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, 2007
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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
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 8, 2007
was 4,085,387.
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..............................................12
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........23
Item 4. Controls and Procedures............................................24
PART II - OTHER INFORMATION...................................................24
Item 1. Legal Proceedings.................................................24
Item 1A. Risk Factors......................................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......25
Item 3. Defaults Upon Senior Securities...................................25
Item 4. Submission of Matters to a Vote of Security Holders...............25
Item 5. Other Information.................................................25
Item 6. Exhibits and Reports on Form 8-K..................................25
SIGNATURES....................................................................26
EXHIBIT INDEX.................................................................27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share and per share data)
September 30, December 31,
2007 2006
----------------- -----------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 16,800 $ 18,965
Federal funds sold 11,756 1,800
----------------- -----------------
Total cash and cash equivalents 28,556 20,765
Interest-bearing deposits in other financial institutions 620 508
Securities available-for-sale 69,536 70,267
Securities held-to-maturity (estimated fair value:
2007 - $15,976; 2006 - $13,586) 15,937 13,350
Federal Home Loan Bank stock 6,036 6,036
Total loans 627,616 625,164
Less: Allowance for loan losses (6,727) (9,412)
----------------- -----------------
Net loans 620,889 615,752
Premises and equipment, net 9,937 9,812
Accrued income receivable 3,288 3,234
Goodwill 1,267 1,267
Bank owned life insurance 16,464 16,054
Other assets 6,916 7,316
----------------- -----------------
Total assets $ 779,446 $ 764,361
================= =================
LIABILITIES
Noninterest-bearing deposits $ 76,476 $ 77,960
Interest-bearing deposits 519,464 515,826
----------------- -----------------
Total deposits 595,940 593,786
Securities sold under agreements to repurchase 34,168 22,556
Other borrowed funds 61,398 63,546
Subordinated debentures 13,500 13,500
Accrued liabilities 13,421 10,691
----------------- -----------------
Total liabilities 718,427 704,079
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000 shares authorized;
2007 - 4,639,724 shares issued; 2006 - 4,626,340 shares issued) 4,640 4,626
Additional paid-in capital 32,615 32,282
Retained earnings 37,495 34,404
Accumulated other comprehensive loss (627) (981)
Treasury stock, at cost (2007 - 553,830 shares;
2006 - 432,852 shares) (13,104) (10,049)
----------------- -----------------
Total shareholders' equity 61,019 60,282
----------------- -----------------
Total liabilities and shareholders' equity $ 779,446 $ 764,361
================= =================
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,
2007 2006 2007 2006
-------------- -------------- -------------- --------------
Interest and dividend income:
Loans, including fees $ 12,731 $ 12,410 $ 37,877 $ 36,279
Securities
Taxable 766 714 2,272 2,097
Tax exempt 145 117 405 344
Dividends 99 85 292 249
Other Interest 43 81 160 112
-------------- -------------- -------------- --------------
13,784 13,407 41,006 39,081
Interest expense:
Deposits 5,386 4,964 15,943 13,341
Securities sold under agreements to repurchase 307 244 787 655
Other borrowed funds 814 761 2,164 2,448
Subordinated debentures 272 330 870 952
-------------- -------------- -------------- --------------
6,779 6,299 19,764 17,396
-------------- -------------- -------------- --------------
Net interest income 7,005 7,108 21,242 21,685
Provision for loan losses 332 474 1,334 1,931
-------------- -------------- -------------- --------------
Net interest income after provision for loan losses 6,673 6,634 19,908 19,754
Noninterest income:
Service charges on deposit accounts 776 806 2,192 2,245
Trust fees 58 56 172 165
Income from bank owned life insurance 173 270 515 727
Gain on sale of loans 23 21 82 75
Other 526 403 1,354 1,181
-------------- -------------- -------------- --------------
1,556 1,556 4,315 4,393
Noninterest expense:
Salaries and employee benefits 3,247 3,278 9,648 9,803
Occupancy 378 347 1,099 999
Furniture and equipment 276 268 810 811
Data processing 221 197 626 613
Other 1,470 1,513 4,416 4,352
-------------- -------------- -------------- --------------
5,592 5,603 16,599 16,578
-------------- -------------- -------------- --------------
Income before income taxes 2,637 2,587 7,624 7,569
Provision for income taxes 804 770 2,330 2,187
-------------- -------------- -------------- --------------
NET INCOME $ 1,833 $ 1,817 $ 5,294 $ 5,382
============== ============== ============== ==============
Earnings per share $ .45 $ .43 $ 1.28 $ 1.27
============== ============== ============== ==============
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,
2007 2006 2007 2006
-------------- -------------- -------------- --------------
Balance at beginning of period $ 60,544 $ 60,064 $ 60,282 $ 59,271
Comprehensive income:
Net income 1,833 1,817 5,294 5,382
Change in unrealized loss
on available-for-sale securities 623 948 537 (188)
Income tax effect (212) (322) (183) 64
-------------- -------------- -------------- --------------
Total comprehensive income 2,244 2,443 5,648 5,258
Proceeds from issuance of common
stock through dividend reinvestment plan ---- ---- 347 ----
Cash dividends (738) (719) (2,203) (2,120)
Shares acquired for treasury (1,031) (610) (3,055) (1,231)
-------------- -------------- -------------- --------------
Balance at end of period $ 61,019 $ 61,178 $ 61,019 $ 61,178
============== ============== ============== ==============
Cash dividends per share $ 0.18 $ 0.17 $ 0.53 $ 0.50
============== ============== ============== ==============
Shares from common stock issued
through dividend reinvestment plan 1 1 13,384 3
============== ============== ============== ==============
Shares acquired for treasury 40,969 24,191 120,978 48,855
============== ============== ============== ==============
See notes to consolidated financial statements
