Message from Management
Dear Fellow Shareholder,
The objective of the report that follows is to share in particular detail "what"
your company did in the calendar year 2008. The objective of this letter is to
share "how" your company did it. In summary, "what" your company did, among
other things, was earn $7,128,000, an increase of 13.2%, or $1.77 per share, an
increase of 16.4%. What I am particularly pleased to share with you is "how" the
more than 275 employees of your company did it: safely, soundly, and securely.
On the date I write this letter, I read these headlines: Economy in Worst Fall
Since '82*, Citi, U.S. Reach Accord on a Third Bailout*, and FDIC Sets Fee
Increases to Refill Its Coffers.* I suspect the one word used more often in 2008
than any other is "unprecedented": unprecedented losses, unprecedented scandals,
unprecedented turmoil. There are approximately 8,300 commercial banks in the
United States. Most, like yours, don't do business in New York, Los Angeles, San
Francisco, or Atlanta. They, as we, would rather do their business on Main
Street than Wall Street. Nevertheless, some of the banks from Wall Street have
been making unprecedented loans in our community in recent years and
experiencing more than their share of foreclosures right here in our community.
In 2008, there were 86 real estate foreclosures in Gallia County, Ohio. Seven
financial institutions accounted for 46 - over half - of those foreclosures, and
six of those seven financial institutions do not even have an office in Gallia
County! Only nine of the remaining 40 foreclosures can be attributed to four
financial institutions with local offices. Unfortunately, our entire community
suffers from foreclosures as our property values drop.
The increasing foreclosure rate and loan quality problems of some banks
nationwide are affecting, among other things, FDIC insurance. The FDIC is
celebrating its 75th year of deposit insurance coverage. On January 1, 1934, the
FDIC insured depositors up to $2,500; on January 1, 2009, 75 years later, the
FDIC was insuring depositors up to $250,000. During that time, not one depositor
has lost a dime of insured deposits. I mention that for two reasons: first, as a
depositor, your insured deposits are safe; as a shareholder, your company will
be paying higher FDIC premiums in 2009. As you know with our own auto insurance,
those of us who don't drive drunk pay for those who do. In the banking industry,
I'm sorry to say, there have been a few "drunk drivers". At Ohio Valley Bank,
your company's primary subsidiary, we're going to be paying more to insure your
deposits. While we'll gladly pay higher premiums on behalf of tens of thousands
of depositors, as one of our Executive Vice Presidents recently said, "We'll
also be looking for our 'safe driver discount'". It's not the community banking
organizations that have created the mortgage mess that has led to a credit
crisis; however, we'll all be paying to clean it up.
Lastly, may I leave you with some thoughts on share performance. While your
management team is not satisfied with our share performance in 2008, we believe
your company has been recognized for its performance when compared to not only
peer banks, but also other public non-financial companies.
Please view Ohio Valley Banc Corp's "Total Return Performance" on the following
page. This report gives an objective comparison of your companies' five-year
cumulative total return to an independent index of peer banks as well as the S&P
500.
I invite your attention once again to the cover of this Annual Report. At Ohio
Valley Banc Corp, we understand that we become successful only through the
interdependent support of our customers, shareholders, and employees. Our
safety, security, and soundness is a result of the talent, dedication, and
service that make up the assets behind the vault door.
Sincerely,
Jeffrey E. Smith
President and CEO
Ohio Valley Banc Corp.
*Wall Street Journal-February 28, 2009
PERFORMANCE
TOTAL RETURN PERFORMANCE
Year ended December 31, 2008
This is a comparison of five-year cumulative total returns among Ohio Valley
Banc Corp.'s common shares, the S & P 500 Index, and SNL $500 Million-$1 Billion
Bank Asset-Size Index. The SNL Index represents stock performance of 94 of the
nation's banks located throughout the United States with total assets between
$500 Million and $1 Billion (including Ohio Valley Banc Corp.) Calculations are
based on an investment of $100 on December 31, 2003 and assumes reinvestment of
dividends.
Period Ending
----------------------------------------------------------
12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08
-------- -------- -------- -------- -------- --------
OVBC $100.00 $126.58 $124.66 $128.24 $131.47 $101.76
SNL $500M-$1B $100.00 $113.32 $118.18 $134.41 $107.71 $ 69.02
S&P 500 $100.00 $110.88 $116.33 $134.70 $142.10 $ 89.53
10-K Information
A copy of Ohio Valley Banc Corp.'s annual report on Form 10-K, as filed with the
Securities and Exchange Commission, will be forwarded without charge to any
shareholder upon written request to: Ohio Valley Banc Corp., Attention: Larry E.
Miller, Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and
proxy statement are also available on the company's Web site, www.ovbc.com.
Contact Information
Ohio Valley Banc Corp.
420 Third Avenue, P.O. Box 240, Gallipolis, Ohio 45631
740.446.2631 or 800.468.6682
Web: www.ovbc.com
E-mail: investorrelations@ovbc.com
BUSINESS PROFILE
Ohio Valley Banc Corp. commenced operations on October 23, 1992, as a one-bank
holding company with The Ohio Valley Bank Company being the wholly-owned
subsidiary. The Company's headquarters are located at 420 Third Avenue in
Gallipolis, Ohio.
The Ohio Valley Bank Company was organized on September 24, 1872. The Bank is
insured under the Federal Deposit Insurance Act and is chartered under the
banking laws of the State of Ohio.
In April 1996, the Banc Corp. opened a consumer finance company operating under
the name of Loan Central, Inc.
Ohio Valley Financial Services, an agency specializing in life insurance, was
formed as a subsidiary of the Corp. in June 2000. The Corp. also has minority
holdings in ProAlliance.
OVBC OFFICERS
Jeffrey E. Smith, President and CEO
E. Richard Mahan, Senior Vice President & Chief Credit Officer
Larry E. Miller, II, Senior Vice President & Secretary
Katrinka V. Hart, Senior Vice President & Risk Management
Mario P. Liberatore, Vice President
Cherie A. Barr, Vice President
Sandra L. Edwards, Vice President
David L. Shaffer, Vice President
Jennifer L. Osborne, Vice President
Tom R. Shepherd, Vice President
Scott W. Shockey, Vice President & Chief Financial Officer
Bryan F. Stepp, Vice President
Paula W. Clay, Assistant Secretary
Cindy H. Johnston, Assistant Secretary
OVBC DIRECTORS
Jeffrey E. Smith
President & CEO, Ohio Valley Banc Corp.
Thomas E. Wiseman
President, The Wiseman Agency, Inc, insurance and financial services
Robert H. Eastman
President, Ohio Valley Supermarkets, Inc. retail grocery stores
Lannes C. Williamson
President, L. Williamson Pallets, Inc. sawmill, pallet manufacturing, and wood
processing
Steven B. Chapman
Certified Public Accountant, Chapman & Burris CPAs, LLC
Anna P. Barnitz
Treasurer & CFO, Bob's Market & Greenhouses, Inc. wholesale horticultural
products and retail landscaping stores
Brent A. Saunders
Attorney, Halliday, Sheets & Saunders
Harold A. Howe
President, Ohio Valley Financial Services Agency, LLC
Robert E. Daniel
Administrator, Holzer Clinic multispecialty physician group practice
Roger D. Williams
President, Bob Evans Restaurants restaurant operator and food products
David W. Thomas
Former Chief Examiner, Ohio Division of Financial Institutions bank supervision
and regulation
DIRECTORS EMERITUS
W. Lowell Call Barney A. Molnar
James L. Dailey C. Leon Saunders
Art E. Hartley, Sr. Wendell B. Thomas
Charles C. Lanham
The year 2008 proved to be full of challenges for not just Ohio Valley Banc
Corp., but for financial institutions across the country. OVBC chose to
concentrate on efficiency and opportunities.
Ohio Valley Banc Corp. introduced the first new service of the year. NetInvestor
debuted to excited shareholders in January 2008. The online service allows
shareholders to securely access their OVBC stock information 24/7. The service
also makes it easier to make mailing address changes, print 1099-Div forms,
receive statements, and verify proxy votes.
Ohio Valley Bank launched CellTeller mobile banking in July. Using CellTeller,
bank customers can access their accounts, make transfers, and pay bills from
their cell phone or other mobile device.
A focus on efficiency led to the closing of one office and the opening of
another in August of 2008.
The Ohio Valley Bank office located inside the Cross Lanes (W.Va.) Walmart was
closed. This closing was part of management's strategic decision to reassign
resources to the company's core market areas including nearby Cabell County,
where the bank has established both a traditional branch office and an in-store
Walmart branch.
That same month, a new Loan Production Office opened its doors in the Walmart
Plaza in Gallipolis (Ohio) and the Ohio Valley Bank office inside the Gallipolis
Walmart was remodeled. The new loan production office improved resources for the
heavy traffic received at the Ohio Valley Bank inside the Gallipolis Walmart. At
a time when other banks were starting to restrict their lending, Ohio Valley
Bank made this bold commitment to show the community that it has money to lend.
In fact, later in August, Ohio Valley Bank expanded its online lending services
to include credit cards.
Ohio Valley Banc Corp.'s leadership was recognized nationally in December 2008,
when the American Bankers Association selected President and CEO Jeffrey E.
Smith as one of only 100 bankers to serve on the national America's Community
Bankers Council. "This is an opportunity to let our voice be heard on national
issues that also affect us locally. This is an historic opportunity for us,"
Smith commented. Earlier in 2008, Smith received the Bud and Donna McGhee Award,
the highest honor bestowed by the Gallia County Chamber of Commerce.
Ohio Valley Banc Corp. stock is traded on The NASDAQ Stock Market under the
symbol OVBC.
Loan Production Office Ribbon-Cutting
As is tradition for every new OVB office opened, the ribbon for the ceremony is
made up of actual currency which is then donated to a deserving charity. The
American Cancer Society Relay for Life of Gallia County was the receiving
charity for this office opening.
Remodeled OVB at Gallipolis Walmart
The newly remodeled Ohio Valley Bank located inside the Gallipolis Walmart
offers improved privacy, more teller windows, and a sleek new design.
Increased e-Services
2008 brought the advent of NetInvestor, CellTeller, and online credit cards. An
unique partnership with the Columbus Zoo & Aquarium increased usage of eDelivery
paperless bank statements.
OHIO VALLEY BANK
OHIO VALLEY BANK DIRECTORS
Jeffrey E. Smith Anna P. Barnitz
Thomas E. Wiseman Brent A. Saunders
Robert H. Eastman Robert E. Daniel
Lannes C. Williamson Roger D. Williams
Harold A. Howe David W. Thomas
Steven B. Chapman
OHIO VALLEY BANK OFFICERS
Jeffrey E. Smith President & Chief Executive Officer
E. Richard Mahan Executive Vice President & Chief Credit Officer
Larry E. Miller, II Executive Vice President & Secretary
Katrinka V. Hart Executive Vice President & Risk Management
SENIOR VICE PRESIDENTS
Mario P. Liberatore West Virginia Bank Group
Sandra L. Edwards Financial Bank Group
David L. Shaffer Commercial Bank Group
Jennifer L. Osborne Retail Lending Group
Tom R. Shepherd Chief Deposit Officer
Scott W. Shockey Chief Financial Officer
Bryan F. Stepp Commercial Lending
VICE PRESIDENTS
Patricia L. Davis Research & Technical Applications
Richard D. Scott Trust
Bryan W. Martin Facilities & Technical Services
Patrick H. Tackett Western Division Branch Administrator
Molly K. Tarbett Loss Prevention Manager
Marilyn E. Kearns Director of Human Resources
David K. Nadler Financial Analyst & Strategic Plan Coordinator
Fred K. Mavis Business Development Officer
ASSISTANT VICE PRESIDENTS
Philip E. Miller Region Manager Franklin County
Rick A. Swain Region Manager Pike County
Judith K. Hall Regional Branch Administrator Gallia/Meigs
Melissa P. Mason Trust Officer
Diana L. Parks Internal Auditor
Christopher S. Petro Comptroller
Linda L. Plymale Transit Officer
Kimberly R. Williams Systems Officer
Deborah A. Carhart Shareholder Relations
Gregory A. Phillips Indirect Lending Manager
Pamela D. Edwards Commercial Loan Operations
Paula W. Clay Assistant Secretary
Cindy H. Johnston Assistant Secretary
Christopher L. Preston Regional Branch Administrator I-64
Angela G. King Regional Branch Administrator Gallia/Meigs
Frank W. Davison Chief Information Officer
Bryna S. Butler Director e-Services and Corporate Communications
Kyla R. Carpenter Director of Marketing
William T. Johnson Enterprise Risk Analyst
Toby M. Mannering Collection Manager
Joe J. Wyant Region Manager Jackson County
Allen W. Elliott Bank Card Manager
ASSISTANT CASHIERS
Brenda G. Henson Manager Customer Service
Richard P. Speirs Maintenance Technical Supervisor
Stephanie L. Stover Retail Lending Operations Manager
Raymond G. Polcyn Retail Lending Manager Gallia-Meigs SuperBanks
Tyrone J. Thomas Assistant Manager Franklin County Region
Tamela D. LeMaster Regional Branch Manager I-64
Linda L. Hart Assistant Manager Waverly Office
Miquel D. McCleese Assistant Manager Columbus Office
Randall L. Hammond Security Officer
OHIO VALLEY BANK
16 locations
Gallipolis, Ohio
Main Office - 420 Third Ave.
Mini Bank - 437 Fourth Ave.
Inside Foodland - 236 Second Ave.
Inside Walmart - 2145 Eastern Ave.
3035 State Route 160
Inside Holzer - 100 Jackson Pike
Loan Office - Walmart Plaza, 2145 Eastern Ave.
Columbus, Ohio
3700 South High St.
Jackson, Ohio
740 East Main St.
Pomeroy, Ohio
Inside Sav-a-Lot - 700 W. Main St.
Rio Grande, Ohio
27 North College Ave.
South Point, Ohio
Inside Walmart - 354 Private Drive
Waverly, Ohio
507 West Emmitt Ave.
Huntington, West Virginia
3331 U.S. Route 60 East
Milton, West Virginia
280 East Main St.
Point Pleasant, West Virginia
328 Viand St.
Web Branch
www.ovbc.com
www.ohiovalleybank.com
WEST VIRGINIA ADVISORY BOARD
Mario P. Liberatore Lannes C. Williamson
Anna P. Barnitz John C. Musgrave
Richard L. Handley Stephen L. Johnson
Gregory K. Hartley E. Allen Bell
Trenton M. Stover John A. Myers
LOAN CENTRAL
LOAN CENTRAL OFFICERS
Katrinka V. Hart Chairman of the Board
Cherie A. Barr President
Timothy R. Brumfield Secretary & Manager, Gallipolis Office
T. Joe Wilson Manager, South Point Office
Deborah G. Moore Manager, Jackson Office
Joseph I. Jones Manager, Waverly Office
John J. Holtzapfel Manager, Wheelersburg Office
Loan Central booked a record number of tax refund loans in 2008 and completed
preparations to expand its offering in 2009 to include three tax refund loan and
preparation options.
Other seasonal programs, such as Back to School loans and Christmas cash, have
proven successful for the finance company. A total of 4,670 loans were
originated by Loan Central in 2008. Their friendly, fast service and convenient
hours set them apart from the competition.
