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: March 31, 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 May 9, 2008 was
4,038,017.
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..........24
Item 4. Controls and Procedures............................................25
PART II - OTHER INFORMATION...................................................25
Item 1. Legal Proceedings.................................................25
Item 1A. Risk Factors......................................................25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......26
Item 3. Defaults Upon Senior Securities...................................26
Item 4. Submission of Matters to a Vote of Security Holders...............26
Item 5. Other Information.................................................26
Item 6. Exhibits and Reports on Form 8-K..................................26
SIGNATURES....................................................................27
EXHIBIT INDEX.................................................................28
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)
--------------------------------------------------------------------------------
March 31, December 31,
2008 2007
----------------- -----------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 17,946 $ 15,584
Federal funds sold 15,732 1,310
----------------- -----------------
Total cash and cash equivalents 33,678 16,894
Interest-bearing deposits in other financial institutions 507 633
Securities available-for-sale 71,333 78,063
Securities held-to-maturity
(estimated fair value: 2008 - $17,462; 2007 - $15,764) 18,589 15,981
Federal Home Loan Bank stock 6,114 6,036
Total loans 633,232 637,103
Less: Allowance for loan losses (6,898) (6,737)
----------------- -----------------
Net loans 626,334 630,366
Premises and equipment, net 9,760 9,871
Accrued income receivable 3,450 3,254
Goodwill 1,267 1,267
Bank owned life insurance 16,475 16,339
Other assets 4,507 4,714
----------------- -----------------
Total assets $ 792,014 $ 783,418
================= =================
LIABILITIES
Noninterest-bearing deposits $ 86,348 $ 78,589
Interest-bearing deposits 524,940 510,437
----------------- -----------------
Total deposits 611,288 589,026
Securities sold under agreements to repurchase 30,043 40,390
Other borrowed funds 61,881 67,002
Subordinated debentures 13,500 13,500
Accrued liabilities 13,334 11,989
----------------- -----------------
Total liabilities 730,046 721,907
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 32,664 32,664
Retained earnings 37,876 37,763
Accumulated other comprehensive income (loss) 815 (115)
Treasury stock, at cost (2008 - 590,731 shares;
2007 - 567,403 shares) (14,029) (13,443)
----------------- -----------------
Total shareholders' equity 61,968 61,511
----------------- -----------------
Total liabilities and shareholders' equity $ 792,014 $ 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
March 31,
2008 2007
---------------- -----------------
Interest and dividend income:
Loans, including fees $ 12,642 $ 12,440
Securities:
Taxable 796 752
Tax exempt 141 128
Dividends 79 95
Other Interest 76 87
---------------- -----------------
13,734 13,502
Interest expense:
Deposits 4,886 5,267
Securities sold under agreements to repurchase 144 226
Other borrowed funds 757 612
Subordinated debentures 272 326
---------------- -----------------
6,059 6,431
---------------- -----------------
Net interest income 7,675 7,071
Provision for loan losses 701 386
---------------- -----------------
Net interest income after provision for loan losses 6,974 6,685
Noninterest income:
Service charges on deposit accounts 710 660
Trust fees 61 56
Income from bank owned life insurance 175 180
Gain on sale of loans 45 39
Loss on sale of other real estate owned (41) (1)
Other 634 459
---------------- -----------------
1,584 1,393
Noninterest expense:
Salaries and employee benefits 3,429 3,233
Occupancy 386 364
Furniture and equipment 235 270
Data processing 265 194
Other 1,437 1,460
---------------- -----------------
5,752 5,521
---------------- -----------------
Income before income taxes 2,806 2,557
Provision for income taxes 841 782
---------------- -----------------
NET INCOME $ 1,965 $ 1,775
================ =================
Earnings per share $ .48 $ .42
================ =================
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
March 31,
2008 2007
----------------- -----------------
Balance at beginning of period $ 61,511 $ 60,282
Comprehensive income:
Net income 1,965 1,775
Change in unrealized loss
on available-for-sale securities 1,410 233
Income tax effect (479) (79)
----------------- -----------------
Total comprehensive income 2,896 1,929
Proceeds from issuance of common
stock through dividend reinvestment plan ---- 347
Cash dividends (774) (714)
Shares acquired for treasury (586) (915)
Cumulative-effect adjustment in adopting SFAS 106 (1,079) ----
----------------- -----------------
Balance at end of period $ 61,968 $ 60,929
================= =================
Cash dividends per share $ 0.19 $ 0.17
