MESSAGE FROM MANAGEMENT
by CEO/President Jeff Smith & Chairman Jim Dailey
Dear Shareholders,
With business often moving at the speed of light, do we take enough time with
the details?
The 2002 passage of the SEC's Sarbanes-Oxley Act ordered executives and
directors to take time to earnestly look at the ethical standards of the
companies they represent. At OVBC there was no regrouping, no compliance rush,
and no "cleaning house". Many requirements handed down by Sarbanes-Oxley were
put in place more than a decade ago when Ohio Valley Banc Corp was formed.
Those familiar with banking have heard the terms "truth in lending" and "truth
in savings", the business world is finally catching on to what banks have always
known. They are effectively establishing their own rules for "truth in
business". Honesty is and has always been the foundation of our business. How
can a bank, finance, or insurance company operate without honesty and trust
between the customers and management? After all, our customers trust us everyday
with their life savings, their most valuable possessions, and even their homes.
We are extremely proud of the 268 trustworthy employees whom produced more than
$5.6 million in net income and increased your earnings per share by 16%. We are
encouraged by the prospects of 2003 as we make plans to introduce new products
and improve facilities. We are also encouraged by your continued support;
demonstrated by an impressive 98 new dividend reinvestment enrollments during
2002. At a time when many other companies' stockholders questioned their
holdings, OVBC's reinvested more than $ 1 million through the Dividend
Reinvestment and Stock Purchase plan.
During 2002 we not only took the time to look into the details of your company's
performance and ethical standards, but regrettably, we had to take time to say
goodbye to a great man. An affable leader, a keen businessman, and a loyal
friend...Ohio Valley Bank lost all of these in November of 2002 with the passing
of Morris Haskins. Haskins served OVB for over 60 years. During his presidency,
he could most often be spotted in the lobby shaking the hands of the "most
important people in the world, his customers". Morris will be greatly missed by
his OVB family and community.
Please take some time to enjoy this year's Annual Meeting. We hope to see you
there.
Sincerely,
Jeffrey E. Smith
President and CEO
James L. Dailey
Chairman of the Board
OVB History
On September 24, 1872, the organizational meeting of the bank was called. Rooms
on Second Avenue in Gallipolis, Ohio were acquired by the organization and on
the first of November, 1872, the bank was opened in those rooms.
The Ohio Valley Bank had expanded its business to such a degree that it quickly
outgrew these rooms. A new building was constructed in 1896 on the corner of
Second Avenue and State Street in Gallipolis. At the time it was the tallest
building in Gallipolis. This building was continually remodeled until the
construction of the Bank's present Main Office in 1961. This modern banking
facility boasted the first drive-thru windows and free customer parking in
Gallia County.
Ohio Valley Bank's first branch opened in 1970 with the completion of an office
in Rio Grande, Ohio, adjacent to the University of Rio Grande campus. Gallia
County's very first ATM was installed at the Mini Bank in 1979.
The bank's first venture into banking outside the county line took place in
1991. Ohio Valley Bank acquired Civic Federal Savings Banks in Gallipolis,
Jackson and Waverly, Ohio. Shortly after, the Ohio Valley Banc Corp commenced
operation as a one-bank holding company, with Ohio Valley Bank Company being a
wholly-owned subsidiary.
A regional revolution in banking hours occurred with the opening of the OVB
SuperBank in late 1996. This first SuperBank, located just inside Foodland, a
downtown Gallipolis grocery, was the first to be open until eight each evening
and stay open on Saturday and Sunday. Once again, Ohio Valley Bank brought a
first to its community.
Banking laws changed in 1997, permitting the state-chartered bank to have full
service banks in West Virginia. The Bank, which already operated a loan
origination office in Point Pleasant, West Virginia was already in position to
make yet another mark in history. Ohio Valley Bank established the first
interstate bank between Ohio and West Virginia.
Ohio Valley Bank went online on June 1, 2000, with www.ovbc.com. The year of
2001 was a year of strategy and planning at the Bank. However, even the wisest,
most experienced banker could not predict what was to come. The terrorist act of
September 11, 2001, was felt by the entire nation. For the first time in the
company's history, its directors approved a special "Freedom Dividend" to be
given to shareholders. Through the "Freedom Dividend" over half a million
dollars was reinvested in OVBC's shareholders.
During 2002 Ohio Valley Bank's Website, www.ovbc.com, received a Standard of
Excellence Award during the Web Marketing Association's 2002 WebAwards. OVBC
also received a major award in 2002. Ohio Valley Banc Corp was again named as
one of the Cleveland Plain Dealer 100, a listing of Ohio's top performing
companies. OVBC and its subsidiaries remain strong. On September 16, just a
little over a year after the 9-11 tragedy, Loan Central opened a new office in
Wheelersburg, Ohio.
INVESTOR INFORMATION
VITAL STATISTICS
> Record earnings for 10 consecutive years
> Earnings per share for 2002 represented an increase of 16.3% over last year.
> Approximately $696 million in assets
BUSINESS PROFILE
Ohio Valley Banc Corp commenced operations on October 23, 1992, as a one-bank
holding company with The Ohio Valley Bank Company being the wholly-owned
subsidiary. The Company's headquarters are located at 420 Third Avenue in
Gallipolis, Ohio.
The Ohio Valley Bank Company was organized on September 24, 1872. The Bank is
insured under the Federal Deposit Insurance Act and is chartered under the
banking laws of the State of Ohio. The company currently operates seventeen
offices in Ohio and West Virginia.
In April 1996, the Banc Corp opened a consumer finance company operating under
the name of Loan Central, Inc. with five offices in Ohio.
Ohio Valley Financial Services, an agency specializing in life insurance, was
formed as a subsidiary of the Corp in June 2000.
The Company also has minority holdings in ProFinance and a title insurance
agency, BSG Title Services.
FORM 10-K
A copy of the company's annual report on Form 10-K, as filed with the Securities
and Exchange Commission, will be forwarded without charge to any stockholder
upon written request to: Ohio Valley Banc Corp,Attention: E. Richard Mahan,
Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and proxy
statement are also available on the company's Web portal, www.ovbc.com.
STOCK LISTING
Ohio Valley Banc Corp stock is traded on The Nasdaq Stock Market under the
symbol OVBC.
HEADQUARTERS
Ohio Valley Banc Corp
420 Third Avenue
P.O. Box 240
Gallipolis, Ohio 45631
740.446.2631 or 800.468.6682
Web: www.ovbc.com E-mail: investorrelations@ovbc.com
FINANCIAL HIGHLIGHTS
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
NET INCOME ($000) $ 5,675 $ 4,895 $ 4,400 $ 4,292 $ 4,130
TOTAL ASSETS ($000) $696,356 $634,999 $561,658 $522,057 $447,448
INCOME PER SHARE $ 1.64 $ 1.41 $ 1.25 $ 1.22 $ 1.18
DIVIDENDS PER SHARE $ .67 $ .79* $ .59 $ .53 $ .44
* Reflects extra "Freedom Dividend" of $ .16
DIRECTOR & OFFICER LISTING
Ohio Valley Banc Corp Directors
- -------------------------------
James L. Dailey
Jeffrey E. Smith
Merrill L. Evans
Robert H. Eastman
W. Lowell Call
Thomas E. Wiseman
Phil A. Bowman
Lannes C. Williamson
Steven B. Chapman
Ohio Valley Banc Corp Officers
- ------------------------------
Jeffrey E. Smith
James L. Dailey
E. Richard Mahan
Larry E. Miller, II
Katrinka V. Hart
Sue Ann Bostic
Mario P. Liberatore
Cherie A. Barr
Harold A. Howe
Sandra L. Edwards
David L. Shaffer
Scott W. Shockey
Cindy H. Johnston
Paula W. Salisbury
Ohio Valley Bank Company Directors
- ----------------------------------
James L. Dailey
Jeffrey E. Smith
Merrill L. Evans
Robert H. Eastman
W. Lowell Call
Thomas E. Wiseman
Phil A. Bowman
Lannes C. Williamson
Harold A. Howe
Steven B. Chapman
Wendell B. Thomas
Anna P. Barnitz
Barney A. Molnar
Brent A. Saunders
*Directors Emeritus*
Keith R. Brandeberry
Art E. Hartley, Sr.
