UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2009
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 has submitted electronically and
posted on its corporate web site, if any, every Interactive Data file required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months(or for such shorter period that the registrant was required
to submit and post such files).
|_| Yes |_| No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|_| Yes |X| No
The number of common shares of the registrant outstanding as of May 8, 2009 was
3,983,009.
OHIO VALLEY BANC CORP.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements (Unaudited)....................................3
Consolidated Balance Sheets.........................................3
Consolidated Statements of Income...................................4
Condensed Consolidated Statements of Changes in
Shareholders' Equity................................................5
Condensed Consolidated Statements of Cash Flows.....................6
Notes to the Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................13
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........26
Item 4. Controls and Procedures............................................27
PART II - OTHER INFORMATION...................................................28
Item 1. Legal Proceedings.................................................28
Item 1A. Risk Factors......................................................28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......28
Item 3. Defaults Upon Senior Securities...................................28
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..................................29
SIGNATURES....................................................................30
EXHIBIT INDEX.................................................................31
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share data)
--------------------------------------------------------------------------------
March 31, December 31,
2009 2008
----------------- -----------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 8,321 $ 16,650
Federal funds sold ---- 1,031
----------------- -----------------
Total cash and cash equivalents 8,321 17,681
Interest-bearing deposits in other financial institutions 42,817 611
Securities available-for-sale 80,344 75,340
Securities held-to-maturity
(estimated fair value: 2009 - $16,315; 2008 - $17,241) 16,025 16,986
Federal Home Loan Bank stock 6,281 6,281
Total loans 633,559 630,391
Less: Allowance for loan losses (7,704) (7,799)
----------------- -----------------
Net loans 625,855 622,592
Premises and equipment, net 10,548 10,232
Accrued income receivable 3,012 3,172
Goodwill 1,267 1,267
Bank owned life insurance 18,311 18,153
Other assets 9,183 8,793
----------------- -----------------
Total assets $ 821,964 $ 781,108
================= =================
LIABILITIES
Noninterest-bearing deposits $ 96,934 $ 85,506
Interest-bearing deposits 557,247 506,855
----------------- -----------------
Total deposits 654,181 592,361
Securities sold under agreements to repurchase 27,292 24,070
Other borrowed funds 51,148 76,774
Subordinated debentures 13,500 13,500
Accrued liabilities 11,261 11,347
----------------- -----------------
Total liabilities 757,382 718,052
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000 shares
authorized; 2009 and 2008 - 4,642,748 shares issued) 4,643 4,643
Additional paid-in capital 32,683 32,683
Retained earnings 42,007 40,752
Accumulated other comprehensive income 961 690
Treasury stock, at cost (2009 and 2008 - 659,739 shares) (15,712) (15,712)
----------------- -----------------
Total shareholders' equity 64,582 63,056
----------------- -----------------
Total liabilities and shareholders' equity $ 821,964 $ 781,108
================= =================
See notes to consolidated financial statements
3
OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share data)
--------------------------------------------------------------------------------
Three months ended
March 31,
2009 2008
---------------- -----------------
Interest and dividend income:
Loans, including fees $ 11,659 $ 12,642
Securities:
Taxable 753 796
Tax exempt 117 141
Dividends 71 79
Other Interest 11 76
---------------- -----------------
12,611 13,734
Interest expense:
Deposits 3,449 4,886
Securities sold under agreements to repurchase 22 144
Other borrowed funds 588 757
Subordinated debentures 272 272
---------------- -----------------
4,331 6,059
---------------- -----------------
Net interest income 8,280 7,675
Provision for loan losses 848 701
---------------- -----------------
Net interest income after provision for loan losses 7,432 6,974
Noninterest income:
Service charges on deposit accounts 625 710
Trust fees 55 61
Income from bank owned life insurance 200 175
Gain on sale of loans 258 45
Loss on sale of other real estate owned ---- (41)
Other 925 634
---------------- -----------------
2,063 1,584
Noninterest expense:
Salaries and employee benefits 3,700 3,429
Occupancy 403 386
Furniture and equipment 285 235
Data processing 227 265
FDIC insurance 285 17
Other 1,698 1,420
---------------- -----------------
6,598 5,752
---------------- -----------------
Income before income taxes 2,897 2,806
Provision for income taxes 846 841
---------------- -----------------
NET INCOME $ 2,051 $ 1,965
================ =================
Earnings per share $ .51 $ .48
================ =================
See notes to consolidated financial statements
4
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (UNAUDITED)
(dollars in thousands, except share and per share data)
--------------------------------------------------------------------------------
Three months ended
March 31,
2009 2008
----------------- -----------------
Balance at beginning of period $ 63,056 $ 61,511
Comprehensive income:
Net income 2,051 1,965
Change in unrealized loss
on available-for-sale securities 411 1,410
Income tax effect (140) (479)
----------------- -----------------
Total comprehensive income 2,322 2,896
Cash dividends (796) (774)
Shares acquired for treasury ---- (586)
Cumulative-effect adjustment in adopting EITF No. 06-04 ---- (1,079)
----------------- -----------------
Balance at end of period $ 64,582 $ 61,968
================= =================
Cash dividends per share $ 0.20 $ 0.19
================= =================
Shares from common stock issued
through dividend reinvestment plan ---- 1
================= =================
Shares acquired for treasury ---- 23,328
================= =================
See notes to consolidated financial statements
5
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands)
--------------------------------------------------------------------------------
Three months ended
March 31,
2009 2008
--------------- ---------------
Net cash provided by operating activities: $ 2,701 $ 2,669
Investing activities:
Proceeds from maturities of securities available-for-sale 3,842 11,089
Purchases of securities available-for-sale (8,498) (2,944)
Proceeds from maturities of securities held-to-maturity 999 449
Purchases of securities held-to-maturity (40) (3,060)
Change in interest-bearing deposits in other financial (42,206) 126
institutions
Net change in loans (4,254) 2,991
Proceeds from sale of other real estate owned 53 141
Purchases of premises and equipment (577) (111)
--------------- ---------------
Net cash provided by (used in) investing activities (50,681) 8,681
Financing activities:
Change in deposits 61,820 22,262
Cash dividends (796) (774)
Purchases of treasury stock ---- (586)
Change in securities sold under agreements to repurchase 3,222 (10,347)
Proceeds from Federal Home Loan Bank borrowings ---- 7,000
Repayment of Federal Home Loan Bank borrowings (3,001) (7,010)
Change in other short-term borrowings (22,625) (5,111)
--------------- ---------------
Net cash provided by (used in) financing activities 38,620 5,434
--------------- ---------------
Change in cash and cash equivalents (9,360) 16,784
Cash and cash equivalents at beginning of period 17,681 16,894
--------------- ---------------
Cash and cash equivalents at end of period $ 8,321 $ 33,678
=============== ===============
Supplemental disclosure:
Cash paid for interest $ 5,645 $ 7,120
Cash paid for income taxes 280 70
Non-cash transfers from loans to other real estate owned 143 340
See notes to consolidated financial statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the accounts of Ohio Valley Banc Corp. ("Ohio Valley") and its
wholly-owned subsidiaries, The Ohio Valley Bank Company (the "Bank"), Loan
Central, Inc. ("Loan Central"), a consumer finance company, and Ohio Valley
Financial Services Agency, LLC ("Ohio Valley Financial Services"), an insurance
agency. Ohio Valley and its subsidiaries are collectively referred to as the
"Company". All material intercompany accounts and transactions have been
eliminated in consolidation.
