UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: MARCH 31, 2002 Commission file number: 0-20914 Ohio Valley Banc Corp ---------------------- (Exact name of Registrant as specified in its charter) Ohio (State or other jurisdiction of incorporation or organization) 31-1359191 ---------- (I.R.S. Employer Identification Number) 420 Third Avenue. Gallipolis, Ohio 45631 ---------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 446-2631 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate the number of shares outstanding of the issuers classes of common stock, as of the latest practicable date. Common stock, $1.00 stated value Outstanding at April 30, 2002 3,462,966 common shares
OHIO VALLEY BANC CORP FORM 10-Q QUARTER ENDED MARCH 31, 2002 ================================================================================ Part I - Financial Information Item 1 - Financial Statements Interim financial information required by Regulation 210.10-01 of Regulation S-X is included in this Form 10Q as referenced below: Consolidated Balance Sheets..................................... 1 Consolidated Statements of Income............................... 2 Condensed Consolidated Statements of Changes in Shareholders' Equity......................................... 3 Condensed Consolidated Statements of Cash Flows................. 4 Notes to the Consolidated Financial Statements.................. 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10 Item 3 - Quantitative and Qualitative Disclosure About Market Risk......................................... 14 Part II - Other Information Other Information and Signatures................................ 15
OHIO VALLEY BANC CORP CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands, except per share data) ================================================================================ March 31, December 31, 2002 2001 ------------ ------------ ASSETS Cash and noninterest-bearing deposits with banks $ 15,874 $ 17,288 Federal funds sold 24,600 9,000 ------------ ------------ Total cash and cash equivalent 40,474 26,288 Interest-bearing balances with banks 1,791 1,264 Securities available-for-sale 54,079 61,559 Securities held-to-maturity (estimated fair value: 2002 - $14,688 , 2001 - $14,421) 14,303 13,973 Total loans 517,676 508,660 Less: Allowance for loan losses (6,377) (6,251) ------------ ------------ Net loans 511,299 502,409 Premises and equipment, net 8,449 8,702 Accrued income receivable 3,314 3,420 Intangible assets, net 1,234 1,267 Bank owned life insurance 12,237 12,089 Other assets 4,467 4,028 ------------ ------------ Total assets $ 651,647 $ 634,999 ============ ============ LIABILITIES Noninterest-bearing deposits $ 58,247 $ 56,735 Interest-bearing deposits 421,748 399,126 ------------ ------------ Total deposits 479,995 455,861 Securities sold under agreements to repurchase 16,410 29,274 Other borrowed funds 87,137 90,856 Obligated mandatorily redeemable capital securities of subsidiary trust 13,500 5,000 Accrued liabilities 7,590 7,708 ----------- ------------ Total liabilities 604,632 588,699 ----------- ------------ SHAREHOLDERS' EQUITY Common stock ($1.00 stated value, 10,000,000 shares authorized; 2002 - 3,592,956 shares issued, 2001 - 3,579,250 shares issued) 3,593 3,579 Additional paid-in capital 29,524 29,207 Retained earnings 16,677 15,979 Accumulated other comprehensive income 729 1,043 Treasury stock at cost (2002 and 2001 - 129,990 shares) (3,508) (3,508) ----------- ------------ Total shareholders' equity 47,015 46,300 ----------- ------------ Total liabilities and shareholders' equity $ 651,647 $ 634,999 =========== ============ ================================================================================ See notes to the consolidated financial statements. 1
OHIO VALLEY BANC CORP CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data) ================================================================================ Three months ended March 31, 2002 2001 ------------- ------------- Interest and dividend income: Loans, including fees $ 10,647 $ 10,389 Securities: Taxable 657 810 Tax exempt 176 193 Dividends 53 80 Other Interest 76 51 ------------- ------------- 11,609 11,523 Interest expense: Deposits 3,900 5,256 Repurchase agreements 84 175 Other borrowed funds 1,113 790 Obligated mandatorily redeemable capital securities of subsidiary trust 139 133 ------------- ------------- 5,236 6,354 ------------- ------------- Net interest income 6,373 5,169 Provision for loan losses 1,142 427 ------------- ------------- Net interest income after provision for loan losses 5,231 4,742 Noninterest income: Service charges on deposit accounts 694 698 Trust fees 54 55 Income from bank owned insurance 171 138 Other 361 275 ------------- ------------- 1,280 1,166 Noninterest expense: Salaries and employee benefits 2,619 2,363 Occupancy expense 311 316 Furniture and equipment expense 263 273 Data processing expense 147 107 Other 1,433 1,320 ------------- ------------- 4,773 4,379 ------------- ------------- Income before income taxes 1,738 1,529 Provision for income taxes 486 422 ------------- ------------- NET INCOME $ 1,252 $ 1,107 ============= ============= Earnings per share (basic and diluted) $ 0.36 $ 0.32 ============= ============= ================================================================================ See notes to the consolidated financial statements. 2
