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:
SEPTEMBER 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
----------------------------------------
(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
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
X No
The number of common shares of the registrant outstanding as of October 31, 2005
was 4,266,403.
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 12
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 21
Item 4 - Controls and Procedures 22
PART II - OTHER INFORMATION 22
Item 1 - Legal Proceedings 22
Item 2 - Unregistered Sales of Equity Securities and
Use of Proceeds 23
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 23
SIGNATURES 24
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,
2005 2004
------------ ------------
ASSETS
Cash and cash equivalents $ 15,364 $ 16,279
Interest-bearing deposits in other banks 492 525
Securities available-for-sale 69,767 74,155
Securities held-to-maturity (estimated fair
value: 2005 - $12,666; 2004 - $12,534) 12,285 11,994
Total loans 607,458 600,574
Less: Allowance for loan losses (7,004) (7,177)
------------ ------------
Net loans 600,454 593,397
Premises and equipment, net 8,510 8,860
Accrued income receivable 2,832 2,643
Goodwill 1,267 1,267
Bank owned life insurance 14,731 13,988
Other assets 6,305 6,012
------------ ------------
Total assets $ 732,007 $ 729,120
============ ============
LIABILITIES
Noninterest-bearing deposits $ 70,437 $ 69,936
Interest-bearing deposits 474,461 465,217
------------ ------------
Total deposits 544,898 535,153
Securities sold under agreements to repurchase 23,091 39,753
Other borrowed funds 82,253 76,550
Subordinated debentures 13,500 13,500
Accrued liabilities 9,790 7,585
----------- ------------
Total liabilities 673,532 672,541
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000
shares authorized; 2005 - 4,611,878 shares
issued, 2004 - 3,689,828 shares issued) 4,612 3,690
Additional paid-in capital 31,932 31,931
Retained earnings 30,547 28,465
Accumulated other comprehensive loss (764) (219)
Treasury stock, at cost (2005 - 345,475;
2004 - 258,970 shares) (7,852) (7,288)
----------- ------------
Total shareholders' equity 58,475 56,579
----------- ------------
Total liabilities and
shareholders' equity $ 732,007 $ 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 Nine months ended
September 30, September 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Interest and dividend income:
Loans, including fees $ 10,933 $ 10,023 $ 31,259 $ 29,781
Securities
Taxable 651 689 1,990 2,123
Tax exempt 117 137 359 420
Dividends 68 57 195 161
Other Interest 4 5 37 40
--------- --------- --------- ---------
11,773 10,911 33,840 32,525
Interest expense:
Deposits 3,349 2,825 9,291 8,379
Securities sold under
agreements to repurchase 183 68 426 159
Other borrowed funds 859 881 2,569 2,710
Subordinated debentures 287 245 828 715
--------- --------- --------- ---------
4,678 4,019 13,114 11,963
--------- --------- --------- ---------
Net interest income 7,095 6,892 20,726 20,562
Provision for loan losses 501 471 1,148 1,612
--------- --------- --------- ---------
Net interest income after provision
for loan losses 6,594 6,421 19,578 18,950
Noninterest income:
Service charges on deposit accounts 783 845 2,299 2,444
Trust fees 54 48 161 154
Income from bank owned insurance 149 148 440 458
Gain on sale of loans 32 21 88 31
Gain on sale of
ProCentury Corp. -- -- -- 2,463
Other 375 313 1,076 936
--------- --------- --------- ---------
1,393 1,375 4,064 6,486
Noninterest expense:
Salaries and employee benefits 3,244 3,185 9,570 9,305
Occupancy 327 311 978 962
Furniture and equipment 310 317 902 918
Data processing 170 183 501 543
Other 1,406 1,349 4,325 4,151
--------- --------- --------- ---------
5,457 5,345 16,276 15,879
--------- --------- --------- ---------
Income before income taxes 2,530 2,451 7,366 9,557
Provision for income taxes 794 781 2,328 3,070
--------- --------- --------- ---------
NET INCOME $ 1,736 $ 1,670 $ 5,038 $ 6,487
========= ========= ========= =========
Earnings per share $ 0.41 $ 0.38 $ 1.18 $ 1.49
