares;
2007 - 567,403 shares) (15,713) (13,443)
----------------- -----------------
Total shareholders' equity 61,823 61,511
----------------- -----------------
Total liabilities and shareholders' equity $ 776,565 $ 783,418
================= =================
See notes to consolidated financial statements
3
OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)
--------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
--------------- ---------------- --------------- ---------------
Interest and dividend income:
Loans, including fees $ 11,580 $ 12,731 $ 35,965 $ 37,877
Securities
Taxable 771 766 2,350 2,272
Tax exempt 131 145 407 405
Dividends 84 99 245 292
Other Interest 91 43 277 160
--------------- ---------------- --------------- ---------------
12,657 13,784 39,244 41,006
Interest expense:
Deposits 3,914 5,386 13,070 15,943
Securities sold under agreements to repurchase 109 307 346 787
Other borrowed funds 637 814 2,057 2,164
Subordinated debentures 273 272 817 870
--------------- ---------------- --------------- ---------------
4,933 6,779 16,290 19,764
--------------- ---------------- --------------- ---------------
Net interest income 7,724 7,005 22,954 21,242
Provision for loan losses 693 332 2,310 1,334
--------------- ---------------- --------------- ---------------
Net interest income after provision for loan 7,031 6,673 20,644 19,908
losses
Noninterest income:
Service charges on deposit accounts 833 776 2,323 2,192
Trust fees 59 58 184 172
Income from bank owned life insurance 200 173 576 515
Gain on sale of loans 20 23 110 82
Gain (loss) on sale of other real estate owned 7 ---- (31) (85)
Other 455 526 1,583 1,439
--------------- ---------------- --------------- ---------------
1,574 1,556 4,745 4,315
Noninterest expense:
Salaries and employee benefits 3,609 3,247 10,428 9,648
Occupancy 404 378 1,172 1,099
Furniture and equipment 260 276 752 810
Data processing 176 221 707 626
Other 1,538 1,470 4,495 4,416
--------------- ---------------- --------------- ---------------
5,987 5,592 17,554 16,599
--------------- ---------------- --------------- ---------------
Income before income taxes 2,618 2,637 7,835 7,624
Provision for income taxes 733 804 2,254 2,330
--------------- ---------------- --------------- ---------------
NET INCOME $ 1,885 $ 1,833 $ 5,581 $ 5,294
=============== ================ =============== ===============
Earnings per share $ .47 $ .45 $ 1.38 $ 1.28
=============== ================ =============== ===============
See notes to consolidated financial statements
4
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (UNAUDITED)
(dollars in thousands, except share and per share data)
--------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
------------- ------------- ------------ ------------
Balance at beginning of period $ 61,594 $ 60,544 $ 61,511 $ 60,282
Comprehensive income:
Net income 1,885 1,833 5,581 5,294
Change in unrealized income/loss
on available-for-sale securities ---- 623 580 537
Income tax effect ---- (212) (197) (183)
------------- ------------- ------------ ------------
Total comprehensive income 1,885 2,244 5,964 5,648
Proceeds from issuance of common
stock through dividend reinvestment plan ---- ---- ---- 347
Cash dividends (761) (738) (2,304) (2,203)
Shares acquired for treasury (895) (1,031) (2,269) (3,055)
Cumulative-effect adjustment in adopting EITF No. 06-04 ---- ---- (1,079) ----
------------- ------------- ------------ ------------
Balance at end of period $ 61,823 $ 61,019 $ 61,823 $ 61,019
============= ============= ============ ============
Cash dividends per share $ 0.19 $ 0.18 $ 0.57 $ 0.53
============= ============= ============ ============
Shares from common stock issued
through dividend reinvestment plan ---- 1 1 13,384
============= ============= ============ ============
Shares acquired for treasury 37,500 40,969 92,336 120,978
============= ============= ============ ============
See notes to consolidated financial statements
5
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands)
--------------------------------------------------------------------------------
Nine months ended
September 30,
2008 2007
--------------- ---------------
Net cash provided by operating activities: $ 7,862 $ 10,133
Investing activities:
Proceeds from maturities of securities available-for-sale 18,418 5,236
Purchases of securities available-for-sale (10,060) (4,009)
Proceeds from maturities of securities held-to-maturity 1,427 234
Purchases of securities held-to-maturity (3,060) (2,828)
Change in interest-bearing deposits in other financial institutions (7,393) (112)
Net change in loans 9,956 (8,103)
Proceeds from sale of other real estate owned 552 1,394
Purchases of premises and equipment (759) (861)
Purchases of bank owned life insurance (427) ----
--------------- ---------------
Net cash provided by (used in) investing activities 8,654 (9,049)
Financing activities:
Change in deposits 4,973 2,154
Cash dividends (2,304) (2,203)
Proceeds from issuance of common stock
through dividend reinvestment plan ---- 347
Purchases of treasury stock (2,269) (3,055)
Change in securities sold under agreements to repurchase (5,856) 11,612
Proceeds from Federal Home Loan Bank borrowings 13,000 15,000
Repayment of Federal Home Loan Bank borrowings (16,012) (10,047)
Change in other short-term borrowings (4,230) (7,101)
Proceeds from subordinated debentures ---- 8,500
Repayment of subordinated debentures ---- (8,500)
--------------- ---------------
Net cash provided by (used in) financing activities (12,698) 6,707
--------------- ---------------
Change in cash and cash equivalents 3,818 7,791
Cash and cash equivalents at beginning of period 16,894 20,765
--------------- ---------------
Cash and cash equivalents at end of period $ 20,712 $ 28,556
=============== ===============
Supplemental disclosure:
Cash paid for interest $ 18,527 $ 19,490
Cash paid for income taxes 2,115 373
Non-cash transfers from loans to other real estate owned 4,905 1,632
See notes to consolidated financial statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the accounts of Ohio Valley Banc Corp. ("Ohio Valley") and its
wholly-owned subsidiaries, The Ohio Valley Bank Company (the "Bank"), Loan
Central, Inc. ("Loan Central"), a consumer finance company, and Ohio Valley
Financial Services Agency, LLC ("Ohio Valley Financial Services"), an insurance
agency. Ohio Valley and its subsidiaries are collectively referred to as the
"Company". All material intercompany accounts and transactions have been
eliminated in consolidation.
These interim financial statements are prepared by the Company without audit and
reflect all adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present fairly the consolidated financial position
of the Company at September 30, 2008, and its results of operations and cash
flows for the periods presented. The results of operations for the nine months
ended September 30, 2008 are not necessarily indicative of the operating results
to be anticipated for the full fiscal year ending December 31, 2008. The
accompanying consolidated financial statements do not purport to contain all the
necessary financial disclosures required by accounting principles generally
accepted in the United States of America ("US GAAP") that might otherwise be
necessary in the circumstances. The Annual Report of the Company for the year
ended December 31, 2007 contains consolidated financial statements and related
notes which should be read in conjunction with the accompanying consolidated
financial statements.
The accounting and reporting policies followed by the Company conform to US
GAAP. The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates. The allowance for loan losses is particularly subject to
change.
The majority of the Company's income is derived from commercial and retail
lending activities. Management considers the Company to operate in one segment,
banking.
INCOME TAX: Income tax expense is the sum of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
CASH FLOW: For consolidated financial statement classification and cash flow
reporting purposes, cash and cash equivalents include cash on hand,
noninterest-bearing deposits with banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods. The Company reports
net cash flows for customer loan transactions, deposit transactions, short-term
borrowings and interest-bearing deposits with other financial institutions.
EARNINGS PER SHARE: Earnings per share are computed based on net income divided
by the weighted average number of common shares outstanding during the period.
The weighted average common shares outstanding were 3,998,509 and 4,101,908 for
the three months ended September 30, 2008 and 2007, respectively. Weighted
average common shares outstanding were 4,030,542 and 4,149,040 for the nine
months ended September 30, 2008 and 2007, respectively. Ohio Valley had no
dilutive effect and no potential common shares issuable under stock options or
other agreements for any period presented.
7
LOANS: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on an accrual basis using the interest method and
includes amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when the loan is impaired or payments are past due over 90 days. Payments
received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
ADOPTION OF NEW ACCOUNTING STANDARDS: In September 2006, Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 157, "Fair Value Measurements". SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. The statement also establishes a fair value hierarchy
about the assumptions used to measure fair value and clarifies assumptions about
risk and the effect of a restriction on the sale or use of an asset. The
standard is effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued Staff Position ("FSP") 157-2, "Effective Date of
FASB Statement No. 157". This FSP delays the effective date of SFAS 157 for all
nonfinancial assets and liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years. The Company adopted the provisions of SFAS 157 on January 1, 2008. There
was no material impact on the September 30, 2008 consolidated financial
statements of the Company as a result of the adoption of SFAS 157.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". The standard provides companies
with an option to report selected financial assets and liabilities at fair value
and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The new standard is effective for the
Company on January 1, 2008. The Company has not elected the fair value option
for any financial assets or financial liabilities.