OHIO VALLEY BANC CORP CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands) ================================================================================ Three months ended March 31, 2002 2001 ------------ ------------ Balance at beginning of period $ 46,300 $ 44,492 Comprehensive income: Net income 1,252 1,107 Net change in unrealized gain on available- for-sale securities (314) 386 ------------ ------------ Total comprehensive income 938 1,493 Proceeds from issuance of common stock through dividend reinvestment plan 331 Cash dividends (554) (523) Shares acquired for treasury (505) ------------ ------------ Balance at end of period $ 47,015 $ 44,957 ============ ============ ================================================================================ See notes to the consolidated financial statements. 3
OHIO VALLEY BANC CORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands, except per share data) ================================================================================ Three months ended March 31, 2002 2001 ------------ ------------ Net cash provided by operating activities $ 2,486 $ 2,418 Investing activities Proceeds from maturities of securities available-for-sale 10,272 9,067 Purchases of securities available- for-sale (3,211) (2,000) Proceeds from maturities of securities held-to-maturity 261 291 Purchases of securities held-to-maturity (602) Change in interest-bearing deposits in other banks (527) (52) Net increase in loans (10,032) (3,148) Purchases of premises and equipment, net (34) (241) Purchases of insurance contracts, net (530) ------------ ------------ Net cash used in investing activities (3,873) 3,387 Financing activities Change in deposits 24,134 5,193 Cash dividends (554) (523) Proceeds from issuance of common stock 331 Purchases of treasury stock (505) Change in securities sold under agreements to repurchase (12,864) (6,220) Proceeds from obligated mandatorily redeemable capital securities of subsidiary trust 8,244 Proceeds from long-term borrowings 40 15,025 Repayment of long-term borrowings (1,808) (5,395) Change in other short-term borrowings (1,950) (1,169) ------------ ------------ Net cash from financing activities 15,573 6,406 ------------ ------------ Change in cash and cash equivalents 14,186 12,211 Cash and cash equivalents at beginning of year 26,288 14,569 ------------ ------------ Cash and cash equivalents at March 31, $ 40,474 $ 26,780 ============ ============ Cash paid for interest $ 6,245 $ 6,256 Cash paid for income taxes 325 402 ================================================================================ See notes to the consolidated financial statements. 4
OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. and its wholly owned subsidiaries The Ohio Valley Bank Company and Loan Central, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. These interim financial statements are prepared without audit and reflect all adjustments of a normal recurring nature which, in the opinion of Management, are necessary to present fairly the consolidated financial position of Ohio Valley Banc Corp. at March 31, 2002, and its results of operations and cash flows for the periods presented. The accompanying consolidated financial statements do not purport to contain all the necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances. The Annual Report for Ohio Valley Banc Corp. for the year ended December 31, 2001, contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements. The provision for income taxes is based upon the effective income tax rate expected to be applicable for the entire year. For consolidated financial statement classification and cash flow reporting purposes, cash and cash equivalents include cash on hand, noninterest-bearing deposits with banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The Company reports net cash flows for customer loan transactions, deposit transactions, short-term borrowings and interest-bearing deposits with other financial institutions. Earnings per share is computed based on the weighted average shares outstanding during the period. Weighted average shares outstanding were 3,459,235 and 3,480,615 for the three months ending March 31, 2002 and March 31, 2001, respectively. The majority of the Company's income is derived from commercial and retail business lending activities. Management considers the Company to operate in one segment, banking. In June 2001, the Financial Accounting Standings Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations". SFAS No. 