5
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands, except per share data)
Nine months ended
September 30,
2007 2006
----------------- -----------------
Net cash provided by operating activities: $ 10,133 $ 9,850
Investing activities:
Proceeds from maturities of securities available-for-sale 5,236 8,502
Purchases of securities available-for-sale (4,009) (11,404)
Proceeds from maturities of securities held-to-maturity 234 42
Purchases of securities held-to-maturity (2,828) (1,480)
Change in interest-bearing deposits in other financial institutions (112) (5)
Net change in loans (8,103) (12,164)
Proceeds from sale of other real estate owned 1,394 255
Purchases of premises and equipment (861) (2,358)
Proceeds from bank owned life insurance ---- 174
----------------- -----------------
Net cash (used in) investing activities (9,049) (18,438)
Financing activities:
Change in deposits 2,154 36,170
Cash dividends (2,203) (2,120)
Proceeds from issuance of common stock
through dividend reinvestment plan 347 ----
Purchases of treasury stock (3,055) (1,231)
Change in securities sold under agreements to repurchase 11,612 (9,147)
Proceeds of Federal Home Loan Bank borrowings 15,000 5,000
Repayment of Federal Home Loan Bank borrowings (10,047) (11,131)
Change in other short-term borrowings (7,101) (3,544)
Proceeds from subordinated debentures 8,500 ----
Repayment of subordinated debentures (8,500) ----
----------------- ----------------
Net cash provided by financing activities 6,707 13,997
----------------- ----------------
Change in cash and cash equivalents 7,791 5,409
Cash and cash equivalents at beginning of period 20,765 19,616
----------------- ----------------
Cash and cash equivalents at end of period $ 28,556 $ 25,025
================= ================
Supplemental disclosure:
Cash paid for interest $ 19,490 $ 16,135
Cash paid for income taxes 373 2,856
Non-cash transfers from loans to other real estate owned 1,632 106
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, 2007, and its results of operations and cash
flows for the periods presented. The results of operations for the nine months
ended September 30, 2007 are not necessarily indicative of the operating results
to be anticipated for the full fiscal year ending December 31, 2007. 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, 2006 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 4,101,908 and 4,228,798 for
the three months ended September 30, 2007 and 2006, respectively. Weighted
average shares outstanding were 4,149,040 and 4,239,291 for the nine months
ended September 30, 2007 and 2006, 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 on loans 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.
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.
NEW ACCOUNTING PRONOUNCEMENTS: The Company adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN48"), on
January 1, 2007. The adoption of FIN 48 had no affect on the Company's financial
statements. At January 1, 2007 and September 30, 2007, the Company had no
unrecognized tax benefits and does not anticipate any significant change to
unrecognized tax benefits during the next 12 months. It is the Company's policy
to account for interest and penalties related to uncertain tax positions as part
of its provision for federal and state income taxes. As of September 30, 2007,
no such accruals exist. The Company and its subsidiaries file a consolidated
U.S. federal income tax return as well as tax returns in the states of Ohio and
West Virginia. These returns are subject to examination by taxing authorities
for tax years 2003 - 2006.
In February 2007, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This statement is expected to expand the
use of fair value measurement, which is consistent with FASB's long-term
measurement objectives for accounting for financial instruments. This statement
is effective for financial statements issued for fiscal years beginning after
November 15, 2007. Early adoption is permitted provided, among other things, an
entity elects to adopt within the first 120 days of that fiscal year. The
Company plans on adopting FAS 159 on January 1, 2008 and does not expect that
the adoption of this standard will have a material impact on its financial
statements.
8
In September 2006, FASB issued FAS No. 157, Fair Value Measurements. FAS No. 157
defines fair value, establishes a framework for measuring fair value in United
States generally accepted accounting principles and expands disclosures about
fair value measurements. FAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company is
currently in the process of evaluating the impact of adopting this Statement and
does not expect any material impact on its financial statements upon adoption.
RECLASSIFICATIONS: Certain items related to the consolidated financial
statements for 2006 have been reclassified to conform to the presentation for
2007. These reclassifications had no effect on the net results of operations.
NOTE 2 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
September 30, December 31,
2007 2006
----------------- -----------------
Commercial real estate $ 190,399 $ 193,359
Commercial and industrial 51,866 47,389
Residential real estate 246,883 238,549
Consumer 131,186 139,961
All other 7,282 5,906
----------------- -----------------
$ 627,616 $ 625,164
================= =================
At September 30, 2007 and December 31, 2006, loans on nonaccrual status were
approximately $4,344 and $12,017, respectively. Loans past due more than 90 days
and still accruing at September 30, 2007 and December 31, 2006 were $964 and
$1,375, respectively.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
Following is an analysis of changes in the allowance for loan losses for the
years ended September 30:
2007 2006
-------------- --------------
Balance - January 1, $ 9,412 $ 7,133
Loans charged off:
Commercial (1) 3,378 524
Residential real estate 432 139
Consumer 1,202 1,645
-------------- --------------
Total loans charged off 5,012 2,308
Recoveries of loans:
Commercial (1) 210 402
Residential real estate 168 203
Consumer 615 924
-------------- --------------
Total recoveries of loans 993 1,529
-------------- --------------
Net loan charge-offs (4,019) (779)
Provision charged to operations 1,334 1,931
-------------- --------------
Balance - September 30, $ 6,727 $ 8,285
============== ==============
(1) Includes commercial and industrial and commercial real estate loans.