Charles C. Lanham
C. Leon Saunders
Warren F. Sheets
West Virginia Advisory Board
- ----------------------------
Lannes C. Williamson
Anna P. Barnitz
Mario P. Liberatore
Charles C. Lanham
Richard L. Handley
Gregory K. Hartley
Trenton M. Stover
R. Raymond Yauger
John C. Musgrave
Ohio Valley Bank Officers
- -------------------------
Jeffrey E. Smith President & Chief Executive Officer
James L. Dailey Chairman of the Board
E. Richard Mahan Executive Vice President & Secretary
Larry E. Miller, II Executive Vice President & Treasurer
Katrinka V. Hart Senior Vice President, Retail Bank Group, and Risk
Management Officer
Sue Ann Bostic Senior Vice President, Administrative Services Group
Mario P. Liberatore Senior Vice President, West Virginia Bank Group
Sandra L. Edwards Senior Vice President, Financial Bank Group
David L. Shaffer Senior Vice President, Commercial Bank Group
Patricia L. Davis Vice President, Research & Technical Applications
Richard D. Scott Vice President, Trust
Tom R. Shepherd Vice President, Director of Marketing, Product Management
& Retail Development
Bryan W. Martin Vice President, Facilities & Technical Services
Hugh H. Graham, Jr. Vice President, SuperBank Division
Patrick H. Tackett Vice President, Western Division Branch Administrator
Jennifer L. Osborne Vice President, Retail Lending
Molly K. Tarbett Vice President, Retail Deposits & Loss Prevention Manager
Scott W. Shockey Vice President and Chief Financial Officer
Robert T. Hennesy Assistant VP, Indirect Lending Manager
Philip E. Miller Assistant VP, Region Manager Franklin County
Rick A. Swain Assistant VP, Region Manager Pike County
Timothy V. Stevens Assistant VP, Region Manager Cabell County
Judy K. Hall Assistant VP, Training and Educational Development
Melissa P. Mason Assistant VP, Trust Officer
Diana L. Parks Assistant VP, Internal Auditor
Christopher S. Petro Assistant VP and Comptroller
Linda L. Plymale Assistant VP, Transit Officer
Kimberly R. Williams Assistant VP, Systems Officer
Bryan F. Stepp Assistant VP, Business Development
Deborah A. Carhart Assistant VP, Shareholder Relations
Brenda G. Henson Assistant Cashier, Manager Customer Service
Kyla R. Carpenter Assistant Cashier and Marketing Officer
Richard P. Speirs Assistant Cashier, Maintenance Technical Supervisor
Stephanie L. Stover Assistant Cashier, Retail Lending Operations Manager
Marilyn E. Kearns Assistant Cashier, Director of Human Resources
Bryna S. Butler Assistant Cashier for Corporate Communications
Raymond G. Polcyn Assistant Cashier, Region Manager Gallia/Meigs/Jackson
SuperBank Offices
Gregory A. Phillips Assistant Cashier, Indirect Lending Assistant
Pamela D. Edwards Assistant Cashier, Commercial Loan Operations
Cindy H. Johnston Assistant Secretary
Paula W. Salisbury Assistant Secretary
Loan Central Officers
- ---------------------
Jeffrey E. Smith Chairman of the Board
Cherie A. Barr President
Timothy R. Brumfield Secretary & Manager, Gallipolis Office
Renae L. Hughes Manager, Jackson Office
Joseph I. Jones Manager, Waverly Office
T. Joe Wilson Manager, South Point Office
John J. Holtzapfel Manager, Wheelersburg Office
SELECTED FINANCIAL DATA
Years Ended December 31
SUMMARY OF OPERATIONS: 2002 2001 2000 1999 1998
(dollars in thousands, except per share data)
Total interest income $ 47,771 $ 47,585 $ 45,195 $ 40,006 $ 35,191
Total interest expense 20,810 24,235 24,065 18,837 15,691
Net interest income 26,961 23,350 21,130 21,169 19,500
Provision for loan losses 5,470 3,503 1,890 2,303 2,295
Total other income 5,634 5,129 3,858 3,132 2,760
Total other expenses 19,175 18,171 16,978 16,060 14,201
Income before income taxes 7,950 6,805 6,120 5,938 5,764
Income taxes 2,275 1,910 1,720 1,646 1,634
Net income 5,675 4,895 4,400 4,292 4,130
PER SHARE DATA (1):
Net income per share $ 1.64 $ 1.41 $ 1.25 $ 1.22 $ 1.18
Cash dividends per share $ .67 $ .79 $ .59 $ .53 $ .44
Weighted average number of common
shares outstanding 3,458,300 3,461,856 3,516,205 3,530,203 3,502,366
AVERAGE BALANCE SUMMARY:
Total loans $ 538,148 $ 473,998 $ 432,165 $ 382,353 $ 305,392
Securities (2) 76,020 70,857 74,733 73,783 74,478
Deposits 489,513 441,255 428,874 376,050 319,493
Shareholders' equity 47,875 45,329 42,773 41,730 38,639
Total assets 667,561 590,193 544,306 488,632 408,482
PERIOD END BALANCES:
Total loans $ 559,561 $ 508,660 $ 448,303 $ 411,158 $ 347,130
Securities (2) 90,759 76,796 76,402 72,186 72,419
Deposits 497,404 455,861 432,371 405,331 327,317
Shareholders' equity 50,375 46,300 44,492 42,708 40,680
Total assets 696,356 634,999 561,658 522,057 447,448
KEY RATIOS:
Return on average assets .85% .83% .81% .88% 1.01%
Return on average equity 11.85% 10.80% 10.29% 10.29% 10.69%
Dividend payout ratio 40.79% 55.84% 47.14% 43.73% 37.13%
Average equity to average assets 7.17% 7.68% 7.86% 8.54% 9.46%
(1) Restated for stock splits as appropriate.
(2) Securities include interest-bearing balances with banks.
CONSOLIDATED STATEMENTS OF CONDITION
As of December 31 2002 2001
----------------- ---- ----
(dollars in thousands)
ASSETS
Cash and noninterest-bearing deposits with banks $ 18,826 $ 17,288
Federal funds sold 4,625 9,000
Total cash and cash equivalents --------- ---------
23,451 26,288
Interest-bearing balances with banks 1,505 1,264
Securities available-for-sale 75,264 61,559
Securities held-to-maturity
(estimated fair value: 2002 - $14,834,
2001 - $14,421) 13,990 13,973
Total loans 559,561 508,660
Less: Allowance for loan losses (7,069) (6,251)
--------- ---------
Net loans 552,492 502,409
Premises and equipment, net 8,247 8,702
Accrued income receivable 3,144 3,420
Goodwill 1,267 1,267
Bank owned life insurance 12,673 12,089
Other assets 4,323 4,028
--------- ---------
Total assets $ 696,356 $ 634,999
========= =========
LIABILITIES
Noninterest-bearing deposits $ 58,997 $ 56,735
Interest-bearing deposits 438,407 399,126
--------- ---------
Total deposits 497,404 455,861
Securities sold under agreements to repurchase 33,052 29,274
Other borrowed funds 95,435 90,856
Obligated mandatorily redeemable capital securities
of subsidiary trust 13,500 5,000
Accrued liabilities 6,590 7,708
--------- ---------
Total liabilities 645,981 588,699
--------- ---------
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 10,000,000
shares authorized; 2002 - 3,620,335 shares
issued, 2001 - 3,579,250 shares issued) 3,620 3,579
Additional paid-in-capital 30,092 29,207
Retained earnings 19,339 15,979
Accumulated other comprehensive income 1,439 1,043
Treasury stock, at cost (2002 - 157,115 shares,
2001 - 129,990 shares) (4,115) (3,508)
--------- ---------
Total shareholders' equity 50,375 46,300
--------- ---------
Total liabilities and shareholders' equity $ 696,356 $ 634,999
========= =========
See accompanying notes to consolidated financial statements
2
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 2002 2001 2000
------------------------------- ---- ---- ----
(dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 43,947 $ 43,321 $ 40,470
Securities:
Taxable 2,612 2,879 3,377
Tax exempt 735 758 793
Dividends 225 309 313
Other Interest 252 318 242
-------- -------- --------
47,771 47,585 45,195
Interest expense:
Deposits 15,129 19,281 20,367
Securities sold under agreements
to repurchase 361 627 859
Other borrowed funds 4,427 3,797 2,671
Obligated mandatorily redeemable capital
securities of subsidiary trust 893 530 168
-------- -------- --------
20,810 24,235 24,065
-------- -------- --------
Net interest income 26,961 23,350 21,130
Provision for loan losses 5,470 3,503 1,890
Net interest income after provision -------- -------- --------
for loan losses 21,491 19,847 19,240
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 3,118 3,003 2,016
Trust fees 215 222 217
Income from bank owned insurance 684 596 482
Other 1,617 1,308 1,143
-------- -------- --------
5,634 5,129 3,858
Noninterest expense:
Salaries and employee benefits 10,641 9,815 9,300
Occupancy 1,274 1,255 1,337
Furniture and equipment 1,083 1,141 1,253
Corporation franchise tax 395 587 385
Data processing 484 496 480
Other 5,298 4,877 4,223
-------- -------- --------
19,175 18,171 16,978
-------- -------- --------
Income before income taxes 7,950 6,805 6,120
Provision for income taxes 2,275 1,910 1,720
-------- -------- --------
NET INCOME $ 5,675 $ 4,895 $ 4,400
======== ======== ========
Earnings per share $ 1.64 $ 1.41 $ 1.25
======== ======== ========
See accompanying notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
Accumulated
Other Total
Common Retained Comprehensive Treasury Shareholders'
(dollars in thousands, except share and Stock Surplus Earnings Income(Loss) Stock Equity
per share data) ------- ------- ------- ----------- -------- -------
BALANCES AT JANUARY 1, 2000 $ 3,549 $28,454 $11,491 $ (597) $ (189) $42,708
Comprehensive income:
Net income 4,400 4,400
Net change in unrealized loss
on available-for-sale securities 1,033 1,033
-------
Total comprehensive income 5,433
Common Stock issued through
dividend reinvestment, 11,198 shares 11 306 317
Cash dividends, $.59 per share (2,074) (2,074)
Shares acquired for treasury, 66,900 shares (1,892) (1,892)
------- ------- ------- ------- -------- -------
BALANCES AT DECEMBER 31, 2000 3,560 28,760 13,817 436 (2,081) 44,492
Comprehensive income:
Net income 4,895 4,895
Net change in unrealized gain
on available-for-sale securities 607 607
-------
Total comprehensive income 5,502
Common Stock issued through
dividend reinvestment, 19,480 shares 19 447 466
Cash dividends, $.79 per share (2,733) (2,733)
Shares acquired for treasury, 57,501 shares (1,427) (1,427)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2001 3,579 29,207 15,979 1,043 (3,508) 46,300
Comprehensive income:
Net income 5,675 5,675
Net change in unrealized gain
on available-for-sale securities 396 396
-------
Total comprehensive income 6,071
Common Stock issued to ESOP, 12,800 shares 13 272 285
Common Stock issued through
dividend reinvestment, 28,285 shares 28 613 641
Cash dividends, $.67 per share (2,315) (2,315)
Shares acquired for treasury, 27,125 shares (607) (607)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2002 $ 3,620 $30,092 $19,339 $ 1,439 $(4,115) $50,375
======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2002 2001 2000
------------------------------- ---- ---- ----
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,675 $ 4,895 $ 4,400
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,165 1,222 1,447
Net amortization and accretion of securities 123 63 99
Proceeds from sale of loans in secondary market 5,913
Loans disbursed for sale in secondary market (5,837)
Gain on sale of loans (76)
Amortization of intangible assets 130 129
Deferred tax benefit (392) (368) (292)
Provision for loan losses 5,470 3,503 1,890
Common stock issued to ESOP 285
FHLB stock dividend (225) (309) (318)
Change in accrued income receivable 276 684 (806)
Change in accrued liabilities (1,118) (120) 1,829
Change in other assets (691) (913) (2,262)
------- ------- -------
Net cash provided by operating activities 10,568 8,787 6,116
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available-for-sale 30,491 25,726 6,749
Purchases of securities available-for-sale (43,469) (26,248) (9,349)
Proceeds from maturities of securities
held-to-maturity 2,005 2,482 2,628
Purchases of securities held-to-maturity (2,046) (741) (2,450)
Change in interest-bearing deposits in other banks (241) (448) (10)
Net increase in loans (55,553) (62,994) (38,705)
Purchases of premises and equipment (710) (639) (844)
Purchases of insurance contracts (2,165) (905)
------- ------- -------
Net cash used in investing activities (69,523) (65,027) (42,886)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits 41,543 23,490 27,040
Cash dividends (2,315) (2,733) (2,074)
Proceeds from issuance of common stock 641 466 317
Purchases of treasury stock (607) (1,427) (1,892)
Change in securities sold under agreements to repurchase 3,778 10,929 1,557
Proceeds from obligated mandatorily redeemable
capital securities of subsidiary trust 8,500 5,000
Proceeds from long-term borrowings 16,065 54,125 30,250
Repayment of long-term borrowings (13,040) (13,615) (25,629)
Change in other short-term borrowings 1,553 (3,276) (2,230)
------- ------- -------
Net cash provided by financing activities 56,118 67,959 32,339
------- ------- -------
CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents (2,837) 11,719 (4,431)
Cash and cash equivalents at beginning of year 26,288 14,569 19,000
------- ------- -------
Cash and cash equivalents at end of year $23,451 $26,288 $14,569
======= ======= =======
CASH PAID DURING THE YEAR FOR:
Interest $21,659 $25,155 $22,456
Income taxes 2,675 2,455 1,655
See accompanying notes to consolidated financial statements
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in thousands, except share and per share data
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Ohio Valley Banc Corp. (the Company) and its wholly-owned
subsidiaries, The Ohio Valley Bank Company (the Bank), Loan Central, a consumer
finance company, Ohio Valley Financial Services Agency, LLC, an insurance
company, and Ohio Valley Statutory Trusts I and II, special purpose financing
entities. All material intercompany accounts and transactions have been
eliminated.