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of this statement apply to all business combinations initiated after June 30, 2001. The adoption of this statement will only impact the Company's financial statements if it enters into a business combination. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of this statement, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other identified intangible assets, such as core deposit intangible assets, will continue to be amortized over their estimated useful lives. The Company adopted this statement on January 1, 2002, and did not materially impact its financial statements. ================================================================================ (Continued) 5
OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 2 - SECURITIES The amortized cost, gross unrealized gains and losses and estimated fair values of the securities, as presented in the consolidated balance sheet are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Values March 31, 2002 ---------- ----------- ------------ --------- Securities Available-for-Sale - ----------------------------- U.S. Government agency securities $ 46,582 $ 1,182 $ (88) $ 47,676 Mortgage-backed securities 1,564 10 1,574 Equity securities 4,829 4,829 ---------- ----------- ------------ --------- Total securities $ 52,975 $ 1,192 $ (88) $ 54,079 ========== =========== ============ ========= Securities Held-to-Maturity - --------------------------- Obligations of state and political subdivisions $ 14,107 $ 472 $ (80) $ 14,499 Mortgage-backed securities 196 (7) 189 ---------- ----------- ------------ --------- Total securities $ 14,303 $ 472 $ (87) $ 14,688 ========== =========== ============ ========= December 31, 2001 Securities Available-for-Sale - ----------------------------- U.S. Treasury securities $ 1,990 $ 3 $ 1,993 U.S. Government agency securities 51,494 1,578 $ (16) 53,056 Mortgage-backed securities 1,719 15 1,734 Equity securities 4,776 4,776 ----------- ------------ ------------ --------- Total securities $ 59,979 $ 1,596 $ (16) $ 61,559 =========== ============ ============ ========= Securities Held-to-Maturity - --------------------------- Obligations of state and political subdivisions $ 13,765 $ 481 $ (25) $ 14,221 Mortgage-backed securities 208 (8) 200 ----------- ------------ ------------ --------- Total securities $ 13,973 $ 481 $ (33) $ 14,421 =========== ============ ============ ========= ================================================================================ (Continued) 6
OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 2 - SECURITIES (Continued) The amortized cost and estimated fair value of debt securities at March 31, 2002, 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 Cost Value Cost Value ------------ ----------- ----------- ----------- Debt securities: Due in one year or less $ 20,965 $ 21,153 $ 1,573 $ 1,601 Due in one to five years 23,617 24,556 5,119 5,371 Due in five to ten years 2,000 1,967 5,338 5,486 Due after ten years 2,077 2,041 Mortgage-backed sec. 1,564 1,574 196 189 ------------ ----------- ----------- ----------- Total debt securities $ 48,146 $ 49,250 $ 14,303 $ 14,688 ============ =========== =========== =========== Gains and losses on the sale of securities are determined using the specific identification method. There were no sales of debt and equity securities during the first three months of 2002 and 2001. NOTE 3 - LOANS Total loans as presented on the balance sheet are comprised of the following classifications: March 31, December 31, 2002 2001 ---------------- ---------------- Real estate loans $ 226,854 $ 226,212 Commercial and industrial loans 177,044 173,154 Consumer loans 113,171 108,437 Other loans 607 857 ---------------- ---------------- $ 517,676 $ 508,660 ================ ================ At March 31, 2002 and December 31, 2001, loans on nonaccrual status were approximately $3,265 and $3,297, respectively. Loans past due more than 90 days and still accruing at March 31, 2002 and December 31, 2001 were $2,244 and $3,013, respectively. ================================================================================ (Continued) 7
OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 4 - ALLOWANCE FOR LOAN LOSSES A summary of activity in the allowance for loan losses for the three months ended March 31 is as follows: 2002 2001 ---------------- ---------------- Balance - January 1, $ 6,251 $ 5,385 Loans charged off: Real estate 211 43 Commercial 431 5 Consumer 753 516 ---------------- ---------------- Total loans charged off 1,395 564 Recoveries of loans: Real estate 101 4 Commercial 132 5 Consumer 146 153 ---------------- ---------------- Total recoveries 379 162 ---------------- ---------------- Net loan charge-offs (1,016) (402) Provision charged to operations 1,142 427 ---------------- ---------------- Balance - March 31, $ 6,377 $ 5,410 ================ ================ Information regarding impaired loans is as follows: March 31, December 31, 2002 2001 -------------- --------------- Balance of impaired loans $ 807 $ 960 ============== =============== Portion of impaired loan balance for which an allowance for credit losses is allocated $ 807 $ 960 ============== =============== Portion of allowance for loan losses allocated to the impaired loan balance $ 600 $ 300 ============== =============== Average investment in impaired loans year-to-date $ 774 $ 1,013 ============== =============== Interest on impaired loans was not material for the periods ended March 31, 2002 and December 31, 2001. ================================================================================ (Continued) 8
OHIO VALLEY BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company, through its subsidiaries, grants residential, consumer, and commercial loans to customers located primarily in the central and southeastern areas of Ohio as well as the western counties of West Virginia. Approximately 4.54% of total loans were unsecured at March 31, 2002 as compared to 4.81% at December 31, 2001. The Corporation is a party to financial instruments with off-balance sheet risk. These instruments are required in the normal course of business to meet the financial needs of its customers. The contract or notional amounts of these instruments are not included in the consolidated financial statements. At March 31, 2002, the contract or notional amounts of these instruments, which primarily include commitments to extend credit and standby letters of credit and financial guarantees, totaled approximately $69,307 as compared to $64,312 at December 31, 2001. NOTE 6 - OTHER BORROWED FUNDS Other borrowed funds at March 31, 2002 and December 31, 2001 are comprised of advances from the Federal Home Loan Bank (FHLB), promissory notes and Federal Reserve Bank Notes. FHLB borrowings Promissory notes FRB Notes Totals --------------- ---------------- --------- ---------- 2002 $ 79,795 $ 6,342 $ 1,000 $ 87,137 2001 $ 81,564 $ 3,792 $ 5,500 $ 90,856 Pursuant to collateral agreements with the FHLB, advances are secured by certain qualifying first mortgage loans and by FHLB stock which total $119,694 and $4,829 at March 31, 2002. Fixed rate FHLB advances mature through 2010 and have interest rates ranging from 4.30% to 6.62%. Promissory notes, issued primarily by the parent company, have fixed rates of 2.05% to 7.00% and are due at various dates through a final maturity date of April 9, 2003. Scheduled principal payments over the next five years are to be: FHLB borrowings Promissory notes FRB Notes Totals --------------- ---------------- --------- ---------- 2002 $ 11,472 $ 4,703 $ 1,000 $ 17,175 2003 13,932 1,639 15,571 2004 14,487 14,487 2005 11,114 11,114 2006 14,606 14,606 Thereafter 14,184 14,184 ---------------- ---------------- ---------- ---------- $ 79,795 $ 6,342 $ 1,000 $ 87,137 ================ ================ ========== ========== Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $29,750 at March 31, 2002 and $29,000 at December 31, 2001. Various investment securities from the Bank used to collateralize FRB notes totaled $5,970 at March 31, 2002 and $5,970 at December 31, 2001. NOTE 7 - TRUST PREFERRED SECURITIES Obligated mandatorily redeemable capital securities of a subsidiary trust (Trust Preferred Securities) of $8,500 were issued on March 26, 2002, with a variable rate of 5.59% and a redemption date of March 27, 2007. Trust preferred securities were unsecured through March 31, 2002. ================================================================================ 9
