UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended:
JUNE 30, 2004
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ______________
Commission file number: 0-20914
OHIO VALLEY BANC CORP.
(Exact name of Registrant as specified in its charter)
Ohio
(State or other jurisdiction of incorporation or organization)
31-1359191
(I.R.S. Employer Identification Number)
420 Third Avenue. Gallipolis, Ohio 45631
(Address of principal executive offices) (Zip Code)
(740) 446-2631
(Registrant's telephone number, including area code)
Not Applicable
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
X Yes No
The number of common shares of the Registrant outstanding as of July 30, 2004
was 3,461,329.
OHIO VALLEY BANC CORP.
FORM 10-Q
INDEX
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements (Unaudited)....................................3
Consolidated Balance Sheets.......................................3
Consolidated Statements of Income.................................4
Condensed Consolidated Statements of Changes in
Shareholders' Equity............................................5
Condensed Consolidated Statements of Cash Flows...................6
Notes to the Consolidated Financial Statements....................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....\\..................................11
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........19
Item 4. Controls and Procedures............................................20
PART II - OTHER INFORMATION...................................................21
Item 1. Legal Proceedings..................................................21
Item 2. Changes in Securities and Use of Proceeds .........................21
Item 3. Defaults Upon Senior Securities....................................21
Item 4. Submission of Matters to a Vote of Security Holders................22
Item 5. Other Information..................................................22
Item 6. Exhibits and Reports on Form 8-K...................................22
SIGNATURES....................................................................23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
June 30, December 31,
2004 2003
------------ ------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 15,517 $ 17,753
Federal funds sold 1,125 --
------------ ------------
Total cash and cash equivalents 16,642 17,753
Interest-bearing deposits in other banks 1,255 859
Securities available-for-sale 70,142 76,352
Securities held-to-maturity (estimated
fair value: 2004 - $13,455; 2003 - $13,547) 13,054 12,835
Total loans 590,822 573,704
Less: Allowance for loan losses (7,137) (7,593)
------------ ------------
Net loans 583,685 566,111
Premises and equipment, net 9,098 9,142
Accrued income receivable 2,732 2,700
Goodwill 1,267 1,267
Bank owned life insurance 13,476 13,222
Other assets 5,828 7,086
------------ ------------
Total assets $ 717,179 $ 707,327
============ ============
LIABILITIES
Noninterest-bearing deposits $ 63,901 $ 62,235
Interest-bearing deposits 475,757 445,274
------------ ------------
Total deposits 539,658 507,509
Securities sold under agreements to repurchase 20,779 24,018
Other borrowed funds 78,371 101,562
Subordinated debentures 13,500 13,500
Accrued liabilities 8,833 6,330
------------ ------------
Total liabilities 661,141 652,919
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share,
10,000,000 shares authorized; 2004 -
3,674,314 shares issued; 2003 - 3,658,212
shares issued) 3,674 3,658
Additional paid-in capital 31,451 30,962
Retained earnings 26,872 23,343
Accumulated other comprehensive income (374) 624
Treasury stock, at cost (2004 - 205,985
shares; 2003 - 159,611 shares) (5,585) (4,179)
------------ ------------
Total shareholders' equity 56,038 54,408
------------ ------------
Total liabilities and
shareholders' equity $ 717,179 $ 707,327
============ ===========
See notes to consolidated financial statements
3
OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Interest and dividend income:
Loans, including fees $ 9,798 $ 10,551 $ 19,757 $ 21,239
Securities
Taxable 700 694 1,434 1,379
Tax exempt 139 172 284 345
Dividends 52 50 104 100
Other Interest 33 26 35 42
--------- --------- --------- ---------
10,722 11,493 21,614 23,105
Interest expense:
Deposits 2,813 3,174 5,554 6,490
Securities sold under
agreements to repurchase 49 48 91 101
Other borrowed funds 879 1,052 1,830 2,140
Subordinated debentures 234 -- 469 --
Obligated mandatorily redeemable
capital securities of
subsidiary trust -- 237 -- 476
--------- --------- --------- ---------
3,975 4,511 7,944 9,207
--------- --------- --------- ---------
Net interest income 6,747 6,982 13,670 13,898
Provision for loan losses 373 1,246 1,141 2,632
--------- --------- --------- ---------
Net interest income after provision
for loan losses 6,374 5,736 12,529 11,266
Noninterest income:
Service charges on deposit accounts 839 803 1,598 1,500
Trust fees 54 58 106 111
Income from bank owned insurance 148 172 311 344
Net gain on sale of loans 3 155 10 352
Net gain on sale of
ProCentury Corp. 2,463 -- 2,463 --
Other 298 340 623 667
--------- --------- --------- ---------
3,805 1,528 5,111 2,974
Noninterest expense:
Salaries and employee benefits 3,080 2,885 6,120 5,682
Occupancy 322 317 651 649
Furniture and equipment 318 240 601 477
Data processing 182 139 360 299
Other 1,444 1,458 2,802 2,856
--------- --------- --------- ---------
5,346 5,039 10,534 9,963
--------- --------- --------- ---------
Income before income taxes 4,833 2,225 7,106 4,277
Provision for income taxes 1,581 652 2,289 1,245
--------- --------- --------- ---------
NET INCOME $ 3,252 $ 1,573 $ 4,817 $ 3,032
========= ========= ========= =========
Earnings per share $ 0.94 $ 0.45 $ 1.39 $ 0.87
========= ========= ========= =========
See notes to consolidated financial statements
4
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (UNAUDITED)
(dollars in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Balance at beginning of period $ 54,476 $ 51,324 $ 54,408 $ 50,375
Comprehensive income:
Net income 3,252 1,573 4,817 3,032
Change in unrealized gain
(loss) on available-for-sale
securities (1,621) 41 (1,512) (195)
Income tax effect 551 (14) 514 66
--------- --------- --------- ---------
Total comprehensive income 2,182 1,600 3,819 2,903
Proceeds from issuance of common
stock through dividend reinvestment
plan 242 153 505 387
Cash dividends (659) (626) (1,288) (1,214)
Shares acquired for treasury (203) -- (1,406) --
--------- --------- --------- ---------
Balance at end of period $ 56,038 $ 52,451 $ 56,038 $ 52,451
========= ========= ========= =========
Cash dividends per share $ 0.19 $ 0.18 $ 0.37 $ 0.35
========= ========= ========= =========
Shares from common stock issued
through dividend reinvestment plan 6,958 6,713 16,102 17,260
========= ========= ========= =========
Shares acquired for treasury 5,890 -- 46,374 --
========= ========= ========= =========
See notes to consolidated financial statements