LOAN CENRAL
6 locations
Gallipolis, Ohio
2145 Eastern Avenue
Jackson, Ohio
345 Main Street
Ironton, Ohio
710 Park Avenue
South Point, Ohio
348 County Road 410
Waverly, Ohio
505 West Emmitt Avenue
Wheelersburg, Ohio
326 Center Street
Loan Central Tax Refund Loan Growth
Period Ending
--------------------------------------
2005 2006 2007 2008
-------- -------- -------- --------
Number of Tax Refund
Loans Originated 868 1,368 1,495 2,027
SELECTED FINANCIAL DATA
Years Ended December 31
2008 2007 2006 2005 2004
(dollars in thousands, except ------ ------ ------ ------ ------
share and per share data)
SUMMARY OF OPERATIONS:
Total interest income $ 51,533 $ 54,947 $ 52,421 $ 46,071 $ 43,490
Total interest expense 20,828 26,420 23,931 18,137 16,146
Net interest income 30,705 28,527 28,490 27,934 27,344
Provision for loan losses 3,716 2,252 5,662 1,797 2,353
Total other income 6,211 5,236 5,830 5,522 7,992
Total other expenses 23,343 22,583 21,199 21,359 20,926
Income before income taxes 9,857 8,928 7,459 10,300 12,057
Income taxes 2,729 2,631 2,061 3,283 3,676
Net income 7,128 6,297 5,398 7,017 8,381
PER SHARE DATA(1):
Earnings per share $ 1.77 $ 1.52 $ 1.27 $ 1.64 $ 1.93
Cash dividends declared
per share $ .76 $ .71 $ .67 $ .63 $ .75
Book value per share $15.83 $15.10 $14.38 $13.90 $13.19
Weighted average number of
common shares outstanding 4,018,367 4,131,621 4,230,551 4,278,562 4,338,598
AVERAGE BALANCE SUMMARY:
Total loans $ 629,225 $ 628,891 $ 626,418 $ 599,345 $ 590,006
Securities (2) 101,100 91,724 86,179 84,089 86,598
Deposits 606,126 595,610 585,301 542,730 537,162
Other borrowed funds (3) 74,178 74,196 81,975 92,520 96,361
Shareholders' equity 61,346 60,549 59,970 57,620 55,788
Total assets 782,312 769,554 760,932 726,489 722,281
PERIOD END BALANCES:
Total loans $ 630,391 $ 637,103 $ 625,164 $ 617,532 $ 600,574
Securities (2) 99,218 100,713 90,161 84,623 86,674
Deposits 592,361 589,026 593,786 562,866 535,153
Shareholders' equity 63,056 61,511 60,282 59,271 56,579
Total assets 781,108 783,418 764,361 749,719 729,120
KEY RATIOS:
Return on average assets .91% .82% .71% .97% 1.16%
Return on average equity 11.62% 10.40% 9.00% 12.18% 15.02%
Dividend payout ratio 42.94% 46.66% 52.56% 38.55% 38.89%
Average equity to average assets 7.84% 7.87% 7.88% 7.93% 7.72%
(1) Restated for stock splits as appropriate.
(2) Securities include interest-bearing balances with banks and FHLB stock.
(3) Other borrowed funds include subordinated debentures.
1
CONSOLIDATED STATEMENTS OF CONDITION
As of December 31
2008 2007
---- ----
(dollars in thousands, except
share and per share data)
ASSETS
Cash and noninterest-bearing deposits with banks $ 16,650 $ 15,584
Federal funds sold 1,031 1,310
--------- ---------
Total cash and cash equivalents 17,681 16,894
Interest-bearing deposits in other financial
institutions 611 633
Securities available-for-sale 75,340 78,063
Securities held-to-maturity
(estimated fair value: 2008 - $17,241,
2007 - $15,764) 16,986 15,981
Federal Home Loan Bank stock 6,281 6,036
Total loans 630,391 637,103
Less: Allowance for loan losses (7,799) (6,737)
--------- ---------
Net loans 622,592 630,366
Premises and equipment, net 10,232 9,871
Accrued income receivable 3,172 3,254
Goodwill 1,267 1,267
Bank owned life insurance 18,153 16,339
Other assets 8,793 4,714
--------- ---------
Total assets $ 781,108 $ 783,418
========= =========
LIABILITIES
Noninterest-bearing deposits $ 85,506 $ 78,589
Interest-bearing deposits 506,855 510,437
--------- ---------
Total deposits 592,361 589,026
Securities sold under agreements to repurchase 24,070 40,390
Other borrowed funds 76,774 67,002
Subordinated debentures 13,500 13,500
Accrued liabilities 11,347 11,989
--------- ---------
Total liabilities 718,052 721,907
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (See Note K)
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000
shares authorized; 2008 - 4,642,748 shares
issued; 2007 - 4,641,747 shares issued) 4,643 4,642
Additional paid-in capital 32,683 32,664
Retained earnings 40,752 37,763
Accumulated other comprehensive gain (loss) 690 (115)
Treasury stock, at cost (2008 - 659,739 shares;
2007 - 567,403 shares) (15,712) (13,443)
--------- ---------
Total shareholders' equity 63,056 61,511
--------- ---------
Total liabilities and shareholders' equity $ 781,108 $ 783,418
========= =========
See accompanying notes to consolidated financial statements
2
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 2008 2007 2006
------------------------------- ---- ---- ----
(dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 47,272 $ 50,671 $ 48,514
Securities:
Taxable 3,109 3,079 2,851
Tax exempt 535 555 474
Dividends 323 398 339
Other interest 294 244 243
-------- -------- --------
51,533 54,947 52,421
Interest expense:
Deposits 16,636 21,315 18,594
Securities sold under agreements
to repurchase 421 1,051 895
Other borrowed funds 2,682 2,911 3,163
Subordinated debentures 1,089 1,143 1,279
-------- -------- --------
20,828 26,420 23,931
-------- -------- --------
Net interest income 30,705 28,527 28,490
Provision for loan losses 3,716 2,252 5,662
Net interest income after provision -------- -------- --------
for loan losses 26,989 26,275 22,828
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 3,073 2,982 2,987
Trust fees 240 230 221
Income from bank owned life insurance 775 757 907
Gain on sale of loans 127 102 104
Loss on sale of other real estate owned (31) (777) (55)
Other 2,027 1,942 1,666
-------- -------- --------
6,211 5,236 5,830
Noninterest expense:
Salaries and employee benefits 14,075 13,045 12,497
Occupancy 1,562 1,467 1,338
Furniture and equipment 1,048 1,086 1,120
Corporation franchise tax 606 671 669
Data processing 773 844 687
Other 5,279 5,470 4,888
-------- -------- --------
23,343 22,583 21,199
-------- -------- --------
Income before income taxes 9,857 8,928 7,459
Provision for income taxes 2,729 2,631 2,061
-------- -------- --------
NET INCOME $ 7,128 $ 6,297 $ 5,398
======== ======== ========
Earnings per share $ 1.77 $ 1.52 $ 1.27
======== ======== ========
See accompanying notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2008, 2007 and 2006
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Shareholders'
(dollars in thousands, except share and Stock Capital Earnings Income(Loss) Stock Equity
per share data) ------- ------- ------- ------------ -------- -------
BALANCES AT JANUARY 1, 2006 $ 4,626 $32,282 $31,843 $(1,231) $ (8,249) $59,271
Comprehensive income:
Net income --- --- 5,398 --- --- 5,398
Change in unrealized loss on
available-for-sale securities --- --- --- 379 --- 379
Income tax effect --- --- --- (129) --- (129)
-------
Total comprehensive income --- --- --- --- --- 5,648
Common stock issued through
dividend reinvestment, 4 shares --- --- --- --- --- ---
Cash dividends, $.67 per share --- --- (2,837) --- --- (2,837)
Shares acquired for treasury, 71,487 shares --- --- --- --- (1,800) (1,800)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2006 4,626 32,282 34,404 (981) (10,049) 60,282
Comprehensive income:
Net income --- --- 6,297 --- --- 6,297
Change in unrealized loss on
available-for-sale securities --- --- --- 1,313 --- 1,313
Income tax effect --- --- --- (447) --- (447)
-------
Total comprehensive income --- --- --- --- --- 7,163
Common stock issued to ESOP,
9,500 shares 10 238 --- --- --- 248
Common stock issued through
dividend reinvestment, 5,907 shares 6 144 --- --- --- 150
Cash dividends, $.71 per share --- --- (2,938) --- --- (2,938)
Shares acquired for treasury, 134,551 shares--- --- --- --- (3,394) (3,394)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2007 4,642 32,664 37,763 (115) (13,443) 61,511
Comprehensive income:
Net income --- --- 7,128 --- --- 7,128
Change in unrealized loss on
available-for-sale securities --- --- --- 1,220 --- 1,220
Income tax effect --- --- --- (415) --- (415)
-------
Total comprehensive income --- --- --- --- --- 7,933
Common stock issued to ESOP,
1,000 shares 1 19 --- --- --- 20
Common stock issued through
dividend reinvestment, 1 share --- --- --- --- --- ---
Cash dividends, $.76 per share --- --- (3,061) --- --- (3,061)
Shares acquired for treasury, 92,336 shares --- --- --- --- (2,269) (2,269)
Cumulative-effect adjustment in adopting
EITF No. 06-04 --- --- (1,078) --- --- (1,078)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2008 $ 4,643 $32,683 $40,752 $ 690 $(15,712) $63,056
======= ======= ======= ======= ======== =======
See accompanying notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2008 2007 2006
------------------------------- ---- ---- ----
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,128 $ 6,297 $ 5,398
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 939 987 1,021
Net amortization and accretion of securities 101 66 94
Proceeds from sale of loans in secondary market 11,703 4,300 4,038
Loans disbursed for sale in secondary market (11,576) (4,198) (3,933)
Gain on sale of loans (127) (102) (104)
Deferred tax (benefit) expense (102) 908 (903)
Provision for loan losses 3,716 2,252 5,662
Common stock issued to ESOP 20 248 ---
Federal Home Loan Bank stock dividend (245) --- (338)
Loss on sale of other real estate owned 31 777 55
Change in accrued income receivable 82 (20) (415)
Change in accrued liabilities (1,720) 1,298 1,852
Change in other assets (601) (1,528) (290)
------- ------- -------
Net cash provided by operating activities 9,349 11,285 12,137
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available-for-sale 24,643 8,969 12,261
Purchases of securities available-for-sale (20,792) (15,509) (15,907)
Proceeds from maturities of securities
held-to-maturity 2,046 1,009 354
Purchases of securities held-to-maturity (3,060) (3,649) (1,625)
Change in interest-bearing deposits in other banks 22 (125) 2
Net change in loans (991) (19,498) (11,589)
Proceeds from sale of other real estate owned 617 4,274 734
Purchases of premises and equipment (1,300) (1,046) (2,534)
Proceeds from bank owned life insurance --- 71 174
Purchases of bank owned life insurance (1,204) --- ---
------- ------- -------
Net cash used in investing activities (19) (25,504) (18,130)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits 3,335 (4,760) 30,920
Cash dividends (3,061) (2,938) (2,837)
Proceeds from issuance of common stock --- 150 ---
Purchases of treasury stock (2,269) (3,394) (1,800)
Change in securities sold under agreements to repurchase (16,320) 17,834 (6,514)
Proceeds from Federal Home Loan Bank borrowings 13,000 20,000 5,000
Repayment of Federal Home Loan Bank borrowings (16,014) (14,061) (22,146)
Change in other short-term borrowings 12,786 (2,483) 4,519
Proceeds from subordinated debentures --- 8,500 ---
Repayment of subordinated debentures --- (8,500) ---
------- ------- -------
Net cash provided by (used in) financing activities (8,543) 10,348 7,142
------- ------- -------
CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents 787 (3,871) 1,149
Cash and cash equivalents at beginning of year 16,894 20,765 19,616
------- ------- -------
Cash and cash equivalents at end of year $17,681 $16,894 $20,765
======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $22,637 $25,854 $22,014
Cash paid for income taxes 2,827 878 3,623
Non-cash transfers from loans to other real estate owned 5,049 2,632 573
See accompanying notes to consolidated financial statements
5
[ THIS PAGE INTENTIONALLY LEFT BLANK ]
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in thousands, except share and per share data
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Ohio Valley Banc Corp. ("Ohio Valley") is a financial
holding company registered under the Bank Holding Company Act of 1956. Ohio
Valley has one banking subsidiary, The Ohio Valley Bank Company (the "Bank"), as
well as a subsidiary that engages in consumer lending to individuals with higher
credit risk history and a subsidiary insurance agency which sells life
insurance.
The Company provides a full range of commercial and retail banking services
from 21 offices located in central and southeastern Ohio and western West
Virginia. It accepts deposits in checking, savings, time and money market
accounts and makes personal, commercial, floor plan, student, construction and
real estate loans. Substantially all loans are secured by specific items of
collateral, including business assets, consumer assets, and commercial and
residential real estate. Commercial loans are expected to be repaid from cash
flow from business operations. The Company also offers safe deposit boxes, wire
transfers and other standard banking products and services. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation. In addition to
accepting deposits and making loans, the Bank invests in U. S. Government and
agency obligations, interest-bearing deposits in other financial institutions
and investments permitted by applicable law.
The Bank's trust department provides a wide variety of fiduciary services
for trusts, estates and benefit plans and also provides investment and security
services as an agent for its customers.
Principles of Consolidation: The consolidated financial statements include the
accounts of Ohio Valley and its wholly-owned subsidiaries, the Bank, Loan
Central, a consumer finance company, and Ohio Valley Financial Services Agency,
LLC, an insurance agency. Ohio Valley and its subsidiaries are collectively
referred to as the "Company". All material intercompany accounts and
transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Areas involving the use of management's
estimates and assumptions that are more susceptible to change in the near term
involve the allowance for loan losses, the fair value of certain securities, the
fair value of financial instruments and the determination and carrying value of
impaired loans.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
noninterest-bearing deposits with banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods. The Company reports
net cash flows for customer loan transactions, deposit transactions, short-term
borrowings and interest-bearing deposits with other financial institutions.
Securities: The Company classifies securities into held-to-maturity and
available-for-sale categories. Held-to-maturity securities are those which the
Company has the positive intent and ability to hold to maturity and are reported
at amortized cost. Securities classified as available-for-sale include equity
securities and other securities that could be sold for liquidity, investment
management or similar reasons even if there is not a present intention of such a
sale. Available-for-sale securities are reported at fair value, with unrealized
gains or losses included as a separate component of equity, net of tax. Other
securities, such as Federal Home Loan Bank stock, are carried at cost.
Premium amortization is deducted from, and discount accretion is added to,
interest income on securities using the level yield method. Gains and losses are
recognized upon the sale of specific identified securities on the completed
transaction basis. Securities are written down to fair value when a decline in
fair value is other than temporary.
Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on an accrual basis using the interest method and
includes amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when the loan is impaired or payments are past due over 90 days. Payments
received on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio,
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Concentrations of Credit Risk: The Company grants residential, consumer and
commercial loans to customers located primarily in the southeastern Ohio and
western West Virginia areas.
The following represents the composition of the Company's loan portfolio at
December 31, 2008:
% of Total Loans
----------------
Residential real estate loans 40.09%
Commercial real estate loans 31.50%
Consumer loans 20.13%
Commercial and industrial loans 7.11%
All other loans 1.17%
----------------
100.00%
================
Approximately 3.79% of total loans are unsecured.
The Bank, in the normal course of its operations, conducts business with
correspondent financial institutions. Balances in correspondent accounts,
investments in federal funds, certificates of deposit and other short-term
securities are closely monitored to ensure that prudent levels of credit and
liquidity risks are maintained. At December 31, 2008, the Bank's primary
correspondent balance was $8,659 on deposit at Fifth Third Bank, Cincinnati,
Ohio.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation, which is computed using the
straight-line or declining balance methods over the estimated useful life of the
owned asset and, for leasehold improvement, over the remaining term of the
leased facility. The useful lives range from 3 to 8 years for equipment,
furniture and fixtures and 7 to 39 years for buildings and improvements.
Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of
foreclosure is included in other assets. Such real estate is carried at the
lower of investment in the loan or estimated fair value of the property less
estimated selling costs. Any reduction to fair value at the time of acquisition
is accounted for as a loan charge-off. Any subsequent reduction in fair value is
recorded as a loss on other assets. Costs incurred to carry other real estate
are charged to expense. Other real estate owned totaled $4,693 at December 31,
2008 and $261 at December 31, 2007.