9
Information regarding impaired loans is as follows:
September 30, December 31,
2007 2006
---------------- ----------------
Balance of impaired loans $ 9,245 $ 17,402
Less portion for which no specific
allowance is allocated 2,969 2,959
---------------- ----------------
Portion of impaired loan balance for which a
specific allowance for credit losses is allocated $ 6,276 $ 14,443
================ ================
Portion of allowance for loan losses specifically
allocated for the impaired loan balance $ 2,072 $ 4,962
================ ================
Average investment in impaired loans year-to-date $ 9,509 $ 18,774
================ ================
Interest recorded on impaired loans was $313 and $495 for the nine-month periods
ended September 30, 2007 and 2006, respectively. Accrual basis income was not
materially different from cash basis income for the periods presented.
NOTE 4 - 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
4.02% of total loans were unsecured at September 30, 2007 as compared to 3.51%
at December 31, 2006.
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, 2007,
the contract amounts of these instruments totaled approximately $76,224,
compared to $73,502 at December 31, 2006. 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 5 - OTHER BORROWED FUNDS
Other borrowed funds at September 30, 2007 and December 31, 2006 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, 2007........... $ 50,192 $ 5,706 $ 5,500 $ 61,398
December 31, 2006............ $ 55,690 $ 5,393 $ 2,463 $ 63,546
Pursuant to collateral agreements with the FHLB, advances are secured by
$217,583 in qualifying mortgage loans and $6,036 in FHLB stock at September 30,
2007. Fixed-rate FHLB advances of $50,192 mature through 2010 and have interest
rates ranging from 3.25% to 6.62%.
At September 30, 2007, 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.
10
The line of credit must be renewed on an annual basis. There was $60,000
available on this line of credit at September 30, 2007.
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 $161,173 at September 30, 2007.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of 4.55% to
6.19% and are due at various dates through a final maturity date of September
30, 2008. As of September 30, 2007, a total of $3,708 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. At September 30, 2007, the interest
rate for the Company's FRB notes was 4.58%. Various investment securities from
the Bank used to collateralize the FRB notes totaled $6,000 at September 30,
2007 and $6,070 at December 31, 2006.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $42,450 at September 30,
2007 and $41,950 at December 31, 2006.
Scheduled principal payments over the next five years:
Periods Ended FHLB Promissory FRB
December 31: Borrowings Notes Notes Totals
-------------------------- ---------------- ---------------- ---------------- ----------------
Three Months Ended 2007 $ 4,018 $ 2,604 $ 5,500 $ 12,122
Year Ended 2008 16,010 3,102 ---- 19,112
Year Ended 2009 11,005 ---- ---- 11,005
Year Ended 2010 19,006 ---- ---- 19,006
Year Ended 2011 6 ---- ---- 6
Thereafter 147 ---- ---- 147
---------------- ---------------- ---------------- ----------------
$ 50,192 $ 5,706 $ 5,500 $ 61,398
================ ================ ================ ================
NOTE 6 - 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 repayment of $8,500 in trust preferred securities
was the result of an early call feature that allowed the Company to redeem the
entire amount 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.
11
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, 2006 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; and the making and servicing of personal,
commercial, floor plan, construction, real estate and student 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, 2007, net income increased by $16, or
0.9%, compared to the same period in 2006, to finish at $1,833. Earnings per
share for the third quarter of 2007 increased $.02, or 4.7%, compared to the
same period in 2006, to finish at $.45 per share. For the first nine months of
2007, net income decreased $88, or 1.6%, compared to the same period in 2006, to
finish at $5,294. Earnings per share for the first nine months of 2007 increased
$.01, or 0.8%, compared to the same period in 2006, to finish at $1.28 per
share. 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
decreased to .92% and 11.72% during the first nine months of 2007, as compared
to .95% and 12.07% for the same period in 2006, respectively. The Company's
minimal change in earnings during the third quarter and nine-month periods of
2007 were caused mostly by: 1) a challenged net interest income due to higher
funding costs and increased average nonaccrual loans, and 2) decreases in
noninterest income due to the recognition of tax-free life insurance proceeds
received in the prior year that were not repeated in the current period. These
negative factors to revenues were counteracted by the benefits of 1) lower loan
loss provision expense experienced in both the third quarter and nine-month
periods of 2007, as compared to the same periods in 2006, as a result of
improvements to the Company's nonperforming credits from year-end 2006, and 2)
stable noninterest expense due to effective overhead management.