During 2007, the Emerging Issues Task Force ("EITF") of FASB issued EITF Issue
No. 06-04, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements" (EITF Issue No.
06-04). EITF Issue No. 06-04 requires an employer to
8
recognize a liability for future postemployment benefits in accordance with SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". EITF Issue No. 06-04 is effective for fiscal years beginning after
December 15, 2007. At December 31, 2007, the Company owned $16,339 of bank owned
life insurance policies. These life insurance policies are generally subject to
endorsement split-dollar life insurance agreements. An endorsement split-dollar
agreement is an arrangement whereby an employer owns a life insurance policy
that covers the life of an employee and, pursuant to a separate agreement,
endorses a portion of the policy's death benefits to the insured employee's
beneficiary. These arrangements were designed to provide a pre-and
postretirement benefit for senior officers and directors of the Company. As a
result of the adoption of EITF No. 06-04, the Company recognized a cumulative
effect adjustment (decrease) to retained earnings of $1,079, which also
represented additional liability required to be provided under EITF No. 06-04 on
January 1, 2008 related to the agreements. This adjustment amount was different
from the estimate made within the Company's 2007 Form 10-K at December 31, 2007.
RECLASSIFICATIONS: Certain items related to the consolidated financial
statements for 2007 have been reclassified to conform to the presentation for
2008. These reclassifications had no effect on the net results of operations.
NOTE 2 - FAIR VALUE OF FINANCIAL INSTRUMENTS
As discussed in Note 1, SFAS 157 was implemented by the Company effective
January 1, 2008. SFAS 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
Level 2: Significant other observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities, quoted prices in markets that
are not active, and other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant, unobservable inputs that reflect a company's own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
The following is a description of the Company's valuation methodologies used to
measure and disclose the fair values of its financial assets and liabilities on
a recurring or nonrecurring basis:
Securities Available-For-Sale: Securities classified as available-for-sale are
reported at fair value utilizing Level 2 inputs. For these securities, the
Company obtains fair value measurements using pricing models that vary based on
asset class and include available trade, bid and other market information. Fair
value of securities available-for-sale may also be determined by matrix pricing,
which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted prices for the specific
securities, but rather by relying on the securities' relationship to other
benchmark quoted securities.
Impaired Loans: Some impaired loans are reported at the fair value of the
underlying collateral adjusted for selling costs. Collateral values are
estimated using Level 2 inputs based on third party appraisals.
9
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
Fair Value Measurements at September 30, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Securities Available-For-Sale ---- $ 70,233 ----
Assets and Liabilities Measured on a Nonrecurring Basis
Assets and liabilities measured at fair value on a nonrecurring basis are
summarized below:
Fair Value Measurements at September 30, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Impaired Loans ---- $ 1,046 ----
The portion of the impaired loan balance for which a specific allowance for
credit losses was allocated totaled $2,164. The valuation allowance for these
loans was $1,118 at September 30, 2008.
NOTE 3 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
September 30, 2008 December 31, 2007
------------------ ------------------
Residential real estate $ 249,362 $ 250,483
Commercial real estate 191,935 196,523
Commercial and industrial 43,961 55,090
Consumer 127,011 127,832
All other 7,724 7,175
------------------ ------------------
$ 619,993 $ 637,103
================== ==================
At September 30, 2008 and December 31, 2007, loans on nonaccrual status were
approximately $3,441 and $2,734, respectively. Loans past due more than 90 days
and still accruing at September 30, 2008 and December 31, 2007 were $893 and
$927, respectively.
10
NOTE 4 - ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
Following is an analysis of changes in the allowance for loan losses for the
nine-month periods ended September 30:
2008 2007
----------- -------------
Balance - January 1, $ 6,737 $ 9,412
Loans charged off:
Commercial (1) 1,101 3,378
Residential real estate 160 432
Consumer 1,703 1,202
----------- -------------
Total loans charged off 2,964 5,012
Recoveries of loans:
Commercial (1) 94 210
Residential real estate 57 168
Consumer 563 615
----------- -------------
Total recoveries of loans 714 993
----------- -------------
Net loan charge-offs (2,250) (4,019)
Provision charged to operations 2,310 1,334
----------- -------------
Balance - September 30, $ 6,797 $ 6,727
=========== =============
(1) Includes commercial and industrial and commercial real estate loans.
Information regarding impaired loans is as follows:
September 30, December 31,
2008 2007
--------------- -----------------
Balance of impaired loans $ 5,543 $ 6,871
Less portion for which no specific
allowance is allocated 3,379 2,568
--------------- -----------------
Portion of impaired loan balance for which a
specific allowance for credit losses is allocated $ 2,164 $ 4,303
=============== =================
Portion of allowance for loan losses specifically
allocated for the impaired loan balance $ 1,118 $ 1,312
=============== =================
Average investment in impaired loans year-to-date $ 6,492 $ 6,918
=============== =================
Interest recognized on impaired loans was $292 and $204 for the nine-month
periods ended September 30, 2008 and 2007, respectively. Accrual basis income
was not materially different from cash basis income for the periods presented.
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
The Company, through its subsidiaries, grants residential, consumer, and
commercial loans to customers located primarily in the central and southeastern
areas of Ohio as well as the western counties of West Virginia. Approximately
3.74% of total loans were unsecured at September 30, 2008 as compared to 4.39%
at December 31, 2007.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. The contract amounts of these instruments are
not included in the consolidated financial statements. At September 30, 2008,
the contract amounts of
11
these instruments totaled approximately $76,906, compared to $82,125 at December
31, 2007. Since many of these instruments are expected to expire without being
drawn upon, the total contract amounts do not necessarily represent future cash
requirements.
NOTE 6 - OTHER BORROWED FUNDS
Other borrowed funds at September 30, 2008 and December 31, 2007 are comprised
of advances from the Federal Home Loan Bank ("FHLB") of Cincinnati, promissory
notes and Federal Reserve Bank ("FRB") Notes.
FHLB Promissory FRB
Borrowings Notes Notes Totals
-------------------- ----------------- --------------- ----------------
September 30, 2008............ $ 48,166 $ 6,094 $ 5,500 $ 59,760
December 31, 2007............. $ 55,779 $ 5,723 $ 5,500 $ 67,002
Pursuant to collateral agreements with the FHLB, advances are secured by
$226,524 in qualifying mortgage loans and $6,280 in FHLB stock at September 30,
2008. Fixed rate FHLB advances of $48,166 mature through 2033 and have interest
rates ranging from 2.13% to 6.62%. There were no variable rate FHLB borrowings
at September 30, 2008.
At September 30, 2008, the Company had a cash management line of credit enabling
it to borrow up to $60,000 from the FHLB. All cash management advances have an
original maturity of 90 days. The line of credit must be renewed on an annual
basis. There was $60,000 available on this line of credit at September 30, 2008.
Based on the Company's current FHLB stock ownership, total assets and pledgeable
residential first mortgage loans, the Company had the ability to obtain
borrowings from the FHLB up to a maximum of $167,796 at September 30, 2008.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of 3.00% to
5.25% and are due at various dates through a final maturity date of November 12,
2010. A total of $4,021 represented promissory notes payable by Ohio Valley to
related parties.
FRB notes consist of the collection of tax payments from Bank customers under
the Treasury Tax and Loan program. These funds have a variable interest rate and
are callable on demand by the U.S. Treasury. The interest rate for the Company's
FRB notes was 1.30% at September 30, 2008 and 4.00% at December 31, 2007.
Various investment securities from the Bank used to collateralize the FRB notes
totaled $5,820 at September 30, 2008 and $5,945 at December 31, 2007.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $56,250 at September 30,
2008 and $34,950 at December 31, 2007.
Scheduled principal payments over the next five years:
FHLB Promissory FRB
Borrowings Notes Notes Totals
------------------- ----------------- --------------- -----------------
Year Ended 2008 $ 2 $ 2,926 $ 5,500 $ 8,428
Year Ended 2009 16,005 2,168 ---- 18,173
Year Ended 2010 26,005 1,000 ---- 27,005
Year Ended 2011 6,006 ---- ---- 6,006
Year Ended 2012 6 ---- ---- 6
Thereafter 142 ---- ---- 142
------------------- ----------------- --------------- -----------------
$ 48,166 $ 6,094 $ 5,500 $ 59,760
=================== ================= =============== =================
12
NOTE 7 - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of
adjustable-rate trust preferred securities as part of a pooled offering of such
securities. The rate on these trust preferred securities will be fixed at 6.58%
for five years, and then convert to a floating-rate term on March 15, 2012,
based on a rate equal to the 3-month LIBOR plus 1.68%. There were no debt
issuance costs incurred with these trust preferred securities. The Company
issued subordinated debentures to the trust in exchange for the proceeds of the
offering. The subordinated debentures must be redeemed no later than June 15,
2037. On March 26, 2007, the proceeds from these new trust preferred securities
were used to pay off $8,500 in higher cost trust preferred security debt, with a
floating rate of 8.97%. This payoff of $8,500 in trust preferred securities was
the result of an early call feature that allowed the Company to redeem the
entire portion of these subordinated debentures at par value. For additional
discussion, please refer to the caption titled "Subordinated Debentures and
Trust Preferred Securities" within Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations of this Form 10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(dollars in thousands, except share and per share data)
Forward Looking Statements
Except for the historical statements and discussions contained herein,
statements contained in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934 and as defined in the Private Securities
Litigation Reform Act of 1995. Such statements are often, but not always,
identified by the use of such words as "believes," "anticipates," "expects," and
similar expressions. Such statements involve various important assumptions,
risks, uncertainties, and other factors, many of which are beyond our control,
which could cause actual results to differ materially from those expressed in
such forward looking statements. These factors include, but are not limited to,
the risk factors discussed in Part I, Item 1A of Ohio Valley's Annual Report on
Form 10-K for the fiscal year ended December 31, 2007 and Ohio Valley's other
securities filings. Readers are cautioned not to place undue reliance on such
forward looking statements, which speak only as of the date hereof. The Company
undertakes no obligation and disclaims any intention to republish revised or
updated forward looking statements as a result of unanticipated future events.
