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, 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 August 7, 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..............................................16
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........30
Item 4. Controls and Procedures............................................31
PART II - OTHER INFORMATION...................................................32
Item 1. Legal Proceedings.................................................32
Item 1A. Risk Factors......................................................32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......32
Item 3. Defaults Upon Senior Securities...................................33
Item 4. Submission of Matters to a Vote of Security Holders...............33
Item 5. Other Information.................................................33
Item 6. Exhibits and Reports on Form 8-K..................................33
SIGNATURES....................................................................34
EXHIBIT INDEX.................................................................35
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share data)
--------------------------------------------------------------------------------
June 30, December 31,
2009 2008
----------------- -----------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 7,933 $ 16,650
Federal funds sold ---- 1,031
----------------- -----------------
Total cash and cash equivalents 7,933 17,681
Interest-bearing deposits in other financial institutions 37,606 611
Securities available-for-sale 89,783 75,340
Securities held-to-maturity
(estimated fair value: 2009 - $15,809; 2008 - $17,241) 15,553 16,986
Federal Home Loan Bank stock 6,281 6,281
Total loans 633,211 630,391
Less: Allowance for loan losses (8,217) (7,799)
----------------- -----------------
Net loans 624,994 622,592
Premises and equipment, net 10,605 10,232
Accrued income receivable 2,757 3,172
Goodwill 1,267 1,267
Bank owned life insurance 18,468 18,153
Other assets 9,720 8,793
----------------- -----------------
Total assets $ 824,967 $ 781,108
================= =================
LIABILITIES
Noninterest-bearing deposits $ 83,415 $ 85,506
Interest-bearing deposits 576,349 506,855
----------------- -----------------
Total deposits 659,764 592,361
Securities sold under agreements to repurchase 29,037 24,070
Other borrowed funds 45,472 76,774
Subordinated debentures 13,500 13,500
Accrued liabilities 11,846 11,347
----------------- -----------------
Total liabilities 759,619 718,052
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 42,606 40,752
Accumulated other comprehensive income 1,128 690
Treasury stock, at cost (2009 and 2008 - 659,739 shares) (15,712) (15,712)
----------------- -----------------
Total shareholders' equity 65,348 63,056
----------------- -----------------
Total liabilities and shareholders' equity $ 824,967 $ 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 Six months ended
June 30, June 30,
2009 2008 2009 2008
--------------- ---------------- --------------- ---------------
Interest and dividend income:
Loans, including fees $ 10,787 $ 11,743 $ 22,446 $ 24,385
Securities
Taxable 719 783 1,472 1,579
Tax exempt 113 135 230 276
Dividends 70 82 141 161
Other Interest 21 110 32 186
--------------- ---------------- --------------- ---------------
11,710 12,853 24,321 26,587
Interest expense:
Deposits 3,562 4,270 7,011 9,156
Securities sold under agreements to repurchase 17 93 39 237
Other borrowed funds 556 663 1,144 1,420
Subordinated debentures 272 272 544 544
--------------- ---------------- --------------- ---------------
4,407 5,298 8,738 11,357
--------------- ---------------- --------------- ---------------
Net interest income 7,303 7,555 15,583 15,230
Provision for loan losses 296 916 1,144 1,617
--------------- ---------------- --------------- ---------------
Net interest income after provision for loan 7,007 6,639 14,439 13,613
losses
Noninterest income:
Service charges on deposit accounts 707 780 1,332 1,490
Trust fees 55 64 110 125
Income from bank owned life insurance 203 201 403 376
Gain on sale of loans 360 45 618 90
Gain (loss) on sale of other real estate owned 27 3 27 (38)
Other 512 494 1,437 1,128
--------------- ---------------- --------------- ---------------
1,864 1,587 3,927 3,171
Noninterest expense:
Salaries and employee benefits 3,704 3,390 7,404 6,819
Occupancy 399 382 802 768
Furniture and equipment 281 257 566 492
Data processing 232 266 459 531
FDIC insurance 696 17 981 34
Other 1,649 1,503 3,347 2,923
--------------- ---------------- --------------- ---------------
6,961 5,815 13,559 11,567
--------------- ---------------- --------------- ---------------
Income before income taxes 1,910 2,411 4,807 5,217
Provision for income taxes 514 680 1,360 1,521
--------------- ---------------- --------------- ---------------
NET INCOME $ 1,396 $ 1,731 $ 3,447 $ 3,696
=============== ================ =============== ===============
Earnings per share $ .35 $ .43 $ .86 $ .91
=============== ================ =============== ===============
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,
2009 2008 2009 2008
------------- ------------- ------------ ------------
Balance at beginning of period $ 64,582 $ 61,968 $ 63,056 $ 61,511
Comprehensive income:
Net income 1,396 1,731 3,447 3,696
Change in unrealized income/loss
on available-for-sale securities 253 (830) 664 580
Income tax effect (86) 282 (226) (197)
------------- ------------- ------------ ------------
Total comprehensive income 1,563 1,183 3,885 4,079
Cash dividends (797) (769) (1,593) (1,543)
Shares acquired for treasury ---- (788) ---- (1,374)
Cumulative-effect adjustment in adopting EITF No. 06-04 ---- ---- ---- (1,079)
------------- ------------- ------------ ------------
Balance at end of period $ 65,348 $ 61,594 $ 65,348 $ 61,594
============= ============= ============ ============
Cash dividends per share $ 0.20 $ 0.19 $ 0.40 $ 0.38
============= ============= ============ ============
Shares from common stock issued
through dividend reinvestment plan ---- ---- ---- 1
============= ============= ============ ============
Shares acquired for treasury ---- 31,508 ---- 54,836
============= ============= ============ ============
See notes to consolidated financial statements
5
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands)
--------------------------------------------------------------------------------
Six months ended
June 30,
2009 2008
--------------- ---------------
Net cash provided by operating activities: $ 5,111 $ 4,391
Investing activities:
Proceeds from maturities of securities available-for-sale 15,650 16,482
Purchases of securities available-for-sale (29,554) (10,060)
Proceeds from maturities of securities held-to-maturity 1,468 1,346
Purchases of securities held-to-maturity (40) (3,060)
Change in interest-bearing deposits in other financial (36,995) (14,874)
institutions
Net change in loans (4,676) 7,289
Proceeds from sale of other real estate owned 710 420
Purchases of premises and equipment (897) (476)
Purchases of bank owned life insurance ---- (427)
--------------- ---------------
Net cash provided by (used in) investing activities (54,334) (3,360)
Financing activities:
Change in deposits 67,403 19,172
Cash dividends (1,593) (1,543)
Purchases of treasury stock ---- (1,374)
Change in securities sold under agreements to repurchase 4,967 (5,081)
Proceeds from Federal Home Loan Bank borrowings ---- 7,000
Repayment of Federal Home Loan Bank borrowings (8,003) (10,011)
Change in other short-term borrowings (23,299) (4,224)
--------------- ---------------
Net cash provided by (used in) financing activities 39,475 3,939
--------------- ---------------
Change in cash and cash equivalents (9,748) 4,970
Cash and cash equivalents at beginning of period 17,681 16,894
--------------- ---------------
Cash and cash equivalents at end of period $ 7,933 $ 21,864
=============== ===============
Supplemental disclosure:
Cash paid for interest $ 9,884 $ 13,400
Cash paid for income taxes 1,775 1,815
Non-cash transfers from loans to other real estate owned 1,130 4,905
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. Subsequent events have been reviewed through August
10, 2009, which is the date the Company filed the Form 10-Q with the U.S.