The consolidated total assets of the Company increased $15,085, or 2.0%, during
the first nine months of 2007 to finish at $779,446, primarily due to excess
12
federal funds sold and higher loan balances, which increased $9,956 and $2,452,
respectively, from year-end 2006. Loan growth continues to be relatively stable
(up 0.4%), with a growing real estate loan portfolio being completely offset by
a declining volume of consumer loans due to lower demand and interest rate
competition. The Company's securities sold under agreements to repurchase
("repurchase agreements") and interest-bearing money market deposits both
increased $11,612 and $7,690, respectively, from year-end 2006. The excess funds
available from both repurchase agreements and money market deposits were used to
fund the net growth in loans, as well as reduce other borrowed funds, which were
down $2,148 from year-end 2006.
Comparison of
Financial Condition
at September 30, 2007 and December 31, 2006
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at September 30, 2007 compared to December 31, 2006.
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,
2007, cash and cash equivalents had increased $7,791, or 37.5%, to $28,556 as
compared to $20,765 at December 31, 2006. The increased levels of cash and cash
equivalents, (mostly federal funds sold) came primarily from growth in
repurchase agreements. With loan balances up slightly from year-end 2006, the
Company used its cash and cash equivalents primarily to satisfy maturing time
deposits as well as to fund quarterly dividend disbursements and treasury stock
repurchases. 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.
Securities
The Company's investment securities portfolio consists of mortgage-backed
securities, U.S. government agency and sponsored entity securities and
obligations of states and political subdivisions. During the first nine months
of 2007, investment securities increased $1,856, or 2.2%, driven by increases in
U.S. government agency and sponsored entity securities of $4,320, or 17.2%, and
obligations of states and political subdivisions of $2,594, or 19.5%, as
compared to year-end 2006. The growth in these two segments of investments was
the result of attractive yield opportunities and a desire to increase
diversification within the Company's securities portfolio. This growth was
partially offset by a decrease in mortgage-backed securities of $5,058, or
11.2%, from year-end 2006. The Company continues to benefit from the advantages
of investment grade mortgage-backed securities, which make up the largest
portion of the Company's investment portfolio, totaling $40,083, or 46.9% of
total investments at September 30, 2007. 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 $5,243 from January 1, 2007
through September 30, 2007. For the remainder of 2007, the Company's focus will
be to generate interest revenue primarily through loan growth due to higher
asset yields on loans.
13
Loans
During the first nine months of 2007, total loans, the Company's primary
category of earning assets, were up $2,452, or 0.4%, from year-end 2006. Higher
loan balances were largely due to growth in residential real estate loans, which
were up $8,334, or 3.5%, from year-end 2006 to total $246,883. Generating
residential real estate loans remains a key focus of the Company's lending
efforts. The Company's residential real estate loans consist primarily of one-
to four-family residential mortgages and carry many of the same customer and
industry risks as the commercial loan portfolio. There continues to be a
significant amount of movement between variable-rate and fixed-rate mortgage
refinancings during the first nine months of 2007. Since year-end 2006, the
Company's one-year adjustable-rate mortgage balances have decreased $21,273, or
31.4%, to finish at $46,518. During 2006, consumer demand for fixed-rate real
estate loans steadily increased due to the continuation of lower, more
affordable, mortgage rates that had not responded as much to the rise in
short-term interest rates of 2004, 2005 and part of 2006. As long-term interest
rates continue to remain relatively stable from a year ago, consumers continue
to pay off and refinance their variable rate mortgages, resulting in lower
one-year adjustable-rate mortgage balances at the end of September 30, 2007 as
compared to year-end 2006. As a result, completely offsetting the decreases in
variable-rate real estate balances were the continued consumer preference of
fixed-rate real estate loans, which were up $28,043, or 19.6%, from year-end
2006 to finish at $171,183. To help further satisfy this increasing demand for
fixed-rate real estate loans, the Company continues to originate and sell some
fixed-rate mortgages to the secondary market, and has sold $3,322 in loans
during the first nine months of 2007, which represent an increase of $591, or
21.6%, over the volume in the first nine months of 2006. The remaining real
estate loan portfolio balances increased $1,564, primarily from a mix of the
Company's other variable-rate real estate loan products.
The Company's increasing real estate loan portfolio was enhanced by net growth
in its commercial loan balances, which were up $1,517, or 0.6%, from year-end
2006. This growth is consistent with the Company's continued emphasis on
commercial lending, which generally yields a higher return on investment as
compared to other types of loans. The Company's commercial loan portfolio
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, stock,
commercial real estate and rental property. Commercial and industrial loans
increased $4,477, or 9.4%, from year-end 2006, partially offset by a decrease in
commercial real estate loan balances, which decreased $2,960, or 1.5%, from
year-end 2006. Commercial real estate, the Company's largest segment of
commercial loans, is largely driven by 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 (20.6% of portfolio), medical industry loans
(13.9% of portfolio), land development loans (11.4% of portfolio), and hotel and
motel loans (10.3% of portfolio). During the first nine months of 2007, the
primary market areas for the Company's commercial loan originations, excluding
loan participations, were in the areas of Gallia, Jackson, Logan, Vinton and
Franklin counties of Ohio, which accounted for 58.8% of total originations, and
the growing West Virginia markets, which accounted for 11.7% 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 2007.
