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: June 30, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 0-20914
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OHIO VALLEY BANC CORP.
------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1359191
-------- ------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
420 Third Avenue, Gallipolis, Ohio 45631
------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 446-2631
----------------
(Registrant's telephone number, including area code)
Not Applicable
----------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|_| Yes |X| No
The number of common shares of the registrant outstanding as of August 8, 2008
was 4,002,509.
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..........25
Item 4. Controls and Procedures............................................26
PART II - OTHER INFORMATION...................................................27
Item 1. Legal Proceedings.................................................27
Item 1A. Risk Factors......................................................27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......27
Item 3. Defaults Upon Senior Securities...................................27
Item 4. Submission of Matters to a Vote of Security Holders...............28
Item 5. Other Information.................................................28
Item 6. Exhibits and Reports on Form 8-K..................................28
SIGNATURES....................................................................29
EXHIBIT INDEX.................................................................30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share data)
--------------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------- -----------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 20,625 $ 15,584
Federal funds sold 1,239 1,310
----------------- -----------------
Total cash and cash equivalents 21,864 16,894
Interest-bearing deposits in other financial institutions 15,507 633
Securities available-for-sale 72,203 78,063
Securities held-to-maturity
(estimated fair value: 2008 - $17,620; 2007 - $15,764) 17,690 15,981
Federal Home Loan Bank stock 6,197 6,036
Total loans 623,126 637,103
Less: Allowance for loan losses (6,571) (6,737)
----------------- -----------------
Net loans 616,555 630,366
Premises and equipment, net 9,898 9,871
Accrued income receivable 3,078 3,254
Goodwill 1,267 1,267
Bank owned life insurance 17,062 16,339
Other assets 9,369 4,714
----------------- -----------------
Total assets $ 790,690 $ 783,418
================= =================
LIABILITIES
Noninterest-bearing deposits $ 85,823 $ 78,589
Interest-bearing deposits 522,375 510,437
----------------- -----------------
Total deposits 608,198 589,026
Securities sold under agreements to repurchase 35,309 40,390
Other borrowed funds 59,767 67,002
Subordinated debentures 13,500 13,500
Accrued liabilities 12,322 11,989
----------------- -----------------
Total liabilities 729,096 721,907
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 38,837 37,763
Accumulated other comprehensive income (loss) 268 (115)
Treasury stock, at cost (2008 - 622,239 shares;
2007 - 567,403 shares) (14,817) (13,443)
----------------- -----------------
Total shareholders' equity 61,594 61,511
----------------- -----------------
Total liabilities and shareholders' equity $ 790,690 $ 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 Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------- -------------- -------------- --------------
Interest and dividend income:
Loans, including fees $ 11,743 $ 12,706 $ 24,385 $ 25,146
Securities
Taxable 783 754 1,579 1,506
Tax exempt 135 132 276 260
Dividends 82 98 161 193
Other Interest 110 30 186 117
-------------- -------------- -------------- --------------
12,853 13,720 26,587 27,222
Interest expense:
Deposits 4,270 5,290 9,156 10,557
Securities sold under agreements to repurchase 93 254 237 480
Other borrowed funds 663 738 1,420 1,350
Subordinated debentures 272 272 544 598
-------------- -------------- -------------- --------------
5,298 6,554 11,357 12,985
-------------- -------------- -------------- --------------
Net interest income 7,555 7,166 15,230 14,237
Provision for loan losses 916 616 1,617 1,002
-------------- -------------- -------------- --------------
Net interest income after provision for loan losses 6,639 6,550 13,613 13,235
Noninterest income:
Service charges on deposit accounts 780 756 1,490 1,416
Trust fees 64 58 125 114
Income from bank owned life insurance 201 162 376 342
Gain on sale of loans 45 20 90 59
Gain (loss) on sale of other real estate owned 3 (84) (38) (85)
Other 494 454 1,128 913
-------------- -------------- -------------- --------------
1,587 1,366 3,171 2,759
Noninterest expense:
Salaries and employee benefits 3,390 3,168 6,819 6,401
Occupancy 382 357 768 721
Furniture and equipment 257 264 492 534
Data processing 266 211 531 405
Other 1,520 1,486 2,957 2,946
-------------- -------------- -------------- --------------
5,815 5,486 11,567 11,007
-------------- -------------- -------------- --------------
Income before income taxes 2,411 2,430 5,217 4,987
Provision for income taxes 680 744 1,521 1,526
-------------- -------------- -------------- --------------
NET INCOME $ 1,731 $ 1,686 $ 3,696 $ 3,461
============== ============== ============== ==============
Earnings per share $ .43 $ .41 $ .91 $ .83
============== ============== ============== ==============
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 Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------- -------------- -------------- --------------
Balance at beginning of period $ 61,968 $ 60,929 $ 61,511 $ 60,282
Comprehensive income:
Net income 1,731 1,686 3,696 3,461
Change in unrealized income/loss
on available-for-sale securities (830) (319) 580 (86)
Income tax effect 282 108 (197) 29
-------------- -------------- -------------- --------------
Total comprehensive income 1,183 1,475 4,079 3,404
Proceeds from issuance of common
stock through dividend reinvestment plan ---- ---- ---- 347
Cash dividends (769) (751) (1,543) (1,465)
Shares acquired for treasury (788) (1,109) (1,374) (2,024)
Cumulative-effect adjustment in adopting EITF No. 06-04 ---- ---- (1,079) ----
-------------- -------------- -------------- --------------
Balance at end of period $ 61,594 $ 60,544 $ 61,594 $ 60,544
============== ============== ============== ==============
Cash dividends per share $ 0.19 $ 0.18 $ 0.38 $ 0.35
============== ============== ============== ==============
Shares from common stock issued
through dividend reinvestment plan ---- 1 1 13,383
============== ============== ============== ==============
Shares acquired for treasury 31,508 43,859 54,836 80,009
============== ============== ============== ==============
See notes to consolidated financial statements
5
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands)
--------------------------------------------------------------------------------
Six months ended
June 30,
2008 2007
--------------- ---------------
Net cash provided by operating activities: $ 4,391 $ 5,169
Investing activities:
Proceeds from maturities of securities available-for-sale 16,482 3,466
Purchases of securities available-for-sale (10,060) (4,008)
Proceeds from maturities of securities held-to-maturity 1,346 212
Purchases of securities held-to-maturity (3,060) (1,429)
Change in interest-bearing deposits in other financial institutions (14,874) (101)
Net change in loans 7,289 (4,066)
Proceeds from sale of other real estate owned 420 1,344
Purchases of premises and equipment (476) (444)
Purchases of bank owned life insurance (427) ----
--------------- ---------------