These interim financial statements are prepared by the Company without audit and
reflect all adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present fairly the consolidated financial position
of the Company at March 31, 2009, and its results of operations and cash flows
for the periods presented. The results of operations for the three months ended
March 31, 2009 are not necessarily indicative of the operating results to be
anticipated for the full fiscal year ending December 31, 2009. 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, 2008 contains consolidated financial statements and related notes which
should be read in conjunction with the accompanying consolidated financial
statements.
The accounting and reporting policies followed by the Company conform to US
GAAP. The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates. The allowance for loan losses is particularly subject to
change.
The majority of the Company's income is derived from commercial and retail
lending activities. Management considers the Company to operate in one segment,
banking.
INCOME TAX: Income tax expense is the sum of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
CASH FLOW: For consolidated financial statement classification and cash flow
reporting purposes, cash and cash equivalents include cash on hand,
noninterest-bearing deposits with banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods. The Company reports
net cash flows for customer loan transactions, deposit transactions, short-term
borrowings and interest-bearing deposits with other financial institutions.
EARNINGS PER SHARE: Earnings per share are computed based on net income divided
by the weighted average number of common shares outstanding during the period.
The weighted average common shares outstanding were 3,983,009 and 4,060,585 for
the three months ended March 31, 2009 and 2008, respectively. Ohio Valley had no
dilutive effect and no potential common shares issuable under stock options or
other agreements for any period presented.
LOANS: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on an accrual basis using the
7
interest method and includes amortization of net deferred loan fees and costs
over the loan term. Interest income is not reported when full loan repayment is
in doubt, typically when the loan is impaired or payments are past due over 90
days. Payments received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
RECENTLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING PRONOUNCEMENTS: Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly: On
April 9, 2009, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") FAS 157-4, "Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly." The FSP provides additional
guidance for estimating fair value in accordance with FASB Statement No. 157,
"Fair Value Measurements", when the volume and level of activity for the asset
or liability have significantly decreased. The FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. Further,
the FSP emphasizes that even if there has been a significant decrease in the
volume and level of activity for the asset or liability and regardless of the
valuation technique(s) used, the objective of a fair value measurement remains
the same. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. The FSP amends Statement 157 to require
certain additional disclosures in interim and annual periods to discuss the
inputs and valuation technique(s) used to measure fair value. This FSP is
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009, and shall
be applied prospectively. Park will adopt this new accounting pronouncement in
the second quarter of 2009. Management is still evaluating the impact of FSP
157-4.
Interim Disclosures about Fair Value of Financial Instruments: On April 9, 2009,
the FASB issued FASB FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about
Fair Value of Financial Instruments." This FSP amends FASB Statement No. 107,
"Disclosures about Fair Value of Financial Instruments", to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, "Interim Financial Reporting", to require those
disclosures in summarized financial information at
8
interim reporting periods. This FSP is effective for interim reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. Park will adopt this new accounting pronouncement in the
second quarter of 2009. Management is still evaluating the impact of FSP FAS
107-1 and APB 28-1.
Recognition and Presentation of Other-Than-Temporary Impairments: On April 9,
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation
of Other-Than-Temporary Impairments." This FSP amends the other-than-temporary
impairment guidance in GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. The
FSP is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009.
Park will adopt this new accounting pronouncement in the second quarter of 2009.
Management is still evaluating the impact of FSP FAS 115-2 and FAS 124-2.
RECLASSIFICATIONS: Certain items related to the consolidated financial
statements for 2008 have been reclassified to conform to the presentation for
2009. These reclassifications had no effect on the net results of operations.
NOTE 2 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 157 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
Level 2: Significant other observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities, quoted prices in markets that
are not active, and other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant, unobservable inputs that reflect a company's own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
The following is a description of the Company's valuation methodologies used to
measure and disclose the fair values of its financial assets and liabilities on
a recurring or nonrecurring basis:
Securities Available-For-Sale: Securities classified as available-for-sale are
reported at fair value utilizing Level 2 inputs. For these securities, the
Company obtains fair value measurements using pricing models that vary based on
asset class and include available trade, bid and other market information. Fair
value of securities available-for-sale may also be determined by matrix pricing,
which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted prices for the specific
securities, but rather by relying on the securities' relationship to other
benchmark quoted securities.
Impaired Loans: Some impaired loans are reported at the fair value of the
underlying collateral adjusted for selling costs. Collateral values are
estimated using Level 3 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 March 31, 2009, 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 ---- $ 80,344 ----
Fair Value Measurements at December 31, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Securities Available-For-Sale ---- $ 75,340 ----
Assets and Liabilities Measured on a Nonrecurring Basis
Assets and liabilities measured at fair value on a nonrecurring basis are
summarized below:
Fair Value Measurements at March 31, 2009, 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 ---- ---- $10,634
Fair Value Measurements at December 31, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Impaired Loans ---- ---- $ 1,182
Impaired loans, which are usually measured for impairment using the fair value
of the collateral, had a carrying amount of $21,597 at March 31, 2009. The
portion of this impaired loan balance for which a specific allowance for credit
losses was allocated totaled $14,131, resulting in a specific valuation
allowance of $3,497. At December 31, 2008, impaired loans had a carrying amount
of $8,099. The portion of this impaired loan balance for which a specific
allowance for credit losses was allocated totaled $2,586, resulting in a
specific valuation allowance of $1,404. The specific valuation allowance for
those loans has increased from $1,404 at December 31, 2008 to $3,497 at March
31, 2009.
10
NOTE 3 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
March 31, 2009 December 31, 2008
----------------- -----------------
Residential real estate $ 243,019 $ 252,693
Commercial real estate 205,886 198,559
Commercial and industrial 47,415 44,824
Consumer 129,202 126,911
All other 8,037 7,404
----------------- -----------------
$ 633,559 $ 630,391
================= =================
At March 31, 2009 and December 31, 2008, loans on nonaccrual status were
approximately $4,326 and $3,396, respectively. Loans past due more than 90 days
and still accruing at March 31, 2009 and December 31, 2008 were $1,691 and
$1,878, respectively.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
Following is an analysis of changes in the allowance for loan losses for the
three-month periods ended March 31:
2009 2008
----------- -----------
Balance - January 1, $ 7,799 $ 6,737
Loans charged off:
Commercial (1) 157 176
Residential real estate 561 80
Consumer 480 555
----------- -----------
Total loans charged off 1,198 811
Recoveries of loans:
Commercial (1) ---- 93
Residential real estate 2 3
Consumer 253 175
----------- -----------
Total recoveries of loans 255 271
----------- -----------
Net loan charge-offs (943) (540)
Provision charged to operations 848 701
----------- -----------
Balance - March 31, $ 7,704 $ 6,898
=========== ===========
Information regarding impaired loans is as follows:
March 31, December 31,
2009 2008
-------------- --------------
Balance of impaired loans $ 21,597 $ 8,099
Less portion for which no specific
allowance is allocated 7,466 5,513
-------------- --------------
Portion of impaired loan balance for which a
specific allowance for credit losses is allocated $ 14,131 $ 2,586
============== ==============
Portion of allowance for loan losses specifically
allocated for the impaired loan balance $ 3,497 $ 1,404
============== ==============
Average investment in impaired loans year-to-date $ 21,806 $ 9,027
============== ==============
(1) Includes commercial and industrial and commercial real estate loans.