Industry Segment Information: The Company is primarily engaged in the business
of commercial and retail banking and trust services, with operations conducted
through 22 offices located in central and southeastern Ohio as well as western
West Virginia. These communities are the source of substantially all of the
Company's deposit, loan and trust services. 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.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Areas
involving the use of management's estimates and assumptions that are more
susceptible to change in the near term involve the allowance for loan losses,
the fair value of certain securities, the fair value of financial instruments
and the determination and carrying value of impaired loans.
Cash and Cash Equivalents: 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.
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
marketable equity securities and other securities that management intends to
sell or 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 not 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 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: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
losses that are probable based on past loss experience, general economic
conditions, information about specific borrower situations, including their
financial position and collateral value, and other factors and estimates which
are subject to change over time. While management may periodically allocate
portions of the allowance for specific problem situations, the entire allowance
is available for any charge-offs that occur. A loan is charged off by management
as a loss when deemed uncollectable, although collection efforts continue and
future recoveries may occur.
Loans are considered impaired if full principal or interest payments are not
anticipated. 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. Smaller-balance homogeneous
loans are evaluated for impairment in total. Such loans include residential
first mortgage loans secured by one-to-four family residences, residential
construction loans, credit card and automobile, home equity and second mortgage
loans. Commercial loans and mortgage loans secured by other properties are
evaluated individually for impairment. When analysis of borrower operating
results and financial condition indicates that underlying cash flows of the
borrower's business are not adequate to meet its debt service requirements, the
loan is evaluated for impairment. Loans are generally moved to nonaccrual status
when 90 days or more past due. These loans are often also considered impaired.
Impaired loans, or portions thereof, are charged off when deemed uncollectable.
This typically occurs when the loan is 120 or more days past due.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk: The Company, through its subsidiaries, grants
residential, consumer and commercial loans to customers located primarily in the
southeastern Ohio and western West Virginia areas. The following represents the
composition of the loan portfolio at December 31, 2002:
% of Total Loans
----------------
Real Estate loans 40.07%
Commercial and industrial loans 36.73%
Consumer loans 22.99%
All other loans .21%
----------------
100.00%
================
Approximately 4.16% of total loans are unsecured.
The Bank, in the normal course of its operations, conducts business with
correspondent financial institutions. Balances in correspondent accounts,
investments in federal funds, certificates of deposit and other short-term
securities are closely monitored to ensure that prudent levels of credit and
liquidity risks are maintained. At December 31, 2002, the Bank's primary
correspondent balances were $4,625 in Federal funds sold at National City Bank,
Cleveland, Ohio and $9,412 on deposit at the Federal Reserve Bank, Cleveland,
Ohio.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the declining balance and
straight-line methods over the estimated useful lives of the various assets.
Maintenance and repairs are expensed and major improvements are capitalized.
Leasehold improvements are amortized over the course of the related lease.
Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of
foreclosure is included in other assets. Such real estate is carried at the
lower of investment in the loan or estimated fair value of the property less
estimated selling costs. Any reduction to fair value at the time of acquisition
is accounted for as a loan charge-off. Any subsequent reduction in fair value is
recorded as a loss on other assets. Costs incurred to carry other real estate
are charged to expense. Other real estate owned totaled $440 at December 31,
2002 and $289 at December 31, 2001. Transfers of loans to other real estate were
$521 in 2002 and $443 in 2001.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Per Share Amounts: Earnings per share is based on net income divided by the
following weighted average number of shares outstanding during the periods:
3,458,300 for 2002, 3,461,856 for 2001 and 3,516,205 for 2000. The Company had
no dilutive securities outstanding for any period presented.
Income Taxes: 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.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale which are also recognized as separate
components of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Bank Owned Life Insurance: The Company has purchased life insurance policies on
certain officers. These policies are recorded at their cash surrender value, or
the amount that could be realized.
ESOP: Compensation expense is based on the market price of shares as they are
committed to be allocated to participant accounts.
New Accounting Pronouncements: Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets and SFAS No. 147, Acquisition of Certain Financial
Institutions. In accordance with these standards, the Company reclassified
intangible assets associated with a certain branch acquisition to goodwill and
ceased amortizing goodwill. Annual impairment testing is required for goodwill
with impairment being recorded if the carrying amount of goodwill exceeds its
implied fair value. See Note R for discussion of the impact of adopting these
standards.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, Accounting for Asset Retirement Obligations. This statement addresses
financial accounting and reporting for legal obligations associated with sale,
abandonment, disposal, recycling or other than temporary removal from service of
tangible long-lived assets. SFAS No. 143 requires an asset obligation to be
recognized at fair value when it is incurred, if a reasonable estimate of its
fair value can be made at the time. Otherwise, the obligation should be recorded
as soon as its fair value can be reasonably estimated. This statement, which is
effective for the Company on January 1, 2003, is not expected to have a material
impact on the Company.
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment and Disposal of Long-Term Assets. This statement eliminates the
requirement that the allocation of goodwill to long-lived assets be tested for
impairment and details both a probability-weighted and "primary asset" approach
to estimated cash flows in testing for impairment of a long-lived asset.
Adoption of SFAS No. 144 did not have a material impact on the Company.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses the timing of recognition
of a liability for exit and disposal cost at the time a liability is incurred,
rather than at a plan commitment date, as previously required. Exit or disposal
costs will be measured at fair value, and the recorded liability will be
subsequently adjusted for changes in estimated cash flows. This Statement is
required to be effective for exit or disposal activities entered after December
31, 2002, and early adoption is encouraged. The Company does not believe this
statement will have a material effect on its financial position or results of
operations.
Reclassifications: The consolidated financial statements for 2001 and 2000 have
been reclassified to conform with the presentation for 2002. Such
reclassifications had no effect on the net results of operations.
NOTE B - SECURITIES
The amortized cost and estimated fair value of securities are as follows:
Gross Gross Estimated
Unrealized Unrealized Fair
Securities Available-for-Sale Gains Losses Value
----- ------ -----
December 31, 2002
-----------------
U.S. Government agency securities $2,099 $66,838
Mortgage-backed securities 81 $ (6) 3,425
Marketable equity securities 5,001
------ ----- -------
Total securities $2,180 $ (6) $75,264
====== ===== =======
December 31, 2001
-----------------
U.S. Treasury securities $ 3 $ 1,993
U.S. Government agency securities 1,578 $ (16) 53,056
Mortgage-backed securities 15 1,734
Marketable equity securities 4,776
------ ----- -------
Total securities $1,596 $ (16) $61,559
====== ===== =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
---- ----- ------ -----
December 31, 2002
-----------------
Obligations of states and
political subdivisions $13,821 $ 881 $ (31) $14,671
Mortgage-backed securities 169 (6) 163
------- ------ ----- -------
Total securities $13,990 $ 881 $ (37) $14,834
======= ====== ===== =======
December 31, 2001
---------------------------
Obligations of states and
political subdivisions $13,765 $ 481 $ (25) $14,221
Mortgage-backed securities 208 (8) 200
------- ------ ----- -------
Total securities $13,973 $ 481 $ (33) $14,421
======= ====== ===== =======
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES (continued)
Securities with a carrying value of approximately $67,758 at December 31,
2002 and $63,455 at December 31, 2001 were pledged to secure public deposits,
repurchase agreements and for other purposes as required or permitted by law.
The amortized cost and estimated fair value of debt securities at December
31, 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
Fair Amortized Fair
Debt Securities: Value Cost Value
------- ------- -------
Due in one year or less $19,478 $ 1,697 $ 1,749
Due in one to five years 47,360 3,835 4,108
Due in five to ten years 5,927 6,406
Due after ten years 2,362 2,408
Mortgage-backed securities 3,425 169 163
------- ------- -------
Total debt securities $70,263 $13,990 $14,834
======= ======= =======
There were no sales of debt and equity securities during 2002, 2001
and 2000.
NOTE C - LOANS
Loans are comprised of the following at December 31:
2002 2001
---- ----
Real estate loans $224,212 $226,212
Commercial and industrial loans 205,508 173,154
Consumer loans 128,662 108,437
All other loans 1,179 857
-------- --------
Total Loans $559,561 $508,660
======== ========
NOTE D - ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses for
years ended December 31:
2002 2001 2000
---- ---- ----
Balance, beginning of year $6,251 $5,385 $5,055
Loans charged-off:
Real estate 636 659 92
Commercial 2,272 620 61
Consumer 2,656 1,903 1,642
------ ------ ------
Total loans charged-off 5,564 3,182 1,795
Recoveries of loans:
Real estate 119 69 4
Commercial 158 17
Consumer 635 459 231
------ ------ ------
Total recoveries of loans 912 545 235
Net loan charge-offs (4,652) (2,637) (1,560)
Provision charged to operations 5,470 3,503 1,890
------ ------ ------
Balance, end of year $7,069 $6,251 $5,385
====== ====== ======
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
Information regarding impaired loans is as follows:
2002 2001
---- ----
Balance of impaired loans $4,780 $2,621
====== ======
Portion of impaired loan balance for which
an allowance for credit losses is allocated $4,780 $2,621
====== ======
Portion of allowance for loan losses allocated
to the impaired loan balance $ 500 $ 420
====== ======
Average investment in impaired loans for the year $5,308 $2,695
====== ======
Past due - 90 days or more and still accruing $1,491 $3,013
====== ======
Nonaccrual $6,569 $3,297
====== ======
Interest on impaired loans was not material for years ending 2002, 2001 or 2000.
In 2002, management adopted a new method of identifying impaired loans and
accordingly, has adjusted the 2001 impaired loan balances to reflect this
method. Management did not adjust impaired loan balances prior to 2001.
NOTE E - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31:
2002 2001
---- ----
Land $ 1,428 $ 1,376
Buildings 8,881 8,661
Furniture and equipment 8,478 8,040
------- -------
18,787 18,077
Less accumulated depreciation 10,540 9,375
------- -------
Total Premises and Equipment $ 8,247 $ 8,702
======= =======
The following is a summary of the future minimum lease payments for facilities
leased by the Company. Lease payments were $339 in 2002 and $333 in 2001.