5
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Six months ended June 30,
2004 2003
------------ ------------
Net cash from operating activities: $ 10,748 $ 3,370
Investing activities:
Proceeds from maturities of securities
available-for-sale 15,754 21,653
Purchases of securities available-for-sale (11,077) (21,023)
Proceeds from maturities of securities
held-to-maturity 824 513
Purchases of securities held-to-maturity (1,056) (1,040)
Change in interest-bearing deposits
in other banks (396) (37)
Net change in loans (18,726) 2,678
Proceeds from sale of other real estate owned (163) (546)
Purchases of premises and equipment (549) (850)
------------ ------------
Net cash from (used) in investing activities (15,389) 1,348
Financing activities:
Change in deposits 32,149 13,401
Cash dividends (1,288) (1,214)
Proceeds from issuance of common stock 505 387
Purchases of treasury stock (1,406) --
Change in securities sold under
agreements to repurchase (3,239) (7,717)
Proceeds from long-term borrowings 3,000 3,415
Repayment of long-term borrowings (12,958) (9,879)
Change in other short-term borrowings (13,233) 120
------------ ------------
Net cash from (used) in financing activities 3,530 (1,487)
------------ ------------
Change in cash and cash equivalents (1,111) 3,231
Cash and cash equivalents at beginning of period 17,753 23,451
------------ ------------
Cash and cash equivalents at end of period $ 16,642 $ 26,682
============ ============
Supplemental Disclosure:
Cash paid for interest $ 7,995 $ 9,693
Cash paid for income taxes 1,837 1,395
Non-cash transfers from loans to
other real estate owned 174 3,598
See notes to consolidated financial statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Ohio
Valley Banc Corp. (the "Company") and its wholly-owned subsidiaries, The Ohio
Valley Bank Company (the "Bank"), Loan Central, Inc., a consumer finance
company, and Ohio Valley Financial Services Agency, LLC, an insurance agency. As
further discussed in Note 1, trusts that had previously been consolidated with
the Company are now reported separately. All material intercompany accounts and
transactions have been eliminated in consolidation.
These interim financial statements are prepared without audit and reflect all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Company at June 30, 2004, and its results of operations and cash flows for the
periods presented. The results of operations for the six months ending June 30,
2004 are not necessarily indicative of the operating results to be anticipated
for the full fiscal year ending December 31, 2004. The accompanying consolidated
financial statements do not purport to contain all the necessary financial
disclosures required by accounting principles generally accepted in the United
States of America (US GAAP) that might otherwise be necessary in the
circumstances. The Annual Report of the Company for the year ended December 31,
2003 contains consolidated financial statements and related notes which should
be read in conjunction with the accompanying consolidated financial statements.
The accounting and reporting policies followed by the Company conform to US
GAAP. The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates. The allowance for loan losses is particularly subject to
change.
The majority of the Company's income is derived from commercial and retail
lending activities. Management considers the Company to operate in one segment,
banking.
INCOME TAX
Income tax expense is the sum of the current year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
CASH FLOW
For consolidated financial statement classification and cash flow reporting
purposes, cash and cash equivalents include cash on hand, noninterest-bearing
deposits with banks and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods. The Company reports net cash flows for
customer loan transactions, deposit transactions, short-term borrowings and
interest-bearing deposits with other financial institutions.
7
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average shares outstanding
during the period. Weighted average shares outstanding were 3,468,842 and
3,477,455 for the three months ending June 30, 2004 and 2003, respectively.
Weighted average shares outstanding were 3,484,600 and 3,473,290 for the six
months ending June 30, 2004 and 2003, respectively.
LOANS
Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income on loans is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income on loans is not reported when full loan repayment is in doubt, typically
when the loan is impaired or payments are past due over 90 days. Payments
received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance for probable incurred
credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. Management
estimates the allowance balance required using past loan loss experience, the
nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
ACCOUNTING PRONOUNCEMENTS
In 2003, the Company adopted FASB Interpretation 46, Consolidation of Variable
Interest Entities. Interpretation 46, as revised in December 2003, changes the
accounting model for consolidation from one based on consideration of control
through voting interests. Whether to consolidate an entity will now also
consider whether that entity has sufficient equity at risk to enable it to
operate without additional financial support, whether the equity owners in that
entity lack the obligation to absorb expected losses or the right to receive
residual returns of the entity, or whether voting rights in the entity are not
proportional to the equity interest and substantially all the entity's
activities are conducted for an investor with few voting rights.
8
Prior to 2003, Ohio Valley Statutory Trusts I and II were consolidated in the
Company's financial statements, with the trust preferred securities issued by
the trust reported in liabilities and the subordinated debentures issued by the
Company eliminated in consolidation. Under this new accounting guidance, the
trusts are no longer consolidated with the Company. Accordingly, the Company
does not report the securities issued by the trust as liabilities, and instead
reports as liabilities the subordinated debentures issued by the Company and
held by the trust, as these are no longer eliminated in consolidation. Since the
Company's equity interest in the trusts cannot be received until the
subordinated debentures are repaid, these amounts have been netted. The effect
of no longer consolidating the trust changes certain balance sheet
classifications but does not change the Company's equity or net income.
Accordingly, the amounts previously reported as "obligated mandatorily
redeemable capital securities of a subsidiary trust" in liabilities have been
recaptioned "subordinated debentures" and continue to be presented in
liabilities on the balance sheet. The changes under this new accounting guidance
were implemented in the first quarter of 2004.