Net cash (used in) investing activities (3,360) (5,026)
Financing activities:
Change in deposits 19,172 (12,863)
Cash dividends (1,543) (1,465)
Proceeds from issuance of common stock
through dividend reinvestment plan ---- 347
Purchases of treasury stock (1,374) (2,024)
Change in securities sold under agreements to repurchase (5,081) 5,111
Proceeds from Federal Home Loan Bank borrowings 7,000 9,000
Repayment of Federal Home Loan Bank borrowings (10,011) (3,033)
Change in other short-term borrowings (4,224) (794)
Proceeds from subordinated debentures ---- 8,500
Repayment of subordinated debentures ---- (8,500)
--------------- ---------------
Net cash provided by (used in) financing activities 3,939 (5,721)
--------------- ---------------
Change in cash and cash equivalents 4,970 (5,578)
Cash and cash equivalents at beginning of period 16,894 20,765
--------------- ---------------
Cash and cash equivalents at end of period $ 21,864 $ 15,187
=============== ===============
Supplemental disclosure:
Cash paid for interest $ 13,400 $ 13,770
Cash paid for income taxes 1,815 327
Non-cash transfers from loans to other real estate owned 4,905 1,370
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 June 30, 2008, and its results of operations and cash flows
for the periods presented. The results of operations for the six 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 4,032,883 and 4,153,401 for
the three months ended June 30, 2008 and 2007, respectively. Weighted average
common shares outstanding were 4,046,734 and 4,172,996 for the six months ended
June 30, 2008 and 2007, respectively. Ohio Valley had no dilutive effect and no
potential common shares issuable under stock options or other agreements for any
period presented.
7
LOANS: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on an accrual basis using the interest method and
includes amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when the loan is impaired or payments are past due over 90 days. Payments
received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
ADOPTION OF NEW ACCOUNTING STANDARDS: In September 2006, Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 157, "Fair Value Measurements". SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. The statement also establishes a fair value hierarchy
about the assumptions used to measure fair value and clarifies assumptions about
risk and the effect of a restriction on the sale or use of an asset. The
standard is effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued Staff Position ("FSP") 157-2, "Effective Date of
FASB Statement No. 157". This FSP delays the effective date of SFAS 157 for all
nonfinancial assets and liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years. The Company adopted the provisions of SFAS 157 on January 1, 2008. There
was no material impact on the June 30, 2008 consolidated financial statements of
the Company as a result of the adoption of SFAS 157.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". The standard provides companies
with an option to report selected financial assets and liabilities at fair value
and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The new standard is effective for the
Company on January 1, 2008. The Company 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
8
recognize a liability for future postemployment benefits in accordance with SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". EITF Issue No. 06-04 is effective for fiscal years beginning after
December 15, 2007. At December 31, 2007, the Company owned $16,339 of bank owned
life insurance policies. These life insurance policies are generally subject to
endorsement split-dollar life insurance agreements. An endorsement split-dollar
agreement is an arrangement whereby an employer owns a life insurance policy
that covers the life of an employee and, pursuant to a separate agreement,
endorses a portion of the policy's death benefits to the insured employee's
beneficiary. These arrangements were designed to provide a pre-and
postretirement benefit for senior officers and directors of the Company. As a
result of the adoption of EITF No. 06-04, the Company recognized a cumulative
effect adjustment (decrease) to retained earnings of $1,079, which also
represented additional liability required to be provided under EITF No. 06-04 on
January 1, 2008 related to the agreements. This adjustment amount was different
from the estimate made within the Company's 2007 Form 10-K at December 31, 2007.
RECLASSIFICATIONS: Certain items related to the consolidated financial
statements for 2007 have been reclassified to conform to the presentation for
2008. These reclassifications had no effect on the net results of operations.
NOTE 2 - FAIR VALUE OF FINANCIAL INSTRUMENTS
As discussed in Note 1, SFAS 157 was implemented by the Company effective
January 1, 2008. SFAS 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:
Level 1: Quoted prices (unadjusted) 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 adjusted for selling costs. Collateral values are estimated using
Level 2 inputs based on third party appraisals.
9
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
Fair Value Measurements at June 30, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Securities Available-For-Sale ---- $ 72,203 ----
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 June 30, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Impaired Loans ---- $ 2,941 ----
NOTE 3 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
June 30, 2008 December 31, 2007
------------------ -------------------
Residential real estate $ 248,529 $ 250,483
Commercial real estate 194,008 196,523
Commercial and industrial 47,565 55,090
Consumer 124,926 127,832
All other 8,098 7,175
------------------ -------------------
$ 623,126 $ 637,103
================== ===================
At June 30, 2008 and December 31, 2007, loans on nonaccrual status were
approximately $2,283 and $2,734, respectively. Loans past due more than 90 days
and still accruing at June 30, 2008 and December 31, 2007 were $2,365 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
six-month periods ended June 30:
2008 2007
----------- -----------
Balance - January 1, $ 6,737 $ 9,412
Loans charged off:
Commercial (1) 990 3,363
Residential real estate 139 348
Consumer 1,128 867
----------- -----------
Total loans charged off 2,257 4,578
Recoveries of loans:
Commercial (1) 94 206
Residential real estate 52 163
Consumer 328 480
----------- -----------
Total recoveries of loans 474 849
----------- -----------
Net loan charge-offs (1,783) (3,729)
Provision charged to operations 1,617 1,002
----------- -----------
Balance - June 30, $ 6,571 $ 6,685
=========== ===========
(1) Includes commercial and industrial and commercial real estate loans.
Information regarding impaired loans is as follows:
June 30, December 31,
2008 2007
--------------- -----------------
Balance of impaired loans $ 6,505 $ 6,871
Less portion for which no specific
allowance is allocated 2,263 2,568
--------------- -----------------
Portion of impaired loan balance for which a
specific allowance for credit losses is allocated $ 4,242 $ 4,303
=============== =================
Portion of allowance for loan losses specifically
allocated for the impaired loan balance $ 1,301 $ 1,312
=============== =================
Average investment in impaired loans year-to-date $ 6,550 $ 6,918
=============== =================
Interest recognized on impaired loans was $218 and $204 for the six-month
periods ended June 30, 2008 and 2007, respectively. Accrual basis income was not
materially different from cash basis income for the periods presented.
