UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 30, 2002 Commission file number: 0-20914 Ohio Valley Banc Corp ---------------------- (Exact name of Registrant as specified in its charter) Ohio (State or other jurisdiction of incorporation or organization) 31-1359191 ---------- (I.R.S. Employer Identification Number) 420 Third Avenue. Gallipolis, Ohio 45631 ---------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 446-2631 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 the number of shares outstanding of the issuers classes of common stock, as of the latest practicable date. Common stock, $1.00 stated value Outstanding at July 31, 2002 3,456,249 common shares OHIO VALLEY BANC CORP FORM 10-Q QUARTER ENDED JUNE 30, 2002 ================================================================================ Part I - Financial Information Item 1 - Financial Statements (Unaudited) Interim financial information required by Regulation 210.10-01 of Regulation S-X is included in this Form 10Q as referenced below: Consolidated Balance Sheets..................................... 1 Consolidated Statements of Income............................... 2 Condensed Consolidated Statements of Changes in Shareholders' Equity......................................... 3 Condensed Consolidated Statements of Cash Flows................. 4 Notes to the Consolidated Financial Statements.................. 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10 Item 3 - Quantitative and Qualitative Disclosure About Market Risk......................................... 14 Part II - Other Information Other Information and Signatures................................ 15 Exhibit Index - 99.1 Certifications of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002....... 16 OHIO VALLEY BANC CORP CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands) ================================================================================ June 30, December 31, 2002 2001 ------------- ------------ ASSETS Cash and noninterest-bearing deposits with banks $ 16,444 $ 17,288 Federal funds sold 6,325 9,000 ------------- ------------ Total cash and cash equivalents 22,769 26,288 Interest-bearing balances with banks 1,492 1,264 Securities available-for-sale 57,859 61,559 Securities held-to-maturity (estimated fair value: 2002 - $15,979, 2001 - $14,421) 15,305 13,973 Total loans 544,795 508,660 Less: Allowance for loan losses (6,746) (6,251) ------------- ------------ Net loans 538,049 502,409 Premises and equipment, net 8,281 8,702 Accrued income receivable 3,434 3,420 Intangible assets, net 1,201 1,267 Bank owned life insurance 12,380 12,089 Other assets 4,451 4,028 ------------- ------------- Total assets $ 665,221 $ 634,999 ============= ============= LIABILITIES Noninterest-bearing deposits $ 57,929 $ 56,735 Interest-bearing deposits 422,991 399,126 ------------- ------------- Total deposits 480,920 455,861 Securities sold under agreements to repurchase 26,121 29,274 Other borrowed funds 88,788 90,856 Obligated mandatorily redeemable capital securities of subsidiary trust 13,500 5,000 Accrued liabilities 7,901 7,708 ------------- ------------- Total liabilities 617,230 588,699 ------------- ------------- SHAREHOLDERS' EQUITY Common stock ($1.00 stated value, 10,000,000 shares authorized; 2002 - 3,592,964 shares issued, 2001 - 3,579,250 shares issued) 3,593 3,579 Additional paid-in capital 29,524 29,207 Retained earnings 17,442 15,979 Accumulated other comprehensive income 1,101 1,043 Treasury stock at cost (2002 - 136,715 shares, 2001 - 129,990 shares) (3,669) (3,508) ------------- ------------- Total shareholders' equity 47,991 46,300 ------------- ------------- Total liabilities and shareholders' equity $ 665,221 $ 634,999 ============= ============= ================================================================================ See notes to the consolidated financial statements. 1 OHIO VALLEY BANC CORP CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data) ================================================================================ Three months ended Six months ended June 30, June 30, 2002 2001 2002 2001 --------- --------- --------- --------- Interest and dividend income: Loans, including fees $ 10,940 $ 10,727 $ 21,587 $ 21,116 Securities: Taxable 641 726 1,298 1,536 Tax exempt 185 192 361 385 Dividends 57 82 110 162 Other Interest 64 140 140 191 --------- --------- --------- --------- 11,887 11,867 23,496 23,390 Interest expense: Deposits 3,740 4,922 7,640 10,178 Repurchase agreements 111 153 195 328 Other borrowed funds 1,088 874 2,201 1,664 Obligated mandatorily redeemable capital securities of subsidiary trust 251 132 390 265 --------- --------- --------- --------- 5,190 6,081 10,426 12,435 --------- --------- --------- --------- Net interest income 6,697 5,786 13,070 10,955 Provision for loan losses 813 646 1,954 1,073 --------- --------- --------- --------- Net interest income after provision 5,884 5,140 11,116 9,882 Noninterest income: Service charges on deposit accounts 801 774 1,495 1,472 Trust fees 60 60 114 115 Income from bank owned insurance 168 146 340 284 Other 385 331 745 606 --------- --------- --------- --------- 1,414 1,311 2,694 2,477 Noninterest expense: Salaries and employee benefits 2,700 2,591 5,319 4,954 Occupancy expense 324 310 635 626 Furniture and equipment expense 271 266 534 539 Data processing expense 145 115 291 222 Other 1,970 1,572 3,404 2,892 --------- --------- --------- --------- 5,410 4,854 10,183 9,233 --------- --------- --------- --------- Income before income taxes 1,888 1,597 3,627 3,126 Provision for income taxes 535 443 1,022 865 --------- --------- --------- --------- NET INCOME $ 1,353 $ 1,154 $ 2,605 $ 2,261 ========= ========= ========= ========= Earnings per share $ 0.39 $ 0.33 $ 0.75 $ 0.65 ========= ========= ========= ========= ================================================================================ See notes to the consolidated financial statements. 2 OHIO VALLEY BANC CORP CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands, except per share data) ================================================================================ Three months ended Six months ended June 30, June 30, 2002 2001 2002 2001 --------- --------- --------- --------- Balance at beginning of period $ 47,015 $ 44,957 $ 46,300 $ 44,492 Comprehensive income: Net income 1,353 1,154 2,605 2,261 Net change in unrealized gain or loss on available-for-sale securities 372 25 58 411 --------- --------- --------- --------- Total comprehensive income 1,725 1,179 2,663 2,672 Proceeds from issuance of common stock through dividend reinvestment plan 331 Cash dividends (588) (555) (1,142) (1,078) Shares acquired for treasury (161) (155) (161) (660) --------- --------- --------- --------- Balance at end of period $ 47,991 $ 45,426 $ 47,991 $ 45,426 ========= ========= ========= ========= Cash dividends per share $ 0.17 $ 0.16 $ 0.33 $ 0.31 ========= ========= ========= ========= ================================================================================ See notes to the consolidated financial statements. 3 OHIO VALLEY BANC CORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands, except per share data) ================================================================================ Six months ended June 30, 2002 2001 ------------ ------------ Net cash provided by operating activities $ 4,558 $ 4,839 Investing activities Proceeds from maturities of securities available-for-sale 21,324 16,574 Purchases of securities available- for-sale (17,437) (5,331) Proceeds from maturities of securities held-to-maturity 421 911 Purchases of securities held-to-maturity (1,773) (811) Change in interest-bearing deposits in other banks (228) (136) Net increase in loans (37,594) (24,286) Purchases of premises and equipment (156) (364) Purchases of insurance contracts (530) ------------ ------------ Net cash used in investing activities (35,443) (13,973) Financing activities Change in deposits 25,059 (3,465) Cash dividends (1,142) (1,078) Proceeds from issuance of common stock 331 Purchases of treasury stock (161) (660) Change in securities sold under agreements to repurchase (3,153) 1,147 Proceeds from obligated mandatorily redeemable capital securities of subsidiary trust 8,500 Proceeds from long-term borrowings 4,040 26,077 Repayment of long-term borrowings (7,557) (7,117) Change in other short-term borrowings 1,449 (2,817) ------------ ------------ Net cash from financing activities 27,366 12,087 ------------ ------------ Change in cash and cash equivalents (3,519) 2,953 Cash and cash equivalents at beginning of year 26,288 14,569 ------------ ------------ Cash and cash equivalents at June 30, $ 22,769 $ 17,522 ============ ============ Cash paid for interest $ 11,455 $ 12,915 Cash paid for income taxes 1,415 1,365 ================================================================================ See notes to the consolidated financial statements. 4 OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp and its wholly owned subsidiaries The Ohio Valley Bank Company and Loan Central, Inc., together referred to as the Company. All material intercompany accounts and transactions have been eliminated in consolidation. These interim financial statements are prepared 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 Ohio Valley Banc Corp. at June 30, 2002, and its results of operations and cash flows for the periods presented. 