11
Interest recognized on impaired loans was $466 and $84 for the three-month
periods ended March 31, 2009 and 2008, 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
3.79% of total loans were unsecured at March 31, 2009, unchanged from December
31, 2008.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. The contract amounts of these instruments are
not included in the consolidated financial statements. At March 31, 2009, the
contract amounts of these instruments totaled approximately $76,823, compared to
$77,940 at December 31, 2008. Since many of these instruments are expected to
expire without being drawn upon, the total contract amounts do not necessarily
represent future cash requirements.
NOTE 6 - OTHER BORROWED FUNDS
Other borrowed funds at March 31, 2009 and December 31, 2008 are comprised of
advances from the Federal Home Loan Bank ("FHLB") of Cincinnati, promissory
notes and Federal Reserve Bank ("FRB") Notes.
FHLB Promissory FRB
Borrowings Notes Notes Totals
-------------------- ----------------- --------------- ----------------
March 31, 2009............... $ 45,163 $ 5,214 $ 771 $ 51,148
December 31, 2008............ $ 68,715 $ 5,479 $ 2,580 $ 76,774
Pursuant to collateral agreements with the FHLB, advances are secured by
$228,745 in qualifying mortgage loans and $6,281 in FHLB stock at March 31,
2009. Fixed rate FHLB advances of $45,163 mature through 2033 and have interest
rates ranging from 2.13% to 6.62%. There were no variable rate FHLB borrowings
at March 31, 2009.
At March 31, 2009, the Company had a cash management line of credit enabling it
to borrow up to $60,000 from the FHLB. All cash management advances have an
original maturity of 90 days. The line of credit must be renewed on an annual
basis. There was $60,000 available on this line of credit at March 31, 2008.
Based on the Company's current FHLB stock ownership, total assets and pledgeable
residential first mortgage loans, the Company had the ability to obtain
borrowings from the FHLB up to a maximum of $169,441 at March 31, 2009.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of 2.00% to
4.50% and are due at various dates through a final maturity date of November 12,
2010. A total of $3,191 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 0.00% at March 31, 2009, unchanged from December 31, 2008. Various
investment securities from the Bank used to collateralize the FRB notes totaled
$5,605 at March 31, 2009 and $45,850 at December 31, 2008.
12
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $41,900 at March 31,
2009 and $45,850 at December 31, 2008.
Scheduled principal payments over the next five years:
FHLB Promissory FRB
Borrowings Notes Notes Totals
------------------- ----------------- --------------- -----------------
Year Ended 2009 $ 13,004 $ 3,833 $ 771 $ 17,608
Year Ended 2010 26,005 1,381 ---- 27,386
Year Ended 2011 6,006 ---- ---- 6,006
Year Ended 2012 6 ---- ---- 6
Year Ended 2013 6 ---- ---- 6
Thereafter 136 ---- ---- 136
------------------- ----------------- --------------- -----------------
$ 45,163 $ 5,214 $ 771 $ 51,148
=================== ================= =============== =================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2008 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.
13
For the three months ended March 31, 2009, net income increased by $86, or 4.4%,
compared to the same quarterly period in 2008, to finish at $2,051. Earnings per
share for the first quarter of 2009 increased $.03, or 6.3%, compared to the
same quarterly period in 2008, to finish at $.51 per share. Earnings per share
growth for the quarterly period ending March 31, 2009 continues to exceed the
nominal dollar net income growth pace due to the Company's stock repurchase
program, with increases in treasury stock repurchases from a year ago 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 1.02% and
13.13% at March 31, 2009, as compared to 1.00% and 13.10%, respectively, at
March 31, 2008. The Company's growth in earnings during the first three months
of 2009 was accomplished primarily by: 1) net interest income expansion of 7.9%
as a result of the lower short-term interest rate environment initiated by the
Federal Reserve Bank, and 2) noninterest income improvement of 30.2% over 2008's
first three months due to the increased transaction volume related to the
Company's gain on sale of loans to the secondary market and seasonal tax
clearing services performed in the first quarter of 2009.
The consolidated total assets of the Company increased $40,856, or 5.2%, during
the first three months of 2009 as compared to year-end 2008, to finish at
$821,964. This improvement in assets was led by an increase in the Company's
interest-bearing deposits in other financial institutions, which increased
$42,206 from year-end 2008, largely from the deployment of interest- and
non-interest bearing deposit liability growth. The Company's loan portfolio also
experienced an increase from year-end 2008, growing 0.5%, a relatively stable
growth pace. This mild increase came primarily from its commercial loan
portfolio, which includes commercial real estate and commercial and industrial
loans. Historical low interest rates have created an increasing demand for
consumers to refinance their existing mortgage loans. This has led to a
significant increase in the volume of real estate loans sold to the secondary
market, which has caused a corresponding decrease to the Company's residential
real estate loan portfolio, which was down 3.8% from year-end 2008. Furthermore,
the Company's residential real estate loan portfolio continues to be challenged
by various economic trends that have had a negative impact on consumer spending.
New purchases of U.S. Government sponsored entity securities led the increase in
the Company's investment securities. While the demand for loans was minimal
during the first three months of 2009, the Company was able to benefit from
growth in its total deposit liabilities of $61,820 from year-end 2008.
Interest-bearing deposit liability growth was led by surges in the Company's
wholesale deposits of $32,617, public fund NOW balances of $12,934 and Market
Watch balances of $8,340, all up from year-end 2008. Furthermore, the Company's
noninterest-bearing demand deposits increased $11,428 from year-end 2008. The
total deposits retained from year-end 2008 were partially used to fund the
repayments of other borrowed funds, which decreased $25,626 from year-end 2008.
The excess liquidity created by the growth in total deposits will continue to be
used as funding sources for potential earning asset growth during 2009.
Comparison of
Financial Condition
at March 31, 2009 and December 31, 2008
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at March 31, 2009 compared to December 31, 2008. 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 non-interest bearing
balances due from banks and federal funds sold. The amounts of cash and cash
equivalents fluctuate on a daily basis due to customer activity and liquidity
needs. At March 31, 2009, cash and cash equivalents had decreased $9,360, or
52.9%, to $8,321 as compared to $17,681 at December 31, 2008. This was largely
the result of increased loan balances and investment security purchases during
the first quarter of 2009. As liquidity levels vary continuously based on
consumer activities, amounts of cash and cash equivalents can vary widely at any
given point in time. Management believes that the current balance of cash and
cash equivalents remains at a level that will meet cash obligations and provide
adequate liquidity. Further information regarding the Company's liquidity can be
found under the caption "Liquidity" in this Management's Discussion and
Analysis.
14
Interest-Bearing Deposits in Other Financial Institutions
At March 31, 2009, the Company had a total of $42,817 invested as
interest-bearing deposits in other financial institutions, an increase from only
$611 at December 31, 2008. This increase is largely the result of the Company's
excess liquidity position due to excess deposit liability growth. 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 fourth quarter of 2008, the Company began shifting its
emphasis of maintaining its excess liquidity from federal funds sold to its
existing clearing account on hand at the Federal Reserve Bank. During this
period in 2008, the Federal Reserve Board announced that it would begin paying
interest on depository institutions' required and excess reserve balances. The
interest rate paid on both the required and excess reserve balances will be
based on the targeted federal funds rate established by the Federal Open Market
Committee. As of the filing date of this report, the interest rate calculated by
the Federal Reserve was 0.25%. Prior to this, the Federal Reserve Bank balances
held by the Company were non-interest bearing. This interest rate is similar to
what the Company would have received from its investments in federal funds sold,
currently targeting a range of 0.0% to 0.25%. Furthermore, Federal Reserve Bank
balances are 100% secured.
