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:
SEPTEMBER 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 October 29, 2004
was 3,452,325.
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..........20
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....................................22
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)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
------------ ------------
ASSETS
Cash and noninterest-bearing deposits with banks $ 14,249 $ 17,753
Federal funds sold 5,075 --
------------ ------------
Total cash and cash equivalents 19,324 17,753
Interest-bearing deposits in other banks 526 859
Securities available-for-sale 70,401 76,352
Securities held-to-maturity (estimated
fair value: 2004 - $13,609; 2003 - $13,547) 12,938 12,835
Total loans 601,728 573,704
Less: Allowance for loan losses (6,941) (7,593)
------------ ------------
Net loans 594,787 566,111
Premises and equipment, net 8,969 9,142
Accrued income receivable 2,769 2,700
Goodwill 1,267 1,267
Bank owned life insurance 13,593 13,222
Other assets 5,472 7,086
------------ ------------
Total assets $ 730,046 $ 707,327
============ ============
LIABILITIES
Noninterest-bearing deposits $ 61,660 $ 62,235
Interest-bearing deposits 478,041 445,274
------------ ------------
Total deposits 539,701 507,509
Securities sold under agreements to repurchase 25,026 24,018
Other borrowed funds 85,049 101,562
Subordinated debentures 13,500 13,500
Accrued liabilities 9,764 6,330
------------ ------------
Total liabilities 673,040 652,919
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share,
10,000,000 shares authorized; 2004 -
3,680,035 shares issued; 2003 - 3,658,212
shares issued) 3,680 3,658
Additional paid-in capital 31,626 30,962
Retained earnings 27,884 23,343
Accumulated other comprehensive income 88 624
Treasury stock, at cost (2004 - 227,710
shares; 2003 - 159,611 shares) (6,272) (4,179)
------------ ------------
Total shareholders' equity 57,006 54,408
------------ ------------
Total liabilities and
shareholders' equity $ 730,046 $ 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 Nine months ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Interest and dividend income:
Loans, including fees $ 10,023 $ 10,280 $ 29,781 $ 31,518
Securities
Taxable 689 658 2,123 2,037
Tax exempt 137 173 420 519
Dividends 57 51 161 151
Other Interest 5 17 40 59
--------- --------- --------- ---------
10,911 11,179 32,525 34,284
Interest expense:
Deposits 2,825 2,951 8,379 9,441
Securities sold under
agreements to repurchase 68 48 159 148
Other borrowed funds 881 1,035 2,710 3,176
Subordinated debentures 245 -- 715 --
Obligated mandatorily redeemable
capital securities of
subsidiary trust -- 233 -- 709
--------- --------- --------- ---------
4,019 4,267 11,963 13,474
--------- --------- --------- ---------
Net interest income 6,892 6,912 20,562 20,810
Provision for loan losses 471 996 1,612 3,627
--------- --------- --------- ---------
Net interest income after provision
for loan losses 6,421 5,916 18,950 17,183
Noninterest income:
Service charges on deposit accounts 845 832 2,444 2,332
Trust fees 48 54 154 165
Income from bank owned insurance 148 172 458 516
Net gain on sale of loans 21 84 31 435
Net gain on sale of
ProCentury Corp. -- -- 2,463 --
Other 313 343 936 1,010
--------- --------- --------- ---------
1,375 1,485 6,486 4,458
Noninterest expense:
Salaries and employee benefits 3,185 2,938 9,305 8,621
Occupancy 311 331 962 980
Furniture and equipment 317 267 918 744
Data processing 183 177 543 475
Other 1,349 1,438 4,151 4,294
--------- --------- --------- ---------
5,345 5,151 15,879 15,114
--------- --------- --------- ---------
Income before income taxes 2,451 2,250 9,557 6,527
Provision for income taxes 781 660 3,070 1,905
--------- --------- --------- ---------
NET INCOME $ 1,670 $ 1,590 $ 6,487 $ 4,622
========= ========= ========= =========
Earnings per share $ 0.48 $ 0.46 $ 1.87 $ 1.33
========= ========= ========= =========
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 Nine months ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Balance at beginning of period $ 56,038 $ 52,451 $ 54,408 $ 50,375
Comprehensive income:
Net income 1,670 1,590 6,487 4,622
Change in unrealized gain
(loss) on available-for-sale
securities 701 (915) (812) (1,111)
Income tax effect (238) 311 276 378
--------- --------- --------- ---------
Total comprehensive income 2,133 986 5,951 3,889
Proceeds from issuance of common
stock through dividend reinvestment
plan 180 168 686 555
Cash dividends (658) (627) (1,946) (1,841)
Shares acquired for treasury (687) (15) (2,093) (15)
--------- --------- --------- ---------
Balance at end of period $ 57,006 $ 52,963 $ 57,006 $ 52,963
========= ========= ========= =========
Cash dividends per share $ 0.19 $ 0.18 $ 0.56 $ 0.53