Increases in the Company's real estate and commercial loan balances were
partially offset by a decreasing consumer loan portfolio. During the first nine
months of 2007, consumer loans decreased $8,775, or 6.3%, from year-end 2006 to
finish at $131,186. The Company's consumer loans are secured by automobiles,
14
mobile homes, recreational vehicles and other personal property. Personal loans
and unsecured credit card receivables are also included as consumer loans. The
decrease in consumer volume was mostly attributable to the automobile lending
segment, which decreased $6,558, or 10.4%, from year-end 2006. 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 (i.e. commercial and real estate loans) 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 and
the rising rate environment from previous years have caused a decline in
automobile loan volume. As rates have aggressively moved up, 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
2007. Also contributing to the decreasing consumer portfolio were all-terrain
vehicle loans, which were down $864, or 14.2%, from year-end 2006, and the
Company's capital line balances, primarily home equity loans, which decreased
$597, or 2.9%, from year-end 2006.
The Company also recognized an increase of $1,376, or 23.3%, in other loans from
year-end 2006. Other loans consist primarily of state and municipal loans and
overdrafts.
The Company will continue to monitor the relatively stable pace of its loan
portfolio growth during the remainder of 2007, and try to expand upon the first
half successes of its commercial loan opportunities. The Company's lending
markets remain challenging and have impacted loan growth due to loan payoffs and
a lower level of loan originations during the nine-month period of 2007.
Furthermore, the Company continues to view consumer loans 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 anticipates total loan growth to be marginal, with volume to
continue at a flat to moderate pace throughout the remainder 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 2007, the Company experienced a
$2,685, or 28.5% decrease in its allowance for loan losses, in large part due to
a decrease in nonperforming loan balances since year-end 2006. During 2006, the
level of nonperforming loans, which consist of nonaccruing loans and accruing
loans past due 90 days or more, had significantly increased from $2,557 at
year-end 2005 to $13,392 at year-end 2006. The nonperforming loan balances
increased primarily from three commercial loan relationships secured by liens on
commercial real estate and equipment, personal guarantees and life insurance.
During this time in 2006, specific allocations were made on behalf of the
portfolio risks and credit deterioration of these nonperforming relationships,
which required corresponding increases in the provision for loan losses to
adequately fund the allowance for loan losses. During the first nine months of
2007, net charge-offs totaled $4,019, which were up $3,240 from the same period
in 2006, in large part due to commercial charge-offs of the specific allocations
that were already reflected in the allowance for loan losses from 2006. As part
of management's strategy to liquidate and resolve its nonperforming
relationships, the Company experienced improvements in the ratio of
nonperforming loans as a percentage of total loans, which finished September 30,
2007 at 0.85%, down from 2.14% at year-end 2006. The Company's ratio of
nonperforming assets, which includes real estate acquired through foreclosure
and referred to as other real estate owned ("OREO"), as a percentage of total
assets also improved from 2.00% at year-end 2006 to 0.96% at September 30, 2007.
At September 30, 2007, nonperforming loans consisted of two large commercial
relationships that represent 0.46% of total loans and 0.37% of total assets.
These nonperforming credits continue to be at various stages of resolution.
15
Management believes that the allowance for loan losses was adequate as of
September 30, 2007, and reflects probable incurred losses in the loan portfolio
as of that date. 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-bearing 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 2007, total
deposits were up slightly by $2,154, or 0.4%, from year-end 2006, resulting from
a funding mix shift from borrowings to deposits as well as minimal growth in
loan balances that eased pressure off funding requirements. The change in
deposits from year-end 2006 came primarily from an increase in the Company's
interest-bearing money market deposits, which increased $7,690, or 13.0%, during
the first nine months of 2007. This growth was largely driven by the Company's
Market Watch product, which generated $6,075 in additional deposit balances from
year-end 2006. Introduced in August 2005, the Market Watch product is a limited
transaction investment account with tiered rates that compete with current
market rate offerings.
Partially offsetting the growth in money market deposits were lower time deposit
balances. Time deposits, particularly certificates of deposit ("CD's"), remain
the most significant source of funding for the Company's earning assets, making
up 57.3% of total deposits. During the first nine months of 2007, time deposits
decreased $4,503, or 1.3%, from year-end 2006. This decrease was primarily due
to maturity runoff of the Company's retail CD balances, decreasing $4,394, or
1.4%, from year-end 2006 as compared to stable IRA and wholesale CD balances
(i.e. brokered CD's). Furthermore, with loan balances at a relatively stable
pace, increasing just 0.4% from year-end 2006, there has not been an aggressive
need to deploy time deposits as a funding source. As market rates have steadied
since June 2006, the Company has seen the cost of its retail CD balances
aggressively reprice upward to reflect current deposit rates. This lagging
effect has caused the Company's retail CD portfolio to become more costly to
fund earning assets, producing an average cost of 4.85% during the first nine
months of 2007 as compared to 4.13% during the same period of 2006. Furthermore,
during the first half of 2007, the economy experienced increases in its
wholesale funding rates, both short- and long-term indices, creating a costly
funding source comparible to that of the Company's retail CD balances. At
September 30, 2007, the average cost of the Company's wholesale CD portfolio was
4.85%, equal to the cost its retail CD portfolio. As a result, management will
continue to utilize both retail and wholesale deposits as funding sources for
future earning asset growth.
Additionally, the Company's interest-free funding source, noninterest bearing
demand deposits, decreased $1,484, or 1.9%, from year-end 2006.