Financial Overview
The Company is primarily engaged in commercial and retail banking, offering a
blend of commercial, consumer and agricultural banking services within central
and southeastern Ohio as well as western West Virginia. The banking services
offered by the Bank include the acceptance of deposits in checking, savings,
time and money market accounts; the making and servicing of personal,
commercial, floor plan and student loans; and the making of construction and
real estate loans. The Bank also offers individual retirement accounts, safe
deposit boxes, wire transfers and other standard banking products and services.
As part of its lending function, the Bank also offers credit card services. Loan
Central engages in consumer finance, offering smaller balance personal and
mortgage loans to individuals with higher credit risk history. Loan Central's
line of business also includes seasonal tax refund loan services during the
January through April periods. Ohio Valley Financial Services sells life
insurance.
For the three months ended September 30, 2008, net income increased by $52, or
2.8%, compared to the same quarterly period in 2007, to finish at $1,885.
Earnings per share for the third quarter of 2008 increased $.02, or 4.4%,
compared to the same quarterly period in 2007, to finish at $.47 per share. For
the nine months ended September 30, 2008, net income increased by $287, or 5.4%,
compared to the same period in 2007, to finish at $5,581. Earnings per share for
the first nine months of 2008 finished at
13
$1.38, up $.10, or 7.8%, over the same period in 2007. Earnings per share growth
for both the quarterly and year-to-date periods ending September 30, 2008
continues to exceed the nominal dollar net income growth pace due to the
Company's stock repurchase program, with increases in treasury stock repurchases
lowering the weighted average number of common shares outstanding. The
annualized net income to average asset ratio, or return on assets (ROA), and net
income to average equity ratio, or return on equity (ROE), both increased to
..95% and 12.20% during the first nine months of 2008, as compared to .92% and
11.72%, respectively, for the same period in 2007. The Company's growth in
earnings during the first nine months of 2008 was accomplished primarily by: 1)
net interest margin expansion as a result of the lower short-term interest rate
environment initiated by the Federal Reserve Bank, which led to lower interest
expense and an 8.1% year-to-date improvement in net interest income; and 2)
noninterest income improvement of 10.0% over 2007's first nine months due to the
increased transaction volume related to the Company's service charges on deposit
accounts and seaonal tax clearing services performed in the first quarter of
2008.
The consolidated total assets of the Company decreased $6,853, or 0.9%, during
the first nine months of 2008 as compared to year-end 2007, to finish at
$776,565. This drop in assets was led by a decrease in the Company's loan
balances, which decreased $17,110 from year-end 2007, and lower investment
securities, which decreased $6,203 from year-end 2007. Loan growth continues to
be challenged by the various economic trends that have had a negative impact on
consumer spending, including the troubled housing crisis as well as rising
energy and food costs. A lower consumer demand for loans has caused decreases in
the Company's entire loan portfolio from year-end 2007, which include
commercial, consumer and real estate loan balances. Maturity runoff of U.S.
Government sponsored entity securities led the decrease in the Company's
investment securities. The loan and investment security decreases contributed to
an excess liquidity position, causing increases of $7,393 in interest-yielding
deposits in other financial institutions and $3,818 in cash and cash
equivalents, from year-end 2007. While the demand for loans decreased during the
first nine months of 2008, the Company was able to benefit from growth in its
total deposit liabilities of $4,973 from year-end 2007, to use as funding
sources for potential earning asset growth during the remaining quarter of 2008.
Interest-bearing deposit liability growth was led by surges in the Company's
public fund NOW accounts, up $36,555 from year-end 2007, and Market Watch
product, up $25,832 from year-end 2007, partially offset by a decrease in time
deposits of $56,527 from year-end 2007. Furthermore, the Company's
noninterest-bearing demand deposits decreased $1,363 from year-end 2007. The
total deposits retained from year-end 2007 were partially used to fund the
runoff in the Company's securities sold under agreements to repurchase
("repurchase agreements") and repayments of other borrowed funds, which
decreased $5,856 and $7,242, respectively, from year-end 2007.
Comparison of
Financial Condition
at September 30, 2008 and December 31, 2007
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at September 30, 2008 compared to December 31, 2007.
The purpose of this discussion is to provide the reader a more thorough
understanding of the consolidated financial statements. This discussion should
be read in conjunction with the interim consolidated financial statements and
the footnotes included in this Form 10-Q.
Cash and Cash Equivalents
The Company's cash and cash equivalents consist of cash and balances due from
banks and federal funds sold. The amounts of cash and cash equivalents fluctuate
on a daily basis due to customer activity and liquidity needs. At September 30,
2008, cash and cash equivalents had increased $3,818, or 22.6%, to $20,712 as
compared to $16,894 at December 31, 2007. The increased liquidity position of
the Company at September 30, 2008 was the result of lower loan demand and
investment security maturities combined
14
with an increase in interest-bearing deposits. As liquidity levels vary
continuously based on consumer activities, amounts of cash and cash equivalents
can vary widely at any given point in time. Management believes that the current
balance of cash and cash equivalents remains at a level that will meet cash
obligations and provide adequate liquidity. Further information regarding the
Company's liquidity can be found under the caption "Liquidity" in this
Management's Discussion and Analysis.
Interest-Bearing Deposits in Other Financial Institutions
At September 30, 2008, the Company had a total of $8,026 invested as
interest-bearing deposits in other financial institutions, an increase from only
$633 at December 31, 2007. This increase is largely the result of the Company's
excess liquidity position due to decreasing loan demand and excess deposit
liabilities. Historically, the Company has typically invested its excess funds
with various correspondent banks in the form of federal funds sold, a common
strategy performed by most banks. Beginning in the second quarter of 2008, the
Company utilized a new relationship with a deposit placement service provider
known as CDARS, or the Certificate of Deposit Account Registry Service, to
invest its excess funds. CDARS provides financial institutions with the means to
invest its own funds through One-Way Sell transactions for various maturity
terms. The rates offered for the terms selected by the Company, between 2.4 and
2.8% at a weighted average maturity of 7 weeks compare favorably to federal
funds rate offerings that were 2.0% at September 30, 2008, and have since been
lowered to 1.0%. The Company views this investment option as a margin-enhancing
alternative when investing its excess funds and will continue to utilize this
method when the need arises. Furthermore, CDARS balances are 100% secured by
Federal Deposit Insurance Corporation ("FDIC") insurance as compared to federal
funds sold balances which were considered unsecured as of this report's
measurement date of September 30, 2008. Since then, as part of the FDIC's
"Liquidity Guarantee Program" announced on October 14, 2008, federal funds sold
balances (or inter-banking funding) will now be 100% guaranteed by the FDIC. The
ability of the Company to issue these guaranteed federal funds sold balances
will expire on June 30, 2009.
Securities
During the first nine months of 2008, investment securities decreased $6,203 to
finish at $87,841, a decrease of 6.6% as compared to year-end 2007. The
Company's investment securities portfolio consists of mortgage-backed
securities, U.S. Government sponsored entity ("GSE") securities and obligations
of states and political subdivisions. GSE securities decreased $9,976, or 25.3%,
as a result of several large maturities during both the first and second
quarters of 2008. In addition to attractive yield opportunities and a desire to
increase diversification within the Company's securities portfolio, GSE
securities have also been used to satisfy pledging requirements for repurchase
agreements. At September 30, 2008, the Company's repurchase agreements decreased
14.5%, reducing the need to secure these balances and impacting the runoff in
GSE securities. This decrease was partially offset by increases in both
mortgage-backed securities and obligations of states and political subdivisions,
which were up $2,141, or 5.5%, and $1,632, or 10.2%, respectively, from year-end
2007. The Company continues to benefit from the advantages of mortgage-backed
securities, which make up the largest portion of the Company's investment
portfolio, totaling $40,805, or 46.5% of total investments at September 30,
2008. The primary advantage of mortgage-backed securities has been the increased
cash flows due to the more rapid (monthly) repayment of principal as compared to
other types of investment securities, which deliver proceeds upon maturity or
call date. Principal repayments from mortgage-backed securities totaled $6,257
from January 1, 2008 through September 30, 2008. For the remainder of 2008, the
Company's focus will be to generate interest revenue primarily through loan
growth, as loans generate the highest yields of total earning assets.
