UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 0-20914
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OHIO VALLEY BANC CORP.
------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1359191
-------- ------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
420 Third Avenue, Gallipolis, Ohio 45631
------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 446-2631
----------------
(Registrant's telephone number, including area code)
Not Applicable
----------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|_| Yes |X| No
The number of common shares of the registrant outstanding as of August 8, 2007
was 4,102,231.
OHIO VALLEY BANC CORP.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements (Unaudited)....................................3
Consolidated Balance Sheets.........................................3
Consolidated Statements of Income...................................4
Condensed Consolidated Statements of Changes in
Shareholders' Equity................................................5
Condensed Consolidated Statements of Cash Flows.....................6
Notes to the Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................12
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........23
Item 4. Controls and Procedures............................................23
PART II - OTHER INFORMATION...................................................24
Item 1. Legal Proceedings.................................................24
Item 1A. Risk Factors......................................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......24
Item 3. Defaults Upon Senior Securities...................................25
Item 4. Submission of Matters to a Vote of Security Holders...............25
Item 5. Other Information.................................................25
Item 6. Exhibits and Reports on Form 8-K..................................25
SIGNATURES....................................................................26
EXHIBIT INDEX.................................................................27
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share and per share data)
June 30, December 31,
2007 2006
----------------- -----------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 14,282 $ 18,965
Federal funds sold 905 1,800
----------------- -----------------
Total cash and cash equivalents 15,187 20,765
Interest-bearing deposits in other financial institutions 609 508
Securities available-for-sale 70,697 70,267
Securities held-to-maturity (estimated fair value:
2007 - $14,523; 2006 - $13,586) 14,562 13,350
FHLB stock 6,036 6,036
Total loans 624,131 625,164
Less: Allowance for loan losses (6,685) (9,412)
----------------- -----------------
Net loans 617,446 615,752
Premises and equipment, net 9,765 9,812
Accrued income receivable 3,355 3,234
Goodwill 1,267 1,267
Bank owned life insurance 16,327 16,054
Other assets 7,748 7,316
----------------- -----------------
Total assets $ 762,999 $ 764,361
================= =================
LIABILITIES
Noninterest-bearing deposits $ 76,135 $ 77,960
Interest-bearing deposits 504,788 515,826
----------------- -----------------
Total deposits 580,923 593,786
Securities sold under agreements to repurchase 27,667 22,556
Other borrowed funds 68,719 63,546
Subordinated debentures 13,500 13,500
Accrued liabilities 11,646 10,691
----------------- -----------------
Total liabilities 702,455 704,079
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000 shares authorized;
2007 - 4,639,723 shares issued;
2006 - 4,626,340 shares issued) 4,640 4,626
Additional paid-in capital 32,615 32,282
Retained earnings 36,400 34,404
Accumulated other comprehensive loss (1,038) (981)
Treasury stock, at cost (2007 - 512,861 shares;
2006 - 432,852 shares) (12,073) (10,049)
----------------- -----------------
Total shareholders' equity 60,544 60,282
----------------- -----------------
Total liabilities and shareholders' equity $ 762,999 $ 64,361
================= =================
See notes to consolidated financial statements
3
OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
-------------- -------------- -------------- --------------
Interest and dividend income:
Loans, including fees $ 12,706 $ 12,113 $ 25,146 $ 23,869
Securities
Taxable 754 699 1,506 1,383
Tax exempt 132 113 260 227
Dividends 98 83 193 164
Other Interest 30 26 117 31
-------------- -------------- -------------- --------------
13,720 13,034 27,222 25,674
Interest expense:
Deposits 5,290 4,463 10,557 8,377
Securities sold under agreements to repurchase 254 229 480 411
Other borrowed funds 738 801 1,350 1,687
Subordinated debentures 272 317 598 622
-------------- -------------- -------------- --------------
6,554 5,810 12,985 11,097
-------------- -------------- -------------- --------------
Net interest income 7,166 7,224 14,237 14,577
Provision for loan losses 616 791 1,002 1,457
-------------- -------------- -------------- --------------
Net interest income after provision for loan losses 6,550 6,433 13,235 13,120
Noninterest income:
Service charges on deposit accounts 756 781 1,416 1,439
Trust fees 58 56 114 109
Income from bank owned life insurance 162 270 342 457
Gain on sale of loans 20 28 59 54
Other 370 423 828 778
-------------- --------------- -------------- --------------
1,366 1,558 2,759 2,837
Noninterest expense:
Salaries and employee benefits 3,168 3,230 6,401 6,525
Occupancy 357 318 721 652
Furniture and equipment 264 275 534 543
Data processing 211 199 405 416
Other 1,486 1,368 2,946 2,839
-------------- -------------- -------------- --------------
5,486 5,390 11,007 10,975
-------------- -------------- -------------- --------------
Income before income taxes 2,430 2,601 4,987 4,982
Provision for income taxes 744 775 1,526 1,417
-------------- -------------- -------------- --------------
NET INCOME $ 1,686 $ 1,826 $ 3,461 $ 3,565
============== ============== ============== ==============
Earnings per share $ .41 $ .43 $ .83 $ .84
============== ============== ============== ==============
See notes to consolidated financial statements
4
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (UNAUDITED)
(dollars in thousands, except share and per share data)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
-------------- -------------- -------------- --------------
Balance at beginning of period $ 60,929 $ 59,537 $ 60,282 $ 59,271
Comprehensive income:
Net income 1,686 1,826 3,461 3,565
Change in unrealized loss
on available-for-sale securities (319) (824) (86) (1,136)
Income tax effect 108 280 29 386
-------------- -------------- -------------- --------------
Total comprehensive income 1,475 1,282 3,404 2,815
Proceeds from issuance of common
stock through dividend reinvestment plan ---- ---- 347 ----
Cash dividends (751) (721) (1,465) (1,401)
Shares acquired for treasury (1,109) (34) (2,024) (621)
-------------- -------------- -------------- --------------
Balance at end of period $ 60,544 $ 60,064 $ 60,544 $ 60,064
============== ============== ============== ==============
Cash dividends per share $ 0.18 $ 0.17 $ 0.35 $ 0.33
============== ============== ============== ==============
Shares from common stock issued
through dividend reinvestment plan 1 1 13,383 2
============== ============== ============== ==============
Shares acquired for treasury 43,859 1,338 80,009 24,664
============== ============== ============== ==============
See notes to consolidated financial statements
5
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands, except per share data)
Six months ended
June 30,
2007 2006
----------------- -----------------
Net cash provided by operating activities: $ 5,169 $ 7,456
Investing activities:
Proceeds from maturities of securities available-for-sale 3,466 6,634
Purchases of securities available-for-sale (4,008) (8,905)
Proceeds from maturities of securities held-to-maturity 212 34
Purchases of securities held-to-maturity (1,429) ----
Change in interest-bearing deposits in other financial institutions (101) ----
Net change in loans (4,066) (7,139)
Proceeds from sale of other real estate owned 1,344 181
Purchases of premises and equipment (444) (1,405)
Proceeds from bank owned life insurance ---- 86
----------------- ----------------
Net cash (used in) investing activities (5,026) (10,514)
Financing activities:
Change in deposits (12,863) 15,737
Cash dividends (1,465) (1,401)
Proceeds from issuance of common stock
through dividend reinvestment plan 347 ----
Purchases of treasury stock (2,024) (621)
Change in securities sold under agreements to repurchase 5,111 (7,919)
Proceeds of Federal Home Loan Bank borrowings 9,000 5,000
Repayment of Federal Home Loan Bank borrowings (3,033) (6,117)
Change in other short-term borrowings (794) (6,167)
Proceeds from subordinated debentures 8,500 ----
Repayment of subordinated debentures (8,500) ----
----------------- ----------------
Net cash provided by financing activities (5,721) (1,488)
----------------- ----------------
Change in cash and cash equivalents (5,578) (4,546)
Cash and cash equivalents at beginning of period 20,765 19,616
----------------- ----------------
Cash and cash equivalents at end of period $ 15,187 $ 15,070
================= ================
Supplemental disclosure:
Cash paid for interest $ 13,770 $ 10,070
Cash paid for income taxes 327 1,723
Non-cash transfers from loans to other real estate owned 1,370 106
See notes to consolidated financial statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the accounts of Ohio Valley Banc Corp. ("Ohio Valley") and its
wholly-owned subsidiaries, The Ohio Valley Bank Company (the "Bank"), Loan
Central, Inc. ("Loan Central"), a consumer finance company, and Ohio Valley
Financial Services Agency, LLC ("Ohio Valley Financial Services"), an insurance
agency. Ohio Valley and its subsidiaries are collectively referred to as the
"Company". All material intercompany accounts and transactions have been
eliminated in consolidation.