Securities
During the first three months of 2009, investment securities increased $4,043 to
finish at $96,369, an increase of 4.4% as compared to year-end 2008. 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 increased $8,212, or 25.8%,
as a result of two large purchases in March 2009. 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 March 31, 2009, the
Company's repurchase agreements increased 13.4%, increasing the need to secure
these balances. This increase was partially offset by decreases in both
mortgage-backed securities and obligations of states and political subdivisions,
which were down $3,209, or 7.4%, and $960, or 5.7%, respectively, from year-end
2008. Mortgage-backed securities continue to make up the largest portion of the
Company's investment portfolio, totaling $40,305, or 41.8% of total investments
at March 31, 2009. 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. However, with the current interest rate environment, the
cash flow is being reinvested at lower rates. Principal repayments from
mortgage-backed securities totaled $3,844 from January 1, 2009 through March 31,
2009. For the remainder of 2009, 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 three months of
2009, total loans increased $3,168, or 0.5%, from year-end 2008. Higher loan
balances were mostly influenced by total commercial loans, which were up $9,918,
or 4.1%, from year-end 2008. The Company's commercial loans include both
commercial real estate and commercial and industrial loans. Management continues
to place emphasis on its commercial lending, which generally yields a higher
return on investment as compared to other types of loans. The Company's
commercial and industrial loan portfolio, up $2,591, or 5.8%, from year-end
2008, 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, increased $7,327, or 3.7%. This segment of loans is mostly secured by
commercial real estate and rental property. Commercial real estate consists of
loan participations with other banks outside the Company's primary market area.
Although the Company is not actively marketing participation loans outside its
primary market area, it is taking advantage of the relationships it has with
15
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
(24.6% of portfolio), medical industry loans (11.9% of portfolio), land
development loans (8.5% of portfolio), and hotel and motel loans (8.0% of
portfolio). During the first three months of 2009, 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 76.0% of total originations. The growing West Virginia markets also
accounted for 11.1% 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 2009.
Also contributing to the loan portfolio increase were consumer loans, which were
up $2,291, or 1.8%, from year-end 2008. 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 increase in consumer loans came mostly from the Company's
automobile indirect lending segment, which increased $2,143, or 7.9%, from
year-end 2008. The automobile lending segment continues to represent the largest
portion of the Company's consumer loan portfolio, representing 22.6% of total
consumer loans at March 31, 2009. Prior to 2009, the Company's indirect
automobile segment was on a declining pace due to the growing economic factors
that had weakened the economy and consumer spending. During this time, the
Company's loan underwriting process and interest rates offered on indirect
automobile opportunities struggled to compete with the more aggressive lending
practices of local banks and alternative methods of financing, such as captive
finance companies offering loans at below-market interest rates related to this
segment. As the economy continues to be challenged, these banks and captive
finance companies that once were successful in getting the majority of the
indirect automobile opportunities are now struggling because of the losses they
have had to absorb as well as the overall decrease in demand for auto loans. As
a result, these businesses have had to tighten their operations and underwriting
processes which have allowed the Company to compete better for a larger portion
of the indirect business within its local markets. Furthermore, the Company has
added several new auto dealer relationships that have contributed to more
business opportunities in 2009.
Further enhancing the growth in indirect auto loan balances were increases in
the Company's tax refund anticipation loans ("RAL"). RAL loans are short-term
cash advances against a customer's anticipated income tax refund. At March 31,
2009, the Company had $2,210 in RAL balances as compared to $828 at March 31,
2008, an increase of $1,382, or 166.9%. Since the terms of RAL loans are short
in nature, continued loan payoffs should leave minimal balances remaining by
year-end 2009.
The remaining consumer loan products not discussed above were collectively down
$1,234, which included general decreases in loan balances from mobile homes,
all-terrain vehicles and recreation vehicles. While the total consumer loan
portfolio was up from year-end 2008, management will continue to place more
emphasis on other loan portfolios (i.e. residential real estate and commercial)
that will promote increased profitable loan growth and higher returns. Indirect
automobile loans bear additional costs from dealers that partially offset
interest revenue and lower the rate of return. Management believes that the
volume of indirect automobile opportunities have begun to stabilize and does not
anticipate any significant growth during the remaining fiscal year of 2009.
16
Generating residential real estate loans remains a key focus of the Company's
lending efforts. Residential real estate loan balances comprise the largest
portion of the Company's loan portfolio and consist primarily of one- to
four-family residential mortgages and carry many of the same customer and
industry risks as the commercial loan portfolio. During the first three months
of 2009, total residential real estate loan balances decreased $9,674, or 3.8%,
from year-end 2008 to total $243,019. During the end of 2008 and first quarter
of 2009, long-term interest rates decreased to historic low levels that prompted
a significant surge of demand for these types of long-term fixed-rate real
estate loan products. At March 31, 2009, the 30-year treasury rate was 3.56%,
compared to 4.30% from a year ago, a decrease of 74 basis points. Consumers
wanted to take advantage of securing their mortgage with a low rate and reducing
their monthly costs. To help manage interest rate risk and satisfy demand for
longer-termed, fixed-rate real estate loans, the Company gained significant
opportunities during the first quarter of 2009 to originate and sell fixed-rate
mortgages to the secondary market. During the first quarter of 2009, the Company
sold $22,131 in loans as compared to $11,704 in secondary market loans that were
sold during the entire year of 2008. The increased volume of loans sold to the
secondary market contributed to growth in real estate origination fees and
higher gains on sale revenue in 2009 as compared to 2008. The increase in demand
for real estate refinancings combined with the Company's emphasis on selling
loans to the secondary market to manage interest rate risk has led to a decrease
in the Company's longer-termed, fixed-rate real estate loans, which were down
$7,627, or 4.1%, from year-end 2008. Terms of these fixed-rate loans include
15-, 20- and 30-year periods. This also contributed to a lower balance of the
Company's one-year adjustable-rate mortgages, which were down $2,757, or 8.3%,
from year-end 2008.
The remaining real estate loan portfolio balances increased $710 primarily from
the Company's other variable rate products. The Company believes it has limited
its interest rate risk exposure due to its practice of promoting and selling
residential mortgage loan production to the secondary market.
The Company recognized an increase of $633 in other loans from year-end 2008.
Other loans consist primarily of state and municipal loans and overdrafts. This
increase was largely due to an increase in state and municipal loans of $559.
The Company continues to monitor the pace of its loan volume. The
well-documented housing market crisis and other disruptions within the economy
have negatively impacted consumer spending, which has limited the lending
opportunities within the Company's market locations. Dramatic declines in the
housing market during the past year, with falling home prices and increasing
foreclosures and unemployment, have resulted in significant write-downs of asset
values by financial institutions. To combat this ongoing potential for loan
loss, the Company will continue to remain consistent in its approach to sound
underwriting practices without sacrificing asset quality and avoiding exposure
to unnecessary risk that could weaken the credit quality of the portfolio. The
Company expects total loan growth in 2009 to be challenged, with volume to
continue at a stable-to-declining pace throughout the rest of the year.
Allowance for Loan Losses
Management continually monitors the loan portfolio to identify potential
portfolio risks and to detect potential credit deterioration in the early
stages, and then establishes reserves based upon its evaluation of these
inherent risks. During the first three months of 2009, the Company's allowance
for loan losses remained relatively stable, finishing at $7,704, as compared to
$7,799 at year-end 2008. This stable level of reserves was, in part, due to the
mild pace of growth within the Company's loan portfolio, up just 0.5% from
year-end 2008. Nonperforming loans at March 31, 2009 totaled 0.95% of total
portfolio loans, an increase from the December 31, 2008 ratio of 0.84%.
