UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended:
JUNE 30, 2005
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-20914
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OHIO VALLEY BANC CORP
----------------------
(Exact name of Registrant as specified in its charter)
Ohio
-------------------------------------------
(State or other jurisdiction of incorporation or organization)
31-1359191
----------
(I.R.S. Employer Identification Number)
420 Third Avenue, Gallipolis, Ohio 45631
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 446-2631
Not Applicable
------------------------
Former name, former address and formal 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 31, 2005
was 4,277,389.
OHIO VALLEY BANC CORP
FORM 10-Q
QUARTER ENDED JUNE 30, 2005
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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 12
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 21
Item 4 - Controls and Procedures 21
PART II - OTHER INFORMATION 22
Item 1 - Legal Proceedings 22
Item 2 - Unregistered Sales of Equity Securities and
Use of Proceeds 22
Item 3 - Defaults Upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 5 - Other Information 23
Item 6 - Exhibits 24
SIGNATURES 25
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,
2005 2004
------------ ------------
ASSETS
Cash and cash equivalents $ 16,271 $ 16,279
Interest-bearing deposits in other banks 531 525
Securities available-for-sale 72,908 74,155
Securities held-to-maturity (estimated fair
value: 2005 - $11,851; 2004 - $12,534) 11,349 11,994
Total loans 594,304 600,574
Less: Allowance for loan losses (6,863) (7,177)
------------ ------------
Net loans 587,441 593,397
Premises and equipment, net 8,791 8,860
Accrued income receivable 2,724 2,643
Goodwill 1,267 1,267
Bank owned life insurance 14,218 13,988
Other assets 6,234 6,012
------------ ------------
Total assets $ 721,734 $ 729,120
============ ============
LIABILITIES
Noninterest-bearing deposits $ 66,145 $ 69,936
Interest-bearing deposits 463,121 465,217
------------ ------------
Total deposits 529,266 535,153
Securities sold under agreements to repurchase 26,485 39,753
Other borrowed funds 84,900 76,550
Subordinated debentures 13,500 13,500
Accrued liabilities 9,542 7,585
----------- ------------
Total liabilities 663,693 672,541
----------- ------------
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000
shares authorized; 2005 - 4,611,860 shares
issued, 2004 - 3,689,828 shares issued) 4,612 3,690
Additional paid-in capital 31,931 31,931
Retained earnings 29,560 28,465
Accumulated other comprehensive loss (428) (219)
Treasury stock, at cost (2005 - 334,471;
2004 - 258,970 shares) (7,634) (7,288)
----------- ------------
Total shareholders' equity 58,041 56,579
----------- ------------
Total liabilities and
shareholders' equity $ 721,734 $ 729,120
=========== ============
================================================================================
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,
2005 2004 2005 2004
--------- --------- --------- ---------
Interest and dividend income:
Loans, including fees $ 10,245 $ 9,798 $ 20,326 $ 19,757
Securities
Taxable 657 700 1,339 1,434
Tax exempt 119 139 242 284
Dividends 67 52 127 104
Other Interest 27 33 33 35
--------- --------- --------- ---------
11,115 10,722 22,067 21,614
Interest expense:
Deposits 3,084 2,813 5,942 5,554
Securities sold under
agreements to repurchase 132 49 243 91
Other borrowed funds 828 879 1,710 1,830
Subordinated debentures 277 234 541 469
--------- --------- --------- ---------
4,321 3,975 8,436 7,944
--------- --------- --------- ---------
Net interest income 6,794 6,747 13,631 13,670
Provision for loan losses 330 373 648 1,141
--------- --------- --------- ---------
Net interest income after provision
for loan losses 6,464 6,374 12,983 12,529
Noninterest income:
Service charges on deposit accounts 810 839 1,515 1,598
Trust fees 53 54 107 106
Income from bank owned insurance 144 148 292 311
Gain on sale of loans 28 3 56 10
Gain on sale of
ProCentury Corp. -- 2,463 -- 2,463
Other 382 298 700 623
--------- --------- --------- ---------
1,417 3,805 2,670 5,111
Noninterest expense:
Salaries and employee benefits 3,143 3,080 6,325 6,120
Occupancy 317 322 651 651
Furniture and equipment 296 318 592 601
Data processing 168 182 331 360
Other 1,410 1,444 2,919 2,802
--------- --------- --------- ---------
5,334 5,346 10,818 10,534
--------- --------- --------- ---------
Income before income taxes 2,547 4,833 4,835 7,106
Provision for income taxes 814 1,581 1,532 2,289
--------- --------- --------- ---------
NET INCOME $ 1,733 $ 3,252 $ 3,303 $ 4,817
========= ========= ========= =========
Earnings per share $ 0.40 $ 0.75 $ .77 $ 1.11
========= ========= ========= =========
================================================================================
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,
2005 2004 2005 2004
--------- --------- --------- ---------
Balance at beginning of period $ 56,927 $ 54,476 $ 56,579 $ 54,408
Comprehensive income:
Net income 1,733 3,252 3,303 4,817
Change in unrealized gain
(loss) on available-for-sale
securities 546 (1,621) (318) (1,512)
Income tax effect (186) 551 108 514
--------- --------- --------- ---------
Total comprehensive income 2,093 2,182 3,093 3,819
Proceeds from issuance of common
stock through dividend reinvestment
plan --- 242 --- 505
Cash paid in lieu of fractional
shares in stock split (12) --- (12) ---
Cash dividends (686) (659) (1,338) (1,288)
Shares acquired for treasury (281) (203) (281) (1,406)
--------- --------- --------- ---------