========= ========= ========= =========
Shares from common stock issued
through dividend reinvestment plan 5,721 6,955 21,823 24,215
========= ========= ========= =========
Shares acquired for treasury 21,725 641 68,099 641
========= ========= ========= =========
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)
- --------------------------------------------------------------------------------
Nine months ended September 30,
2004 2003
------------ ------------
Net cash from operating activities: $ 14,213 $ 6,978
Investing activities:
Proceeds from maturities of securities
available-for-sale 22,170 32,796
Purchases of securities available-for-sale (17,029) (27,879)
Proceeds from maturities of securities
held-to-maturity 935 771
Purchases of securities held-to-maturity (1,056) (1,040)
Change in interest-bearing deposits
in other banks 333 628
Net change in loans (30,374) (8,561)
Proceeds from sale of other real estate owned (214) (847)
Purchases of premises and equipment (741) (1,468)
------------ ------------
Net cash from (used) in investing activities (25,976) (5,600)
Financing activities:
Change in deposits 32,192 16,245
Cash dividends (1,946) (1,841)
Proceeds from issuance of common stock 686 555
Purchases of treasury stock (2,093) (15)
Change in securities sold under
agreements to repurchase 1,008 (10,857)
Proceeds from long-term borrowings 11,000 3,457
Repayment of long-term borrowings (14,303) (10,634)
Change in other short-term borrowings (13,210) (938)
------------ ------------
Net cash from (used) in financing activities 13,334 (4,028)
------------ ------------
Change in cash and cash equivalents 1,571 (2,650)
Cash and cash equivalents at beginning of period 17,753 23,451
------------ ------------
Cash and cash equivalents at end of period $ 19,324 $ 20,801
============ ============
Supplemental Disclosure:
Cash paid for interest $ 12,569 $ 14,674
Cash paid for income taxes 1,837 2,235
Non-cash transfers from loans to
other real estate owned 300 3,663
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 the Accounting Pronouncements section of 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 September 30, 2004, and its results of operations and cash flows for
the periods presented. The results of operations for the nine months ending
September 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 3,462,871 and
3,483,994 for the three months ending September 30, 2004 and 2003, respectively.
Weighted average shares outstanding were 3,477,305 and 3,476,898 for the nine
months ending September 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 confirms that a loan balance is uncollectible. 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:
September 30, December 31,
2004 2003
------------ ------------
Commercial and industrial loans $ 228,981 $ 220,724
Real estate loans 225,344 217,636
Consumer loans 145,907 134,720
Other loans 1,496 624
------------ ------------
$ 601,728 $ 573,704
============ ============
At September 30, 2004 and December 31, 2003, loans on nonaccrual status were
approximately $1,521 and $2,655, respectively. Loans past due more than 90 days
and still accruing at September 30, 2004 and December 31, 2003 were $1,213 and
$659, respectively.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses for the
nine months ended September 30:
2004 2003
---------- ----------
Balance - January 1, $ 7,593 $ 7,069
Loans charged off:
Real estate 598 561
Commercial 1,564 2,171
Consumer 1,595 1,897
---------- -----------
Total loans charged off 3,757 4,629
Recoveries of loans:
Real estate 484 220
Commercial 351 459
Consumer 658 696
---------- -----------
Total recoveries 1,493 1,375
---------- -----------
Net loan charge-offs (2,264) (3,254)
Provision charged to operations 1,612 3,627
---------- -----------
Balance - September 30, $ 6,941 $ 7,442
9
Information regarding impaired loans is as follows:
September 30, December 31,
2004 2003
-------------- ---------------
Balance of impaired loans $ 1,758 $ 1,988
============== ===============
Less portion for which no specific
allowance is allocated $ 624 $ 801
============= ===============
Portion of impaired loan balance for
which a specific allowance for credit
losses is allocated $ 1,134 $ 1,187
============== ===============
Portion of allowance for loan losses
specifically allocated for the
impaired loan balance $ 1,466 $ 475
============== ===============
Average investment in impaired loans
year-to-date $ 1,835 $ 2,082
============== ===============
Interest on impaired loans was not material for the periods ended September 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
3.50% of total loans were unsecured at September 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
September 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 $70,221 as compared to $58,496 at
December 31, 2003.