Nonperforming loans increased $743, or 14.1%, to finish at $6,017 at March 31,
2009 as compared to year-end 2008. Of the nonperforming loans at March 31, 2009,
about 71% were real estate secured. The increase in nonperforming loans was
mostly related to two real estate mortgage borrowers with payment performance
difficulties that were placed on nonaccrual during March 2009. These two
troubled credits also impacted the Company's nonperforming assets, which
increased $833, or 8.4%, to finish at $10,801 at March 31, 2009 as compared to
year-end 2008. Approximately 0.50% of nonperforming assets is related to one
large commercial borrowing classified as other real estate owned ("OREO").
17
During the first quarter of 2008, 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. During the second quarter of 2008, 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 transferred approximately $4,214 in loans to OREO as a
result of reaching a settlement agreement with the borrower that included the
Bank receiving deeds in lieu of foreclosure. The Company's ratio of
nonperforming assets, which include these OREO properties, to total assets
equated to 1.31% at March 31, 2009, an increase from 1.28% at year-end 2008.
Excluding the aforementioned large commercial borrowing classified as OREO,
nonperforming assets to total assets would equal 0.80%. Both nonperforming loans
and nonperforming assets at March 31, 2009 continue to be in various stages of
resolution for which management believes such loans are adequately
collateralized or otherwise appropriately considered in its determination of the
adequacy of the allowance for loan losses.
In addition to the nonperforming loans and nonperforming assets discussed above,
there was $21,597 of loans held by the Company at March 31, 2009 classified as
impaired, or for which management has concerns regarding the ability of the
borrowers to meet existing repayment terms. These impaired loans reflect the
distinct possibility that the Company will not be able to collect all amounts
due according to the contractual terms of the loan. Although these loans have
been identified as potential problem loans, they may never become delinquent or
classified as non-performing. Impaired loans are considered in the determination
of the overall adequacy of the allowance for loan losses.
During the first three months of 2009, net charge-offs totaled $943, which were
up $403 from the same period in 2008, in large part due to one residential real
estate loan. Management believes that the allowance for loan losses is adequate
and reflects probable incurred losses in the loan portfolio. Asset quality
remains a key focus, as management continues to stress not just loan growth, but
quality in loan underwriting as well.
Deposits
Deposits are used as part of the Company's liquidity management strategy to meet
obligations for depositor withdrawals, fund the borrowing needs of loan
customers, and to fund ongoing operations. Deposits, both interest- and
noninterest-bearing, continue to be the most significant source of funds used by
the Company to support earning assets. The Company seeks to maintain a proper
balance of core deposit relationships on hand while also utilizing various
wholesale deposit sources such as brokered and network certificates of deposit
("CD") balances as an alternative funding source to efficiently manage the net
interest margin. Deposits are influenced by changes in interest rates, economic
conditions and competition from other banks. During the first three months of
2009, total deposits were up $61,820, or 10.4%, from year-end 2008. The change
in deposits came primarily from an increase in the Company's interest-bearing
time deposits, interest-bearing demand deposits and money market deposit
balances.
Core relationship deposits are considered by management as a primary source of
the Bank's liquidity. The Bank focuses on these kinds of deposit relationships
with consumers from local markets who can maintain multiple accounts and
services at the Bank. The Company views core deposits as the foundation of its
long-term funding sources because it believes such core deposits are more stable
and less sensitive to changing interest rates and other economic factors. As a
result, the Bank's core customer relationship strategy has resulted in a higher
percentage of its deposits being held in NOW accounts, money market accounts,
and noninterest-bearing demand accounts from year-end 2008, while a lesser
percentage has resulted in retail time deposits from year-end 2008.
18
Deposit growth came mostly from time deposits, which increased $24,025, or 7.8%,
from year-end 2008. Time deposits, particularly CD's, are the most significant
source of funding for the Company's earning assets, making up 50.7% of total
deposits. With loan balances maintaining a relatively stable growth pace, up
just 0.5% from year-end 2008, there has not been an aggressive need to deploy
time deposits as a funding source. As market rates have aggressively lowered
since September 2007, the Company has seen the cost of its retail CD balances
reprice downward (as a lagging effect to the actions by the Federal Reserve) to
reflect current deposit rates. This lagging effect has caused the interest rates
on the Company's retail CD portfolio to stabilize and become comparable to the
interest rate offerings of its alternative funding source, wholesale fund
deposits. As market rates have fallen considerably from a year ago, the Bank's
CD customers have been more likely to consider re-investing their matured CD
balances with other institutions offering the most attractive rates. This has
led to an increased maturity runoff within its "customer relation" retail CD
portfolio. Furthermore, with the significant downturn in economic conditions,
the Bank's CD customers in general have experienced reduced funds available to
deposit with structured terms, choosing to remain more liquid. As a result, the
Company has experienced a shift within its time deposit portfolio, with retail
CD balances decreasing $8,592 from year-end 2008, while utilizing more wholesale
funding deposits (i.e., brokered and network CD issuances), which increased
$32,617 from year-end 2008. The Bank increased its use of brokered deposits
during the previous two quarters with laddered maturities into the future. This
trend of utilizing brokered CD's selectively based on maturity and interest rate
opportunities not only fits well with management's strategy of funding the
balance sheet with low-costing wholesale funds, but it also assists to support
the interest rate risks associated with loan originations of longer-term fixed
rate mortgages experienced during the first quarter of 2009.
Further enhancing deposit growth were interest-bearing NOW account balances,
which increased $13,124, or 37.9%, during the first three months of 2009 as
compared to year-end 2008. This growth was largely driven by a $12,934 increase
in public fund balances related to the collection of real estate taxes by local
municipalities who maintain various deposit accounts (NOW accounts) within the
Bank. These deposits from seasonal real estate tax collections are short-term in
nature and typically decrease in the second quarter. Further growth to public
fund NOW accounts came from increased balances related to the local city and
county school construction projects currently in process within Gallia County,
Ohio.
Also contributing to growth in deposits were money market deposit balances,
increasing $9,079, or 10.6%, during the first three months of 2009 as compared
to year-end 2008. This increase was primarily driven by the Company's Market
Watch money market account product. 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. With an added emphasis on further
building and maintaining core deposit relationships, the Company began marketing
a special six-month introductory rate offer of 3.00% APY during the first
quarter of 2009 that would be for new Market Watch accounts. This special offer
has been well received by the Bank's customers and contributed to most of the
money market year-to-date increase in 2009. As of March 31, 2009, this program
had gathered $90,348 in deposits, including $8,340 in the first quarter of 2009,
a 10.2% increase from the balances at year-end 2008.
The Company's interest-free funding source, noninterest bearing demand deposits,
also increased $11,428, or 13.4%, from year-end 2008. This increase was largely
from growth in the Bank's business checking accounts, particularly with two
accounts used in the facilitation of tax refund checks and deposits discussed
later within the caption titled "Noninterest Income". These balances, which are
seasonal in nature, are expected to stabilize during the second quarter of 2009.
19
The Company will continue to experience increased competition for deposits in
its market areas, which should challenge its net growth. The Company will
continue to emphasize growth in its core deposits as well as to utilize its
wholesale CD funding sources during the remainder of 2009, reflecting the
Company's efforts to reduce its reliance on higher cost funding and improving
net interest income.