Balance at end of period $ 58,041 $ 56,038 $ 58,041 $ 56,038
========= ========= ========= =========
Cash dividends per share $ 0.16 $ 0.15 $ 0.31 $ 0.29
========= ========= ========= =========
Shares from stock split, 25%
Common stock 922,030 --- 922,030 ---
========= ========= ========= =========
Treasury stock 64,742 --- 64,742 ---
========= ========= ========= =========
Shares from common stock issued
through dividend reinvestment plan 1 6,958 2 16,102
========= ========= ========= =========
Shares acquired for treasury 10,759 5,890 10,759 46,374
========= ========= ========= =========
================================================================================
See notes to the 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,
2005 2004
------------ ------------
Net cash from operating activities: $ 6,040 $ 10,748
Investing activities:
Proceeds from maturities of
securities available-for-sale 12,023 15,754
Purchases of securities available-
for-sale (11,029) (11,077)
Proceeds from maturities of
securities held-to-maturity 639 824
Purchases of securities held-to-maturity --- (1,056)
Change in interest-bearing deposits
in other banks (6) (396)
Net change in loans 5,360 (18,726)
Proceeds from sale of other real
estate owned (100) (163)
Purchases of premises and equipment (499) (549)
------------ ------------
Net cash from (used) in investing
activities 6,388 (15,389)
Financing activities:
Change in deposits (5,887) 32,149
Cash dividends (1,338) (1,288)
Cash paid in lieu of fractional shares
in stock split (12) ---
Proceeds from issuance of common stock --- 505
Purchases of treasury stock (281) (1,406)
Change in securities sold under
agreements to repurchase (13,268) (3,239)
Proceeds from long-term borrowings 5,521 3,000
Repayment of long-term borrowings (9,403) (12,958)
Change in other short-term borrowings 12,232 (13,233)
------------ ------------
Net cash from (used) in financing
activities (12,436) 3,530
------------ ------------
Change in cash and cash equivalents (8) (1,111)
Cash and cash equivalents at beginning of period 16,279 17,753
------------ ------------
Cash and cash equivalents at end of period $ 16,271 $ 16,642
============ ============
SUPPLEMENTAL DISCLOSURE
- -----------------------
Cash paid for interest $ 7,933 $ 7,995
Cash paid for income taxes 1,835 1,837
Non-cash tranfers from loans to other real
estate owned 60 174
================================================================================
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.
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, 2005, and its results of operations and cash flows for the
periods presented. The results of operations for the six months ending June 30,
2005 are not necessarily indicative of the operating results to be anticipated
for the full fiscal year ending December 31, 2005. 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,
2004 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 4,287,619 and
4,336,053 for the three months ending June 30, 2005 and 2004, respectively.
Weighted average shares outstanding were 4,288,093 and 4,355,750 for the six
months ending June 30, 2005 and 2004, respectively.
STOCK SPLITS
On April 13, 2005, the Company's Board of Directors declared a five-for-four
stock split, effected in the form of a stock dividend, on the shares of the
Company's common stock. Each shareholder of record on April 25, 2005, received
an additional share of common stock for every four shares of common stock then
held. The stock was issued on May 10, 2005. The stock split was recorded by
transferring from retained earnings an amount equal to the stated value of the
shares issued. The Company retained the current par value of $1.00 per share for
all shares of common stock. Earnings and cash dividends per share amounts have
been retroactively adjusted to reflect the effect of the stock split.
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 an accrual basis using 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.
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.
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8
ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board ("FASB") ratified the
consensus reached by the Emerging Issues Task Force in Issue 03-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1"). The basic model developed to evaluate whether an investment
within scope of EITF 03-1 is other-than-temporarily impaired involves a
three-step process including determining whether an investment is impaired (fair
value less amortized cost), evaluating whether the impairment is
other-than-temporary and, if other-than-temporary, requiring recognition of an
impairment equal to the difference between the investment's cost and fair value.
In September 2004, the FASB issued Staff Position ("FSP") No. 03-1-1 which
delayed the effective date for the measurement and recognition guidance
contained in paragraphs 10-20 of EITF 03-1. The delay of the effective date for
paragraphs 10-20 will be superseded concurrent with the final issuance of
proposed FSP EITF Issue 03-1-a, "Implication Guidance for the Application of
Paragraph 16 of EITF 03-1, 'The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments.'" The amount of other-than-temporary
impairment to be recognized, if any, will be dependent on market conditions,
management's intent and ability to hold investments until a forecasted recovery,
and the finalization of this proposed guidance by the FASB. To date, this
guidance has not had a material impact on the Company's financial condition,
results of operations, or cash flows.