========= ========= ========= =========
================================================================================
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,
2005 2004 2005 2004
--------- --------- --------- ---------
Balance at beginning of period $ 58,041 $ 56,038 $ 56,579 $ 54,408
Comprehensive income:
Net income 1,736 1,670 5,038 6,487
Change in unrealized gain
(loss) on available-for-sale
securities (509) 701 (826) (812)
Income tax effect 173 (238) 281 276
--------- --------- --------- ---------
Total comprehensive income 1,400 2,133 4,493 5,951
Proceeds from issuance of common
stock through dividend reinvestment
plan --- 180 --- 686
Cash paid in lieu of fractional
shares in stock split --- --- (12) ---
Cash dividends (684) (658) (2,022) (1,946)
Shares acquired for treasury (282) (687) (563) (2,093)
--------- --------- --------- ---------
Balance at end of period $ 58,475 $ 57,006 $ 58,475 $ 57,006
========= ========= ========= =========
Cash dividends per share $ 0.16 $ 0.15 $ 0.47 $ 0.44
========= ========= ========= =========
Shares from stock split, 25%
Common stock --- --- 922,030 ---
========= ========= ========= =========
Treasury stock --- --- 64,742 ---
========= ========= ========= =========
Shares from common stock issued
through dividend reinvestment plan 18 5,721 20 21,823
========= ========= ========= =========
Shares acquired for treasury 11,004 21,725 21,763 68,099
========= ========= ========= =========
================================================================================
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)
================================================================================
Nine months ended September 30,
2005 2004
------------ ------------
Net cash from operating activities: $ 8,657 $ 14,213
Investing activities:
Proceeds from maturities of
securities available-for-sale 17,634 22,170
Purchases of securities available-
for-sale (13,964) (17,029)
Proceeds from maturities of
securities held-to-maturity 700 935
Purchases of securities held-to-maturity (1,000) (1,056)
Change in interest-bearing deposits
in other banks 33 333
Net change in loans (8,161) (30,374)
Proceeds from sale of other real
estate owned (100) (214)
Purchases of premises and equipment (508) (741)
Purchases of insurance contracts (395) ---
------------ ------------
Net cash used in investing activities (5,761) (25,976)
Financing activities:
Change in deposits 9,745 32,192
Cash dividends (2,022) (1,946)
Cash paid in lieu of fractional shares
in stock split (12) ---
Proceeds from issuance of common stock --- 686
Purchases of treasury stock (563) (2,093)
Change in securities sold under
agreements to repurchase (16,662) 1,008
Proceeds from long-term borrowings 13,520 11,000
Repayment of long-term borrowings (13,529) (14,303)
Change in other short-term borrowings 5,712 (13,210)
------------ ------------
Net cash from (used) in financing
activities (3,811) 13,334
------------ ------------
Change in cash and cash equivalents (915) 1,571
Cash and cash equivalents at beginning of period 16,279 17,753
------------ ------------
Cash and cash equivalents at end of period $ 15,364 $ 19,324
============ ============
SUPPLEMENTAL DISCLOSURE
- -----------------------
Cash paid for interest $ 13,008 $ 12,569
Cash paid for income taxes 2,525 1,837
Non-cash tranfers from loans to other real
estate owned 68 300
================================================================================
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 by the Company 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, 2005, and its results of operations and cash
flows for the periods presented. The results of operations for the nine months
ending September 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 4,270,276 and
4,328,589 for the three months ending September 30, 2005 and 2004, respectively.
Weighted average shares outstanding were 4,282,089 and 4,346,631 for the nine
months ending September 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
liquidation and 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.