OHIO VALLEY BANC CORP (dollars in thousands, except per share data) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. INTRODUCTION The following discussion focuses on the consolidated financial condition of Ohio Valley Banc Corp. at March 31, 2002, compared to December 31, 2001, and the consolidated results of operations for the quarterly period ending March 31, 2002, compared to the same period in 2001. The purpose of this discussion is to provide the reader a more thorough understanding of the consolidated financial statements. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10-Q. The Registrant is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on the liquidity, capital resources or operations except as discussed herein. Also, the Registrant is not aware of any current recommendations by regulatory authorities which would have such effect if implemented. FINANCIAL CONDITION The consolidated total assets of Ohio Valley Banc Corp. increased $16,648 or 2.6% to reach $651,647 at March 31, 2002. Contributing to this asset growth was the increase in federal funds sold which grew $15,600 during the first three months of 2002. With the anticipation of upcoming commercial loan originations, management will use the federal funds sold balances as a funding source. The large increase in federal funds sold was funded partially by the Company's newest issuance of trust preferred securities which totaled $8,500 and maturities of various treasury and government agency securities which lead to a total investment decrease of $7,150. The demand for these types of investments have decreased due to the decline in yield on reinvestment opportunities. Also contributing to asset growth was loans, which grew $9,016 or 1.8% during the first three months of 2002. Loans were funded by growth in deposits of $24,134 or 5.3%, of which a portion was used to reduce securities sold under agreements to repurchase which are down $12,864. During the first three months of 2002, loan growth was led by consumer loans expanding $4,734 or 4.4%. Approximately 75% of this increase occurred within indirect loans, particularly automobiles, where management has been more aggressive in its pricing of these products. Commercial loans increased $3,890 or 2.2%. Approximately 67% of these loans were originated in the primary market areas of Gallia, Jackson, Pike and Franklin counties in Ohio and 18% was from the growing West Virginia market areas. While commercial loan growth was limited in the first quarter of 2002 by large unanticipated paydowns, increased loan volume in the second quarter is expected. Additionally, real estate mortgages increased $642 during the first three months in 2002. During the first quarter of 2002, management continued to emphasize asset quality which is important in a period of economic slowdown. This emphasis prompted a $614,000 net charge-off increase occurring mostly in installment and commercial nonperforming loans. As a result, the Company's nonperforming loans as a percent of total loans declined to 1.06% at March 31, 2002 as compared to 1.24% at year end 2001. Furthermore, management believes the allowance for loan losses is adequate to absorb probable Page 10
losses in the portfolio based on collateral values, declines in nonperforming loans and the fact that almost half of the Company's loan portfolio consists of real estate mortgages. A comprehensive analysis of the allowance for loan losses is performed on a quarterly basis to ensure its adequacy. As a percentage of total loans, the allowance for loan losses at March 31, 2002 and December 31, 2001 was 1.23%. Total deposit growth was primarily in time deposits which increased $13,181 or 4.9%. This growth was partially driven by increases in the Company's brokered CD issues which totaled $5,227 during the first three months of 2002. Savings and interest-bearing demand deposits increased $9,441 or 7.1%. While the Company's Gold Club account continues to impact this area of deposit growth, the largest portion of this increase was related to the collection of real estate taxes by local municipalities who maintain various deposit accounts within the bank. These deposits from tax collections are short-term in nature and also had an impact on the increase in federal funds which represent overnight investments. Additionally, non-interest bearing deposits increased $1,512 or 2.7% during the first three months of 2002. Management utilized this net deposit growth to help fund the growth in loans and to reduce securities sold under agreements to repurchase. Other borrowed funds are primarily advances from the Federal Home Loan Bank, which are used to fund loan growth or short-term liquidity needs. Other borrowed funds are down $3,719 from December 31, 2001, as management is shifting its focus back to funding loan growth through its traditional retail sources of funds in certificates of deposit since the cost of these retail sources has decreased significantly. The decrease in other borrowed funds occurred primarily in overnight borrowings. Additionally, securities sold under agreements to repurchase are down $12,864 from December 31, 2001. Furthermore, on March 26, 2002, the Company completed the issuance of $8,500 of trust