The Company will continue to experience increased competition for deposits in
its market areas, which should challenge net growth in its deposit balances. The
Company will continue to evaluate its deposit portfolio mix to properly utilize
both retail and wholesale funds to support earning assets and minimize interest
costs.
Securities Sold Under Agreements to Repurchase
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were up $11,612, or 51.5%, from year-end 2006. This increase was
mostly due to the fluctuation of various commercial accounts during the third
quarter of 2007.
16
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 2007, other
borrowed funds were down $2,148, or 3.4%, from year-end 2006. The excess funds
available from both repurchase agreements and interest-bearing deposits were
used to reduce other borrowed funds, as well as fund the net growth in loans
from year-end 2006. 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 $51 pre-tax ($33 after taxes) in both the second and third quarters of
2007. This quarterly savings that contributed to margin improvement will
continue throughout the fourth quarter of 2007. For additional discussion on the
terms and conditions of this new trust preferred security issuance, please refer
to "Note 6 - 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,
2007 of $61,019 was up $737, or 1.2%, as compared to the balance of $60,282 on
December 31, 2006. Contributing most to this increase was year-to-date net
income of $5,294 and $347 in proceeds from the issuance of common stock.
Partially offsetting the growth in capital were cash dividends paid of $2,203,
or $.53 per share, year-to-date, and an increase in the amount of treasury share
repurchases. The Company had treasury stock totaling $13,104 at September 30,
2007, an increase of $3,055, or 30.4%, as compared to the total at year-end
2006. The Company anticipates repurchasing additional common shares from time to
time as authorized by its stock repurchase program. In February 2007, the Board
of Directors authorized the repurchase of up to 175,000 of its common shares
between February 16, 2007 and February 15, 2008. As of September 30, 2007,
119,010 shares had been repurchased pursuant to that authorization.
Comparison of
Results of Operations
for the Quarter and Year-To-Date Periods
Ended September 30, 2007 and 2006
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, 2007 compared to the same period in 2006. 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.
17
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 2007, net interest income decreased $103, or 1.4%, as compared
to the same quarter in 2006. Through the first nine months of 2007, net interest
income decreased $443, or 2.0%, as compared to the same period in 2006. The
decrease in quarterly and year-to-date net interest income is primarily due to a
compressed net interest margin caused by higher funding costs as well as average
increases in nonaccrual loan balances.
Total interest income increased $377, or 2.8%, for the third quarter of 2007 and
increased $1,925, or 4.9%, during the first nine months of 2007 as compared to
the same periods in 2006. Growth in 2007's year-to-date average earning assets
of $7,858, or 1.1%, as compared to the same period in 2006 was complemented with
a 29 basis point increase in asset yields, growing from 7.36% to 7.65% for the
same time periods. The growth in average earning assets was largely comprised of
residential real estate loans, investment securities and short-term federal
funds sold since September 2006. Outpacing interest income was interest expense,
increasing $480, or 7.6%, during the third quarter of 2007 and $2,368, or 13.6%,
during the first nine months of 2007 as compared to the same periods in 2006, as
a result of higher funding costs, competitive factors to retain deposits, and
larger average earning asset balances which required additional funding. In a
changing interest rate environment, rates on loans reprice more rapidly than
interest rates paid on deposits. In 2005 and the first half of 2006, net
interest margins were exceeding previous periods in relation to the actions by
the Federal Reserve to increase market rates of interest. As a result, interest
rates on deposits have increased (as a lagging impact of earlier Federal Reserve
action), increasing funding costs and decreasing the net interest margin.
Increases in funding costs came mostly from the Bank's retail CD accounts, which
have been most responsive to the rising rate environment. The year-to-date
weighted average cost of the Bank's retail CD balances grew 76 basis points from
4.09% at September 30, 2006 to 4.85% at September 30, 2007. The change in
interest expense was further impacted by the Company's growth in average money
market accounts largely due to its Market Watch product with tiered market
rates. The Market Watch product competes with other such rate offerings in the
Company's existing market areas. As a result of the rise in rates from previous
periods, the Bank's total weighted average funding costs have increased 45 basis
points from September 30, 2006 to September 30, 2007.
Putting additional pressure on net interest income was an increase in the
Company's year-to-date average nonaccrual loan balances, which have grown from
an average of $4,823 for the nine months ended September 30, 2006 to an average
of $6,983 for the nine months ended September 30, 2007. While this segment of
nonperforming loans continues to improve, with actual nonaccrual balances
decreasing $7,673 from year-end 2006, and decreasing $2,907 from September 30,
2006, the interest income that has not been recorded on these nonaccrual
balances over the past 12 months has limited the increase to earning asset
income and has contributed to net interest margin compression.
As a result of increased funding costs and higher average nonaccrual balances,
the Company's net interest margin decreased 7 basis points from 3.97% to 3.90%
for the third quarter of 2007 and decreased 11 basis points from 4.10% to 3.99%
during the first nine months of 2007 as compared to the same periods in 2006. It
is difficult to speculate on future changes in net interest margin and the
frequency and size of changes in market interest rates as these changes are
dependent upon a variety of factors that are beyond the Company's control.