NOTE 2 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
June 30, December 31,
2004 2003
------------ ------------
Commercial and industrial loans $ 225,466 $ 220,724
Real estate loans 223,732 217,636
Consumer loans 140,860 134,720
Other loans 764 624
------------ ------------
$ 590,822 $ 573,704
============ ============
At June 30, 2004 and December 31, 2003, loans on nonaccrual status were
approximately $1,712 and $2,655, respectively. Loans past due more than 90 days
and still accruing at June 30, 2004 and December 31, 2003 were $765 and $659,
respectively.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses for the six
months ended June 30:
2004 2003
---------- ----------
Balance - January 1, $ 7,593 $ 7,069
Loans charged off:
Real estate 414 276
Commercial 1,059 1,670
Consumer 963 1,376
---------- -----------
Total loans charged off 2,436 3,322
Recoveries of loans:
Real estate 209 148
Commercial 138 374
Consumer 492 440
---------- -----------
Total recoveries 839 962
---------- -----------
Net loan charge-offs (1,597) (2,360)
Provision charged to operations 1,141 2,632
---------- -----------
Balance - June 30, $ 7,137 $ 7,341
9
Information regarding impaired loans is as follows:
June 30, December 31,
2004 2003
-------------- ---------------
Balance of impaired loans $ 2,513 $ 1,988
============== ===============
Less portion for which no specific
allowance is allocated $ 677 $ 801
============= ===============
Portion of impaired loan balance for
which a specific allowance for credit
losses is allocated $ 1,836 $ 1,187
============== ===============
Portion of allowance for loan losses
specifically allocated for the
impaired loan balance $ 1,498 $ 475
============== ===============
Average investment in impaired loans
year-to-date $ 2,703 $ 2,082
============== ===============
Interest on impaired loans was not material for the periods ended June 30, 2004
and 2003, respectively.
NOTE 4 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
The Company, through its subsidiaries, grants residential, consumer, and
commercial loans to customers located primarily in the central and southeastern
areas of Ohio as well as the western counties of West Virginia. Approximately
3.57% of total loans were unsecured at June 30, 2004 as compared to 3.99% at
December 31, 2003.
The Company is a party to financial instruments with off-balance sheet risk.
These instruments are required in the normal course of business to meet the
financial needs of its customers. The contract or notional amounts of these
instruments are not included in the consolidated financial statements. At June
30, 2004, the contract or notional amounts of these instruments, which primarily
include commitments to extend credit and standby letters of credit and financial
guarantees, totaled approximately $62,735 as compared to $58,496 at December 31,
2003.
NOTE 5 - OTHER BORROWED FUNDS
Other borrowed funds at June 30, 2004 and December 31, 2003 are comprised of
advances from the Federal Home Loan Bank (FHLB) of Cincinnati, promissory notes
and Federal Reserve Bank Notes.
FHLB Promissory FRB
Borrowings Notes Notes Totals
---------- ---------- ---------- ----------
June 30, 2004....... $ 66,696 $ 6,293 $ 5,382 $ 78,371
December 31, 2003... $ 90,729 $ 7,031 $ 3,802 $ 101,562
Pursuant to collateral agreements with the FHLB, advances are secured by certain
qualifying first mortgage loans and by FHLB stock which totaled $100,044 and
$5,307 at June 30, 2004. Fixed rate FHLB advances of $66,696 mature through 2010
and have interest rates ranging from 3.25% to 6.62%.
10
Promissory notes, issued primarily by the parent company, have fixed rates of
2.85% to 4.25% and are due at various dates through a final maturity date of
November 7, 2005.
At June 30, 2004, scheduled principal payments through December 31 over the next
five years are as follows:
FHLB Promissory FRB
Borrowings Notes Notes Totals
---------- ---------- ---------- ----------
2004 $ 8,718 $ 2,828 $ 5,382 $ 16,928
2005 17,116 3,465 -- 20,581
2006 17,608 -- -- 17,608
2007 4,061 -- -- 4,061
2008 9,010 -- -- 9,010
Thereafter 10,183 -- -- 10,183
---------- ---------- ---------- ----------
$ 66,696 $ 6,293 $ 5,382 $ 78,371
========== ========== ========== ==========
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $29,000 at June 30, 2004
and December 31, 2003. Various securities from the Bank used to collateralize
FRB notes totaled $5,390 at June 30, 2004 and $5,995 at December 31, 2003.
NOTE 6 - GAIN ON SALE OF PROCENTURY
On April 26, 2004, the Company sold 450,000 common shares of ProCentury Corp.
("ProCentury"), a Columbus-based property and casualty insurer, which
represented 9% of ProCentury's outstanding common stock. The transaction was
completed as part of ProCentury's initial public offering. The sale of stock,
which represented 100% of the Company's ownership in ProCentury, resulted in a
pre-tax gain of $2,463 and an after-tax gain of $1,625 ($.47 cents per share).
The Company's investment in ProCentury was made in October of 2000 to allow for
more diversification of operations by becoming part of a property and casualty
insurance underwriter as made permissible by the Gramm-Leach-Bliley Act of 1999.
The Company decided to liquidate its investment to utilize the cash proceeds to
enhance the Company's core business of banking through branch renovations and
expansion.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(dollars in thousands, except share and per share data)
The following discussion focuses on the consolidated financial condition of the
Company and its subsidiaries at June 30, 2004, compared to December 31, 2003,
and the consolidated results of operations for the quarterly and year-to-date
periods ending June 30, 2004 compared to the same periods in 2003. The purpose
of this discussion is to provide the reader a more thorough understanding of the
consolidated financial statements. This discussion should be read in conjunction
with the interim consolidated financial statements and the footnotes included in
this Form 10-Q.
The Company is not aware of any trends, events or uncertainties that will have
or are reasonably likely to have a material effect on the liquidity, capital
resources or operations except as discussed herein. Also, the Company is not
aware of any current recommendations by regulatory authorities which would have
such effect if implemented.
11
Comparison of
Financial Condition
at June 30, 2004 and December 31, 2003
--------------------------------------
Introduction
The consolidated total assets of the Company increased $9,852 or 1.4% during the
first six months of 2004 to finish at $717,179. This increase in assets was
primarily due to an increase in the Company's loan portfolio, which is up
$17,118, partially offset by a $5,991 decline in securities from year-end 2003.