2003 $ 311
2004 208
2005 153
2006 104
2007 52
Thereafter 10
------
$ 838
======
10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - DEPOSITS
Following is a summary of interest-bearing deposits at December 31:
2002 2001
---- ----
NOW accounts $105,130 $ 91,497
Savings and Money Market 43,959 40,936
Time:
IRA accounts 38,295 36,634
Certificates of Deposit:
In denominations under $100,000 167,086 155,074
In denominations of $100,000 or more 83,937 74,985
-------- --------
Total time deposits 289,318 266,693
-------- --------
Total interest-bearing deposits $438,407 $399,126
======== ========
Following is a summary of total time deposits by remaining maturities at
December 31:
2002
------
Within one year $156,269
From one to two years 68,303
From two to three years 35,771
From three to four years 15,453
From four to five years 11,901
Thereafter 1,621
--------
Total $289,318
========
NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Following is a summary of securities sold under agreements to repurchase at
December 31:
2002 2001
---- ----
Balance outstanding at period-end $33,052 $29,274
------- -------
Weighted average interest rate at period-end 1.08% 1.90%
------- -------
Average amount outstanding during the year $23,090 $19,893
------- -------
Approximate weighted average interest rate
during the year 1.56% 3.15%
------- -------
Maximum amount outstanding as of any month-end $33,052 $29,274
------- -------
Securities underlying these agreements at
year-end were as follows:
Carrying value of securities $40,650 $39,221
------- -------
Fair Value $42,180 $40,619
------- -------
The Company had securities sold under agreements to repurchase totaling $11,280
at December 31, 2002 and $8,914 at December 31, 2001 with a local healthcare
provider.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2002 and 2001 are comprised of
advances from the Federal Home Loan Bank (FHLB), promissory notes and Federal
Reserve Bank Notes (FRB) Notes.
FHLB Borrowings Promissory Notes FRB Notes Totals
--------------- ---------------- --------- -------
2002 $84,590 $ 5,345 $ 5,500 $95,435
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 $126,885
and $5,001 at December 31, 2002. Fixed rate FHLB advances mature through 2010
and have interest rates ranging from 3.28% to 6.62%.
Promissory notes, issued primarily by the parent company, have fixed rates
of 2.00% to 5.25% and are due at various dates through a final maturity date of
September 30, 2005.
Scheduled principal payments over the next five years:
FHLB borrowings Promissory notes FRB Notes Total
--------------- ---------------- --------- -----
2003 $14,174 $5,030 $5,500 $24,704
2004 17,487 215 17,702
2005 17,115 100 17,215
2006 17,607 17,607
2007 4,060 4,060
Thereafter 14,147 14,147
------- ------ ------ -------
$84,590 $5,345 $5,500 $95,435
======= ====== ====== =======
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $30,425 at December 31,
2002 and $29,000 at December 31, 2001. Various investment securities from the
Bank used to collateralize FRB notes totaled $6,010 at December 31, 2002 and
$5,970 at December 31, 2001.
NOTE I - OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUST
On March 26, 2002, the Company completed an issuance of $8,500 at a current
variable rate of 5.0% obligated mandatorily redeemable capital securities of a
subsidiary trust (Trust Preferred Securities) through a newly formed,
wholly-owned subsidiary, Ohio Valley Statutory Trust II (the "Trust Issuer").
The Trust Issuer invested the total proceeds from the sale of trust preferred
securities in a long-term subordinated debenture issued by the Company with a
current variable rate of 5.0% 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 at par value. The Company used the
net proceeds from the sale of these securities to provide additional capital to
the Bank to support growth. Debt issuance costs of $256 were incurred and
capitalized and will amortize as a yield adjustment through expected maturity.
On September 7, 2000, the Company completed the issuance of $5,000 at 10.60%
trust preferred securities through its wholly-owned subsidiary, Ohio Valley
Statutory Trust I (the "Trust Issuer"). The Trust Issuer invested the total
proceeds from the sale of trust preferred securities in a long-term subordinated
debenture issued by the Company with a fixed rate of 10.60% and a maturity date
of September 7, 2030. However, beginning September 7, 2010, the Company may, at
its option, redeem all or a portion of these trust preferred securities at a
premium of 105.30% with the call price declining .53% per year until reaching a
call price of par at year twenty through maturity. The Company used the net
proceeds from the sale of these securities to help fund the Company's year-end
insurance investments, help continue the Company's stock repurchases and provide
additional capital to the Bank to support growth. Debt issuance costs of $166
were incurred and capitalized and will amortize as a yield adjustment through
expected maturity.
The trust preferred securities were unsecured at December 31, 2002. A
description of the trust preferred securities currently outstanding at December
31, 2002 is presented below:
Current
Issuing Date of Interest Mandatory Principal
Entity Issuance Rate Redemption Date Balance
- ------------------- ----------------- -------- ----------------- ---------
Ohio Valley March 26, 2002 5.00% March 26, 2032 $8,500
Statutory Trust II
Ohio Valley September 7, 2000 10.60% September 7, 2030 $5,000
Statutory Trust I
12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES
The provision for federal income taxes consists of the following components:
2002 2001 2000
---- ---- ----
Current tax expense $2,667 $2,278 $2,012
Deferred tax (benefit) (392) (368) (292)
------ ------ ------
Total federal income taxes $2,275 $1,910 $1,720
====== ====== ======
The sources of gross deferred tax assets and gross deferred tax liabilities
at December 31:
2002 2001
---- ----
Items giving rise to deferred tax assets:
Allowance for loan losses in excess of tax reserve $2,251 $1,857
Deferred compensation 709 599
Depreciation 10
Other 76 96
Items giving rise to deferred tax liabilities:
Investment accretion (63) (40)
Depreciation (19)
FHLB stock dividends (620) (544)
Unrealized gain on securities available-for-sale (739) (537)
Other (24)
------ ------
Net deferred tax asset $1,600 $1,412
====== ======
The difference between the financial statement tax provision and amounts
computed by applying the statutory federal income tax rate of 34% to income
before taxes is as follows:
2002 2001 2000
---- ---- ----
Statutory tax $2,703 $2,314 $2,081
Effect of nontaxable interest
and dividends (254) (263) (278)
Nondeductible interest expense 30 42 49
Income from bank owned insurance (198) (176) (139)
Other items (6) (7) 7
------ ------ ------
Total federal income taxes $2,275 $1,910 $1,720
====== ====== ======
There were no taxes attributable to gains on sale of securities in 2002,
2001 and 2000.
13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
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 Bank's exposure to credit loss
in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit, and financial
guarantees written, is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for instruments recorded on the balance
sheet.
Following is a summary of such commitments at December 31:
2002 2001
----- -----
Fixed rate $ 1,262 $ 2,075
Variable rate 44,730 52,578
Standby letters of credit 9,158 9,659
The interest rate on fixed rate commitments ranged from 4.875% to 17.90% at
December 31, 2002.
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
issued by the Bank to guarantee the performance of a customer to a third party.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and income-producing commercial
properties.
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or results of operations.
The bank subsidiary of the Company is required to maintain average reserve
balances with the Federal Reserve Bank or as cash in the vault. The amount of
those reserve balances for the year ended December 31, 2002, was approximately
$6,623.
NOTE L - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies in which they are
affiliated were loan customers during 2002. A summary of activity on these
borrower relationships with aggregate debt greater than $60 is as follows:
Total loans at January 1, 2002 $13,137
New loans 7,672
Repayments (2,565)
Other changes (16)
-------
Total loans at December 31, 2002 $18,228
=======
Other changes include adjustment for loans applicable to one reporting period
that are excludable from the other reporting period. In addition, certain
directors, executive officers and companies in which they are affiliated were
recipients of promissory notes issued by the parent company in the amount of
$3,392.
14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - EMPLOYEE BENEFITS
The Bank has a profit-sharing plan for the benefit of its employees and their
beneficiaries. Contributions to the plan are determined by the Board of
Directors. Contributions charged to expense were $149, $134 and $146 for 2002,
2001 and 2000.
The Company maintains an Employee Stock Ownership Plan (ESOP) covering
substantially all of its employees. The Company makes discretionary
contributions to the plan which are allocated to plan participants based on
relative compensation. The total number of shares held by the Plan, all of which
have been allocated to participant accounts were 159,595 and 154,914 at December
31, 2002 and 2001. In addition, the Bank made contributions to its ESOP Trust as
follows:
Years ended December 31
2002 2001 2000
---- ---- ----
Number of shares issued 12,800 0 0
====== ===== =====
Value of stock contributed $ 285
Cash contributed 158 $ 123 $ 293
----- ----- -----
Total charged to expense $ 443 $ 123 $ 293
===== ===== =====
Life insurance contracts with a cash surrender value of $12,673 have been
purchased by the Company, the owner the of policies. The purpose of these
contracts was to replace a current group life insurance program for executive
officers and implement a supplemental retirement program. The cost of providing
the benefits to the participants of the supplemental retirement program is
expected to be offset by the earnings on the life insurance contracts.
NOTE N - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes for the years ended
December 31, are as follow:
2002 2001 2000
Net unrealized holding gains on ---- ---- ----
available-for-sale securities $ 600 $ 920 $ 1,565
Tax effect 204 313 532
------- ------- -------
Other comprehensive income $ 396 $ 607 $ 1,033
======= ======= =======
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-term Investments: For short-term instruments, the carrying amount
is a reasonable estimate of fair value.
Securities: For securities, fair value equals quoted market price, if available.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar instruments. The fair value for FHLB stock is
estimated at carrying value.
Loans: The fair value of fixed rate loans is estimated by discounting future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
fair market value of commitments is not material at December 31, 2002 or 2001.
The fair value for variable rate loans is estimated to be equal to carrying
value.
Deposit Liabilities: The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
Borrowings: For other borrowed funds and obligated mandatorily redeemable
capital securities of subsidiary trust, rates currently available to the Bank
for debt with similar terms and remaining maturities are used to estimate fair
value. For securities sold under agreements to repurchase, carrying value is a
reasonable estimate of fair value.
Accrued Interest Receivable and Payable: For accrued interest receivable and
payable, the carrying amount is a reasonable estimate of fair value.
In addition, other assets and liabilities that are not defined as financial
instruments were not included in the disclosures below, such as premises and
equipment and life insurance contracts.