These interim financial statements are prepared by the Company without audit and
reflect all adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present fairly the consolidated financial position
of the Company at June 30, 2007, and its results of operations and cash flows
for the periods presented. The results of operations for the six months ended
June 30, 2007 are not necessarily indicative of the operating results to be
anticipated for the full fiscal year ending December 31, 2007. The accompanying
consolidated financial statements do not purport to contain all the necessary
financial disclosures required by accounting principles generally accepted in
the United States of America ("US GAAP") that might otherwise be necessary in
the circumstances. The Annual Report of the Company for the year ended December
31, 2006 contains consolidated financial statements and related notes which
should be read in conjunction with the accompanying consolidated financial
statements.
The accounting and reporting policies followed by the Company conform to US
GAAP. The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates. The allowance for loan losses is particularly subject to
change.
The majority of the Company's income is derived from commercial and retail
lending activities. Management considers the Company to operate in one segment,
banking.
INCOME TAX: Income tax expense is the sum of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
CASH FLOW: For consolidated financial statement classification and cash flow
reporting purposes, cash and cash equivalents include cash on hand,
noninterest-bearing deposits with banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods. The Company reports
net cash flows for customer loan transactions, deposit transactions, short-term
borrowings and interest-bearing deposits with other financial institutions.
EARNINGS PER SHARE: Earnings per share are computed based on net income divided
by the weighted average number of common shares outstanding during the period.
The weighted average common shares outstanding were 4,153,401 and 4,240,739 for
the three months ended June 30, 2007 and 2006, respectively. Weighted average
shares outstanding were 4,172,996 and 4,244,624 for the six months ended June
30, 2007 and 2006, respectively. Ohio Valley had no dilutive effect and no
potential common shares issuable under stock options or other agreements for any
period presented.
7
LOANS: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income on loans is reported on an accrual basis using the interest
method and includes amortization of net deferred loan fees and costs over the
loan term. Interest income is not reported when full loan repayment is in doubt,
typically when the loan is impaired or payments are past due over 90 days.
Payments received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
NEW ACCOUNTING PRONOUNCEMENTS: In February 2007, the Financial Accounting
Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities. This
statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This statement is
expected to expand the use of fair value measurement, which is consistent with
FASB's long-term measurement objectives for accounting for financial
instruments. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Early adoption is permitted
provided, among other things, an entity elects to adopt within the first 120
days of that fiscal year. The Company does not anticipate early adoption of FAS
159. The Company is evaluating the effects of this statement on its financial
statements and has not yet determined the impact FAS 159 might have on its
financial condition or results of operations.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN48"), on January 1, 2007. The adoption of FIN
48 had no affect on the Company's financial statements. The Company has no
unrecognized tax benefits and does not anticipate any increase in unrecognized
benefits during 2007 relative to any tax positions taken prior to January 1,
2007. Should the accrual of any interest or penalties relative to unrecognized
tax benefits be necessary, it is the Company's policy to record such accruals in
its income taxes accounts; no such accruals exist as of January 1, 2007. The
Company and its subsidiaries file a consolidated U.S. federal income tax return
as well as tax returns in the states of Ohio and West Virginia. These returns
are subject to examination by taxing authorities for all years after 2002.
8
RECLASSIFICATIONS: Certain items related to the consolidated financial
statements for 2006 have been reclassified to conform to the presentation for
2007. These reclassifications had no effect on the net results of operations.
NOTE 2 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
June 30, December 31,
2007 2006
--------------------- ----------------------
Commercial real estate $ 192,710 $ 193,359
Commercial and industrial 51,590 47,389
Residential real estate 238,593 238,549
Consumer 133,928 139,961
All other 7,310 5,906
--------------------- ----------------------
$ 624,131 $ 625,164
===================== =======================
At June 30, 2007 and December 31, 2006, loans on nonaccrual status were
approximately $4,238 and $12,017, respectively. Loans past due more than 90 days
and still accruing at June 30, 2007 and December 31, 2006 were $967 and $1,375,
respectively.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
Following is an analysis of changes in the allowance for loan losses for the
years ended June 30:
2007 2006
---------------- -----------------
Balance - January 1, $ 9,412 $ 7,133
Loans charged off:
Commercial (1) 3,363 438
Residential real estate 348 132
Consumer 867 1,162
---------------- -----------------
Total loans charged off 4,578 1,732
Recoveries of loans:
Commercial (1) 206 354
Residential real estate 163 199
Consumer 480 676
---------------- -----------------
Total recoveries of loans 849 1,229
---------------- -----------------
Net loan charge-offs (3,729) (503)
Provision charged to operations 1,002 1,457
---------------- -----------------
Balance - June 30, $ 6,685 $ 8,087
================ =================
(1) Includes commercial and industrial and commercial real estate loans.
9
Information regarding impaired loans is as follows:
June 30, December 31,
2007 2006
------------------- -------------------
Balance of impaired loans $ 8,683 $ 17,402
Less portion for which no specific
allowance is allocated 2,347 2,959
------------------- -------------------
Portion of impaired loan balance for which a
specific allowance for credit losses is allocated $ 6,336 $ 14,443
=================== ===================
Portion of allowance for loan losses specifically
allocated for the impaired loan balance $ 2,072 $ 4,962
=================== ===================
Average investment in impaired loans year-to-date $ 9,313 $ 18,774
=================== ===================
Interest on impaired loans was $204 and $386 for the six-month periods ended
June 30, 2007 and 2006, respectively. Accrual basis income was not materially
different from cash basis income for the periods presented.
NOTE 4 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
The Company, through its subsidiaries, grants residential, consumer, and
commercial loans to customers located primarily in the central and southeastern
areas of Ohio as well as the western counties of West Virginia. Approximately
4.16% of total loans were unsecured at June 30, 2007 as compared to 3.51% at
December 31, 2006.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. The contract amounts of these instruments are
not included in the consolidated financial statements. At June 30, 2007, the
contract amounts of these instruments totaled approximately $79,190, compared to
$73,502 at December 31, 2006. Since many of these instruments are expected to
expire without being drawn upon, the total contract amounts do not necessarily
represent future cash requirements.
NOTE 5 - OTHER BORROWED FUNDS
Other borrowed funds at June 30, 2007 and December 31, 2006 are comprised of
advances from the Federal Home Loan Bank (FHLB) of Cincinnati, promissory notes
and Federal Reserve Bank (FRB) Notes.
FHLB Promissory FRB
Borrowings Notes Notes Totals
-------------------- -------------------- -------------------- --------------------
June 30, 2007..................... $ 59,006 $ 5,629 $ 4,084 $ 68,719
December 31, 2006................. $ 55,690 $ 5,393 $ 2,463 $ 63,546
Pursuant to collateral agreements with the FHLB, advances are secured by
$215,866 in qualifying mortgage loans and $6,036 in FHLB stock at June 30, 2007.
