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, 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 May 9, 2007 was
4,160,220.
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............................................23
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.......24
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
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,
2007 2006
----------------- -----------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 17,772 $ 18,965
Federal funds sold 1,162 1,800
----------------- -----------------
Total cash and cash equivalents 18,934 20,765
Interest-bearing deposits in other financial institutions 612 508
Securities available-for-sale 70,435 70,267
Securities held-to-maturity (estimated fair value:
2007 - $13,526; 2006 - $13,586) 13,337 13,350
FHLB stock 6,036 6,036
Total loans 628,790 625,164
Less: Allowance for loan losses (8,400) (9,412)
----------------- ----------------
Net loans 620,390 615,752
Premises and equipment, net 9,855 9,812
Accrued income receivable 3,322 3,234
Goodwill 1,267 1,267
Bank owned life insurance 16,202 16,054
Other assets 8,941 7,316
----------------- -----------------
Total assets $ 769,331 $ 764,361
================= =================
LIABILITIES
Noninterest-bearing deposits $ 80,328 $ 77,960
Interest-bearing deposits 522,380 515,826
----------------- -----------------
Total deposits 602,708 593,786
Securities sold under agreements to repurchase 28,087 22,556
Other borrowed funds 53,387 63,546
Subordinated debentures 13,500 13,500
Accrued liabilities 10,720 10,691
----------------- -----------------
Total liabilities 708,402 704,079
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000
shares authorized; 2007 - 4,639,722 shares issued;
2006 - 4,626,340 shares issued) 4,640 4,626
Additional paid-in capital 32,615 32,282
Retained earnings 35,465 34,404
Accumulated other comprehensive loss (827) (981)
Treasury stock, at cost (2007 - 469,002 shares;
2006 - 432,852 shares) (10,964) (10,049)
----------------- -----------------
Total shareholders' equity 60,929 60,282
----------------- -----------------
Total liabilities and shareholders' equity $ 769,331 $ 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
March 31,
2007 2006
---------------- -----------------
Interest and dividend income:
Loans, including fees $ 12,440 $ 11,756
Securities
Taxable 752 684
Tax exempt 128 114
Dividends 95 81
Other Interest 87 5
---------------- -----------------
13,502 12,640
Interest expense:
Deposits 5,267 3,914
Securities sold under agreements to repurchase 226 182
Other borrowed funds 612 886
Subordinated debentures 326 305
---------------- -----------------
6,431 5,287
---------------- -----------------
Net interest income 7,071 7,353
Provision for loan losses 386 666
---------------- -----------------
Net interest income after provision for loan losses 6,685 6,687
Noninterest income:
Service charges on deposit accounts 660 658
Trust fees 56 53
Income from bank owned life insurance 180 187
Gain on sale of loans 39 26
Other 458 355
---------------- -----------------
1,393 1,279
Noninterest expense:
Salaries and employee benefits 3,233 3,295
Occupancy 364 334
Furniture and equipment 270 268
Data processing 194 217
Other 1,460 1,471
---------------- -----------------
5,521 5,585
---------------- -----------------
Income before income taxes 2,557 2,381
Provision for income taxes 782 642
---------------- -----------------
NET INCOME $ 1,775 $ 1,739
================ =================
Earnings per share $ .42 $ .41
================ =================
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,
2007 2006
----------------- -----------------
Balance at beginning of period $ 60,282 $ 59,271
Comprehensive income:
Net income 1,775 1,739
Change in unrealized loss
on available-for-sale securities 233 (312)
Income tax effect (79) 106
----------------- -----------------
Total comprehensive income 1,929 1,533
Proceeds from issuance of common
stock through dividend reinvestment plan 347 ----
Cash dividends (714) (680)
Shares acquired for treasury (915) (587)
----------------- -----------------
Balance at end of period $ 60,929 $ 59,537
================= =================
Cash dividends per share $ 0.17 $ 0.16
================= =================
Shares from common stock issued
through dividend reinvestment plan 13,382 1