Loans
The loan portfolio represents the Company's largest asset category and is its
most significant source of interest income. During the first nine months of
2008, total loans were down $17,110, or 2.7%, from
15
year-end 2007. Lower loan balances were mostly influenced by total commercial
loans, which were down $15,717, or 6.2%, from year-end 2007. The Company's
commercial loans include both commercial real estate and commercial and
industrial loans. While commercial loan balances are down, management continues
to place emphasis on its commercial lending, which generally yields a higher
return on investment as compared to other types of loans. The Company's
commercial and industrial loan portfolio, down $11,129, or 20.2%, from year-end
2007, consists of loans to corporate borrowers primarily in small to mid-sized
industrial and commercial companies that include service, retail and wholesale
merchants. Collateral securing these loans includes equipment, inventory, and
stock. Commercial real estate, the Company's largest segment of commercial
loans, decreased $4,588, or 2.3%, largely due to lower loan demand as well as
commercial loan paydowns and payoffs. This segment of loans is mostly secured by
commercial real estate and rental property. Commercial real estate consists of
loan participations with other banks outside the Company's primary market area.
Although the Company is not actively marketing participation loans outside its
primary market area, it is taking advantage of the relationships it has with
certain lenders in those areas where the Company believes it can profitably
participate with an acceptable level of risk. The commercial loan portfolio,
including participation loans, consists primarily of rental property loans
(19.8% of portfolio), medical industry loans (14.4% of portfolio), land
development loans (10.8% of portfolio), and hotel and motel loans (10.5% of
portfolio). During the first nine months of 2008, the primary market areas for
the Company's commercial loan originations, excluding loan participations, were
in the areas of Gallia, Jackson and Franklin counties of Ohio, which accounted
for 62.5% of total originations. The growing West Virginia markets also
accounted for 27.2% of total originations for the same time period. While
management believes lending opportunities exist in the Company's markets, future
commercial lending activities will depend upon economic and related conditions,
such as general demand for loans in the Company's primary markets, interest
rates offered by the Company and normal underwriting considerations.
Additionally, the potential for larger than normal commercial loan payoffs may
limit loan growth during the remainder of 2008.
Generating residential real estate loans remains a key focus of the Company's
lending efforts. Residential real estate loan balances comprise the largest
portion of the Company's loan portfolio and consist primarily of one- to
four-family residential mortgages and carry many of the same customer and
industry risks as the commercial loan portfolio. During the first nine months of
2008, total residential real estate loan balances decreased $1,121, or 0.4%,
from year-end 2007 to total $249,362. The decrease was largely driven by a
reduction in the Company's one-year adjustable-rate mortgage balances of $8,007,
or 19.0%, from year-end 2007. During 2006 and 2007, consumer demand for
fixed-rate real estate loans continued to increase due to the continuation of
lower, more affordable, mortgage rates. As long-term interest rates continue to
remain relatively stable in 2008, consumers continue to pay off and refinance
their variable rate mortgages, although the volume of refinancings continues to
stabilize as compared to 2007 and 2006. This has resulted in lower one-year
adjustable-rate mortgage balances at the end of 2008's nine-month period as
compared to year-end 2007. Partially offsetting the decreases in variable rate
real estate loan balances was an increase to the Company's five-year adjustable
rate (2-step) product, with balances being up $6,219, or 95.2%, from year-end
2007. This product allows the consumer to secure a fixed initial interest rate
for the first five years, with the loan adjusting to a variable interest rate
for years 6-30. Real estate loan growth was also experienced in the Company's
longer-termed, fixed-rate real estate loans, which were up $2,202, or 1.2%, from
year-end 2007. Terms of these fixed-rate loans include 15-, 20- and 30-year
periods. To help further satisfy demand for longer-termed, fixed-rate real
estate loans, the Company continues to originate and sell some fixed-rate
mortgages to the secondary market, and has sold $10,480 in loans during the
first nine months of 2008, which were up $7,158, or 215.4%, over the volume sold
during the first nine months of 2007. The remaining real estate loan portfolio
balances decreased $1,335 primarily from the Company's residential construction
loans.
Also contributing to the loan portfolio decrease were consumer loans, which were
down $821, or 0.6%, from year-end 2007. The Company's consumer loans are secured
by automobiles, mobile homes, recreational vehicles and other personal property.
Personal loans and unsecured credit card receivables
16
are also included as consumer loans. The decrease in consumer volume was mostly
attributable to the automobile indirect lending segment, which decreased $2,083,
or 7.2%, from year-end 2007. While the automobile lending segment continues to
represent the largest portion of the Company's consumer loan portfolio,
management's emphasis on profitable loan growth with higher returns has
contributed most to the reduction in loan volume within this area. Indirect
automobile loans bear additional costs from dealers that partially offset
interest revenue and lower the rate of return. Furthermore, economic factors
that have weakened the economy and consumer spending have caused a decline in
automobile loan volume. As short-term rates have aggressively moved down since
September 2007, continued competition with local banks and alternative methods
of financing, such as captive finance companies offering loans at below-market
interest rates, have continued to challenge automobile loan growth during the
first nine months of 2008. Partially offsetting the decreases in auto loans was
an increase to the Company's capital line loan balances, which increased $1,432,
or 7.4%, from year-end 2007.
The Company recognized an increase of $549 in other loans from year-end 2007.
Other loans consist primarily of state and municipal loans and overdrafts. This
increase was largely due to an increase in overdrafts of $282.
The Company continues to monitor the pace of its loan volume, as it has
experienced a 2.2% drop-off within its total loan portfolio during the first
nine months of 2008. The well-documented housing market crisis and rising energy
costs have impacted consumer spending and have led to lower consumer demand for
loans. Furthermore, the Company continues to view the consumer loan segment as a
decreasing portfolio, due to higher loan costs, increased competition in
automobile loans and a lower return on investment as compared to the other loan
portfolios. As a result, the Company expects total loan growth in 2008 to be
challenged, with volume to continue at a stable-to-declining pace throughout the
rest of the year. The Company remains committed to sound underwriting practices
without sacrificing asset quality and avoiding exposure to unnecessary risk that
could weaken the credit quality of the portfolio.
Allowance for Loan Losses
Management continually monitors the loan portfolio to identify potential
portfolio risks and to detect potential credit deterioration in the early
stages, and then establishes reserves based upon its evaluation of these
inherent risks. During the first nine months of 2008, the Company's allowance
for loan losses remained relatively stable, finishing at $6,797, as compared to
$6,737 at year-end 2007. This stable level of reserves was, in part, due to the
declining levels of the Company's loan portfolio, down 2.7% from year-end 2007.
The level of nonperforming loans, which consist of nonaccruing loans and
accruing loans past due 90 days or more, increased from $3,661 at year-end 2007
to $4,334 at September 30, 2008. During the first quarter, the Company
experienced problems with one of its commercial borrowers that was unable to
meet the debt requirements of its loans. During this time, the Company stopped
recognizing interest income on the loans, reversed all interest that had been
accrued and unpaid and classified the loans as nonperforming. At March 31, 2008,
the ratio of nonperforming loans to total loans grew to 1.40% as a result of
this classification. During the second quarter, continued analysis of these
loans was performed, which included the reviews of updated appraisals that
reflected a decline in market values due to deteriorating market conditions.
This analysis, along with continued loan deterioration of this large commercial
borrower, prompted management to charge down the loan by $750, including
estimated costs to sell, to the estimated fair value of the collateral.
Subsequently, the Company acquired these properties through foreclosure and
transferred the loans to other real estate owned ("OREO"). This shifted
approximately $4,214 from nonperforming loans to nonperforming assets, which
contributed to the increase in its nonperforming assets from $3,922 at year-end
2007 to $8,947 at September 30, 2008. As a result, the Company's ratio of
nonperforming loans to total loans decreased to .70% at September 30, 2008,
while the ratio of nonperforming assets to total assets increased from .50% at
year-end 2007 to 1.15% at September 30, 2008.
17
During the first nine months of 2008, net charge-offs totaled $2,250, which were
down $1,769 from the same period in 2007, in large part due to commercial
charge-offs of specific allocations that were reflected in the allowance for
loan losses from 2007. Management believes that the allowance for loan losses is
adequate and reflects probable incurred losses in the loan portfolio. Asset
quality remains a key focus, as management continues to stress not just loan
growth, but quality in loan underwriting as well.
Deposits
Deposits, both interest- and noninterest-bearing, continue to be the most
significant source of funds used by the Company to support earning assets.