Fixed-rate FHLB advances of $51,206 mature through 2010 and have interest rates
ranging from 3.25% to 6.62%. In addition, variable rate FHLB borrowings of
$7,800 mature in 2007 and carry an interest rate of 5.37%.
10
At June 30, 2007, the Company had a cash management line of credit enabling it
to borrow up to $60,000 from the FHLB. All cash management advances have an
original maturity of 90 days. The line of credit must be renewed on an annual
basis. There was $52,200 available on this line of credit at June 30, 2007.
Based on the Company's current FHLB stock ownership, total assets and pledgeable
residential first mortgage loans, the Company had the ability to obtain
borrowings from the FHLB up to a maximum of $159,901 at June 30, 2007.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of 4.80% to
6.25% and are due at various dates through a final maturity date of September
30, 2008. As of June 30, 2007, a total of $3,708 represented promissory notes
payable by Ohio Valley to related parties.
FRB notes consist of the collection of tax payments from Bank customers under
the Treasury Tax and Loan program. These funds have a variable interest rate and
are callable on demand by the U.S. Treasury. At June 30, 2007, the interest rate
for the Company's FRB notes was 5.04%. Various investment securities from the
Bank used to collateralize the FRB notes totaled $6,000 at June 30, 2007 and
$6,070 at December 31, 2006.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $41,550 at June 30, 2007
and $41,950 at December 31, 2006.
Scheduled principal payments over the next five years:
Years Ended FHLB Promissory FRB
December 31: Borrowings Notes Notes Totals
-------------------------------- ----------------- ---------------- ----------------- -----------------
2007 $ 18,832 $ 2,527 $ 4,084 $ 25,443
2008 16,010 3,102 ---- 19,112
2009 8,005 ---- ---- 8,005
2010 16,006 ---- ---- 16,006
2011 6 ---- ---- 6
Thereafter 147 ---- ---- 147
----------------- ----------------- ----------------- -----------------
$ 59,006 $ 5,629 $ 4,084 $ 68,719
================= ================= ================= =================
NOTE 6 - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of
adjustable-rate trust preferred securities as part of a pooled offering of such
securities. The rate on these trust preferred securities will be fixed at 6.58%
for five years, and then convert to a floating-rate term on March 15, 2012,
based on a rate equal to the 3-month LIBOR plus 1.68%. There were no debt
issuance costs incurred with these trust preferred securities. The Company
issued subordinated debentures to the trust in exchange for the proceeds of the
offering. The subordinated debentures must be redeemed no later than June 15,
2037. On March 26, 2007, the proceeds from these new trust preferred securities
were used to pay off $8,500 in higher cost trust preferred security debt, with a
floating rate of 8.97%. This repayment of $8,500 in trust preferred securities
was the result of an early call feature that allowed the Company to redeem the
entire portion of these subordinated debentures at par value. For additional
discussion, please refer to the caption titled "Subordinated Debentures and
Trust Preferred Securities" within Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations of this Form 10-Q.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(dollars in thousands, except share and per share data)
Forward Looking Statements
Except for the historical statements and discussions contained herein,
statements contained in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934 and as defined in the Private Securities
Litigation Reform Act of 1995. Such statements are often, but not always,
identified by the use of such words as "believes," "anticipates," "expects," and
similar expressions. Such statements involve various important assumptions,
risks, uncertainties, and other factors, many of which are beyond our control,
which could cause actual results to differ materially from those expressed in
such forward looking statements. These factors include, but are not limited to,
the risk factors discussed in Part I, Item 1A of Ohio Valley's Annual Report on
Form 10-K for the fiscal year ended December 31, 2006 and Ohio Valley's other
securities filings. Readers are cautioned not to place undue reliance on such
forward looking statements, which speak only as of the date hereof. The Company
undertakes no obligation and disclaims any intention to republish revised or
updated forward looking statements as a result of unanticipated future events.
Financial Overview
The Company is primarily engaged in commercial and retail banking, offering a
blend of commercial, consumer and agricultural banking services within central
and southeastern Ohio as well as western West Virginia. The banking services
offered by the Bank include the acceptance of deposits in checking, savings,
time and money market accounts; and the making and servicing of personal,
commercial, floor plan, construction, real estate and student loans. The Bank
also offers individual retirement accounts, safe deposit boxes, wire transfers
and other standard banking products and services. As part of its lending
function, the Bank also offers credit card services. Loan Central engages in
consumer finance, offering smaller balance personal and mortgage loans to
individuals with higher credit risk history. Loan Central's line of business
also includes seasonal tax refund loan services during the January through April
periods. Ohio Valley Financial Services sells life insurance.
For the three months ended June 30, 2007, net income decreased by $140, or 7.7%,
to finish at $1,686 compared to the same period in 2006. Earnings per share for
the second quarter of 2007 decreased $.02, or 4.7%, to finish at $.41 per share
compared to the same period in 2006. For the first six months of 2007, net
income decreased $104, or 2.9%, to finish at $3,461 compared to the same period
in 2006. Earnings per share for the first six months of 2007 decreased $.01, or
1.2%, to finish at $.83 per share compared to the same period in 2006. The
annualized net income to average asset ratio, or return on assets (ROA), and net
income to average equity ratio, or return on equity (ROE), both decreased to
..91% and 11.53% during the first six months of 2007, as compared to .95% and
12.10% for the same period in 2006, respectively. The Company's decrease in
earnings during both the second quarter and first half periods of 2007 were
caused mostly by: 1) a challenged net interest income due to higher funding
costs and increased average nonaccrual loans, and 2) decreases in noninterest
income due to higher net losses on the sale of other real estate owned ("OREO")
and the recognition of tax-free life insurance proceeds received in the prior
year that were not repeated in the current period. These factors were partially
offset by the benefits of a lower provision expense experienced in both the
second quarter and first half of 2007, as compared to the same periods in 2006,
as a result of improvements to the Company's nonperforming credits from year-end
2006.
The consolidated total assets of the Company decreased $1,362, or 0.2%, during
the first half of 2007 to finish at $762,999, primarily due to lower loan
balances, which decreased $1,033 from year-end 2006. Loan growth continues to be
12
challenged by the declining volume of consumer loans combined with a stable real
estate loan portfolio. With loan balances flat to declining, the Company's
deposits were down from year-end 2006 by $12,863, or $2.2%, to finish at
$580,923. This runoff, primarily driven by three large maturing commercial
certificates of deposit ("CD's"), was partially offset by an increase in the
Company's securities sold under agreements to repurchase ("repurchase
agreements") and other borrowed funds, which increased $5,111 and $5,173,
respectively, from year-end 2006.
Comparison of
Financial Condition
at June 30, 2007 and December 31, 2006
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at June 30, 2007 compared to December 31, 2006. The
purpose of this discussion is to provide the reader a more thorough
understanding of the consolidated financial statements. This discussion should
be read in conjunction with the interim consolidated financial statements and
the footnotes included in this Form 10-Q.
Cash and Cash Equivalents
The Company's cash and cash equivalents consist of cash and balances due from
banks and federal funds sold. The amounts of cash and cash equivalents fluctuate
on a daily basis due to customer activity and liquidity needs. At June 30, 2007,
cash and cash equivalents had decreased $5,578, or 26.9%, to $15,187 as compared
to $20,765 at December 31, 2006. With loan demand down from year-end 2006, the
Company used its cash and cash equivalents primarily to satisfy maturing time
deposits as well as to fund investment security purchases, quarterly dividend
disbursements and treasury stock repurchases. As liquidity levels vary
continuously based on consumer activities, amounts of cash and cash equivalents
can vary widely at any given point in time. While down from year-end 2006,
management believes that the current balance of cash and cash equivalents
remains at a level that will meet cash obligations and provide adequate
liquidity. Further information regarding the Company's liquidity can be found
under the caption "Liquidity" in this Management's Discussion and Analysis.