Loan growth in the first quarter resulted in a decrease in the Company's cash
and cash equivalents which are down $1,111 from year-end 2003. In addition to
cash, the Company's year-to-date loan growth was also funded by an increase in
the Company's total deposits which were up $32,149, primarily from a 10%
increase in time deposits. Growth in deposits also provided additional funds to
pay down other borrowings which have decreased $23,191 from year-end 2003.
Cash and Cash Equivalents
The Company's cash and cash equivalents consist of cash and balances due from
banks and federal funds sold. The amounts of cash and cash equivalents fluctuate
on a daily basis due to customer activity and liquidity needs. At June 30, 2004,
cash and cash equivalents totaled $16,642, down 6.26% compared to $17,753 at
December 31, 2003. This decrease was primarily attributable to the Company's
increased funding needs related to the growth in the loan portfolio as well as
fewer items in the process of collection at June 30, 2004. Management believes
that the current balance of cash and cash equivalents, although down from
year-end 2003, remains at a level that will meet cash obligations and provide
adequate liquidity. Further information regarding the Company's liquidity can be
found under the caption "Liquidity" in this management's discussion and
analysis.
Securities
During the first six months of 2004, securities declined $5,991 or 6.7% led by a
decline in U.S. government agency securities of $10,975 or 29.0% offset
partially by an increase in higher yielding mortgage-backed securities of $4,648
or 13.9%. The Company has shifted from investing in U.S. government agency
securities to mortgage-backed securities primarily to improve both the yield in
the securities portfolio and the timing of cash flows due to the more rapid
repayment of principal in mortgage-backed securities.
Loans
During the first six months of 2004, total loans were up $17,118 or 3.0% from
year-end 2003 led by increases in the Company's consumer, real estate and
commercial loan portfolios. This growth was led by consumer loans which were up
$6,140 or 4.6% from year-end 2003 to reach $140,860. Consumer loan growth came
primarily from originations in the areas of automobiles (both direct and
indirect), mobile homes and recreational vehicles, which were collectively up
$5,376 from year-end 2003. Indirect automobile lending continues to represent
the largest portion of the Company's consumer loan portfolio with balances of
$49,300 and $47,800 at June 30, 2004 and December 31, 2003, respectively. The
Company believes the growth in the consumer loan portfolio is attributable to
the low interest rate environment which allows for more aggressive loan pricing.
12
During the first six months of 2004, total real estate loans increased $6,096 or
2.8% from year-end 2003 to reach $223,732. In 2003, the Company's real estate
loan portfolio was impacted by a heavy period of mortgage refinancing triggered
by a record low rate interest environment. This prompted the Company's
risk-management strategy of selling its longer term (15 to 30 year) fixed rate
real estate loan originations to the secondary market while growing its 1 year
adjustable rate products. As the Company's loan portfolio is better positioned
for a "rise" in interest rates and the heavy period of mortgage refinancing
declining, the Company has experienced real estate loan growth mostly in its 15
and 20 year fixed rate products, which are up $7,000 or 12.4% from year-end
2003.
The Company's loan growth was also attributable to a $4,742 or 2.1% increase in
commercial loan balances from year-end 2003. This commercial growth came mostly
from lending opportunities within the Company's primary market areas of Gallia,
Jackson, Pike and Franklin counties in Ohio, which accounted for 68% of the
total increase. The Company's growing West Virginia markets contributed 10% to
total commercial loan originations. Commercial loans represent the largest
portion of the total loan portfolio of 38% at June 30, 2004 and December 31,
2003. Continued commercial loan volume in 2004 will be dependent upon economic
conditions as well as general demand for loans in the Company's market area.
Allowance for Loan Losses
During the first six months of 2004, the Company experienced a $763 or 32.3%
decrease in net charge offs as compared to the same period in 2003. The decline
in net charge offs, particularly consumer and commercial loans, is largely
attributed to the Company's improved nonperforming loan status. The Company's
nonperforming loans at June 30, 2004 totaled $2,477 as compared to $5,911 for
the same period in 2003, which emphasizes management's continued focus on asset
quality. The decreased nonperforming loans improved the Company's ratio of
nonperforming loans as a percentage of total loans to .42% as of June 30, 2004
compared to 1.08% at June 30, 2003 and .97% at June 30, 2002. Due to this
decline in nonperforming loans caused by improvements in asset quality and lower
portfolio risk, the ratio of allowance for loan losses to total loans decreased
to 1.21% at June 30, 2004 as compared to 1.32% at December 31, 2003 and June 30,
2003. Management believes that the allowance for loan losses is adequate to
absorb probable losses in the loan portfolio.
Deposits
Total deposit growth of $32,149 or 6.3% during the first six months of 2004 was
primarily in time deposits which increased $29,017 or 10.2%. This growth was
primarily driven by increases in the Company's brokered CD and network CD
issuances of $14,000 and $7,598, respectively, during the first six months of
2004. Management continues to utilize these deposit sources from local and
national markets to not only supplement deposit growth, but also fund growth in
earning assets as well as reduce other borrowed funds. The Company's
interest-free funding source, noninterest bearing demand deposits, grew $1,666
or 2.7% during the first six months of 2004 over year-end 2003. This increase
occurred mostly in business and pay-it-safe checking account balances which were
up $1,866. In addition, the Company's interest bearing demand deposits declined
$2,045 or 1.8% during the same period largely due to decreases in the Company's
public fund, Gold Club and Earnie NOW account balances.
Other Borrowed Funds
Other borrowed funds consist primarily of advances from the Federal Home Loan
Bank ("FHLB"), which are used to fund loan growth and short-term liquidity
needs. Other borrowed funds are down $23,191 or 22.8% from December 31, 2003.
With the growth in deposits outpacing asset growth, management was able to
reduce short-term borrowings from the FHLB by $14,075 and long-term fixed rate
borrowings from the FHLB by $9,958 from year-end 2003. Based on the current low
interest rate environment, management prefers funding asset growth with term
deposits rather than variable rate borrowings.