Securities and Exchange Commission ("SEC").
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, 2009, and its results of operations and cash flows
for the periods presented. The results of operations for the six months ended
June 30, 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 4,032,883 for
the three months ended June 30, 2009 and 2008, respectively. The weighted
average common shares outstanding were 3,983,009 and 4,046,734 for the six
months ended June 30, 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.
7
SECURITIES: The Company classifies securities into held-to-maturity and
available-for-sale categories. Held-to-maturity securities are those which the
Company has the positive intent and ability to hold to maturity and are reported
at amortized cost. Securities classified as available-for-sale include equity
securities and other securities that could be sold for liquidity, investment
management or similar reasons even if there is not a present intention of such a
sale. Available-for-sale securities are reported at fair value, with unrealized
gains or losses included as a separate component of equity, net of tax. Other
securities, such as Federal Home Loan Bank stock, are carried at cost.
Premium amortization is deducted from, and discount accretion is added to,
interest income on securities using the level yield method. Gains and losses are
recognized upon the sale of specific identified securities on the completed
transaction basis. Securities are written down to fair value when a decline in
fair value is other than temporary.
LOANS: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on an accrual basis using the interest method and
includes amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when the loan is impaired or payments are past due over 90 days. Payments
received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
MORTGAGE SERVICING RIGHTS: A mortgage servicing right ("MSR") is a contractual
agreement where the right to service a mortgage loan is sold by the original
lender to another party. When the Company sells mortgage loans to the secondary
market, it retains the servicing rights to these loans. The Company's MSR is
recognized separately when acquired through sales of loans and is initially
recorded at fair value with the income statement effect recorded in gains on
sales of loans. Subsequently, the MSR is then amortized in proportion to and
over the period of estimated future servicing income of the underlying loan. The
MSR is then evaluated for impairment periodically based upon the fair value of
the rights as compared to the carrying amount, with any impairment being
recognized through a valuation allowance. Fair value of the MSR is based on
market prices for comparable mortgage servicing contracts. At June 30, 2009, the
Company's MSR asset portfolio was not material, totaling $483, or 0.7% of the
total mortgage loans being serviced.
8
RECENT 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. The Company adopted this new accounting pronouncement in the
second quarter of 2009 and determined there was no material impact to the
financial statement disclosures or the Company's financial position and results
of operations.
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 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. The
Company adopted this new accounting pronouncement in the second quarter of 2009
and determined there was no material impact to the financial statement
disclosures or the Company's financial position and results of operations.
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. The
Company adopted this new accounting pronouncement in the second quarter of 2009
and determined there was no material impact to the financial statement
disclosures or the Company's financial position and results of operations.
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 MEASUREMENTS
FAS 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. FAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of
9
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.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
Fair Value Measurements at June 30, 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 ---- $ 89,783 ----
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 ----
10
Assets and Liabilities Measured on a Nonrecurring Basis
Assets and liabilities measured at fair value on a nonrecurring basis are
summarized below:
Fair Value Measurements at June 30, 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 ---- ---- $10,637
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 $21,772 at June 30, 2009. The
portion of this impaired loan balance for which a specific allowance for credit
losses was allocated totaled $14,370, resulting in a specific valuation
allowance of $3,733. 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 $3,733 at June 30,
2009.