Securities
The Company's investment securities portfolio consists of mortgage-backed
securities, U.S. government agency and sponsored entity securities and
obligations of states and political subdivisions. During the first half of 2007,
investment securities increased $1,642, or 2.0%, driven by increases in U.S.
government agency and sponsored entity securities of $3,913, or 15.5%, and
obligations of states and political subdivisions of $1,216, or 9.1%, as compared
to year-end 2006. The growth in these two segments of investments was the result
of attractive yield opportunities and a desire to increase diversification
within the Company's securities portfolio. This growth was partially offset by a
decrease in mortgage-backed securities of $3,487, or 7.7%, from year-end 2006.
The Company continues to benefit from the advantages of investment grade
mortgage-backed securities, which make up the largest portion of the Company's
investment portfolio, totaling $41,654, or 48.9% of total investments at June
30, 2007. The primary advantage of mortgage-backed securities has been the
increased cash flows due to the more rapid (monthly) repayment of principal as
compared to other types of investment securities, which deliver proceeds upon
maturity or call date. Principal repayments from mortgage-backed securities
totaled $3,470 from January 1, 2007 through June 30, 2007. For the remainder of
2007, the Company's focus will be to generate interest revenue primarily through
loan growth due to higher asset yields on loans.
13
Loans
During the first six months of 2007, total loans, the Company's primary category
of earning assets, were down $1,033, or 0.2%, from year-end 2006. Lower loan
balances were largely the result of a decreasing consumer loan portfolio. During
the first half of 2007, consumer loans decreased $6,033, or 4.3%, from year-end
2006 to $133,928. The Company's consumer loans are secured by automobiles,
mobile homes, recreational vehicles and other personal property. Personal loans
and unsecured credit card receivables are also included as consumer loans. The
decrease in consumer volume was mostly attributable to the automobile lending
segment, which decreased $4,360, or 6.9%, from year-end 2006. While the
automobile lending segment continues to represent the largest portion of the
Company's consumer loan portfolio, management's emphasis on profitable loan
growth with higher returns has contributed most to the reduction in loan volume
within this area. Indirect automobile loans bear additional costs from dealers
that partially offset interest revenue and lower the rate of return.
Furthermore, economic factors and the rising rate environment from previous
years have caused a decline in automobile loan volume. As rates have
aggressively moved up, continued competition with local banks and alternative
methods of financing, such as captive finance companies offering loans at
below-market interest rates, have continued to challenge automobile loan growth
during the first half of 2007. In addition, the Company's capital line balances,
primarily home equity loans, decreased $437, or 2.1%, from year-end 2006 due to
an increased number of paydowns.
The Company's decreasing consumer loan portfolio was partially offset by an
increase in its commercial loan balances. Commercial loans increased $3,552, or
1.5%, from year-end 2006. This growth is consistent with the Company's continued
emphasis on commercial lending, which generally yields a higher return on
investment as compared to other types of loans. The Company's commercial loan
portfolio consists of loans to corporate borrowers primarily in small to
mid-sized industrial and commercial companies that include service, retail and
wholesale merchants. Collateral securing these loans includes equipment,
inventory, stock, commercial real estate and rental property. Commercial real
estate, the Company's largest segment of commercial loans, contributed most to
commercial loan growth, increasing $4,201, or 8.9%, largely driven by loan
participations with other banks outside the Company's primary market area.
Although the Company is not actively marketing participation loans outside its
primary market area, it is taking advantage of the relationships it has with
certain lenders in those areas where the Company believes it can profitably
participate with an acceptable level of risk. Growth in commercial real estate
loans was partially offset by a slight decrease in the Company's commercial and
industrial loans, which were down $649, or 0.3%, from year-end 2006. The
commercial loan portfolio, including participation loans, consists primarily of
rental property loans (21.6% of portfolio), medical industry loans (12.9% of
portfolio), land development loans (11.5% of portfolio), and hotel and motel
loans (10.5% of portfolio). During the first half of 2007, the primary market
areas for the Company's commercial loan originations, excluding loan
participations, were in the areas of Gallia, Jackson, Logan, Vinton and Franklin
counties of Ohio, which accounted for 57.4% of total originations, and the
growing West Virginia markets, which accounted for 9.6% 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 second half of 2007.
The Company also recognized an increase of $1,404, or 23.8%, in other loans from
year-end 2006. Other loans consist primarily of state and municipal loans and
overdrafts.
While commercial loans comprise the largest portion of the Company's loan
portfolio, generating residential real estate loans remains a key focus of the
Company's lending efforts. The Company's residential real estate loans consist
primarily of one- to four-family residential mortgages and carry many of the
14
same customer and industry risks as the commercial loan portfolio. For the first
half of 2007, total residential real estate loan balances were up slightly from
year-end 2006, increasing $44 to total $238,593. While the real estate portfolio
is relatively flat, there continues to be a significant amount of movement
between variable-rate and fixed-rate mortgage refinancings during the first six
months of 2007. Since year-end 2006, the Company's one-year adjustable-rate
mortgage balances have decreased $12,761, or 18.8%, to finish at $55,030. During
2006, consumer demand for fixed-rate real estate loans steadily increased due to
the continuation of lower, more affordable, mortgage rates that had not
responded as much to the documented rise in short-term interest rates of 2004,
2005 and part of 2006. As long-term interest rates continue to remain relatively
stable from a year ago, consumers continue to pay off and refinance their
variable rate mortgages, resulting in lower one-year adjustable-rate mortgage
balances at the end of 2007's first half period as compared to year-end 2006. As
a result, partially offsetting the decreases in variable-rate real estate
balances were the continued consumer preference of fixed-rate real estate loans,
which were up $12,301, or 8.6%, from year-end 2006. To help further satisfy this
increasing demand for fixed-rate real estate loans, the Company continues to
originate and sell some fixed-rate mortgages to the secondary market, and has
sold $2,710 in loans during the first half of 2007, which were up $675, or
33.1%, over the volume in the first half of 2006. The remaining real estate loan
portfolio balances increased $504, primarily from the Company's other
variable-rate real estate loan products.
The Company will continue to monitor the flat to declining pace of its loan
portfolio during the second half of 2007, and try to expand upon the first half
successes of its commercial loan opportunities. The Company's operating
environment remains challenging and has impacted loan growth due to loan payoffs
and a lower level of loan originations during the first half period of 2007.
Furthermore, the Company continues to view consumer loans as a decreasing
portfolio, due to higher loan costs, increased competition in automobile loans
and a lower return on investment as compared to the other loan portfolios. As a
result, the Company anticipates total loan growth in the second half of 2007 to
be marginal, with volume to continue at a flat to moderate pace throughout the
remainder of the year. The Company remains committed to sound underwriting
practices without sacrificing asset quality and avoiding exposure to unnecessary
risk that could weaken the credit quality of the portfolio.
Allowance for Loan Losses
Management continually monitors the loan portfolio to identify potential
portfolio risks and to detect potential credit deterioration in the early
stages, and then establishes reserves based upon its evaluation of these
inherent risks. During the first six months of 2007, the Company experienced a
$2,727, or 29.0% decrease in its allowance for loan losses, in large part due to
a decrease in nonperforming loan balances since year-end 2006. During 2006, the
level of nonperforming loans, which consist of nonaccruing loans and accruing
loans past due 90 days or more, had significantly increased from $2,557 at
year-end 2005 to $13,392 at year-end 2006. The nonperforming loan balances
increased primarily from three commercial loan relationships secured by liens on
commercial real estate and equipment, personal guarantees and life insurance.