13
Shareholders' Equity
Total shareholders' equity at June 30, 2004 of $56,038 was up by $1,630 or 3.0%
as compared to the balance of $54,408 on December 31, 2003. This increase was
largely due to year-to-date income of $4,817 plus proceeds of $505 from the
issuance of common stock through the dividend reinvestment plan less cash
dividends paid of $1,288 or $.37 per share year-to-date. While cash dividends
represented 26.7 % of year-to-date income, dividends net of proceeds from the
dividend reinvestment plan represented only 16.3% of year-to-date income.
Partially offsetting the growth in capital was an increase in the amount
treasury stock repurchases. The Company had treasury stock totaling $5,585 at
June 30, 2004, an increase of $1,406 as compared to the total at year-end 2003.
During the first six months of 2004, the Company repurchased 46,374 common
shares at an average price of $30.32 per share under the 2004 Stock Repurchase
Program. The Company anticipates repurchasing additional common shares as
authorized by its 2004 Stock Repurchase Program.
Further offsetting the growth in capital was a decrease in the Company's market
value on available-for-sale securities which lowered shareholders' equity by
$998, net of deferred income taxes. At June 30, 2004, the Company had an
unrealized loss, net of deferred income taxes, totaling $374 as compared to an
unrealized gain, net of deferred income taxes, totaling $624 at December 31,
2003. The Company has approximately 84% of its securities classified as
available-for-sale. As a result, the securities and shareholders' equity
sections of the Company's balance sheet are more sensitive to the changing
market values of securities than if the securities were classified as
held-to-maturity.
Comparison of
Results of Operations
for the Quarter and Year-To-Date Periods
Ended June 30, 2004 and 2003
----------------------------------------
Introduction
For the three months ended June 30, 2004, net income totaled $3,252, up $1,679
or 106.7% from $1,573 a year ago. For the six months ended June 30, 2004, net
income totaled $4,817, up $1,785 or 58.9% over the $3,032 earned a year ago.
Comparing June 30, 2004 to June 30, 2003, the annualized year-to-date return on
assets improved from .89% to 1.35%, while return on equity improved from 11.95%
to 17.57%. Second quarter 2004 earnings per share was $.94, up 108.9% over last
year's $.45 second quarter earnings per share. During the first six months of
2004, earnings per share was $1.39, up 59.8% over last year's $.87 per share.
The quarterly and year-to-date gains in net income and earnings per share were
primarily due to the Company's sale of its minority interest in an insurance
investment ProCentury, which resulted in an after-tax gain of $1,625 or $.47 per
share. For additional information on the ProCentury transaction, please refer to
Note 6 of the Company's consolidated financial statements under the caption
"Gain on Sale of ProCentury" located on page 11 of this Form 10-Q. Significant
improvement in the Company's asset quality also contributed to the increase in
net income by lowering provision expense by $873 and $1,491 for the quarterly
and year-to-date periods of 2004, as compared to 2003, respectively.
Net Interest Income
For the second quarter of 2004, net interest income was down $235 or 3.4% as
compared to the second quarter of 2003. Through the first six months of 2004,
net interest income was down $228 or 1.6% as compared to the same period in
2003. The second quarter and year-to-date decreases to net interest income were
primarily due to the growth in earning assets being completely offset by net
interest margin compression from a sustained low interest rate environment. This
net interest margin compression is a result of declining earning asset yields
combined with limited opportunities for corresponding decreases to average rates
paid on the Company's interest-bearing liabilities.
14
Total interest income decreased $771 or 6.7% for the second quarter of 2004 and
decreased $1,491 or 6.5% through the first six months of 2004 as compared to the
same periods in 2003. Growth in average earning assets of $22,941 or 3.5%
through the first six months of 2004 was completely offset by declining asset
yields, which were down 72 basis points as compared to the first six months in
2003. This can be attributed to the high volume of mortgage refinancing
throughout 2003 that resulted in the real estate loan portfolio shifting from
higher-yielding fixed rate mortgages to adjustable rate mortgages at
significantly lower rates.
Total interest expense decreased $536 or 11.9% for the second quarter of 2004
and decreased $1,263 or 13.7% through the first six months of 2004 as compared
to the same periods in 2003. The decline in interest expense was attributable to
a 50 basis point year-to-date decrease in the Bank's average funding costs due
to the sustained low interest rate environment. As a result, the Company's net
interest margin through the first six months of 2004 decreased to 4.12% from
4.36% in the same period for 2003. For additional discussion on the Company's
rate sensitive assets and liabilities, please see Item 3, Quantitative and
Qualitative Disclosure About Market Risk on page 19 of this Form 10-Q.
Provision Expense
The Company's provision expense was $373 in the second quarter of 2004, down
$873 or 70.1% as compared to the same period in 2003. The Company's provision
expense finished at $1,141 through the first six months of 2004, down $1,491 or
56.6% as compared to the same period in 2003. These significant decreases are
largely due to the Company's improved asset quality as well as lower levels of
loan delinquencies. Through the first six months of 2004, the Company
experienced an $837 decline in nonperforming loans to finish at $2,477 at June
30, 2004 as compared to $3,314 in nonperforming loans at December 31, 2003 and
$5,979 at June 30, 2003. In addition, the Company's net charge offs declined
$763 or 32.3% through the first six months of 2004 as compared to the same
period in 2003. The combination of fewer nonperforming loans, declining net
charge offs and improved asset quality had a direct effect on the lower amounts
of provision that were recorded to the allowance for loan losses during the
first quarter and year-to-date periods of 2004 as compared to 2003. Future
provisions to the allowance for loan losses will continue to be based on the
Company's quarterly minimum adequacy analysis that is discussed further in
detail under the caption "Critical Accounting Policies - Allowance for Loan
Losses" on page 17 of this Form 10-Q.
Noninterest Income
Total noninterest income increased $2,277 or 149.0% for the second quarter and
$2,137 or 71.9% for the first six months of 2004 as compared to the same periods
in 2003. Driving the quarterly and year-to-date increases was the sale of the
Company's interest in ProCentury, a Columbus-based property and casualty
insurer, on April 26, 2004. The sale of stock ownership in ProCentury, which was
part of an initial public offering, resulted in gross income of $2,463
recognized. For additional information on the ProCentury transaction, please
refer to Note 6 of the Company's consolidated financial statements under the
caption "Gain on Sale of ProCentury" located on page 11 of this Form 10-Q.