In accordance with FAS 107-1, the carrying amounts and estimated fair values of
financial instruments, at June 30, 2009 and December 31, 2008 are as follows:
June 30, 2009 December 31, 2008
---------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ -------------
Financial Assets:
Cash and cash equivalents $ 7,933 $ 7,933 $ 17,681 $ 17,681
Interest-bearing deposits in other banks 37,606 37,606 611 611
Securities 105,336 105,592 92,326 92,581
Federal Home Loan Bank stock 6,281 N/A 6,281 N/A
Loans 624,994 635,524 622,592 637,422
Accrued interest receivable 2,757 2,757 3,172 3,172
Financial liabilities:
Deposits (659,764) (662,714) (592,361) (591,742)
Securities sold under agreements to repurchase (29,037) (29,037) (24,070) (24,070)
Other borrowed funds (45,472) (46,452) (76,774) (78,777)
Subordinated debentures (13,500) (13,715) (13,500) (13,718)
Accrued interest payable (3,786) (3,786) (4,933) (4,933)
11
NOTE 3 - SECURITIES
The following table summarizes the amortized cost and fair value of the
available-for-sale and held-to-maturity investment securities portfolio at June
30, 2009 and December 31, 2008 and the corresponding amounts of unrealized gains
and losses therein:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ -------------
Securities Available-for-Sale
June 30, 2009
-------------
U.S. Treasury securities $ 2,560 ---- ---- $ 2,560
U.S. Government sponsored entity securities 51,080 $ 912 $ (1) 51,991
Mortgage-backed securities 34,433 799 ---- 35,232
------------ ------------ ------------ -------------
Total securities $ 88,073 $ 1,711 $ (1) $ 89,783
============ ============ ============ =============
December 31, 2008
-----------------
U.S. Treasury securities ---- ---- ---- ----
U.S. Government sponsored entity securities $ 30,623 $ 1,243 ---- $ 31,866
Mortgage-backed securities 43,671 82 $ (279) 43,474
------------ ------------ ------------ -------------
Total securities $ 74,294 $ 1,325 $ (279) $ 75,340
============ ============ ============ =============
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ -------------
Securities Held-to-Maturity
June 30, 2009
-------------
Obligations of states and political subdivisions $ 15,515 $ 313 $ (55) $ 15,773
Mortgage-backed securities 38 ---- (2) 36
------------ ------------ ------------ -------------
Total securities $ 15,553 $ 313 $ (57) $ 15,809
============ ============ ============ =============
December 31, 2008
-----------------
Obligations of states and political subdivisions $ 16,946 $ 327 $ (70) $ 17,203
Mortgage-backed securities 40 ---- (2) 38
------------ ------------ ------------ -------------
Total securities $ 16,986 $ 327 $ (72) $ 17,241
============ ============ ============ =============
The amortized cost and fair value of the investment securities portfolio at June
30, 2009 are shown by expected maturity. Expected maturities may differ from
contractual maturities if borrowers have the right to call or prepay obligations
with or without call or prepayment penalties.
Available-for-Sale Held-to-Maturity
---------------------------------------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
------------ ------------ ------------ -------------
Maturity:
Due in one year or less $ 34,548 $ 34,782 $ 675 $ 676
Due in one to five years 16,590 17,160 3,285 3,435
Due in five to ten years 2,502 2,609 3,689 3,516
Due after ten years ---- ---- 7,866 8,146
Mortgage-backed securities 34,433 35,232 38 36
------------ ------------ ------------ -------------
Total securities $ 88,073 $ 89,783 $ 15,553 $ 15,809
============ ============ ============ =============
12
The following table summarizes the investment securities with unrealized losses
at June 30, 2009 by aggregated major security type and length of time in a
continuous unrealized loss position:
Less Than 12 Months 12 Months or Longer Total
------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
--------- ------------ ---------- ------------ ---------- ------------
U.S. Government sponsored $ 2,496 $ (1) ---- ---- $ 2,496 $ (1)
entity securities
Mortgage-backed securities ---- ---- $ 36 $ (2) 36 (2)
Obligations of states and
political subdivisions ---- ---- 2,548 (55) 2,548 (55)
--------- ------------ ---------- ------------ ---------- ------------
Total securities $ 2,496 $ (1) $ 2,584 $ (57) $ 5,080 $ (58)
========= ============ ========== ============ ========== ============
Unrealized losses on the Company's debt securities have not been recognized into
income because the issuers' securities are of high credit quality, management
has the intent and ability to hold them for the foreseeable future, and the
decline in fair value is largely due to changes in market interest rates. The
fair value is expected to recover as the bonds approach their maturity date or
reset date. Management does not believe any individual unrealized loss at June
30, 2009 represents an other-than-temporary impairment.
NOTE 4 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
June 30, 2009 December 31, 2008
---------------------- -------------------
Residential real estate $ 238,230 $ 252,693
Commercial real estate 207,918 198,559
Commercial and industrial 47,086 44,824
Consumer 131,125 126,911
All other 8,852 7,404
---------------------- -------------------
$ 633,211 $ 630,391
====================== ===================
At June 30, 2009 and December 31, 2008, loans on nonaccrual status were
approximately $4,180 and $3,396, respectively. Loans past due more than 90 days
and still accruing at June 30, 2009 and December 31, 2008 were $1,961 and
$1,878, respectively.
13
NOTE 5 - ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
Following is an analysis of changes in the allowance for loan losses for the
six-month periods ended June 30:
2009 2008
----------- -------------
Balance - January 1, $ 7,799 $ 6,737
Loans charged off:
Commercial (1) 232 990
Residential real estate 605 139
Consumer 1,038 1,128
----------- -------------
Total loans charged off 1,875 2,257
Recoveries of loans:
Commercial (1) 722 94
Residential real estate 6 52
Consumer 421 328
----------- -------------
Total recoveries of loans 1,149 474
----------- -------------
Net loan charge-offs (726) (1,783)
Provision charged to operations 1,144 1,617
----------- -------------
Balance - June 30, $ 8,217 $ 6,571
=========== =============
Information regarding impaired loans is as follows:
June 30, December 31,
2009 2008
--------------- -----------------
Balance of impaired loans $ 21,772 $ 8,099
Less portion for which no specific
allowance is allocated 7,402 5,513
--------------- -----------------
Portion of impaired loan balance for which a
specific allowance for credit losses is allocated $ 14,370 $ 2,586
=============== =================
Portion of allowance for loan losses specifically
allocated for the impaired loan balance $ 3,733 $ 1,404
=============== =================
Average investment in impaired loans year-to-date $ 21,838 $ 9,027
=============== =================
Interest recognized on impaired loans was $777 and $218 for the six-month
periods ended June 30, 2009 and 2008, respectively. Accrual basis income was not
materially different from cash basis income for the periods presented.
NOTE 6 - 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
3.74% of total loans were unsecured at June 30, 2009, down from 3.79% at
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
(1) Includes commercial and industrial and commercial real estate loans.
14
instruments are not included in the consolidated financial statements. At June
30, 2009, the contract amounts of these instruments totaled approximately
$72,164, 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 7 - OTHER BORROWED FUNDS
Other borrowed funds at June 30, 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
-------------------- ----------------- --------------- ----------------
June 30, 2009................... $ 40,162 $ 4,128 $ 1,182 $ 45,472
December 31, 2008............... $ 68,715 $ 5,479 $ 2,580 $ 76,774
Pursuant to collateral agreements with the FHLB, advances are secured by
$219,864 in qualifying mortgage loans and $6,281 in FHLB stock at June 30, 2009.