================= =================
Shares from common stock issued
through dividend reinvestment plan 1 13,382
================= =================
Shares acquired for treasury 23,328 36,150
================= =================
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)
--------------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
--------------- ---------------
Net cash provided by operating activities: $ 2,669 $ 1,693
Investing activities:
Proceeds from maturities of securities available-for-sale 11,089 1,552
Purchases of securities available-for-sale (2,944) (1,501)
Proceeds from maturities of securities held-to-maturity 449 10
Purchases of securities held-to-maturity (3,060) ----
Change in interest-bearing deposits in other financial institutions 126 (104)
Net change in loans 2,991 (6,261)
Proceeds from sale of other real estate owned 141 60
Purchases of premises and equipment (111) (292)
--------------- ---------------
Net cash provided by (used in) investing activities 8,681 (6,536)
Financing activities:
Change in deposits 22,262 8,922
Cash dividends (774) (714)
Proceeds from issuance of common stock
through dividend reinvestment plan ---- 347
Purchases of treasury stock (586) (915)
Change in securities sold under agreements to repurchase (10,347) 5,531
Proceeds from Federal Home Loan Bank borrowings 7,000 ----
Repayment of Federal Home Loan Bank borrowings (7,010) (3,020)
Change in other short-term borrowings (5,111) (7,139)
Proceeds from subordinated debentures ---- 8,500
Repayment of subordinated debentures ---- (8,500)
--------------- ---------------
Net cash provided by financing activities 5,434 3,012
--------------- ---------------
Change in cash and cash equivalents 16,784 (1,831)
Cash and cash equivalents at beginning of period 16,894 20,765
--------------- ---------------
Cash and cash equivalents at end of period $ 33,678 $ 18,934
=============== ===============
Supplemental disclosure:
Cash paid for interest $ 7,120 $ 7,156
Cash paid for income taxes 70 ----
Non-cash transfers from loans to other real estate owned 340 1,237
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 March 31, 2008, and its results of operations and cash flows
for the periods presented. The results of operations for the three months ended
March 31, 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 4,060,585 and 4,192,809 for
the three months ended March 31, 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.
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
7
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 March 31, 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 did not elect the fair value option for
any financial assets or financial liabilities as of January 1, 2008.
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 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
8
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 12/31/07.
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) or 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 from quoted prices on nationally
recognized securities exchanges.
Impaired Loans: Impaired loans are reported at the fair value of the underlying
collateral. Collateral values are estimated using Level 2 inputs based on third
party appraisals.
Other Real Estate Owned: These assets are reported at the lower of the loan
carrying amount at foreclosure or fair value. Fair value is based on third party
appraisals which are considered Level 2 inputs.
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 March 31, 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 ---- $ 71,333 ----
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 March 31, 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 ---- $ 4,284 ----
Other Real Estate Owned ---- 493 ----
NOTE 3 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
March 31, 2008 December 31, 2007
------------------ -------------------
Residential real estate $ 248,980 $ 250,483
Commercial real estate 193,824 196,523
Commercial and industrial 56,891 55,090
Consumer 126,077 127,832
All other 7,460 7,175
------------------ -------------------
$ 633,232 $ 637,103
================== ===================
At March 31, 2008 and December 31, 2007, loans on nonaccrual status were
approximately $7,145 and $2,734, respectively. Loans past due more than 90 days
and still accruing at March 31, 2008 and December 31, 2007 were $1,715 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
years ended March 31:
2008 2007
----------- -----------
Balance - January 1, $ 6,737 $ 9,412
Loans charged off:
Commercial (1) 176 1,211
Residential real estate 80 169
Consumer 555 460
----------- -----------
Total loans charged off 811 1,840
Recoveries of loans:
Commercial (1) 93 121
Residential real estate 3 49
Consumer 175 272
----------- -----------
Total recoveries of loans 271 442
----------- -----------
Net loan charge-offs (540) (1,398)
Provision charged to operations 701 386
----------- -----------
Balance - March 31, $ 6,898 $ 8,400
=========== ===========
(1) Includes commercial and industrial and commercial real estate loans.