Deposits are influenced by changes in interest rates, economic conditions and
competition from other banks. During the first nine months of 2008, total
deposits were up $4,973, or 0.8%, from year-end 2007. The change in deposits
came primarily from an increase in the Company's interest-bearing demand
deposits and money market deposit balances.
Interest-bearing NOW account balances increased $33,956, or 51.7%, during the
first nine months of 2008 as compared to year-end 2007. This growth was largely
driven by a $36,555 increase in public fund balances related to the local city
and county school construction projects currently in process within Gallia
County, Ohio.
Further deposit growth came from the Company's money market deposit balances,
which were up $27,343, or 37.8%, during the first nine months of 2008 as
compared to year-end 2007. This increase was from the Company's Market Watch
money market account product, which generated $25,832 in new deposit balances
from year-end 2007, mostly during the second quarter of 2008. Introduced in
August 2005, the Market Watch product is a limited transaction investment
account with tiered rates that competes with current market rate offerings and
serves as an alternative to certificates of deposit for some customers. In the
second quarter of 2008, the Company began marketing a special six-month
introductory rate offer of 3.50% APY that would be for new Market Watch
accounts. This special offer was well received by the Bank's customers and
contributed to most of the year-to-date increase in 2008. As a result, Market
Watch deposit balances increased $20,670, or 28.4%, during the second quarter of
2008.
Partially offsetting money market deposit growth were time deposits, decreasing
$56,527, or 16.6%, from year-end 2007. Time deposits, particularly CD's, are the
most significant source of funding for the Company's earning assets, making up
47.9% of total deposits. With loan balances on a declining pace, down 2.7% from
year-end 2007, there has not been an aggressive need to deploy time deposits as
a funding source. Yet, as market rates have aggressively lowered since September
2007, the Company has seen the cost of its retail CD balances continue to
reprice downward (as a lagging effect to the actions by the Federal Reserve) to
reflect current deposit rates. This lagging effect has caused the Company's
retail CD portfolio to become more of an attractive funding source to fund
earning assets, producing an average cost of 4.24% during the first nine months
of 2008 as compared to 4.85% during the same period in 2007. Wholesale fund
deposits (i.e., brokered and network CD issuances) have not been as responsive
to the decline in short-term market rates, producing an average cost of 4.80%
during the first nine months of 2008 as compared to 4.85% during the same period
in 2007, well exceeding the price to fund asset growth with retail CD balances.
As a result, management will continue to emphasize its core deposit funding and
retail CD balances as a more affordable and cost effective source to subsidize
earning asset growth as compared to wholesale deposits.
The Company's interest-free funding source, noninterest bearing demand deposits,
also decreased $1,363, or 1.7%, from year-end 2007.
The Company will continue to experience increased competition for deposits in
its market areas, which should challenge its net growth in retail CD balances.
The Company will continue to emphasize growth
18
in its core deposits as well as to utilize its retail CD funding sources during
the remainder of 2008, reflecting the Company's efforts to reduce its reliance
on higher cost funding.
Securities Sold Under Agreements to Repurchase
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were down $5,856, or 14.5%, from year-end 2007. This decrease
was mostly due to seasonal fluctuations of two commercial accounts in the first
nine months of 2008.
Other Borrowed Funds
The Company also accesses other funding sources, including short-term and
long-term borrowings, to fund asset growth and satisfy short-term liquidity
needs. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB)
advances and promissory notes. During the first nine months of 2008, other
borrowed funds were down $7,242, or 10.8%, from year-end 2007. Management used
the growth in deposit proceeds to repay FHLB borrowings during the first nine
months of 2008. While deposits continue to be the primary source of funding for
growth in earning assets, management will continue to utilize various wholesale
borrowings to help manage interest rate sensitivity and liquidity.
Subordinated Debentures and Trust Preferred Securities
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of
adjustable-rate trust preferred securities as part of a pooled offering of such
securities. The Company used the proceeds from these trust preferred securities
to pay off $8,500 in higher cost trust preferred security debt on March 26,
2007. The replacement of the higher cost trust preferred security debt was a
strategy by management to lower interest rate pressures that were impacting
interest expense and help improve the Company's net interest margin. The early
extinguishment and replacement of this higher cost debt improved earnings by
nearly $54 pre-tax ($35 after taxes) during the first nine months of 2008 as
compared to the same period in 2007. For additional discussion on the terms and
conditions of this new trust preferred security issuance, please refer to "Note
7 - Subordinated Debentures and Trust Preferred Securities" within Item 1, Notes
to the Consolidated Financial Statements of this Form 10-Q.
Shareholders' Equity
The Company maintains a capital level that exceeds regulatory requirements as a
margin of safety for its depositors. Total shareholders' equity at September 30,
2008 of $61,823 was up $312, or 0.5%, as compared to the balance of $61,511 on
December 31, 2007. Contributing most to this increase was year-to-date net
income of $5,581 partially offset by cash dividends paid of $2,304, or $.57 per
share, year-to-date, and increased share repurchases. The Company had treasury
stock totaling $15,713 at September 30, 2008, an increase of $2,269 as compared
to the total at year-end 2007. The Company anticipates repurchasing additional
common shares from time to time as authorized by its stock repurchase program.
The Board of Directors authorized the repurchase of up to 175,000 of its common
shares between February 15, 2008 and February 15, 2009. As of September 30,
2008, 77,853 shares had been repurchased pursuant to that authorization.
Comparison of
Results of Operations
for the Quarter and Year-To-Date Periods
Ended September 30, 2008 and 2007
The following discussion focuses, in more detail, on the consolidated results of
operations of the Company for the quarterly and year-to-date periods ended
September 30, 2008 compared to the same periods in 2007. The purpose of this
discussion is to provide the reader a more thorough understanding of
19
the consolidated financial statements. This discussion should be read in
conjunction with the interim consolidated financial statements and the footnotes
included in this Form 10-Q.
Net Interest Income
The most significant portion of the Company's revenue, net interest income,
results from properly managing the spread between interest income on earning
assets and interest expense on interest-bearing liabilities. The Company earns
interest and dividend income from loans, investment securities and short-term
investments while incurring interest expense on interest-bearing deposits and
repurchase agreements, as well as short-term and long-term borrowings. For the
third quarter of 2008, net interest income increased $719, or 10.3%, as compared
to the same quarter in 2007. Through the first nine months of 2008, net interest
income increased $1,712, or 8.1%, as compared to the same period in 2007. The
increase in quarterly and year-to-date net interest income is primarily due to
an expanding net interest margin caused by lower funding costs.
Total interest income decreased $1,127, or 8.2%, for the third quarter of 2008
and decreased $1,762, or 4.3%, during the first nine months of 2008 as compared
to the same periods in 2007. This drop in interest earnings was largely due to a
decrease in the yields earned on average earning assets during both the
quarterly and year-to-date periods of 2008 as compared to the same periods in
2007. The average yield on earning assets for the three months ended September
30, 2008 decreased 66 basis points to 6.96% as compared to the same period in
2007. The average yield on earning assets for the nine months ended September
30, 2008 decreased 51 basis points to 7.14% as compared to the same period in
2007. Both negative effects reflect the decreases in short-term interest rates
since September of 2007. Partially offsetting the assets yield decreases were
positive contributions from growth in the Company's average earning assets, up
$6,104, or 0.8%, during the third quarter of 2008 and up $18,039, or 2.5%,
during the first nine months of 2008 as compared to the same periods in 2007.
The growth in average earning assets was largely comprised of residential real
estate loan and commercial real estate loan participations since September 2007.
In addition, during the third quarter of 2008, the Company received over $2,800
in payoff funds on a troubled commercial credit. This loan settlement resulted
in the recovery of $173 in loan interest and late fees. Further contributing to
interest revenue was addional fee income from increased originations of the
Company's refund anticipation loans ("RAL"). The Company's participation with a
third party tax software provider has given us the opportunity to make RAL loans
during the tax refund loan season, typically from January through March. RAL
loans are short-term cash advances against a customer's anticipated income tax
refund. Through the first nine months of 2008, the Company had recognized $265
in RAL fees as compared to $94 during the same period in 2007.
In relation to lower earning asset yields, the Company's total interest expense
decreased $1,846, or 27.2%, for the third quarter of 2008 and decreased $3,474,
or 17.6%, during the first nine months of 2008 as compared to the same periods
in 2007, as a result of lower interest-bearing liability costs. Since September
2007, the Federal Reserve has reduced the target Federal Funds rate 425 basis
points. That reduction has caused a corresponding downward shift in short-term
interest rates, while longer-term rates have not decreased to the same extent.
The Bank had positioned its balance sheet so that there were more
interest-bearing liabilites subject to repricing than interest rates on loans.
As a result, interest paid on liabilities decreased more than interest earned on
assets. The short-term rate decreases impacted the repricings of various Bank
deposit products, including public fund NOW accounts, Gold Club and Market Watch
accounts. Interest rates on CD balances will continue to reprice at lower rates
(as a lagging effect to the Federal Reserve action to drop the Federal Funds
rate), which will continue to lower funding costs and improve the net interest
margin for the remainder of 2008. As a result of the decrease in rates from
September 2007, the Bank's total weighted average funding costs have decreased
75 basis points from September 30, 2007 to September 30, 2008.