Fixed-rate FHLB advances of $40,162 mature through 2033 and have interest rates
ranging from 2.13% to 6.62%. There were no variable-rate FHLB borrowings at June
30, 2009.
At June 30, 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 June 30, 2009.
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 $162,863 at June 30, 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 June 30, 2009, unchanged from December 31, 2008. Various
investment securities from the Bank used to collateralize the FRB notes totaled
$5,390 at June 30, 2009 and $5,880 at December 31, 2008.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $33,600 at June 30, 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 $ 8,003 $ 2,291 $ 1,182 $ 11,476
Year Ended 2010 26,005 1,837 ---- 27,842
Year Ended 2011 6,006 ---- ---- 6,006
Year Ended 2012 6 ---- ---- 6
Year Ended 2013 6 ---- ---- 6
Thereafter 136 ---- ---- 136
------------------- ----------------- --------------- -----------------
$ 40,162 $ 4,128 $ 1,182 $ 45,472
=================== ================= =============== =================
15
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, 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.
For the three months ended June 30, 2009, net income decreased by $335, or
19.4%, compared to the same quarterly period in 2008, to finish at $1,396.
Earnings per share for the second quarter of 2009 decreased $.08, or 18.6%,
compared to the same quarterly period in 2008, to finish at $.35 per share. For
the six months ended June 30, 2009, net income decreased by $249, or 6.7%, to
finish at $3,447 compared to the same period in 2008. Earnings per share for the
first six months of 2009 finished at $.86, a decrease of 5.5% from the same
period in 2008. The percentage decrease in nominal dollar net income for both
the quarterly and year-to-date periods ending June 30, 2009 exceeded the net
income earnings per share percentage decrease 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 decreased to
0.85% and 10.86% at June 30, 2009, as compared to 0.94% and 12.18%,
respectively, at June 30, 2008.
The Company's decrease in earnings during both the three months and six months
ended June 30, 2009 as compared to the same periods in 2008 was primarily the
result of increases in FDIC premiums that have been assessed on all FDIC insured
institutions. With the increases in FDIC premiums, along with a special
assessment that was charged by the FDIC in June 2009, the Company's FDIC
insurance expense increased $679 and $947 during the second quarter and
year-to-date periods of 2009, respectively, as compared to the same periods in
2008. Partially offsetting the significant FDIC insurance expense
16
increases was noninterest income improvement of 17.5% during the second quarter
of 2009 and 23.8% during the year-to-date period ending June 30, 2009, as
compared to the same periods in 2008. The growth in noninterest income was
largely 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 during the first half of 2009.
The consolidated total assets of the Company increased $43,859, or 5.6%, during
the first six months of 2009 as compared to year-end 2008, to finish at
$824,967. This improvement in assets was led by an increase in the Company's
interest-bearing deposits in other financial institutions, which increased
$36,995 from year-end 2008, largely from the deployment of interest- and
non-interest bearing deposit liability growth. New purchases of U.S. Government
sponsored entity securities led the increase in the Company's investment
securities, growing 14.1% from year-end 2008. The Company's loan portfolio also
experienced an increase from year-end 2008, growing 0.4%, 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 5.7% 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.
While the demand for loans was minimal during the first six months of 2009, the
Company was able to benefit from growth in its total deposit liabilities of
$67,403 from year-end 2008. Interest-bearing deposit liability growth was led by
surges in the Company's wholesale deposits of $35,681, Market Watch balances of
$20,299 and public fund NOW balances of $10,185, all up from year-end 2008.
Partially offsetting growth in interest-bearing deposits were decreases in the
Company's noninterest-bearing demand deposits, which were down $2,091 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 $31,302
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 the second half of 2009.
Comparison of
Financial Condition
at June 30, 2009 and December 31, 2008
The following discussion focuses, in more detail, on the consolidated financial
condition of the Company at June 30, 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 June 30, 2009, cash and cash equivalents had decreased $9,748, or
55.1%, to $7,933 as compared to $17,681 at December 31, 2008. The decrease in
cash and cash equivalents was largely affected by the Company's preference to
utilize its interest-bearing Federal Reserve Bank clearing account to maintain
its excess funds. The Federal Reserve Bank clearing account became
interest-bearing during the fourth quarter of 2008. Further affecting the
decrease in cash and cash equivalents were increased loan balances and
investment security purchases during the first half 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
17
information regarding the Company's liquidity can be found under the caption
"Liquidity" in this Management's Discussion and Analysis.
Interest-Bearing Deposits in Other Financial Institutions
At June 30, 2009, the Company had a total of $37,606 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
increased 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 remained at 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 half of 2009, investment securities increased $13,010 to finish
at $105,336, an increase of 14.1% as compared to year-end 2008. The Company's
investment securities portfolio consists primarily of U.S. Government sponsored
entity ("GSE") securities, mortgage-backed securities and obligations of states
and political subdivisions. GSE securities increased $20,125, or 63.2%, as a
result of several new purchases during the second quarter of 2009. During this
quarterly period, the Company continued to experience a significant increase in
excess funds from growth in total deposit balances. With the demand for loan
balances at a relatively stable pace, the Company invested the excess funds into
new short-term GSE securities totaling $18,479 with maturities less than one
year and interest rate yields less than 1.0%. The Company's intention is to
re-invest these shorter-term securities into future loan growth or longer-term
securities if interest rates are increased in the near future. In addition to
helping achieve diversification within the Company's securities portfolio, GSE
securities have also been used to satisfy pledging requirements for repurchase
agreements. At June 30, 2009, the Company's repurchase agreements increased
20.6%, 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 $8,244, or 18.9%, and $1,431, or
8.4%, respectively, from year-end 2008. Typically, 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 that is being collected is
being reinvested at lower rates. Principal repayments from mortgage-backed
securities totaled $9,152 from January 1, 2009 through June 30, 2009. For the
second half 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 six months of 2009,
total loans increased just $2,820, or 0.4%, from year-end 2008. Higher loan
balances were mostly influenced by total commercial loans, which were up
$11,621, or 4.8%, 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
18
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
$2,262, or 5.0%, 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 $9,359, or 4.7%. 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 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 (24.3% of portfolio), medical industry loans
(12.0% of portfolio), land development loans (8.2% of portfolio), and hotel and
motel loans (7.8% of portfolio). During the first half 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 68.7% of total originations. The growing West Virginia
markets also accounted for 15.2% 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 $4,214, or 3.3%, 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 $3,899, or 14.4%, from
year-end 2008. The automobile indirect lending segment continues to represent
the largest portion of the Company's consumer loan portfolio, representing 23.6%
of total consumer loans at June 30, 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.