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
The Company, through its subsidiaries, grants residential, consumer, and
commercial loans to customers located primarily in the central and southeastern
areas of Ohio as well as the western counties of West Virginia. Approximately
3.49% of total loans were unsecured at June 30, 2008 as compared to 4.39% at
December 31, 2007.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. The contract amounts of these instruments are
not included in the consolidated financial statements. At June 30, 2008, the
contract amounts of these
11
instruments totaled approximately $80,513, 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 June 30, 2008 and December 31, 2007 are comprised of
advances from the Federal Home Loan Bank (FHLB) of Cincinnati, promissory notes
and Federal Reserve Bank (FRB) Notes.
FHLB Promissory FRB
Borrowings Notes Notes Totals
-------------------- ----------------- --------------- ----------------
June 30, 2008................... $ 48,167 $ 6,090 $ 5,510 $ 59,767
December 31, 2007............... $ 55,779 $ 5,723 $ 5,500 $ 67,002
Pursuant to collateral agreements with the FHLB, advances are secured by
$226,206 in qualifying mortgage loans and $6,197 in FHLB stock at June 30, 2008.
Fixed rate FHLB advances of $48,167 mature through 2033 and have interest rates
ranging from 2.13% to 6.62%. There were no variable rate FHLB borrowings at June
30, 2008.
At June 30, 2008, the Company had a cash management line of credit enabling it
to borrow up to $60,000 from the FHLB. All cash management advances have an
original maturity of 90 days. The line of credit must be renewed on an annual
basis. There was $60,000 available on this line of credit at June 30, 2008.
Based on the Company's current FHLB stock ownership, total assets and pledgeable
residential first mortgage loans, the Company had the ability to obtain
borrowings from the FHLB up to a maximum of $167,560 at June 30, 2008.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of 3.00% to
6.25% and are due at various dates through a final maturity date of November 12,
2010. A total of $4,021 represented promissory notes payable by Ohio Valley to
related parties.
FRB notes consist of the collection of tax payments from Bank customers under
the Treasury Tax and Loan program. These funds have a variable interest rate and
are callable on demand by the U.S. Treasury. The interest rate for the Company's
FRB notes was 1.77% at June 30, 2008 and 4.00% at December 31, 2007. Various
investment securities from the Bank used to collateralize the FRB notes totaled
$4,820 at June 30, 2008 and $5,945 at December 31, 2007.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $47,250 at June 30, 2008
and $34,950 at December 31, 2007.
Scheduled principal payments over the next five years:
FHLB Promissory FRB
Borrowings Notes Notes Totals
------------------- ----------------- --------------- -----------------
Year Ended 2008 $ 6,003 $ 4,313 $ 5,510 $ 15,826
Year Ended 2009 16,005 777 ---- 16,782
Year Ended 2010 26,005 1,000 ---- 27,005
Year Ended 2011 6 ---- ---- 6
Year Ended 2012 6 ---- ---- 6
Thereafter 142 ---- ---- 142
------------------- ----------------- --------------- -----------------
$ 48,167 $ 6,090 $ 5,510 $ 59,767
=================== ================= =============== =================
12
NOTE 7 - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of
adjustable-rate trust preferred securities as part of a pooled offering of such
securities. The rate on these trust preferred securities will be fixed at 6.58%
for five years, and then convert to a floating-rate term on March 15, 2012,
based on a rate equal to the 3-month LIBOR plus 1.68%. There were no debt
issuance costs incurred with these trust preferred securities. The Company
issued subordinated debentures to the trust in exchange for the proceeds of the
offering. The subordinated debentures must be redeemed no later than June 15,
2037. On March 26, 2007, the proceeds from these new trust preferred securities
were used to pay off $8,500 in higher cost trust preferred security debt, with a
floating rate of 8.97%. This payoff of $8,500 in trust preferred securities was
the result of an early call feature that allowed the Company to redeem the
entire portion of these subordinated debentures at par value. For additional
discussion, please refer to the caption titled "Subordinated Debentures and
Trust Preferred Securities" within Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations of this Form 10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands, except share and per share data)
Forward Looking Statements
Except for the historical statements and discussions contained herein,
statements contained in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934 and as defined in the Private Securities
Litigation Reform Act of 1995. Such statements are often, but not always,
identified by the use of such words as "believes," "anticipates," "expects," and
similar expressions. Such statements involve various important assumptions,
risks, uncertainties, and other factors, many of which are beyond our control,
which could cause actual results to differ materially from those expressed in
such forward looking statements. These factors include, but are not limited to,
the risk factors discussed in Part I, Item 1A of Ohio Valley's Annual Report on
Form 10-K for the fiscal year ended December 31, 2007 and Ohio Valley's other
securities filings. Readers are cautioned not to place undue reliance on such
forward looking statements, which speak only as of the date hereof. The Company
undertakes no obligation and disclaims any intention to republish revised or
updated forward looking statements as a result of unanticipated future events.
Financial Overview
The Company is primarily engaged in commercial and retail banking, offering a
blend of commercial, consumer and agricultural banking services within central
and southeastern Ohio as well as western West Virginia. The banking services
offered by the Bank include the acceptance of deposits in checking, savings,
time and money market accounts; the making and servicing of personal,
commercial, floor plan and student loans; and the making of construction and
real estate loans. The Bank also offers individual retirement accounts, safe
deposit boxes, wire transfers and other standard banking products and services.
As part of its lending function, the Bank also offers credit card services. Loan
Central engages in consumer finance, offering smaller balance personal and
mortgage loans to individuals with higher credit risk history. Loan Central's
line of business also includes seasonal tax refund loan services during the
January through April periods. Ohio Valley Financial Services sells life
insurance.