================================================================================
8
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In March 2004, the Financial Accounting Standards Board ("FASB") reached a
consensus on 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"), which clarifies the application of an impairment model to
determine whether investments have other-than-temporary impairment. The
provisions of EITF 03-1 must be applied prospectively to all current and future
investments accounted for in accordance with SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities". On September 15, September 30, and
November 15, 2004, the FASB issued proposed staff positions to provide guidance
on the application and scope of certain paragraphs and to defer the effective
date of the impairment measurement and recognition provisions contained in
specific paragraphs of EITF 03-1. On June 29, 2005, FASB decided to not provide
additional guidance on the meaning of other-than-temporary impairment for EITF
03-1, but directed the staff to issue FSP FAS 115-1 "The Meaning of
Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value". FSP FAS 115-1 will be effective for other-than-temporary
impairment analyses conducted in periods beginning after December 15, 2005. The
Company has concluded that this new accounting guidance on other-than-temporary
impairment will not have a material impact on its results of operations,
financial condition 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. 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.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
The Company does not have any off-balance sheet derivative financial instruments
such as interest rate swap agreements.
NOTE 2 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
September 30, December 31,
2005 2004
---------------- ----------------
Real estate loans $ 232,185 $ 227,234
Commercial and industrial loans 225,837 226,058
Consumer loans 149,295 146,965
Other loans 141 317
---------------- ----------------
$ 607,458 $ 600,574
================ ================
At September 30, 2005 and December 31, 2004, loans on nonaccrual status were
approximately $1,651 and $1,618, respectively. Loans past due more than 90 days
and still accruing at September 30, 2005 and December 31, 2004 were $1,234 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
nine months ended September 30:
2005 2004
---------------- ----------------
Balance - January 1, $ 7,177 $ 7,593
Loans charged off:
Real estate 215 598
Commercial 1,166 1,564
Consumer 1,596 1,595
---------------- ----------------
Total loans charged off 2,977 3,757
Recoveries of loans:
Real estate 166 484
Commercial 848 351
Consumer 642 658
---------------- ----------------
Total recoveries 1,656 1,493
---------------- ----------------
Net loan charge-offs (1,321) (2,264)
Provision charged to operations 1,148 1,612
---------------- ----------------
Balance - September 30, $ 7,004 $ 6,941
================ ================
Information regarding impaired loans is as follows:
September 30, December 31,
2005 2004
-------------- ---------------
Balance of impaired loans $ 5,688 $ 5,573
============== ===============
Less portion for which no specific
allowance is allocated $ 577 $ 619
============== ===============
Portion of impaired loan balance for
which a specific allowance for credit
losses is allocated $ 5,111 $ 4,954
============== ===============
Portion of allowance for loan losses
specifically allocated for the
impaired loan balance $ 2,455 $ 1,986
============== ===============
Average investment in impaired loans
year-to-date $ 5,942 $ 5,711
============== ===============
Interest on impaired loans was not material for the nine-month periods ended
September 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
3.24% of total loans were unsecured at September 30, 2005 as compared to 3.36%
at December 31, 2004.
================================================================================
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
September 30, 2005, the contract amounts of these instruments totaled
approximately $61,794 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 September 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 $ 70,412 $ 6,341 $ 5,500 $ 82,253
2004 $ 67,222 $ 5,355 $ 3,973 $ 76,550
Pursuant to collateral agreements with the FHLB, advances are secured by
$202,256 in qualifying first mortgage loans and $5,616 in FHLB stock at
September 30, 2005. Fixed rate FHLB advances of $67,012 mature through 2010 and
have interest rates ranging from 2.54% to 6.62%. In addition, variable rate FHLB
borrowings totaling $3,400 mature in 2005 with an interest rate of 4.06%.
At September 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 September 30, 2005, $31,600 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 $149,819 at September 30, 2005.
Promissory notes, issued primarily by the Company, have fixed rates of 3.10% to
6.25% and are due at various dates through a final maturity date of September
30, 2008.
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 September 30, 2005, the interest
rate for the Company's FRB notes was 3.49%.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $28,450 at September 30,
2005 and $29,500 at December 31, 2004. Various investment securites from the
Bank used to collateralize FRB notes totaled $6,070 at September 30, 2005 and
$6,060 at December 31, 2004.