The remaining consumer loan products not discussed above were collectively up
$315, or 0.3%, which included general increases 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 will continue to stabilize and does
not anticipate any significant growth during the remaining fiscal year of 2009.
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
19
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 half of 2009, total residential real estate loan balances decreased
$14,463, or 5.7%, from year-end 2008 to total $238,230. 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 loans. At March 31, 2009 and December 31, 2008, the
30-year treasury rate was 3.56% and 2.69%, respectively, as compared to 4.53% at
June 30, 2008. Consumers wanted to take advantage of the low rates and reduce
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 half of 2009 to originate and sell fixed-rate
mortgages to the secondary market. During the first and second quarters of 2009,
the Company sold $47,970 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 $11,756, or 6.4%, 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 one-year adjustable-rate mortgages, which were down $4,841,
or 14.6%, from year-end 2008.
The remaining real estate loan portfolio balances increased $2,134 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 loans to the secondary market.
The Company recognized an increase of $1,448 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 overdraft balances of $999.
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 anticipates the volume of secondary market loan sales to stabilize
during the second half of 2009 as long-term interest rates begin to increase
slightly. At June 30, 2009, the 30-year treasury rate was 4.32%, as compared to
3.56% at March 31, 2009. The Company anticipates 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 six months of 2009, the Company's allowance for
loan losses increased to $8,217, as compared to $7,799 at year-end 2008 and
$6,571 at June 30, 2008. This surge in increased reserves was, in large part,
due to the continued increase in the Company's nonperforming loan balances.
Nonperforming loans at June 30, 2009 totaled 0.97% of total portfolio loans, an
increase from the December 31, 2008 ratio of 0.84% and the June 30, 2008 ratio
of 0.75%. Nonperforming loans have increased $867, or 16.4%, to finish at $6,141
at June 30, 2009 as compared to year-end 2008, while also increasing $1,493, or
32.1%, as compared to a year ago at June 30, 2008. The increase in nonperforming
loans was mostly related to real estate mortgage borrowers, comprising about 67%
of total nonperforming loans at June 30, 2009, with payment performance
difficulties. Most of these real estate secured
20
nonperforming loans have been placed on nonaccrual status. These troubled
credits also impacted the Company's nonperforming assets, which increased
$1,286, or 12.9%, to finish at $11,254 at June 30, 2009 as compared to year-end
2008, while also increasing $1,860, or 19.8%, as compared to a year ago at June
30, 2008. Approximately 37.4% of nonperforming assets is related to one large
commercial borrowing classified as other real estate owned ("OREO"). 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 1.36% at June 30, 2009, an increase from 1.28% at year-end 2008 and
1.19% at June 30, 2008. Excluding the aforementioned large commercial borrowing
classified as OREO, nonperforming assets to total assets would equal 0.85% at
June 30, 2009. Both nonperforming loans and nonperforming assets at June 30,
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 $21,772 of loans held by the Company at June 30, 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 six months of 2009, net charge-offs totaled just $726, a
decrease of $1,057 from the same period in 2008, mostly due to a large recovery
from a previously charged off commercial loan during June 2009. This large
commercial loan recovery totaling $648 not only lowered net charge-offs, but
also lowered provision expense charges during the second quarter of 2009.
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 internet 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 half of 2009,
total deposits were up $67,403, or 11.4%, from year-end 2008. The change in
deposits came primarily from increases in the Company's money market deposits,
interest-bearing demand deposits and interest-bearing time 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
21
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 money market accounts and NOW accounts from year-end 2008, while a
lesser percentage has resulted in retail time deposits from year-end 2008.
Furthermore, the Company's core noninterest-bearing demand accounts have been
maintained at comparable levels to that of year-end 2008, down just 2.4%.
Deposit growth came mostly from time deposits, increasing $28,658, or 9.3%, from
year-end 2008. Time deposits, particularly CD's, are the most significant source
of funding for the Company's earning assets, making up 51.0% of total deposits.
With loan balances maintaining a relatively stable growth pace, up just 0.4%
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 $7,023 from year-end 2008, while utilizing more wholesale funding
deposits (i.e., brokered and internet CD issuances), which increased $35,681
from year-end 2008. The Bank increased its use of brokered deposits mostly
during the fourth quarter of 2008 and the first quarter of 2009 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
the limited loan originations of longer-term fixed rate mortgages experienced
during the first half of 2009.
Also contributing to growth in deposits were money market deposit balances,
increasing $20,299, or 23.7%, during the first six 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 June 30, 2009, this program
had gathered $102,407 in deposits, including $12,059 in the second quarter of
2009, a 24.9% increase from the balances at year-end 2008.
Further enhancing deposit growth were interest-bearing NOW account balances,
which increased $15,272, or 18.9%, during the first six months of 2009 as
compared to year-end 2008. This growth was largely driven by a $10,185 increase
in public fund balances related to local city and county school construction
projects currently in process within Gallia County, Ohio.
Partially offsetting the increases in total deposit balances was the Company's
interest-free funding source, noninterest bearing demand deposits, decreasing
$2,091, or 2.4%, from year-end 2008. This decrease was largely from lower
business checking account balances from year-end 2008.