Growth in noninterest income was also positively impacted by continued growth in
the Company's service charge revenue on deposit accounts, which was up $36 or
4.5% for the second quarter and $98 or 6.5% for the first six months of 2004 as
compared to the same periods in 2003. This growth in service charge income
primarily came from overdraft fees relative to the consistent average growth in
the Company's checking account balances. At June 30, 2004, the Bank's average
checking account balances were $69,200 as compared to $61,700 and $58,400 for
the same periods in 2003 and 2002.
15
Partially offsetting the gains in noninterest income was the Company's net gain
on sale of loans decreasing $152 for the second quarter and $342 for the six
months ending June 30, 2004 as compared to the same periods in 2003. This was
the result of a decline in volume of the Bank's secondary market sales of new
long-term, fixed rate real estate loan originations. As previously mentioned,
the mortgage refinancing boom appears to have peaked and has resulted in the
Bank not having sold a real estate loan to the secondary market in 2004 as
compared to approximately 140 loans being sold in the first and second quarters
of 2003. Additionally, the Company's income from bank owned insurance decreased
$24 or 14.0% for the second quarter and $33 or 9.6% for the six months ending
June 30, 2004 as compared to the same periods in 2003 due to lower market rates.
Furthermore, other noninterest income was down $42 or 12.4% for the second
quarter and $44 or 6.6% for the six months ending June 30, 2004 as compared to
the same time periods in 2003. This was in relation to the elimination of a
quarterly fee associated with joint marketing services between the Company and
ProCentury. The second quarter liquidation of ProCentury effectively terminated
these services at the end of the first quarter 2004 which resulted in a decrease
of $43 in other noninterest income for the three and six months ending June 30,
2004 as compared to the same periods in 2003.
Noninterest Expense
Total noninterest expense increased $307 or 6.1% for the second quarter of 2004
and $571 or 5.7% for the first six months of 2004 as compared to the same
periods in 2003. Contributing most to the quarterly and year-to-date increases
were salaries and employee benefits, the Company's largest noninterest expense
item, which increased $195 or 6.8% for the second quarter of 2004 and $438 or
7.7% for the first six months of 2004 as compared to the same periods in 2003.
This increase was related to the rising cost of medical insurance, annual merit
increases and an increase in the Bank's full-time equivalent employee base from
243 employees at June 30, 2003 to 255 employees at June 30, 2004. Also adding to
the quarterly and year-to-date growth in noninterest expense were furniture and
equipment costs being up $78 or 32.5% for the second quarter of 2004 and $124 or
26.0% for the first six months of 2004 as compared to the same periods in 2003.
This was largely due to the depreciation of furniture and equipment related to
the Company's various investments in facility upgrades (Milton, WVa), operating
system upgrades (AS400 computer), as well as newer "up-to-date" personal
computer systems to improve employee and network efficiency. The remaining
noninterest expense categories were collectively up $34 or 1.8% for the second
quarter of 2004 and $9 or .2% for the first six months of 2004 as compared to
the same periods in 2003.
Capital Resources
All of the capital ratios exceeded the regulatory minimum guidelines as
identified in the following table:
Company Ratios Regulatory Well
6/30/04 12/31/03 Minimum Capitalized
Tier 1 risk-based capital 12.2% 12.0% 4.00% 6.0%
Total risk-based capital ratio 13.5% 13.3% 8.00% 10.0%
Leverage ratio 9.5% 9.5% 4.00% 5.0%
Cash dividends paid of $659 for the second quarter and $1,288 for the first six
months of 2004 represent a 5.3% quarterly increase and a 6.1% year-to-date
increase over the cash dividends paid during the same periods in 2003. The
increase in cash dividends paid for both periods is largely due to an increase
in the dividend rate paid per share. The quarterly dividend rate increased from
$0.18 to $0.19 in 2004 as compared to the same period in 2003 which contributed
to an increase in the Company's year-to-date dividend rate from $0.35 to $0.37
per share in 2004 as compared to the same period in 2003. The dividend rate has
increased in proportion to the consistent growth in retained earnings. At June
30, 2004, approximately 78% of the shareholders were enrolled in the Company's
dividend reinvestment plan. As part of the Company's stock purchase program,
management will continue to utilize reinvested dividends and voluntary cash, if
necessary, to purchase shares on the open market to be redistributed through the
dividend reinvestment plan.
16
Liquidity
Liquidity relates to the Bank's ability to meet the cash demands and credit
needs of its customers and is provided by the ability to readily convert assets
to cash and raise funds in the market place. Total cash and cash equivalents,
interest-bearing deposits with banks, held-to-maturity securities maturing
within one year and securities available-for-sale of $89,630 represented 12.5%
of total assets at June 30, 2004. In addition, the FHLB offers advances to the
Bank which further enhances the Bank's ability to meet liquidity demands. At
June 30, 2004, the Bank could borrow an additional $51 million from the FHLB.
The Company experienced a decrease of $1,111 in cash and cash equivalents for
the six months ended June 30, 2004. See the condensed consolidated statement of
cash flows on page 6 for further cash flow information.
Off-Balance Sheet Arrangements
The Company engages in certain off-balance sheet credit-related activities,
including commitments to extend credit and standby letters of credit, which
could require the Company to make cash payments in the event that specified
future events occur. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Standby letters of credit are
conditional commitments to guarantee the performance of a customer to a third
party. While off-balance sheet activities are necessary to meet the financing
needs of the Company's customers, many of these commitments are expected to
expire without being drawn upon; therefore, the total amount of commitments does
not necessarily represent future cash requirements.
Critical Accounting Policies
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Management views
critical accounting policies to be those which are highly dependent on
subjective or complex judgments, estimates and assumptions, and where changes in
those estimates and assumptions could have a significant impact on the financial
statements. Management currently views the adequacy of the allowance for loan
losses to be a critical accounting policy.