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 for Ohio Valley Banc Corp for the year ended December 31, 2001, 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 and to general practices within the financial services industry. 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 disclosures 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 provision for income taxes is based upon the effective income tax rate expected to be applicable for the entire year. 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 is computed based on the weighted average shares outstanding during the period. Weighted average shares outstanding were 3,460,731 and 3,466,293 for the three months ending June 30, 2002 and June 30, 2001, respectively. Weighted average shares outstanding were 3,459,987 and 3,473,414 for the six months ending June 30, 2002 and June 30, 2001, respectively. The majority of the Company's income is derived from commercial and retail business lending activities. Management considers the Company to operate in one segment, banking. In June 2001, the Financial Accounting Standings Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations". SFAS No. 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of this statement apply to all business combinations initiated after June 30, 2001. The adoption of this statement will only impact the Company's financial statements if it enters into a business combination. ================================================================================ (Continued) 5 OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of this statement, goodwill arising from business combinations is no longer amortized, but rather is assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other identified intangible assets, such as core deposit intangible assets, continue to be amortized over their estimated useful lives. The Company adopted this statement on January 1, 2002, and did not materially impact its financial statements. NOTE 2 - SECURITIES The amortized cost, gross unrealized gains and losses and estimated fair values of the securities, as presented in the consolidated balance sheet are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Values June 30, 2002 ---------- ----------- ------------ --------- Securities Available-for-Sale - ----------------------------- U.S. Government agency securities $ 49,792 $ 1,616 $ 51,408 Mortgage-backed securities 1,513 52 1,565 Equity securities 4,886 4,886 ---------- ----------- ------------ --------- Total securities $ 56,191 $ 1,668 $ 0 $ 57,859 ========== =========== ============ ========= Securities Held-to-Maturity - --------------------------- Obligations of state and political subdivisions $ 15,123 $ 739 $ (57) $ 15,805 Mortgage-backed securities 182 (8) 174 ---------- ----------- ------------ --------- Total securities $ 15,305 $ 739 $ (65) $ 15,979 ========== =========== ============ ========= December 31, 2001 Securities Available-for-Sale - ----------------------------- U.S. Treasury securities $ 1,990 $ 3 $ 1,993 U.S. Government agency securities 51,494 1,578 $ (16) 53,056 Mortgage-backed securities 1,719 15 1,734 Equity securities 4,776 4,776 ----------- ------------ ------------ --------- Total securities $ 59,979 $ 1,596 $ (16) $ 61,559 =========== ============ ============ ========= Securities Held-to-Maturity - --------------------------- Obligations of state and political subdivisions $ 13,765 $ 481 $ (25) $ 14,221 Mortgage-backed securities 208 (8) 200 ----------- ------------ ------------ --------- Total securities $ 13,973 $ 481 $ (33) $ 14,421 =========== ============ ============ ========= ================================================================================ (Continued) 6 OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 2 - SECURITIES (Continued) The amortized cost and estimated fair value of debt securities at June 30, 2002, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities. Available-for-Sale Held-to-Maturity -------------------------- -------------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ------------ ----------- ----------- ----------- Debt securities: Due in one year or less $ 14,893 $ 15,031 $ 1,875 $ 1,908 Due in one to five years 34,899 36,377 4,666 4,952 Due in five to ten years 5,335 5,656 Due after ten years 3,247 3,289 Mortgage-backed sec. 1,513 1,565 182 174 ------------ ----------- ----------- ----------- Total debt securities $ 51,305 $ 52,973 $ 15,305 $ 15,979 ============ =========== =========== =========== Gains and losses on the sale of securities are determined using the specific identification