NOTE 5 - OTHER BORROWED FUNDS
Other borrowed funds at September 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
---------- ---------- ---------- ----------
September 30, 2004.. $ 73,351 $ 6,376 $ 5,322 $ 85,049
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 $110,026 and
$5,364, respectively, at September 30, 2004. Fixed rate FHLB advances of $73,351
mature through 2010 and have interest rates ranging from 1.65% to 6.62%.
10
Promissory notes, issued primarily by the parent company, have fixed rates of
1.70% to 4.25% and are due at various dates through a final maturity date of
February 9, 2006.
At September 30, 2004, scheduled principal payments through December 31 over the
next five years are as follows:
FHLB Promissory FRB
Borrowings Notes Notes Totals
---------- ---------- ---------- ----------
2004 $ 7,393 $ 2,804 $ 5,322 $ 15,519
2005 21,616 3,465 -- 25,081
2006 20,107 107 -- 20,214
2007 5,061 -- -- 5,061
2008 9,010 -- -- 9,010
Thereafter 10,164 -- -- 10,164
---------- ---------- ---------- ----------
$ 73,351 $ 6,376 $ 5,322 $ 85,049
========== ========== ========== ==========
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 September 30,
2004 and $27,000 at December 31, 2003. Various securities from the Bank used to
collateralize FRB notes totaled $6,160 at September 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 September 30, 2004, compared to December 31,
2003, and the consolidated results of operations for the quarterly and
year-to-date periods ending September 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 September 30, 2004 and December 31, 2003
-------------------------------------------
Introduction
The consolidated total assets of the Company increased $22,719 or 3.2% during
the first nine months of 2004 to finish at $730,046. This increase in assets was
primarily due to an increase in the Company's loan portfolio, which is up
$28,024, partially offset by a $5,848 decline in securities from year-end 2003.
Loan growth in 2004 has resulted in a decrease in the Company's cash and
noninterest-bearing deposits with banks which are down $3,504 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 $32,192,
primarily from a 10% increase in time deposits from year-end 2003. Growth in
deposits also provided additional funds to pay down other borrowed funds which
have decreased $16,513 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 September 30,
2004, cash and cash equivalents totaled $19,324, up 8.8% compared to $17,753 at
December 31, 2003. This increase was primarily attributable to the Company's
improved liquidity position that produced excess federal funds sold of $5,075 at
September 30, 2004 as compared to no federal funds sold at year-end 2003. Cash
and noninterest-bearing deposits with banks decreased by $3,504 or 19.3% due to
increased funding needs related to the growth in the loan portfolio as well as
fewer items in the process of collection at September 30, 2004. Management
believes that the current balance of cash and cash equivalents remains at a
level that will meet cash obligations and provide adequate liquidity. Further
information regarding the Company's liquidity can be found under the caption
"Liquidity" in this management's discussion and analysis.
Securities
During the first nine months of 2004, securities declined $5,848 or 6.6% led by
a decline in U.S. government agency securities of $15,540 or 41.1% offset
partially by an increase in higher yielding mortgage-backed securities of $9,405
or 28.1%. 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 nine months of 2004, total loans were up $28,024 or 4.9% from
year-end 2003. This growth was led by real estate loans which increased $11,345
or 5.2% from year-end 2003 to reach $228,981. 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 a significant portion of 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 and retaining them in the
portfolio. The Company's loan portfolio is now better positioned for a "rise" in
interest rates and the heavy period of mortgage refinancing has declined, and as
a result, the Company has increased its fixed rate loan originations. For 2004's
year-to-date period, real estate loan growth was comprised mostly of 15 and 20
year fixed rate originations which were up $8,459 or 14.9% from year-end 2003.
In addition, the Company's 1 year adjustable rate products continue to be up by
$3,160 or 4.2% from year-end 2003. Real estate loans represent the largest
portion of the total loan portfolio at 38% period ending September 30, 2004.
12
Loan increases also came from consumer loans which were up $11,187 or 8.3% from
year-end 2003 to reach $145,907. Consumer loan growth came primarily from
originations in the areas of automobiles (both direct and indirect),
recreational vehicles and mobile homes which were collectively up $8,750 from
year-end 2003. Indirect automobile lending continues to represent the largest
portion of the consumer loan portfolio with an increase of $3,628 or 7.6% to
reach $51,418 at September 30, 2004 as compared to $47,790 at December 31, 2003.