In December 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued AICPA Statement of Position No.
03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer"
("SOP 03-3"), to address accounting for differences between the contractual cash
flows of certain loans and debt securities and the cash flows expected to be
collected when loans or debt securities are acquired in a transfer and those
cash flow differences are attributable, at least in part, to credit quality. As
such, SOP 03-3 only applies to loans and debt securities purchased or acquired
in purchase business combinations and does not apply to originated loans. The
application of SOP 03-3 limits the interest income, including accretion of
purchase price discounts, that may be recognized for certain loans and debt
securities. Additionally, SOP 03-3 requires that the excess of contractual cash
flows over cash flows expected to be collected (nonaccretable difference) not be
recognized as an adjustment of yield or valuation allowance, such as the
allowance for loan and lease losses. Subsequent to the initial investment,
increases in expected cash flows generally should be recognized prospectively
through adjustment of the yield on the loan or debt security over its remaining
life. Decreases in expected cash flows should be recognized as impairment. SOP
03-3 is effective for loans and debt securities acquired in fiscal years
beginning after December 15, 2004. This guidance has not had a material impact
on the Company's financial condition, results of operations, or cash flows.
NOTE 2 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
June 30, December 31,
2005 2004
---------------- ----------------
Real estate loans $ 226,708 $ 227,234
Commercial and industrial loans 220,947 226,058
Consumer loans 146,413 146,965
Other loans 236 317
---------------- ----------------
$ 594,304 $ 600,574
================ ================
At June 30, 2005 and December 31, 2004, loans on nonaccrual status were
approximately $1,582 and $1,618, respectively. Loans past due more than 90 days
and still accruing at June 30, 2005 and December 31, 2004 were $1,242 and
$1,402, respectively.
================================================================================
9
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:
2005 2004
---------------- ----------------
Balance - January 1, $ 7,177 $ 7,593
Loans charged off:
Real estate 259 414
Commercial 1,127 1,059
Consumer 1,038 963
---------------- ----------------
Total loans charged off 2,424 2,436
Recoveries of loans:
Real estate 214 209
Commercial 784 138
Consumer 464 492
---------------- ----------------
Total recoveries 1,462 839
---------------- ----------------
Net loan charge-offs (962) (1,597)
Provision charged to operations 648 1,141
---------------- ----------------
Balance - June 30, $ 6,863 $ 7,137
================ ================
Information regarding impaired loans is as follows:
June 30, December 31,
2005 2004
-------------- ---------------
Balance of impaired loans $ 5,056 $ 5,573
============== ===============
Less portion for which no specific
allowance is allocated $ 490 $ 619
============== ===============
Portion of impaired loan balance for
which a specific allowance for credit
losses is allocated $ 4,566 $ 4,954
============== ===============
Portion of allowance for loan losses
specifically allocated for the
impaired loan balance $ 1,932 $ 1,986
============== ===============
Average investment in impaired loans
year-to-date $ 5,292 $ 5,711
============== ===============
Interest on impaired loans was not material for the six-month periods ended June
30, 2005 and 2004.
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
3.27% of total loans were unsecured at June 30, 2005 as compared to 3.36% at
December 31, 2004.
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10
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments primarily include commitments to extend credit,
standby letters of credit and financial guarantees. The contract amounts of
these instruments are not included in the consolidated financial statements. At
June 30, 2005, the contract amounts of these instruments totaled approximately
$60,127 as compared to $61,667 at December 31, 2004. Since many of these
instruments are expected to expire without being drawn upon, the total contract
amounts do not necessarily represent future cash requirements.
NOTE 5 - OTHER BORROWED FUNDS
Other borrowed funds at June 30, 2005 and December 31, 2004 are comprised of
advances from the Federal Home Loan Bank (FHLB) of Cincinnati, promissory notes
and Federal Reserve Bank (FRB) Notes.
FHLB Borrowings Promissory Notes FRB Notes Totals
--------------- ---------------- --------- ----------
2005 $ 74,764 $ 7,478 $ 2,658 $ 84,900
2004 $ 67,222 $ 5,355 $ 3,973 $ 76,550
Pursuant to collateral agreements with the FHLB, advances are secured by
$204,356 in qualifying first mortgage loans and $5,548 in FHLB stock at June 30,
2005. Fixed rate FHLB advances of $63,139 mature through 2010 and have interest
rates ranging from 2.54% to 6.62%. In addition, variable rate FHLB borrowings
totaling $11,625 mature in 2005 with an interest rate of 3.53%.
At June 30, 2005, the Company had a cash management line of credit enabling it
to borrow up to $35,000 from the FHLB. All cash management advances have an
original maturity of 90 days. The line of credit must be renewed on an annual
basis. At June 30, 2005, $23,375 was available on this line of credit.