As a result of lower funding costs, increased RAL fees and the recovery of
interest and late fees on a troubled commercial credit, the Company's net
interest margin increased 37 basis points from 3.90% to
20
4.27% for the third quarter of 2008 and increased 21 basis points from 3.99% to
4.20% during the first nine months of 2008 as compared to the same periods in
2007. The net interest margin is expected to benefit for the remainder of 2008
as a result of the Federal Reserve's recent one-half percent cuts in the
targeted Federal Funds rate on both October 8 and October 29, 2008. It is
difficult, though, to speculate on future changes in net interest margin and the
frequency and size of changes in market interest rates. The past year has seen
the banking industry under significant stress due to declining real estate
values and asset impairment. The Federal Reserve's most recent actions of
decreasing the target Federal Funds rate by 100 basis points in October 2008 was
necessary to take steps in repairing the recessionary problems and promote
economic stability. However, there can be no assurance of additional future rate
cuts as changes in market interest rates are dependent upon a variety of factors
that are beyond the Company's control. For additional discussion on the
Company's rate sensitive assets and liabilities, please see Item 3, Quantitative
and Qualitative Disclosure About Market Risk, of this Form 10-Q.
Provision for Loan Losses
Credit risk is inherent in the business of originating loans. The Company sets
aside an allowance for loan losses through charges to income, which are
reflected in the consolidated statement of income as the provision for loan
losses. This provision charge is recorded to achieve an allowance for loan
losses that is adequate to absorb losses probable and incurred in the Company's
loan portfolio. Management performs, on a quarterly basis, a detailed analysis
of the allowance for loan losses that encompasses loan portfolio composition,
loan quality, loan loss experience and other relevant economic factors.
Provision expense increased $361, or 108.7%, for the three months ended
September 30, 2008, and increased $976, or 73.2%, for the first nine months of
2008 as compared to the same periods in 2007. The increase in provision expense
was impacted by a $750 charge-off taken on a loan relationship with a large
commercial borrower during the second quarter of 2008. Management deemed this
action as appropriate to account for the credit deterioration that was evident
from updated appraisal reviews. The properties have since been acquired by the
Company through foreclosure. Management will seek to sell or liquidate the OREO
properties.
While provision expense increased both 108.7% and 73.2% during the three-month
and nine-month periods ended September 30, 2008 as compared to the same periods
in 2007, the Company's net charge-offs were down by $1,769, or 44.0%, during the
first nine months of 2008 as compared to the same period in 2007. This
relationship between rising provision expense and lower net charge-offs was
primarily from a timing difference that is a direct result of the Company's
significant commercial loan allocations that were made to the allowance for loan
losses during the fourth quarter of 2006. At that time, a specific allocation
for loan losses was made on behalf of a commercial loan that was determined to
be impaired, which required a corresponding increase to provision for loan
losses in 2006. During the first and second quarters of 2007, charge-offs were
recorded on the specific allocation established for the impaired loan of 2006,
effectively causing the majority of the $3,378 in commercial loan charge-offs at
September 30, 2007.
Management believes that the allowance for loan losses is adequate at September
30, 2008 and reflective of probable losses in the portfolio. The allowance for
loan losses was 1.10% of total loans at September 30, 2008, up from the
allowance level as a percentage of total loans of 1.06% at December 31, 2007.
Future provisions to the allowance for loan losses will continue to be based on
management's quarterly in-depth evaluation that is discussed in further detail
under the caption "Critical Accounting Policies - Allowance for Loan Losses" of
this Form 10-Q.
Noninterest Income
Noninterest income for the three months ended September 30, 2008 was $1,574, an
increase of $18, or 1.2%, over the same period in 2007. Noninterest income for
the nine months ended September 30, 2008 was $4,745, an increase of $430, or
10.0%, over the same period in 2007. These results were impacted
21
mostly by service charges on deposit accounts, as well as seasonal tax refund
processing fees and debit card interchange fees that are classified as other
noninterest income. The Bank's service charge fees on deposit accounts increased
in large part due to a higher volume of overdraft balances, contributing to an
increase in non-sufficient fund fees of $76, or 12.0%, during the third quarter
of 2008 and $185, or 10.5%, during the first nine months of 2008, as compared to
the same periods in 2007.
Also contributing to noninterest revenue growth were earnings from bank owned
life insurance ("BOLI"). Income earned on life insurance contracts from the
Company's supplemental retirement program was up $27, or 15.6%, during the third
quarter of 2008 and $61, or 11.8%, during the first nine months of 2008 as
compared to the same periods in 2007. BOLI activity was impacted by additional
investments in life insurance contracts purchased during the second quarter of
2008 and a higher earnings rate tied to such policies. The Company's average
investment balance in BOLI through September 30, 2008 was $16,760, an increase
of $519, or 3.2%, as compared to the same period in 2007.
To help manage consumer demand for longer-termed, fixed-rate real estate
mortgages, the Company has taken additional opportunities to sell some real
estate loans to the secondary market. Through September 30, 2008, the Company
has sold 96 loans totaling $10,480 to the secondary market as compared to 34
loans totaling $3,322 during the same period in 2007. While being down slightly
by $3, or 13.0%, during the third quarter of 2008, the volume increase in loan
sales has contributed to the year-to-date growth in income on sale of loans,
which was up $28, or 34.1%, during the first nine months of 2008, as compared to
the same periods in 2007.
Growth in noninterest income also came from a decrease in the loss on sale of
OREO. This income was the result of higher OREO losses experienced in last
year's 2007 second quarter, which were primarily the result of a loss incurred
on the sale of one large commercial property during that time.
Also contributing to noninterest revenue growth were activities from other
noninterest income sources. As mentioned previously, the Company began its
participation in a new tax refund loan service in 2006 where it serves as a
facilitator for the clearing of tax refunds for a tax software provider. The
Company is one of a limited number of financial institutions throughout the U.S.
that facilitates tax refunds through its relationship with this tax software
provider. As a result of tax refund processing fee activity being mostly
seasonal, there was no income recorded during the third quarters of 2008 and
2007. During the first nine months of 2008, the Company's tax refund processing
fees increased by $161, or 146.7%, over the same period in 2007. Further
enhancing growth in other noninterest income was debit card interchange income,
increasing $34, or 25.1%, during the third quarter of 2008 and $82, or 20.4%,
during the first nine months of 2008 as compared to the same periods in 2007.
The volume of transactions utilizing the Company's Jeanie(R) Plus debit card
continue to increase over a year ago. The Company's customers used their
Jeanie(R) Plus debit cards to complete 981,230 transactions during the first
nine months of 2008, up 12.8% from the 869,975 transactions during the same
period in 2007, derived mostly from gasoline and restaurant purchases.
Partially offsetting growth in other noninterest income were quarterly and
year-to-date decreases in the Company's rental income from OREO properties.
Rental income from OREO properties totaled $97 and $126 for the third quarter
and nine-month periods of 2007, respectively, as compared to no income
recognized for the same periods in 2008. The 2007 rental income was primarily
earned on one large commercial facility located in Kanawha County, West
Virginia, that the Company eventually sold in December 2007.
The total of all remaining noninterest income categories remained relatively
unchanged from the prior quarterly and year-to-date periods. The total growth in
noninterest income demonstrates management's desire to leverage technology to
enhance efficiency and diversify the Company's revenue sources.
22
Noninterest Expense
Noninterest expense during the third quarter of 2008 increased $395, or 7.1%,
and increased $955, or 5.8%, during the first nine months of 2008 as compared to
the same periods in 2007. Contributing to the growth in overhead expense were
salaries and employee benefits, the Company's largest noninterest expense item,
which increased $362, or 11.1%, for the third quarter of 2008 and $780, or 8.1%,
during the first nine months of 2008 as compared to the same periods in 2007.
The increases were largely due to higher accrued incentive costs, increased
health insurance benefit expenses and a higher full-time equivalent ("FTE")
employee base. The Company's FTE employees increased at September 30, 2008 to
266 employees on staff as compared to 253 employees at September 30, 2007.
Also increasing for the year were data processing expenses, which increased $81,
or 12.9%, during the first nine months of 2008 as compared to the same period in
2007. The increase was due to the monthly costs incurred on the Bank's
implementation of new technology to better serve the convenience of its
customers, which technology includes ATM, debit and credit cards, as well as
various online banking products, including net teller and bill pay. However,
data processing expenses during the third quarter of 2008 decreased $45, or
20.4%, as compared to the same period in 2007. The decrease was due to the
successful re-negotiation of the Bank's monthly data processing costs. The
negotiations for lower monthly processing charges were finalized in the third
quarter of 2008 and decreased the monthly data processing costs by $15 per
month.