Goodwill: Goodwill results from business acquisitions and represents the excess
of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Goodwill is assessed at least
annually for impairment and any such impairment will be recognized in the period
identified.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Per Share Amounts: Earnings per share is based on net income divided by the
following weighted average number of common shares outstanding during the
periods: 4,018,367 for 2008; 4,131,621 for 2007; 4,230,551 for 2006. Ohio Valley
had no dilutive securities outstanding for any period presented.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.The Company
recognizes interest and/or penalties related to income tax matters in income tax
expense.
The Company adopted Financial Accounting Standards Board ("FASB")
Interpretation 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), as of
January 1, 2007. A tax position is recognized as a benefit only if it is "more
likely than not" that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the
largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the "more likely than not" test,
no tax benefit is recorded. The adoption of FIN 48 had no impact on the
Company's financial statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale which are also recognized as separate
components of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Bank Owned Life Insurance: The Company has purchased life insurance policies on
certain officers. These policies are recorded at their cash surrender value, or
the amount that could be currently realized.
ESOP: Compensation expense is based on the market price of shares as they are
committed to be allocated to participant accounts.
Adoption of New Accounting Standards: In September 2006, the FASB issued
Statement of Financial Accounting Standards ("FAS") No. 157, "Fair Value
Measurements". FAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. The statement
also establishes a fair value hierarchy about the assumptions used to measure
fair value and clarifies assumptions about risk and the effect of a restriction
on the sale or use of an asset. The standard was effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued Staff
Position ("FSP") 157-2, "Effective Date of FASB Statement No. 157". This FSP
delays the effective date of FAS 157 for all nonfinancial assets and
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The impact of adoption was
not material. In October 2008, the FASB issued FSP 157-3, "Determining the Fair
Value of a Financial Asset when the Market for That Asset Is Not Active". This
FSP clarifies the application of FAS 157 in a market that is not active. The
impact of adoption was not material.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities". The standard provides companies
with an option to report selected financial assets and liabilities at fair value
and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The new standard was effective for the
Company on January 1, 2008. The Company has not elected the fair value option
for any financial assets or financial liabilities.
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In September 2006, the FASB Emerging Issues Task Force ("EITF") finalized
Issue No. 06-04, "Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements". This
issue requires that a liability be recorded during the service period when a
split-dollar life insurance agreement continues after participants' employment
or retirement. The required accrued liability will be based on either the
post-employment benefit cost for the continuing life insurance or based on the
future death benefit depending on the contractual terms of the underlying
agreement.
This issue was effective for fiscal years beginning after December 15,
2007. As a result of the adoption of EITF No. 06-04, the Company recognized a
cumulative effect adjustment (decrease) to retained earnings of $1,078, which
also represented additional liability required to be provided under EITF No.
06-04 on January 1, 2008 related to the agreements.
On November 5, 2007, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair
Value through Earnings ("SAB 109"). Previously, SAB 105, Application of
Accounting Principles to Loan Commitments, stated that in measuring the fair
value of a derivative loan commitment, a company should not incorporate the
expected net future cash flows related to the associated servicing of the loan.
SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows
related to the associated servicing of the loan should be included in measuring
fair value for all written loan commitments that are accounted for at fair value
through earnings. SAB 105 also indicated that internally-developed intangible
assets should not be recorded as part of the fair value of a derivative loan
commitment, and SAB 109 retains that view. SAB 109 was effective for derivative
loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The impact of adoption was not material.
Effect of Newly Issued But Not Yet Effective Accounting Standards: In December
2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations ("FAS
141(R)"), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. FAS No. 141(R) is effective for fiscal years beginning on
or after December 15, 2008. Earlier adoption is prohibited. The adoption of this
standard is not expected to have a material effect on the Company's results of
operations or financial position.
In December 2007, the FASB issued FAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51" ("FAS No. 160"),
which will change the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. FAS No. 160 is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. Earlier adoption is prohibited and the Company does not
expect the adoption of FAS No. 160 to have a significant impact on its results
of operations or financial position.
In March 2008, the FASB issued FAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FAS No. 133". FAS No. 161
amends and expands the disclosure requirements of FAS No. 133 for derivative
instruments and hedging activities. FAS No. 161 requires qualitative disclosure
about objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. FAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The adoption of this standard is
not expected to have a material effect on the Company's results of operations or
financial position.
Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. These financial instruments are
recorded when they are funded. See Note K for more specific disclosure related
to loan commitments.
Dividend Restrictions: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Bank to Ohio Valley or by Ohio
Valley to its shareholders. These restrictions pose no practical limit on the
ability of the Bank or Ohio Valley to pay dividends at historical levels. See
Note P for more specific disclosure related to dividend restrictions.
Restrictions on Cash: Cash on hand or on deposit with Fifth Third Bank and the
Federal Reserve Bank of $8,066 and $8,312 was required to meet regulatory
reserve and clearing requirements at year-end 2008 and 2007. The balances at
Fifth Third Bank do not earn interest.
10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in Note O. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Industry Segment Information: While management monitors the revenue streams of
the various products and services, the identifiable segments are not material,
and operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the financial service operations are
considered by management to be aggregated in one reportable segment.
Reclassifications: The consolidated financial statements for 2007 and 2006 have
been reclassified to conform with the presentation for 2008. These
reclassifications had no effect on the net results of operations.
NOTE B - SECURITIES
Securities are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
---- ----- ------ -----
December 31, 2008
-----------------
U.S. Government sponsored
entity securities $30,623 $1,243 --- $31,866
Mortgage-backed securities 43,671 82 $ (279) 43,474
------- ------ -------- -------
Total securities $74,294 $1,325 $ (279) $75,340
======= ====== ======= =======
December 31, 2007
-----------------
U.S. Government sponsored
entity securities $39,002 $ 462 $ (17) $39,447
Mortgage-backed securities 39,235 37 (656) 38,616
------- ------ -------- -------
Total securities $78,237 $ 499 $ (673) $78,063
======= ====== ======= =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
---- ----- ------ -----
December 31, 2008
-----------------
Obligations of states and
political subdivisions $16,946 $ 327 $ (70) $17,203
Mortgage-backed securities 40 --- (2) 38
------- ------ ----- -------
Total securities $16,986 $ 327 $ (72) $17,241
======= ====== ===== =======
December 31, 2007
-----------------
Obligations of states and
political subdivisions $15,933 $ 236 $(451) $15,718
Mortgage-backed securities 48 --- (2) 46
------- ------ ----- -------
Total securities $15,981 $ 236 $(453) $15,764
======= ====== ===== =======
At year-end 2008 and 2007, there were no holdings of securities of any one
issuer, other than the U.S. Government and its agencies, in an amount greater
than 10% of shareholders' equity.
Securities with a carrying value of approximately $73,539 at December 31,
2008 and $78,843 at December 31, 2007 were pledged to secure public deposits,
repurchase agreements and for other purposes as required or permitted by law.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES (continued)
The amortized cost and estimated fair value of debt securities at December
31, 2008, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because certain issuers may have the right to call
or prepay the debt obligations prior to their contractual maturities.
Available-for-Sale Held-to-Maturity
---------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Debt Securities: Cost Value Cost Value
------- ------- ------- -------
Due in one year or less $ 7,499 $ 7,682 $ 1,085 $ 1,087
Due in one to five years 20,622 21,551 3,992 4,140
Due in five to ten years 2,502 2,633 2,865 2,999
Due after ten years --- --- 9,004 8,977
Mortgage-backed securities 43,671 43,474 40 38
------- ------- ------- -------
Total debt securities $74,294 $75,340 $16,986 $17,241
======= ======= ======= =======
There were no sales of debt or equity securities during 2008, 2007 and
2006.
Securities with unrealized losses not recognized in income are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2008 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Description of Securities
-------------------------
U.S. Government sponsored
entity securities --- --- --- --- --- ---
Mortgage-backed securities $12,759 $ (178) $18,951 $ (103) $31,710 $ (281)
Obligations of states and
political subdivisions --- --- 2,879 (70) 2,879 (70)
------- ------ ------- ------- ------- -------
$12,759 $ (178) $21,830 $ (173) $34,589 $ (351)
======= ====== ======= ======= ======= =======
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2007 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Description of Securities
-------------------------
U.S. Government sponsored
entity securities $ 1,983 $ (17) --- --- $ 1,983 $ (17)
Mortgage-backed securities 663 (4) $32,938 $ (654) 33,601 (658)
Obligations of states and
political subdivisions --- --- 5,443 (451) 5,443 (451)
------- ------ ------- ------- ------- -------
$ 2,646 $ (21) $38,381 $(1,105) $41,027 $(1,126)
======= ====== ======= ======= ======= =======
Unrealized losses on the Company's debt securities have not been recognized
into income because the issuers' securities are of high credit quality,
management has the intent and ability to hold them for the foreseeable future,
and the decline in fair value is largely due to increases in market interest
rates. The fair value is expected to recover as the bonds approach their
maturity date or reset date. Management does not believe any individual
unrealized loss at December 31, 2008 represents an other-than-temporary
impairment.
12
NOTE C - LOANS
Loans are comprised of the following at December 31:
2008 2007
---- ----
Residential Real estate $252,693 $250,483
Commercial real estate 198,559 196,523
Commercial and industrial 44,824 55,090
Consumer 126,911 127,832
All other 7,404 7,175
-------- --------
Total Loans $630,391 $637,103
======== ========
NOTE D - ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses for
the years ended December 31:
2008 2007 2006
---- ---- ----
Balance, beginning of year $6,737 $9,412 $7,133
Loans charged off:
Commercial (1) 1,164 4,002 3,079
Residential real estate 225 422 432
Consumer 2,140 1,617 2,120
------ ------ ------
Total loans charged off 3,529 6,041 5,631
Recoveries of loans:
Commercial (1) 95 248 946
Residential real estate 61 166 204
Consumer 719 700 1,097
------ ------ ------
Total recoveries of loans 875 1,114 2,247
Net loan charge-offs (2,654) (4,927) (3,384)
Provision charged to operations 3,716 2,252 5,663
------ ------ ------
Balance, end of year $7,799 $6,737 $9,412
====== ====== ======
Information regarding impaired loans is as follows:
2008 2007
---- ----
Balance of impaired loans $ 8,099 $ 6,871
Less portion for which no specific
allowance is allocated 5,513 2,568
------- -------
Portion of impaired loan balance for which
an allowance for credit losses is allocated $ 2,586 $ 4,303
======= =======
Portion of allowance for loan losses allocated
to the impaired loan balance $ 1,404 $ 1,312
======= =======
Average investment in impaired loans for the year $ 9,027 $ 6,918
======= =======
Past due - 90 days or more and still accruing $ 1,878 $ 927
======= =======
Nonaccrual $ 3,396 $ 2,734
======= =======
Interest recognized on impaired loans was $490, $401 and $939 for years ending
2008, 2007 and 2006, respectively. Accrual basis income was not materially
different from cash basis income for the periods presented.
(1) Includes commercial and industrial and commercial real estate loans
13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31:
2008 2007
---- ----
Land $ 1,570 $ 1,565
Buildings 10,220 9,953
Leasehold improvements 2,822 2,771
Furniture and equipment 12,489 11,511
------- -------
27,101 25,800
Less accumulated depreciation 16,869 15,929
------- -------
Total premises and equipment $10,232 $ 9,871
======= =======
The following is a summary of the future minimum lease payments for facilities
leased by the Company. Lease payments were $448 in 2008 and $405 in 2007.
2009 $ 453
2010 351
2011 316
2012 277
2013 225
Thereafter 133
------
$1,755
======
NOTE F - DEPOSITS
Following is a summary of interest-bearing deposits at December 31:
2008 2007
---- ----
NOW accounts $ 80,855 $ 65,618
Savings and Money Market 118,289 103,712
Time:
IRA accounts 46,574 44,050
Certificates of Deposit:
In denominations under $100,000 151,438 170,565
In denominations of $100,000 or more 109,699 126,492
-------- --------
Total time deposits 307,711 341,107
-------- --------
Total interest-bearing deposits $506,855 $510,437
======== ========
Following is a summary of total time deposits by remaining maturity at
December 31:
2008
------
Within one year $219,240
From one to two years 49,403
From two to three years 32,956
From three to four years 2,648
From four to five years 2,435
Thereafter 1,029
--------
Total $307,711
========
Brokered deposits, included in time deposits, were $17,906 and $21,820 at
December 31, 2008 and 2007, respectively.
14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are financing arrangements
that have overnight maturity terms. At maturity, the securities underlying the
agreements are returned to the Company. Information concerning securities sold
under agreements to repurchase is summarized as follows at December 31:
2008 2007
---- ----
Balance outstanding at period-end $24,070 $40,390
------- -------
Weighted average interest rate at period-end .70% 2.91%
------- -------
Average amount outstanding during the year $28,040 $27,433
------- -------
Approximate weighted average interest rate
during the year 1.50% 3.83%
------- -------
Maximum amount outstanding as of any month-end $35,309 $40,390
------- -------
Securities underlying these agreements at
year-end were as follows:
Carrying value of securities $51,690 $49,290
------- -------
Fair Value $52,083 $48,829
------- -------
The Company sold securities under agreements to repurchase with overnight
maturity terms totaling $2,514 at December 31, 2008 and $12,379 at December 31,
2007 with one large commercial account.
NOTE H - OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2008 and 2007 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
--------------- ---------------- --------- -------
2008 $68,715 $ 5,479 $ 2,580 $ 76,774
2007 $55,779 $ 5,723 $ 5,500 $ 67,002
Pursuant to collateral agreements with the FHLB, advances are secured by
$226,127 in qualifying mortgage loans and $6,280 in FHLB stock at December 31,
2008. Fixed rate FHLB advances of $48,165 mature through 2033 and have interest
rates ranging from 2.13% to 6.62%. In addition, variable rate FHLB borrowings of
$20,550 matured in 2009 and carried an interest rate of .54%.
At December 31, 2008, the Company had a cash management line of credit
enabling it to borrow up to $60,000 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. There was $39,450 available on this line of credit at December 31,
2008.
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 $167,501 at December 31,
2008.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of
2.40% to 5.00% and are due at various dates through a final maturity date of
November 12, 2010. A total of $3,521 represented promissory notes payable by
Ohio Valley to related parties. See Note L for further discussion of related
party transactions.
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. The interest rate for the
Company's FRB notes was zero percent at December 31, 2008 and 4.00% at December
31, 2007. Various investment securities from the Bank used to collateralize FRB
notes totaled $5,880 at December 31, 2008 and $5,945 at December 31, 2007.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $45,850 at December 31,
2008 and $34,950 at December 31, 2007.
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - OTHER BORROWED FUNDS (continued)
Scheduled principal payments over the next five years:
FHLB Borrowings Promissory Notes FRB Notes Totals
--------------- ---------------- --------- ------
Year Ended 2009 $36,556 $4,479 $2,580 $43,615
Year Ended 2010 26,005 1,000 --- 27,005
Year Ended 2011 6,006 --- --- 6,006
Year Ended 2012 6 --- --- 6
Year Ended 2013 6 --- --- 6
Thereafter 136 --- --- 136
------- ------ ------ -------
$68,715 $5,479 $2,580 $76,774
======= ====== ====== =======
NOTE I - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
On September 7, 2000, a trust formed by Ohio Valley issued $5,000 of 10.6%
fixed rate trust preferred securities as part of a pooled offering of such
securities. The Company issued subordinated debentures to the trust in exchange
for the proceeds of the offering, which debentures represent the sole asset of
the trust. The Company may redeem all or a portion of these subordinated
debentures beginning September 7, 2010 at a premium of 105.30% with the call
price declining .53% per year until reaching a call price of par at year twenty
through maturity. The subordinated debentures must be redeemed no later than
September 7, 2030. Debt issuance costs of $166 were incurred and capitalized and
will amortize as a yield adjustment through expected maturity.