Information regarding impaired loans is as follows:
March 31, December 31,
2008 2007
--------------- -----------------
Balance of impaired loans $ 11,566 $ 6,871
Less portion for which no specific
allowance is allocated 7,282 2,568
--------------- -----------------
Portion of impaired loan balance for which a
specific allowance for credit losses is allocated $ 4,284 $ 4,303
=============== =================
Portion of allowance for loan losses specifically
allocated for the impaired loan balance $ 1,312 $ 1,312
=============== =================
Average investment in impaired loans year-to-date $ 11,563 $ 6,918
=============== =================
Interest recognized on impaired loans was $84 and $85 for the three-month
periods ended March 31, 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
3.54% of total loans were unsecured at March 31, 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 March 31, 2008, the
contract amounts of these
11
instruments totaled approximately $81,013, 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 March 31, 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
-------------------- ----------------- --------------- ----------------
March 31, 2008.................. $ 51,169 $ 5,550 $ 5,162 $ 61,881
December 31, 2007............... $ 55,779 $ 5,723 $ 5,500 $ 67,002
Pursuant to collateral agreements with the FHLB, advances are secured by
$228,472 in qualifying mortgage loans and $6,114 in FHLB stock at March 31,
2008. Fixed rate FHLB advances of $51,169 mature through 2010 and have interest
rates ranging from 2.13% to 6.62%. There were no variable rate FHLB borrowings
at March 31, 2008.
At March 31, 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 March 31, 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 $169,238 at March 31, 2008.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of 3.75% to
6.25% and are due at various dates through a final maturity date of February 11,
2009. A total of $3,521 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 1.98% at March 31, 2008 and 4.00% at December 31, 2007. Various
investment securities from the Bank used to collateralize the FRB notes totaled
$5,945 at March 31, 2008 and 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 $41,750 at March 31,
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 $ 9,004 $ 5,225 $ 5,162 $ 19,391
Year Ended 2009 16,005 325 ---- 16,330
Year Ended 2010 26,006 ---- ---- 26,006
Year Ended 2011 6 ---- ---- 6
Year Ended 2012 6 ---- ---- 6
Thereafter 142 ---- ---- 142
------------------- ----------------- --------------- -----------------
$ 51,169 $ 5,550 $ 5,162 $ 61,881
=================== ================= =============== =================
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.
Net income increased by $190, or 10.7%, to reach $1,965 for the three months
ended March 31, 2008, compared to the same period in 2007. Earnings per share
for the first quarter of 2008 finished at $.48, up 14.3% over the same period in
2007. 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),
increased to 1.00% and
13
13.02% during the first quarter of 2008, as compared to .94% and 11.91%,
respectively, for the same period in 2007. The Company's growth in earnings
during the first quarter 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 an 8.5% improvement in net
interest income; and 2) noninterest income improvement of 13.7% over 2007's
first quarter due to the increased transaction volume related to the Company's
tax refund loans and deposit clearing services as well as service charges on
deposit accounts.
The consolidated total assets of the Company increased $8,596, or 1.1%, during
the first quarter of 2008 to finish at $792,014. This moderate increase in
assets was led by an excess liquidity position, causing an increase of $14,422
in overnight federal funds sold balances from year-end 2007. Federal funds sold
balances were partially offset by lower loan balances, which decreased $3,871
from year-end 2007, and lower investment securities, which decreased $4,122 from
year-end 2007. Loan growth continues to be challenged by the declining volume of
consumer loans as well as decreases in its commercial and real estate loan
portfolios during the first quarter of 2008 as compared to year-end 2007.
Maturity runoff of U.S. Government sponsored entity securities led the decrease
in the Company's investment securities. While the demand for loans decreased
during the first quarter of 2008, the Company was able to benefit from growth in
its interest-bearing deposits of $14,503 from year-end 2007, to use as funding
sources during the remaining three quarters of 2008. Interest-bearing deposit
growth was led by surges in the Company's public fund NOW accounts, up $23,301
from year-end 2007, and Market Watch product, up $4,170 from year-end 2007,
partially offset by a decrease in time deposits of $15,310 from year-end 2007.
Furthermore, the Company's noninterest-bearing demand deposits increased $7,759
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 $10,347 and $5,121, respectively, from year-end
2007.