Overhead expenses were also impacted by occupancy, furniture and equipment
costs, which increased $10, or 1.5%, during the third quarter of 2008 and $15,
or 0.8%, during the first nine months of 2008, as compared to the same periods
in 2007. This was in large part due to the addition of a new banking facility
located within a hospital in Gallia County. This full service banking center was
built during 2007 at a cost of over $371. This new facility investment serves as
an additional market presence to service the banking needs of the medical staff
and patients along the hospital's campus area. The facility was placed in
service and depreciation commenced during the fourth quarter of 2007.
Also contributing to noninterest expense growth was the Company's FDIC expense,
which was up $104, or 597.3%, during the third quarter of 2008 and $102, or
191.8%, during the first nine months of 2008, as compared to the same periods in
2007. This was in large part to the Company's share of a one-time assessment
credit being fully utilized by June 30, 2008. With the elimination of this
credit, the Company entered the third quarter of 2008 with its deposits being
assessed at a rate close to 7 basis points. In early October 2008, the FDIC
issued a proposed rule that would raise current deposit insurance assessment
rates uniformly for all financial institutions for the first quarter of 2009,
which would result in a premium increase of an additional 7 basis points. The
proposed rule also provides for a new means of calculating deposit insurance
during the second quarter of 2009, which includes an assessment of the financial
institution's brokered deposit, secured liability and capital levels. As a
result, the Company anticipates its cost of insuring deposits will more than
double in 2009 from its already increasing levels in 2008.
Increases in the Company's marketing costs, up $1, or 0.3%, during the third
quarter of 2008 and $86, or 18.5%, during the first nine months of 2008 as
compared to the same periods in 2007, also contributed to the increases in
noninterest expense. Marketing costs include advertising, donations and public
relations activities. Various inflationary increases in other noninterest
expenses also included supplies, forms, postage, telephone and other
miscellaneous expenses during the quarterly and year-to-date periods presented.
Partially offsetting these increases within other noninterest expense was a
decrease in the Company's foreclosure expenses, which were down $25, or 34.1%,
during the third quarter of 2008 and $244, or 86.6%, during the first nine
months of 2008 as compared to the same periods in 2007. Management anticipates
current year foreclosure costs to be below the costs incurred from 2007 due to
the larger than normal volume of foreclosure costs that were incurred during
2007.
23
The Company's efficiency ratio is defined as noninterest expense as a percentage
of fully tax-equivalent net interest income plus noninterest income. The
emphasis management has placed on managing its balance sheet mix and interest
rate sensitivity to help expand the net interest margin as well as developing
more innovative ways to generate noninterest revenue has contributed to an
improving efficiency ratio, finishing at 63.66% for the three months ended
September 30, 2008 and 62.64% during the nine months ended September 30, 2008 as
compared to 64.47% and 64.16% for the same periods in 2007.
Capital Resources
All of the Company's capital ratios exceeded the regulatory minimum guidelines
as identified in the following table:
Company Ratios Regulatory
9/30/08 12/31/07 Minimum
------- -------- ----------
Tier 1 risk-based capital 12.3% 12.0% 4.00%
Total risk-based capital ratio 13.4% 13.1% 8.00%
Leverage ratio 9.5% 9.5% 4.00%
Cash dividends paid of $2,304 for the first nine months of 2008 represent a 4.6%
increase over the cash dividends paid during the same period in 2007. The
quarterly dividend rate increased from $0.18 per share in 2007 to $0.19 per
share in 2008. The dividend rate has increased in proportion to the consistent
growth in retained earnings. At September 30, 2008, approximately 82% of the
Company's shareholders were enrolled in the Company's dividend reinvestment
plan.
Liquidity
Liquidity relates to the Company's ability to meet the cash demands and credit
needs of its customers and is provided by the ability to readily convert assets
to cash and raise funds in the market place. Total cash and cash equivalents,
interest-bearing deposits with other financial institutions, held-to-maturity
securities maturing within one year and available-for-sale securities of
$100,561 represented 12.9% of total assets at September 30, 2008. In addition,
the FHLB offers advances to the Bank which further enhances the Bank's ability
to meet liquidity demands. At September 30, 2008, the Bank could borrow an
additional $63,000 from the FHLB. The Bank also has the ability to purchase
federal funds from several of its correspondent banks. For further cash flow
information, see the condensed consolidated statement of cash flows contained in
this Form 10-Q. Management does not rely on any single source of liquidity and
monitors the level of liquidity based on many factors affecting the Company's
financial condition.
Off-Balance Sheet Arrangements
As discussed in Note 5 - Concentrations of Credit Risk and Financial Instruments
with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet
credit-related activities, including commitments to extend credit and standby
letters of credit, which could require the Company to make cash payments in the
event that specified future events occur. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. While these commitments are
necessary to meet the financing needs of the Company's customers, many of these
commitments are expected to expire without being drawn upon. Therefore, the
total amount of commitments does not necessarily represent future cash
requirements.
24
Critical Accounting Policies
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Management views
critical accounting policies to be those that are highly dependent on subjective
or complex judgments, estimates and assumptions, and where changes in those
estimates and assumptions could have a significant impact on the financial
statements. Management currently views the adequacy of the allowance for loan
losses to be a critical accounting policy.
Allowance for loan losses: To arrive at the total dollars necessary to maintain
an allowance level sufficient to absorb probable losses incurred at a specific
financial statement date, management has developed procedures to establish and
then evaluate the allowance once determined. The allowance consists of the
following components: specific allocation, general allocation and other
estimated general allocation.
To arrive at the amount required for the specific allocation component, the
Company evaluates loans for which a loss may be incurred either in part or
whole. To achieve this task, the Company has created a quarterly report
("Watchlist") which lists the loans from each loan portfolio that management
deems to be potential credit risks. The criteria to be placed on this report
are: past due 60 or more days, nonaccrual and loans management has determined to
be potential problem loans. These loans are reviewed and analyzed for potential
loss by the Large Loan Review Committee, which consists of the President of the
Company and members of senior management with lending authority. The function of
the Committee is to review and analyze large borrowers for credit risk,
scrutinize the Watchlist and evaluate the adequacy of the allowance for loan
losses and other credit related issues. The Committee has established a grading
system to evaluate the credit risk of each commercial borrower on a scale of 1
(least risk) to 10 (greatest risk). After the Committee evaluates each
relationship listed in the report, a specific loss allocation may be assessed.
The specific allocation is currently made up of amounts allocated to the
commercial and real estate loan portfolios.
Included in the specific allocation analysis are impaired loans, which consist
of loans with balances of $200 or more on nonaccrual status or non-performing in
nature. These loans are also individually analyzed and a specific allocation may
be assessed based on expected credit loss. Collateral dependent loans will be
evaluated to determine a fair value of the collateral securing the loan. Any
changes in the impaired allocation will be reflected in the total specific
allocation.
The second component (general allowance) is based upon total loan portfolio
balances minus loan balances already reviewed (specific allocation). The Large
Loan Review Committee evaluates credit analysis reports that provide management
with a "snapshot" of information on borrowers with larger-balance loans
(aggregate balances of $1,000 or greater), including loan grades, collateral
values, and other factors. A list is prepared and updated quarterly that allows
management to monitor this group of borrowers. Therefore, only small balance
commercial loans and homogeneous loans (consumer and real estate loans) are not
specifically reviewed to determine minor delinquencies, current collateral
values and present credit risk. The Company utilizes actual historic loss
experience as a factor to calculate the probable losses for this component of
the allowance for loan losses. This risk factor reflects a three-year
performance evaluation of credit losses per loan portfolio. The risk factor is
achieved by taking the average net charge-off per loan portfolio for the last 36
consecutive months and dividing it by the average loan balance for each loan
portfolio over the same time period. The Company believes that by using the 36
month average loss risk factor, the estimated allowance will more accurately
reflect current probable losses.
The final component used to evaluate the adequacy of the allowance includes five
additional areas that
25
management believes can have an impact on collecting all principal due. These
areas are: 1) delinquency trends, 2) current local economic conditions, 3)
non-performing loan trends, 4) recovery vs. charge-off, and 5) personnel
changes. Each of these areas is given a percentage factor, from a low of 10% to
a high of 30%, determined by the degree of impact it may have on the allowance.
To calculate the impact of other economic conditions on the allowance, the total
general allowance is multiplied by this factor. These dollars are then added to
the other two components to provide for economic conditions in the Company's
assessment area. The Company's assessment area takes in a total of ten counties
in Ohio and West Virginia. Each assessment area has its individual economic
conditions; however, the Company has chosen to average the risk factors for
compiling the economic risk factor.
The adequacy of the allowance may be determined by certain specific and
nonspecific allocations; however, the total allocation is available for any
credit losses that may impact the loan portfolios.