The estimated fair values of the Company's financial instruments at December
31, are as follows:
2002 2001
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and short-term investments $ 24,956 $ 24,956 $ 27,552 $ 27,552
Securities 84,253 85,097 70,756 71,204
FHLB stock 5,001 5,001 4,776 4,776
Loans 552,492 562,727 502,409 507,459
Accrued interest receivable 3,144 3,144 3,420 3,420
Financial liabilities:
Deposits (497,404) (503,295) (455,861) (460,547)
Securities sold under agreements
to repurchase (33,052) (33,052) (29,274) (29,274)
Other borrowed funds (95,435) (100,515) (90,856) (92,076)
Obligated mandatorily redeemable
capital securities of subsidiary
trust (13,500) (13,746) (5,000) (5,250)
Accrued interest payable (4,327) (4,327) (5,177) (5,177)
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgements regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements administered
by federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgements by regulators about components, risk weightings and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements. The prompt corrective action
regulations provide five classifications, including well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized, although these terms are not used to represent overall
financial condition. If adequately capitalized, regulatory approval is required
to accept brokered deposits. If undercapitalized, capital distributions are
limited, as is asset growth and expansion, and plans for capital restoration are
required. At year-end, consolidated actual capital levels and minimum required
levels for the Company and Bank were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2002
Total capital (to risk weighted assets)
Consolidated $68,149 12.2% $44,663 8.0% $55,829 10.0%
The Ohio Valley Bank Company $61,864 12.2% $40,602 8.0% $50,753 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated $61,169 11.0% $22,332 4.0% $33,497 6.0%
The Ohio Valley Bank Company $55,515 10.9% $20,301 4.0% $30,452 6.0%
Tier 1 capital (to average assets)
Consolidated $61,169 9.2% $26,702 4.0% $33,378 5.0%
The Ohio Valley Bank Company $55,515 8.1% $27,271 4.0% $34,089 5.0%
2001
Total capital (to risk weighted assets)
Consolidated $55,242 10.7% $41,160 8.0% $51,450 10.0%
The Ohio Valley Bank Company $51,374 11.2% $36,570 8.0% $45,713 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated $48,991 9.5% $20,580 4.0% $30,870 6.0%
The Ohio Valley Bank Company $45,658 10.0% $18,285 4.0% $27,428 6.0%
Tier 1 capital (to average assets)
Consolidated $48,991 7.9% $24,910 4.0% $31,137 5.0%
The Ohio Valley Bank Company $45,658 7.4% $24,593 4.0% $30,742 5.0%
The Company and Bank at year-end 2002 were categorized as well capitalized.
Management is not aware of any event or circumstances subsequent to year-end
that would change the Company's or Bank's capital structure.
Dividends paid by the subsidiaries are the primary source of funds available to
the Company for payment of dividends to shareholders and for other working
capital needs. The payment of dividends by the subsidiaries to the Company is
subject to restrictions by regulatory authorities. These restrictions generally
limit dividends to the current and prior two years retained earnings. At
December 31, 2002, approximately $8,360 of the subsidiaries' retained earnings
were available for dividends under these guidelines. In addition to these
restrictions, as a practical matter, dividend payments cannot reduce regulatory
capital levels below minimum regulatory guidelines. These restrictions do not
presently limit the Company from paying dividends at its historical level.
17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Ohio Valley Banc Corp. In this
information, the parent's investment in subsidiaries is stated at cost plus
equity in undistributed earnings of the subsidiaries since acquisition. This
information should be read in conjunction with the consolidated financial
statements.
CONDENSED STATEMENTS OF CONDITION at December 31:
Assets 2002 2001
---- ----
Cash and cash equivalents $ 1,831 $ 457
Interest-bearing balances with subsidiaries 4 4
Investment in subsidiaries 60,367 49,756
Notes receivable - subsidiaries 5,332 3,089
Other assets 2,087 2,105
------- -------
Total assets $69,621 $55,411
======= =======
Liabilities
Notes Payable $ 5,344 $ 3,787
Subordinated debentures 13,560 5,155
Other liabilities 342 169
------- -------
Total liabilities $19,246 $ 9,111
------- -------
Shareholders' Equity
Total shareholders' equity 50,375 46,300
------- -------
Total liabilities and shareholders' equity $69,621 $55,411
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31:
2002 2001 2000
---- ---- ----
Income:
Interest on deposits $ 2 $ 33
Interest on loans $ 2 3 6
Interest on notes 203 282 474
Other operating income 42 8 19
Dividends from bank subsidiary 4,428 3,317 925
Expenses:
Interest on notes 219 308 343
Interest on subordinated debentures 921 546 173
Operating expenses 208 229 144
------ ------ ------
Income before federal income taxes and equity
in undistributed earnings of subsidiaries 3,327 2,529 797
Income tax benefit 365 262 42
Equity in undistributed earnings of subsidiaries 1,983 2,104 3,561
------ ------ ------
Net Income $5,675 $4,895 $4,400
====== ====== ======
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31: 2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $5,675 $4,895 $4,400
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries(1,983) (2,104) (3,561)
Change in other assets 49 10 (2,014)
Change in other liabilities (185) (24) (15)
------ ------ ------
Net cash provided by (used in)
operating activities 3,556 2,777 (1,190)
------ ------ ------
Cash flows from investing activities:
Capital contributions to subsidiaries (8,000) (6,090)
Proceeds from repayment of long-term note
from subsidiary 4,000
Change in other long-term investments (263) (156)
Change in other short-term investments (2,258) 2,860 (645)
Change in subsidiary line of credit 16 (2) 153
Change in interest-bearing deposits 255 801
------ ------ ------
Net cash provided by (used in)
investing activities (10,505) 3,113 (1,937)
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 8,762 5,155
Change in other short-term borrowings 1,557 (1,789) 1,621
Cash dividends paid (2,315) (2,733) (2,074)
Proceeds from issuance of common stock 926 466 317
Purchases of treasury stock (607) (1,427) (1,892)
------ ------ ------
Net cash provided by (used in)
financing activities 8,323 (5,483) 3,127
------ ------ ------
Cash and cash equivalents:
Change in cash and cash equivalents 1,374 407 0
Cash and cash equivalents at beginning of year 457 50 50
------ ------ ------
Cash and cash equivalents at end of year $1,831 $ 457 $ 50
====== ====== ======
19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - ACQUISITION AND INTANGIBLE ASSETS
On September 24, 1999, the Bank acquired from Huntington National Bank certain
assets and assumed certain deposits and other liabilities in accordance with a
purchase and assumption agreement of the same date. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the assets
acquired and liabilities assumed were recorded based on their estimated fair
market values at the date of acquisition.
Goodwill related to the acquisition at December 31, 2002 and 2001 was $1,267.
Effective January 1, 2002, the Company adopted new accounting guidance changing
accounting for goodwill. In accordance with this guidance, goodwill is not
amortized, but is reviewed for impairment. The following table presents
reconciliation between reported net income and net income adjusted for the
effect of the new accounting pronouncement:
2002 2001 2000
------- ------- -------
Reported net income $ 5,675 $ 4,895 $ 4,400
Effect of goodwill amortization
expense (net of tax) 86 85
------- ------- -------
Net income adjusted $ 5,675 $ 4,981 $ 4,485
======= ======= =======
Reported net income per share $ 1.64 $ 1.41 $ 1.25
Effect of goodwill amortization
expense (net of tax) 0.02 0.02
------- ------- -------
Net income per share adjusted $ 1.64 $ 1.43 $ 1.27
======= ======= =======
20
SUMMARIZED QUARTERLY FINANCIAL INFORMATION
NOTE S - CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited)
Quarters Ended
2002 Mar. 31 Jun. 30 Sept. 30 Dec. 31
Total interest income $11,609 $11,887 $12,119 $12,156
Total interest expense 5,236 5,191 5,280 5,103
Net interest income 6,373 6,696 6,839 7,053
Provision for loan losses 1,142 813 1,541 1,974
Net Income 1,252 1,353 1,409 1,661
Net income per share $ .36 $ .39 $ .41 $ .48
2001
Total interest income $11,523 $11,867 $12,159 $12,036
Total interest expense 6,354 6,081 6,065 5,735
Net interest income 5,169 5,786 6,094 6,301
Provision for loan losses 427 646 1,092 1,338
Net Income 1,107 1,154 1,220 1,414
Net income per share $ .32 $ .33 $ .35 $ .41
2000
Total interest income $10,652 $11,100 $11,627 $11,816
Total interest expense 5,380 5,778 6,282 6,625
Net interest income 5,272 5,322 5,345 5,191
Provision for loan losses 302 407 456 725
Net Income 1,052 991 1,099 1,258
Net income per share $ .30 $ .28 $ .31 $ .36
21
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Ohio Valley Banc Corp.
Gallipolis, Ohio
We have audited the accompanying consolidated statements of condition of Ohio
Valley Banc Corp., as of December 31, 2002 and 2001 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ohio Valley Banc
Corp. as of December 31, 2002 and 2001 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
As disclosed in Note A, the Company adopted new accounting guidance for goodwill
in 2002.
/s/CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
January 28, 2003
22
SUMMARY OF COMMON STOCK DATA
OHIO VALLEY BANC CORP.
Years ended December 31, 2002 and 2001
INFORMATION AS TO STOCK PRICES AND DIVIDENDS: The market for the common stock of
the Company is not highly active and trading has historically been limited. On
February 9, 1996, the Company's common stock was established on NASDAQ
securities market under the symbol "OVBC". Prior to this date a limited market
was created in the first quarter of 1992 through the Ohio Company.
The following table shows bid and ask quotations for the Company's common
stock during 2002 and 2001. The range of market price is compiled from data
provided by the broker based on limited trading. The quotations are inter-dealer
prices, without retail markup, markdown, or commission, and may not represent
actual transactions.
2002 Low Bid High Bid Low Ask High Ask
- ---- ------- -------- ------- --------
First Quarter $23.65 $24.00 $23.75 $24.65
Second Quarter 23.60 24.25 23.72 24.50
Third Quarter 21.35 23.60 22.19 24.45
Fourth Quarter 19.75 21.10 20.50 21.40
2001 Low Bid High Bid Low Ask High Ask
- ---- ------- -------- ------- --------
First Quarter $24.50 $25.25 $24.75 $25.75
Second Quarter 24.50 25.75 24.88 26.95
Third Quarter 24.50 25.05 24.95 26.00
Fourth Quarter 21.40 25.75 23.50 26.00
Dividends per share 2002 2001
- ------------------- ---- ----
First Quarter $.16 $.15
Second Quarter .17 .16
Third Quarter .17 .16
Fourth Quarter
Normal dividend .17 .16
Special dividend .16
Shown above is a table which reflects the dividends paid per share on the
Company's common stock. This disclosure is based on the weighted average number
of shares for each year and does not indicate the amount paid on the actual
shares outstanding at the end of each quarter. As of December 31, 2002 the
number of holders of common stock was 1,877 an increase from 1,855 shareholders
at December 31, 2001.
On December 11, 2001, the Company's Board of Directors declared a special
cash dividend of $.16 per share on the outstanding shares of Ohio Valley Banc
Corp stock payable on December 31, 2001 to shareholders of record on December
21, 2001. The special dividend was approved in large part to help increase
shareholder return and serve as a reinvestment back in the community.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this discussion is to provide an analysis of the
Company's financial condition and results of operations which is not otherwise
apparent from the audited consolidated financial statements included in this
report. The accompanying consolidated financial information has been prepared by
management in conformity with accounting principles generally accepted in the
United States of America (US GAAP) and is consistent with that reported in the
consolidated statements. Reference should be made to those statements and the
selected financial data presented elsewhere in this report for an understanding
of the following tables and related discussion.