Comparison of
Financial Condition
at March 31, 2008 and December 31, 2007
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at March 31, 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 March 31,
2008, cash and cash equivalents had increased $16,784, or 99.3%, to $33,678 as
compared to $16,894 at December 31, 2007. The increased liquidity position of
the Company at March 31, 2008 was the result of lower loan demand combined with
increases in both interest- and noninterest-bearing deposits. Interest-bearing
deposits were impacted by growth in the Company's public fund NOW accounts.
Noninterest-bearing deposit growth was driven by seasonal volume of tax refund
check and deposit clearing transactions during the first quarter of 2008. The
Company used these excess funds to invest in overnight federal funds sold
balances, which increased $14,422 to reach $15,732 at March 31, 2008 as compared
to only $1,310 at year-end 2007. 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.
14
Securities
During the first quarter of 2008, investment securities decreased $4,122 to
finish at $89,922, a decrease of 4.4% as compared to year-end 2007. The
Company's investment securities portfolio consists of mortgage-backed
securities, U.S. government sponsored entity securities and obligations of
states and political subdivisions. U.S. government sponsored entity securities
decreased $7,970, or 20.2%, as a result of two large maturities in the first
quarter of 2008. In addition to attractive yield opportunities and a desire to
increase diversification within the Company's securities portfolio, the demand
for U.S. government sponsored entity securities has also been to satisfy
pledging requirements for repurchase agreements. In the first quarter of 2008,
the Company's repurchase agreements decreased 25.6%, reducing the need to secure
these balances and impacted the runoff in U.S. government sponsored entity
securities. This decrease was partially offset by increases in both
mortgage-backed securities and obligations of states and political subdivisions,
which were up $1,238, or 3.2%, and $2,610, or 16.4%, 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 $39,902, or 44.4% of total investments at March 31, 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 $1,926
from January 1, 2008 through March 31, 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 quarter of 2008,
total loans were down $3,871, or 0.6%, from year-end 2007. Lower loan balances
were mostly influenced by consumer loans, which were down $1,755, or 1.4%, 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 are also included as consumer loans. The
decrease in consumer volume was mostly attributable to the automobile indirect
lending segment, which decreased $1,222, or 4.2%, 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 quarter of 2008. In addition,
the Company's all-terrain vehicle loans decreased $405, or 11.5%, from year-end
2007.
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. For the first quarter of
2008, total residential real estate loan balances decreased $1,503, or 0.6%,
from year-end 2007 to total $248,980. The decrease was largely driven by a
reduction in the Company's one-year adjustable-rate mortgage balances of $3,154,
or 7.5%, 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 has begun 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 first quarter as compared
to year-end 2007. Partially offsetting
15
the decreases in variable real estate loan balances was the continued consumer
preference of the Company's longer-termed, fixed-rate real estate loans, which
were up $1,959, or 1.2%, from year-end 2007. 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 $2,983
in loans during the first three months of 2008, which were up $1,053, or 54.5%,
over the volume in the first three months of 2007. The remaining real estate
loan portfolio balances decreased $308 primarily from the Company's other
variable-rate real estate loan products.
The Company's commercial loans comprise the largest portion of the Company's
loan portfolio. During the first quarter of 2008, total commercial loans, which
include commercial real estate loans, and commercial and industrial loans,
decreased $898, or 0.4%, from year-end 2007. 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 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 real estate, the Company's largest segment of commercial
loans, contributed most to lower commercial loan balances during the first
quarter of 2008, decreasing $2,699, or 1.4%, largely due to commercial loan
paydowns and payoffs. Commercial real estate loans are largely comprised 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. Partially offsetting lower
commercial real estate loan balances was growth in the Company's commercial and
industrial loans, which were up $1,801, or 3.3%, from year-end 2007. The
commercial loan portfolio, including participation loans, consists primarily of
rental property loans (18.3% of portfolio), medical industry loans (13.7% of
portfolio), land development loans (12.2% of portfolio), and hotel and motel
loans (10.9% of portfolio). During the first quarter 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 58.5% of total originations, and the growing West
Virginia markets, which accounted for 31.5% 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.
The Company recognized an increase of $285 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 state and municipal loans of $253.
The Company continues to monitor the pace of its loan volume, as it has
experienced a 0.6% drop-off within its total loan portfolio during the first
quarter of 2008. The well-documented housing market crisis and rising energy
costs have impacted consumer spending and has led to lower consumer demand for
loans. 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 expects total loan growth in 2008 to be challenged, with
volume to remain relatively stable 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.