Based on the Company's current FHLB stock ownership, total assets and pledgeable
residential first mortgage loans, the Company had the ability to obtain
borrowings from the FHLB up to a maximum of $151,375 at June 30, 2005.
Promissory notes, issued primarily by the Company, have fixed rates of 2.40% to
4.50% and are due at various dates through a final maturity date of December 13,
2006.
FRB notes consist of the collection of tax payments from Bank customers under
the Treasury Tax and Loan program. These funds have a variable interest rate and
are callable on demand by the U.S. Treasury. At June 30, 2005, the interest rate
for the Company's FRB notes was 2.91%.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $30,500 at June 30, 2005
and $29,500 at December 31, 2004. Various investment securites from the Bank
used to collateralize FRB notes totaled $6,070 at June 30, 2005 and $6,060 at
December 31, 2004.
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11
At June 30, 2005, scheduled principal payments through December 31 over the next
five years are as follows:
FHLB Borrowings Promissory Notes FRB Notes Totals
--------------- ---------------- --------- ----------
2005 $ 20,422 $ 5,721 $ 2,658 $ 28,801
2006 22,107 1,757 ---- 23,864
2007 8,061 ---- ---- 8,061
2008 14,010 ---- ---- 14,010
2009 3,007 ---- ---- 3,007
Thereafter 7,157 ---- ---- 7,157
---------------- ---------------- ---------- ----------
$ 74,764 $ 7,478 $ 2,658 $ 84,900
================ ================ ========== ==========
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 $1,625 ($.38 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. The Company decided to liquidate its investment in 2004
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, 2005, compared to December 31, 2004,
and the consolidated results of operations for the quarterly and year-to-date
periods ending June 30, 2005 compared to the same periods in 2004. 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's Board of Directors approved a five-for-four stock split on April
13, 2005. The additional common shares resulting from the stock split were
distributed on May 10, 2005 to stockholders of record as of April 25, 2005. The
consolidated financial statements, notes and references to share and per share
data have been retroactively restated for the stock split.
Comparison of
Financial Condition
at June 30, 2005 and December 31, 2004
--------------------------------------
Introduction
The consolidated total assets of the Company decreased $7,386 or 1.0% during the
first six months of 2005 to finish at $721,734. This decrease in assets was
primarily due to a decrease in the Company's loan portfolio and
available-for-sale securities, which are down $6,270 and $1,247, respectively,
12
from year-end 2004. The excess funds available as a result of declining loan
balances were used to support the decline in the Company's securities sold under
agreements to repurchase ("repurchase agreements"), which decreased by $13,268
from year-end 2004. In addition, other borrowed funds increased $8,350 during
the first six months of 2005.
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, 2005,
cash and cash equivalents were relatively unchanged at $16,271 as compared to
$16,279 at December 31, 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 six months of 2005, investment securities decreased $1,892 or
2.2% driven by a decrease in U.S. government agency securities of $1,602 or 8.0%
as compared to year-end 2004. The Company's demand for U.S. government agency
securities has primarily been to satisfy pledging requirements for repurchase
agreements and public fund deposits. In this first half of 2005, the Company's
repurchase agreements have decreased 33.4%, lowering the need to secure these
balances and producing the slight runoff in U.S. government agency securities.
While the Company's focus is to generate interest revenue primarily though loan
growth, management will continue to invest excess funds in securities when
opportunities arise. Mortgage-backed securities continue to make up the largest
portion of the Company's investment portfolio, totaling $48,953, or 58.1% of
total investments at June 30, 2005. Mortgage-backed securities provide increased
cash flows due to the more rapid repayment of principal as compared to other
investment security types which deliver proceeds upon maturity or call date.
Loans
During the first six months of 2005, total loans were down $6,270 or 1.0% from
year-end 2004, due to economic factors and lower loan demand. Loan demand has
steadily improved since the first quarter period of 2005 when balances were down
$10,601 or 1.8% from year-end 2004.
Total loan declines were led by commercial loans, which were down $5,111 or 2.3%
from year-end 2004 to finish at $220,947. While the general demand for
commercial loan opportunities has declined in this first half of 2005, the
Company also experienced several loan payoffs from commercial business customers
in the first quarter due to the challenged economy, especially in Ohio. The
primary market areas for the Company's commercial loans are in the areas of
Gallia, Jackson and Franklin counties in Ohio, which accounted for 47.6% of
total originations for the first half of 2005 and the growing West Virginia
markets, which accounted for 19.9% of total originations for the same time
period. Commercial loan volume in the second half of 2005 will continue to be
dependent upon economic conditions as well as general demand for loans in the
Company's market area.