================================================================================
11
At September 30, 2005, scheduled principal payments through December 31 over the
next five years are as follows:
FHLB Borrowings Promissory Notes FRB Notes Totals
--------------- ---------------- --------- ----------
2005 $ 8,071 $ 3,193 $ 5,500 $ 16,764
2006 22,107 1,757 ---- 23,864
2007 12,061 1,291 ---- 13,352
2008 18,009 100 ---- 18,109
2009 3,007 ---- ---- 3,007
Thereafter 7,157 ---- ---- 7,157
---------------- ---------------- ---------- ----------
$ 70,412 $ 6,341 $ 5,500 $ 82,253
================ ================ ========== ==========
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 September 30, 2005, compared to December 31,
2004, and the consolidated results of operations for the quarterly and
year-to-date periods ending September 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 September 30, 2005 and December 31, 2004
-------------------------------------------
Introduction
- ------------
The consolidated total assets of the Company increased $2,887 or 0.4% during the
first nine months of 2005 to finish at $732,007. This increase in assets was
primarily due to an increase in the Company's loan portfolio, which is up
$6,884, partially offset by a $4,097 decrease in securities from year-end 2004.
Loans were primarily funded by an increase in the Company's total deposits which
were up $9,745 and other borrowed funds which were up $5,703 from year-end 2004.
The excess funds available from the increases in deposits and borrowings were
used to support the decline in the Company's securities sold under agreements to
repurchase ("repurchase agreements"), which decreased by $16,662 from year-end
2004.
12
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,
2005, cash and cash equivalents were down $915 to finish at $15,364 as compared
to $16,279 at December 31, 2004. The Company's funding needs due to the
increased loan volume in the third quarter of 2005 can be attributed to the
decline in cash and cash equivalents. 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 2005, investment securities decreased $4,092 or
4.8% driven by a decrease in U.S. government agency securities of $4,289 or
21.4% 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 the nine-month period of
2005, the Company's repurchase agreements decreased 41.9%, reducing the need to
secure these balances and producing the 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 $48,426,
or 59.0% of total investments at September 30, 2005. Mortgage-backed securities
provide increased cash flows due to the more rapid repayment of principal as
compared to other types of investment securities which deliver proceeds upon
maturity or call date.
Loans
- -----
During the first nine months of 2005, total loans were up $6,884 or 1.1% from
year-end 2004, due to a successful third quarter of seasonally high loan demand.
During this period, total loan balances grew $13,154 or 2.2% from $594,304 at
June 30, 2005 to $607,458 at September 30, 2005.
Total loan growth was led by real estate loans, which were up $4,951 or 2.2%
from year-end 2004 to finish at $232,185. Throughout the first half of 2005,
consumer demand for real estate loans had been slowed by the heavy volume of
refinancing at record low interest rates for 2003 and part of 2004. However,
real estate loan demand steadily increased throughout the third quarter due to
the continuation of lower mortgage rates as well as the seasonal volume typical
for this time period. As a result, the Company was able to grow its 1 year
adjustable rate mortgage balances by $3,796 from year-end 2004. Based on the
Company's interest rate risk profile, management felt comfortable keeping a
portion of the fixed rate mortgages originated during the third quarter for the
loan portfolio. As a result, fixed rate loan balances grew $2,599 from year-end
2004. The Company continues to primarily sell fixed rate mortgages to the
secondary market and has sold $3,000 in loans during 2005. The remaining real
estate loan portfolio balances decreased primarily from the Company's other
variable rate real estate loan products.
13
During the nine-month period of 2005, consumer loans were up $2,330 or 1.6% from
year-end 2004 to finish at $149,295. Leading consumer loan growth was an
increase in mobile home loan balances, up $2,458 from year-end 2004, coming
primarily from the growing market of Cabell County, West Virginia. Also, in the
third quarter of 2005, the Company initiated an instant loan check solicitation
to its customers which generated over 460 originations and grew consumer loan
balances by $2,330 from year-end 2004. Furthermore, increased consumer loan
demand in the third quarter contributed to growth in recreational vehicle,
all-terrain vehicle and capital line loan balances, which were collectively up
$1,435 from year-end 2004. These increases in consumer loan balances were
partially offset by a decrease in automobile loans, both direct and indirect,
which were down $5,018 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 the continued rising rate environment have
caused a decline in 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, resulted in 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 nine-month period
of 2005.