16
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 three months of 2008, the Company's allowance
for loan losses remained stable, finishing at $6,898, as compared to $6,737 at
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 $8,860 at quarter-end 2008. The nonperforming loan balances
increased primarily from one commercial loan relationship which accounted for
56.0% of total nonperforming loans and 53.1% of nonperforming assets. While this
relationship accounted for the deterioration in the Company's asset quality at
March 31, 2008, management believes the remaining balance of this commercial
relationship is adequately collateralized based on the current liquidation value
of the underlying property. As a result, no specific allocations were made to
the allowance for loan losses on behalf of this nonperforming relationship.
Management believes it has appropriately reviewed and considered this loan
relationship in establishing the allowance for loan losses at March 31, 2008,
even though no specific allocations were made. During the first quarter of 2008,
net charge-offs totaled $540, which were down $858 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. As a result of the
commercial loan relationship mentioned earlier, the Company's ratio of
nonperforming loans as a percentage of total loans was 1.40% at March 31, 2008,
up from 0.57% at year-end 2007. 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 increased from
0.50% at year-end 2007 to 1.18% at March 31, 2008. This nonperforming credit
continues to be at various stages of resolution. 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 three months of 2008, total
deposits were up $22,262, or 3.8%, from year-end 2007. The change in deposits
came primarily from an increase in the Company's interest-bearing demand
deposits, non-interest bearing deposits and money market balances.
Interest-bearing demand deposits increased $24,616, or 37.5%, during the first
quarter of 2008. This growth was largely driven by a $23,301 increase in public
fund balances related to the local city and county school construction projects
currently in process within Gallia County, Ohio. Also contributing to the growth
in the Company's public fund deposits was the collection of real estate taxes by
local municipalities who maintain various deposit accounts (NOW accounts) within
the Bank. These deposits from seasonal real estate tax collections are
short-term in nature and typically decrease in the second quarter.
The Company's interest-free funding source, noninterest bearing demand deposits,
increased $7,759, or 9.9%, from year-end 2007. The spike in demand deposits was
largely the result of the Company's relationship with a third party tax software
provider that allows the Bank to actively participate as a facilitator of
electronic tax refund checks ("ERC's") and electronic tax refund deposits
("ERD's") that are transacted throughout the United States. These ERC's and
ERD's are facilitated through several business checking accounts on hand at the
Bank. At March 31, 2008, the Bank had $7,754 in excess ERC's and ERD's that had
yet to clear through these business checking accounts. Also adding to the
increase in interest-free funds was growth in the Company's free checking
products, which were up $1,029, or 12.9%. This includes the Company's Easy
Checking accounts, which feature no service charge or minimum balance
requirements to the customer. The Easy Checking account, a transaction account
with
17
electronic features, increases the Company's core deposits, increases
interchange fees and helps to lower processing costs.
Partially offsetting deposit growth were time deposits, decreasing $15,310, or
4.5%, from year-end 2007. Time deposits, particularly CD's, are the most
significant source of funding for the Company's earning assets, making up 53.3%
of total deposits. With loan balances on a declining pace, down 0.6% 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 begin 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 4.69% during the first quarter of 2008 as compared
to 4.78% during the same period of 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 4.84% during the first
quarter of 2008 as compared to 4.76% during the same period of 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 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 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 $10,347, or 25.6%, from year-end 2007. This increase
was mostly due to seasonal fluctuations of two commercial accounts in the first
quarter 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 three months of 2008, other
borrowed funds were down $5,121, or 7.6%, from year-end 2007. Management used
the growth in deposit proceeds to repay FHLB borrowings during the first quarter
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 quarter 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.
18
Shareholders' Equity
The Company maintains a capital level that exceeds regulatory requirements as a
margin of safety for its depositors. Total shareholders' equity at March 31,
2008 of $61,968 was up $457, or 0.7%, as compared to the balance of $61,511 on
December 31, 2007. Contributing most to this increase was year-to-date net
income of $1,965 partially offset by cash dividends paid of $774, or $.19 per
share, year-to-date, and an increase in the amount of share repurchases. The
Company had treasury stock totaling $14,029 at March 31, 2008, an increase of
$586 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 March 31, 2008, 8,845 shares had been repurchased pursuant to that
authorization.