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of
adjustable-rate trust preferred securities as part of a pooled offering of such
securities. The rate on these trust preferred securities will be fixed at 6.58%
for five years, and then convert to a floating-rate term on March 15, 2012,
based on a rate equal to the 3-month LIBOR plus 1.68%. There were no debt
issuance costs incurred with these trust preferred securities. The Company
issued subordinated debentures to the trust in exchange for the proceeds of the
offering. The subordinated debentures must be redeemed no later than June 15,
2037.
On March 26, 2007, the proceeds from these new trust preferred securities
were used to pay off $8,500 in higher cost trust preferred security debt that
was issued on March 26, 2002. This repayment of $8,500 in trust preferred
securities was the result of an early call feature that allowed the Company to
redeem the entire amount of these subordinated debentures at par value. These
higher cost subordinated debentures, which were floating based on a rate equal
to the 3-month LIBOR plus 3.60%, not to exceed 11.00%, were redeemed at a
floating rate of 8.97%. The replacement of this higher cost debt was a strategy
by management to lower interest expense and improve the net interest margin.
Under the provisions of the related indenture agreements, the interest
payable on the trust preferred securities is deferrable for up to five years and
any such deferral is not considered a default. During any period of deferral,
the Company would be precluded from declaring or paying dividends to
shareholders or repurchasing any of the Company's common stock. Under FASB
Interpretation No. 46, as revised, the trusts are not consolidated with the
Company. Accordingly, the Company does not report the securities issued by the
trust as liabilities, and instead reports as liabilities the subordinated
debentures issued by the Company and held by the trust. Since the Company's
equity interest in the trusts cannot be received until the subordinated
debentures are repaid, these amounts have been netted.
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES
The provision for income taxes consists of the following components:
2008 2007 2006
---- ---- ----
Current tax expense $2,831 $1,723 $2,964
Deferred tax (benefit)expense (102) 908 (903)
------ ------ ------
Total income taxes $2,729 $2,631 $2,061
====== ====== ======
The source of gross deferred tax assets and gross deferred tax liabilities
at December 31:
2008 2007
---- ----
Items giving rise to deferred tax assets:
Allowance for loan losses $2,712 $2,343
Deferred compensation 1,362 1,278
Unrealized loss on securities available-for-sale --- 59
Deferred loan fees/costs 294 293
Depreciation 21 150
Other 189 252
Items giving rise to deferred tax liabilities:
Investment accretion (2) (3)
FHLB stock dividends (1,081) (995)
Unrealized gain on securities available-for-sale (356) ---
Prepaid expenses (168) (130)
Intangibles (232) (196)
Other (66) (65)
------ ------
Net deferred tax asset $2,673 $2,986
====== ======
The difference between the financial statement tax provision and amounts
computed by applying the statutory federal income tax rate of 34% to income
before taxes is as follows:
2008 2007 2006
---- ---- ----
Statutory tax $3,351 $3,036 $2,536
Effect of nontaxable interest (282) (282) (211)
Nondeductible interest expense 34 47 33
Income from bank owned insurance (192) (210) (264)
Effect of state income tax 1 114 119
Tax credits (193) (78) (68)
Other items 10 4 (84)
------ ------ ------
Total income taxes $2,729 $2,631 $2,061
====== ====== ======
The adoption of FIN 48 at January 1, 2007 had no impact on the Company's
financial statements. At December 31, 2007 and December 31, 2008, the Company
had no unrecognized tax benefits recorded. The Company does not expect the
amount of unrecognized tax benefits to significantly change within the next
twelve months.
The Company is subject to U.S. federal income tax as well as West Virginia
state income tax. The Company is no longer subject to federal examination for
years prior to 2005. The Company's 2003-2005 West Virginia state income tax
returns were examined by taxing authority and no additional liability was
assessed. The tax years 2005-2007 remain open to federal examination, and the
2006-2007 tax years remain open to state examination.
17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. The Bank's exposure to credit loss
in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit, and financial
guarantees written, is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for instruments recorded on the balance
sheet.
Following is a summary of such commitments at December 31:
2008 2007
----- -----
Fixed rate $ 577 $ 2,127
Variable rate 63,839 65,391
Standby letters of credit 13,524 14,607
The interest rate on fixed rate commitments ranged from 6.00% to 8.99% at
December 31, 2008.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and incomeproducing commercial
properties.
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material effect on financial condition or results of operations.
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank or cash in the vault. The amount of those reserve balances was
$7,999 and $7,066 for the years ended December 31, 2008 and 2007, respectively.
NOTE L - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies in which they are
affiliated were loan customers during 2008. A summary of activity on these
borrower relationships with aggregate debt greater than $120 is as follows:
Total loans at January 1, 2008 $11,809
New loans 1,284
Repayments (4,508)
Other changes (174)
-------
Total loans at December 31, 2008 $ 8,411
=======
Other changes include adjustments for loans applicable to one reporting
period that are excludable from the other reporting period, such as changes in
persons included. In addition, certain directors, executive officers and
companies with which they are affiliated were recipients of interest-bearing
promissory notes issued by Ohio Valley in the amount of $3,521 at December 31,
2008 and $3,768 at December 31, 2007.
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - EMPLOYEE BENEFITS
The Bank has a profit-sharing plan for the benefit of its employees and
their beneficiaries. Contributions to the plan are determined by the Board of
Directors of Ohio Valley. Contributions charged to expense were $187, $172 and
$171, for 2008, 2007 and 2006.
Ohio Valley maintains an Employee Stock Ownership Plan (ESOP) covering
substantially all employees of the Company. Ohio Valley makes discretionary
contributions to the ESOP which are allocated to ESOP participants based on
relative compensation. The total number of shares held by the ESOP, all of which
have been allocated to participant accounts, were 227,177 and 225,148 at
December 31, 2008 and 2007. In addition, the Bank made contributions to its ESOP
Trust as follows:
Years ended December 31
2008 2007 2006
---- ---- ----
Number of shares issued 1,000 1,000 8,500
====== ====== ======
Value of stock contributed $ 20 $ 26 $ 222
Cash contributed 340 318 121
----- ----- -----
Total charged to expense $ 360 $ 344 $ 343
===== ===== =====
Life insurance contracts with a cash surrender value of $18,153 at December
31, 2008 have been purchased by the Company, the owner of the policies. The
purpose of these contracts was to replace a current group life insurance program
for executive officers, implement a deferred compensation plan for directors and
executive officers, implement a director retirement plan and implement a
supplemental retirement plan for certain officers. Under the deferred
compensation plan, Ohio Valley pays each participant the amount of fees deferred
plus interest over the participant's desired term, upon termination of service.
Under the director retirement plan, participants are eligible to receive ongoing
compensation payments upon retirement subject to length of service. The
supplemental retirement plan provides payments to select executive officers upon
retirement based upon a compensation formula determined by Ohio Valley's Board
of Directors. The present value of payments expected to be provided are accrued
during the service period of the covered individuals and amounted to $3,914 and
$3,669 at December 31, 2008 and 2007. Expenses related to the plans for each of
the last three years amounted to $328, $294, and $262.
NOTE N - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes for the years ended
December 31, are as follow:
2008 2007 2006
---- ---- ----
Net unrealized holding gains on
available-for-sale securities $ 1,220 $ 1,313 $ 379
Tax effect (415) (447) (129)
------- ------- -------
Other comprehensive income (loss) $ 805 $ 866 $ 250
======= ======= =======
19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
As discussed in Note A, FAS 157 was implemented by the Company effective
January 1, 2008. FAS 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. FAS 157 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
Level 2: Significant other observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities, quoted prices in markets that
are not active, and other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant, unobservable inputs that reflect a company's own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
The following is a description of the Company's valuation methodologies used to
measure and disclose the fair values of its financial assets and liabilities on
a recurring or nonrecurring basis:
Securities Available-For-Sale: Securities classified as available-for-sale are
reported at fair value utilizing Level 2 inputs. For these securities, the
Company obtains fair value measurements using pricing models that vary based on
asset class and include available trade, bid and other market information. Fair
value of securities available-for-sale may also be determined by matrix pricing,
which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted prices for the specific
securities, but rather by relying on the securities' relationship to other
benchmark quoted securities.
Impaired Loans: Some impaired loans are reported at the fair value of the
underlying collateral adjusted for selling costs. Collateral values are
estimated using Level 3 inputs based on third party appraisals.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
Fair Value Measurements at December 31, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Securities Available-For-Sale ---- $ 75,340 ----
Assets and Liabilities Measured on a Nonrecurring Basis
Assets and liabilities measured at fair value on a nonrecurring basis are
summarized below:
Fair Value Measurements at December 31, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Impaired Loans ---- ---- $1,182
The portion of the impaired loan balance for which a specific allowance for
credit losses was allocated totaled $2,586. The valuation allowance for these
loans was $1,404, resulting in additional provision for loan loss expense of
$775 at December 31, 2008.
20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents: For these short-term instruments, the carrying amount
is a reasonable estimate of fair value.
Interest-bearing Deposits in Other Banks: For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Securities: Securities classified as available-for-sale are reported at fair
value. For these securities, the Company obtains fair value measurements using
pricing models that vary based on asset class and include available trade, bid
and other market information. Fair value of securities available-for-sale may
also be determined by matrix pricing, which is a mathematical technique used
widely in the industry to value debt securities without relying exclusively on
quoted prices for the specific securities, but rather by relying on the
securities' relationship to other benchmark quoted securities.
Federal Home Loan Bank stock: It is not practical to determine the fair value of
Federal Home Loan Bank stock due to restrictions placed on its transferability.
Loans: The fair value of fixed rate loans is estimated by discounting future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
fair market value of loan commitments and standby letters of credits was not
material at December 31, 2008 or 2007. The fair value for variable rate loans is
estimated to be equal to carrying value. This fair value represents an entry
price in accordance with FAS No. 107. While FAS No. 157 amended FAS No. 107 in
several respects, this approach to fair value remains an acceptable approach
under Generally Accepted Accounting Principles.
Deposit Liabilities: The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
Borrowings: For other borrowed funds and subordinated debentures, rates
currently available to the Bank for debt with similar terms and remaining
maturities are used to estimate fair value. For securities sold under agreements
to repurchase, carrying value is a reasonable estimate of fair value.
Accrued Interest Receivable and Payable: For accrued interest receivable and
payable, the carrying amount is a reasonable estimate of fair value.
In addition, other assets and liabilities that are not defined as financial
instruments were not included in the disclosures below, such as premises and
equipment and life insurance contracts.
The estimated fair values of the Company's financial instruments at
December 31, are as follows:
2008 2007
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 17,681 $ 17,681 $ 16,894 $ 16,894
Interest-bearing deposits
in other banks 611 611 633 633
Securities 92,326 92,581 94,044 93,827
Federal Home Loan Bank stock 6,281 N/A 6,036 N/A
Loans 622,592 637,422 630,366 639,273
Accrued interest receivable 3,172 3,172 3,254 3,254
Financial liabilities:
Deposits (592,361) (591,742) (589,026) (588,045)
Securities sold under agreements
to repurchase (24,070) (24,070) (40,390) (40,390)
Other borrowed funds (76,774) (78,777) (67,002) (68,124)
Subordinated debentures (13,500) (13,718) (13,500) (14,121)
Accrued interest payable (4,933) (4,933) (6,742) (6,742)
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year-end, consolidated actual capital levels and minimum required levels
for the Company and the Bank were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2008
Total capital (to risk weighted assets)
Consolidated $82,205 13.5% $48,783 8.0% $60,979 N/A
Bank 76,642 12.7 48,155 8.0 60,194 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 74,581 12.2 24,391 4.0 36,587 N/A
Bank 69,158 11.5 24,078 4.0 36,116 6.0
Tier 1 capital (to average assets)
Consolidated 74,581 9.7 30,788 4.0 38,485 N/A
Bank 69,158 9.1 30,355 4.0 37,944 5.0
2007
Total capital (to risk weighted assets)
Consolidated $80,578 13.1% $49,037 8.0% $61,296 N/A
Bank 75,119 12.4 48,364 8.0 60,455 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 73,841 12.0 24,518 4.0 36,777 N/A
Bank 68,682 11.4 24,182 4.0 36,273 6.0
Tier 1 capital (to average assets)
Consolidated 73,841 9.5 31,081 4.0 38,851 N/A
Bank 68,682 9.0 30,656 4.0 38,320 5.0
At year-end 2008 and 2007, the most recent regulatory notifications
categorized the Company and the Bank as well capitalized under the regulatory
framework for prompt corrective action. No conditions or events have occurred
since that notification that management believes have changed the status of the
Company or the Bank as well capitalized.
Dividends paid by the subsidiaries are the primary source of funds
available to Ohio Valley for payment of dividends to shareholders and for other
working capital needs. The payment of dividends by the subsidiaries to Ohio
Valley is subject to restrictions by regulatory authorities. These restrictions
generally limit dividends to the current and prior two years retained earnings.
At January 1, 2009, approximately $2,861 of the subsidiaries' retained earnings
were available for dividends under these guidelines. In addition to these
restrictions, as a practical matter, dividend payments cannot reduce regulatory
capital levels below minimum regulatory guidelines.
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Ohio Valley. In this
information, Ohio Valley's investment in its subsidiaries is stated at cost plus
equity in undistributed earnings of the subsidiaries since acquisition. This
information should be read in conjunction with the consolidated financial
statements of the Company.
CONDENSED STATEMENTS OF CONDITION
Years ended December 31:
2008 2007
Assets ---- ----
Cash and cash equivalents $ 1,169 $ 1,055
Investment in subsidiaries 75,440 73,926
Notes receivable - subsidiaries 5,461 5,658
Other assets 295 428
------- -------
Total assets $82,365 $81,067
======= =======
Liabilities
Notes payable $ 5,479 $ 5,723
Subordinated debentures 13,500 13,500
Other liabilities 330 333
------- -------
Total liabilities 19,309 19,556
------- -------
Shareholders' Equity
Total shareholders' equity 63,056 61,511
------- -------
Total liabilities and shareholders' equity $82,365 $81,067
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31:
2008 2007 2006
---- ---- ----
Income:
Interest on notes $ 259 $ 311 $ 261
Other operating income 33 35 68
Dividends from subsidiaries 6,250 5,000 5,000
Expenses:
Interest on notes 261 314 264
Interest on subordinated debentures 1,089 1,143 1,279
Operating expenses 309 227 279
------ ------ ------
Income before income taxes and equity in
undistributed earnings of subsidiaries 4,883 3,662 3,507
Income tax benefit 458 450 590
Equity in undistributed earnings of subsidiaries 1,787 2,185 1,301
------ ------ ------
Net Income $7,128 $6,297 $5,398
====== ====== ======
23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31:
2008 2007 2006
---- ---- ----
Cash flows from operating activities:
Net income $7,128 $6,297 $5,398
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings
of subsidiaries (1,787) (2,185) (1,301)
Change in other assets 133 (39) 4
Change in other liabilities (3) (73) (13)
------ ------ ------
Net cash provided by
operating activities 5,471 4,000 4,088
------ ------ ------
Cash flows from investing activities:
Change in other short-term investments 197 (320) (420)
------ ------ ------
Net cash provided by (used in)
investing activities 197 (320) (420)
------ ------ ------
Cash flows from financing activities:
Change in other short-term borrowings (244) 329 280
Proceeds from subordinated debentures --- 8,500 ---
Repayment of subordinated debentures --- (8,500) ---
Cash dividends paid (3,061) (2,938) (2,837)
Proceeds from issuance of common shares 20 398 ---
Purchases of treasury shares (2,269) (3,394) (1,800)
------ ------ ------
Net cash used in financing activities (5,554) (5,605) (4,357)
------ ------ ------
Cash and cash equivalents:
Change in cash and cash equivalents 114 (1,925) (689)
Cash and cash equivalents at beginning of year 1,055 2,980 3,669
------ ------ ------
Cash and cash equivalents at end of year $1,169 $1,055 $2,980
====== ====== ======
24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited)
Quarters Ended
Mar. 31 Jun. 30 Sept. 30 Dec. 31
2008 ------- ------- -------- -------
Total interest income $13,734 $12,853 $12,657 $12,289
Total interest expense 6,059 5,298 4,933 4,538
Net interest income 7,675 7,555 7,724 7,751
Provision for loan losses 701 916 693 1,406
Net Income 1,965 1,731 1,885 1,547
Earnings per share $ .48 $ .43 $ .47 $ .39
2007
Total interest income $13,502 $13,720 $13,784 $13,941
Total interest expense 6,431 6,554 6,779 6,656
Net interest income 7,071 7,166 7,005 7,285
Provision for loan losses 386 616 332 918
Net Income 1,775 1,686 1,833 1,003
Earnings per share $ .42 $ .41 $ .45 $ .24
2006
Total interest income $12,640 $13,034 $13,407 $13,340
Total interest expense 5,287 5,810 6,299 6,535
Net interest income 7,353 7,224 7,108 6,805
Provision for loan losses (1) 666 791 474 3,731
Net Income 1,739 1,826 1,817 16
Earnings per share $ .41 $ .43 $ .43 $ ---
(1) During the fourth quarter of 2006, the Bank increased the allowance
for loan losses to account for increases in its nonaccrual loan
balances and historical loan loss factors resulting in a provision
expense charge of $3,731.