RESULTS OF OPERATIONS:
SUMMARY
Ohio Valley Banc Corp generated earnings of $5,675 for 2002 an increase
of 15.9% from 2001. Net income was up 11.3% in 2001. Net income per share of
$1.64 for 2002 represented continued growth from $1.41 in 2001 and $1.25 in
2000. Asset growth for 2002 was $61,357 or 9.7% which resulted in total assets
at year-end of $696,356. The Company's return on assets (ROA) increased to .85%
for 2002 compared to .83% in 2001 and .81% in 2000. Return on equity (ROE) was
11.85% for 2002 compared to 10.80% in 2001 and 10.29% in 2000. The average of
the bid and ask price for the Company's stock was $20.61 at December 31, 2002
compared to $24.20 at year-end 2001 and $25.375 at year-end 2000.
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 the liabilities used to fund those
assets. Net interest income is affected by changes in both the average volume
and mix of the balance sheet and the level of interest rates for financial
instruments. Changes in net interest income are measured by net interest margin
and net interest spread. Net interest margin is expressed as net interest income
divided by average interest-earning assets. Net interest spread is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. Both of these are reported on
a taxable equivalent basis. Net interest margin is greater than net interest
spread due to the interest earned on interest-earning assets funded from
noninterest bearing funding sources, primarily demand deposits and shareholders'
equity. Following is a discussion of changes in interest-earning assets,
interest-bearing liabilities and the associated impact on interest income and
interest expense for the three years ending December 31, 2002. Tables I and II
have been prepared to summarize the significant changes outlined in this
analysis.
Net interest income on a fully tax equivalent basis (FTE) increased
$3,604 in 2002, an increase of 15.22% compared to the $23,680 earned in 2001.
Net interest income (FTE) increased $2,193 in 2001, an increase of 10.21%
compared to the $21,487 earned in 2000. Both increases were primarily
attributable to an increase in interest-earning assets as well as a decrease in
funding costs resulting in a higher net interest margin.
For 2002, average earning assets grew by 13.7% as compared to growth of
8.4% in 2001. Driving the growth in earning assets was the growth in average
loan balances. Average total loans expanded $64,150 or 13.5% from 2001 and
represented 85.6% of earning assets. This compares to average loan growth of
9.7% for 2001 and loans representing 85.7% of earning assets. Management focuses
on generating loan growth as this portion of earning assets provides the
greatest return to the Company. Although loans comprise a larger percentage of
earning assets, management is comfortable with the current level of loans based
on collateral values, the balance of the allowance for loan losses and the
Company's well-capitalized status. Average securities declined from 14.5% of
earning assets for 2000 to 11.8% in 2002. Management maintains securities at a
dollar level adequate enough to provide ample liquidity and cover pledging
requirements.
Average interest-bearing liabilities increased 14.1% between 2001 and
2002 and increased 8.7% between 2000 and 2001. While interest-bearing
liabilities consists mostly of time deposits, this composition has continued to
decline from 57.5 % of interest-bearing liabilities in 2000 to 51.8% in 2002. A
large portion of deposits has shifted to other borrowed funds and NOW accounts
which have grown to comprise 36.4% of interest-bearing liabilities in 2002 from
29.0% in 2000. Other borrowings and NOW accounts have been a cost-effective
funding source for the Company's increase in earning assets in 2002 with the
average cost of both being 3.74% compared to the time deposit average cost of
4.32%. NOW account balances were influenced by the growth in the Company's
public fund deposits and Gold Club product.
The net interest margin increased .06% to 4.34% in 2002 from 4.28% in
2001. This is compared to a .07% increase in the net interest margin in 2001.
Contributing to the increase in net interest margin in 2002 was the increase in
the net interest spread of .22%. The decrease in yield on earning assets of
1.01% was completely offset by the larger decrease in funding costs of 1.23%.
Contributing to the decline in yield on earning assets was a decrease in the
return on average loans of .97% from 2001. Total interest expense declined 14.1%
due to the costs of time deposits decreasing 1.61%, the cost of NOW accounts
decreasing 1.10% and the cost of borrowings decreasing .43%, impacted by the low
rate environment in 2002. The cost of borrowings could have decreased even
further, but management chose to lengthen the maturity of its funding
liabilities during 2002's low rate environment. The impact of interest free
funds on the net interest margin decreased from .61% in 2001 to .45% in 2002.
The .16% decrease in the contribution of interest free funding sources combined
with the .22% increase in the net interest spread yielded the .06% increase in
the net interest margin. The 2001 increase in net interest margin of .07% was
due to a .13% increase in net interest spread with lower asset yields of .27%
being completely offset by lower funding costs of .40%. The increase in net
interest spread was partially offset by a .06% decrease in interest free funding
sources.
NONINTEREST INCOME AND EXPENSE
Total noninterest income increased $505 in 2002, a 9.8% gain over 2001.
Total noninterest income increased 32.9% in 2001. Contributing to the growth in
noninterest income was the increase in service charge income on deposit accounts
which was up $115 in 2002 and $987 in 2001. Continued growth in transaction
account balances led to the overall increase in 2002. The large increase in 2001
was anticipated from the implementation of new products and services in the
fourth quarter of 2000 that generated additional service charge income in 2001
and did not have the same impact in 2002. Income earned on life insurance
contracts from the Company's supplemental retirement program was up $88 in 2002
and $114 in 2001. Other operating income increased $309 over 2001 due to the
gains on sale of mortgage loans as well as other fee income from debit and
credit card transactions, commissions earned from loan insurance sales and loan
service fees. Additionally, other operating income in 2001 increased $165 over
2000 driven by the Company's minority investments in insurance subsidiaries
ProFinance Holdings Corporation and BSG Title Services Agency, LLC.
Total noninterest expense increased $1,004 or 5.5% in 2002 and $1,193
or 7.0% in 2001. The most significant expense in this category is salary and
employee benefits which increased $826 or 8.4% from 2001 to 2002. Contributing
most to this increase were annual merit increases, rising benefit costs and
increases to incentive compensation plans in relation to the successful growth
in earnings experienced in 2002. The Company's full-time equivalent employee
base remained steady with 252 employees at year-end 2002 as compared to 249 at
year-end 2001. Salaries and employee benefits expense also increased $515 or
5.5% from 2000 to 2001 largely due to the increase in full-time equivalent
employees as well as annual merit increases and rising benefit costs. Growth in
additional offices and fixed assets has been relatively stable throughout 2002
with the addition of only one new finance company office in the third quarter.
This has provided for a net decrease in occupancy and furniture and equipment
expense, which were collectively down $39 or 1.6% in 2002 versus a decline of
$194 in 2001. Corporation franchise tax decreased $192 from 2001 to 2002 largely
due to a tax assessment charged to expense in 2001 that was related to the
exclusion of intercompany indebtedness for taxable net worth. The assessment was
challenged and the Company was successful in having the charge reversed in 2002.
Other noninterest expense was up $421 in 2002 and $654 in 2001. The increase in
2002 was largely driven by a one time charge off of fraudulent checks totaling
$484 in the second quarter. Management was successful in recovering over $100 by
year-end 2002 and is continuing to seek recoveries of this charge off. Other
noninterest expense increases in 2001 were related to new computer software
depreciation, general increases in overhead expenses related to continuing
growth and inflationary increases. The Company's efficiency ratio improved over
last year as a result of the growth in revenue sources (net interest income and
noninterest income) outpacing the growth in noninterest expense. The efficiency
ratio for 2002 improved to 58.1% from 62.5% in 2001.
FINANCIAL CONDITION:
SECURITIES
Management's goal in structuring the portfolio is to maintain a prudent
level of liquidity while providing an acceptable rate of return without
sacrificing asset quality. Maturing securities have historically provided
sufficient liquidity such that management has not sold a debt security in
several years.
The balance of total securities increased 18.2% over 2001 with the
ratio of securities to total assets increasing to 12.8% at December 31, 2002
compared to 11.9% at December 31, 2001. The Company's demand for securities was
mostly in Government agency bonds which increased $13,782 largely due to
pledging requirements that were necessary for public fund deposits. Government
agency bonds comprise 75% of total securities and as a result, the portfolio's
exposure to credit risk is minimal. The yield on reinvestment opportunities for
securities has continued to decline in 2002. The weighted average FTE yield on
debt securities at year-end 2002 was 4.69% as compared to 5.60% at year-end
2001. Table III provides a summary of the portfolio by category and remaining
contractual maturity. Issues classified as equity securities have no stated
maturity date and are not included in Table III.
LOANS
In 2002, total loans increased $50,901 or 10.0% to reach $559,561. The
largest contributor was commercial loans which experienced growth of $32,354 or
18.7%. The commercial loan area originated over $96,000 in loans for 2002.
Approximately 66% of these loans were originated in Gallia, Jackson, Pike and
Franklin counties and 22% were originated from the West Virginia markets. The
Company's commercial loan growth was impacted by the low interest rate
environment experienced during 2002 as well as the success experienced in the
Company's newer markets such as West Virginia contributing to a higher volume of
business opportunities. Contributions to the loan portfolio were also made from
the Company's consumer loan portfolio which expanded by $20,225 representing an
18.7% gain. The largest portion of consumer loans were originated through
indirect lending, primarily from area automobile dealers, and are subject to the
same underwriting as the Company's regular loans. As with commercial loans, auto
indirect loan opportunities were impacted by the low interest rate environment
evident in 2002 which allowed for more aggressive pricing on these loan types.
At December 31, 2002, indirect loan balances represented nearly half of total
consumer loans. In 2002, real estate loans declined $2,000 as compared to the
loan growth of $16,488 experienced in 2001. The Company began selling loans to
the Federal Home Loan Mortgage Corporation (Freddie Mac) in the fourth quarter
of 2002 which contributed to the overall decline in real estate mortgage loan
originations. The Company emphasizes the selling of 15 to 30 year real estate
loans at fixed rates which will assist management in minimizing its exposure to
interest rate risk. While the Company has generally originated real estate loans
for its own portfolio, the emphasis on selling long-term fixed rate real estate
loans on the secondary market will continue in 2003. Tables V, VI, and VII have
been provided to enhance the understanding of the loan portfolio and the
allowance for potential loan losses. Management evaluates the adequacy of the
allowance for loan losses quarterly based on several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, and management's estimate of probable losses. Actual losses on
loans are reflected as reductions in the reserve and are referred to as
charge-offs. The amount of the provision for loan losses charged to operating
expenses is the amount necessary, in management's opinion, to maintain the
allowance for loan losses at an adequate level. The allowance required is
primarily a function of the relative quality of the loans in the loan portfolio,
the mix of loans in the portfolio and the rate of growth of outstanding loans.
The ratio of net charge-offs to average total loans at December 31,
2002 was .86% up over .56% at December 31, 2001 due mostly to the $2,015
increase in net charge-offs within the consumer (particularly automobile
indirect) and commercial loan portfolios. This increase in net charge-offs was a
result of stronger emphasis being placed on improving the asset quality within
the Company's loan portfolio. Nonperforming loans, which include nonaccrual
loans and accruing loans past due 90 days or more, are returned to performing
status when the loan is brought current and has performed in accordance with
contractual terms. Nonperforming loans were approximately $8,060 at December 31,
2002 compared to $6,310 at the end of 2001. The increase in nonperforming loans
was the result of a single commercial line which is in the process of collection
and represented .70 percent of total loans which increased nonperforming loans
as a percentage of total loans to 1.44% for the year ending December 31, 2002 as
compared to 1.24% at year-end 2001.