To arrive at the total dollars necessary to maintain an allowance level
sufficient to absorb the probable losses at a specific financial statement date,
management has developed procedures to establish and then evaluate the allowance
once determined. The allowance consists of the following components: specific
allocation, general allocation and other estimated general allocation.
To arrive at the amount required for the specific allocation component, the
Company evaluates loans for which a loss may be incurred either in part or
whole. To achieve this task, the Company has created a quarterly report
("Watchlist") which lists loans from each loan portfolio that management deems
to be potential credit risks. The criteria to be placed on this report are: past
due 60 or more days, nonaccrual and loans management has determined to be
17
potential problem loans. These loans are reviewed and analyzed for potential
loss by the Large Loan Review Committee which consists of the President and
members of senior management with lending authority. The function of the
Committee is to review and analyze large borrowers for credit risk, scrutinize
the Watchlist and evaluate the adequacy of the allowance for loan losses and
other credit related issues. The Committee has established a grading system to
evaluate the credit risk of each commercial borrower on a scale of 1 (least
risk) to 10 (greatest risk). After the Committee evaluates each relationship
listed in the report, a specific loss allocation may be assessed. This
allocation is made up of amounts allocated to the commercial (89%), consumer
(9%) and real estate (2%) loan portfolios. The total specific allocation at June
30, 2004 was $3,031.
Impaired loans consist of loans with balances of $200 or more on nonaccrual
status or non-performing in nature. These loans are also individually analyzed
and a specific allocation may be assessed based on expected credit loss.
Collateral dependent loans will be evaluated to determine a fair value of the
collateral securing the loan. Non-performing loan balances continue to decline
from the year-end (down 25%). Any changes in the allocation will be reflected in
the specific allocation component. As of June 30, 2004, the total allocation for
impaired loans was $1,498, which is reflected in the specific allocation of
$3,031.
The second component (general allowance) consists of the total loan portfolio
balances minus loan balances already reviewed (specific allocation). A quarterly
large loan report is prepared to provide management with a "snapshot" of
information on larger-balance loans (of $550 or greater), including loan grades,
collateral values, etc. This tool allows management to monitor this group of
borrowers. Therefore, only small balance commercial loans and homogeneous loans
(consumer and real estate loans) have not been specifically reviewed to
determine minor delinquencies, current collateral values and present credit
risk. The Company utilizes actual historic loss experience as a factor to
calculate the probable losses for this component of the adequacy calculation.
This risk factor reflects an actual 3 year performance evaluation of credit
losses per loan portfolio. The risk factor is achieved by taking the average
charge off per loan portfolio for the last 36 consecutive months and dividing it
by the average loan balance for each loan portfolio over the same time period.
The Company believes that by using a 36 month average loss risk factor, the
estimated allowance will more accurately reflect current losses. The total
general allowance at June 30, 2004 was $3,634.
The final component used to evaluate the adequacy of the allowance includes five
additional areas that management believes can have an impact on collecting all
principal and interest due. These areas are: 1) delinquency trends; 2) current
local economic conditions; 3) non-performing loan trends; 4) recovery vs. charge
off; and 5) personnel changes. Each of these areas is given a percentage factor,
from a low of 10% to a high of 30%, determined by the importance of the impact
it may have on the allowance. After evaluating each area, an overall factor of
13% was determined for this reporting period. To calculate the impact of other
economic conditions on the allowance, the total general allowance is multiplied
by this factor. These dollars are then added to the other two components to
provide for economic conditions in the Company's assessment area. The Company's
assessment area takes in ten counties in two states, Ohio and West Virginia.
Each assessment area has its individual economic conditions; however, the
Company has chosen to average the risk factors for compiling the economic risk
factor. The total allocation for this component at June 30, 2004 was $472.
The adequacy of the allowance may be determined by certain specific and
nonspecific allocations; however, the total allocation is available for any
credit losses that may impact the loan portfolios. The Company has determined
the estimated adequate allowance as of June 30, 2004 to be $7,137.
18
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with commercial loans
comprising the most significant portion. Credit risk is primarily subject to
loans made to businesses and individuals in central and southeastern Ohio as
well as western West Virginia. Management believes this risk to be general in
nature, as there are no material concentrations of loans to any industry or
consumer group. To the extent possible, the Company diversifies its loan
portfolio to limit credit risk by avoiding industry concentrations.
Forward Looking Statements
Except for the historical statements and discussions contained herein,
statements contained in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934 and as defined in the Private Securities
Litigation Reform Act of 1995. Such statements are often, but not always,
identified by the use of such words as "believes," "anticipates," "expects," and
similar expressions. Such statements involve various important assumptions,
risks, uncertainties, and other factors, many of which are beyond our control,
which 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; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company's goal for interest rate sensitivity management is to maintain a
balance between steady net interest income growth and the risks associated with
interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the
Company's financial condition to adverse movements in interest rates. Accepting
this risk can be an important source of profitability, but excessive levels of
IRR can threaten the Company's earnings and capital.
The Company evaluates IRR through the use of an earnings simulation model to
analyze net interest income sensitivity to changing interest rates. The modeling
process starts with a base case simulation, which assumes a flat interest rate
scenario. The base case scenario is compared to rising and falling interest rate
scenarios assuming a parallel shift in all interest rates. Comparisons of net
interest income and net income fluctuations from the flat rate scenario
illustrate the risks associated with the projected balance sheet structure.
The Company's Asset/Liability Committee monitors and manages IRR within Board
approved policy limits. The current IRR policy limits anticipated changes in net
interest income over a 12 month horizon to plus or minus 10% of the base net
interest income assuming a parallel rate shock of up 100, 200 and 300 basis
points and down 100 basis points. Based on the current interest rate
environment, management did not test interest rates down 200 and 300 basis
points.