method, however there were no sales of debt and equity securities during the first six months of 2002 and 2001. NOTE 3 - LOANS Total loans as presented on the balance sheet are comprised of the following classifications: June 30, December 31, 2002 2001 ---------------- ---------------- Real estate loans $ 229,962 $ 226,212 Commercial and industrial loans 191,934 173,154 Consumer loans 122,314 108,437 Other loans 585 857 ---------------- ---------------- $ 544,795 $ 508,660 ================ ================ At June 30, 2002 and December 31, 2001, loans on nonaccrual status were approximately $3,832 and $3,297, respectively. Loans past due more than 90 days and still accruing at June 30, 2002 and December 31, 2001 were $1,448 and $3,013, respectively. ================================================================================ (Continued) 7 OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 4 - ALLOWANCE FOR LOAN LOSSES A summary of activity in the allowance for loan losses for the six months ended June 30 is as follows: 2002 2001 ---------------- ---------------- Balance - January 1, $ 6,251 $ 5,385 Loans charged off: Real estate 289 90 Commercial 326 15 Consumer 1,422 970 ------------------ ----------------- Total loans charged off 2,037 1,075 Recoveries of loans: Real estate 106 9 Commercial 133 16 Consumer 339 263 ------------------ ----------------- Total recoveries 578 288 ------------------ ----------------- Net loan charge-offs (1,459) (787) Provision charged to operations 1,954 1,073 ------------------ ----------------- Balance - June 30, $ 6,746 $ 5,671 ================== ================= Information regarding impaired loans is as follows: June 30, December 31, 2002 2001 -------------- --------------- Balance of impaired loans $ 1,357 $ 960 ============== =============== Portion of impaired loan balance for which an allowance for credit losses is allocated $ 1,357 $ 960 ============== =============== Portion of allowance for loan losses allocated to the impaired loan balance $ 750 $ 300 ============== =============== Average investment in impaired loans year-to-date $ 1,340 $ 1,013 ============== =============== Interest on impaired loans was not material for the periods ended June 30, 2002 and June 30, 2001. All impaired loan balances were also included as part of the Company's nonperforming loans at June 30, 2002. ================================================================================ (Continued) 8 OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company, through its subsidiaries, grants residential, consumer, and commercial loans to customers located primarily in the central and southeastern areas of Ohio as well as the western counties of West Virginia. Approximately 4.21% of total loans were unsecured at June 30, 2002 as compared to 4.81% at December 31, 2001. The Corporation is a party to financial instruments with off-balance sheet risk. These instruments are required in the normal course of business to meet the financial needs of its customers. The contract or notional amounts of these instruments are not included in the consolidated financial statements. At June 30, 2002, the contract or notional amounts of these instruments, which primarily include commitments to extend credit and standby letters of credit and financial guarantees, totaled approximately $71,276 as compared to $64,312 at December 31, 2001. NOTE 6 - OTHER BORROWED FUNDS Other borrowed funds at June 30, 2002 and December 31, 2001 are comprised of advances from the Federal Home Loan Bank (FHLB), promissory notes and Federal Reserve Bank Notes. FHLB borrowings Promissory notes FRB Notes Totals --------------- ---------------- --------- ---------- 2002 $ 78,047 $ 5,944 $ 4,797 $ 88,788 2001 $ 81,564 $ 3,792 $ 5,500 $ 90,856 Pursuant to collateral agreements with the FHLB, advances are secured by certain qualifying first mortgage loans and by FHLB stock which total $117,070 and $4,886 at June 30, 2002. Fixed rate FHLB advances mature through 2010 and have interest rates ranging from 3.87% to 6.62%. Promissory notes, issued primarily by the parent company, have fixed rates of 2.35% to 7.00% and are due at various dates through a final maturity date of December 26, 2003. At June 30, 2002, scheduled principal payments over the next five years are to be: FHLB borrowings Promissory notes FRB Notes Totals --------------- ---------------- --------- ---------- 2002 $ 5,723 $ 2,805 $ 4,797 $ 13,325 2003 13,932 3,139 17,071 2004 16,487 16,487 2005 13,115 13,115 2006 14,606 14,606 Thereafter 14,184 14,184 ---------------- ---------------- ---------- ---------- $ 78,047 $ 5,944 $ 4,797 $ 88,788 ================ ================ ========== ========== Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $31,750 at June 30, 2002 and $29,000 at December 31, 2001. Various investment securities from the Bank used to collateralize FRB notes totaled $5,970 at June 30, 2002 and $5,970 at December 31, 2001. NOTE 7 - TRUST PREFERRED SECURITIES Obligated mandatorily redeemable capital securities of a subsidiary trust (Trust Preferred Securities) of $8,500 were issued on March 26, 2002, and have a current variable rate of 5.47%, that adjusts quarterly, and a mandatory redemption date of March 26, 2032. However, beginning March 26, 2007, the Company may, at its option, redeem all or a portion of these trust preferred securities. Total trust preferred securities were unsecured through June 30, 2002. ================================================================================ 9 OHIO VALLEY BANC CORP (dollars in thousands, except per share data) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. INTRODUCTION The following discussion focuses on the consolidated financial condition of Ohio Valley Banc Corp at June 30, 2002, compared to December 31, 2001, and the consolidated results of operations for the quarterly and year-to-date periods ending June 30, 2002, compared to the same periods in 2001. 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. The Registrant is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on the liquidity, capital resources or operations except as discussed herein. Also, the Registrant is not aware of any current recommendations by regulatory authorities which would have such effect if implemented. FINANCIAL CONDITION The consolidated total assets of Ohio Valley Banc Corp. increased $30,222 or 4.8% during the first six months to reach $665,221 at June 30, 2002. The factor contributing most to this growth in assets was loans which grew $36,135 or 7.1%. The Company experienced strong loan growth during the second quarter which contributed to 75% of the year-to-date loan increase. This strong growth in loans was funded primarily by deposits which increased $25,059 or 5.5% and the Company's newest trust preferred security issuance which totaled $8,500. Furthermore, loans were funded by continued maturities of various U.S. treasury and government agency securities which led to a total investment decrease of $2,368 or 3.1%. The demand for these types of investment securities are decreasing due to the decline in yield on reinvestment opportunities. During the first six months of 2002, loan growth was led by commercial loans expanding $18,780 or 10.8%. This growth came mostly from loan originations within the primary market areas of Gallia, Jackson, Pike and Franklin counties in Ohio which accounted for 67% of the total increase. In addition, approximately 21% of commercial loan originations came from the growing West Virginia market areas. For the same period, consumer loans increased $13,877 or 12.8%. Approximately 83% of this increase occurred within indirect loans, particularly automobiles, where management has been more aggressive in its pricing of these products. Furthermore, real estate mortgages grew $3,750 or 1.7%, with the largest portion of growth occurring within the West Virginia market areas of Mason and Cabell county. During the first six months of 2002, management has continued to emphasize improving asset quality by driving down nonperforming loans. This emphasis has prompted a $672 increase in net charge offs, occurring mostly in the first quarter, which consisted primarily of installment and commercial nonperforming loans. As a result, the Company's nonperforming loans as a percent of total loans declined to .97% at June 30, 2002 as compared to 1.24% at year end 2001. The allowance for loan losses was 1.24% of total loans at June 30, 2002, up from 1.23% at year end 2001. Even though nonperforming loans have declined, management has maintained the allowance for loan losses based on Page 10 a general decline in economic conditions and is comfortable that it is adequate to absorb probable losses in the loan portfolio. Total deposit growth during the first half of 2002 was primarily in time deposits which increased $13,614 or 5.1%. This growth was partially driven by increases in the Company's brokered certificates of deposit which totaled $5,197 through June 30, 2002. To accompany time deposit growth, the Company also had strong growth in savings and interest-bearing demand deposits which increased $10,251 or 7.7%. This growth, primarily in the Company's public fund NOW and Gold Club accounts, is related to the changing interest rate environment which has influenced customers to maintain their funds in more short-term, highly liquid