================= =================
Shares acquired for treasury 36,150 23,326
================= =================
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,
2007 2006
--------------- ---------------
Net cash provided by operating activities: $ 1,693 $ 2,891
Investing activities:
Proceeds from maturities of securities available-for-sale 1,552 4,687
Purchases of securities available-for-sale (1,501) (4,007)
Proceeds from maturities of securities held-to-maturity 10 30
Change in interest-bearing deposits in other financial
institutions (104) (5)
Net change in loans (6,261) (9,428)
Proceeds from sale of other real estate owned 60 145
Purchases of premises and equipment (292) (400)
--------------- ----------------
Net cash (used in) investing activities (6,536) (8,978)
Financing activities:
Change in deposits 8,922 17,717
Cash dividends (714) (680)
Proceeds from issuance of common stock
through dividend reinvestment plan 347 ----
Purchases of treasury stock (915) (587)
Change in securities sold under agreements to repurchase 5,531 (12,889)
Repayment of Federal Home Loan Bank borrowings (3,020) (1,103)
Change in other short-term borrowings (7,139) 1,585
Proceeds from subordinated debentures 8,500 ----
Repayment of subordinated debentures (8,500) ----
--------------- ----------------
Net cash provided by financing activities 3,012 4,043
--------------- ----------------
Change in cash and cash equivalents (1,831) (2,044)
Cash and cash equivalents at beginning of period 20,765 19,616
--------------- ----------------
Cash and cash equivalents at end of period $ 18,934 $ 17,572
=============== ================
Supplemental disclosure:
Cash paid for interest $ 7,156 $ 5,455
Cash paid for income taxes ---- 180
Non-cash transfers from loans to other real estate owned 1,237 61
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, 2007, and its results of operations and cash flows
for the periods presented. The results of operations for the three months ended
March 31, 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 4,192,809 and 4,248,551 for
the three months ended March 31, 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.
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.
NEW ACCOUNTING PRONOUNCEMENTS: 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 does not anticipate early adoption of FAS
159. The Company is evaluating the effects of this statement on its financial
statements and has not yet determined the impact FAS 159 might have on its
financial condition or results of operations.
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. The Company has no
unrecognized tax benefits and does not anticipate any increase in unrecognized
benefits during 2007 relative to any tax positions taken prior to January 1,
2007. Should the accrual of any interest or penalties relative to unrecognized
tax benefits be necessary, it is the Company's policy to record such accruals in
its income taxes accounts; no such accruals exist as of January 1, 2007. 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 all years after 2002.
8
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:
March 31, December 31,
2007 2006
------------------ -------------------
Commercial real estate $198,632 $193,359
Commercial and industrial 52,207 47,389
Residential real estate 235,735 238,549
Consumer 135,964 139,961
All other 6,252 5,906
------------------ -------------------
$ 628,790 $ 625,164
================== ===================
At March 31, 2007 and December 31, 2006, loans on nonaccrual status were
approximately $8,649 and $12,017, respectively. Loans past due more than 90 days
and still accruing at March 31, 2007 and December 31, 2006 were $1,407 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 March 31:
2007 2006
----------- -------------
Balance - January 1, $ 9,412 $ 7,133
Loans charged off:
Commercial(1) 1,211 372
Residential real estate 169 110
Consumer 460 666
----------- -------------
Total loans charged off 1,840 1,148
Recoveries of loans:
Commercial(1) 121 89
Residential real estate 49 118
Consumer 272 415
----------- -------------
Total recoveries of loans 442 622
----------- -------------
Net loan charge-offs (1,398) (526)
Provision charged to operations 386 666
----------- -------------
Balance - March 31, $ 8,400 $ 7,273
=========== =============
(1) Includes commercial and industrial and commercial real estate loans.