For the three months ended June 30, 2008, net income increased by $45, or 2.7%,
to finish at $1,731 compared to the same quarterly period in 2007. Earnings per
share for the second quarter of 2008 increased $.02, or 4.9%, to finish at $.43
per share compared to the same quarterly period in 2007. For the six months
ended June 30, 2008, net income increased by $235, or 6.8%, to finish at $3,696
compared to the same period in 2007. Earnings per share for the first six months
of 2008 finished at $.91, up 9.6%
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over the same period in 2007. Earnings per share growth for both the quarterly
and year-to-date periods ending June 30, 2008 continues to exceed the nominal
dollar net income growth pace due to the Company's stock repurchase program,
with increases in treasury stock repurchases lowering the weighted average
number of common shares outstanding. The annualized net income to average asset
ratio, or return on assets (ROA), and net income to average equity ratio, or
return on equity (ROE), both increased to .94% and 12.18% during the first six
months of 2008, as compared to .91% and 11.53%, respectively, for the same
period in 2007. The Company's growth in earnings during the first half of 2008
was accomplished primarily by: 1) net interest margin expansion as a result of
the lower short-term interest rate environment initiated by the Federal Reserve
Bank, which led to lower interest expense and a 7.0% improvement in net interest
income; and 2) noninterest income improvement of 14.9% over 2007's first half
period due to the increased transaction volume related to the Company's service
charges on deposit accounts and seaonal tax clearing services performed in the
first quarter of 2008.
The consolidated total assets of the Company increased $7,272, or 0.9%, during
the first six months of 2008 as compared to year-end 2007, to finish at
$790,690. This mild increase in assets was led by a continued excess liquidity
position, causing increases of $14,874 in interest-yielding deposits in other
financial institutions and $4,970 in cash and cash equivalents, from year-end
2007. This increase of interest-yielding deposit assets and cash balances were
partly the result of lower loan balances, which decreased $13,977 from year-end
2007, and lower investment securities, which decreased $4,151 from year-end
2007, as well as growth in deposit liabilities from year-end 2007. Loan growth
continues to be challenged by the various economic trends that have had a
negative impact on consumer spending, including the troubled housing crisis as
well as rising energy and food costs. A lower consumer demand for loans has
caused decreases in the Company's entire loan portfolio from year-end 2007,
which include commercial, consumer and real estate loan balances. Maturity
runoff of U.S. Government sponsored entity securities led the decrease in the
Company's investment securities. While the demand for loans decreased during the
first half of 2008, the Company was able to benefit from growth in its total
deposit liabilities of $19,172 from year-end 2007, to use as funding sources for
potential earning asset growth during the remaining two quarters of 2008.
Interest-bearing deposit liability growth was led by surges in the Company's
public fund NOW accounts, up $26,501 from year-end 2007, and Market Watch
product, up $24,840 from year-end 2007, partially offset by a decrease in time
deposits of $40,348 from year-end 2007. Furthermore, the Company's
noninterest-bearing demand deposits increased $7,234 from year-end 2007. The
total deposits retained from year-end 2007 were partially used to fund the
runoff in the Company's securities sold under agreements to repurchase
("repurchase agreements") and repayments of other borrowed funds, which
decreased $5,081 and $7,235, respectively, from year-end 2007.
Comparison of
Financial Condition
at June 30, 2008 and December 31, 2007
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at June 30, 2008 compared to December 31, 2007. The
purpose of this discussion is to provide the reader a more thorough
understanding of the consolidated financial statements. This discussion should
be read in conjunction with the interim consolidated financial statements and
the footnotes included in this Form 10-Q.
Cash and Cash Equivalents
The Company's cash and cash equivalents consist of cash and balances due from
banks and federal funds sold. The amounts of cash and cash equivalents fluctuate
on a daily basis due to customer activity and liquidity needs. At June 30, 2008,
cash and cash equivalents had increased $4,970, or 29.4%, to $21,864 as compared
to $16,894 at December 31, 2007. The increased liquidity position of the Company
at June 30, 2008 was the result of lower loan demand and investment security
maturities combined with increases in both interest- and noninterest-bearing
deposits. As liquidity levels vary continuously based on
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consumer activities, amounts of cash and cash equivalents can vary widely at any
given point in time. Management believes that the current balance of cash and
cash equivalents remains at a level that will meet cash obligations and provide
adequate liquidity. Further information regarding the Company's liquidity can be
found under the caption "Liquidity" in this Management's Discussion and
Analysis.
Interest-Bearing Deposits in Other Financial Institutions
At June 30, 2008, the Company had a total of $15,507 invested as
interest-bearing deposits in other financial institutions, an increase from only
$633 at December 31, 2007. This increase is largely the result of the Company's
excess liquidity position due to decreasing loan demand and growing excess
deposit liabilities. Historically, the Company has typically invested its excess
funds with various correspondent banks in the form of federal funds sold, a
common strategy performed by most banks. Beginning in the second quarter of
2008, the Company utilized a new relationship with a deposit placement service
provider known as CDARS, or the Certificate of Deposit Account Registry Service,
to invest its excess funds. CDARS provides financial institutions with the means
to invest its own funds through One-Way Sell transactions for various maturity
terms. The rates offered for the terms selected by the Company, between 2.4 and
2.5% at a weighted average maturity of 4 weeks; compare favorably to federal
funds rate offerings that are currently at 2.0%. The Company views this
investment option as a margin-enhancing alternative when investing its excess
funds and will continue to utilize this method when the need arises.
Furthermore, CDARS balances are 100% secured by FDIC insurance as compared to
federal funds sold balances which are unsecured.
Securities
During the first half of 2008, investment securities decreased $4,151 to finish
at $89,893, 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 ("GSE") securities and obligations of states and
political subdivisions. GSE securities decreased $10,007, or 25.4%, as a result
of several large maturities during both the first and second quarters of 2008.
In addition to attractive yield opportunities and a desire to increase
diversification within the Company's securities portfolio, GSE securities have
also been used to satisfy pledging requirements for repurchase agreements. At
June 30, 2008, the Company's repurchase agreements decreased 12.6%, reducing the
need to secure these balances and impacted the runoff in GSE securities. This
decrease was partially offset by increases in both mortgage-backed securities
and obligations of states and political subdivisions, which were up $1,713, or
10.8%, and $4,143, or 10.7%, 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
$42,807, or 47.6% of total investments at June 30, 2008. The primary advantage
of mortgage-backed securities has been the increased cash flows due to the more
rapid (monthly) repayment of principal as compared to other types of investment
securities, which deliver proceeds upon maturity or call date. Principal
repayments from mortgage-backed securities totaled $4,320 from January 1, 2008
through June 30, 2008. For the remainder of 2008, the Company's focus will be to
generate interest revenue primarily through loan growth, as loans generate the
highest yields of total earning assets.