Securities Sold Under Agreements to Repurchase
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were up $3,222, or 13.4%, from year-end 2008. This increase was
mostly due to seasonal fluctuations of two commercial accounts in the first
three months of 2009.
Other Borrowed Funds
The Company also accesses other funding sources, including short-term and
long-term borrowings, to fund asset growth and satisfy short-term liquidity
needs. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB)
advances and promissory notes. During the first three months of 2009, other
borrowed funds were down $25,626, or 33.4%, from year-end 2008. Management used
the growth in deposit proceeds to repay FHLB borrowings during the first three
months of 2009. 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.
Shareholders' Equity
The Company maintains a capital level that exceeds regulatory requirements as a
margin of safety for its depositors. Total shareholders' equity at March 31,
2009 of $64,582 was up $1,526, or 2.4%, as compared to the balance of $63,056 on
December 31, 2008. Contributing most to this increase was year-to-date net
income of $2,051 partially offset by cash dividends paid of $797, or $.20 per
share, year-to-date. The Company had treasury stock totaling $15,712 at March
31, 2009, unchanged from year-end 2008. The Company may repurchase additional
common shares from time to time as authorized by its stock repurchase program.
Most recently, the Board of Directors authorized the repurchase of up to 175,000
of its common shares between February 16, 2009 and February 15, 2010. As of
March 31, 2009, all 175,000 shares were still available to be repurchased
pursuant to that authorization.
Comparison of
Results of Operations for the
Quarter Ended March 31, 2009 and 2008
The following discussion focuses, in more detail, on the consolidated results of
operations of the Company for the quarterly periods ended March 31, 2009
compared to the same periods in 2008. The purpose of this discussion is to
provide the reader a more thorough understanding of the consolidated financial
statements. This discussion should be read in conjunction with the interim
consolidated financial statements and the footnotes included in this Form 10-Q.
Net Interest Income
The most significant portion of the Company's revenue, net interest income,
results from properly managing the spread between interest income on earning
assets and interest expense on interest-bearing liabilities. The Company earns
interest and dividend income from loans, investment securities and short-term
investments while incurring interest expense on interest-bearing deposits and
repurchase agreements, as well as short-term and long-term borrowings. For the
first quarter of 2009, net interest income increased $605, or 7.9%, as compared
to the same quarterly period in 2008. The increase in quarterly net interest
income is primarily due to an expanding net interest margin caused by lower
funding costs.
20
Total interest income decreased $1,123, or 8.2%, during the first quarter of
2009 as compared to the same period in 2008. This drop in interest earnings was
largely due to a decrease in the yields earned on average earning assets during
the first quarter of 2009 as compared to the same period in 2008. The average
yield on earning assets for the three months ended March 31, 2009 decreased 79
basis points to 6.70% as compared to 7.49% during the same period in 2008. This
negative effect reflects the decrease in short-term interest rates since
September of 2007. Partially offsetting the asset yield decreases were positive
contributions from growth in the Company's average earning assets, up $25,260,
or 3.4%, during the first quarter of 2009 as compared to the same period in
2008. The growth in average earning assets was largely comprised of
interest-bearing deposits in other financial institutions. Further contributing
to interest revenue was addional fee income from increased originations of the
Company's RAL loans. The Company's participation with a third party tax software
provider has given the Bank 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 three months of 2009, the Company had recognized $390 in RAL
fees as compared to $214 during the same period in 2008, an increase of $176, or
82.2%.
Although the Company's residential real estate loan balances have decreased 3.8%
from year-end 2008, additional contributions to interest revenue also came from
real estate fees. During the end of 2008 and entering 2009, the nation's
long-term interest rates that are tied to fixed-rate mortgages became
increasingly affordable. At March 31, 2009, the 30-year treasury rate was 3.56%
as compared to 4.30% from a year ago, a decrease of 74 basis points. This was
responsible for a significant increase in the demand for real estate
refinancings that would allow consumers to take advantage of historical low
rates. This also allowed the Company to originate a significant volume of real
estate loans that were sold to the secondary market. Both the significant volume
of refinancings and secondary market loan originations resulted in the Company's
real estate fees increasing $120, or 93.4%, during the first quarter of 2009 as
compared the first three months of 2008.
In relation to lower earning asset yields, the Company's total interest expense
decreased $1,728, or 28.5%, for the first quarter of 2009 as compared to the
first quarter of 2008, as a result of lower interest-bearing liability costs.
Since September 2007, the Federal Reserve has reduced the target Federal Funds
rate 500 basis points to where it currently is at a range of 0.0% to 0.25%. That
reduction has caused a corresponding downward shift in short-term interest
rates, and most recently had an impact in lowering longer-term rates. The Bank
has maintained a liability-sensitive balance sheet, which has been positioned so
that there were more interest-bearing liabilites subject to repricing than
interest rates on loans. As a result, interest paid on liabilities decreased
more than interest earned on assets. The short-term rate decreases impacted the
repricings of various Bank deposit products, including public fund NOW accounts,
Gold Club and Market Watch accounts. Interest rates on CD balances will continue
to reprice at lower rates (as a lagging effect to the Federal Reserve action to
drop the Federal Funds rate), which will continue to lower funding costs and
improve the net interest margin for the remainder of 2009. As a result of the
decrease in rates from September 2007, the Bank's total weighted average funding
costs have decreased 104 basis points from March 31, 2008 to March 31, 2009.
As a result of lower funding costs, increased RAL and real estate fees, the
Company's net interest margin increased 21 basis points from 4.21% to 4.42% for
the first quarter of 2009 as compared to the first quarter of 2008. The net
interest margin is expected to benefit for the remainder of 2009, but not to the
extent the net interest margin improved during 2008, as interest rate liability
repricings are continuing to stabilize. It is difficult to speculate on future
changes in net interest margin and the frequency and size of changes in market
interest rates. The past year has seen the banking industry under significant
stress due to declining real estate values and asset impairment. The Federal
Reserve's most recent actions of decreasing the prime rate in the fourth quarter
of 2008 by 175 basis points, including a 75 basis point drop in December 2008,
was necessary to take steps in repairing the recessionary problems and promote
economic stability. However, there can be no assurance of additional future rate
cuts during the remainder of 2009 as changes in market interest rates are
dependent upon a variety of factors that are beyond the Company's control. For
additional discussion on the Company's rate sensitive assets and liabilities,
please see Item 3, Quantitative and Qualitative Disclosure About Market Risk, of
this Form 10-Q.
21
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 $147, or 21.0%, for the three months ended March 31,
2009 as compared to the same period in 2008. The increase in provision expense
was impacted by a $373, or 69.1%, increase in net charge-offs during the first
quarter of 2009 as compared to the first quarter of 2008. The increase in net
charge-offs was mostly from residential real estate loan balances.
Management believes that the allowance for loan losses was adequate at March 31,
2009 and reflective of probable losses in the portfolio. The allowance for loan
losses was 1.22% of total loans at March 31, 2009, relatively stable from the
allowance level as a percentage of total loans of 1.24% at December 31, 2008.
This 2 basis point decrease in the allowance for loan loss was largely due to a
decrease in specific allocations. As part of the allowance for loan loss
determination, specific allocations based on the probability of loan loss were
estimated at December 31, 2008. During the first three months of 2009, a portion
of these estimated allocations were unused due to differences in actual realized
values versus management estimates. Future provisions to the allowance for loan
losses will continue to be based on management's quarterly in-depth evaluation
that is discussed in further detail under the caption "Critical Accounting
Policies - Allowance for Loan Losses" of this Form 10-Q.