The Company's West Virginia markets of Cabell and Kanawha counties contributed
most to the auto indirect lending growth, which increased $2,763 from year-end
2003. 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.
The Company's total loan growth was also attributable to a $4,620 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
73.3% of the total increase. The Company's growing West Virginia markets
contributed 9.3% to total commercial loan originations. Continued growth in
commercial loans for the remaining periods in 2004 and 2005 will be dependent
upon economic conditions as well as general demand for loans in the Company's
market areas.
Allowance for Loan Losses
During the first nine months of 2004, the Company experienced a $990 or 30.4%
decrease in net charge offs as compared to the same period in 2003. The decrease
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 September 30, 2004 totaled $2,734 as compared to $5,445
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 .45% as of September 30,
2004 compared to .96% at September 30, 2003. 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 1.15%
at September 30, 2004 as compared to 1.32% at December 31, 2003. Management
believes that the allowance for loan losses is adequate to absorb probable
losses in the loan portfolio.
Deposits
Total deposit growth of $32,192 or 6.3% during the first nine months of 2004 was
primarily in time deposits which increased $28,935 or 10.1%. This growth was
primarily driven by increases in the Company's brokered CD and network CD
issuances of $15,703 and $2,290, respectively, during the first nine 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 and reduce other borrowed funds. The Company's interest bearing
demand deposits increased $3,832 or 2.4% during the same period largely due to
increases in the Company's public fund, Gold Club and Earnie NOW account
balances. Additionally, the Company's interest-free funding source, noninterest
bearing demand deposits, decreased $575 or .9% during the first nine months of
2004 over year-end 2003. This decrease occurred mostly in business checking
account balances which were down $725.
13
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 were down $16,513 or 16.3% 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 $3,304 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.
Shareholders' Equity
Total shareholders' equity at September 30, 2004 of $57,006 was up by $2,598 or
4.8% as compared to the balance of $54,408 on December 31, 2003. This increase
was largely due to year-to-date income of $6,487 plus proceeds of $686 from the
issuance of common stock through the dividend reinvestment plan less cash
dividends paid of $1,946 or $.56 per share year-to-date. While cash dividends
represented 30 % of year-to-date income, dividends net of proceeds from the
dividend reinvestment plan represented only 19.4% 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 $6,272 at
September 30, 2004, an increase of $2,093 as compared to the total at year-end
2003. During the first nine months of 2004, the Company repurchased 68,099
common shares at an average price of $30.74 per share under the 2004 Stock
Repurchase Program. The Company anticipates repurchasing additional common
shares in the future as authorized by its 2004 Stock Repurchase Program.
Further offsetting the growth in capital was a decrease in the market value of
available-for-sale securities held by the Company which lowered shareholders'
equity by $536, net of deferred income taxes. At September 30, 2004, the Company
had an unrealized gain, net of deferred income taxes, totaling $88 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 September 30, 2004 and 2003
----------------------------------------
Introduction
For the three months ended September 30, 2004, net income totaled $1,670, up $80
or 5.0% from the $1,590 reported a year ago. For the nine months ended September
30, 2004, net income totaled $6,487, up $1,865 or 40.4% over the $4,622 earned a
year ago. Comparing September 30, 2004 to September 30, 2003, the annualized
year-to-date return on assets improved from .89% to 1.21%, while return on
equity improved from 11.95% to 15.64%. Third quarter 2004 earnings per share was
$.48, up 4.3% over last year's $.46 third quarter earnings per share. During the
first nine months of 2004, earnings per share was $1.87, up 40.6% over last
year's $1.33 per share. The year-to-date gain 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 $525 and $2,015 for the
quarterly and year-to-date periods of 2004, as compared to 2003, respectively.
14
Net Interest Income
For the third quarter of 2004, net interest income was down $20 or .3% as
compared to the third quarter of 2003. Through the first nine months of 2004,
net interest income was down $248 or 1.2% as compared to the same period in
2003. The third quarter and year-to-date decreases to net interest income were
primarily due to the growth in earning assets being more than 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.