22
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 $4,967, or 20.6%, from year-end 2008. This increase was
mostly due to seasonal fluctuations of two commercial accounts in the first six
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 six months of 2009, other
borrowed funds were down $31,302, or 40.8%, from year-end 2008. Management used
the growth in deposit proceeds to repay FHLB borrowings during the first six
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 June 30, 2009
of $65,348 was up $2,292, or 3.6%, as compared to the balance of $63,056 on
December 31, 2008. Contributing most to this increase was year-to-date net
income of $3,447 partially offset by cash dividends paid of $1,593, or $.40 per
share, year-to-date. The Company had treasury stock totaling $15,712 at June 30,
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 June
30, 2009, all 175,000 shares were still available to be repurchased pursuant to
that authorization.
Comparison of
Results of Operations
for the Quarter and Year-To-Date Periods
Ended June 30, 2009 and 2008
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, 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
second quarter of 2009, net interest income decreased $252, or 3.3%, as compared
to the same quarterly period in 2008. Yet, through the first six months of 2009,
net interest income exceeded previous year results by $353, or 2.3%, as compared
23
to the same year-to-date period in 2008. The year over year improvement is
largely the result of significant increases in the Company's refund anticipation
loan ("RAL") fees during the first quarter of 2009 as well as loan fees from the
increased volume of real estate refinancings and real estate loans sold to the
secondary market during the first half of 2009. While the Company has maintained
improved levels of net interest income on a year-to-date basis, the pace of
growth continues to decrease. When comparing 2009's first and second linked
quarter results of $8,280 and $7,303, respectively, net interest income has
decreased $977, or 11.8%. This decrease is largely the result of a compressing
net interest margin due to higher relative balances being invested in overnight
or short-term earning assets at lower return yields.
Total interest and dividend income decreased $1,143, or 8.9%, during the second
quarter of 2009 and decreased $2,266, or 8.5%, during the first six months of
2009 as compared to the same periods in 2008. This drop in interest earnings was
largely due to a decrease in the yields earned on average earning assets during
both the quarterly and year-to-date periods of 2009 as compared to the same
periods in 2008. The average yield on earning assets for the three months ended
June 30, 2009 decreased 95 basis points to 6.03% as compared to 6.98% during the
same period in 2008. The average yield on earning assets for the six months
ended June 30, 2009 decreased 87 basis points to 6.36% as compared to 7.23%
during the same period in 2008. This negative effect reflects the decrease in
short-term interest rates initiated by the Federal Reserve Board in 2007. The
Company's loan portfolio is significantly affected by changes in the prime
interest rate. The prime interest rate began 2008 at 7.25% and decreased 200
basis points in the first quarter, 25 basis points in the second quarter and 175
basis points in the fourth quarter to end 2008 at 3.25%. During the first six
months of 2009, the prime interest rate remained at 3.25% for the entire period.
Earning asset yields were also negatively affected by the recent investments
made to lower yielding earning assets during the second quarter of 2009. During
this period, loan demand continued at a slow pace while excess funds increased
due to core depoit growth of the Bank. As a result, a total of $18,479 of these
excess funds were placed into short-term GSE securities with maturities less
than one year and interest rate yields less than 1.0%. Furthermore, the Company
has accumulated a total of $37,168 within its interest-bearing Federal Reserve
Bank clearing account at June 30, 2009. This interest-bearing account became
interest-bearing in December of 2008 and currently yields an interest rate of
only 0.25%. With higher earning asset balances being placed in lower yielding,
shorter-term products, the most recent yields on average earning assets
decreased from 6.70% during the first quarter of 2009 to 6.03% during the second
quarter of 2009. The Company's intention with its short-term GSE purchases and
higher Federal Reserve Bank balances is to re-invest these shorter-term liquid
assets into future loan growth or longer-term securities if interest rates are
increased in the near future.
Partially offsetting the asset yield decreases were positive contributions from
growth in the Company's average earning assets, up $38,615, or 5.2%, during the
second quarter of 2009 and up $31,983, or 4.3%, during the first half of 2009 as
compared to the same periods 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 half of 2009, the Company had recognized $397 in
RAL fees as compared to $265 during the same period in 2008, an increase of
$132, or 49.8%.
Although the Company's residential real estate loan balances have decreased 5.7%
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 and December 31, 2008, the 30-year
treasury rate was 3.56% and 2.69%, respectively, as compared to 4.53% at June
30, 2008. This was responsible for a significant increase in the demand for real
estate refinancings that would allow consumers to take advantage of historical
24
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 $114, or 70.0%, during the second quarter
of 2009 and increasing $233, or 80.3%, during the first half of 2009 as compared
to the same periods in 2008.
In relation to lower earning asset yields, the Company's total interest expense
decreased $891, or 16.8%, for the second quarter of 2009 and decreased $2,619,
or 23.1%, during the first half of 2009 as compared to the same periods in 2008,
as a result of lower rates paid on interest-bearing liabilities. Since the
beginning of 2008, the Federal Reserve Board has reduced the prime and federal
funds interest rates by 400 basis points. The prime interest rate is currently
at 3.25% and the target federal funds rate has decreased to a range of 0.0% to
0.25%. 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 have repriced to lower rates (as a
lagging effect to the Federal Reserve's action to drop short-term interest
rates), which have lower funding costs during 2009. As a result of decreases in
the average market interest rates mentioned above, the Bank's total weighted
average funding costs have decreased 83 basis points from 3.08% at June 30, 2008
to 2.25% at June 30, 2009.
During the three and six months ended June 30, 2009, the accelerated decline in
asset yields, particularly in the second quarter, have completely offset the
declines in funding costs and the benefits of increased RAL and real estate
fees. As a result, the Company's net interest margin has decreased 35 basis
points from 4.13% to 3.78% during the second quarter of 2009, and has decreased
8 basis points from 4.17% to 4.09% during the first six months of 2009 as
compared to the same periods in 2008. The net interest margin is expected to
remain challenged for the remainder of 2009, as lower yielding, short-term
assets continue to grow as a result of excess deposit growth, while the
Company's demand for loan growth is expected to remain flat for the remainder of
2009. 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 Board's actions of decreasing
short-tem interest rates in 2008 were necessary to take steps in repairing the
recessionary problems and promote economic stability. The Company believes it is
reasonably possible the prime interest rate and the federal funds rate will
remain at the current, historically low levels for the remainder of 2009.