Noninterest Income
Noninterest income for the three months ended March 31, 2009 was $2,063, an
increase of $479, or 30.2%, over the same period in 2008. These results were
impacted mostly by seasonal tax refund processing fees and gains on sale of
secondary market real estate loans partially offset by a decrease in the Bank's
service charge fees on deposit accounts.
Noninterest revenue growth was mostly led by tax refund processing fees
classified as other noninterest income. 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 first three months of 2009, the Company's tax
refund processing fees increased by $239, or 108.1%, over the same period in
2008. As a result of tax refund processing fee activity being mostly seasonal,
tax refund processing fees are estimated to be minimal during the remaining
periods of 2009.
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 March 31, 2009, the Company has
sold 155 loans totaling $22,131 to the secondary market as compared to 46 loans
totaling $11,704 during the entire fiscal year of 2008. Historic low interest
rates related to long-term fixed-rate mortgage loans have caused consumers to
refinance existing mortgages in order to reduce their monthly costs. Despite the
low level of home sales, consumers are selectively purchasing real estate while
locking in low long-term rates. This volume increase in loan sales has
contributed to the first quarter growth in income on sale of loans, which was up
$213, or 473.3%, during the first three months of 2009, as compared to the same
periods in 2008. The Company anticipates this revenue from secondary market loan
sales will stabilize during the remaining periods of 2009.
22
Growth in noninterest income also came from a decrease in the loss on sale of
OREO. This income was the result of higher OREO losses experienced in last
year's 2008 first quarter of $41, which were primarily the result of a loss
incurred on the sale of one large real estate property during that time. There
currently have been minimal OREO losses recorded during the first three months
of 2009.
Partially offsetting noninterest income growth was a decrease in the Bank's
service charge fees on deposit accounts, which lowered by $85, or 12.0%. This
was in large part due to a lower volume of overdraft balances, as customers
presented fewer checks against non-sufficient funds during the first three
months of 2009, as compared to the same periods in 2008.
The total of all remaining noninterest income categories increased $71 during
the first quarter of 2009 as compared to the first quarter of 2008. 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 first quarter of 2009 increased $846, or 14.7%,
as compared to the same period in 2008. Contributing most to the growth in
overhead expense was salaries and employee benefits, the Company's largest
noninterest expense item, which increased $271, or 7.9%, for the first quarter
of 2009 as compared to the same period in 2008. The increase was largely due to
increased annual cost of living salary increases, higher accrued incentive costs
and a higher full-time equivalent ("FTE") employee base. The Company's FTE
employees increased at March 31, 2009 to 264 employees on staff as compared to
253 employees at March 31, 2008.
Further contributing to noninterest expense growth was increases in the
Company's FDIC insurance expense, which totaled $285 for the quarter ended March
31, 2009 as compared to just $17 for the quarter ended March 31, 2008, an
increase of $268. This increase was in large part due to the Company's share of
a one-time assessment credit being fully utilized by June 30, 2008. With the
elimination of this credit, the Company entered the third quarter of 2008 with
its deposits being assessed at a rate close to 7 basis points. In December 2008,
the FDIC issued a rule increasing deposit insurance assessment rates uniformly
for all financial institutions for the first quarter of 2009 by an additional 7
basis points on an annual basis. On February 27, 2009, the FDIC announced
adoption of an interim final rule imposing a one-time special assessment equal
to 20 basis points of an institution's assessment base on June 30, 2009, which
will be collected on September 30, 2009. The rule further provides for possible
additional special assessments of up to 10 basis points. The one-time assessment
has attracted significant attention and may be decreased from 20 basis points to
a lower assessment rate. A final determination on the rate of the one-time
emergency special assessment is expected near the end of June 2009. As a result
of this special assessment, the Company anticipates its FDIC insurance expense
to significantly increase in 2009 from its already increasing levels of 2008.
Increases in the Company's other noninterest expenses were realized during the
first three months of 2009, increasing $278, or 19.6%, as compared to the same
period in 2008. Leading the growth in this area was increases to the Company's
telecommunications costs, which increased $106, or 80.3%, during the first
quarter of 2009 as compared to the same period in 2008. During the second half
of 2008, the Company improved the communication lines between all of its
branches to achieve faster relay of information and increase work efficiency.
This investment upgrade of communication lines has equated to a $35 per month
cost. Other noninterest expense increases also came from the Bank's loan
expense, which increased $70 during the first quarter of 2009 as compared to the
same period in 2008. This was due to the larger than normal volume of recovered
foreclosure costs that were recorded during the first quarter of 2008.
23
Overhead expenses were also impacted by occupancy, furniture and equipment
costs, which increased $67, or 10.8%, during the first quarter of 2009 as
compared to the same period in 2008. This was in large part due to the complete
replacements of all of the Company's automated teller machines ("ATM") during
the second half of 2008. The investment of over $500 was necessary to upgrade
each ATM location with more current equipment to better service customer needs.
All ATM's had been fully replaced by the end of 2009's first quarter, with
depreciation commencing on most of these assets beginning January 2009.
Partially offsetting increases to noninterest expense were decreases in data
processing costs. The Company continues to incur monthly costs from the Bank's
use of technology to better serve the convenience of its customers, which
includes ATM, debit and credit cards, as well as various online banking
products, including net teller and bill pay. During the first quarter of 2009,
data processing expenses decreased $38, or 14.3%, as compared to the same period
in 2008. The decrease was due to the successful re-negotiation of the Bank's
monthly data processing costs in 2008. The negotiations for lower monthly
processing charges were finalized in the third quarter of 2008 and decreased the
monthly data processing costs by more than $15 per month beginning with the
August 2008 bill.
The Company's efficiency ratio is defined as noninterest expense as a percentage
of fully tax-equivalent net interest income plus noninterest income. Management
continues to place emphasis 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. However, the recent
developments with rising FDIC insurance expense has contributed to higher
overhead expense levels that have outpaced revenue levels which have caused the
efficiency ratio to increase from 61.38% at March 31, 2008 to 63.17% at March
31, 2009.
Capital Resources
All of the Company's capital ratios exceeded the regulatory minimum guidelines
as identified in the following table:
Company Ratios Regulatory
3/31/09 12/31/08 Minimum
------- -------- ----------
Tier 1 risk-based capital 12.2% 12.2% 4.00%
Total risk-based capital ratio 13.4% 13.5% 8.00%
Leverage ratio 9.3% 9.7% 4.00%
Cash dividends paid of $797 during the first three months of 2009 represent a
3.0% increase over the cash dividends paid during the same period in 2008. The
quarterly dividend rate increased from $0.19 per share in 2008 to $0.20 per
share in 2009. The dividend rate has increased in proportion to the consistent
growth in retained earnings. At March 31, 2009, approximately 81% 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
$132,307 represented 16.1% of total assets at March 31, 2009. In addition, the
FHLB offers advances to the Bank which further enhances the Bank's ability to
meet liquidity demands. At March 31, 2009, the Bank could borrow an additional
$82,000 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.
24
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.