Total interest income decreased $268 or 2.4% for the third quarter of 2004 and
decreased $1,759 or 5.1% through the first nine months of 2004 as compared to
the same periods in 2003. Growth in average earning assets of $26,902 or 4.1%
through the first nine months of 2004 was more than offset by declining asset
yields, which were down 65 basis points as compared to the first nine 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 $248 or 5.8% for the third quarter of 2004 and
decreased $1,511 or 11.2% through the first nine months of 2004 as compared to
the same periods in 2003. The decline in interest expense was attributable to a
42 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 nine months of 2004 decreased to 4.10% from
4.33% 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 20 of this Form 10-Q.
Provision Expense
The Company's provision expense was $471 in the third quarter of 2004, down $525
or 52.7% as compared to the same period in 2003. The Company's provision expense
finished at $1,612 through the first nine months of 2004, down $2,015 or 55.6%
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 nine months of 2004, the Company experienced a
$580 decline in nonperforming loans to finish at $2,734 at September 30, 2004 as
compared to $3,314 in nonperforming loans at December 31, 2003. In addition, the
Company's net charge offs declined $990 or 30.4% through the first nine 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 third 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 18 of this Form 10-Q.
15
Noninterest Income
Total noninterest income decreased $110 or 7.4% for the third quarter in 2004 as
compared to the same periods in 2003. Driving the quarterly decrease was the
decrease in net gain on sale of loans of $63 or 75.0% as compared to the same
quarterly period 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 having sold only a minimal amount of
real estate loans to the secondary market in the third quarter of 2004 as
compared to approximately 51 loans being sold during the third quarter of 2003.
Other noninterest income was down $30 or 8.7% for the quarter ending September
30, 2004 as compared to the same period in 2003 due 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 for 2004 which resulted in a decrease of $43 in other noninterest
income for the three months ending September 30, 2004 as compared to the same
period in 2003. Further impacting the quarterly decrease in noninterest income
was the decrease in income from bank owned life insurance of $24 or 14.0% for
the third quarter period ending September 30, 2004 as compared to the same
periods in 2003 due to lower market rates.
Total noninterest income increased $2,028 or 45.5% for the first nine months of
2004 as compared to the same period in 2003. Contributing most to the
year-to-date increase 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 year-to-date noninterest income was also
positively impacted by continued growth in the Company's service charge revenue
on deposit accounts, which was up $112 or 4.8% for the first nine 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 September 30, 2004, the Bank's
average checking account balances were $69,945 as compared to $62,753 for the
same period in 2003.
Partially offsetting the year-to-date gain in noninterest income was the
decrease in the Company's net gain on sale of loans by $404 or 92.9% during the
nine months ending September 30, 2004 as compared to the same period in 2003. As
mentioned in the quarterly results of operations, refinancing volume has
declined and has resulted in the Bank having sold only a minimal amount of real
estate loans to the secondary market in 2004 as compared to approximately 191
loans being sold in the nine months of 2003. The Company's income from bank
owned insurance decreased $58 or 11.2% for the nine months ending September 30,
2004 as compared to the same period in 2003 due to lower market rates.
Furthermore, other noninterest income was down $74 or 7.3% for the nine months
ending September 30, 2004 as compared to the same period in 2003 due to the
elimination of the quarterly fee associated with ProCentury as discussed in the
quarterly results of operations.
16
Noninterest Expense
Total noninterest expense increased $194 or 3.8% for the third quarter of 2004
and $765 or 5.1% for the nine months ending 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 $247 or 8.4% for the third quarter of 2004 and $684 or 7.9% for
the first nine 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
260 employees at September 30, 2003 to 265 employees at September 30, 2004. Also
adding to the quarterly and year-to-date growth in noninterest expense were
furniture and equipment costs being up $50 or 18.7% for the third quarter of
2004 and $174 or 23.4% for the first nine 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, W.Va.), operating system upgrades (AS400 computer), as well as newer
"up-to-date" personal computer systems to help improve employee and network
efficiency. The remaining noninterest expense categories were collectively down
$103 or 5.3% for the third quarter of 2004 and $93 or 1.6% for the first nine
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
9/30/04 12/31/03 Minimum Capitalized
Tier 1 risk-based capital 12.0% 12.0% 4.00% 6.0%
Total risk-based capital ratio 13.2% 13.3% 8.00% 10.0%
Leverage ratio 9.6% 9.5% 4.00% 5.0%
Cash dividends paid of $658 for the third quarter and $1,946 for the first nine
months of 2004 represent a 4.9% quarterly increase and a 5.7% 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 $0.53 to $0.56
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
September 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.