However, there can be no assurance to that effect or as to the magnitude of any
change in market interest rates should a change be prompted by the Federal
Reserve Board, as such changes 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.
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 decreased $620, or 67.7%, for the three months ended June 30,
2009 and decreased $473, or 29.3%, during the first half of 2009 as compared to
the same periods in 2008. The decrease in provision expense was impacted by a
$1,057, or 59.3%, decrease in net charge-offs during the first half of 2009 as
compared to the first half of 2008. The decrease in net charge-offs was due to a
large recovery from a previously charged off commercial loan during June 2009
that totaled $648.
Management believes that the allowance for loan losses was adequate at June 30,
2009 and reflective of probable losses in the portfolio. The allowance for loan
losses was 1.30% of total loans at June 30, 2009,
25
up from the allowance level as a percentage of total loans of 1.24% at December
31, 2008 and 1.05% at June 30, 2008. As part of the allowance for loan loss
determination, specific allocations based on the probability of loan loss on the
Company's nonperforming loan relationships are estimated. This increase in the
allowance for loan loss percentage is directionally consistent with the increase
in specific allocations relative to the change in nonperforming loan balances.
Future provisions to the allowance for loan losses will continue to be based on
management's quarterly in-depth evaluation that is discussed in further detail
under the caption "Critical Accounting Policies - Allowance for Loan Losses" of
this Form 10-Q.
Noninterest Income
Noninterest income for the three months ended June 30, 2009 was $1,864, an
increase of $277, or 17.5%, over the same quarterly period in 2008. Noninterest
income for the six months ended June 30, 2009 was $3,927, an increase of $756,
or 23.8%, over the same year-to-date 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 gains on the sale of real estate
loans to the secondary market. To help manage consumer demand for longer-termed,
fixed-rate real estate mortgages, the Company has taken additional opportunities
to sell most real estate loans to the secondary market. Through June 30, 2009,
the Company has sold 346 loans totaling $47,970 to the secondary market as
compared to 109 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 quarterly and year-to-date growth
in income on sale of loans, which was up $315, or 700.0%, during the three
months ended June 30, 2009 and up $528, or 586.7%, during the six months ended
June 30, 2009, as compared to the same periods in 2008. The Company anticipates
the volume of secondary market loan sales to decline during the second half of
2009.
Further contributing to noninterest income growth was the Company's 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 second quarter of 2009,
the Company's tax refund processing fees increased by $12, or 124.3%, and
increased $249, or 91.3%, during the first half of 2009, as compared to the same
periods 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
second half of 2009.
Growth in noninterest income also came from the net gains and losses on the
sales of OREO assets. This income was the result of higher OREO losses
experienced in last year's first six months of 2008 combined with higher OREO
gains experienced during the first six months of 2009. As a result, income from
OREO sales increased $24 during the second quarter of 2009, and increased $65,
or 171.1%, during the first half of 2009 as compared to the same periods in
2008. Both increases were primarily the result of a $41 loss incurred on the
sale of one large real estate property during the first quarter of 2008 and a
$24 gain recognized on the sale of one large real estate property during the
second quarter of 2009.
Partially offsetting noninterest income growth was a decrease in the Bank's
service charge fees on deposit accounts, which declined by $73, or 9.4%, during
the second quarter of 2009, and decreased $158, or 10.6%, during the six months
ended June 30, 2009 as compared to the same periods in 2008. The decrease was in
large part due to a lower volume of overdraft balances, as customers presented
fewer checks against non-sufficient funds during 2009 as compared to 2008.
26
The total of all remaining noninterest income categories decreased $1 during the
second quarter of 2009 and increased $72 during the first half of 2009 as
compared to the same periods in 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 second quarter of 2009 increased $1,146, or
19.7%, and increased $1,992, or 17.2%, during the first half of 2009 as compared
to the same periods in 2008. Contributing most to the growth in overhead expense
was a significant increase in the Company's FDIC insurance premium expense,
which was up $679 during the second quarter of 2009 to finish at $696 as
compared to just $17 in insurance expense during the second quarter of 2008. The
Company's FDIC insurance premium expense increased $947 during the first half of
2009 to finish at $981 as compared to just $34 in insurance expense during the
first half of 2008. The increases in deposit insurance expense were due to
increases in the fee assessment rates during 2009 and a special assessment
applied to all FDIC insured institutions as of June 30, 3009. With regard to the
increase in fee assessment rates, prior to the third quarter of 2008, the
Company had benefited from its share of available credits that were used to
offset insurance assessments that resulted in minimum quarterly insurance
premiums, approximately $17 per quarter. This assessment credit benefit was
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.
In May 2009, the FDIC issued a final rule which levied a special assessment
applicable to all FDIC insured depository institutions totaling 5 basis points
of each institution's total assets less Tier 1 capital as of June 30, 2009, not
to exceed 10 basis points of total deposits. This special assessment is part of
the FDIC's efforts to rebuild the Deposit Insurance Fund. As a result, deposit
insurance expense during the three and six months ended June 30, 2009 included a
$373 accrual related to this special assessment. Furthermore, the final rule
also allows the FDIC to impose additional special assessments for the third and
fourth quarters of 2009, if necessary. The Company cannot provide any assurance
as to the final amount or timing of any such special assessments, should such
special assessments occur, as these assessments would depend upon a variety of
factors which are beyond the Company's control.
Also contributing to overhead expense increase was salaries and employee
benefits, the Company's largest noninterest expense item, which increased $314,
or 9.3%, for the second quarter of 2009, and increased $585, or 8.6%, during the
first six months of 2009 as compared to the same periods 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 June 30, 2009 to 270 employees on staff
as compared to 263 employees at June 30, 2008.
Increases in the Company's other noninterest expenses were realized during 2009,
increasing $146, or 9.7%, during the second quarter of 2009 and increasing $424,
or 14.5%, during the first six months of 2009 as compared to the same periods in
2008. Leading the growth in this area was increases to the Company's
telecommunications costs, which increased $51, or 37.7%, during the second
quarter of 2009, and increased $157, or 58.8%, during the first six months` of
2009 as compared to the same periods 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 $65, or 46.4%, during the second quarter of 2009, and increased
$91, or 325.8%, during the first six months of 2009 as compared to the same
periods in 2008. This was due to the larger than normal volume of recovered
foreclosure costs that were collected during the first half of 2008.