For 2002, provision expense was up by $1,967 compared to the provision
expense for 2001. This increase in provision expense was largely associated with
the increases in net charge-offs as a percent of average total loans as well as
the growth in commercial loans which generally require a higher allocation of
the allowance for loan losses based on the risks associated with this loan type.
At December 31, 2002, the allowance for loan losses totaled $7,069, or 1.26% of
total loans, up $818 from December 31, 2001 when the allowance was 1.23% of
total loans. Management increased the allowance as a percent of total loans in
2002 due to an increase in nonperforming loans and a general decline in economic
conditions. Management feels that the allowance is adequate to absorb probable
and incurred losses in the portfolio based on collateral values as well as a
high relative volume of real estate mortgages. While management is comfortable
that the allowance for loan losses is adequate to absorb future losses inherent
in the loan portfolio, management is prepared to increase the allowance should
economic conditions dictate.
DEPOSITS
Interest-earning assets are funded primarily by core deposits. The
accompanying table IV shows the composition of total deposits as of December 31,
2002. Total deposits grew $41,543 or 9.1% to reach $497,404 by year-end 2002.
Leading the growth in deposits were time deposits which increased $22,625 or
8.5% over 2001. Generating $18,088 of this growth was certificates of deposit
gathered through national markets as well as brokered certificates of deposit.
These deposits sources were utilized to supplement deposit growth due to their
competitive cost and longer maturities compared to traditional retail sources.
With historical low interest rates, management lengthened maturities to protect
against rising interest rates. Interest-bearing demand deposits increased by
$13,633 or 14.9% over 2001. Driving this growth were increases in public fund
NOW accounts which were up $9,913 over 2001 and the Company's Gold Club product,
offering customers a NOW account with other banking benefits, which increased
$1,699 over 2001. Furthermore, non-interest bearing demand deposits increased
$2,262 or 4.0% during 2002. With the previous expansion into new markets,
management expects continued growth in deposits in 2003.
FUNDS BORROWED
During 2002, the Company utilized borrowed funds as one of its funding
sources as these balances grew to $95,435 at December 31, 2002 compared to
$90,856 at December 31, 2001. Other funds borrowed consist primarily of Federal
Home Loan Bank (FHLB) advances, securities sold under agreements to repurchase,
and promissory notes. FHLB advances are subject to collateral agreements and are
secured by qualifying first mortgage loans and FHLB stock. Management utilized
FHLB advances to primarily fund long-term assets. Similar to the certificates of
deposit strategy, management utilized FHLB advances to extend the average term
of its funding sources and help protect against rising interest rates. At
December 31, 2002, the balance of FHLB advances totaled $84,590 compared to
$81,564 at December 31, 2001. Management will continue to evaluate borrowings
from the FHLB as an alternative funding source in 2003. Promissory notes are
primarily associated with funding loans at Loan Central and most were issued
with terms of one year or less.
CAPITAL RESOURCES
The Company maintains a capital level that exceeds regulatory
requirements as a margin of safety for its depositors and shareholders.
Shareholders' equity totaled $50,375 at December 31, 2002, compared to $46,300
at December 31, 2001, which represents growth of 8.8%. All of the capital ratios
exceeded the regulatory minimum guidelines as identified in Note P "Regulatory
Matters".
Cash dividends paid of $2,315 for 2002 represents a 15.3% decrease over
the cash dividends paid during 2001. The decrease in cash dividends paid is due
to the special "freedom" dividend paid in the fourth quarter of 2001 at $.16 per
share which increased the number of dividend distributions to five compared to
four dividend distributions in 2002. Management deemed the special dividend
prudent to increase shareholder return and make an additional contribution back
to shareholders in light of the tragic events that impacted the economy in 2001.
Excluding the special dividend of 2001, cash dividends paid for 2002 would have
increased $133 or 6.1% over 2001 largely due to an increase in the dividend rate
paid per share.
The Company maintains a dividend reinvestment and stock purchase plan.
The plan allows shareholders to purchase additional shares of company stock. A
benefit of the plan is to permit the shareholders to reinvest cash dividends as
well as make supplemental purchases without the usual payment of brokerage
commissions. During 2002, shareholders invested $1,100 through the dividend
reinvestment and stock purchase plan. These proceeds resulted in the issuance of
28,285 new shares and the acquisition of 19,692 existing shares through open
market purchases for a total of 47,977 shares. At December 31, 2002,
approximately 76% of the shareholders were enrolled in the dividend reinvestment
plan. Members' reinvestment of dividends and supplemental purchases in 2002
represented 48% of year-to-date dividends paid. In addition, as part of the
Company's stock repurchase program in 2002, management purchased 27,125 shares
in the open market. The current stock repurchase program limits the number of
shares to be repurchased to 175,000 shares. At December 31, 2002, the Company
could repurchase an additional 18,000 shares under the existing share repurchase
program which is scheduled to expire on February 10, 2003.
LIQUIDITY AND INTEREST RATE SENSITIVITY
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. It is
management's policy not to position the balance sheet so as to expose the
Company to levels of interest rate risk which could significantly impair
earnings performance or endanger capital.
The Company's asset and liability committee monitors the rate
sensitivity of the balance sheet weekly through parameters established by the
Board of Directors. The committee uses interest rate sensitivity modeling
analysis prepared quarterly to monitor the relationship between the maturity and
repricing of its interest-earning assets and interest-bearing liabilities.
Interest rate sensitivity gap is defined as the difference between the amount of
interest-earning assets and interest-bearing liabilities maturing or repricing
within a specified time period. A gap position is considered positive when the
amount of interest sensitive assets exceeds the amount of interest sensitive
liabilities, and is considered negative when the amount of interest sensitive
liabilities exceeds the amount of interest sensitive assets. Generally, during a
period of rising interest rates, a negative gap would adversely affect net
interest income, while a positive gap would result in an increase in net
interest income. Conversely, during a period of falling interest rates, a
negative gap would result in an increase in net interest income, while a
positive gap would negatively affect net interest income. This analysis assumes
that interest rate changes for interest-earning assets and interest-bearing
liabilities are of the same magnitude and velocity, whereas actual interest rate
changes generally differ in magnitude and velocity. Based on the interest rate
sensitivity model, the Company was liability sensitive in the short term and
asset sensitive for periods over five years.
The Company's exposure to interest rate risk is primarily managed
through the selection of the type and repricing characteristics of
interest-earning assets and interest-bearing liabilities. Management can
influence the Company's gap position by offering fixed or variable rate
products, by changing the terms of new loans, investments and time deposits, or
by selling existing assets or repaying certain liabilities. The Company's
ability to manage its gap position can be challenged by customer preferences
which may not meet the Company's goals. The FHLB assists in funding
interest-earning assets by providing advances with similar repricing
characteristics as many of the loans offered by the Company.
Table VIII provides information about the Company's interest-bearing
financial instruments. The table presents information strictly by expected
maturity date without regard for repricing dates for variable rate products.
Noninterest-bearing checking deposits assume an annual decay rate of 13% and
savings and interest-bearing checking accounts assume an annual decay rate of
14% based on the Company's historical experience. A fundamental difference
between the table and the interest rate sensitivity model previously discussed
is that the table presents financial intruments based on the date of expected
cash flows while the model only focuses on repricing characteristics of
financial instruments.
Liquidity management should focus on matching the cash inflows and
outflows within the Company's natural market for loans and deposits. This goal
is accomplished by maintaining sufficient asset liquidity along with stable core
deposits. The primary sources of liquidity are interest-bearing balances with
banks, federal funds sold and the maturity and repayment of investments and
loans as well as cash flows provided from operations. The Company has classified
$75,264 in securities as available for sale at December 31, 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 December 31,
2002, the Bank could borrow an additional $44,000 from the Federal Home Loan
Bank. The Bank also has the ability to purchase federal funds from several of
its correspondent banks. See the consolidated statement of cash flows for
further cash flow information. 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.
INFLATION
Consolidated financial data included herein has been prepared in
accordance with US GAAP. Presently, US GAAP requires the Company to measure
financial position and operating results in terms of historical dollars with the
exception of securities available for sale, which are carried at fair value.
Changes in the relative value of money due to inflation or deflation are
generally not considered.
In management's opinion, changes in interest rates affect the financial
institution to a far greater degree than changes in the inflation rate. While
interest rates are greatly influenced by changes in the inflation rate, they do
not change at the same rate or in the same magnitude as the inflation rate.
Rather, interest rate volatility is based on changes in the expected rate of
inflation, as well as monetary and fiscal policies. A financial institution's
ability to be relatively unaffected by changes in interest rates is a good
indicator of its capability to perform in today's volatile economic environment.
The Company seeks to insulate itself from interest rate volatility by ensuring
that rate sensitive assets and rate sensitive liabilities respond to changes in
interest rates in a similar time frame and to a similar degree.
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.
CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME
Table I
December 31
------------------------------------------------------------------------------------
2002 2001 2000
(dollars in thousands) -------------------------- -------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
ASSETS
- ------
Interest-earning assets:
Interest-bearing balances $ 1,607 $ 15 .91% $ 1,068 33 3.03% $ 729 $ 34 4.63%
with banks
Federal funds sold 14,643 237 1.62 8,125 285 3.51 3,418 208 6.10
Securities:
Taxable 59,831 2,837 4.74 54,755 3,188 5.82 58,106 3,690 6.35
Tax exempt 14,582 1,051 7.21 15,034 1,079 7.18 15,898 1,137 7.15
Loans 538,148 43,954 8.17 473,998 43,330 9.14 432,165 40,483 9.37
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
earning assets 628,811 48,094 7.65% 552,980 47,915 8.66% 510,316 45,552 8.93%
Noninterest-earning assets:
Cash and due from banks 15,871 13,935 12,851
Other nonearning assets 29,594 28,970 26,257
Allowance for loan losses (6,715) (5,692) (5,118)
-------- -------- --------
Total noninterest-
earning assets 38,750 37,213 33,990
-------- -------- --------
Total assets $667,561 $590,193 $544,306
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $102,393 2,203 2.15% $88,340 2,873 3.25% $ 82,307 3,780 4.59%
Savings and Money Market 42,264 522 1.23 38,379 724 1.89 42,430 1,091 2.57
Time deposits 287,032 12,404 4.32 264,269 15,684 5.93 256,846 15,496 6.03
Repurchase agreements 23,090 361 1.56 19,893 627 3.15 17,606 859 4.88
Other borrowed money 98,938 5,320 5.38 74,525 4,327 5.81 47,311 2,839 6.00
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
bearing liabilities 553,717 20,810 3.76% 485,406 24,235 4.99% 446,500 24,065 5.39%
Noninterest-bearing liabilities:
Demand deposit accounts 57,824 50,267 47,291
Other liabilities 8,145 9,191 7,742
-------- -------- ------
Total noninterest-
bearing liabilities 65,969 59,458 55,033
Shareholders' equity 47,875 45,329 42,773
-------- -------- --------
Total liabilities and
shareholders' equity $667,561 $590,193 $544,306
======== ======== ========
Net interest earnings $27,284 $23,680 $21,487
======= ======= =======
Net interest earnings as a percent
of interest-earning assets 4.34% 4.28% 4.21%
----- ----- -----
Net interest rate spread 3.89% 3.67% 3.54%
----- ----- -----
Average interest-bearing liabilities
to average earning assets 88.06% 87.78% 87.49%
===== ===== =====
Fully taxable equivalent yields are calculated assuming a 34% tax rate, net of
nondeductible interest expense. Average balances are computed on an average
daily basis. The average balance for available-for-sale securities includes the
market value adjustment. However, the calculated yield is based on the
securities' amortized cost. Average loan balances include nonaccruing loans.