During the first six months of 2005, total real estate loans were relatively
stable, decreasing $526 or 0.2% from year-end 2004 to finish at $226,708, an
improvement from the first three months of 2005 when real estate loans were down
$3,734 or 1.6% from year-end 2004. The reduction in loans was mostly impacted by
the Company's fixed rate real estate loans, which decreased $3,691 or 3.2% for
the six-month period ending June 30, 2005. While the economy continues to
experience a rising rate environment resulting in several short-term rate
13
increases since June 2004, long-term rates have not been as responsive,
remaining at a flat to declining level. As a result, the Company has sold over
$2,000 in 30 year fixed rate mortgages to the secondary market during the first
half of 2005. Furthermore, the high volume of refinancings in 2003 and a portion
of 2004 at historical low interest rates have reduced consumer demand for fixed
rate real estate loans during the first half of 2005. However, since the
seasonally low volume period of the first quarter, loan demand has steadily
increased in the second quarter of 2005, prompting growth in the Company's one
year adjustable rate loans which are up $5,063 or 6.3% from year-end 2004. The
remaining real estate loan portfolio decrease came from the Company's other
variable rate real estate loan products.
During the first six months of 2005, consumer loans also were relatively stable,
decreasing $552 or 0.4% from year-end 2004 to finish at $146,413, an improvement
from the first three months of 2005 when consumer loans were down $2,227 or 1.5%
from year-end 2004. Consumer loan decreases were led by automobile loans, both
direct and indirect, which were down $4,126 or 5.3% from year-end 2004. While
the automobile lending segment continues to represent the largest portion of the
Company's consumer loan portfolio, economic factors and a rising rate
environment have had an impact on the recent declining loan volume within this
area. The Company was under a sustained low rate environment for 2003 and much
of 2004, which created better pricing opportunities for customers and, in turn,
yielded additional consumer demand for automobile loans during this period. As
rates have been aggressively moving up, continued competition with alternative
methods of financing, such as captive finance companies which continue to offer
0% interest rate loans, has challenged automobile loan growth during the first
half of 2005. The decrease in automobile loans was partially offset by an
increase in the demand for mobile home loans which were up $1,755 or 21.7%. The
increase came primarily from the growing Cabell County market of West Virginia.
While total loan balances are currently down, the Company remains committed to
sound underwriting practices without sacrificing asset quality and avoiding
exposure to unnecessary risk that could weaken the portfolio. With steady
improvements continuing in loan demand throughout second quarter, management is
more optimistic regarding future loan growth.
Allowance for Loan Losses
During the first six months of 2005, the Company experienced a $635 or 39.8%
decrease in net charge offs as compared to the same period in 2004, mostly from
increased collection efforts within the commercial loan portfolio. Furthermore,
the Company's nonperforming loan balance continues to remain relatively stable,
ending at $2,824 as of June 30, 2005 as compared to $3,020 at year-end 2004 and
$2,477 at June 30, 2004, which emphasizes management's continued focus on asset
quality. The Company's ratio of nonperforming loans as a percentage of total
loans was .48% at June 30, 2005 as compared to .50% at year-end 2004 and .42% at
June 30, 2004. Due to stable asset quality impacted by sound underwriting
practices and lower portfolio risk, the ratio of allowance for loan losses to
total loans decreased to 1.15% at June 30, 2005 as compared to 1.21% at June 30,
2004. Management believes that the allowance for loan losses is reflective of
probable incurred losses in the loan portfolio.
Deposits
During the first six months of 2005, total deposits were down $5,887 or 1.1%
from year-end 2004, primarily due to decreases in time deposits and noninterest
bearing demand deposits. Time deposits decreased $6,333 or 2.1% from year-end
2004 largely due to the maturity of one large commercial CD of over $6,000 in
the first quarter of 2005 as well as a decrease in the Company's brokered CD and
network CD issuances of $3,956 or 6.4% from year-end 2004. As interest rates
continue to rise, wholesale funding rates from brokered and network CD deposits
are increasing at a faster pace than retail rates on CD deposits. This has
14
prompted a shift in emphasis back to retail funding which has caused an increase
in traditional CD deposits of $3,811 or 1.9% over year-end 2004, partially
offsetting the declines in wholesale funding. This shift back to more
traditional funding also generated an increase in the Company's interest bearing
demand deposits, which were up $4,237 or 2.7% during the first six months of
2005. This increase was largely from the Company's Gold Club - NOW account,
which was up $2,944 or 5.44% from year-end 2004, in large part to a special rate
offering for new Gold Club accounts that began in June 2005. The Gold Club
product offers customers a NOW account combined with other banking benefits that
include a higher interest rate, unlimited check writing and free services and
discounts. The Company's interest-free funding source, noninterest bearing
demand deposits, decreased $3,791 or 5.4% during the first six months of 2005.
This decrease occurred mostly in business checking account balances, which were
down $3,603 or 9.2% compared to year-end 2004.
Securities Sold Under Agreements to Repurchase
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were down $13,268 or 33.4% from year-end 2004. This decline was
mostly due to typical seasonal fluctuations of two commercial accounts in the
first quarter of 2005.
Other Borrowed Funds
Other borrowed funds are primarily advances from the FHLB, which are used to
fund loan growth and short-term liquidity needs. During the first six months of
2005, other borrowed funds were up $8,350 or 10.9% from December 31, 2004
primarily due to short-term FHLB advances which were up $11,425.