products such as the Bank's NOW transaction account. In addition, non-interest bearing demand deposits have increased $1,194 or 2.1% during the same period. Management has utilized the total deposit growth to help fund the growth in loans and to reduce securities sold under agreements to repurchase. Other borrowed funds are primarily advances from the Federal Home Loan Bank, which are used to fund loan growth or short-term liquidity needs. Other borrowed funds are down $2,068 or 2.3% from December 31, 2001, as management has shifted its focus back to funding loan growth through its traditional retail sources of funds in certificates of deposit since the cost of these retail sources has declined significantly. The decrease in other borrowed funds occurred primarily in overnight borrowings. Additionally, securities sold under agreements to repurchase are down $3,153 from December 31, 2001. Furthermore, on March 26, 2002, the Company completed the issuance of $8,500 of trust preferred securities. The proceeds from this issuance have been used to enhance the Company's risk-based capital adequacy levels as well as support the growth of additional earning assets, particularly the second quarter growth in loans. Total shareholders' equity at June 30, 2002 of $47,991 was up by $1,691 as compared to the balance of $46,300 on December 31, 2001. Contributing most to this increase was year-to-date income of $2,605 and proceeds from the issuance of common stock through the dividend reinvestment plan of $331 less cash dividends paid of $1,142, or $.17 per share for the most recent quarter end. The cash dividend represents 43.8% of the year-to-date income. Management has had limited activity within the Company's stock repurchase program during the first half of 2002. RESULTS OF OPERATIONS Ohio Valley Banc Corp's net income was $1,353 for the second quarter and $2,605 for the first six months of 2002, up by 17.2% and 15.2% compared to $1,154 and $2,261 for the same periods in 2001. Comparing year-to-date June 30, 2002 to June 30, 2001, return on assets increased from .80% to .81% and return on equity increased from 10.19% to 11.20%. Second quarter earnings per share was $.39 per share, up 18.2% over last year's $.33 per share. During the first six months of 2002, earnings per share was $.75 per share, up 15.4% from last year's $.65 per share. The primary contributor to the gain in net income was strong net interest income growth which exceeded the second quarter and year-to-date of last year by $911 and $2,115. The second quarter and year-to-date increases to net interest income of 15.7% and 19.3% were primarily due to the declines in total interest expense of $891 or 14.7% and $2,009 or 16.2% versus relatively no Page 11 change in total interest income due to strong loan growth. Earning assets, driven by loans, increased $31,320 from December 31, 2001 and represented 94.1% of total assets as compared to 93.6% at year end 2001. The declines in interest expense were largely impacted by a 134 basis point decline in the Bank's average funding costs due to the current interest rate environment. As a result, the Company's net interest margin improved to 4.40% for the first half of 2002 from 4.23% the prior year. For additional discussion on the Company's rate sensitivity assets and liabilities, please see Item 3, Quantitative and Qualitative Disclosure About Market Risk on page 14. The increases in net interest income for the second quarter and year-to-date periods of 2002 were partially offset by increases to provision expense of $167 and $881 for the same periods as compared to 2001. These increases to provision expense were in large part from the significant increase in net charge-offs, particularly in the first quarter, which helped to enhance asset quality and lower the credit risks associated with the Company's loan portfolio. The increases in net interest income after provision for the second quarter and year-to-date periods of 2002 were partially offset by increases in net noninterest expense of $453 or 12.8% and $733 or 10.8% for the same periods as compared to 2001. Total noninterest income increased $103 or 7.9% for the second quarter and $217 or 8.8% for the first six months in 2002 as compared to the same periods in 2001. Contributing most to this gain was earnings from bank owned life insurance contracts, service charge income due to growth in transaction account volume and loan service fees. Total noninterest expense increased $556 or 11.5% and $950 or 10.2% for the second quarter and year-to-date periods of 2002 as compared to the same periods in 2001. Contributing most to this increase was increases to other noninterest expense of $398 and $512 for the second quarter and year-to-date periods of 2002 as compared to the same periods in 2001. Impacting other noninterest expense was a one time net charge off of $464 related to fraudulent check kiting activity in the second quarter of 2002. Management is actively seeking recoveries related to this charge off. Additionally, salaries and employee benefits, the Company's largest noninterest expense item, were up $109 over the second quarter of 2001 and $365 over the first six months of 2001. These increases are related to annual merit increases, incentive-based compensation and the continuing rise in the cost of medical insurance. Furthermore, increases in data processing, loan acquisition costs and general increases in overhead costs were recognized during the same periods as compared to 2001. CAPITAL RESOURCES All of the capital ratio's exceeded the regulatory minimum guidelines as identified in the following table: Company Ratios Regulatory June 30, 2002 December 31, 2001 Minimum ------------- ----------------- ----------- Tier 1 risk-based capital 10.6% 9.5% 4.00% Total risk-based capital ratio 11.8% 10.7% 8.00% Leverage ratio 9.0% 7.9% 4.00% Cash dividends paid of $1,142 for the first six months of 2002 represents a 5.9% increase over the cash dividends paid during the same period in 2001. The increase in cash dividends paid is largely due to the increase in the dividend rate paid per share. At June 30, 2002, approximately 73% of the shareholders Page 12 were enrolled in the dividend reinvestment plan. As part of the Company's stock repurchase program, management has continued to utilize reinvested dividends and voluntary cash to purchase shares on the open market to be redistributed through the dividend reinvestment plan. LIQUIDITY Liquidity relates to the Bank'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 banks, held-to-maturity securities maturing within one year and securities available-for-sale of $83,995 represented 12.6% of total assets at June 30, 2002. In addition, the Federal Home Loan Bank in Cincinnati offers advances to the Bank which further enhances the Bank's ability to meet liquidity demands. At June 30, 2002, the Bank could borrow an additional $47 million from the Federal Home Loan Bank. The Company experienced a decrease of $3,519 in cash and cash equivalents for the six months ended June 30, 2002. See the condensed consolidated statement of cash flows on page 4 for further cash flow information. CONCENTRATION OF CREDIT RISK The Company maintains a diversified credit portfolio, with real estate loans 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. 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, that could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to: changes in political, economic or other factors such as inflation rates, recessionary or expansive trends, and taxes; competitive pressures; fluctuations in interest rates; the level of defaults and prepayment on loans made by the Company; unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. 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, whether as a result of new information, unanticipated future events or otherwise. Page 13 OHIO VALLEY BANC CORP. MATURITY ANALYSIS (dollars in thousands) Item 3. Quantitative and Qualitative Disclosure About Market Risk As of June 30, 2002 Principal Amount Maturing in: There- Fair Value 2002 2003 2004 2005 2006 after Total 06/30/02 Rate-Sensitive Assets: Fixed interest rate loans $ 6,513 $ 9,049 $ 13,953 $ 21,548 $ 25,206 $281,271 $357,540 $362,010 Average interest rate 9.84% 11.13% 10.68% 9.79% 8.73% 7.90% 8.29% Variable interest rate loans $ 29,732 $ 19,353 $ 3,131 $ 4,663 $ 6,234 $124,142 $187,255 $189,034 Average interest rate 6.51% 5.88% 6.03% 6.38% 6.85% 6.82% 6.65% Fixed interest rate securities $ 8,416 $ 13,139 $ 16,376 $ 14,905 $ 1,500 $ 17,160 $ 71,496 $ 73,838 Average interest rate 5.60% 4.64% 5.48% 6.00% 5.83% 6.22% 5.63% Federal funds sold $ 6,325 $ 6,325 $ 6,325 Average interest rate 1.69% 1.69% Other interest-bearing assets $ 1,492 $ 1,492 $ 1,492 Average interest rate 1.29% 1.29% Total Rate-Sensitive Assets $ 52,478 $41,541 $ 33,460 $ 41,116 $ 32,940 $422,573 $624,108 $632,699 Average interest rate 6.05% 6.63% 7.70% 8.03% 8.24% 7.51% 7.41% Rate-Sensitive Liabilities: Noninterest-bearing checking $ 7,878 $ 6,807 $ 5,881 $ 5,081 $ 4,390 $ 27,892 $ 57,929 $ 57,929 Savings & Interest-bearing checking $ 22,731 $ 19,043 $ 15,966 $ 13,396 $ 11,248 $ 60,300 $142,684 $142,684 Average interest rate 1.84% 1.85% 1.86% 1.87% 1.88% 1.93% 1.89% Time deposits $ 93,582 $115,743 $ 43,621 $ 13,978 $ 9,786 $ 3,597 $280,307 $285,632 Average interest rate 4.04% 4.18% 