Loan income includes cash received on nonaccruing loans.
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE
Table II
2002 2001
----------------------------- ----------------------------
(dollars in thousands) Increase (Decrease) Increase (Decrease)
From Previous Year Due to From Previous Year Due to
----------------------------- ----------------------------
Volume Yield/Rate Total Volume Yield/Rate Total
------ ---------- ----- ------ ---------- -----
INTEREST INCOME
- ---------------
Interest-bearing balances
with banks $ 12 $ (29) $ (17) $ 13 $ (14) $ (1)
Federal funds sold 155 (203) (48) 194 (117) 77
Securities:
Taxable 277 (628) (351) (206) (296) (502)
Tax exempt (32) 4 (28) (62) 4 (58)
Loans 5,514 (4,891) 623 3,843 (996) 2,847
------- ------- ------- ------- ------- -------
Total interest income 5,926 (5,747) 179 3,782 (1,419) 2,363
INTEREST EXPENSE
- ----------------
NOW accounts 407 (1,076) (669) 261 (1,168) (907)
Savings and Money Market 68 (270) (202) (97) (270) (367)
Time deposits 1,263 (4,543) (3,280) 443 (255) 188
Repurchase agreements 88 (354) (266) 101 (333) (232)
Other borrowed money 1,332 (340) 992 1,583 (95) 1,488
------- ------- ------- ------- ------- -------
Total interest expense 3,158 (6,583) (3,425) 2,291 (2,121) 170
------- ------- ------- ------- ------- -------
Net interest earnings $ 2,768 $ 836 $ 3,604 $ 1,491 $ 702 $ 2,193
======= ======= ======= ======= ======= =======
The change in interest due to both volume and rate has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each. Fully taxable equivalent yield assumes a 34% tax
rate, net of related nondeductible interest expense.
SECURITIES
Table III
MATURING
---------------------------------------------------------------------------
As of December 31, 2002 Within After One but After Five but
(dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years
-------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Obligations of U.S. Government
agency securities $19,478 2.90% $47,360 4.58%
Obligations of states and
political subdivisions 1,697 7.95% 3,835 7.95% $5,927 7.43% $2,362 7.45%
Mortgage-backed securities 2 8.00% 2,913 4.31% 679 5.62%
------- ---- ------- ---- ------ ---- ------ ----
Total debt securiities $21,175 3.30% $51,197 4.84% $8,840 6.45% $3,041 6.85%
======= ==== ======= ==== ====== ==== ====== ====
Tax equivalent adjustments have been made in calculating yields on obligations
of states and political subdivisions using a 34% rate. Weighted average yields
are calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security. Mortgage-backed securities, which have
prepayment provisions, are assigned to a maturity based on estimated average
lives. Securities are shown at their carrying values which include the market
value adustments for available-for-sale securities.
DEPOSITS
Table IV as of December 31
(dollars in thousands)
2002 2001 2000
---- ---- ----
Interest-bearing deposits:
NOW accounts $105,130 $ 91,497 $ 80,336
Money Market 10,255 10,286 9,622
Savings accounts 33,704 30,650 26,976
IRA accounts 38,295 36,634 34,683
Certificates of Deposit 251,023 230,059 233,093
-------- -------- --------
438,407 399,126 384,710
Noninterest-bearing deposits:
Demand deposits 58,997 56,735 47,661
-------- -------- --------
Total deposits $497,404 $455,861 $432,371
======== ======== ========
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Table V Years Ended December 31
(dollars in thousands) 2002 2001 2000 1999 1998
- ---------------------- ---- ---- ---- ---- ----
Commercial loans $2,780 $1,831 $1,546 $1,278 $1,132
Percentage of loans to total loans 36.94% 34.21% 31.36% 29.33% 28.18%
Real estate loans 1,091 874 609 270 264
Percentage of loans to total loans 40.07% 44.47% 46.78% 49.04% 47.14%
Consumer loans 1,981 1,935 1,629 1,444 1,360
Percentage of loans to total loans 22.99% 21.32% 21.86% 21.63% 24.68%
Unallocated 1,217 1,611 1,601 2,063 1,521
------- ------- ------- ------- -------
Allowance for Loan Losses $7,069 $6,251 $5,385 $5,055 $4,277
======= ======= ======= ======= =======
100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
Ratio of net charge-offs
to average loans .86% .56% .36% .40% .46%
======= ======= ======= ======= =======
The above allocation is based on estimates and subjective judgements and is not
necessarily indicative of the specific amounts or loan categories in which
losses may ultimately occur.
SUMMARY OF NONPERFORMING AND PAST DUE LOANS
Table VI
(dollars in thousands) 2002 2001 2000 1999 1998
- ---------------------- ---- ---- ---- ---- ----
Impaired loans $4,780 $2,621 $1,233 $1,413 $ 624
Past due-90 days or more and
still accruing 1,491 3,013 3,691 3,711 2,106
Nonaccrual 6,569 3,297 2,948 2,953 981
Accruing loans past due 90
days or more to total loans .27% .59% .82% .90% .61%
Nonaccrual loans as a % of
total loans 1.17% .65% .66% .72% .28%
Impaired loans as a % of total loans .85% .52% .28% .34% .18%
Allowance for loans losses as a
% of total loans 1.26% 1.23% 1.20% 1.23% 1.23%
Management believes that the impaired loan disclosures are comparable to the
nonperforming loan disclosures except that the impaired loan disclosures do not
include single family residential or consumer loans which are analyzed in the
aggregate for loan impairment purposes.
In 2002, management adopted a new method of identifying impaired loans and
accordingly, has adjusted the 2001 impaired loan balances to reflect this
method. Management did not adjust impaired loan balances prior to 2001.During
2002, the Company recognized $160 of interest income on impaired loans.
Individual loans not included above that management feels have loss potential
total approximately $500. The Company has no assets which are considered to be
troubled debt restructings.
Management formally considers placing a loan on nonaccrual status when
collection of principal or interest has become doubtful.Furthermore, a loan
should not be returned to the accrual status unless either all delinquent
principal or interest has been brought current or the loan becomes well secured
and is in the process of collection.
MATURITY AND REPRICING DATA OF LOANS
Table VII
As of December 31, 2002 Maturing/Repricing
(dollars in thousands)
Within After One but
One Year Within Five Years After Five Years Total
-------- ----------------- ---------------- -----
Commercial loans and other $116,215 $ 44,195 $ 46,277 $206,687
Real estate loans 43,603 21,917 158,692 224,212
Consumer loans 22,172 74,390 32,100 128,662
-------- -------- -------- --------
Total loans $181,990 $140,502 $237,069 $559,561
======== ======== ======== ========
Loans maturing or repricing after one year with:
Variable interest rates $ 50,545
Fixed interest rates 327,026
--------
Total $377,571
========
RATE SENSITIVITY ANALYSIS
Table VIII
(dollars in thousands)
As of December 31, 2002 Principal Amount Maturing in:
There- Fair Value
2003 2004 2005 2006 2007 after Total 12/31/02
Rate-Sensitive Assets:
Fixed interest rate loans $ 11,575 $ 10,513 $ 21,012 $ 23,658 $ 31,402 $241,745 $339,905 $348,403
Average interest rate 9.04% 10.89% 9.59% 8.78% 7.89% 7.86% 8.17%
Variable interest rate loans $ 46,368 $ 3,821 $ 4,798 $ 5,978 $ 5,895 $152,796 $219,656 $221,393
Average interest rate 5.96% 5.53% 6.08% 6.19% 5.91% 6.38% 6.25%
Fixed interest rate securities $ 21,048 $ 20,332 $ 25,904 $ 500 $ 2,487 $ 11,808 $ 82,079 $ 85,097
Average interest rate 3.30% 4.86% 4.74% 5.63% 5.49% 6.55% 4.69%
Federal funds sold $ 4,625 $ 4,625 $ 4,625
Average interest rate 1.27% 1.27%
Other interest-bearing assets $ 1,505 $ 1,505 $ 1,505
Average interest rate 0.67% 0.67%
Total Rate-Sensitive Assets $ 85,121 $34,666 $ 51,714 $ 30,136 $ 39,784 $406,349 $647,770 $661,023
Average interest rate 5.37% 6.76% 6.83% 8.21% 7.45% 7.27% 7.01%
Rate-Sensitive Liabilities:
Noninterest-bearing checking $ 7,599 $ 6,620 $ 5,767 $ 5,025 $ 4,377 $ 29,609 $ 58,997 $ 58,997
Savings & Interest-bearing checking $ 21,193 $ 18,034 $ 15,372 $ 13,125 $ 11,225 $ 70,140 $149,089 $149,089
Average interest rate 1.50% 1.52% 1.54% 1.56% 1.57% 1.65% 1.59%
Time deposits $156,269 $ 68,303 $ 35,771 $ 15,453 $ 11,901 $ 1,621 $289,318 $295,209
Average interest rate 3.71% 3.89% 4.06% 4.49% 4.71% 6.87% 3.90%
Fixed interest rate borrowings $ 19,204 $ 17,702 $ 17,215 $ 17,607 $ 4,060 $ 19,147 $ 94,935 $100,261
Average interest rate 4.97% 4.96% 4.92% 4.92% 3.80% 6.80% 5.27%
Variable interest rate borrowings $ 47,052 $ 47,052 $ 47,052
Average interest rate 1.80% 1.80%
Total Rate-Sensitive Liabilities $251,317 $110,659 $ 74,125 $ 51,210 $ 31,563 $120,517 $639,391 $650,608
Average interest rate 3.15% 3.44% 3.42% 3.45% 2.82% 2.13% 3.05%
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% 80.59% 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%
KEY RATIOS
Table IX
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Return on average assets .85% .83% .81% .88% 1.01%
Return on average equity 11.85% 10.80% 10.29% 10.29% 10.69%
Dividend payout ratio 40.79% 55.84% 47.14% 43.73% 37.13%
Average equity to
average assets 7.17% 7.68% 7.86% 8.54% 9.46%