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with residential real
estate loans currently comprising the most significant portion. Credit risk is
primarily subject to loans made to businesses and individuals in central and
southeastern Ohio as well as western West Virginia. Management believes this
risk to be general in nature, as there are no material concentrations of loans
to any industry or consumer group. To the extent possible, the Company
diversifies its loan portfolio to limit credit risk by avoiding industry
concentrations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's goal for interest rate sensitivity management is to maintain a
balance between steady net interest income growth and the risks associated with
interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the
Company's financial condition to adverse movements in interest rates. Accepting
this risk can be an important source of profitability, but excessive levels of
IRR can threaten the Company's earnings and capital.
The Company evaluates IRR through the use of an earnings simulation model to
analyze net interest income sensitivity to changing interest rates. The modeling
process starts with a base case simulation, which assumes a flat interest rate
scenario. The base case scenario is compared to rising and falling interest rate
scenarios assuming a parallel shift in all interest rates. Comparisons of net
interest income and net income fluctuations from the flat rate scenario
illustrate the risks associated with the projected balance sheet structure.
The Company's Asset/Liability Committee monitors and manages IRR within Board
approved policy limits. The current IRR policy limits anticipated changes in net
interest income to an instantaneous increase or decrease in market interest
rates over a 12 month horizon to +/- 5% for a 100 basis point rate shock, +/-
7.5% for a 200 basis point rate shock and +/- 10% for a 300 basis point rate
shock.
The following table presents the Company's estimated net interest income
sensitivity:
September 30, 2008 December 31, 2007
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
------------------------ -------------------- --------------------
+300 (2.39%) (8.23%)
+200 (1.66%) (5.09%)
+100 (1.02%) (2.47%)
-100 1.77% 2.48%
-200 3.04% 5.01%
-300 4.60% 7.86%
26
The estimated percentage change in net interest income due to a change in
interest rates was within the policy guidelines established by the Board. At
September 30, 2008, the Company's analysis of net interest income reflects a
liability sensitive position. Based on current assumptions, an instantaneous
decrease in interest rates would positively impact net interest income primarily
due to the duration of earning assets exceeding the duration of interest-bearing
liabilities. As compared to December 31, 2007, the Company's interest rate risk
profile has become less liability sensitive primarily due to the influx of
liquidity and to the extension of maturity terms offered on new time deposits.
Since September 2007, the Federal Reserve has reduced short-term interest rates
425 basis points and the Company's net interest margin has responded positively
to the decline in market rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of the President and Chief Executive Officer (the
principal executive officer) and the Vice President and Chief Financial Officer
(the principal financial officer) of Ohio Valley, Ohio Valley's management has
evaluated the effectiveness of Ohio Valley's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the quarterly period covered by
this Quarterly Report on Form 10-Q. Based on that evaluation, Ohio Valley's
President and Chief Executive Officer and Vice President and Chief Financial
Officer have concluded that Ohio Valley's disclosure controls and procedures are
effective as of the end of the quarterly period covered by this Quarterly Report
on Form 10-Q to ensure that information required to be disclosed by Ohio Valley
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by Ohio Valley in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to Ohio Valley's management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in Ohio Valley's internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Ohio
Valley's fiscal quarter ended September 30, 2008, that has materially affected,
or is reasonably likely to materially affect, Ohio Valley's internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Ohio Valley or any of
its subsidiaries is a party, other than ordinary, routine litigation incidental
to their respective businesses. In the opinion of Ohio Valley's management,
these proceedings should not, individually or in the aggregate, have a material
effect on Ohio Valley's results of operations or financial condition.
ITEM 1A. RISK FACTORS
You should carefully consider the risk factors discussed in Part I, "Item 1A.
Risk Factors" in Ohio Valley's Annual Report on Form 10-K for the year ended
December 31, 2007, as filed with the U.S. Securities and Exchange Commission on
March 17, 2008 and available at www.sec.gov. These risk factors could materially
affect the Company's business, financial condition or future results. The risk
factors described in the Annual Report on Form 10-K are not the only risks
facing the Company.
27
Additional risks and uncertainties not currently known to the Company or that
management currently deems to be immaterial also may materially adversely affect
the Company's business, financial condition and/or operating results.
In addition to these factors, the following risk factors should be considered
when evaluating the Company's results of operations and financial condition:
Difficult conditions in the financial markets may adversely affect our business
and results of operations.
Our financial performance depends on the quality of loans in our portfolio. That
quality may be adversely affected by several factors, including underwriting
procedures, collateral quality or geographic or industry conditions, as well as
the recent deterioration in the financial markets. Many lenders and
institutional investors have reduced and, in some cases, ceased to provide
funding to borrowers, including other financial institutions. This market
turmoil and tightening of credit have led to an increased level of commercial
and consumer delinquencies and defaults, lack of consumer confidence, increased
market volatility and widespread reduction of business activity. In addition,
our credit risk may be increased when our collateral cannot be sold or is sold
at prices not sufficient to recover the full amount of the loan balance.
Deterioration in our ability to collect our loans receivable may adversely
affect our profitability and financial condition.
Federal and state governments could adopt laws responsive to the current credit
conditions that would adversely affect our ability to collect on loans.
Federal or state governments might adopt legislation or regulations reducing the
amount that our customers are required to pay under existing loan contracts or
limit our ability to foreclose on collateral.
FDIC insurance premiums may increase materially.
The FDIC insures deposits at FDIC insured financial institutions, including the
Bank. The FDIC charges the insured financial institutions premiums to maintain
the Deposit Insurance Fund at a certain level. Current economic conditions have
increased bank failures and expectations for further failures, in which case the
FDIC ensures payments of deposits up to insured limits from the Deposit
Insurance Fund. In October 2008, the FDIC issued a proposed rule that would
increase premiums paid by insured institutions and make other changes to the
assessment system. Increases in deposit insurance premiums could adversely
affect our net income.
In addition, the FDIC has adopted the Temporary Liquidity Guarantee Program,
pursuant to which it provides unlimited insurance on deposits in
noninterest-bearing transaction accounts not otherwise covered by the existing
deposit insurance limit of $250,000. After the initial 30 days of coverage for
all insured institutions choosing to participate, any institution wishing to
participate will pay a 10 basis point surcharge on the insured deposits. The
Company has chosen to participate. Such participation will increase our expenses
and decrease net income.
Concern of customers over deposit insurance may cause a decrease in deposits at
the Bank.
With recent increased concerns about bank failures, customers increasingly are
concerned about the extent to which their deposits are insured by the FDIC.
Customers may withdraw deposits from the Bank in an effort to ensure that the
amount they have on deposit at the Bank is fully insured. Decreases in deposits
may adversely affect our funding costs and net income.
28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEED
(a) Not Applicable.
(b) Not Applicable.
(c) The following table provides information regarding Ohio
Valley's repurchases of its common shares during the fiscal
quarter ended September 30, 2008:
ISSUER REPURCHASES OF EQUITY SECURITIES(1)
Maximum Number
of Shares That May
Total Number Total Number of Shares Yet Be Purchased
of Common Average Purchased as Part of Under Publicly
Shares Price Paid per Publicly Announced Announced Plan or
Period Purchased Common Share Plans or Programs Programs
----------------------- --------------- ------------------- ------------------------ ----------------------
July 1 - 31, 2008 17,000 $25.10 17,000 117,647
August 1 - 31, 2008 10,000 $24.18 10,000 107,647
September 1 - 30, 2008 10,500 $21.55 10,500 97,147
--------------- ------------------- ------------------------ ----------------------
TOTAL 37,500 $23.86 37,500 97,147
=============== =================== ======================== ======================
(1) On January 15, 2008, Ohio Valley's Board of Directors announced its plan
to repurchase up to 175,000 of its common shares between February 16, 2008
and February 15, 2009.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
(a) Exhibits:
Reference is made to the Exhibit Index set forth immediately
following the signature page of this Form 10-Q.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO VALLEY BANC CORP.
Date: November 6, 2008 By: /s/ Jeffrey E. Smith
-----------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: November 6, 2008 By: /s/ Scott W. Shockey
----------------------
Scott W. Shockey
Vice President and Chief Financial Officer
30
EXHIBIT INDEX
The following exhibits are included in this Form 10-Q or are incorporated by
reference as noted in the following table:
Exhibit Number Exhibit Description
---------------------- -------------------------------------------------
3(a) Amended Articles of Incorporation of Ohio Valley
(reflects amendments through April 7,1999) [for
SEC reporting compliance only - - not filed with
the Ohio Secretary of State]. Incorporated herein
by reference to Exhibit 3(a) to Ohio Valley's
Annual Report on Form 10-K for fiscal year ended
December 31, 2007(SEC File No. 0-20914).
3(b) Code of Regulations of Ohio Valley. Incorporated
herein by reference to Exhibit 3(b) to Ohio
Valley's current report on Form 8-K (SEC File
No.0-20914) filed November 6, 1992.
4 Agreement to furnish instruments and agreements
defining rights of holders of long-term debt.
Filed herewith.
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal
Executive Officer).Filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal
Financial Officer). Filed herewith.
32 Section 1350 Certification (Principal Executive
Officer and Principal Financial Officer). Filed
herewith.
31