25
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Ohio Valley Banc Corp.
We have audited the accompanying consolidated statements of condition of Ohio
Valley Banc Corp. (the "Company") as of December 31, 2008 and 2007, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2008. We
also have audited the Company's internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the Company's internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ohio Valley Banc
Corp. as of December 31, 2008 and 2007, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, Ohio Valley Banc Corp. maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/CROWE HORWATH LLP
Crowe Horwath LLP
Columbus, Ohio
March 12, 2009
26
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Board of Directors and Shareholders
Ohio Valley Banc Corp.
The management of Ohio Valley Banc Corp. (the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. The Company's internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal control
over financial reporting includes those policies and procedures that: (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
The system of internal control over financial reporting as it relates to
the consolidated financial statements is evaluated for effectiveness by
management. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed Ohio Valley Banc Corp's system of internal control over
financial reporting as of December 31, 2008, in relation to criteria for
effective internal control over financial reporting as described in "Internal
Control Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
concluded that, as of December 31, 2008, its system of internal control over
financial reporting is effective and meets the criteria of the "Internal Control
Integrated Framework".
Crowe Horwath LLP, independent registered public accounting firm, has
issued an audit report dated March 12, 2009 on the Company's internal control
over financial reporting. That report is contained in Ohio Valley's Annual
Report to Shareholders under the heading "Report of Independent Registered
Public Accounting Firm".
Ohio Valley Banc Corp
/s/JEFFREY E. SMITH
Jeffrey E. Smith
President, CEO
/s/SCOTT W. SHOCKEY
Scott W. Shockey
Vice President, CFO
27
SUMMARY OF COMMON STOCK DATA
OHIO VALLEY BANC CORP.
Years ended December 31, 2008 and 2007
INFORMATION AS TO STOCK PRICES AND DIVIDENDS: On February 9, 1996, Ohio Valley's
common shares began to be quoted on The NASDAQ Stock Market under the symbol
"OVBC". The following table summarizes the high and low sales prices for Ohio
Valley's common shares on the NASDAQ Global Market for each quarterly period
since January 1, 2007.
2008 High Low
- ---- ------ ------
First Quarter $26.65 $25.00
Second Quarter 26.25 25.00
Third Quarter 25.50 20.00
Fourth Quarter 21.80 17.65
2007 High Low
- ---- ------ ------
First Quarter $26.50 $24.86
Second Quarter 25.70 24.15
Third Quarter 25.73 25.00
Fourth Quarter 25.95 24.60
Shown below is a table which reflects the dividends declared per share on
Ohio Valley's common shares. As of March 13, 2009, the number of holders of
record of common shares was 2,124, a decrease from 2,136 shareholders at
March 13, 2008.
Dividends per share 2008 2007
- ------------------- ---- ----
First Quarter $.19 $.17
Second Quarter .19 .18
Third Quarter .19 .18
Fourth Quarter .19 .18
Dividends paid by the subsidiaries are the primary source of funds
available to Ohio Valley for payment of dividends to shareholders and for other
working capital needs. The payment of dividends by the subsidiaries to Ohio
Valley is subject to restrictions by regulatory authorities. These restrictions
generally limit dividends to the current and prior two years retained earnings.
28
PERFORMANCE GRAPH
OHIO VALLEY BANC CORP.
Year ended December 31, 2008
The following graph sets forth a comparison of five-year cumulative total
returns among the Company's common shares (indicated "Ohio Valley Banc Corp." on
the Performance Graph), the S & P 500 Index (indicated "S & P 500" on the
Performance Graph), and SNL Securities SNL $500 Million-$1 Billion Bank
Asset-Size Index (indicated "SNL" on the Performance Graph) for the fiscal years
indicated. Information reflected on the graph assumes an investment of $100 on
December 31, 2003 in each of the common shares of the Company, the S & P 500
Index, and the SNL Index. Cumulative total return assumes reinvestment of
dividends. The SNL Index represents stock performance of ninety-four (94) of the
nation's banks located throughout the United States with total assets between
$500 Million and $1 Billion as selected by SNL Securities of Charlottesville,
Virginia. The Company is included as one of the 94 banks in the SNL Index.
TOTAL RETURN PERFORMANCE
OVBC, SNL $500M-$1B Bank Index and S&P 500
2003-2008
Period Ending
----------------------------------------------------------
12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08
-------- -------- -------- -------- -------- --------
OVBC $100.00 $126.58 $124.66 $128.24 $131.47 $101.76
SNL $500M-$1B $100.00 $113.32 $118.18 $134.41 $107.71 $ 69.02
S&P 500 $100.00 $110.88 $116.33 $134.70 $142.10 $ 89.53
29
[ THIS PAGE INTENTIONALLY LEFT BLANK ]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDIION AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide an analysis of the Company's
financial condition and results of operations which is not otherwise apparent
from the audited consolidated financial statements included in this report. The
accompanying consolidated financial information has been prepared by management
in conformity with U.S. generally accepted accounting principles ("US GAAP") and
is consistent with that reported in the consolidated statements. Reference
should be made to those statements and the selected financial data presented
elsewhere in this report for an understanding of the following tables and
related discussion. All dollars are reported in thousands, except share and per
share data.
RESULTS OF OPERATIONS:
SUMMARY
Ohio Valley Banc Corp. generated net income of $7,128 for 2008, an increase
of 13.2% from 2007. Net income was also up 16.7% in 2007. Earnings per share
were $1.77 for 2008, an increase of 16.4% from 2007. Earnings per share were up
19.7% in 2007. The increase in net income and earnings per share for 2008 was
primarily due to a 6.0% net interest income expansion as a result of the lower
short-term interest rate environment initiated by the Federal Reserve Bank.
Growth in income also came from noninterest income improvement of 18.6% over
2007 due to lower losses on the sale of other real estate owned ("OREO"). The
increase in net income and earnings per share for 2007 was largely related to a
$3,410 decrease in provision for loan loss expense as a result of lower
nonperforming loans and charge-offs from year-end 2006. The lower provision
expense for 2007 can be attributed mostly to the specific allocations made to
the allowance for loan losses in the fourth quarter of 2006 that resulted in
$3,731 in provision expense, which contributed to the decrease in 2006's net
income and earnings per share.
Total assets during 2008 decreased $2,310, or 0.3%, resulting in total
assets at year-end of $781,108. The Company's return on assets (ROA) was .91%
for 2008 compared to .82% in 2007 and .71% in 2006. Return on equity (ROE) was
11.62% for 2008 compared to 10.40% in 2007 and 9.00% in 2006. The increasing
trend in both ROA and ROE for 2008 and 2007 were the result of improved earnings
performance due to net interest and noninterest income activities in 2008 and a
significant decrease in provision expense during 2007.
NET INTEREST INCOME
The most significant portion of the Company's revenue, net interest income,
results from properly managing the spread between interest income on earning
assets and interest expense incurred on interest-bearing liabilities. The
Company earns interest and dividend income from loans, investment securities and
short-term investments while incurring interest expense on interest-bearing
deposits, securities sold under agreements to repurchase ("repurchase
agreements") and short- and long-term borrowings. Net interest income is
affected by changes in both the average volume and mix of the balance sheet and
the level of interest rates for financial instruments. Changes in net interest
income are measured by net interest margin and net interest spread. Net interest
margin is expressed as net interest income divided by average interest-earning
assets. Net interest spread is the difference between the average yield earned
on interest-earning assets and the average rate paid on interest-bearing
liabilities. Both of these are reported on a fully tax-equivalent ("FTE") basis.
Net interest margin is greater than net interest spread due to the interest
earned on interest-earning assets funded from noninterest bearing funding
sources, primarily demand deposits and shareholders' equity. Following is a
discussion of changes in interest-earning assets, interest-bearing liabilities
and the associated impact on interest income and interest expense for the three
years ending December 31, 2008. Tables I and II have been prepared to summarize
the significant changes outlined in this analysis.
Net interest income on an FTE basis increased $2,177 in 2008, an increase
of 7.5% compared to the $28,891 earned in 2007. The increase was primarily
attributable to an expanding net interest margin caused by lower funding costs
combined with a higher level of interest-earning assets, mostly from growth in
securities and interest-bearing balances with banks. Net interest income on an
FTE basis increased $121 in 2007, an increase of 0.4% compared to the $28,770
earned in 2006. The small increase was primarily attributable to a higher level
of interest-earning assets, mostly from growth in securities and loans,
partially offset by a lower net interest margin caused by a higher average
balance of loans on nonaccrual status and an increased pressure in funding costs
due to the lagging effect of short-term rate increases experienced during the
first half of 2006. For 2008, average earning assets grew $10,834, or 1.5%, as
compared to growth of $8,253, or 1.2%, in 2007. Driving this continued growth in
earning assets for 2008 was average interest-bearing balances with banks,
increasing to $5,710 at year-end 2008, up from $549 at year-end 2007. The
increase was due to the Company's excess liquidity position resulting from lower
loan demand and excess deposit liabilities. Average interest-bearing balances
with banks represented 0.8% of earning assets at year-end 2008 as compared to
0.1% at year-end 2007. Earning asset growth was also experienced from average
securities balances, which expanded $4,215, or 4.6%, for 2008 and represented
13.0% of earning assets at year-end 2008. This compares to average securities
growth of $5,575, or 6.5%, for 2007 representing 12.6% of earning assets at
year-end 2007. The growth in average securities was largely comprised of U.S.
government sponsored entity securities. Average loans, the Company's highest
portion of earning assets, remained relatively stable during 2008 and 2007,
increasing $334, or 0.1%, and $2,473, or 0.4%, respectively. Average loans for
2008 represented 85.5% of earning assets as compared to 86.7% for 2007. The
MANAGEMENT'S DISCUSSION AND ANALYSIS
growth in average loans was largely comprised of commercial loan participations
as well as residential real estate mortgages.
Further contributing to net interest income was additional fee income from
increased originations of the Company's refund anticipation loans ("RAL").
Participating with a third party tax software provider has given the Company the
opportunity to make RAL loans during the tax refund loan season, typically from
January through March. RAL loans are short-term cash advances against a
customer's anticipated income tax refund. During 2008, the Company had
recognized $265 in RAL fees as compared to $94 during 2007.
Management continues to focus on generating loan growth as this portion of
earning assets provides the greatest return to the Company. Although loans make
up the largest percentage of earning assets, management is comfortable with the
current level of loans based on collateral values, the balance of the allowance
for loan losses, strict underwriting standards and the Company's
well-capitalized status. Management maintains securities at a dollar level
adequate enough to provide ample liquidity and cover pledging requirements.
Average interest-bearing liabilities increased 0.6% between 2007 and 2008
and increased 0.7% between 2006 and 2007. Interest-bearing liabilities in 2008
were comprised largely of time deposits and NOW accounts, which together
represented 64.1% of total interest-bearing liabilities, down from 67.9% in 2007
and 70.2% in 2006. Other borrowed money represented 9.7% of total
interest-bearing liabilities in 2008, down from 9.8% in 2007 and 11.1% in 2006.
The reason for this composition decrease was from growth in the Company's
savings and money market accounts, primarily its Market Watch product, which
together represented a higher composition of total interest-bearing liabilities
at 19.5% in 2008 as compared to 15.7% in 2007 and 12.7% in 2006. Introduced in
2005, the Market Watch product offers customers tiered rates that are
competitive with other offerings in the Company's market areas. The increased
demand for the Market Watch product was largely the result of promotional
pricing during the second quarter of 2008. The consumer preference for this
product generated a significant amount of funding dollars which have helped to
support earning asset growth and maturity runoffs of time deposits. This
continued shift in composition during 2008 with higher savings and money market
balances and lower time deposits served as a cost effective contribution to the
net interest margin. The average cost of savings and money market accounts was
1.70%, 2.78% and 2.42% during the years ending 2008, 2007 and 2006,
respectively. This is compared to the much higher average cost of time deposits
of 4.17%, 4.88% and 4.24% during the years ending 2008, 2007 and 2006,
respectively.
The net interest margin increased 24 basis points to 4.23% in 2008 from
3.99% in 2007. This increase is compared to a 3 basis points decrease in the net
interest margin in 2007. During 2008, there was a decrease of 11 basis points in
interest free funds (i.e. demand deposits, shareholders' equity) from .63% in
2007 to .52% in 2008. However, this impact from interest free funds was
completely offset by an increase in the net interest rate spread on interest
sensitive assets and liabilities of 35 basis points, with lower asset yields of
..58% being completely offset by lower funding costs of .93%.
Lower asset yields caused interest income on an FTE basis to decrease
$3,415, or 6.2%, from 2007. Lower asset yields were largely the result of loan
yields decreasing 55 basis points from 2007 to 2008. The drop in loan yield can
be attributed to the decreases in short-term interest rates initiated by the
Federal Reserve since September of 2007. Since that time, the Federal Reserve
has decreased short-term interest rates ten times for a total of 500 basis
points. The Company's commercial, participation and real estate loan portfolios
have been most sensitive to these decreases in short-term interest rates since
2007. Furthermore, long-term interest rates continue to decrease from a year ago
causing increased opportunities for mortgage refinancings. As a result, the
Company continues to experience a customer demand shift from its one-year
adjustable-rate mortgages, with average balances down $18,178 in 2008, to its
thirty-year fixed-rate real estate mortgages, with average balances up $21,781
in 2008. The volume of refinancings during 2008 continues to stabilize as
compared to 2007 and 2006.
Conversely in 2007, the Company experienced an increase in loan yields
which contributed most to a $2,610, or 5.0%, increase in interest income on an
FTE basis from 2006 to 2007. Loan yield expansion was attributed to the rise in
short-term rates between June 2004 and June 2006 as set by the Federal Reserve.
During this time, short-term market interest rates were increased by 425 basis
points causing a positive impact to loan yields within the Company's commercial,
participation and real estate loan portfolios. Long-term interest rates during
this time continued to remain relatively stable which contributed to a loan
shift from one-year adjustable-rate mortgages, which yielded 7.10% during 2007,
to thirty-year fixed-rate real estate mortgages, which yielded 7.21% in 2007.
In relation to lower earning asset yields for 2008, the Company's
interest-bearing liability costs decreased .93% causing interest expense to drop
$5,592, or 21.2%, from 2007 to 2008. As previously mentioned, the Federal
Reserve has reduced rates a full 500 basis points since September 2007 that has
caused a downward shift in short-term interest rates, while longer-term rates
have not decreased to the same extent. In a changing interest rate environment,
rates on loans reprice more rapidly than interest rates paid on deposits.