9
Information regarding impaired loans is as follows:
March 31, December 31,
2007 2006
--------------- -----------------
Balance of impaired loans $ 13,598 $ 17,402
Less portion for which no specific
allowance is allocated 3,337 2,959
--------------- -----------------
Portion of impaired loan balance for which a
specific allowance for credit losses is allocated $ 10,261 $ 14,443
=============== =================
Portion of allowance for loan losses specifically
allocated for the impaired loan balance $ 4,272 $ 4,962
=============== =================
Average investment in impaired loans year-to-date $ 13,973 $ 18,774
=============== =================
Interest on impaired loans was $85 and $185 for the three-month periods ended
March 31, 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
3.70% of total loans were unsecured at March 31, 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 March 31, 2007, the
contract amounts of these instruments totaled approximately $73,455, 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 March 31, 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
-------------------- ----------------- --------------- ----------------
March 31, 2007.................. $ 45,320 $ 5,860 $ 2,207 $ 53,387
December 31, 2006............... $ 55,690 $ 5,393 $ 2,463 $ 63,546
Pursuant to collateral agreements with the FHLB, advances are secured by
$217,104 in qualifying mortgage loans and $6,036 in FHLB stock at March 31,
2007. Fixed-rate FHLB advances of $42,220 mature through 2010 and have interest
rates ranging from 3.25% to 6.62%. In addition, variable rate FHLB borrowings of
$3,100 mature in 2007 and carry an interest rate of 5.43%.
10
At March 31, 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. The line of credit must be renewed on an annual
basis. There was $56,900 available on this line of credit at March 31, 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 $160,818 at March 31, 2007.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of 4.80% to
6.25% and are due at various dates through a final maturity date of September
30, 2008. As of March 31, 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 March 31, 2007, the interest rate for the Company's FRB notes was
5.04%. Various investment securities from the Bank used to collateralize the FRB
notes totaled $6,070 at March 31, 2007 and 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 $36,950 at March 31,
2007 and $41,950 at December 31, 2006.
Scheduled principal payments over the next five years:
Years Ended FHLB Promissory FRB
December 31: Borrowings Notes Notes Totals
-------------------------------- ------------------- ----------------- --------------- -----------------
2007 $ 14,146 $ 2,901 $ 2,207 $ 19,254
2008 16,010 2,959 ---- 18,969
2009 8,005 ---- ---- 8,005
2010 7,006 ---- ---- 7,006
2011 6 ---- ---- 6
Thereafter 147 ---- ---- 147
------------------- ----------------- --------------- -----------------
$ 45,320 $ 5,860 $ 2,207 $ 53,387
=================== ================= =============== =================
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 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
(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; 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 $36, or 2.1%, to $1,775 for the three months ended March
31, 2007, compared to the same period in 2006. Earnings per share for the first
quarter of 2007 finished at $.42, up 2.4% over the same period in 2006. 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), remained stable at
..94% and 11.91% during the first quarter of 2007, as compared to .94% and
11.93%, respectfully, for the same period in 2006. The Company's modest growth
in earnings during the first quarter of 2007 was accomplished by: 1) lowering
provision expense by 42% as a result of improvements to its nonperforming
credits from year-end 2006; and 2) increasing its emphasis on expense control,
which helped to lower overhead costs by 1.1% over the first quarter of 2006
while growing noninterest revenue by 8.9% over the same period in 2006.
The Company's reduction to provision expense was based on a lower funding need
required to maintain an adequate allowance for loan loss balance at March 31,
2007 as compared to March 31, 2006. During the first quarter of 2007, the
Company provided $386 to the allowance for loan losses, a $280 decrease from the
same period in 2006, in large part to improvements in lower nonperforming loans.
Although the ratio of nonperforming loans to total loans was up 120 basis points
from March 31, 2006, this nonperforming level was down 54 basis points from
year-end 2006 and represents the continued efforts of the Company to lower its
nonperforming loan balances and improve credit quality within the loan
portfolio.
12
The Company's first quarter 2007 net noninterest expense (noninterest expense
less noninterest income) was $4,128, a decrease of $178, or 4.1%, as compared to
the same period in 2006. This was in large part due to growth in the Company's
tax processing fees and debit card interchange fees which led to a $114
improvement in noninterest income, while salaries and employee benefits
decreased $62 as a result of lower incentive compensation and full-time
equivalent employees. Tax processing fees are seasonal in nature and will
generate revenues for the Company primarily within the quarterly period of
January through March, when such tax volume is high.