Shareholders' Equity
Total shareholders' equity at June 30, 2005 of $58,041 was up by $1,462 as
compared to the balance of $56,579 on December 31, 2004. Contributing most to
this increase was year-to-date net income of $3,303 less cash dividends paid of
$1,338, or $.31 per share year-to-date, adjusted for the five-for-four stock
split in May 2005. Management's decision to effect a five-for-four stock split
was generated by a desire to make the Company's common stock more accessible to
smaller investors.
Partially offsetting the growth in capital was an increase in the amount of
treasury stock repurchases. The Company had treasury stock totaling $7,634 at
June 30, 2005, an increase of $346 as compared to the total at year-end 2004.
The Company anticipates repurchasing additional common shares from time to time
as authorized by its stock repurchase program. Most recently, the Company's
Board of Directors authorized the repurchase of up to 175,000 shares of the
Company's common stock through open market and privately negotiated purchases
between August 16, 2005 and February 16, 2006.
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 $210, net of deferred income taxes. At June 30, 2005, the Company had
an unrealized loss, net of deferred income taxes, of $428 as compared to an
unrealized loss, net of deferred income taxes, of $219 at December 31, 2004. The
Company has approximately 86.5% 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.
15
Comparison of
Results of Operations
for the Quarter and Year-To-Date Periods
Ended June 30, 2005 and 2004
----------------------------
For the three months ended June 30, 2005, net income totaled $1,733, down $1,519
or 46.7% from the $3,252 reported a year ago. For the six months ended June 30,
2005, net income totaled $3,303, down $1,514 or 31.4% from the $4,817 earned a
year ago. Comparing June 30, 2005 to June 30, 2004, the annualized year-to-date
return on assets decreased from 1.35% to 0.93%, while return on equity decreased
from 17.57% to 11.71%. Second quarter 2005 earnings per share was $.40, down
46.7% from last year's $.75 second quarter earnings per share. During the first
six months of 2005, earnings per share was $.77, down 30.6% from last year's
$1.11 per share. The quarterly and year-to-date decreases in net income and
earnings per share were due to the previously disclosed sale of the Company's
interest in ProCentury, a Columbus-based property and casualty insurer, which
resulted in an after-tax gain of $1,625 or $.38 per share in the second quarter
of 2004. For additional information on 2004's 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 12 of this Form 10-Q.
Continued improvements in the Company's asset quality generated positive gains
to income by lowering provision expense $43 and $493, respectively, for the
quarterly and year-to-date periods of 2005 as compared to 2004, respectively.
Net Interest Income
For the second quarter of 2005, net interest income was up $47 or 0.7% as
compared to the second quarter of 2004. Through the first six months of 2005,
net interest income was down $39 or .3% as compared to the same period in 2004.
The stability of both the quarterly and year-to-date changes to net interest
income were primarily due to the improvement in net interest margin due to the
rising rate environment with significant increases in short-term rates over the
past year.
Total interest income increased $393 or 3.7% for the second quarter of 2005 and
increased $453 or 2.1% through the first six months of 2005 as compared to the
same periods in 2004. Growth in 2005's year-to-date average earning assets of
$2,971 or 0.4% as compared to the same period in 2004 was complemented with a 12
basis point increase in asset yields, growing from 6.49% to 6.61% for the same
time period. This growth in asset yields can be attributed to the rising rate
environment that has generated consistent increases in short-term interest rates
since June 2004. The increase in short-term interest rates was most sensitive to
the Company's commercial loan portfolio, with loan yields up 40 basis points
from 6.07% at June 2004 to 6.47% at June 2005. With short-term rates on the
rise, long-term interest rates continue to remain flat to declining, causing the
Company's real estate and consumer loan portfolio yields to remain below 2004
levels.
Total interest expense increased $346 or 8.7% for the second quarter of 2005 and
increased $492 or 6.2% through the first six months of 2005 as compared to the
same periods in 2004. The increase came mostly from interest expense incurred on
the Bank's NOW account and CD deposits which have been more responsive to the
rising rate environment experienced in the first half of 2005. As a result of
this continued rise in rates, the Bank's average funding costs have increased 14
basis points from June 2004. The Company's net interest margin through the first
six months of 2005 has decreased to 4.10% from 4.12% in the same period of 2004.
While the Company's net interest margin is below a year ago, the Federal
Reserve's actions to increase interest rates have allowed loan yields to
stabilize and take some pressure off of the net interest margin. This is evident
with the improvement of the Company's net interest margin in the second quarter
of 2005 where it finished at 4.07%, an increase of 6 basis points over the same
time period in 2004.
16
Since many of the Company's loans are variable-rate, the anticipated increases
in rates for 2005 should result in higher interest income for the Company in the
near term. However, deposit customers will similarly expect higher rates of
interest on their accounts that could potentially offset some of this benefit of
rising interest rates. 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 21 of this Form 10-Q.