4.32% 5.00% 4.91% 5.85% 4.24% Fixed interest rate borrowings $ 8,528 $ 17,072 $ 16,487 $ 13,114 $ 14,606 $ 19,184 $ 88,991 $ 91,749 Average interest rate 4.82% 5.19% 5.01% 5.09% 5.22% 6.89% 5.48% Variable interest rate borrowings $ 39,418 $ 39,418 $ 39,418 Average interest rate 2.53% 2.53% Total Rate-Sensitive Liabilities $172,137 $158,665 $ 81,955 $ 45,569 $ 40,030 $110,973 $609,329 $617,412 Average interest rate 3.26% 3.83% 3.67% 3.55% 3.63% 2.43% 3.36% As of December 31, 2001 Principal Amount Maturing in: There- Fair Value 2002 2003 2004 2005 2006 after Total 12/31/01 Total Rate-Sensitive Assets $ 97,688 $ 17,119 $ 31,670 $ 40,920 $ 30,418 $370,285 $588,100 $595,178 Average interest rate 5.70 9.20% 8.82% 8.59% 8.26% 7.74% 7.59% Total Rate-Sensitive Liabilities $241,620 $102,787 $ 58,432 $ 40,300 $ 33,796 $104,056 $580,991 $586,897 Average interest rate 4.13% 4.17% 3.69% 3.57% 3.53% 2.46% 3.72% (Continued) 14 MATURITY ANALYSIS ================================================================================ Item 3. Quantitative and Qualitative Disclosure About Market Risk (continued) The Company's one year cumulative gap is liability sensitive, which would benefit the Company in a declining rate environment. Based on low interest rates, management has taken steps to guard against rising interest rates. Management has been offering fixed rate mortgage loans to be sold on the secondary market. Historically, the Company originated all mortgage loans to be held in its own portfolio. Furthermore, management has extended the average maturity of its funding sources by offering longer term certificates of deposit and borrowing wholesale funds for longer time periods. The result of the above strategies that were implemented starting last year is less exposure to interest rate risk. Part II - Other Information Item 1 - Legal Proceedings - -------------------------- None Item 2 - Changes in Securities - ------------------------------ None Item 3 - Defaults Upon Senior Securities - ---------------------------------------- None Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ Ohio Valley Banc Corp held its Annual Meeting of Shareholders on April 10, 2002, for the purpose of electing directors. Shareholders received proxy materials containing the information required by this item. Three directors, Phil A. Bowman, W. Lowell Call and James L. Dailey were nominated for reelection and were reelected. The summary of voting of the 2,812,154 shares outstanding were as follows: Director Candidate Shares voted: For Against Abstain - ------------------ --- ------- ------- Phil A. Bowman 2,808,906 3,248 W. Lowell Call 2,806,833 5,321 James L. Dailey 2,807,263 4,891 Directors with terms expiring in 2003 are Merrill L. Evans, Lannes C. Williamson and Thomas E. Wiseman. Directors with terms expiring in 2004 are Steven B. Chapman, Robert H. Eastman and Jeffrey E. Smith. Item 5 - Other Information - -------------------------- None Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- B. The Company filed a report on Form 8-K dated April 11, 2002 related to the issuance of a news release announcing its earnings for the first quarter period ending March 31, 2002. OHIO VALLEY BANC CORP --------------------- Date August 14, 2002 /s/ Jeffrey E. Smith --------------- --------------------- Jeffrey E. Smith President and Chief Executive Officer Date August 14, 2002 /s/ Larry E. Miller, II --------------- ------------------------ Larry E. Miller, II Senior Vice President and Treasurer ================================================================================ 15 EXHIBIT INDEX ------------- EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Ohio Valley Banc Corp. (the "Company") on Form 10-Q for the quarterly period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey E. Smith, President and Chief Executive Officer of the Company, certify, pursuant to Title 18, United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1924; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date August 14, 2002 /s/ Jeffrey E. Smith ------------------- ----------------------- Jeffrey E. Smith President and Chief Executive Officer In connection with the Quarterly Report of Ohio Valley Banc Corp. (the "Company") on Form 10-Q for the quarterly period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Larry E. Miller, II, Senior Vice President and Treasurer of the Company, certify, pursuant to Title 18, United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1924; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date August 14, 2002 /s/ Larry E. Miller, II ------------------- ------------------------ Larry E. Miller, II Senior Vice President and Treasurer Page 16