Loans
The loan portfolio represents the Company's largest asset category and is its
most significant source of interest income. During the first six months of 2008,
total loans were down $13,977, or 2.2%, from year-end 2007. Lower loan balances
were mostly influenced by total commercial loans, which were down $10,040, or
4.0%, from year-end 2007. The Company's commercial loans comprise the largest
portion of the Company's loan portfolio and include both commercial real estate
and commercial and industrial loans. While commercial loan balances are down,
management continues to place emphasis on its commercial lending, which
generally yields a higher return on investment as compared to other types of
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loans. The Company's commercial and industrial loan portfolio, down $7,525, or
13.7%, from year-end 2007, consists of loans to corporate borrowers primarily in
small to mid-sized industrial and commercial companies that include service,
retail and wholesale merchants. Collateral securing these loans includes
equipment, inventory, and stock. Commercial real estate, the Company's largest
segment of commercial loans, decreased $2,515, or 1.3%, largely due to lower
loan demand as well as commercial loan paydowns and payoffs. This segment of
loans is mostly secured by commercial real estate and rental property.
Commercial real estate consists mostly of loan participations with other banks
outside the Company's primary market area. Although the Company is not actively
marketing participation loans outside its primary market area, it is taking
advantage of the relationships it has with certain lenders in those areas where
the Company believes it can profitably participate with an acceptable level of
risk. The commercial loan portfolio, including participation loans, consists
primarily of rental property loans (18.8% of portfolio), medical industry loans
(13.6% of portfolio), land development loans (10.6% of portfolio), and hotel and
motel loans (10.4% of portfolio). During the first half of 2008, the primary
market areas for the Company's commercial loan originations, excluding loan
participations, were in the areas of Gallia, Jackson and Franklin counties of
Ohio, which accounted for 62.1% of total originations. The growing West Virginia
markets also accounted for 31.1% 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.
Also contributing to the loan portfolio decrease were consumer loans, which were
down $2,906, or 2.3%, 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 $2,064, or 7.1%, 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 half of 2008. In
addition, the Company's all-terrain vehicle loans decreased $739, or 21.0%, 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. During the first six months
of 2008, total residential real estate loan balances decreased $1,954, or 0.8%,
from year-end 2007 to total $248,529. The decrease was largely driven by a
reduction in the Company's one-year adjustable-rate mortgage balances of $5,730,
or 13.6%, 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 half period as
compared to year-end 2007. Partially offsetting the decreases in variable rate
real estate loan balances was an increase to the Company's five-year adjustable
rate (2-step) product, with balances being up $3,927, or 60.1%, from year-end
2007. This product allows the consumer to secure a fixed initial interest rate
for the first five years, with the loan adjusting to a variable interest rate
for years 6-30. Real estate loan growth was also
16
experienced in the Company's longer-termed, fixed-rate real estate loans, which
were up $1,716, or 1.0%, from year-end 2007. Terms of these fixed-rate loans
include 15-, 20- and 30-year periods. To help further satisfy demand for
longer-termed, fixed-rate real estate loans, the Company continues to originate
and sell some fixed-rate mortgages to the secondary market, and has sold $8,719
in loans during the first six months of 2008, which were up $6,009, or 221.7%,
over the volume in the first six months of 2007. The remaining real estate loan
portfolio balances decreased $1,867 primarily from the Company's residential
construction loans.
The Company recognized an increase of $923 in other loans from year-end 2007.
Other loans consist primarily of state and municipal loans and overdrafts. This
increase was largely due to an increase in overdrafts of $645.
The Company continues to monitor the pace of its loan volume, as it has
experienced a 2.2% drop-off within its total loan portfolio during the first
half 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 the consumer loan segment as a
decreasing portfolio, due to higher loan costs, increased competition in
automobile loans and a lower return on investment as compared to the other loan
portfolios. As a result, the Company expects total loan growth in 2008 to be
challenged, with volume to continue at a stable-to-declining pace throughout the
rest of the year. The Company remains committed to sound underwriting practices
without sacrificing asset quality and avoiding exposure to unnecessary risk that
could weaken the credit quality of the portfolio.
Allowance for Loan Losses
Management continually monitors the loan portfolio to identify potential
portfolio risks and to detect potential credit deterioration in the early
stages, and then establishes reserves based upon its evaluation of these
inherent risks. During the first six months of 2008, the Company's allowance for
loan losses remained relatively stable, finishing at $6,571, 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 $4,648 at June 30, 2008. Furthermore, the Company's
nonperforming assets, which include real estate acquired through foreclosure and
referred to as other real estate owned ("OREO"), also increased from $3,922 at
year-end 2007 to $9,394 at June 30, 2008. During the first quarter, the Company
experienced problems with one of its commercial borrowers that was unable to
meet the debt requirements of its loans. During this time, the Company stopped
recognizing interest income on the loans, reversed all interest that had been
accrued and unpaid and classified the loans as nonperforming. At March 31, 2008,
the ratio of nonperforming loans to total loans grew to 1.40% as a result of
this classification. During the second quarter, continued analysis of these
loans was performed, which included the reviews of updated appraisals that
reflected a decline in market values due to deteriorating market conditions.
This analysis, along with continued loan deterioration of this large commercial
borrower, prompted management to charge down the loan by $750, including
estimated costs to sell, to the estimated fair value of the collateral.
Subsequently, the Company acquired these properties through foreclosure and
transferred the loans to OREO. This shifted approximately $4,214 from
nonperforming loans to nonperforming assets. As a result, the Company's ratio of
nonperforming loans to total loans decreased to .75% at June 30, 2008, while the
ratio of nonperforming assets to total assets increased from .50% at year-end
2007 to 1.19% at June 30, 2008.
During the first half of 2008, net charge-offs totaled $1,783, which were down
$1,946 from the same period in 2007, in large part due to commercial charge-offs
of specific allocations that were reflected in the allowance for loan losses
from 2007. Management believes that the allowance for loan losses is adequate
and reflects probable incurred losses in the loan portfolio. Asset quality
remains a key focus, as management continues to stress not just loan growth, but
quality in loan underwriting as well.