Commercial loans have remained relatively unchanged from year-end 2004,
decreasing $221 or 0.1%. The general demand for commercial loans had declined
during the first half of 2005, with several loan payoffs from commercial
business customers during that period due to a challenged economy, especially in
Ohio. Seasonal loan demand caused commercial loan balances to increase in the
third quarter, resulting in a $4,890 growth in loan balances from $220,947 at
June 30, 2005 to $225,837 at September 30, 2005. The primary market areas for
the Company's commercial loans are in the areas of Gallia, Jackson, Franklin and
Pike counties in Ohio, which accounted for 60.0% of total originations for the
nine-month period of 2005 and the growing West Virginia markets, which accounted
for 21.0% of total originations for the same time period. Commercial loan volume
for the remainder of 2005 will continue to be dependent upon economic conditions
as well as general demand for loans in the Company's market area.
While the Company has experienced increases in loan volume throughout the third
quarter of 2005, it does not anticipate loan growth levels to remain at this
same pace in the fourth quarter of 2005. The Company remains committed to sound
underwriting practices without sacrificing asset quality and avoiding exposure
to unnecessary risk that could weaken the portfolio.
Allowance for Loan Losses
- -------------------------
During the nine-month period of 2005, the Company experienced a $943 or 41.7%
decrease in net charge offs as compared to the same period in 2004, mostly from
increased collection efforts within the commercial loan portfolio. Net charge
offs for the commercial loan portfolio decreased $843 during the nine-month
period of 2005 as compared to the same period in 2004. Furthermore, the
Company's nonperforming loan balance continues to remain relatively stable,
ending at $2,885 as of September 30, 2005 as compared to $3,020 at year-end 2004
and $2,734 at September 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 0.48% at September 30, 2005 as compared to 0.50% at year-end
2004 and 0.45% at September 30, 2004. Due to stable asset quality, sound
underwriting practices and lower portfolio risk, the ratio of allowance for loan
losses to total loans remains unchanged at 1.15% at September 30, 2005 as
compared to the same time period in 2004. Management believes that the allowance
for loan losses is reflective of probable incurred losses in the loan portfolio.
14
Deposits
- --------
During the nine-month period of 2005, total deposits were up $9,745 or 1.8% from
year-end 2004, primarily due to increases in time deposits and interest bearing
demand deposits. Time deposits increased $6,340 or 2.1% from year-end 2004
largely due to an increase in retail CD balances of $15,662 partially offset by
a decrease in the Company's brokered CD and network CD issuances of $8,392 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 prompted a shift in emphasis back to retail
funding which has caused the increase in traditional CD deposits over year-end
2004. The increase in CD balances was used to fund the growing loan volume in
the third quarter of 2005. This shift back to more traditional funding also
generated an increase in the Company's interest bearing demand deposits, which
were up $2,904 or 1.9% during the nine months of 2005. This increase was largely
from the Company's new Market Watch money market account, which generated $7,806
in new deposit balances from year-end 2004. Introduced in August 2005, the
Market Watch product is a limited transaction investment account with tiered
rates that will compete with current market rate offerings as well as other
banking benefits. This new product is anticipated to grow throughout the
remainder of 2005. Partially offsetting this growth in the Market Watch product
were decreases in the Company's Gold Club product, down $4,904 from year-end
2004 and Shareholder Gold product, down $1,605 from year-end 2004. The Company's
interest-free funding source, noninterest bearing demand deposits, remained
relatively stable with a balance of $70,347 at September 30, 2005, up $501 or
0.7% from year-end 2004.
Securities Sold Under Agreements to Repurchase
- ----------------------------------------------
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were down $16,662 or 41.9% 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 nine-month period of
2005, other borrowed funds were up $5,703 or 7.5% from year-end 2004 primarily
due to short-term FHLB advances which were up $3,400 and FRB Notes which were up
$1,527.
Shareholders' Equity
- --------------------
Total shareholders' equity at September 30, 2005 of $58,475 was up by $1,896 as
compared to the balance of $56,579 on December 31, 2004. Contributing most to
this increase was year-to-date net income of $5,038 less cash dividends paid of
$2,022, or $.47 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 $7,852 at
September 30, 2005, an increase of $564 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. 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.