Despite the recent actions by the Federal Reserve to begin lowering rates for
the first time since June 2003, rates have primarily been steady since June
2006. With market rates having been stable and now heading for what appears to
be future reductions, management believes this will continue to present
opportunities for net interest margin improvement. This is in large part due to
18
repricing rates of the Company's retail CD balances continuing to slow down and
benefit from the lower market rates initiated by the Federal Reserve. This trend
is anticipated to continue throughout the remainder of 2007 and into 2008. 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
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. During the first nine
months of 2007, provision expense decreased $597, or 30.9%, compared to the same
time period in 2006. This decrease is primarily a result of the Company's
decrease in nonperforming loan balances since year-end 2006 combined with
significant commercial loan allocations that were made to the allowance for loan
losses during 2006. At September 30, 2007, the Company's nonperforming loan
balances had decreased to $5,308, compared to $13,392 at year-end 2006, as a
result of charge-offs of some of the troubled commercial loan relationships
already discussed under the caption "Allowance for Loan Losses" within this
management's discussion and analysis. As a result, through the first nine months
of 2007, the ratio of the Company's nonperforming loans to total loans decreased
to 0.85%, compared to 2.14% at December 31, 2006, while nonperforming assets to
total assets also decreased to 0.96%, compared to 2.00% for the same time
period. Management believes that the allowance for loan losses is adequate and
reflective of probable losses in the portfolio. The allowance for loan losses
was 1.07% of total loans at September 30, 2007, down from 1.51% at December 31,
2006. Future provisions to the allowance for loan losses will continue to be
based on management's quarterly in-depth evaluation that is discussed further in
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, 2007 was $1,556,
unchanged from the same quarterly period in 2006. Noninterest income for the
nine months ended September 30, 2007 was $4,315, a decrease of $78, or 1.8%,
from the same period in 2006. These results were impacted most by decreases in
the Company's tax-free bank owned life insurance ("BOLI") investment proceeds
partially offset by increases in OREO rental income, tax processing fees and
debit card interchange fees.
BOLI income was down $97, or 35.9%, during the third quarter of 2007, and down
$212, or 29.2%, during the first nine months of 2007, as compared to the same
periods of 2006, driven mostly by tax-free life insurance proceeds of $87 that
were recorded in the third quarter of 2006 that were not repeated in 2007.
Furthermore, the Company also realized $86 of tax-free life insurance proceeds
in the second quarter of 2006. As a result of these non-recurring timing
differences, management anticipates revenues from BOLI investments to be lower
during the remainder of 2007 as compared to 2006. Noninterest income was also
negatively impacted by lower monthly service charges on deposit accounts,
decreasing $30, or 3.7%, during the third quarter of 2007, and $53, or 2.4%,
during the nine-month period of 2007 as compared to the same periods in 2006,
primarily due to a lower volume of overdraft fees.
Partially offsetting the decreases in noninterest income were increases in other
noninterest income, which include rental income from OREO properties,
improvements in the Company's tax refund processing fees and debit card
interchange fees. Rental income from OREO properties totaled $97 and $126 for
the third quarter and nine-month periods of 2007, primarily from one large
commercial facility located in Kanawha County, West Virginia. Also, in 2006, the
Company began its participation in a new tax refund loan service where it served
as a facilitator for the clearing of tax refunds for a tax software provider. As
a result, the Company's tax refund processing fees during the first nine months
of 2007 totaled $110, a $64 increase over the same period in 2006. Further
19
enhancing the growth to other noninterest income was debit card interchange
income, increasing $16, or 13.0%, during the third quarter of 2007, and $48, or
13.4%, during the nine-month period of 2007 as compared to the same periods in
2006. The volume of transactions utilizing the Company's Jeanie(R) Plus debit
card continue to increase over a year ago and are comprised mostly of gasoline
and restaurant purchases.
Noninterest Expense
During the third quarter of 2007, total noninterest expense was down $11, or
0.2%, as compared to the same period in 2006. During the nine months ended
September 30, 2007, noninterest expense reflects a minimal increase of $21, or
0.1%, as compared to the same period in 2006. Contributing to the quarterly and
year-to-date noninterest expense changes were the costs associated with
resolving nonperforming loans. These loan expenses caused other noninterest
expenses to grow $64, or 1.5%, during the first nine months of 2007, as compared
to the same period in 2006. Loan expenses were realized at a lower pace during
the third quarter of 2007, causing other noninterest expense to decrease $43, or
2.8%, as compared to the same quarterly period in 2006. Loan expenses (i.e.,
foreclosure costs) that have been incurred as part of resolving nonperforming
credits during 2007 have been necessary to improve asset quality and lower
portfolio risk.
Further increases to noninterest expense were recorded within the Company's
occupancy expense, which was up $31, or .3%, during the third quarter of 2007,
and $100, or 10.0%, during the first nine months of 2007, as compared to the
same periods in 2006. The increases were in large part due to the Company's
expansion of its Jackson, Ohio facility. In late 2006, the Company invested over
$2,000 to replace its Jackson, Ohio facility and, during that time, ceased
operations in its Jackson superbank facility. The facility was placed in service
and depreciation commenced during the fourth quarter of 2006. Occupancy costs
during 2007 will continue to outpace the occupancy costs of 2006 as a result of
this new facility.