The Company's improvements in lower provision expense and lower net noninterest
expense was partially offset by a decrease in its net interest income. The
Company's net interest income during the first quarter of 2007 decreased $282,
or 3.8% as compared to the same period in 2006. The decrease has been in large
part due to a lower net interest margin, which finished at 4.02% for the first
quarter of 2007, as compared to 4.25% during the same time period in 2006. The
net interest margin compression was related to the upward pressures felt by the
Company's funding costs, primarily within its certificates of deposit ("CD")
portfolio. The consistent increases to market rates by the Federal Reserve Bank
that began in 2004, and caused significant asset repricings to its commercial
and real estate portfiolios, have slowed. Since June 2006, rates have been held
steady by the Federal Reserve Bank, beginning a steady cycle of interest rate
increases to the Bank's CD portfolio, a lagging effect to the earlier Federal
Reserve Bank action. This lagging effect has allowed for average CD rates to
increase from 3.81% during the first quarter of 2006 to an average interest rate
of 4.78% during the first quarter of 2007, an increase of 97 basis points.
Furthermore, the Company's net interest income and net interest margin have been
negatively affected by an increase in loans on nonaccrual status, which have
increased $7,003 from March 31, 2006 to finish at $8,649 at March 31, 2007. This
was due in large part to several commercial mortgages from three commercial
relationships representing approximately 74.6% of total loans on nonaccrual
status. With the Company's balance sheet being in a liability sensitive
position, continued interest rate pressures are expected to challenge the net
interest margin for the remainder of 2007, especially if market rates begin to
rise.
The consolidated total assets of the Company increased $4,970, or 0.7%, during
the first quarter of 2007 to finish at $769,331, primarily due to increased loan
balances which increased $3,626 from year-end 2006. Loans were primarily funded
by an increase in the Company's deposits and securities sold under agreements to
repurchase ("repurchase agreements"), which increased $8,922 and $5,531,
respectively, from year-end 2006. The excess funds available from the increases
in deposits and repurchase agreements were used to reduce other borrowed funds,
which were down $10,159 from year-end 2006.
Comparison of
Financial Condition
at March 31, 2007 and December 31, 2006
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at March 31, 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 c onsolidated 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,
2007, cash and cash equivalents had decreased $1,831, or 8.8%, to $18,934 as
compared to $20,765 at December 31, 2006. Cash and cash equivalents declined
13
during the first quarter of 2007 because the Company used more cash to fund
growth in loans. As liquidity levels vary continuously based on consumer
activities, amounts of cash and cash equivalents can vary widely at any given
point in time. While down from year-end 2006, 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
During the first quarter of 2007, investment securities remained stable at
$83,772, increasing only $155, or 0.2% as compared to year-end 2006. 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. U.S. government agency and
sponsored entity securities increased $1,570, or 6.2%, as a result of attractive
yield opportunities and increased diversification. This growth was partially
offset by a decrease in mortgage-backed securities of $1,405, or 3.1%, from
year-end 2006. 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 $43,736, or 52.2% of total investments at March
31, 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 $1,555 from January 1, 2007 through March 31, 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.
Loans
During the first quarter of 2007, total loans, the Company's primary category of
earning assets, were up $3,626, or 0.6%, from year-end 2006. Total loan growth
was mostly influenced by commercial loans, which increased $10,091, or 4.2%,
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 real
estate, the Company's largest segment of commercial loans, contributed most to
commercial loan growth, increasing $5,273, or 2.7%, 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. Growth in commercial loans was
further enhanced by an increase in the Company's commercial and industrial
loans, which were up $4,818, or 10.2%, from year-end 2006. The commercial loan
portfolio, including participation loans, consists primarily of rental property
loans (14.3% of portfolio), medical industry loans (12.5% of portfolio), hotel
and motel loans (9.0% of portfolio), and land development loans (8.9% of
portfolio). During the first quarter of 2007, the primary market areas for the
Company's commercial loan originations, excluding loan participations, were in
the areas of Gallia, Vinton and Franklin counties of Ohio, which accounted for
40.3% of total originations, and the growing West Virginia markets, which
accounted for 6.8% 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 2007.