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 $91,796 represented 12.6%
of total assets at September 30, 2004. In addition, the FHLB offers advances to
the Bank which further enhances the Bank's ability to meet liquidity demands. At
September 30, 2004, the Bank could borrow an additional $48 million from the
FHLB. The Company experienced an increase of $1,571 in cash and cash equivalents
for the nine months ended September 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.
17
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 the loans from each loan portfolio that management
deems to be potential credit risks. The criteria to be placed on this report
are: past due 60 or more days, nonaccrual and loans management has determined to
be potential problem loans. These loans are reviewed and analyzed for potential
loss by the Large Loan Review Committee which consists of the President and
members of senior management with lending authority. The function of the
Committee is to review and analyze large borrowers for credit risk, scrutinize
the Watchlist and evaluate the adequacy of the allowance for loan losses and
other credit related issues. The Committee has established a grading system to
evaluate the credit risk of each commercial borrower on a scale of 1 (least
risk) to 10 (greatest risk). After the Committee evaluates each relationship
listed in the report, a specific loss allocation may be assessed. The specific
allocation is currently made up of amounts allocated to the commercial (99%) and
real estate (1%) loan portfolios. The total specific allocation at September 30,
2004 was $2,365.
Included in the specific allocation are impaired loans, which consist of loans
with balances of $200 or more on nonaccrual status or non-performing in nature.
These loans are also individually analyzed and a specific allocation may be
assessed based on expected credit loss. Collateral dependent loans will be
evaluated to determine a fair value of the collateral securing the loan.
Non-performing loan balances continue to decline from the year-end (down 18%).
Any changes in the impaired allocation will be reflected in the total specific
allocation. As of September 30, 2004, the total allocation for impaired loans
was $1,486, which is reflected in the specific allocation of $2,365.
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 1 year or 3 year performance evaluation of
credit losses per loan portfolio, whichever is greater. The risk factor is
achieved by taking the average charge off per loan portfolio for the last 12 or
18
36 consecutive months, whichever is greater, and dividing it by the average loan
balance for each loan portfolio over the same time period. The Company believes
that by using the greater of the 12 or 36 month average loss risk factor, the
estimated allowance will more accurately reflect current probable losses. The
total general allowance at September 30, 2004 was $3,911.
The final component used to evaluate the adequacy of the allowance includes five
additional areas that management believes can have an impact on collecting all
principal due. These areas are: 1) delinquency trends; 2) current local economic
conditions; 3) non-performing loan trends; 4) recovery vs. charge off; and 5)
personnel changes. Each of these areas is given a percentage factor, from a low
of 10% to a high of 30%, determined by the importance of the impact it may have
on the allowance. After evaluating each area, an overall factor of 17% 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 a total of ten counties in Ohio and West Virginia. Each assessment
area has its individual economic conditions; however, the Company has chosen to
average the risk factors for compiling the economic risk factor. The total
allocation for this component at September 30, 2004 was $665.
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 September 30, 2004 to be $6,941.
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with real estate loans
currently comprising the most significant portion. Credit risk is primarily
subject to loans made to businesses and individuals in central and southeastern
Ohio as well as western West Virginia. Management believes this risk to be
general in nature, as there are no material concentrations of loans to any
industry or consumer group. To the extent possible, the Company diversifies its
loan portfolio to limit credit risk by avoiding industry concentrations.
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.
19
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 low interest rate
environment, management did not test interest rates down 200 and 300 basis
points.
The following table presents the Company's estimated net interest income
sensitivity:
September 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 (.64%) .09%
+200 (.18%) (.14%)
+100 (.01%) (.56%)
-100 1.01% 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
September 30, 2004, the Company's net interest income declines modestly with an
increase in interest rates. 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:
20
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 September 30, 2004, that have materially affected
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) The following table provides information regarding the
Company's repurchases of its common shares during the fiscal
quarter ended September 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
-------------------------- ------------- -------------- ---------------------- --------------------------
July 1 - 31, 2004 7,000 $33.10 7,000 121,816
August 1 - 31, 2004 5,000 $31.10 5,000 116,816
September 1 - 30, 2004 9,725 $30.85 9,725 107,091
------------- ------------- ------------- -------------
TOTAL 21,725 $31.63 21,725 107,091
============= ============= ============= =============
21
(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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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 July 16, 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 second
quarter and year-to-date period ending June 30, 2004.
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: November 9, 2004 By: /s/ Jeffrey E. Smith
----------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date: November 9, 2004 By: /s/ Larry 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: November 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: November 9, 2004 /s/ Larry E. Miller, II
-----------------------------------------
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
September 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: November 9, 2004 Dated: November 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.