27
Overhead expenses were also impacted by occupancy, furniture and equipment
costs, which increased $41, or 6.4%, during the second quarter of 2009 and
increased $108, or 8.6%, during the first six months of 2009 as compared to the
same periods 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 second quarter of 2009,
data processing expenses decreased $34, or 12.8%, and during the first six
months of 2009, data processing expenses decreased $72, or 13.6%, as compared to
the same periods in 2008. The decreases were 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 assessment rates and a special
assessment resulting in an additional charge of $373 has contributed to higher
overhead expense levels, which have outpaced revenue levels and have caused both
second quarter and year-to-date efficiency ratios to increase from prior
periods. The efficiency ratio during the second quarter of 2009 increased to
75.12% from the 62.88% experienced during the second quarter of 2008. The
efficiency ratio during the first half of 2009 increased to 68.79% from the
62.13% experienced during the first half of 2008.
Capital Resources
All of the Company's capital ratios exceeded the regulatory minimum guidelines
as identified in the following table:
Company Ratios Regulatory
6/30/09 12/31/08 Minimum
------- -------- ----------
Tier 1 risk-based capital 12.2% 12.2% 4.00%
Total risk-based capital ratio 13.5% 13.5% 8.00%
Leverage ratio 9.3% 9.7% 4.00%
Cash dividends paid of $1,593 during the first six months of 2009 represent a
3.2% 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 June 30, 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
$135,997 represented 16.5% of total assets at June 30, 2009. In addition, the
FHLB offers advances to the Bank which further enhances the Bank's
28
ability to meet liquidity demands. At June 30, 2009, the Bank could borrow an
additional $89,000 from the FHLB. Furthermore, the Bank has established a
borrowing line with the Federal Reserve. At June 30, 2009, this line totaled
$43,000. Lastly, the Bank also has the ability to purchase federal funds from
several of its correspondent banks. For further cash flow information, see the
condensed consolidated statement of cash flows contained in this Form 10-Q.
Management does not rely on any single source of liquidity and monitors the
level of liquidity based on many factors affecting the Company's financial
condition.
Off-Balance Sheet Arrangements
As discussed in Note 5 - Concentrations of Credit Risk and Financial Instruments
with Off-Balance Sheet Risk, the Company engages in certain off-balance sheet
credit-related activities, including commitments to extend credit and standby
letters of credit, which could require the Company to make cash payments in the
event that specified future events occur. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. While these commitments are
necessary to meet the financing needs of the Company's customers, many of these
commitments are expected to expire without being drawn upon. Therefore, the
total amount of commitments does not necessarily represent future cash
requirements.
Critical Accounting Policies
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes, provide
information on how significant assets and liabilities are valued in the
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
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$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 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,
30
which assumes a flat interest rate scenario. The base case scenario is compared
to rising and falling interest rate scenarios assuming a parallel shift in all
interest rates. Comparisons of net interest income and net income fluctuations
from the flat rate scenario illustrate the risks associated with the projected
balance sheet structure.
The Company's Asset/Liability Committee monitors and manages IRR within Board
approved policy limits. The current IRR policy limits anticipated changes in net
interest income to an instantaneous increase or decrease in market interest
rates over a 12 month horizon to +/- 5% for a 100 basis point rate 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:
June 30, 2009 December 31, 2008
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
------------------------ -------------------- --------------------
+300 .67% (5.74%)
+200 .22% (4.12%)
+100 (.21%) (2.30%)
-100 .65% 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 half 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 earning 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
SEC'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.
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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, 2009, 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 SEC 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 PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) The following table provides information regarding Ohio Valley's
repurchases of its common shares during the fiscal quarter ended
June 30, 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
--------------------- ------------- -------------- ---------------------- -------------------
April 1 - 30, 2009 ---- ---- ---- 175,000
May 1 - 31, 2009 ---- ---- ---- 175,000
June 1 - 30, 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.
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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 13, 2009
for the purpose of electing directors. Shareholders received proxy
materials containing the information required by this Item. Four
directors, Anna P. Barnitz, Roger D. Williams, Lannes C. Williamson
and Thomas E. Wiseman were nominated for reelection and were
reelected. Of the 3,983,009 shares outstanding, a summary of the
3,201,775 shares voted is as follows:
Broker
Director Candidate For Withheld Non-Votes
------------------ --------- -------- ---------
Anna P. Barnitz 3,198,368 3,407 ----
Roger D. Williams 3,197,364 4,411 ----
Lannes C. Williamson 3,197,364 4,411 ----
Thomas E. Wiseman 3,197,152 4,623 ----
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 7, 2009 By: /s/ Jeffrey E. Smith
-----------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: August 7, 2009 By: /s/ Scott W. Shockey
----------------------
Scott W. Shockey
Vice President and Chief Financial Officer
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EXHIBIT INDEX
The following exhibits are included in this Form 10-Q or are incorporated by
reference as noted in the following table:
Exhibit Number Exhibit Description
---------------------- -------------------------------------------------
3(a) Amended Articles of Incorporation of Ohio Valley
(reflects amendments through April 7,1999) [for
SEC reporting compliance only - - not filed with
the Ohio Secretary of State]. Incorporated herein
by reference to Exhibit 3(a) to Ohio Valley's
Annual Report on Form 10-K for fiscal year ended
December 31, 2007(SEC File No. 0-20914).
3(b) Code of Regulations of Ohio Valley. Incorporated
herein by reference to Exhibit 3(b) to Ohio
Valley's current report on Form 8-K (SEC File
No.0-20914) filed November 6, 1992.
4 Agreement to furnish instruments and agreements
defining rights of holders of long-term debt.
Filed herewith.
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal
Executive Officer).Filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal
Financial Officer). Filed herewith.
32 Section 1350 Certification (Principal Executive
Officer and Principal Financial Officer). Filed
herewith.
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