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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 six months of 2008, total
deposits were up $19,172, or 3.3%, from year-end 2007. The change in deposits
came primarily from an increase in the Company's interest-bearing demand
deposits, money market deposit and non-interest bearing deposit balances.
Interest-bearing NOW account balances increased $25,330, or 38.6%, during the
first half of 2008 as compared to year-end 2007. This growth was largely driven
by a $26,501 increase in public fund balances related to the local city and
county school construction projects currently in process within Gallia County,
Ohio.
Further deposit growth came from the Company's money market deposit balances,
which were up $24,715, or 34.2%, during the first half of 2008 as compared to
year-end 2007. This increase was from the Company's Market Watch money market
account product, which generated $24,840 in new deposit balances from year-end
2007, mostly during the second quarter of 2008. Introduced in August 2005, the
Market Watch product is a limited transaction investment account with tiered
rates that competes with current market rate offerings and serves as an
alternative to certificates of deposit for some customers. In the second quarter
of 2008, the Company began marketing a special six-month introductory rate offer
of 3.50% APY that would be for new Market Watch accounts. This special offer was
well received by the Bank's customers and contributed to most of the
year-to-date increase in 2008. As a result, Market Watch deposit balances
increased $20,670, or 28.4%, during the second quarter of 2008.
The Company's interest-free funding source, noninterest bearing demand deposits,
increased $7,234, or 9.2%, from year-end 2007. The increase in interest-free
funds was primarily from the Company's business checking products, which were up
$6,075, or 15.5%, from year-end 2007. Further enhancing growth in noninterest
bearing demand deposits was an increase in the Company's free checking products,
which were up $2,854, or 35.9%. 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 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 $40,348, or
11.8%, from year-end 2007. Time deposits, particularly CD's, are the most
significant source of funding for the Company's earning assets, making up 49.5%
of total deposits. With loan balances on a declining pace, down 2.2% 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 4.46% during the first half of 2008 as compared to
4.83% during the same period in 2007. Wholesale fund deposits (i.e., brokered
and network CD issuances) have not been as responsive to the decline in
short-term market rates, producing an average cost of 4.81% during the first
half of 2008 and 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.
18
Securities Sold Under Agreements to Repurchase
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were down $5,081, or 12.6%, from year-end 2007. This increase
was mostly due to seasonal fluctuations of two commercial accounts in the first
half 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 six months of 2008, other
borrowed funds were down $7,235, or 10.8%, from year-end 2007. Management used
the growth in deposit proceeds to repay FHLB borrowings during the first half
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 half of 2008 as compared
to the same period in 2007. For additional discussion on the terms and
conditions of this new trust preferred security issuance, please refer to "Note
7 - Subordinated Debentures and Trust Preferred Securities" within Item 1, Notes
to the Consolidated Financial Statements of this Form 10-Q.
Shareholders' Equity
The Company maintains a capital level that exceeds regulatory requirements as a
margin of safety for its depositors. Total shareholders' equity at June 30, 2008
of $61,594 was up $83, or 0.1%, as compared to the balance of $61,511 on
December 31, 2007. Contributing most to this increase was year-to-date net
income of $3,696 partially offset by cash dividends paid of $1,543, or $.38 per
share, year-to-date, and increased share repurchases. The Company had treasury
stock totaling $14,817 at June 30, 2008, an increase of $1,374 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 June 30, 2008,
40,353 shares had been repurchased pursuant to that authorization.
Comparison of
Results of Operations
for the Quarter and Year-To-Date Periods
Ended June 30, 2008 and 2007
The following discussion focuses, in more detail, on the consolidated results of
operations of the Company for the quarterly and year-to-date periods ended June
30, 2008 compared to the same periods 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.
19
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
second quarter of 2008, net interest income increased $389, or 5.4%, as compared
to the same quarter in 2007. Through the first six months of 2008, net interest
income increased $993, or 7.0%, as compared to the same period in 2007. The
increase in quarterly and year-to-date net interest income is primarily due to
an expanding net interest margin caused by lower funding costs.
Total interest income decreased $867, or 6.3%, for the second quarter of 2008
and decreased $635, or 2.3%, during the first six months of 2008 as compared to
the same periods in 2007. This drop in interest earnings was largely due to a
decrease in the yields earned on average earning assets during both the
quarterly and year-to-date periods of 2008 as compared to the same periods in
2007. The average yield on earning assets for the three months ended June 30,
2008 decreased 72 basis ponts to 6.98% as compared to the same period in 2007.
The average yield on earning assets for the six months ended June 30, 2008
decreased 44 basis points to 7.23% as compared to the same period in 2007. Both
negative effects reflect the decreases in short-term interest rates since
September of 2007. Partially offsetting the assets yield decreases were positive
contributions from growth in the Company's average earning assets, up $26,596,
or 3.7%, during the second quarter of 2008 and up $24,075, or 3.3%, during the
first half of 2008 as compared to the same periods in 2007. The growth in
average earning assets was largely comprised of residential real estate loan and
commercial real estate loan participations since June 2007. Further contributing
to interest revenue was addional fee income from increased originations of the
Company's refund anticipation loans ("RAL"). The Company's participation with a
third party tax software provider has given us the opportunity to make RAL loans
during the tax refund loan season, typically from January through March. RAL
loans are short-term cash advances against a customer's anticipated income tax
refund. Through the first half of 2008, the Company had recognized $265 in RAL
fees as compared to $94 during the same period in 2007.
In relation to lower earning asset yields, the Company's total interest expense
decreased $1,256, or 19.2%, for the second quarter of 2008 and decreased $1,628,
or 12.5%, during the first six months of 2008 as compared to the same periods in
2007, as a result of lower interest-bearing liability costs. Since September
2007, the Federal Reserve has reduced the target Federal Funds rate 325 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 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 33 basis points from June 30, 2007 to June 30, 2008.
As a result of lower funding costs, the Company's net interest margin increased
8 basis points from 4.05% to 4.13% for the second quarter of 2008 and increased
13 basis points from 4.04% to 4.17% during the first six months of 2008 as
compared to the same periods in 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 most recent
actions of not changing interest rates, with the last change made on April 30,
2008 which saw the target Federal Funds rate drop by "only" 25 basis points as
20
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
Credit risk is inherent in the business of originating loans. The Company sets
aside an allowance for loan losses through charges to income, which are
reflected in the consolidated statement of income as the provision for loan
losses. This provision charge is recorded to achieve an allowance for loan
losses that is adequate to absorb losses probable and incurred in the Company's
loan portfolio. Management performs, on a quarterly basis, a detailed analysis
of the allowance for loan losses that encompasses loan portfolio composition,
loan quality, loan loss experience and other relevant economic factors.