Comparison of
Results of Operations
for the Quarter Ended March 31, 2008
The following discussion focuses, in more detail, on the consolidated results of
operations of the Company for the quarterly period ended March 31, 2008 compared
to the same period in 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.
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
first quarter of 2008, net interest income increased $604, or 8.5%, as compared
to the same quarter in 2007, primarily due to an expanding net interest margin
caused by lower funding costs.
Total interest income increased $232, or 1.7%, for the first quarter of 2008 as
compared to the same period in 2007. Growth in 2008's year-to-date average
earning assets of $21,571, or 3.0%, as compared to the same period in 2007,
contributed to the growth in interest revenue. The growth in average earning
assets was largely comprised of residential real estate loan and commercial real
estate loan participations since March 2007. Further complementing asset yields
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 them 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 quarter of 2008, the Company had recognized over $213 in RAL
fees as compared to $65 during the same period in 2007.
Partially offsetting the positive contributions to net interest income from
earning asset growth and RAL loan fees was a 15 basis point decrease in the
Company's asset yields, dropping from 7.64% at March 31, 2007 to 7.49% at March
31, 2008. In relation to lower earning asset yields, the Company's total
interest expense decreased $372, or 5.8%, during the first quarter of 2008 as
compared to the same period in 2007, as a result of lower interest-bearing
liability costs. Since September 2007, the Federal Reserve has reduced the
target Federal Funds rate 300 basis points. These actions have caused a
corresponding downward shift in short-term interest rates, while longer-term
rates have not decreased to the same extent. Although rates on loans reprice
more rapidly than interest rates paid on deposits during a changing interest
rate environment, the Bank had positioned its balance sheet so that there were
more interest-bearing
19
liabilites subject to reprice and, therefore, were more reactive to the
aggressive changes in short-term interest rates than earning 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. As a result of the decrease in rates from September 2007, the Bank's
total weighted average funding costs have decreased 31 basis points from March
31, 2007 to March 31, 2008.
As a result of lower funding costs, the Company's quarterly net interest margin
increased 19 basis points from 4.02% at March 31, 2007 to 4.21% at March 31,
2008. It is difficult to speculate on future changes in net interest margin and
the frequency and size of changes in market interest rates. However, as
evidenced by the Federal Reserve's most recent action on April 30, 2008 of
dropping the target Federal Funds rate by "only" 25 basis points as compared to
much larger increments in previous periods, management believes that market
rates are beginning to approach their "target" zone of economic stability. 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. With market rates seemingly beginning to stabilize from the aggressive
rate cuts over the past seven months, management believes that there will
continue to be opportunities for net interest margin improvement during the rest
of 2008, with the Company's retail CD portfolio poised to mature and reprice at
the lower market rates. 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 quarter of
2008, provision expense increased $315, or 81.6%, over the same time period in
2007. This increase is primarily 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 quarter of 2007, charge-offs
were recorded on the specific allocation established for the impaired loan of
2006, effectively causing the majority of the $1,211 in commercial loan
charge-offs at March 31, 2007. While the Company's nonperforming loans and
nonperforming assets are up from year-end 2007, management believes the
liquidation values behind the commercial loan relationship that has caused this
increase in nonperforming loans are adequate and, therefore, no specific
allocations were made to the allowance for loan losses. Management believes that
the allowance for loan losses was adequate at March 31, 2008 and reflective of
probable losses in the portfolio. The allowance for loan losses was 1.09% of
total loans at March 31, 2008, up from 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 March 31, 2008 was $1,584, an
increase of $191, or 13.7%, over the same period in 2007. These quarterly
results were impacted 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 during the first quarter of 2008, increasing non-sufficient fund fees
by $62, or 12.0%, over the same quarterly period in 2007. Also contributing to
noninterest revenue growth were activities from other noninterest
20
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. These tax
refunds are in the form of two items: electronic refund checks and electronic
refund deposits. ERC's and ERD's are granted by tax preparers to taxpayers who
wish to receive their funds electronically via an ACH. The Company then
facilitates the clearing of the ERC/ERD items via a demand deposit business
account. During the first quarter of 2008, the Company's tax refund processing
fees totaled over $221, an increase of $136, or 158.8%, over the same period in
2007. Further enhancing growth in other noninterest income was debit card
interchange income, increasing $18, or 13.9%, during the first quarter of 2008
as compared to the same period 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 300,464
transactions during the first three months of 2008, up 9.8% from the 273,536
transactions during the same period in 2007, derived mostly from gasoline and
restaurant purchases.