However, the Bank had positioned its balance sheet so that there were more
interest-bearing liabilities subject to repricing than interest rates on loans.
As a result, interest paid on liabilities decreased more than interest earned on
assets. The short-term rate decreases impacted the repricings of various Bank
deposit products, including public fund NOW accounts, Gold Club and Market Watch
accounts. Contributing most to the decrease in funding costs were interest rates
on time deposit balances (CD's), which continued to reprice at lower rates
during 2008 (as a lagging effect to the Federal Reserve action to drop
short-term interest rates). The year-to-date weighted average cost of the
MANAGEMENT'S DISCUSSION AND ANALYSIS
Company's time deposits decreased 71 basis points from 4.88% at year-end 2007 to
4.17% at year-end 2008.
Conversely in 2007, the Company saw its interest-bearing liability costs
increase .38% from 2006 as a result of the Federal Reserve's actions to increase
short-term interest rates between June 2004 and June 2006, as previously
mentioned. While this action was effective in allowing asset yields to grow,
interest rate pressures were felt by an increase in the Company's total interest
expense, which increased $2,489, or 10.4%, from 2006, as a result of higher
funding costs, competitive factors to retain deposits, and larger average
earning asset balances which required additional funding. Increases in funding
costs during 2007 came mostly from the Bank's time deposit accounts, which were
most responsive to the lagging effect from previous market rate increases. The
year-to-date weighted average cost of the Bank's time deposits grew 64 basis
points from 4.24% at year-end 2006 to 4.88% at year-end 2007. The change in
interest expense was further impacted by the Company's growth in average money
market accounts largely due to its Market Watch product with tiered market
rates. As a result, the year-to-date weighted average cost of the Bank's savings
and money market deposits grew 36 basis points from 2.42% at year-end 2006 to
2.78% at year-end 2007.
It is difficult to speculate on future changes in net interest margin and
the frequency and size of changes in market interest rates. The past year has
seen the banking industry under significant stress due to declining real estate
values and asset impairments. The Federal Reserve's actions of decreasing
short-term interest rates were necessary to take steps in repairing the
recessionary problems and promote economic stability. However, there can be no
assurance of additional future rate cuts in 2009 as changes in market interest
rates are dependent upon a variety of factors that are beyond the Company's
control. The Company anticipates the lagging effect of time deposit repricings
will continue during 2009, but at a much smaller pace, and should continue to
lower funding costs and improve net interest margin. For additional discussion
on the Company's rate sensitive assets and liabilities, please see "Interest
Rate Sensitivity and Liquidity" and "Table VIII" within this Management's
Discussion and Analysis.
NONINTEREST INCOME
Total noninterest income increased $975, or 18.6%, in 2008 as compared to
2007. Contributing most to the increase in noninterest income was the decrease
in the loss on sale of OREO. During the fourth quarter of 2007, the Company's
largest non-performing asset was liquidated, creating a pretax loss of $686. The
sale of this OREO property was directly attributable to management's strategy of
being more aggressive in improving the Company's nonperforming levels. As a
result, the loss on sale of OREO decreased $746, or 96.0%, from year-end 2007.
Also contributing to noninterest revenue growth were activities from other
noninterest income sources, which include improvements in the Company's tax
refund processing fees and debit card interchange fees. As mentioned previously,
the Company began its participation in a new tax refund loan service in 2006
where it serves as a facilitator for the clearing of tax refunds for a tax
software provider. The Company is one of a limited number of financial
institutions throughout the U.S. that facilitates tax refunds through its
relationship with this tax software provider. As a result of tax refund
processing fee activity being mostly seasonal, the majority of income was
recorded during the first half of 2008, with only minimal income recorded
thereafter. For 2008, the Company's tax refund processing fees increased by
$163, or 148.5%, over 2007. Further enhancing growth in other noninterest income
was debit card interchange income, increasing $106, or 19.4%, during 2008 as
compared to 2007. The volume of transactions utilizing the Company's Jeanie(R)
Plus debit card continue to increase from a year ago. The Company's customers
used their Jeanie(R) Plus debit cards to complete 1,319,191 transactions during
2008, up 13.1% from the 1,166,337 transactions during 2007, derived mostly from
gasoline and restaurant purchases.
Also increasing noninterest income was the Bank's service charge fees on
deposit accounts, which increased $91, or 3.1%, from year-end 2007. A higher
volume of overdraft balances contributed to an increase in non-sufficient fund
fees during 2008.
To help manage consumer demand for longer-termed, fixed-rate real estate
mortgages, the Company has taken additional opportunities to sell some real
estate loans to the secondary market. During the year ended December 31, 2008,
the Company sold 109 loans totaling $11,704 to the secondary market as compared
to 41 loans totaling $4,299 during the year ended December 31, 2007. This volume
increase in loan sales contributed to the growth in income on sale of loans,
which was up $25, or 24.5%, during 2008 as compared to 2007.
Income earned on the Company's bank owned life insurance ("BOLI") contracts
was up $18, or 2.4%, during 2008 as compared to 2007. BOLI activity was mostly
impacted by additional investments in life insurance contracts purchased during
the second and fourth quarters of 2008. The Company's average investment balance
in BOLI through December 31, 2008 was $16,934, an increase of $669, or 4.1%, as
compared to the same period in 2007.
Partially offsetting the growth in other noninterest income were decreases
in the Company's rental income from OREO properties. Rental income from OREO
properties totaled $213 during 2007 as compared to no rental income recognized
during 2008. Rental income recognized in 2007 from OREO properties was primarily
from one large commercial facility located in Kanawha County, West Virginia and
one hotel facility located in Portsmouth, Ohio. Both properties were eventually
sold in December 2007.
In 2007, total noninterest income decreased $594, or 10.2%, as compared to
2006. Contributing most to this decrease was the loss on sale of OREO
experienced during the fourth quarter of 2007, creating a pretax loss of $686.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Further decreasing noninterest income was the Company's tax-free BOLI investment
proceeds. BOLI income was down $150, or 16.5%, during 2007, driven mostly by
tax-free life insurance proceeds of $174 that were recorded in 2006 as compared
to $71 in proceeds during 2007. Partially offsetting the 2007 decreases from the
loss on sale of OREO and BOLI revenue were increases in rental income from the
OREO properties previously mentioned that totaled $213 during 2007 as compared
to no income in 2006. The Company's tax processing fees were also up $27, or
71.8%, as compared to the same period in 2006.
NONINTEREST EXPENSE
Total noninterest expense increased $760, or 3.4%, in 2008 and increased
$1,384, or 6.5%, in 2007. The most significant expense in this category is
salary and employee benefits, which increased $1,030, or 7.9%, from 2007 to
2008. Contributing most to this increase were increased health insurance benefit
expenses, annual cost of living salary increases and higher incentive costs due
to higher corporate performance during 2008 as compared to 2007. During 2008,
the Company also experienced a higher full-time equivalent employee base,
increasing from 256 employees at year-end 2007 to 264 employees at year-end
2008, further increasing salaries and employee benefit expenses during 2008.
During 2007, salary and employee benefits increased $548, or 4.4%, from 2006.
This increase was in large part due to annual cost of living salary increases as
well as increases in employee incentive compensation due to higher corporate
performance during 2007 as compared to 2006. During 2007, the Company also
experienced a slightly higher full-time equivalent employee base, increasing
from 254 employees at year-end 2006 to 256 employees at year-end 2007, further
increasing salaries and employee benefit expenses during 2007.
In 2008, occupancy and furniture and equipment expenses increased $57, or
2.2%, as compared to 2007. This increase was in large part due to the addition
of a new banking facility located within a hospital in Gallia County. The full
service banking center was built during 2007 at a cost of approximately $371 and
serves as an additional market presence to service the banking needs of the
medical staff and patients along the hospital's campus area. The facility was
placed in service and depreciation commenced during the fourth quarter of 2007.
As a result, occupancy and furniture and equipment expenses for this new
facility increased $49 during 2008 as compared to 2007. In 2007, occupancy and
furniture and equipment expenses increased $95, or 3.9%, as compared to 2006.
The increase was in large part due to the Company's investment in its Jackson,
Ohio facility. In late 2006, the Company invested over $2,000 to replace its
Jackson, Ohio facility and, during that time, ceased operations in its Jackson
superbank facility. The facility was placed in service and depreciation
commenced during the fourth quarter of 2006.
During 2008, corporation franchise tax decreased $65, or 9.7%, as compared
to 2007. This cost savings effect was the result of a tax credit the Company was
able to apply for and receive based on the training programs that exist and are
utilized within the Company for the benefit of its employees. Corporation
franchise tax was relatively stable during 2007 as compared to 2006, increasing
$2, or .3%, based on capital levels at the Bank during this period.
The Company continues to incur monthly costs from the Bank's use of
technology to better serve the convenience of its customers, which includes ATM,
debit and credit cards, as well as various online banking products, including
net teller and bill pay. During 2008, data processing expenses decreased $71, or
8.4%, as compared to 2007. The decrease was due to the successful re-negotiation
of the Bank's monthly data processing costs. The negotiations for lower monthly
processing charges were finalized in the third quarter of 2008 and decreased the
monthly data processing costs by more than $15 per month beginning with the
August 2008 bill. During 2007, data processing expenses increased $157, or
22.9%, as compared to 2006, mostly due to the transactional volume increases in
the Company's Jeanie(R) Plus debit cards during 2007.
Other noninterest expenses were down $191, or 3.5%, during 2008.
Contributing most to this expense savings was a decrease in the Company's
foreclosure expenses, which were down $487, or 90.5%, during 2008 as compared to
2007. This decrease was due to the larger than normal volume of foreclosure
costs that were incurred during 2007 associated with higher average
nonperforming loan balances during that time. Foreclosure costs that were
incurred as part of resolving nonperforming credits during 2007 were deemed
necessary to improve asset quality and lower portfolio risk.
Partially offsetting lower foreclosure expense during 2008 within other
noninterest expense was growth in the Company's Federal Deposit Insurance
Corporation ("FDIC") insurance expense, which was up $198, or 283.7%, during
2008 as compared to 2007. This increase was in large part due to the Company's
share of a one-time assessment credit being fully utilized by June 30, 2008.
With the elimination of this credit, the Company entered the third quarter of
2008 with its deposits being assessed at a rate close to 7 basis points. In
December 2008, the FDIC issued a rule increasing deposit insurance assessment
rates uniformly for all financial institutions for the first quarter of 2009 by
an additional 7 basis points on an annual basis. On February 27, 2009, the FDIC
announced adoption of an interim final rule imposing a one-time special
assessment of 20 basis points and a final rule adjusting the risk-based
calculation used to determine the premiums to be paid by each insured
institution. The amount of the special assessment may be decreased, but
additional special assessments and premium increases are possible, which could
have a material adverse effect on the Company's net income. As a result of this
special assessment and the changes to the premium calculation, the Company
anticipates its FDIC insurance expense to significantly increase in 2009 from
its already increasing levels in 2008. All other noninterest expense categories
were up $98, or 2.0%, from 2007.
MANAGEMENT'S DISCUSSION AND ANALYSIS
During 2007, other noninterest expenses were up $582, or 11.9%, in large
part due to increases in the various loan and collection expenses associated
with higher nonperforming loan balances mentioned above.
The Company's efficiency ratio is defined as noninterest expense as a
percentage of FTE net interest income plus noninterest income. The emphasis
management has placed on managing its balance sheet mix and interest rate
sensitivity to help expand the net interest margin as well as developing more
innovative ways to generate noninterest revenue has contributed to an improved
efficiency ratio, finishing at 62.5% for 2008 as compared to 66.1% for 2007.
Conversely, in 2007, the efficiency ratio finished at 66.1%, up from 61.2% in
2006. This less-improved efficiency number is largely the result of higher loan
costs that were incurred during 2007 to better the Company's nonperforming loan
levels.
FINANCIAL CONDITION:
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
December 31, 2008, cash and cash equivalents had increased $787, or 4.7%, to
$17,681 as compared to $16,894 at December 31, 2007. The increased liquidity
position of the Company at December 31, 2008 was the result of lower loan demand
and investment security maturities combined with an increase in total deposits.
As liquidity levels vary continuously based on consumer activities, amounts of
cash and cash equivalents can vary widely at any given point in time. Management
believes that the current balance of cash and cash equivalents remains at a
level that will meet cash obligations and provide adequate liquidity.
INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS
At December 31, 2008, the Company had a total of $611 invested as
interest-bearing deposits in other financial institutions, a slight decrease
from $633 at December 31, 2007. Historically, the Company has typically invested
its excess funds with various correspondent banks in the form of federal funds
sold, a common strategy performed by most banks. Beginning in the second quarter
of 2008, the Company utilized a new relationship with a deposit placement
service provider known as CDARS, or the Certificate of Deposit Account Registry
Service, to invest its excess funds. CDARS provides financial institutions with
the means to invest its own funds through One-Way Sell transactions for various
maturity terms. The rates offered for the terms selected by the Company, between
1.8% and 2.8% at a weighted average maturity of 7 weeks, compared favorably to
federal funds rate offerings at that time, which were 2.0% at September 30,
2008, and have since been lowered to .25% at December 31, 2008. At December 31,
2008, the Company's CDARS One-Way Sell investments had matured. The Company
views this investment option as a margin-enhancing alternative when investing
its excess funds and will continue to utilize this method when the need arises.
Furthermore, CDARS balances are 100% secured by FDIC insurance as compared to
federal funds sold balances which were considered unsecured as of September 30,
2008. Since then, as part of the FDIC's "Liquidity Guarantee Program" announced
on October 14, 2008, federal funds sold balances (or inter-banking funding) will
now be 100% guaranteed by the FDIC for participating institutions. The ability
of the Company to issue these guaranteed federal funds sold balances will expire
on June 30, 2009.
SECURITIES
Management's goal in structuring the portfolio is to maintain a prudent
level of liquidity while providing an acceptable rate of return without
sacrificing asset quality. Maturing securities have historically provided
sufficient liquidity such that management has not sold a debt security in
several years, other than renewals or replacements of maturing securities.
The balance of total securities decreased $1,718, or 1.8%, as compared to
2007, with the ratio of securities to total assets also decreasing to 11.8% at
December 31, 2008, compared to 12.0% at December 31, 2007. The Company's
investment securities portfolio consists of mortgage-backed securities, U.S.
Government sponsored entity ("GSE") securities and obligations of states and
political subdivisions ("municipals"). GSE securities decreased $7,581, or
19.2%, as a result of several large maturities during both the first and second
quarters of 2008. In addition to attractive yield opportunities and a desire to
increase diversification within the Company's securities portfolio, GSE
securities have also been used to satisfy pledging requirements for repurchase
agreements. At December 31, 2008, the Company's repurchase agreements had
decreased 40.4%, reducing the need to secure these balances and impacting the
runoff in GSE securities. This decrease was partially offset by increases in
both mortgage-backed securities and obligations of states and political
subdivisions, which were up $4,850, or 12.5%, and $1,013, or 6.4%, respectively,
from year-end 2007. Mortgage-backed securities make up the largest portion of
the Company's investment portfolio, totaling $43,514, or 47.1% of total
investments at December 31, 2008. The primary advantage of mortgage-backed
securities has been the increased cash flows due to the more rapid (monthly)
repayment of principal as compared to other types of investment securities,
which deliver proceeds upon maturity or call date. Principal repayments from
mortgage-backed securities during 2008 totaled $7,985. With the general decrease
in interest rates evident since 2007, the reinvestment rates on debt securities
continue to show lower returns during 2008. The weighted average FTE yield on
debt securities at year-end 2008 was 4.34%, as compared to 4.55% at year-end
2007. Table III provides a summary of the portfolio by category and remaining
contractual maturity. Issues classified as equity securities have no stated
MANAGEMENT'S DISCUSSION AND ANALYSIS
maturity date and are not included in Table III. For 2009, the Company's focus
will be to generate interest revenue primarily through loan growth, as loans
generate the highest yields of total earning assets.