25
The second component (general allowance) is based upon total loan portfolio
balances minus loan balances already reviewed (specific allocation). The Large
Loan Review Committee evaluates credit analysis reports that provide management
with a "snapshot" of information on borrowers with larger-balance loans
(aggregate balances of $1,000 or greater), including loan grades, collateral
values, and other factors. A list is prepared and updated quarterly that allows
management to monitor this group of borrowers. Therefore, only small balance
commercial loans and homogeneous loans (consumer and real estate loans) are not
specifically reviewed to determine minor delinquencies, current collateral
values and present credit risk. The Company utilizes actual historic loss
experience as a factor to calculate the probable losses for this component of
the allowance for loan losses. This risk factor reflects a three-year
performance evaluation of credit losses per loan portfolio. The risk factor is
achieved by taking the average net charge-off per loan portfolio for the last 36
consecutive months and dividing it by the average loan balance for each loan
portfolio over the same time period. The Company believes that by using the 36
month average loss risk factor, the estimated allowance will more accurately
reflect current probable losses.
The final component used to evaluate the adequacy of the allowance includes five
additional areas that management believes can have an impact on collecting all
principal due. These areas are: 1) delinquency trends, 2) current local economic
conditions, 3) non-performing loan trends, 4) recovery vs. charge-off, and 5)
personnel changes. Each of these areas is given a percentage factor, from a low
of 10% to a high of 30%, determined by the degree of impact it may have on the
allowance. To calculate the impact of other economic conditions on the
allowance, the total general allowance is multiplied by this factor. These
dollars are then added to the other two components to provide for economic
conditions in the Company's assessment area. The Company's assessment area takes
in a total of ten counties in Ohio and West Virginia. Each assessment area has
its individual economic conditions; however, the Company has chosen to average
the risk factors for compiling the economic risk factor.
The adequacy of the allowance may be determined by certain specific and
nonspecific allocations; however, the total allocation is available for any
credit losses that may impact the loan portfolios.
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with residential real
estate loans currently comprising the most significant portion. Credit risk is
primarily subject to loans made to businesses and individuals in central and
southeastern Ohio as well as western West Virginia. Management believes this
risk to be general in nature, as there are no material concentrations of loans
to any industry or consumer group. To the extent possible, the Company
diversifies its loan portfolio to limit credit risk by avoiding industry
concentrations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's goal for interest rate sensitivity management is to maintain a
balance between steady net interest income growth and the risks associated with
interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the
Company's financial condition to adverse movements in interest rates. Accepting
this risk can be an important source of profitability, but excessive levels of
IRR can threaten the Company's earnings and capital.
The Company evaluates IRR through the use of an earnings simulation model to
analyze net interest income sensitivity to changing interest rates. The modeling
process starts with a base case simulation, which assumes a flat interest rate
scenario. The base case scenario is compared to rising and falling interest rate
scenarios assuming a parallel shift in all interest rates. Comparisons of net
interest income and net income fluctuations from the flat rate scenario
illustrate the risks associated with the projected balance sheet structure.
26
The Company's Asset/Liability Committee monitors and manages IRR within Board
approved policy limits. The current IRR policy limits anticipated changes in net
interest income to an instantaneous increase or decrease in market interest
rates over a 12 month horizon to +/- 5% for a 100 basis point rate shock, +/-
7.5% for a 200 basis point rate shock and +/- 10% for a 300 basis point rate
shock. Based on the level of interest rates, management did not test interest
rates down 200 or 300 basis points.
The following table presents the Company's estimated net interest income
sensitivity:
March 31, 2009 December 31, 2008
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
------------------------- --------------------- ---------------------
+300 1.19% (5.74%)
+200 .55% (4.12%)
+100 (.15%) (2.30%)
-100 .57% 2.54%
The estimated percentage change in net interest income due to a change in
interest rates was within the policy guidelines established by the Board. During
the first quarter of 2009, the interest rate risk profile became less exposed to
rising interest rates due to various balance sheet changes. For example, the
duration of earnings assets shortened with interest-bearing balances with banks,
which are subject to reprice daily, increasing significantly due to the influx
of deposits. In addition, the balance of fixed-rate mortgages decreased, as
management chose to sell the majority of new originations and refinancings to
the secondary market. On the liability side of the balance sheet, management
emphasized longer-term CD specials and selected longer maturity terms for
brokered CD issuances. Furthermore the balance of nonmaturity deposits increased
significantly from year end. These balances may not earn interest, such as
checking accounts, or exhibit a low correlation to changes in interest rates,
such as savings and NOW accounts. Given the low rate environment, the next move
in interest rates would most likely be an increasing trend. As a result,
management would consider the current interest rate risk profile more desireable
than our profile at December 31, 2008.
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.
27
Changes in Internal Control over Financial Reporting
There was no change in Ohio Valley's internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Ohio
Valley's fiscal quarter ended September 30, 2008, that has materially affected,
or is reasonably likely to materially affect, Ohio Valley's internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Ohio Valley or any of
its subsidiaries is a party, other than ordinary, routine litigation incidental
to their respective businesses. In the opinion of Ohio Valley's management,
these proceedings should not, individually or in the aggregate, have a material
effect on Ohio Valley's results of operations or financial condition.
ITEM 1A. RISK FACTORS
You should carefully consider the risk factors discussed in Part I, "Item 1A.
Risk Factors" in Ohio Valley's Annual Report on Form 10-K for the year ended
December 31, 2008, as filed with the U.S. Securities and Exchange Commission on
March 16, 2009 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 PROCEED
(a) Not Applicable.
(b) Not Applicable.
(c) The following table provides information regarding Ohio Valley's
repurchases of its common shares during the fiscal quarter ended
March 31, 2009:
ISSUER REPURCHASES OF EQUITY SECURITIES(1)
Maximum Number
of Shares That May
Total Number Total Number of Shares Yet Be Purchased
of Common Average Purchased as Part of Under Publicly
Shares Price Paid per Publicly Announced Announced Plan or
Period Purchased Common Share Plans or Programs Programs
--------------------- ------------- -------------- ---------------------- -------------------
January 1 - 31, 2009 ---- ---- ---- 97,147
February 1 - 28, 2009 ---- ---- ---- 175,000
March 1 - 31, 2009 ---- ---- ---- 175,000
------------- -------------- ---------------------- -------------------
TOTAL ---- ---- ---- 175,000
============= ============== ====================== ====================
(1) On January 20, 2009, Ohio Valley's Board of Directors announced its
plan to repurchase up to 175,000 of its common shares between February
16, 2009 and February 15, 2010.
28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
(a) Exhibits:
Reference is made to the Exhibit Index set forth immediately
following the signature page of this Form 10-Q.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO VALLEY BANC CORP.
Date: May 8, 2009 By: /s/ Jeffrey E. Smith
-----------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: May 8, 2009 By: /s/ Scott W. Shockey
----------------------
Scott W. Shockey
Vice President and Chief Financial Officer
30
EXHIBIT INDEX
The following exhibits are included in this Form 10-Q or are incorporated by
reference as noted in the following table:
Exhibit Number Exhibit Description
---------------------- -------------------------------------------------
3(a) Amended Articles of Incorporation of Ohio Valley
(reflects amendments through April 7,1999) [for
SEC reporting compliance only - - not filed with
the Ohio Secretary of State]. Incorporated herein
by reference to Exhibit 3(a) to Ohio Valley's
Annual Report on Form 10-K for fiscal year ended
December 31, 2007(SEC File No. 0-20914).
3(b) Code of Regulations of Ohio Valley. Incorporated
herein by reference to Exhibit 3(b) to Ohio
Valley's current report on Form 8-K (SEC File
No.0-20914) filed November 6, 1992.
4 Agreement to furnish instruments and agreements
defining rights of holders of long-term debt.
Filed herewith.
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal
Executive Officer).Filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal
Financial Officer). Filed herewith.
32 Section 1350 Certification (Principal Executive
Officer and Principal Financial Officer). Filed
herewith.
31