Partially offsetting occupancy and other noninterest expense were lower salary
and employee benefit costs. Salaries and employee benefits, the Company's
largest noninterest expense item, decreased $31, or 0.9%, for the third quarter
of 2007, and $155, or 1.6%, during the first nine months of 2007, as compared to
the same periods in 2006. The decrease was largely due to lower accrued
incentive costs as well as a lower number of full-time equivalent ("FTE")
employees. At September 30, 2007, the Company had 253 FTE employees on staff as
compared to 258 FTE employees at September 30, 2006. The total of all remaining
noninterest expense categories was relatively unchanged. The stable level of
noninterest expenses during 2007 largely reflects the continued efforts by
management to improve efficiency by placing strong emphasis on overhead expense
control.
The Company's efficiency ratio is defined as noninterest expense as a percentage
of fully tax-equivalent net interest income plus noninterest income. While the
Company has experienced good cost containment in its overhead expenses,
decreases to both quarterly and year-to-date net interest income have negatively
affected the Company's efficiency. The efficiency ratio for the three months
ended September 30, 2007 was 64.47%, up from 64.09% for the same period in 2006.
The efficiency ratio for the nine months ended September 30, 2007 was 64.16%, up
from 63.02% for the same period in 2006.
20
Capital Resources
All of the Company's capital ratios exceeded the regulatory minimum guidelines
as identified in the following table:
Coompany Ratios Regulatory Well
9/30/07 12/31/06 Minimum Capitalized
---------- ---------- -------------- --------------
Tier 1 risk-based capital 12.2% 12.2% 4.00% 6.0%
Total risk-based capital ratio 13.3% 13.4% 8.00% 10.0%
Leverage ratio 9.6% 9.6% 4.00% 5.0%
Cash dividends paid of $2,203 for the first nine months of 2007 represent a 3.9%
increase over the cash dividends paid during the same period in 2006. The
quarterly dividend rate increased from $0.17 per share in 2006 to $0.18 per
share in 2007. The dividend rate has increased in proportion to the consistent
growth in retained earnings. At September 30, 2007, approximately 81% of the
Company's shareholders were enrolled in the Company's dividend reinvestment
plan. As part of the Company's stock purchase program, management will continue
to utilize reinvested dividends and voluntary cash, if necessary, to purchase
shares on the open market to be redistributed through the 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 $99,839
represented 12.8% of total assets at September 30, 2007. In addition, the FHLB
offers advances to the Bank which further enhances the Bank's ability to meet
liquidity demands. At September 30, 2007, the Bank could borrow an additional
$68,000 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 4 - 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.
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
21
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 in
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 loans placed on this report are: loans
past due 60 or more days, nonaccrual loans 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 3 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 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
22
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 commercial 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 over a 12 month horizon to plus or minus 10% of the base net
interest income assuming a parallel rate shock of up 100, 200 and 300 basis
points and down 100, 200 and 300 basis points.
The following table presents the Company's estimated net interest income
sensitivity:
September 30, 2007 December 31, 2006
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
------------------------ ------------------------ ------------------------
+300 (6.75%) (5.95%)
+200 (3.82%) (3.26%)
+100 (1.71%) (1.37%)
-100 1.50% 1.10%
-200 2.92% 1.74%
-300 5.14% 2.65%
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, 2007, the Company's analysis of net interest income reflects a
modest liability sensitive position. Based on current assumptions, an
instantaneous increase in interest rates would negatively impact net interest
income primarily due to the duration of earning assets exceeding the duration of
23
interest-bearing liabilities in conjuction with variable rate loans reaching
their annual interest rate cap or potentially their lifetime interest rate cap.
Furthermore, in a rising rate environment, the prepayment amounts on loans and
mortgage-backed securities slow down producing less cash flow to reinvest at
higher interest rates. During an instantaneous decrease in interest rates, the
opposite occurs producing an increase in net interest income. With the recent
action taken by the Federal Reserve to reduce short-term interest rates,
management anticipates this to have a positive impact on net interest income. As
compared to December 31, 2006, the Company's interest rate risk profile has
become more liability sensitive due to the growth in fixed-rate residential
mortgages.
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, 2007, 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
In addition to other information set forth in this Quarterly Report on Form
10-Q, 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, 2006, as filed with the U.S. Securities and Exchange Commission on
March 16, 2007 and available at www.sec.gov. These risk factors could materially
affect the Company's business, financial condition or future results. The risk
24
factors described in the Annual Report on Form 10-K are not the only risks
facing the Company. 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(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, 2007:
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, 2007 24,631 $25.25 24,631 72,328
August 1 - 31, 2007 5,806 $25.00 5,806 66,522
September 1 - 30, 2007 10,532 $25.06 10,532 55,990
----------------- --------------------- ------------------------- -----------------------------
TOTAL 40,969 $25.17 40,969 55,990
================= ===================== ========================= =============================
(1) On July 21,2006, Ohio Valley's Board of Directors announced its plan to
repurchase up to 175,000 of its common shares between August 16, 2006 and
February 16, 2007. On February 9, 2007, Ohio Valley's Board of Directors
announced its plan to repurchase up to 175,000 of its common shares between
February 16, 2007 and February 15, 2008.
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.
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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 8, 2007 By: /s/ Jeffrey E. Smith
------------------------------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: November 8, 2007 By: /s/ Scott W. Shockey
------------------------------------------
Scott W. Shockey
Vice President and Chief Financial Officer
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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.
Incorporated herein by reference to Exhibit 3(a)
to Ohio Valley's Annual Report on Form 10-K for
fiscal year nded December 31, 1997 (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.
27