During this time, specific allocations were made on behalf of the portfolio
risks and credit deterioration of these nonperforming relationships, which
required corresponding increases in the provision for loan losses to adequately
fund the allowance for loan losses. During the first half of 2007, net
charge-offs totaled $3,729, which were up $3,226 from the same period in 2006,
in large part due to commercial charge-offs of the specific allocations that
were already reflected in the allowance for loan losses from 2006. As part of
management's strategy to liquidate and resolve its nonperforming relationships,
the Company experienced improvements in the ratio of nonperforming loans as a
percentage of total loans, which finished June 30, 2007 at 0.83%, down from
2.14% at year-end 2006. The Company's ratio of nonperforming assets, which
includes real estate acquired through foreclosure and referred to as other real
estate owned ("OREO"), as a percentage of total assets also improved from 2.00%
at year-end 2006 to 0.93% at June 30, 2007. At June 30, 2007, nonperforming
loans consisted of two large commercial relationships that represent 0.46% of
total loans and 0.38% of total assets. These nonperforming credits continue to
be at various stages of resolution. Management believes that the allowance for
15
loan losses is adequate and reflects probable incurred losses in the loan
portfolio. Asset quality remains a key focus, as management continues to stress
not just loan growth, but quality in loan underwriting as well.
Deposits
Deposits, both interest-bearing and noninterest bearing, continue to be the most
significant source of funds used by the Company to support earning assets.
Deposits are influenced by changes in interest rates, economic conditions and
competition from other banks. During the first six months of 2007, total
deposits were down $12,863, or 2.2%, from year-end 2006, resulting from a
funding mix shift from deposits to borowings as well as lower loan balances that
eased pressure off funding requirements. The change in deposits came primarily
from a decrease in the Company's time deposits and non-interest bearing demand
balances.
Time deposits, particularly CD's, remain the most significant source of funding
for the Company's earning assets, making up 57.0% of total deposits. During the
first half of 2007, time deposits decreased $14,277, or 4.1%, from year-end
2006. This decrease was primarily due to the CD maturities within two commercial
relationships that totaled $14,000. The Company funded these commercial
maturities through borrowings and excess liquidity. Furthermore, with loan
balances at a flat to declining pace from year-end 2006, there has not been an
aggressive need to deploy time deposits as a funding source. As market rates
have steadied since June 2006, the Company has seen the cost of its retail CD
balances aggressively reprice upward to reflect current deposit rates. This
lagging effect has caused the Company's retail CD portfolio to become more
costly to fund earning assets, producing an average cost of 4.83% during the
first six months of 2007 as compared to 3.90% during the same period of 2006.
Furthermore, during the second quarter of 2007, the economy experienced
increases in its wholesale funding rates, both short- and long-term indices,
creating a costly funding source comparible to that of the Company's retail CD
balances. At June 30, 2007, the average cost of the Company's wholesale CD
portfolio was 4.81%, just 2 basis points lower than its retail CD portfolio. As
a result, management will continue to utilize both retail and wholesale deposits
as funding sources for future earning asset growth.
The Company's interest-free funding source, noninterest bearing demand deposits,
decreased $1,825, or 2.3%, from year-end 2006. This decrease was primarily from
seasonal decreases in business checking balances from several large commercial
accounts.
Partially offsetting time deposit and noninteret bearing demand deposit
decreases was growth in the Company's money market deposits, which increased
$4,029, or 6.8%, during the first six months of 2007. This growth was largely
driven by the Company's Market Watch product, which generated $4,765 in
additional deposit balances from year-end 2006. Introduced in August 2005, the
Market Watch product is a limited transaction investment account with tiered
rates that compete with current market rate offerings.
The Company will continue to experience increased competition for deposits in
its market areas, which should challenge net growth in their deposit balances.
The Company will continue to evaluate its deposit portfolio mix to properly
utilize both retail and wholesale funds to support earning assets and minimize
interest costs.
Securities Sold Under Agreements to Repurchase
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were up $5,111, or 22.7%, from year-end 2006. This increase was
mostly due to the fluctuation of one commercial account in the second quarter of
2007.
16
Other Borrowed Funds
The Company also accesses other funding sources, including short-term and
long-term borrowings, to fund asset growth and satisfy short-term liquidity
needs. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB)
advances and promissory notes. During the first six months of 2007, other
borrowed funds were up $5,173, or 8.1%, from year-end 2006. Part of the increase
was to fund the maturities of several large commercial CD's. While deposits
continue to be the primary source of funding for growth in earning assets,
management will continue to utilize various wholesale borrowings to help manage
interest rate sensitivity and liquidity.
Subordinated Debentures and Trust Preferred Securities
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of
adjustable-rate trust preferred securities as part of a pooled offering of such
securities. The Company used the proceeds from these trust preferred securities
to pay off $8,500 in higher cost trust preferred security debt on March 26,
2007. The replacement of the higher cost trust preferred security debt was a
strategy by management to lower interest rate pressures that were impacting
interest expense and help improve the Company's net interest margin. The early
extinguishment and replacement of this higher cost debt improved earnings by
nearly $51 pre-tax ($33 after taxes) in the second quarter of 2007. This
quarterly savings that contributed to margin improvement will continue
throughout the third and fourth quarters of 2007. For additional discussion on
the terms and conditions of this new trust preferred security issuance, please
refer to "Note 6 - Subordinated Debentures and Trust Preferred Securities"
within Item 1, Notes to the Consolidated Financial Statements of this Form 10-Q.
Shareholders' Equity
The Company maintains a capital level that exceeds regulatory requirements as a
margin of safety for its depositors. Total shareholders' equity at June 30, 2007
of $60,544 was up $262, or 0.4%, as compared to the balance of $60,282 on
December 31, 2006. Contributing most to this increase was year-to-date net
income of $3,461 and $347 in proceeds from the issuance of common stock.
Partially offsetting the growth in capital were cash dividends paid of $1,465,
or $.35 per share, year-to-date, and an increase in the amount of treasury share
repurchases. The Company had treasury stock totaling $12,073 at June 30, 2007,
an increase of $2,024, or 20.1%, as compared to the total at year-end 2006. The
Company anticipates repurchasing additional common shares from time to time as
authorized by its stock repurchase program. In February 2007, the Board of
Directors authorized the repurchase of up to 175,000 of its common shares
between February 16, 2007 and February 15, 2008. As of June 30, 2007, 78,041
shares had been repurchased pursuant to that authorization.
Comparison of
Results of Operations
for the Quarter and Year-To-Date Periods
Ended June 30, 2007 and 2006
The following discussion focuses, in more detail, on the consolidated results of
operations of the Company for the quarterly and year-to-date periods ended June
30, 2007 compared to the same period in 2006. The purpose of this discussion is
to provide the reader a more thorough understanding of the consolidated
financial statements. This discussion should be read in conjunction with the
interim consolidated financial statements and the footnotes included in this
Form 10-Q.
17
Net Interest Income
The most significant portion of the Company's revenue, net interest income,
results from properly managing the spread between interest income on earning
assets and interest expense on interest-bearing liabilities. The Company earns
interest and dividend income from loans, investment securities and short-term
investments while incurring interest expense on interest-bearing deposits and
repurchase agreements, as well as short-term and long-term borrowings. For the
second quarter of 2007, net interest income decreased $58, or 0.8%, as compared
to the same quarter in 2006. Through the first six months of 2007, net interest
income decreased $340, or 2.3%, as compared to the same period in 2006. The
decrease in quarterly and year-to-date net interest income is primarily due to a
compressed net interest margin caused by higher funding costs as well as average
increases in nonaccrual loan balances.