15
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 $545, net of deferred income taxes. At September 30, 2005, the Company
had an unrealized loss, net of deferred income taxes, of $764 as compared to an
unrealized loss, net of deferred income taxes, of $219 at December 31, 2004. The
Company has approximately 85.0% 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 Company held more securities which could
be classified as held-to-maturity.
Comparison of
Results of Operations
for the Quarter and Year-To-Date Periods
Ended September 30, 2005 and 2004
----------------------------------------
For the three months ended September 30, 2005, net income totaled $1,736, up $66
or 4.0% from the $1,670 reported a year ago. For the nine months ended September
30, 2005, net income totaled $5,038, down $1,449 or 22.3% from the $6,487 earned
a year ago. Comparing September 30, 2005 to September 30, 2004, the annualized
year-to-date return on assets decreased from 1.21% to 0.93%, while return on
equity decreased from 15.64% to 11.76%. Third quarter 2005 earnings per share
were $.41, up 7.9% from last year's $.38 third quarter earnings per share.
During the nine months of 2005, earnings per share was $1.18, down 20.8% from
last year's $1.49 per share. The year-to-date decrease 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 $464 for the year-to-date period of 2005
while being up just $30 for the quarter-to-date period of 2005 as compared to
the same time periods in 2004.
Net Interest Income
- -------------------
For the third quarter of 2005, net interest income was up $203 or 2.9% as
compared to the third quarter of 2004. Through the nine-month period of 2005,
net interest income was up $164 or 0.8% as compared to the same period in 2004.
The increases in both quarterly and year-to-date net interest income were
primarily due to the improvement in net interest margin in relation to the
rising rate environment with significant increases in short-term rates over the
past year.
Total interest income increased $862 or 7.9% for the third quarter of 2005 and
increased $1,315 or 4.0% through the first nine months of 2005 as compared to
the same periods in 2004. Growth in 2005's year-to-date average earning assets
of $2,790 or 0.4% as compared to the same period in 2004 was complemented with a
23 basis point increase in asset yields, growing from 6.45% to 6.68% 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 62
basis points from 6.02% at September 2004 to 6.64% at September 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 at or below 2004 levels.
16
Total interest expense increased $659 or 16.4% for the third quarter of 2005 and
increased $1,151 or 9.6% through the nine-month period 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 throughout the nine months
of 2005. As a result of this continued rise in rates, the Bank's average funding
costs have increased 22 basis points from September 2004. The Federal Reserve's
actions to increase interest rates over the past year has been effective in
allowing asset yields to grow while taking pressure off of the net interest
margin. This, combined with the Company's emphasis on profitable loan pricing,
has contributed to growth in the net interest margin, increasing 8 basis points
to 4.13% for the quarter-to-date period ending September 30, 2005 and increasing
1 basis point to 4.11% for the nine-month period ending September 30, 2005 as
compared to the same time periods in 2004.
Since many of the Company's loans are variable-rate, the anticipated increases
in rates for the remainder of 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 which 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 third quarter of
2005, finishing at $501, an increase of just $30 or 6.4% as compared to the same
quarterly period in 2004. The Company's provision expense finished at $1,148 for
the nine months of 2005, down $464 or 28.8% 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. Net charge-offs were $1,321 for the nine months of 2005, a decrease
of $943 or 41.7%. Through the nine-month period of 2005, the ratio of the
Company's nonperforming loans to total loans stood at 0.48% as compared to 0.45%
at September 30, 2004. The combination of stable nonperforming loans, declining
(commercial) net charge offs and improved asset quality had a direct effect on
the lower amounts of provision expense that needed to be 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 increased $18 or 1.3% for the third quarter of 2005 and
decreased $2,422 or 37.3% through the nine months of 2005 as compared to the
same periods in 2004. The decline in the year-to-date period was 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 $41 or 1.0% through the nine
months of 2005 as compared to the same period in 2004. Excluding ProCentury,
impacting the increases for both periods was growth in the Company's debit and
credit card interchange income which was up $19 and $70, respectively, for the
quarterly and year-to-date periods of 2005 as compared to the same periods in
2004. With long term rates still at relatively low levels, the Company continues
to sell long term fixed rate loans to the secondary market in 2005. As a result,
noninterest income was further enhanced by increases in the Company's gain on
17
sale of secondary market real estate loans which were up $11 and $57,
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
$62 and $145, 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 as well as a $2,238 decrease in checking
account balances since year-end 2004.