14
While commercial loans comprise the largest portion of the Company's loan
portfolio, 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 2007, total residential real estate loan balances decreased $2,814,
or 1.2%, from year-end 2006 to total $235,735. The decrease was largely driven
by a reduction in the Company's one-year adjustable-rate mortgage balances of
$5,284, or 7.8%, from year-end 2006. 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 documented rise
in short-term interest rates of 2004, 2005 and part of 2006. As long-term
interest rates continue to remain steady, consumers continue to pay off and
refinance their variable rate mortgages, resulting in lower one-year
adjustable-rate mortgage balances at the end of 2007's first quarter as compared
to year-end 2006. In addition, real estate construction loans were down $1,401,
or 22.4% from year-end 2006. Partially offsetting the decreases in variable real
estate and real estate construction loan balances were the continued consumer
preference of fixed-rate real estate loans, which were up $3,643, or 2.5%, from
year-end 2006. 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 $1,930 in loans during the first
three months of 2007, which were up $885 or 84.7% over the volume in the first
three months of 2006. The remaining real estate loan portfolio balances
increased $228, primarily from the Company's other variable-rate real estate
loan products.
During the first quarter of 2007, consumer loans continued to fall, decreasing
$3,997, or 2.9%, from year-end 2006 to $135,964. 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 lending segment, which decreased $2,362, or 3.8%,
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 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 quarter of 2007. In addition, the Company's capital
line balances, primarily home equity loans, decreased $472, or 2.3%, from
year-end 2006.
The Company recognized an increase of $346 in other loans from year-end 2006.
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 $416.
The Company is pleased with its total loan growth results during the first
quarter of 2007, particularly the success within the commercial loan portfolio.
However, management will continue to monitor the slower-moving real estate loan
balances, impacted by increased payoffs in its variable-rate mortgages.
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 2007 to be challenging, with
volume to continue at a 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.
15
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 2007, the Company experienced a
$1,012, or 10.8% 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, 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 quarter of 2007, net
charge-offs totaled $1,398, which were up $872 from the same period in 2006, in
large part to commercial charge-offs of 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 March 31, 2007 at 1.60%, 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 1.71% at March 31, 2007. The three nonperforming commercial
relationships mentioned above represented 1.03% of total loans and 0.84% of
total assets at March 31, 2007. These nonperforming credits continue 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-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 three months of 2007, total
deposits were up $8,922, or 1.5%, from year-end 2006, resulting from the efforts
to attract deposits to fund loan growth as well as seasonal timing differences.
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 $11,006, or 14.0% during the first
quarter of 2007. This growth was largely driven by a $10,592 increase in public
funds related to 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 $2,368, or 3.0%, from year-end 2006. This increase was primarily from
growth in free checking products that include 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 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 $5,387, or
1.6%, from year-end 2006. Time deposits, particularly CD's, are the most
significant source of funding for the Company's earning assets, making up 56.5%
of total deposits. With loan growth pacing mildly at just 0.6% from year-end
2006, there has not been an aggressive need to deploy time deposits as a funding
16
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 4.78%
during the first quarter of 2007 as compared to 3.81% during the same period of
2006. As a result, management has shifted its emphasis to wholesale funding
sources as a more affordable and cost effective source to subsidize earning
asset growth as compared to retail CD balances. This strategic emphasis is
evident when comparing the change in the Company's retail CD balances, which
have decreased $18,877, or 6.1%, from year-end 2006, while wholesale funding
deposits (i.e., brokered and network CD issuances) have increased $13,491, or
35.9%, from year-end 2006.
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 utilize wholesale funding sources during the
remainder of 2007, 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 up $5,531, or 24.5%, from year-end 2006. This increase was
mostly due to fluctuations of two commercial accounts in the first quarter of
2007.
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 2007, other
borrowed funds were down $10,159, or 16.0%, from year-end 2006. Management used
the growth in deposit proceeds to fund loans and repay FHLB borrowings during
the first quarter 2007. 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. In future
quarters, the early extinguishment and replacement of this higher cost debt is
expected to improve earnings by nearly $51 pre-tax ($33 after taxes) per
quarter. 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 March 31,
2007 of $60,929 was up $647, or 1.1%, as compared to the balance of $60,282 on
December 31, 2006. Contributing most to this increase was year-to-date net
income of $1,775 and $347 in proceeds from the issuance of common stock.