Total interest income increased $686, or 5.3%, for the second quarter of 2007
and increased $1,548, or 6.0%, during the first half of 2007 as compared to the
same periods in 2006. Growth in 2007's year-to-date average earning assets of
$8,867, or 1.2%, as compared to the same period in 2006 was complemented with a
36 basis point increase in asset yields, growing from 7.31% to 7.67% for the
same time periods. The growth in average earning assets was largely comprised of
commercial real estate loan participations, investment securities and short-term
federal funds sold since June 2006. Outpacing interest income was interest
expense, increasing $744, or 12.8%, during the second quarter of 2007 and
$1,888, or 17.0%, during the first half of 2007 as compared to the same periods
in 2006, as a result of higher funding costs, competitive factors to retain
deposits, and larger average earning asset balances which required additional
funding. In a changing interest rate environment, rates on loans reprice more
rapidly than interest rates paid on deposits. In 2005 and the first half of
2006, net interest margins were exceeding previous periods in relation to the
actions by the Federal Reserve to increase market rates of interest. As the
Federal Reserve's most recent actions have held rates steady, interest rates on
deposits have increased (as a lagging impact of earlier Federal Reserve action),
increasing funding costs and decreasing the net interest margin. Increases in
funding costs came mostly from the Bank's retail CD accounts, which have been
most responsive to the rising rate environment. The year-to-date weighted
average cost of the Bank's retail CD balances grew 93 basis points from 3.90% at
June 30, 2006 to 4.83% at June 30, 2007. The change in interest expense was
further impacted by the Company's average growth in money market accounts
largely due to its Market Watch product with tiered market rates that compete
with other such rate offerings in the Company's existing market areas. As a
result of the rise in rates from previous periods, the Bank's total weighted
average funding costs have increased 53 basis points from June 30, 2006 to June
30, 2007.
Putting additional pressure on net interest income was an increase in the
Company's year-to-date average nonaccrual loan balances, which have grown from
an average of $3,127 for the six months ended June 30, 2006 to an average of
$8,361 for the six months ended June 30, 2007. While this segment of
nonperforming loans continues to improve, with actual nonaccrual balances
decreasing $8,083 from year-end 2006, and decreasing $2,006 from June 30, 2006,
the interest income that has not been recorded on these nonaccrual balances over
the past 12 months has limited the increase to earning asset income and has
contributed to net interest margin compression.
As a result of increased funding costs and higher average nonaccrual balances,
the Company's net interest margin decreased 4 basis points from 4.09% to 4.05%
for the second quarter of 2007 and decreased 13 basis points from 4.17% to 4.04%
during the first half of 2007 as compared to the same periods in 2006. It is
difficult to speculate on future changes in net interest margin and the
frequency and size of changes in market interest rates. However, as evidenced by
the Federal Reserve's action to keep rates steady since June 2006, management
believes that market rates continue to be at their "target" zone of economic
stability, with no anticipation of any rate changes throughout the remainder of
2007. There can be no assurance to this effect as changes in market interest
rates are dependent upon a variety of factors that are beyond the Company's
control. With market rates remaining at their stable levels, management believes
that there are opportunities for net interest margin improvement during the
second half of 2007, and have already experienced margin improvement when
comparing linked quarters in March 2007 to June 2007. For the first quarter of
18
2007, net interest margin was 4.02% as compared to 2007's second quarter margin
of 4.05%, an increase of 3 basis points, in large part due to repricing rates of
the Company's retail CD balances beginning to slow down. This trend is
anticipated to continue throughout the remainder of 2007. For additional
discussion on the Company's rate sensitive assets and liabilities, please see
Item 3, Quantitative and Qualitative Disclosure About Market Risk, of this Form
10-Q.
Provision for Loan Losses
Management performs, on a quarterly basis, a detailed analysis of the allowance
for loan losses that encompasses loan portfolio composition, loan quality, loan
loss experience and other relevant economic factors. During the first half of
2007, provision expense decreased $455, or 31.2%, over the same time period in
2006. This decrease is primarily a direct result of the Company's decrease in
nonperforming loan balances since year-end 2006 combined with significant
commercial loan allocations that were made to the allowance for loan losses
during 2006. At June 30, 2007, the Company's nonperforming loan balances had
decreased to $5,205, compared to $13,392 at year-end 2006, as a result of
commercial loan charge-offs of some of the troubled relationships already
discussed under the caption "Allowance for Loan Losses" within this management's
discussion and analysis. As a result, through the first half of 2007, the ratio
of the Company's nonperforming loans to total loans decreased to 0.83%, compared
to 2.14% at December 31, 2006, while nonperforming assets to total assets also
decreased to 0.93%, compared to 2.00% for the same time periods. Management
believes that the allowance for loan losses is adequate and reflective of
probable losses in the portfolio. The allowance for loan losses was 1.07% of
total loans at June 30, 2007, down from 1.51% at December 31, 2006. Future
provisions to the allowance for loan losses will continue to be based on
management's quarterly in-depth evaluation that is discussed further in detail
under the caption "Critical Accounting Policies - Allowance for Loan Losses" of
this Form 10-Q.
Noninterest Income
Noninterest income for the three months ended June 30, 2007 was $1,366, a
decrease of $192, or 12.3%, from the same period in 2006. Noninterest income for
the six months ended June 30, 2007 was $2,759, a decrease of $78, or 2.7%, from
the same period in 2006. The quarterly and year-to-date decreasing results were
impacted most by the Company's tax-free bank owned life insurance ("BOLI")
investments and net losses on the sale of OREO, partially offset by increased
tax processing fees and debit card interchange fees.
BOLI income was down $108, or 40.0%, during the second quarter of 2007, and down
$115, or 25.2%, during the first half of 2007, as compared to the same periods
of 2006, driven mostly by tax-free life insurance proceeds of $86 that were
recorded in the second quarter of 2006 that were not repeated in 2007.
Furthermore, the Company also realized $87 of tax-free life insurance proceeds
in the third quarter of 2006. As a result of these non-recurring timing
differences, management anticipates revenues from BOLI investments to be lower
during the remaining six months of 2007 as compared to 2006. Other noninterest
income was negatively impacted by losses incurred on the sale of various OREO
properties, causing net losses on the sale of OREO to increase $84 during the
second quarter of 2007 and $78 during the first half period of 2007, as compared
to the same periods in 2006.
Partially offsetting the decreases in other noninterest income were improvements
in the Company's tax refund processing fees and debit card interchange fees. In
2006, the Company began its participation in a new tax refund loan service where
it serves as a facilitator for the clearing of tax refunds for a tax software
provider. As a result, the Company's tax refund processing fees during the first
six months of 2007 totaled $110, a $64 increase over the same period in 2006.
Further enhancing the changes in other noninterest income was debit card
interchange income, increasing $32, or 13.6%, during the first six months of
2007 as compared to the same period in 2006. The volume of transactions
19
utilizing the Company's Jeanie(R) Plus debit card continue to increase over a
year ago. The Company's customers used their Jeanie(R) Plus debit cards to
complete 572,232 transactions during the first six months of 2007, up 18.2% from
the 484,188 transactions during the same period in 2006, derived mostly from
gasoline and restaurant purchases.
Noninterest Expense
During the second quarter of 2007, total noninterest expense was up $96, or
1.8%, as compared to the same period in 2006. During the six months ended June
30, 2007, noninterest expense was up $32, or 0.3%, as compared to the same
period in 2006. Contributing most to the quarterly and year-to-date increases
were the costs associated with resolving nonperforming loans. This caused other
noninterest expenses to increase $118, or 8.6%, during the second quarter of
2007, and $107, or 3.8%, during the first half of 2007, as compared to the same
periods of 2006. Loan expenses (i.e., foreclosure costs), that have been
incurred as part of resolving nonperforming credits during 2007 have been
necessary to improve asset quality and lower portfolio risk.