Noninterest Expense
- -------------------
Total noninterest expense was up $112 or 2.1% for the third quarter of 2005 and
was up $397 or 2.5% for the nine months in 2005 as compared to the same periods
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 $59 or 1.9% for the third quarter of 2005 and $265 or 2.8% for
the nine months of 2005 as compared to the same periods in 2004. This increase
was due to the rising cost of medical insurance, benefit plans and annual merit
increases. The Company's full-time equivalent employee base of 267 employees at
September 30, 2005 was mostly unchanged from the 265 employees at September 30,
2004. Occupancy, furniture and equipment costs have remained relatively stable
in 2005, increasing only $9 in the third quarter of 2005 and unchanged through
the nine-month period 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 decreased $13 in the
third quarter of 2005 and $42 in the nine-month period 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 remaining other noninterest
expenses increased $57 in the third quarter of 2005 and increased $174 during
the nine-month period of 2005 as compared to the same periods in 2004. These
increases are related mostly to the significant growth in accounting costs 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 Company's capital ratios exceeded the regulatory minimum guidelines
as identified in the following table:
Company Ratios Regulatory Well
9/30/05 12/31/04 Minimum Capitalized
------- -------- ----------- -----------
Tier 1 risk-based capital 12.4% 12.1% 4.00% 6.0%
Total risk-based capital ratio 13.6% 13.3% 8.00% 10.0%
Leverage ratio 9.8% 9.4% 4.00% 5.0%
Cash dividends paid of $684 for the third quarter of 2005 and $2,022 for the
nine months of 2005 represent a 4.0% 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 $0.44 to $0.47 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 September 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.
18
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 $85,918 represented 11.7%
of total assets at September 30, 2005. In addition, the FHLB offers advances to
the Bank which further enhances the Bank's ability to meet liquidity demands. At
September 30, 2005, the Bank could borrow an additional $50 million from the
FHLB. The Company's cash and cash equivalents experienced a decrease of $915 for
the nine months ended September 30, 2005. For further cash flow information, see
the condensed consolidated statement of cash flows on page 6 of this Form 10-Q.
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.
19
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 4%).
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
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 11% 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.
20
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; unanticipated natural disasters; 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.
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 is not party to
any market risk sensitive instruments for trading purposes.
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:
September 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 (.69%) (1.07%)
+200 .37% (.42%)
+100 .44% (.11%)
-100 (.94%) .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
September 30, 2005, the Company's analysis of net interest income reflects a
modest asset sensitive position in rates up 100 or 200 basis points. Based on
current assumptions, an increase in interest rates in excess of 200 basis points
would negatively impact net interest income due to variable rate loans reaching
their annual interest rate cap as well as the general decline in cash flow from
earning assets in a rising interest rate environment. As compared to December
31, 2004, the balance sheet is better positioned to generate additional net
interest income from anticipated future rate increases.
21
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:
o information required to be disclosed by the Company in this
Quarterly Report on Form 10-Q and the other reports the Company
files or submits under the Exchange Act 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 and the other reports the Company
files or submits under the Exchange Act 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, 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.
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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, 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
-------------------------- ------------- -------------- ---------------------- --------------------------
July 1 - 31, 2005 1,004 $25.55 1,004 163,237
August 1 - 31, 2005 10,000 $25.60 10,000 165,000
September 1 - 30, 2005 ---- ---- ---- 165,000
--------------------------------------------------------------------------------------------
TOTAL 11,004 $25.60 11,004 165,000
============================================================================================
(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 has 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
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
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 November 9, 2005 By: /s/ Jeffrey E. Smith
-------------------------------------------
Jeffrey E. Smith
President and Chief Executive Officer
Date November 9, 2005 By: /s/ Scott W. Shockey
-------------------------------------------
Scott W. Shockey
Vice President and Chief Financial Officer
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