Provision expense increased $300, or 48.7%, for the three months ended June 30,
2008, and increased $615, or 61.4%, for the first six months of 2008 as compared
to the same periods in 2007. The increase in provision expense was impacted by a
$750 charge-off taken on a loan relationship with a large commercial borrower
during the second quarter of 2008. Management deemed this action as appropriate
to account for the credit deterioration that was evident from updated appraisal
reviews. The properties have since been acquired by the Company through
foreclosure. Management will seek to sell or liquidate the OREO properties.
While provision expense increased both 48.7% and 61.4% during the three-month
and six-month periods ended June 30, 2008 as compared to the same periods in
2007, the Company's net charge-offs were down by $1,946, or 52.2%, during the
first half of 2008 as compared to the same period in 2007. This inconsistent
relationship between rising provision expense and lower net charge-offs was
primarily from a timing difference that is a direct result of the Company's
significant commercial loan allocations that were made to the allowance for loan
losses during the fourth quarter of 2006. At that time, a specific allocation
for loan losses was made on behalf of a commercial loan that was determined to
be impaired, which required a corresponding increase to provision for loan
losses in 2006. During the first and second quarters of 2007, charge-offs were
recorded on the specific allocation established for the impaired loan of 2006,
effectively causing the majority of the $3,363 in commercial loan charge-offs at
June 30, 2007.
Management believes that the allowance for loan losses is adequate at June 30,
2008 and reflective of probable losses in the portfolio. The allowance for loan
losses was 1.05% of total loans at June 30, 2008, down slightly from the
allowance level as a percentage of total loans of 1.06% at December 31, 2007.
Future provisions to the allowance for loan losses will continue to be based on
management's quarterly in-depth evaluation that is discussed in further detail
under the caption "Critical Accounting Policies - Allowance for Loan Losses" of
this Form 10-Q.
Noninterest Income
Noninterest income for the three months ended June 30, 2008 was $1,587, an
increase of $221, or 16.2%, over the same period in 2007. Noninterest income for
the six months ended June 30, 2008 was $3,171, an increase of $412, or 14.9%,
over the same period in 2007. These 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, contributing to an increase in
non-sufficient fund fees of $47, or 7.6%, during the second quarter of 2008 and
$109, or 9.6%, during the first half of 2008, as compared to the same periods in
2007.
21
Also contributing to noninterest revenue growth were earnings from bank owned
life insurance ("BOLI"). Income earned on life insurance contracts from the
Company's supplemental retirement program was up $39, or 24.1%, during the
second quarter of 2008 and $34, or 9.9%, during the first half of 2008 as
compared to the same periods in 2007. BOLI activity was impacted by additional
investments in life insurance contracts purchased during the second quarter of
2008 and a higher earnings rate tied to such policies. The Company's average
investment balance in BOLI through June 30, 2008 was $16,580, an increase of
$406, or 2.5%, as compared to the same period in 2007.
To help manage consumer demand for longer-termed, fixed-rate real estate
mortgages, the Company has taken additional opportunities to sell some real
estate loans to the secondary market. Through June 30, 2008, the Company has
sold 78 loans totaling $8,719 to the secondary market as compared to 25 loans
totaling $2,710 during the same period in 2007. This has contributed to growth
in income on sale of loans, which was up $25, or 125.0%, during the second
quarter of 2008 and $31, or 52.5%, during the first half of 2008 as compared to
the same periods in 2007.
Growth in noninterest income also came from a decrease in the loss on sale of
OREO. The higher OREO losses experienced in 2007's second quarter and
year-to-date periods were largely the result of losses incurred on the sale of
one large commercial property during that time.
Also contributing to noninterest revenue growth were activities from other
noninterest income sources. As mentioned previously, the Company began its
participation in a new tax refund loan service in 2006 where it serves as a
facilitator for the clearing of tax refunds for a tax software provider. The
Company is one of a limited number of financial institutions throughout the U.S.
that facilitates tax refunds through its relationship with this tax software
provider. During the second quarter of 2008, the Company's tax refund processing
fees increased by $48, or 101.7%, and increased $160, or 146.3%, during the
first half of 2008 over the same periods in 2007. Further enhancing growth in
other noninterest income was debit card interchange income, increasing $30, or
21.8%, during the second quarter of 2008 and $48, or 18.0%, during the first
half of 2008 as compared to the same periods in 2007. The volume of transactions
utilizing the Company's Jeanie(R) Plus debit card continue to increase over a
year ago. The Company's customers used their Jeanie(R) Plus debit cards to
complete 640,607 transactions during the first six months of 2008, up 11.9% from
the 572,232 transactions during the same period in 2007, derived mostly from
gasoline and restaurant purchases.
The total of all remaining noninterest income categories remained relatively
unchanged from the prior quarterly and year-to-date periods. The total growth in
noninterest income demonstrates management's desire to leverage technology to
enhance efficiency and diversify the Company's revenue sources.
Noninterest Expense
Noninterest expense during the second quarter of 2008 was up $329, or 6.0%, and
up $560, or 5.1%, during the first half of 2008 as compared to the same periods
in 2007. Contributing to the growth in overhead expense were salaries and
employee benefits, the Company's largest noninterest expense item, which
increased $222, or 7.0%, for the second quarter of 2008 and $418, or 6.5%,
during the first half of 2008 as compared to the same periods in 2007. The
increases were largely due to higher accrued incentive costs, increased health
insurance benefit expenses and a higher full-time equivalent ("FTE") employee
base. The Company's FTE employees increased at June 30, 2008 to 263 employees on
staff as compared to 256 employees at June 30, 2008.
Also increasing were data processing expenses, which were up $55, or 26.1%,
during the second quarter of 2008 and $126, or 31.1%, during the first six
months of 2008 as compared to the same periods 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.
22
Also contributing to noninterest expense growth were activities from other
noninterest expense sources led by increases in the Company's marketing costs,
which were up $35, or 23.5%, during the second quarter of 2008 and $85, or
30.4%, during the first half of 2008 as compared to the same periods in 2007.