Further increases in noninterest expense were recorded within the Company's
occupancy expense, which was up $39, or 12.3%, during the second quarter of
2007, and $69, or 10.6%, during the first half of 2007, as compared to the same
periods in 2006. This was in large part due to the Company's expansion of its
Jackson, Ohio facility. In late 2006, the Company invested over $2,000 to
replace its Jackson, Ohio facility and, during that time, ceased operations in
its Jackson superbank facility. The facility was placed in service and
depreciation commenced during the fourth quarter of 2006. Occupancy costs during
2007 will continue to outpace the occupancy costs of 2006 as a result of this
new facility.
Partially offsetting occupancy and other noninterest expense were lower salary
and employee benefit costs. Salaries and employee benefits, the Company's
largest noninterest expense item, decreased $62, or 1.9%, for the second quarter
of 2007, and $124, or 1.9%, during the first half of 2007, as compared to the
same periods in 2006. The decrease was largely due to lower accrued incentive
costs as well as a lower number of full-time equivalent ("FTE") employees. At
June 30, 2007, the Company had 256 FTE employees on staff as compared to 261 FTE
employees at June 30, 2006. The total of all remaining noninterest expense
categories was relatively unchanged. The stable level of noninterest expenses
during 2007 largely reflects the continued efforts by management to improve
efficiency by placing strong emphasis on overhead expense control.
The Company's efficiency ratio is defined as noninterest expense as a percentage
of fully tax-equivalent net interest income plus noninterest income. While the
Company has experienced good cost containment in its overhead expenses,
decreases to both quarterly and year-to-date net interest income have negatively
affected the Company's efficiency. The efficiency ratio for the three months
ended June 30, 2007 was 63.53%, up from 60.85% for the same period in 2006. The
efficiency ratio for the six months ended June 30, 2007 was 64.01%, up from
62.54% for the same period in 2006.
Capital Resources
All of the Company's capital ratios exceeded the regulatory minimum guidelines
as identified in the following table:
Company Ratios Regulatory Well
Minimum Capitalized
6/30/07 12/31/06
Tier 1 risk-based capital 12.2% 12.2% 4.00% 6.0%
Total risk-based capital ratio 13.3% 13.4% 8.00% 10.0%
Leverage ratio 9.7% 9.6% 4.00% 5.0%
20
Cash dividends paid of $1,465 for the first six months of 2007 represent a 4.6%
increase over the cash dividends paid during the same period in 2006. The
quarterly dividend rate increased from $0.17 per share in 2006 to $0.18 per
share in 2007. The dividend rate has increased in proportion to the consistent
growth in retained earnings. At June 30, 2007, approximately 81% of the
Company's shareholders were enrolled in the Company's dividend reinvestment
plan. As part of the Company's stock purchase program, management will continue
to utilize reinvested dividends and voluntary cash, if necessary, to purchase
shares on the open market to be redistributed through the dividend reinvestment
plan.
Liquidity
Liquidity relates to the Company's ability to meet the cash demands and credit
needs of its customers and is provided by the ability to readily convert assets
to cash and raise funds in the market place. Total cash and cash equivalents,
interest-bearing deposits with other financial institutions, held-to-maturity
securities maturing within one year and available-for-sale securities of $87,619
represented 11.5% of total assets at June 30, 2007. In addition, the FHLB offers
advances to the Bank which further enhances the Bank's ability to meet liquidity
demands. At June 30, 2007, the Bank could borrow an additional $59,000 from the
FHLB. The Bank also has the ability to purchase federal funds from several of
its correspondent banks. For further cash flow information, see the condensed
consolidated statement of cash flows contained in this Form 10-Q. Management
does not rely on any single source of liquidity and monitors the level of
liquidity based on many factors affecting the Company's financial condition.
Off-Balance Sheet Arrangements
As discussed in Note 4 - Concentrations of Credit Risk and Financial Instruments
with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet
credit-related activities, including commitments to extend credit and standby
letters of credit, which could require the Company to make cash payments in the
event that specified future events occur. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. While these commitments are
necessary to meet the financing needs of the Company's customers, many of these
commitments are expected to expire without being drawn upon. Therefore, the
total amount of commitments does not necessarily represent future cash
requirements.
Critical Accounting Policies
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Management views
critical accounting policies to be those that are highly dependent on subjective
or complex judgments, estimates and assumptions, and where changes in those
estimates and assumptions could have a significant impact on the financial
statements. Management currently views the adequacy of the allowance for loan
losses to be a critical accounting policy.
Allowance for loan losses: To arrive at the total dollars necessary to maintain
an allowance level sufficient to absorb probable losses incurred at a specific
financial statement date, management has developed procedures to establish and
then evaluate the allowance once determined. The allowance consists of the
following components: specific allocation, general allocation and other
estimated general allocation.
To arrive at the amount required for the specific allocation component, the
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Company evaluates loans for which a loss may be incurred either in part or
whole. To achieve this task, the Company has created a quarterly report
("Watchlist") which lists the loans from each loan portfolio that management
deems to be potential credit risks. The criteria to be placed on this report
are: past due 60 or more days, nonaccrual and loans management has determined to
be potential problem loans. These loans are reviewed and analyzed for potential
loss by the Large Loan Review Committee, which consists of the President of the
Company and members of senior management with lending authority. The function of
the Committee is to review and analyze large borrowers for credit risk,
scrutinize the Watchlist and evaluate the adequacy of the allowance for loan
losses and other credit related issues. The Committee has established a grading
system to evaluate the credit risk of each commercial borrower on a scale of 1
(least risk) to 10 (greatest risk). After the Committee evaluates each
relationship listed in the report, a specific loss allocation may be assessed.
The specific allocation is currently made up of amounts allocated to the
commercial and real estate loan portfolios.
Included in the specific allocation analysis are impaired loans, which consist
of loans with balances of $200 or more on nonaccrual status or non-performing in
nature. These loans are also individually analyzed and a specific allocation may
be assessed based on expected credit loss. Collateral dependent loans will be
evaluated to determine a fair value of the collateral securing the loan. Any
changes in the impaired allocation will be reflected in the total specific
allocation.
The second component (general allowance) is based upon total loan portfolio
balances minus loan balances already reviewed (specific allocation). The Large
Loan Review Committee evaluates credit analysis reports that provide management
with a "snapshot" of information on borrowers with larger-balance loans
(aggregate balances of $1,000 or greater), including loan grades, collateral
values, and other factors. A list is prepared and updated quarterly that allows
management to monitor this group of borrowers. Therefore, only small balance
commercial loans and homogeneous loans (consumer and real estate loans) are not
specifically reviewed to determine minor delinquencies, current collateral
values and present credit risk. The Company utilizes actual historic loss
experience as a factor to calculate the probable losses for this component of
the allowance for loan losses. This risk factor reflects a 3 year performance
evaluation of credit losses per loan portfolio. The risk factor is achieved by
taking the average net charge-off per loan portfolio for the last 36 consecutive
months and dividing it by the average loan balance for each loan portfolio over
the same time period. The Company believes that by using the 36 month average
loss risk factor, the estimated allowance will more accurately reflect current
probable losses.