Partially offsetting the growth in capital were cash dividends paid of $714, or
$.17 per share, year-to-date, and an increase in the amount of share
repurchases. The Company had treasury stock totaling $10,964 at March 31, 2007,
17
an increase of $915 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. 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 March 31, 2007, 34,182 shares had been repurchased
pursuant to that authorization.
Comparison of
Results of Operations
for the Quarter Ended March 31, 2007
The following discussion focuses, in more detail, on the consolidated results of
operations of the Company for the quarterly period ended March 31, 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.
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 2007, net interest income decreased $282, or 3.8%, as compared
to the same quarter in 2006, primarily due to a compressing net interest margin
caused by higher funding costs as well as increases in nonaccrual loan balances.
Total interest income increased $862, or 6.8%, for the first quarter of 2007 as
compared to the same period in 2006. Growth in 2007's year-to-date average
earning assets of $13,469, or 1.9%, as compared to the same period in 2006 was
complemented with a 37 basis point increase in asset yields, growing from 7.27%
to 7.64% for the same time periods. The growth in average earning assets was
largely comprised of commercial real estate loan participations and short-term
federal funds sold since March 2006. Outpacing interest income was interest
expense, increasing $1,144, or 21.6%, during the first quarter of 2007 as
compared to the same period 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 the Federal Reserve's most recent actions
have held rates steady, 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 account deposits, which have been most responsive to the
rising rate environment. The quarterly weighted average cost of the Bank's
retail CD balances grew 97 basis points from 3.81% at March 31, 2006 to 4.78% at
March 31, 2007. The change in interest expense was further impacted by the
Company's money market accounts largely due to its Market Watch product with
tiered market rates that compete 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 62 basis points
from March 31, 2006 to March 31, 2007.
Putting additional pressure on net interest income was an increase in the
Company's nonaccrual loan balances, which have grown from $1,646 at March 31,
2006 to $8,649 at March 31, 2007. While this segment of nonperforming loans has
improved since year-end 2006 (decreasing by $3,368), the interest income that
has not been recorded on the $7,003 in additional loans that were placed on
nonaccrual status has limited the increase to earning asset income and has
contributed to net interest margin compression.
18
As a result of increased funding costs and higher nonaccrual balances, the
Company's quarterly net interest margin has decreased 23 basis points from 4.25%
at March 31, 2006 to 4.02% at March 31, 2007. 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 action to
keep rates steady since June 2006, management believes that market rates
continue to be at their "target" zone of economic stability, with no
anticipation of rate changes until possibly the fourth quarter of 2007. There
can be no assurance to this effect as changes in market interest rates are
dependent upon a variety of factors that are beyond the Company's control. With
market rates remaining at their stable levels, management believes that there
are opportunities for net interest margin improvement during 2007, and have
already experienced margin improvement when comparing linked quarters in
December 2006 to March 2007. For the fourth quarter of 2006, net interest margin
was 3.78% as compared to 2007's first quarter margin of 4.02%, an increase of 24
basis points, in large part due to repricing rates of the Company's retail CD
balances beginning to slow down. This trend is anticipated to continue
throughout the remainder of 2007. 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
2007, provision expense decreased $280 over the same time period in 2006. This
decrease is primarily a direct 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
March 31, 2007, the Company's nonperforming loan balances had decreased to
$10,056, compared to $13,392 at year-end 2006, as a result of commercial loan
charge-offs of some of the troubled relationships already discussed under the
caption "Allowance for Loan Losses" within this management's discussion and
analysis. As a result, through the first quarter period of 2007, the ratio of
the Company's nonperforming loans to total loans decreased to 1.60%, compared to
2.14% at December 31, 2006, while nonperforming assets to total assets also
decreased to 1.71%, compared to 2.00% for the same time periods. Management
believes that the allowance for loan losses is adequate and reflective of
probable losses in the portfolio. The allowance for loan losses was 1.34% of
total loans at March 31, 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 March 31, 2007 was $1,393, an
increase of $114, or 8.9%, over the same period in 2006. These quarterly results
were impacted most by tax refund processing fees and debit card interchange fees
that are classified within other noninterest income, which was up $103, or
29.0%, during the first quarter of 2007 over the same period in 2006. In 2006,
the Company began its participation in a new tax refund loan service where it
serves as a facilitator for the clearing of tax refunds for a tax software
provider. As a result, the Company's tax refund processing fees were up $86
during the first quarter of 2007, as compared to the same period in 2006.