19
The following table presents the Company's estimated net interest income
sensitivity:
June 30, 2004 December 31, 2003
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
- ------------------------ -------------------- --------------------
+300 (.95%) .09%
+200 (.53%) (.14%)
+100 (.37%) (.56%)
-100 1.35% 2.04%
The estimated change in net interest income reflects minimal interest rate risk
exposure and is well within the policy guidelines established by the Board. At
June 30, 2004, the Company's net interest income declines modestly with an
increase in interest rates due primarily to an above average volume of time
deposits maturing during the third quarter of 2004. In a declining rate
environment, net interest income increases from the interest rate floors on
variable rate commercial and real estate loans. Management is continuing to
emphasize variable rate and short-term duration assets to better position the
balance sheet for higher interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of the President and Chief Executive Officer (the
principal executive officer) and the Senior Vice President and Treasurer (the
principal financial officer) of the Company, the Company's management has
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") as of the end of the quarterly period covered by
this Quarterly Report on Form 10-Q. Based on that evaluation, the Company's
President and Chief Executive Officer and Senior Vice President and Treasurer
have concluded that:
o information required to be disclosed by the Company in this
Quarterly Report on Form 10-Q would be accumulated and
communicated to the Company's management, including its
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure;
o information required to be disclosed by the Company in this
Quarterly Report on Form 10-Q would be recorded, processed,
summarized and reported within the time periods specified in the
SEC's rules and forms; and
o the Company's disclosure controls and procedures are effective
as of the end of the quarterly period covered by this Quarterly
Report on Form 10-Q to ensure that material information relating
to the Company and its consolidated subsidiaries is made known
to them, particularly during the period in which this Quarterly
Report on Form 10-Q is being prepared.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the
Company's fiscal quarter ended June 30, 2004, that have materially affected or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Company other than routine
litigation incidental to its business. In the opinion of the Company's
management, these proceedings should not, individually or in the aggregate, have
a material adverse effect on the Company's results of operations or financial
condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) Not Applicable.
(d) Not Applicable.
(e) The following table provides information regarding the
Company's repurchases of its common shares during the fiscal
quarter ended June 30, 2004:
ISSUER REPURCHASES OF EQUITY SECURITIES (1)
-------------------------------------------
Total Number of Shares Maximum Number
Total Number Average Purchased as Part of of Shares That May
of Shares Price Paid per Publicly Announced Yet Be Purchased
Period Purchased Share Plans or Programs Under the Plan or Programs
-------------------------- ------------- -------------- ---------------------- --------------------------
April 1 - 30, 2004 -- -- -- 134,706
May 1 - 31, 2004 5,890 $34.49 5,890 128,816
June 1 - 30, 2004 -- -- -- 128,816
-------------
TOTAL 5,890
=============
(1) On June 15, 1999, the Company's Board of Directors authorized a stock
repurchase program to repurchase up to 175,000 shares of the Company's
common stock through open market and privately negotiated purchases.
The Company's Board of Directors approved annual extensions to the
plan. Most recently, the Board of Directors extended the stock
repurchase program from February 16, 2004 to February 15, 2005, and
authorized the Company to repurchase up to 175,000 shares of its common
stock through open market and privately negotiated purchases. The
timing of the purchases, the prices paid and actual number of shares
purchased will depend upon market conditions and limitations imposed by
applicable federal securities laws.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 14, 2004, for the
purpose of electing directors. Shareholders received proxy materials containing
the information required by this item. Three directors, Steven B. Chapman,
Robert H. Eastman and Jeffrey E. Smith were nominated for reelection and were
reelected. The summary of voting of the 2,931,651 shares outstanding were as
follows:
Director Candidate For Against Abstain
Steven B. Chapman 2,922,162 9,489 ----
Robert H. Eastman 2,922,151 9,500 ----
Jeffrey E. Smith 2,928,035 3,616 ----
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
31.1 - Rule 13a-14(a)/15d-14(a) Certification (Principal Executive
Officer)
31.2 - Rule 13a-14(a)/15d-14(a) Certification (Principal Financial
Officer)
32 - Section 1350 Certification (Principal Executive Officer and
Principal Financial Officer)
(b) Reports on Form 8-K:
On April 15, 2004, the Company furnished a report on Form 8-K to
report under Item 12. Results of Operations and Financial Condition
the issuance of a news release announcing its earnings for the first
quarter period ending March 31, 2004.
On April 28, 2004, the Company filed a report on Form 8-K to report
under Item 5. Other Events and Regulation FD Disclosure the sale of
its ownership interest in ProCentury Corp. in connection with
ProCentury Corp.'s initial public offering.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO VALLEY BANC CORP.
Date: August 9, 2004 By: /s/ Jeffrey E. Smith
----------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: August 9, 2004 By: /s/ Jeffrey E. Miller, II
--------------------------
Larry E. Miller, II
Senior Vice President and Treasurer
23
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification
I, Jeffrey E. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ohio Valley
Banc Corp.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this report
is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based upon
such evaluation; and
(c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
(a) all significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
/s/ Jeffrey E. Smith
-----------------------------------
Date: August 9, 2004 Jeffrey E. Smith, President and CEO
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification
I, Larry E. Miller, II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ohio Valley
Banc Corp.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this report
is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based upon
such evaluation; and
(c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
(a) all significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: August 9, 2004 /s/ Larry E. Miller, II
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Larry E. Miller, II, Sr. VP and Treasurer
Exhibit 32
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of Ohio Valley Banc Corp. (the
"Corporation") on Form 10-Q for the quarterly and year-to-date periods ended
June 30, 2004, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), the undersigned Jeffrey E. Smith, President and Chief
Executive Officer of the Corporation, and Larry E. Miller, II, Senior Vice
President and Treasurer (Chief Financial Officer) of the Corporation, each
certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of their knowledge:
(1) The Report fully complies with the requirements of Section 13
(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Corporation.
* /s/ Jeffrey E. Smith * /s/ Larry E. Miller, II
- ---------------------- -------------------------
Jeffrey E. Smith Larry E. Miller, II
President and Chief Executive Officer Senior Vice President and Treasurer
(Chief Financial Officer)
Dated: August 9, 2004 Dated: August 9, 2004
* This certification is being furnished as required by Rule 13a - 14(b) under
the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350
of Chapter 63 of Title 18 of the United States Code, and shall not be
deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise
subject to the liability of that Section. This certification shall not be
deemed to be incorporated by reference into any filing under the Securities
Act of 1933 or the Exchange Act, except as otherwise stated in such filing.