Provision Expense
The Company's provision expense was relatively stable in the second quarter of
2005, finishing at $330, a decrease of $43 or 11.5% as compared to the same time
period in 2004. The Company's provision expense finished at $648 through the
first six months of 2005, down $493 or 43.2% as compared to the same period in
2004. These continued benefits of lower provision expense are directionally
consistent with the Company's strong asset quality numbers and lower net
charge-offs. Through the first six months of 2005, the ratio of the Company's
nonperforming loans to total loans stood at 0.48% as compared to 0.42% at June
30, 2004. The combination of stable nonperforming loans, declining net charge
offs and improved asset quality had a direct effect on the lower amounts of
provision expense that were recorded to the allowance for loan losses in 2005 as
compared to 2004. Future provisions to the allowance for loan losses will
continue to be based on the quarterly evaluation that is discussed further in
detail under the caption "Critical Accounting Policies - Allowance for Loan
Losses" on page 19 of this Form 10-Q.
Noninterest Income
Total noninterest income decreased $2,388 or 62.8% for the second quarter in
2005 and decreased $2,441 or 47.8% through the first six months of 2005 as
compared to the same periods in 2004. The declines in both periods were due to
the previously disclosed 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 in 2004. 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 12 of this Form 10-Q. Excluding the impact from
ProCentury, noninterest income would have been up $75 in the second quarter of
2005 and up $22 through the first six months of 2005 as compared to the same
periods in 2004. Impacting the increases for both periods was growth in the
Company's debit and credit card interchange income which was up $17 and $51,
respectively, for the quarterly and year-to-date periods of 2005 as compared to
the same periods in 2004. Further enhancing noninterest income was growth in the
Company's gain on sale of secondary market real estate loans which were up $25
and $46, respectively, for the quarterly and year-to-date periods of 2005 as
compared to the same periods in 2004. Partially offsetting these positive growth
trends in noninterest income was a decrease in service charges on deposit
accounts, down $29 and $83, respectively, for the quarterly and year-to-date
periods of 2005 as compared to the same periods in 2004. The decrease was
largely associated with less overdraft fee volume in 2005. Furthermore, checking
account balances have decreased $5,031 since year-end 2004 and are down $2,313
as compared to June 30, 2004.
Noninterest Expense
Total noninterest expense in the second quarter of 2005 was mostly level with
the noninterest expenses for the second quarter of 2004, decreasing just $12 or
0.2%. The Company's noninterest expense was up $284 or 2.7% for the six months
ending 2005 as compared to the same period in 2004. Contributing most to the
quarterly and year-to-date results were salaries and employee benefits, the
Company's largest noninterest expense item, which increased $63 or 2.0% for the
second quarter of 2005 and $205 or 3.4% for the first six months of 2005 as
compared to the same periods in 2004. This increase was related to the rising
17
cost of medical insurance, benefit plans and annual merit increases. The
Company's full-time equivalent employee base of 273 employees at June 30, 2005
was mostly unchanged from the 272 employees at June 30, 2004. Occupancy,
furniture and equipment costs provided a benefit to noninterest expenses,
decreasing $27 in the second quarter of 2005 and $9 for the first six months of
2005 as compared to the same periods in 2004. This was in large part due to the
maturities of depreciation terms on several asset acquisitions from previous
years. Data processing expenses also decreased $14 in the second quarter of 2005
and $29 in the first six months of 2005 as compared to the same periods in 2004
as a result of lower monthly processing fees on debit cards that were negotiated
in 2004. The Company's other noninterest expenses decreased $34 in the second
quarter of 2005 but increased $117 during the first six months of 2005 as
compared to the same periods in 2004. The quarterly decrease was impacted mostly
by lower monthly cash letter service fees that were negotiated going into 2005.
The year-to-date increase in other noninterest expense is related to the
significant growth in accounting fees which are up $151 from 2004 as a result of
higher exam and audit fees associated with the new regulatory reporting
environment under Section 404 of the Sarbanes-Oxley Act of 2002.
Capital Resources
All of the capital ratio's exceeded the regulatory minimum guidelines as
identified in the following table:
Company Ratios Regulatory Well
6/30/05 12/31/04 Minimum Capitalized
------- -------- ----------- -----------
Tier 1 risk-based capital 12.5% 12.1% 4.00% 6.0%
Total risk-based capital ratio 13.7% 13.3% 8.00% 10.0%
Leverage ratio 9.9% 9.4% 4.00% 5.0%
Cash dividends paid of $686 for the second quarter of 2005 and $1,338 for the
first six months of 2005 represent a 4.1% quarterly increase and a 3.9%
year-to-date increase over the cash dividends paid during the same periods in
2004. The quarterly dividend rate increased from $0.15 per share in 2004 to
$0.16 per share in 2005 which contributed to an increase in the Company's
year-to-date dividend rate from $0.29 to $0.31 per share in 2005 as compared to
the same period in 2004. The dividend rate has increased in proportion to the
consistent growth in retained earnings. At June 30, 2005, approximately 80% of
the Company's 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 $90,055 represented 12.5%
of total assets at June 30, 2005. In addition, the FHLB offers advances to the
Bank which further enhances the Bank's ability to meet liquidity demands. At
June 30, 2005, the Bank could borrow an additional $46 million from the FHLB.