The final component used to evaluate the adequacy of the allowance includes five
additional areas that management believes can have an impact on collecting all
principal due. These areas are: 1) delinquency trends, 2) current local economic
conditions, 3) non-performing loan trends, 4) recovery vs. charge-off, and 5)
personnel changes. Each of these areas is given a percentage factor, from a low
of 10% to a high of 30%, determined by the degree of impact it may have on the
allowance. To calculate the impact of other economic conditions on the
allowance, the total general allowance is multiplied by this factor. These
dollars are then added to the other two components to provide for economic
conditions in the Company's assessment area. The Company's assessment area takes
in a total of ten counties in Ohio and West Virginia. Each assessment area has
its individual economic conditions; however, the Company has chosen to average
the risk factors for compiling the economic risk factor.
The adequacy of the allowance may be determined by certain specific and
nonspecific allocations; however, the total allocation is available for any
credit losses that may impact the loan portfolios.
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with commercial loans
currently comprising the most significant portion. Credit risk is primarily
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subject to loans made to businesses and individuals in central and southeastern
Ohio as well as western West Virginia. Management believes this risk to be
general in nature, as there are no material concentrations of loans to any
industry or consumer group. To the extent possible, the Company diversifies its
loan portfolio to limit credit risk by avoiding industry concentrations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's goal for interest rate sensitivity management is to maintain a
balance between steady net interest income growth and the risks associated with
interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the
Company's financial condition to adverse movements in interest rates. Accepting
this risk can be an important source of profitability, but excessive levels of
IRR can threaten the Company's earnings and capital.
The Company evaluates IRR through the use of an earnings simulation model to
analyze net interest income sensitivity to changing interest rates. The modeling
process starts with a base case simulation, which assumes a flat interest rate
scenario. The base case scenario is compared to rising and falling interest rate
scenarios assuming a parallel shift in all interest rates. Comparisons of net
interest income and net income fluctuations from the flat rate scenario
illustrate the risks associated with the projected balance sheet structure.
The Company's Asset/Liability Committee monitors and manages IRR within Board
approved policy limits. The current IRR policy limits anticipated changes in net
interest income over a 12 month horizon to plus or minus 10% of the base net
interest income assuming a parallel rate shock of up 100, 200 and 300 basis
points and down 100, 200 and 300 basis points.
The following table presents the Company's estimated net interest income
sensitivity:
June 30, 2007 December 31, 2006
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
+300 (6.18%) (5.95%)
+200 (3.26%) (3.26%)
+100 (1.27%) (1.37%)
-100 1.07% 1.10%
-200 2.49% 1.74%
-300 4.43% 2.65%
The estimated change in net interest income reflects minimal interest rate risk
exposure and is well within the policy guidelines established by the Board. At
June 30, 2007, the Company's analysis of net interest income reflects a modest
liability sensitive position. Based on current assumptions, an instantaneous
increase in interest rates would negatively impact net interest income primarily
due to variable rate loans reaching their annual interest rate cap or
potentially their lifetime interest rate cap. Furthermore, in a rising rate
environment, the prepayment amounts on loans and mortgage-backed securities slow
down, producing less cash flow to reinvest at higher interest rates. During an
instantaneous decrease in interest rates, the opposite occurs, producing an
increase in net interest income. As compared to December 31, 2006, the Company's
interest rate risk profile has been relatively stable.
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
23
(the principal financial officer) of Ohio Valley, Ohio Valley's management has
evaluated the effectiveness of Ohio Valley's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the quarterly period covered by
this Quarterly Report on Form 10-Q. Based on that evaluation, Ohio Valley's
President and Chief Executive Officer and Vice President and Chief Financial
Officer have concluded that Ohio Valley's disclosure controls and procedures are
effective as of the end of the quarterly period covered by this Quarterly Report
on Form 10-Q to ensure that information required to be disclosed by Ohio Valley
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by Ohio Valley in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to Ohio Valley's management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in Ohio Valley's internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Ohio
Valley's fiscal quarter ended June 30, 2007, that has materially affected, or is
reasonably likely to materially affect, Ohio Valley's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Ohio Valley or any of
its subsidiaries is a party, other than ordinary, routine litigation incidental
to their respective businesses. In the opinion of Ohio Valley's management,
these proceedings should not, individually or in the aggregate, have a material
effect on Ohio Valley's results of operations or financial condition.
ITEM 1A. RISK FACTORS
In addition to other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the risk factors discussed in Part I, "Item
1A. Risk Factors" in Ohio Valley's Annual Report on Form 10-K for the year ended
December 31, 2006, as filed with the U.S. Securities and Exchange Commission on
March 16, 2007 and available at www.sec.gov. These risk factors could materially
affect the Company's business, financial condition or future results. The risk
factors described in the Annual Report on Form 10-K are not the only risks
facing the Company. Additional risks and uncertainties not currently known to
the Company or that management currently deems to be immaterial also may
materially adversely affect the Company's business, financial condition and/or
operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
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(c) The following table provides information regarding Ohio
Valley's repurchases of its common shares during the fiscal
quarter ended June 30, 2007:
ISSUER REPURCHASES OF EQUITY SECURITIES(1)
Maximum Number
of Shares That May
Total Number Total Number of Shares Yet Be Purchased
of Common Average Purchased as Part of Under Publicly
Shares Price Paid per Publicly Announced Announced Plan or
Period Purchased Common Share Plans or Programs Programs
April 1 - 30, 2007 500 $25.25 500 140,318
May 1 - 31, 2007 17,508 $25.31 17,508 122,810
June 1 - 30, 2007 25,851 $25.29 25,851 96,959
----------------- --------------------- ------------------------- -----------------------------
TOTAL 43,859 $25.30 43,859 96,959
================= ===================== ========================= =============================
(1) On July 21, 2006, Ohio Valley's Board of Directors announced its plan to
repurchase up to 175,000 of its common shares between August 16, 2006 and
February 16, 2007. On February 9, 2007, Ohio Valley's Board of Directors
announced its plan to repurchase up to 175,000 of its common shares between
February 16, 2007 and February 15, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 9, 2007
for the purpose of electing directors.Shareholders received proxy
materials containing the information required by this item. Four
directors, Steven B. Chapman, Robert E. Daniel, Robert H. Eastman
and Jeffrey E. Smith were nominated for reelection and were
reelected. The summary of voting of the 3,451,404 shares
outstanding is as follows:
Broker
Director Candidate For Withheld Non-Votes
Steven B. Chapman 3,421,835 29,569 ----
Robert E. Daniel 3,433,305 18,099 ----
Robert H. Eastman 3,440,596 10,808 ----
Jeffrey E. Smith 3,443,926 7,478 ----
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
(a) Exhibits:
Reference is made to the Exhibit Index set forth immediately
following the signature page of this Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO VALLEY BANC CORP.
Date: August 8, 2007 By: /s/ Jeffrey E. Smith
-------------------------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: August 8, 2007 By: /s/ Scott W. Shockey
-------------------------------------
Scott W. Shockey
President and Chief Financial Officer
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EXHIBIT INDEX
The following exhibits are included in this Form 10-Q or are incorporated by
reference as noted in the following table:
Exhibit Number Exhibit Description
3(a) Amended Articles of Incorporation of Ohio Valley.
Incorporated herein by reference to Exhibit 3(a)
to Ohio Valley's Annual Report on Form 10-K for
fiscal year ended December 31, 1997 (SEC File
No. 0-20914).
3(b) Code of Regulations of Ohio Valley. Incorporated
herein by reference to Exhibit 3(b) to Ohio
Valley's current report on Form 8-K (SEC File
No.0-20914) filed November 6, 1992.
4 Agreement to furnish instruments and agreements
defining rights of holders of long-term debt.
Filed herewith.
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal
Executive Officer).Filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal
Financial Officer). Filed herewith.
32 Section 1350 Certification (Principal Executive
Officer and Principal Financial Officer). Filed
herewith.
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