Partially offsetting the growth in noninterest income was an increase in the
loss on sale of OREO, with losses totaling $41 at March 31, 2008 as compared to
$1 at March 31, 2007. The total of all remaining noninterest income categories
remained relatively unchanged from the prior year. The total growth in
noninterest income demonstrates management's desire to leverage technology to
enhance efficiency and diversify the Company's revenue sources.
Noninterest Expense
During the first quarter of 2008, total noninterest expense was up $231, or
4.2%, as compared to the same period in 2007. Contributing to the quarterly
increase were salaries and employee benefits, the Company's largest noninterest
expense item, which increased $196, or 6.1%, for the first quarter of 2008 as
compared to the same time period in 2007. The increase was largely due to higher
accrued incentive costs as well as increased health insurance benefit expenses.
The Company's full-time equivalent ("FTE") employees remained relatively
unchanged at March 31, 2008 with 253 FTE employees on staff as compared to 252
FTE employees at March 31, 2007. Also increasing were data processing expenses,
which were up $71, or 36.6%, over the same quarterly period in 2007. This was in
large part due to the continued higher monthly costs incurred on the Bank's
implementation of new technology to better serve the convenience of its consumer
base, which include ATM, debit and credit cards, as well as various online
banking products, including net teller and bill pay.
Partially offsetting the increases to overhead expenses was a decrease in
occupancy, furniture and equipment costs, which decreased $13, or 2.1%, in the
first quarter of 2008 as compared to the same period in 2007. This was in large
part due to the maturities of depreciation terms on asset acquisitions from
previous years causing depreciation expense to fall from a year ago.
Further decreases were recognized within other noninterest expense, led by loan
costs decreasing $137, and corporate franchise tax decreasing $15 during the
first quarter of 2008 as compared to the same period in 2007. Management
anticipates loan expenses to be below the costs incurred from 2007 due to the
larger than normal volume of foreclosure costs that were incurred during 2007.
These large loan and collection expenses from last year were the result of
having to resolve nonperforming credits and improve asset quality during this
time. Partially offsetting loan and corporate franchise tax decreases within
other noninterest expense were increases in the Company's marketing costs, which
were up $51 from last year, that include advertising, donations and public
relations activities.
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,
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finishing at 61.38% for the three months ended March 31, 2007, as compared to
64.49% for the same period 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
3/31/08 12/31/07 Minimum
------- -------- ----------
Tier 1 risk-based capital 12.0% 12.0% 4.00%
Total risk-based capital ratio 13.1% 13.1% 8.00%
Leverage ratio 9.3% 9.5% 4.00%
Cash dividends paid of $774 for the first three months of 2008 represent an 8.4%
increase over the cash dividends paid during the same period in 2007. The
quarterly dividend rate increased from $0.17 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 March 31, 2008, 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
$106,758 represented 13.5% of total assets at March 31, 2008. In addition, the
FHLB offers advances to the Bank which further enhances the Bank's ability to
meet liquidity demands. At March 31, 2008, the Bank could borrow an additional
$76,000 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.
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
22
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 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.
23
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 commercial loans,
both commercial real estate and commercial and industrial, 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:
March 31, 2008 December 31, 2007
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
------------------------ -------------------- --------------------
+300 (3.41%) (8.23%)
+200 (2.24%) (5.09%)
+100 (1.08%) (2.47%)
-100 1.47% 2.48%
-200 2.99% 5.01%
-300 4.65% 7.86%
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
March 31, 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
24
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. Since September 2007, the
Federal Reserve has reduced short-term interest rates 325 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 March 31, 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
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, 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. 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.
25
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 March 31, 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 Pograms Programs
----------------------- --------------- ------------------- ------------------------ ----------------------
January 1 - 31, 2008 10,850 $25.17 10,850 31,567
February 1 - 29, 2008 10,803 $25.08 10,803 167,830
March 1 - 31, 2008 1,675 $25.00 1,675 166,155
--------------- ------------------- ------------------------ ----------------------
TOTAL 23,328 $25.12 23,328 166,155
=============== =================== ======================== ======================
(1) 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. 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.
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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: May 9, 2008 By: /s/ Jeffrey E. Smith
----------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: May 9, 2008 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
(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.
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