The Company's cash and cash equivalents remained relatively unchanged for the
six months ended June 30, 2005, experiencing a decrease of only $8. For further
cash flow information, see the condensed consolidated statement of cash flows on
page 6 of this Form 10-Q.
18
Off-Balance Sheet Arrangements
As discussed in Note 4 - "Concentrations of Credit Risk and Financial
Instruments with Off-Balance Sheet Risk", the Company engages in certain
off-balance sheet credit-related activities, including commitments to extend
credit and standby letters of credit, which could require the Company to make
cash payments in the event that specified future events occur. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. While 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.
Allowance for loan losses
To arrive at the total dollars necessary to maintain an allowance level
sufficient to absorb probable losses incurred at a specific financial statement
date, management has developed procedures to establish and then evaluate the
allowance once determined. The allowance consists of the following components:
specific allocation, general allocation and other estimated general allocation.
To arrive at the amount required for the specific allocation component, the
Company evaluates loans for which a loss may be incurred either in part or
whole. To achieve this task, the Company has created a quarterly report
("Watchlist") which lists the loans from each loan portfolio that management
deems to be potential credit risks. The criteria to be placed on this report
are: past due 60 or more days, nonaccrual and loans management has determined to
be potential problem loans. These loans are reviewed and analyzed for potential
loss by the Large Loan Review Committee which consists of the President of the
Company and members of senior management with lending authority. The function of
the Committee is to review and analyze large borrowers for credit risk,
scrutinize the Watchlist and evaluate the adequacy of the allowance for loan
losses and other credit related issues. The Committee has established a grading
system to evaluate the credit risk of each commercial borrower on a scale of 1
(least risk) to 10 (greatest risk). After the Committee evaluates each
relationship listed in the report, a specific loss allocation may be assessed.
The specific allocation is currently made up of amounts allocated to the
commercial loan portfolio.
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 year-end 2004 (down 6%).
Any changes in the impaired allocation will be reflected in the total specific
allocation.
The second component (general allowance) consists of the total loan portfolio
19
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 allowance for loan
losses. 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 net charge off per loan portfolio for
the last 12 or 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 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 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 a total of ten counties in Ohio and West Virginia. Each assessment
area has its individual economic conditions; however, the Company has chosen to
average the risk factors for compiling the economic risk factor.
The adequacy of the allowance may be determined by certain specific and
nonspecific allocations; however, the total allocation is available for any
credit losses that may impact the loan portfolios.
Concentration of Credit Risk
The Company maintains a diversified credit portfolio, with 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 as a result of
unanticipated future events.
20
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.
The following table presents the Company's estimated net interest income
sensitivity:
June 30, 2005 December 31, 2004
Change in Interest Rates Percentage Change in Percentage Change in
in Basis Points Net Interest Income Net Interest Income
- ------------------------ -------------------- --------------------
+300 (1.35%) (1.07%)
+200 (.27%) (.42%)
+100 .09% (.11%)
-100 .08% .35%
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, 2005, the Company's analysis of net interest income reflects a modest
liability sensitive position. Based on current assumptions, an increase in
interest rates in excess of 100 basis points would negatively impact net
interest income.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of the President and Chief Executive Officer (the
principal executive officer) and the Vice President and Chief Financial Officer
(the principal financial officer) of 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 Vice President and Chief Financial
Officer have concluded that:
21
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, 2005, 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.
22
(c) The following table provides information regarding the
Company's repurchases of its common shares during the fiscal
quarter ended June 30, 2005:
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, 2005 ---- ---- ---- 175,000
May 1 - 31, 2005 ---- ---- ---- 175,000
June 1 - 30, 2005 10,759 $26.17 10,759 164,241
--------------------------------------------------------------------------------------------
TOTAL 10,759 $26.17 10,759 164,241
============================================================================================
(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 August 16, 2005 to February 16, 2006,
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
The Company held its Annual Meeting of Shareholders on April 13, 2005, for the
purpose of electing directors. Shareholders received proxy materials containing
the information required by this item. Three directors, W. Lowell Call, Harold
A. Howe and Brent A. Saunders were nominated for reelection and were reelected.
The summary of voting of the 2,921,053 shares outstanding were as follows:
Director Candidate For Against Abstain
W. Lowell Call 2,914,181 6,872 ----
Harold A. Howe 2,914,048 7,005 ----
Brent A. Saunders 2,909,101 11,952 ----
ITEM 5. OTHER INFORMATION
Not Applicable.
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ITEM 6. EXHIBITS
(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)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO VALLEY BANC CORP.
Date August 9, 2005 By: /s/ Jeffrey E. Smith
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Jeffrey E. Smith
President and Chief Executive Officer
Date August 9, 2005 By: /s/ Scott W. Shockey
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Scott W. Shockey
Vice President and Chief Financial Officer
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