LOANS
In 2008, the Company's primary category of earning assets, total loans,
decreased $6,712, or 1.1%, to finish at $630,391. Lower loan balances were
largely due to total commercial loans decreasing $8,230, or 3.3%, from year-end
2007. The Company's commercial loans include both commercial real estate and
commercial and industrial loans. While commercial loan balances are down,
management continues to place emphasis on its commercial lending, which
generally yields a higher return on investment as compared to other types of
loans. The Company's commercial and industrial loan portfolio, down $10,266, or
18.6%, from year-end 2007, consists of loans to corporate borrowers primarily in
small to mid-sized industrial and commercial companies that include service,
retail and wholesale merchants. Collateral securing these loans includes
equipment, inventory, and stock. Commercial real estate, the Company's largest
segment of commercial loans, increased $2,036, or 1.0%. This segment of loans is
mostly secured by commercial real estate and rental property. Commercial real
estate consists of loan participations with other banks outside the Company's
primary market area. Although the Company is not actively marketing
participation loans outside its primary market area, it is taking advantage of
the relationships it has with certain lenders in those areas where the Company
believes it can profitably participate with an acceptable level of risk. The
commercial loan portfolio, including participation loans, consists primarily of
rental property loans (22.8% of portfolio), medical industry loans (12.0% of
portfolio), land development loans (8.9% of portfolio), and hotel and motel
loans (8.3% of portfolio). During 2008, the primary market areas for the
Company's commercial loan originations, excluding loan participations, were in
the areas of Gallia, Jackson and Franklin counties of Ohio, which accounted for
61.9% of total originations. The growing West Virginia markets also accounted
for 30.2% of total originations for the same time period. While management
believes lending opportunities exist in the Company's markets, future commercial
lending activities will depend upon economic and related conditions, such as
general demand for loans in the Company's primary markets, interest rates
offered by the Company and normal underwriting considerations. Additionally, the
potential for larger than normal commercial loan payoffs may limit loan growth
during 2009.
Also contributing to the loan portfolio decrease were consumer loans, which
were down $921, or 0.7%, from year-end 2007. The Company's consumer loans are
secured by automobiles, mobile homes, recreational vehicles and other personal
property. Personal loans and unsecured credit card receivables are also included
as consumer loans. The decrease in consumer volume was mostly attributable to
the automobile lending segment, which decreased $2,450, or 4.3%, from year-end
2007. While the automobile lending segment continues to represent the largest
portion of the Company's consumer loan portfolio, management's emphasis on
profitable loan growth with higher returns has contributed most to the reduction
in loan volume within this area. Indirect automobile loans bear additional costs
from dealers that partially offset interest revenue and lower the rate of
return. Furthermore, economic factors that have weakened the economy and
consumer spending have caused a decline in automobile loan volume. As short-term
rates have aggressively moved down since September 2007, continued competition
with local banks and alternative methods of financing, such as captive finance
companies offering loans at below-market interest rates, have continued to
challenge automobile loan growth during 2008 and should continue to do so in
2009. Partially offsetting the decreases in auto loans was an increase to the
Company's home equity capital line loan balances, which increased $2,162, or
11.1%, from year-end 2007. The remaining consumer loan portfolio balances
decreased $633 from year-end 2007.
Generating residential real estate loans remains a key focus of the
Company's lending efforts. Residential real estate loan balances comprise the
largest portion of the Company's loan portfolio and consist primarily of one- to
four-family residential mortgages and carry many of the same customer and
industry risks as the commercial loan portfolio. During 2008, total residential
real estate loan balances increased $2,210, or 0.9%, from year-end 2007 to total
$252,693. The increase was largely driven by growth in the Company's five-year
adjustable rate (2-step) product, with balances being up $7,374, or 112.9%, from
year-end 2007. This product allows the consumer to secure a fixed initial
interest rate for the first five years, with the loan adjusting to a variable
interest rate for years 6 through 30. Real estate loan growth was also
experienced in the Company's longer-termed, fixed-rate real estate loans, which
were up $6,287, or 3.4%, from year-end 2007. Terms of these fixed-rate loans
include 15-, 20- and 30-year periods. To help further satisfy demand for
longer-termed, fixed-rate real estate loans, the Company continues to originate
and sell some fixed-rate mortgages to the secondary market, and has sold $11,704
in loans during 2008, which were up $7,405, or 172.2%, over the volume sold
during 2007.
Partially offsetting the increases in five-year adjustable and long-term,
fixed-rate real estate loan balances was a decrease to the Company's one-year
adjustable-rate mortgage balances of $9,118, or 21.6%, from year-end 2007.
During 2006 and 2007, consumer demand for fixed-rate real estate loans continued
to increase due to the continuation of lower, more affordable, mortgage rates.
As long-term interest rates remained low during 2008, consumers continued to pay
off and refinance their variable rate mortgages, although the volume of
refinancings continues to stabilize as compared to 2007 and 2006. This has
resulted in lower one-year adjustable-rate mortgage balances at year-end 2008 as
compared to year-end 2007.
The remaining real estate loan portfolio balances decreased $2,333
primarily from the Company's residential construction loans.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Additionally, the Company recognized an increase of $229, or 3.2%, in other
loans from year-end 2007. Other loans consist primarily of state and municipal
loans and overdrafts. This increase was largely due to an increase in state and
municipal loan balances of $248.
The Company continues to monitor the pace of its loan volume, as it has
experienced a 1.1% drop-off within its total loan portfolio during 2008. The
well-documented housing market crisis and rising energy costs have impacted
consumer spending and have led to lower consumer demand for loans. Furthermore,
the Company continues to view the consumer loan segment as a decreasing
portfolio, due to higher loan costs, increased competition in automobile loans
and a lower return on investment as compared to the other loan portfolios. As a
result, the Company anticipates total loan growth to be challenging throughout
2009. The Company remains committed to sound underwriting practices without
sacrificing asset quality and avoiding exposure to unnecessary risk that could
weaken the credit quality of the portfolio.
ALLOWANCE FOR LOAN LOSSES AND PROVISION EXPENSE
Tables IV and V have been provided to enhance the understanding of the loan
portfolio and the allowance for loan losses. Management evaluates the adequacy
of the allowance for loan losses quarterly based on several factors including,
but not limited to, general economic conditions, loan portfolio composition,
prior loan loss experience, and management's estimate of probable losses.
Management continually monitors the loan portfolio to identify potential
portfolio risks and to detect potential credit deterioration in the early
stages, and then establishes reserves based upon its evaluation of these
inherent risks. Actual losses on loans are reflected as reductions in the
reserve and are referred to as charge-offs. The amount of the provision for loan
losses charged to operating expenses is the amount necessary, in management's
opinion, to maintain the allowance for loan losses at an adequate level that is
reflective of probable and inherent loss. The allowance required is primarily a
function of the relative quality of the loans in the loan portfolio, the mix of
loans in the portfolio and the rate of growth of outstanding loans.
During 2008, the Company increased its provision for loan loss expense by
$1,464 as compared to 2007, which increased the allowance for loan losses by
$1,062, or 15.8%, to $7,799. The increase in the allowance for loan losses was
in large part due to an increase in the level of nonperforming loans, which
consist of nonaccruing loans and accruing loans past due 90 days or more.
Nonperforming loans increased from $3,661 at year-end 2007 to $5,274 at year-end
2008 that required specific allocations to be made on behalf of the portfolio
risks and credit deterioration of these nonperforming credits. During the first
quarter of 2008, the Company experienced problems with one of its commercial
borrowers that was unable to meet the debt requirements of its loans. During
this time, the Company stopped recognizing interest income on the loans,
reversed all interest that had been accrued and unpaid and classified the loans
as nonperforming. At March 31, 2008, the ratio of nonperforming loans to total
loans grew to 1.40% as a result of this classification. During the second
quarter, continued analysis of these loans was performed, which included the
reviews of updated appraisals that reflected a decline in market values due to
deteriorating market conditions. This analysis, along with continued loan
deterioration of this large commercial borrower, prompted management to charge
down the loan by $750, including estimated costs to sell, to the estimated fair
value of the collateral. Subsequently, the Company acquired these properties
through foreclosure and transferred the loans to OREO. This shifted
approximately $4,214 from nonperforming loans to nonperforming assets, which
contributed to the increase in its nonperforming assets from $3,922 at year-end
2007 to $9,968 at year-end 2008. As a result, the Company's ratio of
nonperforming loans to total loans decreased to .84% at December 31, 2008, while
the ratio of nonperforming assets, which includes OREO properties, to total
assets increased from .50% at year-end 2007 to 1.28% at year-end 2008.
During 2008, net charge-offs totaled $2,654, which were down $2,273 from
2007, in large part due to commercial charge-offs of specific allocations that
were reflected in the allowance for loan losses from 2007.
As a result of higher nonperforming loan balances, the ratio of allowance
for loan losses to total loans increased to 1.24% at December 31, 2008 as
compared to 1.06% at December 31, 2007. Management believes that the allowance
for loan losses at December 31, 2008 was adequate and reflected probable
incurred losses in the loan portfolio. There can be no assurance, however, that
adjustments to the allowance for loan losses will not be required in the future.
Changes in the circumstances of particular borrowers, as well as adverse
developments in the economy are factors that could change and make adjustments
to the allowance for loan losses necessary. The actions that took place in the
first and second quarters of 2008 were deemed prudent and necessary by
management to maintain the allowance at its adequate level. Asset quality will
continue to remain a key focus, as management continues to stress not just loan
growth, but quality in loan underwriting as well.
DEPOSITS
Interest-earning assets are funded generally by both interest-bearing and
noninterest-bearing core deposits. Deposits are influenced by changes in
interest rates, economic conditions and competition from other banks. The
accompanying table VII shows the composition of total deposits as of December
31, 2008. Total deposits increased $3,335, or 0.6%, to finish at $592,361 at
year-end 2008, resulting mostly from an increase in the Company's
interest-bearing demand deposits and money market deposit balances.
Interest-bearing NOW account balances increased $15,237, or 23.2%, during
2008 as compared to year-end 2007. This growth was largely driven by a $16,386
increase in public fund balances related to the local city and county school
construction projects currently in process within Gallia County, Ohio.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Further deposit growth came from the Company's money market deposit
balances, which were up $13,349, or 18.5%, during 2008 as compared to year-end
2007. This increase was from the Company's Market Watch money market account
product, which generated $13,485 in new deposit balances from year-end 2007,
mostly during the second quarter of 2008. Introduced in August 2005, the Market
Watch product is a limited transaction investment account with tiered rates that
competes with current market rate offerings and serves as an alternative to
certificates of deposit for some customers. In the second quarter of 2008, the
Company began marketing a special six-month introductory rate offer of 3.50% APY
that would be for new Market Watch accounts. This special offer was well
received by the Bank's customers and contributed to most of the year-to-date
increase in 2008. As a result of this introductory rate offer, Market Watch
deposit balances increased $20,670 during the second quarter of 2008.
The Company's interest-free funding source, noninterest bearing demand
deposits, also increased $6,917, or 8.8%, from year-end 2007, largely due to
growth in business checking account balances.
Time deposits, particularly CD's, remain the most significant source of
funding for the Company's earning assets, making up 51.9% of total deposits.
During 2008, time deposits decreased $33,396, or 9.8%, from year-end 2007,
partly because of the declining pace of the Company's loan portfolio. With loan
balances down 1.1% from year-end 2007, there has not been an aggressive need to
deploy CD's as a funding source. Furthermore, an increased demand for the Market
Watch product generated a deposit composition shift during 2008 from CD balances
to higher savings and money market balances. This deposit shift also served as a
cost effective contribution to the net interest margin. The average cost of
savings and money market accounts was 1.70% and 2.78% during the years ending
2008 and 2007, respectively. This is compared to the much higher average cost of
time deposits of 4.17% and 4.88% during the years ending 2008 and 2007,
respectively.
The Company will continue to experience increased competition for deposits
in its market areas, which should challenge net growth in its deposit balances.
The Company will continue to evaluate its deposit portfolio mix to properly
utilize both retail and wholesale funds to support earning assets and minimize
interest costs.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were down $16,320, or 40.4%, from year-end 2007. This decrease
was mostly due to seasonal fluctuations of two commercial accounts during 2008.
FUNDS BORROWED
The Company also accesses other funding sources, including short-term and
long-term borrowings, to fund asset growth and satisfy short-term liquidity
needs. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB)
advances and promissory notes. During 2008, other borrowed funds were up $9,772,
or 14.6%, from year-end 2007, primarily to support various deposit maturities.
While retail deposits continue to be the primary source of funding for growth in
earning assets, management will continue to utilize various wholesale borrowings
to help manage interest rate sensitivity and liquidity.
OFF-BALANCE SHEET ARRANGEMENTS
The disclosures required for off-balance sheet arrangements are discussed
in Note I and Note K.
SUBORDINATED DEBENTURES
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of
adjustable-rate trust preferred securities as part of a pooled offering of such
securities. The Company used the proceeds from these trust preferred securities
to pay off $8,500 in higher cost trust preferred security debt on March 26,
2007. The replacement of the higher cost trust preferred security debt was a
strategy by management to lower interest rate pressures that were impacting
interest expense and help improve the Company's net interest margin. The early
extinguishment and replacement of this higher cost debt improved earnings by
nearly $54 pre-tax ($35 after taxes) during 2008 as compared to 2007. For
additional discussion on the terms and conditions of this new trust preferred
security issuance, please refer to Note I "Subordinated Debentures and Trust
Preferred Securities".
CAPITAL RESOURCES
The Company maintains a capital level that exceeds regulatory requirements
as a margin of safety for its depositors and shareholders. All of the capital
ratios exceeded the regulatory minimum guidelines as identified in Note P
"Regulatory Matters". Shareholders' equity totaled $63,056 at December 31, 2008,
compared to $61,511 at December 31, 2007, which represents growth of 2.5%.
Contributing most to this increase was year-to-date net income of $7,128
partially offset by cash dividends paid of $3,061, or $.76 per share,
year-to-date, and increased share repurchases. The Company had treasury stock
totaling $15,712 at December 31, 2008, an increase of $2,269 as compared to the
total at year-end 2007. The Company may repurchase additional common shares from
time to time as authorized by its stock repurchase program. Most recently, the
Board of Directors extended the stock repurchase program from February 16, 2009
to February 15, 2010, and authorized Ohio Valley to repurchase up to 175,000 of
its common shares through open market and privately negotiated purchases.
Furthermore, the Company benefits from a dividend reinvestment and stock
purchase plan that is administered by an independent agent of the Company. The
plan allows shareholders to purchase additional shares of company stock. A
benefit of the plan is to permit the shareholders to reinvest cash dividends as
well as make supplemental purchases without the usual payment of brokerage
MANAGEMENT'S DISCUSSION AND ANALYSIS
commissions. During 2008, shareholders invested more than $1,167 through the
dividend reinvestment and stock purchase plan. These proceeds resulted in the
acquisition of 49,539 existing shares through open market purchases. At December
31, 2008, approximately 81% of the shareholders were enrolled in the dividend
reinvestment plan.
INTEREST RATE SENSITIVITY AND LIQUIDITY
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 to an instantaneous increase or decrease in market
interest rates over a 12 month horizon to +/- 5% for a 100 basis point rate
shock, +/- 7.5% for a 200 basis point rate shock and +/- 10% for a 300 basis
point rate shock. Based on the level of interest rates at December 31, 2008,
management did not test interest rates down 200 or 300 basis points.
The estimated percentage change in net interest income due to a change in
interest rates was within the policy guidelines established by the Board. At
December 31, 2008, the Company's analysis of net interest income reflects a
liability sensitive position. Based on current assumptions, an instantaneous
decrease in interest rates would positively impact net interest income primarily
due to the duration of earning assets exceeding the duration of interest-bearing
liabilities. Conversely, an increase in interest rates would negatively impact
net interest income. As compared to December 31, 2007, the Company's interest
rate risk profile has become less exposed to rising interest rates primarily due
to the extension of maturity terms offered on new time deposits. Since September
2007, the Federal Reserve has reduced short-term interest rates 500 basis points
and the Company's net interest margin has responded positively to the decline in
market rates.