Further enhancing growth in other noninterest income was debit card interchange
income, increasing $14, or 12.6%, during the first quarter of 2007 as compared
to the same period in 2006. 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 273,536 transactions
during the first three months of 2007, up 18.5% from the 230,799 transactions
during the same period in 2006, derived mostly from gasoline and restaurant
purchases. The Company also recorded growth in its gain on sale of secondary
19
market real estate loans, which were up $13, or 50.0%, for the first quarter of
2007 as compared to the same period in 2006. 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 2007, total noninterest expense was down $64, or
1.1%, as compared to the same period in 2006. Contributing to the quarterly
decrease were salaries and employee benefits, the Company's largest noninterest
expense item, which decreased $62, or 1.9%, for the first quarter of 2007 as
compared to the same time period 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 March 31, 2007, the Company had 252 FTE employees on staff
as compared to 259 FTE employees at March 31, 2006. Further decreases were
recognized within data processing and other noninterest expense, which were down
$23, or 10.6%, and $11, or 0.7%, respectively, during the first quarter of 2007
as compared to the same period in 2006. The savings experienced in these lower
noninterest expenses during the interim of 2007 largely reflects the continued
efforts by management to improve efficiency by placing strong emphasis on
overhead expense control. These decreases in personnel, data processing and
other noninterest costs were partially offset by an increase in occupancy
expense, which was up $30, or 9.0%, during the first quarter of 2007 as compared
to the same period in 2006, 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
timing difference. The total of all remaining noninterest expense categories was
relatively unchanged from the prior year.
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 expense control has contributed to a stable
efficiency ratio, finishing at 64.49% for the three months ended March 31, 2007,
as compared to 64.17% for the same period in 2006.
Capital Resources
All of the Company's capital ratios exceeded the regulatory minimum guidelines
as identified in the following table:
Company Ratios Regulatory Well
3/31/07 12/31/06 Minimum Capitalized
---------- ---------- ------------ -------------
Tier 1 risk-based capital 12.1% 12.2% 4.00% 6.0%
Total risk-based capital ratio 13.4% 13.4% 8.00% 10.0%
Leverage ratio 9.7% 9.6% 4.00% 5.0%
Cash dividends paid of $714 for the first three months of 2007 represent a 5.0%
increase over the cash dividends paid during the same period in 2006. The
quarterly dividend rate increased from $0.16 per share in 2006 to $0.17 per
share in 2007. The dividend rate has increased in proportion to the consistent
growth in retained earnings. At March 31, 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.
20
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 $91,107
represented 11.8% of total assets at March 31, 2007. In addition, the FHLB
offers advances to the Bank which further enhances the Bank's ability to meet
liquidity demands. At March 31, 2007, the Bank could borrow an additional
$78,000 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
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
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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
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.
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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, 2007 December 31, 2006
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
+300 (3.65%) (5.95%)
+200 (1.67%) (3.26%)
+100 (.42%) (1.37%)
-100 .07% 1.10%
-200 .69% 1.74%
-300 1.96% 2.65%
The estimated change in net interest income reflects minimal interest rate risk
exposure and is well within the policy guidelines established by the Board. At
March 31, 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 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 a
nominal increase in net interest income. As compared to December 31, 2006, the
Company's interest rate risk profile has become less liability sensitive due to
a modest extension of the term offered for certificate of deposit specials.
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
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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, 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
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.
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(c) The following table provides information regarding Ohio
Valley's repurchases of its common shares during the fiscal
quarter ended March 31, 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
January 1 - 31, 2007 1,968 $25.25 1,968 134,950
February 1 - 28, 2007 9,805 $25.33 9,805 165,195
March 1 - 31, 2007 24,377 $25.29 24,377 140,818
--------------- ------------------- ------------------------ ----------------------
TOTAL 36,150 $25.30 36,150 140,818
=============== =================== ======================== ======================
(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: May 9, 2007 By: /s/ Jeffrey E. Smith
----------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: May 9, 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 ended
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.
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