Marketing costs include advertising, donations and public relations activities.
Various inflationary increases in other noninterest expenses also included
supplies, forms, postage, telephone and other miscellaneous expenses during the
quarterly and year-to-date periods presented. Partially offsetting these
increases within other noninterest expense was a decrease in the Company's
foreclosure expenses, which were down $82, or 75.5%, during the second quarter
of 2008 and $216, or 103.6%, during the first half of 2008 as compared to the
same periods in 2007. Management anticipates current year foreclosure costs to
be below the costs incurred from 2007 due to the larger than normal volume of
foreclosure costs that were incurred during 2007. 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.
The Company's efficiency ratio is defined as noninterest expense as a percentage
of fully tax-equivalent net interest income plus noninterest income. The
emphasis management has placed on managing its balance sheet mix and interest
rate sensitivity to help expand the net interest margin as well as developing
more innovative ways to generate noninterest revenue has contributed to an
improving efficiency ratio, finishing at 62.88% for the three months ended June
30, 2008 and 62.13% during the six months ended June 30, 2008 as compared to
63.53% and 64.01% for the same periods in 2007.
Capital Resources
All of the Company's capital ratios exceeded the regulatory minimum guidelines
as identified in the following table:
Company Ratios Regulatory
6/30/08 12/31/07 Minimum
------- -------- ----------
Tier 1 risk-based capital 12.1% 12.0% 4.00%
Total risk-based capital ratio 13.2% 13.1% 8.00%
Leverage ratio 9.3% 9.5% 4.00%
Cash dividends paid of $1,543 for the first six months of 2008 represent a 5.3%
increase over the cash dividends paid during the same period in 2007. The
quarterly dividend rate increased from $0.18 per share in 2007 to $0.19 per
share in 2008. The dividend rate has increased in proportion to the consistent
growth in retained earnings. At June 30, 2008, approximately 82% of the
Company's shareholders were enrolled in the Company's dividend reinvestment
plan.
Liquidity
Liquidity relates to the Company's ability to meet the cash demands and credit
needs of its customers and is provided by the ability to readily convert assets
to cash and raise funds in the market place. Total cash and cash equivalents,
interest-bearing deposits with other financial institutions, held-to-maturity
securities maturing within one year and available-for-sale securities of
$110,964 represented 14.0% of total assets at June 30, 2008. In addition, the
FHLB offers advances to the Bank which further enhances the Bank's ability to
meet liquidity demands. At June 30, 2008, the Bank could borrow an additional
$72,000 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.
23
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
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
24
loans (aggregate balances of $1,000 or greater), including loan grades,
collateral values, and other factors. A list is prepared and updated quarterly
that allows management to monitor this group of borrowers. Therefore, only small
balance commercial loans and homogeneous loans (consumer and real estate loans)
are not specifically reviewed to determine minor delinquencies, current
collateral values and present credit risk. The Company utilizes actual historic
loss experience as a factor to calculate the probable losses for this component
of the allowance for loan losses. This risk factor reflects a three-year
performance evaluation of credit losses per loan portfolio. The risk factor is
achieved by taking the average net charge-off per loan portfolio for the last 36
consecutive months and dividing it by the average loan balance for each loan
portfolio over the same time period. The Company believes that by using the 36
month average loss risk factor, the estimated allowance will more accurately
reflect current probable losses.
The final component used to evaluate the adequacy of the allowance includes five
additional areas that 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,
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 to an instantaneous increase or decrease in market interest
rates over a 12 month horizon to +/- 5% for a 100 basis point rate
25
shock, +/- 7.5% for a 200 basis point rate shock and +/- 10% for a 300 basis
point rate shock.
The following table presents the Company's estimated net interest income
sensitivity:
June 30, 2008 December 31, 2007
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
------------------------ -------------------- --------------------
+300 (1.63%) (8.23%)
+200 (0.99%) (5.09%)
+100 (0.51%) (2.47%)
-100 0.79% 2.48%
-200 2.13% 5.01%
-300 3.42% 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
June 30, 2008, the Company's analysis of net interest income reflects a
liability sensitive position. Based on current assumptions, an instantaneous
decrease in interest rates would positively impact net interest income primarily
due to the duration of earning assets exceeding the duration of interest-bearing
liabilities. As compared to December 31, 2007, the Company's interest rate risk
profile has become less liability sensitive primarily due to the influx of
liquidity and to the extension of maturity terms offered on new time deposits.
Since September 2007, the Federal Reserve has reduced short-term interest rates
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 June 30, 2008, that has materially affected, or is
reasonably likely to materially affect, Ohio Valley's internal control over
financial reporting.
26
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.
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 June 30, 2008:
ISSUER REPURCHASES OF EQUITY SECURITIES(1)
Maximum Number
of Shares That May
Total Number Total Number of Shares Yet Be Purchased
of Common Average Purchased as Part of Under Publicly
Shares Price Paid per Publicly Announced Announced Plan or
Period Purchased Common Share Plans or Pograms Programs
----------------------- --------------- ------------------- ------------------------ ----------------------
April 1 - 30, 2008 9,000 $25.05 9,000 157,155
May 1 - 31, 2008 21,508 $25.00 21,508 135,647
June 1 - 30, 2008 1,000 $25.00 1,000 134,647
--------------- ------------------- ------------------------ ----------------------
TOTAL 31,508 $25.02 31,508 134,647
=============== =================== ======================== ======================
(1) On January 15, 2008, Ohio Valley's Board of Directors announced its plan
to repurchase up to 175,000 of its common shares between February 16, 2008
and February 15, 2009.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 7, 2008 for the
purpose of electing directors. Shareholders received proxy materials containing
the information required by this item. Three directors, Harold A. Howe, Brent A.
Saunders and David W. Thomas were nominated for reelection and were reelected.
Of the 4,051,017 shares outstanding, a summary of the 3,311,034 shares voted is
as follows:
Broker
Director Candidate For Withheld Non-Votes
Harold A. Howe 3,282,458 28,576 ----
Brent A. Saunders 3,232,193 78,841 ----
David W. Thomas 3,292,182 18,852 ----
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.
28
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: August 8, 2008 By: /s/ Jeffrey E. Smith
----------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: August 8, 2008 By: /s/ Scott W. Shockey
---------------------
Scott W. Shockey
Vice President and Chief Financial Officer
29
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.
30