Liquidity management focuses on matching the cash inflows and outflows
within the Company's natural market for loans and deposits. This goal is
accomplished by maintaining sufficient asset liquidity along with stable core
deposits. The primary sources of liquidity are interest-bearing balances with
banks, federal funds sold and the maturity and repayment of investments and
loans as well as cash flows provided from operations. The Company has classified
$75,340 in securities as available for sale at December 31, 2008. In addition,
the Federal Home Loan Bank in Cincinnati offers advances to the Bank which
further enhances the Bank's ability to meet liquidity demands. At December 31,
2008, the Bank could borrow an additional $52,937 from the Federal Home Loan
Bank. The Bank also has the ability to purchase federal funds from several of
its correspondent banks. See the consolidated statement of cash flows for
further cash flow information. Management does not rely on any single source of
liquidity and monitors the level of liquidity based on many factors affecting
the Company's financial condition.
INFLATION
Consolidated financial data included herein has been prepared in accordance
with US GAAP. Presently, US GAAP requires the Company to measure financial
position and operating results in terms of historical dollars with the exception
of securities available for sale, which are carried at fair value. Changes in
the relative value of money due to inflation or deflation are generally not
considered.
In management's opinion, changes in interest rates affect the financial
institution to a far greater degree than changes in the inflation rate. While
interest rates are greatly influenced by changes in the inflation rate, they do
not change at the same rate or in the same magnitude as the inflation rate.
Rather, interest rate volatility is based on changes in the expected rate of
inflation, as well as monetary and fiscal policies. A financial institution's
ability to be relatively unaffected by changes in interest rates is a good
indicator of its capability to perform in today's volatile economic environment.
The Company seeks to insulate itself from interest rate volatility by ensuring
that rate sensitive assets and rate sensitive liabilities respond to changes in
interest rates in a similar time frame and to a similar degree.
CRITICAL ACCOUNTING POLICIES
The most significant accounting policies followed by the Company are
presented in Note A 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 in 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 loans placed
on this report are: loans past due 60 or more days, nonaccrual loans 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 and real estate loan portfolios.
Included in the specific allocation analysis 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. Any changes in the impaired allocation will be reflected in
the total specific allocation.
The second component (general allowance) is based upon total loan portfolio
balances minus loan balances already reviewed (specific allocation). The Large
Loan Review Committee evaluates credit analysis reports that provide management
with a "snapshot" of information on borrowers with larger-balance loans
(aggregate balances of $1,000 or greater), including loan grades, collateral
values, and other factors. A list is prepared and updated quarterly that allows
management to monitor this group of borrowers. Therefore, only small balance
commercial loans and homogeneous loans (consumer and real estate loans) are not
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 a 3 year performance
evaluation of credit losses per loan portfolio. The risk factor is achieved by
taking the average net charge-off per loan portfolio for the last 36 consecutive
months and dividing it by the average loan balance for each loan portfolio over
the same time period. The Company believes that by using the 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 degree of impact it may have on
the allowance. 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.
CONCENTRATIONS OF CREDIT RISK
The Company maintains a diversified credit portfolio, with residential 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,
that could cause actual results to differ materially from those expressed in
such forward looking statements. These factors include, but are not limited to:
changes in political, economic or other factors such as inflation rates,
recessionary or expansive trends, and taxes; competitive pressures; fluctuations
MANAGEMENT'S DISCUSSION AND ANALYSIS
in interest rates; the level of defaults and prepayment on loans made by the
Company; unanticipated litigation, claims, or assessments; fluctuations in the
cost of obtaining funds to make loans; and regulatory changes. Additional
detailed information concerning a number of important factors which could cause
actual results to differ materially from the forward-looking statements
contained in management's discussion and analysis is available in the Company's
filings with the Securities and Exchange Commission, under the Securities
Exchange Act of 1934, including the disclosure under the heading "Item 1A. Risk
Factors" of Part 1 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2008. Readers are cautioned not to place undue reliance
on such forward looking statements, which speak only as of the date hereof. The
Company undertakes no obligation and disclaims any intention to republish
revised or updated forward looking statements, whether as a result of new
information, unanticipated future events or otherwise.
CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME
Table I
December 31
------------------------------------------------------------------------------------
2008 2007 2006
(dollars in thousands) -------------------------- -------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
ASSETS
- ------
Interest-earning assets:
Interest-bearing balances $ 5,710 $ 137 2.39% $ 549 $ 23 4.22% $ 579 $ 23 4.06%
with banks
Federal funds sold 5,552 157 2.83 4,428 221 5.00 4,193 220 5.24
Securities:
Taxable 82,606 3,432 4.15 76,748 3,477 4.53 73,160 3,189 4.36
Tax exempt 12,784 768 6.01 14,427 797 5.52 12,440 688 5.53
Loans 629,225 47,402 7.53 628,891 50,793 8.08 626,418 48,581 7.76
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
earning assets 735,877 51,896 7.05% 725,043 55,311 7.63% 716,790 52,701 7.35%
Noninterest-earning assets:
Cash and due from banks 15,029 14,137 15,306
Other nonearning assets 38,217 38,094 36,655
Allowance for loan losses (6,811) (7,720) (7,819)
-------- -------- --------
Total noninterest-
earning assets 46,435 44,511 44,142
-------- -------- --------
Total assets $782,312 $769,554 $760,932
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $ 88,110 $ 1,599 1.81% $ 78,636 $ 1,924 2.45% $ 93,137 $ 2,343 2.52%
Savings and Money Market 121,392 2,061 1.70 97,240 2,705 2.78 78,241 1,895 2.42
Time deposits 311,188 12,976 4.17 341,686 16,686 4.88 338,593 14,356 4.24
Repurchase agreements 28,040 421 1.50 27,433 1,051 3.83 22,692 895 3.94
Other borrowed money 60,678 2,682 4.42 60,603 2,911 4.80 68,475 3,163 4.62
Subordinated debentures 13,500 1,089 8.07 13,593 1,143 8.41 13,500 1,279 9.48
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
bearing liabilities 622,908 20,828 3.34% 619,191 26,420 4.27% 614,638 23,931 3.89%
Noninterest-bearing liabilities:
Demand deposit accounts 85,436 78,048 75,330
Other liabilities 12,622 11,766 10,994
-------- -------- --------
Total noninterest-
bearing liabilities 98,058 89,814 86,324
Shareholders' equity 61,346 60,549 59,970
-------- -------- --------
Total liabilities and
shareholders' equity $782,312 $769,554 $760,932
======== ======== ========
Net interest earnings $31,068 $28,891 $28,770
======= ======= =======
Net interest earnings as a percent
of interest-earning assets 4.23% 3.99% 4.02%
----- ----- -----
Net interest rate spread 3.71% 3.36% 3.46%
----- ----- -----
Average interest-bearing liabilities
to average earning assets 84.65% 85.40% 85.75%
===== ===== =====
Fully taxable equivalent yields are calculated assuming a 34% tax rate, net of
nondeductible interest expense. Average balances are computed on an average
daily basis. The average balance for available-for-sale securities includes the
market value adjustment. However, the calculated yield is based on the
securities' amortized cost. Average loan balances include nonaccruing loans.
Loan income includes cash received on nonaccruing loans.
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE
Table II
2008 2007
----------------------------- ----------------------------
(dollars in thousands) Increase (Decrease) Increase (Decrease)
From Previous Year Due to From Previous Year Due to
----------------------------- ------------------------------
Volume Yield/Rate Total Volume Yield/Rate Total
------ ---------- ----- ------ ---------- -----
INTEREST INCOME
- ---------------
Interest-bearing balances
with banks $ 128 $ (14) $ 114 $ (1) $ 1 --
Federal funds sold 47 (111) (64) 12 (11) $ 1
Securities:
Taxable 255 (300) (45) 160 128 288
Tax exempt (96) 67 (29) 110 (1) 109
Loans 27 (3,418) (3,391) 192 2,020 2,212
------- ------- ------- ------- ------- -------
Total interest income 361 (3,776) (3,415) 473 2,137 2,610
INTEREST EXPENSE
- ----------------
NOW accounts 213 (538) (325) (356) (63) (419)
Savings and Money Market 570 (1,214) (644) 503 307 810
Time deposits (1,407) (2,303) (3,710) 132 2,198 2,330
Repurchase agreements 23 (653) (630) 182 (26) 156
Other borrowed money 3 (232) (229) (425) 173 (252)
Subordinated debentures (8) (46) (54) --- (136) (136)
------- ------- ------- ------- ------- -------
Total interest expense (606) (4,986) (5,592) 36 2,453 2,489
------- ------- ------- ------- ------- -------
Net interest earnings $ 967 $ 1,210 $ 2,177 $ 437 $ (316) $ 121
======= ======= ======= ======= ======= =======
The change in interest due to volume and rate is determined as follows: Volume
Variance - change in volume multiplied by the previous year's rate; Yield/Rate
Variance - change in rate multiplied by the previous year's volume; Total
Variance - change in volume multiplied by the change in rate. The change in
interest due to both volume and rate has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the
change in each. Fully taxable equivalent yield assumes a 34% tax rate, net of
related nondeductible interest expense.
SECURITIES
Table III
MATURING
---------------------------------------------------------------------------
As of December 31, 2008 Within After One but After Five but
(dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years
-------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
U.S. Government
sponsored entity securities $ 7,682 4.14% $21,551 4.26% $ 2,633 4.95% --- ---
Obligations of states and
political subdivisions 1,085 6.02% 3,992 7.04% 2,865 6.96% $9,004 3.21%
Mortgage-backed securities 1,235 3.35% 42,279 3.88% --- --- --- ---
------- ---- ------- ---- ------- ---- ------ ----
Total debt securiities $10,002 4.25% $67,822 4.19% $ 5,498 6.00% $9,004 3.21%
======= ==== ======= ==== ======= ==== ====== ====
Tax equivalent adjustments have been made in calculating yields on obligations
of states and political subdivisions using a 34% rate. Weighted average yields
are calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security. Mortgage-backed securities, which have
prepayment provisions, are assigned to a maturity based on estimated average
lives. Securities are shown at their carrying values which include the market
value adustments for available-for-sale securities.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Table IV Years Ended December 31
(dollars in thousands) 2008 2007 2006 2005 2004
- ---------------------- ---- ---- ---- ---- ----
Commercial loans (1) $5,898 $5,273 $7,806 $4,704 $4,657
Percentage of loans to total loans 39.78% 40.63% 39.45% 38.33% 37.69%
Residential real estate loans 806 327 310 623 642
Percentage of loans to total loans 40.09% 39.31% 38.16% 38.06% 37.84%
Consumer loans 1,095 1,137 1,296 1,806 1,878
Percentage of loans to total loans 20.13% 20.06% 22.39% 23.61% 24.47%
------- ------- ------- ------- -------
Allowance for Loan Losses $7,799 $6,737 9,412 $7,133 $7,177
======= ======= ======= ======= =======
100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
Ratio of net charge-offs
to average loans 1.24% .78% .54% .31% .47%
======= ======= ======= ======= =======
The above allocation is based on estimates and subjective judgments and is
not necessarily indicative of the specific amounts or loan categories in which
losses may ultimately occur.
(1) Includes commercal and industrial and commercial real estate loans.
SUMMARY OF NONPERFORMING AND PAST DUE LOANS
Table V
(dollars in thousands) 2008 2007 2006 2005 2004
- ---------------------- ---- ---- ---- ---- ----
Impaired loans $ 8,099 $ 6,871 $17,402 $7,983 $5,573
Past due-90 days or more and
still accruing 1,878 927 1,375 1,317 1,402
Nonaccrual 3,396 2,734 12,017 1,240 1,618
Accruing loans past due 90
days or more to total loans .30% .14% .22% .21% .23%
Nonaccrual loans as a % of
total loans .54% .43% 1.92% .20% .27%
Impaired loans as a % of total loans 1.28% 1.08% 2.78% 1.29% .93%
Allowance for loans losses as a
% of total loans 1.24% 1.06% 1.51% 1.16% 1.20%
Management believes that the impaired loan disclosures are comparable to
the nonperforming loan disclosures except that the impaired loan disclosures do
not include single family residential or consumer loans which are analyzed in
the aggregate for loan impairment purposes.
During 2008, the Company recognized $490 of interest income on impaired
loans. Individual loans not included above that management feels have loss
potential total approximately $1,404. The Company has no assets which are
considered to be troubled debt restructurings that are not already included in
the table above.
Management formally considers placing a loan on nonaccrual status when
collection of principal or interest has become doubtful. Furthermore, a loan
should not be returned to the accrual status unless either all delinquent
principal or interest has been brought current or the loan becomes well secured
and is in the process of collection.
MATURITY AND REPRICING DATA OF LOANS
Table VI
As of December 31, 2008 Maturing/Repricing
(dollars in thousands)
Within After One but
One Year Within Five Years After Five Years Total
-------- ----------------- ---------------- -----
Residential real estate loans $ 45,456 $ 20,488 $186,749 $252,693
Commercial loans (1) 134,965 77,312 38,510 250,787
Consumer loans 29,785 65,648 31,478 126,911
-------- -------- -------- --------
Total loans $210,206 $163,448 $256,737 $630,391
======== ======== ======== ========
Loans maturing or repricing after one year with:
Variable interest rates $ 76,096
Fixed interest rates 344,089
--------
Total $420,185
========
(1) Includes commercial and industrial and commercial real estate loans.
DEPOSITS
Table VII as of December 31
(dollars in thousands)
2008 2007 2006
---- ---- ----
Interest-bearing deposits:
NOW accounts $ 80,855 $ 65,618 $ 78,484
Money Market 85,625 72,276 58,941
Savings accounts 32,664 31,436 32,719
IRA accounts 46,574 44,050 38,731
Certificates of Deposit 261,137 297,057 306,951
-------- -------- --------
506,855 510,437 515,826
Noninterest-bearing deposits:
Demand deposits 85,506 78,589 77,960
-------- -------- --------
Total deposits $592,361 $589,026 $593,786
======== ======== ========
The following table presents the Company's estimated net interest income
sensitivity:
INTEREST RATE SENSITIVITY
Table VIII
Change in December 31, 2008 December 31, 2007
Interest Rates % Change in % Change in
Basis Points Net Interest Income Net Interest Income
- --------------- ------------------- -------------------
+300 (5.47%) (8.23%)
+200 (4.12%) (5.09%)
+100 (2.30%) (2.47%)
-100 2.54% 2.48%
-200 ---- 5.01%
-300 ---- 7.86%
CONTRACTUAL OBLIGATIONS
Table IX
The following table presents, as of December 31, 2008, significant fixed and
determinable contractual obligations to third parties by payment date. Further
discussion of the nature of each obligation is included in the referenced note
to the consolidated financial statements.
Payments Due In
(dollars in thousands)
Note One Year One to Three to Over
Reference or Less Three Years Five Years Five Years Total
--------- -------- ----------- ---------- ---------- ----------
Deposits without a stated maturity F $284,650 --- --- --- $284,650
Consumer and brokered time deposits F 219,240 $ 82,359 $ 5,083 $ 1,029 307,711
Repurchase agreements G 24,070 --- --- --- 24,070
Other borrowed funds H 43,615 33,011 12 136 76,774
Subordinated debentures I --- --- --- 13,500 13,500
KEY RATIOS
Table X
2008 2007 2006 2005 2004
---- ---- ---- ---- ----
Return on average assets .91% .82% .71% .97% 1.16%
Return on average equity 11.62% 10.40% 9.00% 12.18% 15.02%
Dividend payout ratio 42.94% 46.66% 52.56% 38.55% 38.89%
Average equity to
average assets 7.84% 7.87% 7.88% 7.93% 7.72%