preferred securities. The proceeds from this issuance will be used to enhance the Company's risk-based capital adequacy levels as well as support the growth of additional earning assets. Total shareholders' equity at March 31, 2002 of $47,015 was up by $715 as compared to the balance of $46,300 on December 31, 2001. Contributing to this increase was year-to-date income of $1,252 and proceeds from the issuance of common stock through the dividend reinvestment plan of $331 less cash dividends paid of $554, or $.16 per share. The cash dividend represents 44.2% of the year-to-date income. Management had limited activity within the Company's stock repurchase program during the first three months of 2002. On January 15, 2002, the Company voted to extend its stock repurchase program to February 10, 2003. The stock repurchase program limits the purchase of up to 175,000 shares. As of April 30, 2002, the Company had over 45,000 shares available to purchase. RESULTS OF OPERATIONS Ohio Valley Banc Corp's net income was $1,252 for the first quarter of 2002, up $145 or 13.1% compared to $1,107 for the first quarter of 2002. Comparing March 31, 2002 to March 31, 2001, return on assets was unchanged at .80% and return on equity increased from 10.11% to 10.86%. First quarter earnings per share was $.36 per share, up 12.5% over last year's $.32 per share. The primary contributors to the gain in net income were a $1,204 or 23% increase in net interest income partially offset by a $715 increase in provision for loan losses. 11
The 23% increase in net interest income was primarily due to the decrease in the Bank's funding costs resulting in a higher net interest margin. Earning assets increased $17,993 from December 31, 2001 and had a positive impact to net interest income. Net interest income was further enhanced by the 142 basis point decrease in average funding costs which was a benefit realized by the decline in interest rates that occurred throughout 2001. As a result, the Company's net interest margin during the first quarter of 2002 increased 32 basis points to 4.38% as compared to 4.06% for the same period in 2001. For additional discussion on the Company's rate sensitive assets and liabilities, please see Item 3, Quantitative and Qualitative Disclosure About Market Risk on page 14. The increase in net interest income during the first three months of 2002 was partially offset by an increase to provision expense of $715 for the same period as compared to 2001. The year-to-date increase to provision expense was the result of a $614 increase to net charge-offs, primarily consumer and commercial nonperforming loans, which helped to enhance asset quality and lower the credit risk associated with the Company's loan portfolio. The increase in net interest income after provision for the first quarter of 2002 was partially offset by net noninterest expense increasing $280 or 8.7% for the first quarter in 2002 compared to the same period in 2001. Total noninterest income increased $114 or 9.8% for the first three months in 2002 compared to the same period in 2001. Contributing most to this gain was earnings from bank owned life insurance contracts and loan service fees. Total noninterest expense increased $394 or 9.0% for the first quarter compared to the same period in 2001. Contributing the most to this gain was the increase in salary and employee benefits, the Company's largest noninterest expense, which were up $256 over the first three months of 2001. This increase was primarily affected by annual merit increases and rising benefit costs. Furthermore, data processing and other operating expense were up $153 over the first quarter of 2001 due to loan acquisition costs, taxes and general increases in overhead expenses. CAPITAL RESOURCES All of the capital ratio's exceeded the regulatory minimum guidelines as identified in the following table: Company Ratios Regulatory March 31, 2002 December 31, 2001 Minimum -------------- ----------------- ---------- Tier 1 risk-based capital 11.0% 9.5% 4.00% Total risk-based capital ratio 12.2% 10.7% 8.00% Leverage ratio 9.2% 7.9% 4.00% Cash dividends paid of $554 for the first three months of 2002 represents a 5.9% increase over the cash dividends paid during the same period in 2001. The increase in cash dividends paid is largely due to the increase in the dividend rate paid per share. At March 31, 2002, approximately 73% of the shareholders were enrolled in the dividend reinvestment plan. As part of the Company's stock repurchase program, management will continue to monitor opportunities to utilize reinvested dividends and voluntary cash to purchase shares on the open market that can be redistributed through the dividend reinvestment plan. 12
LIQUIDITY Liquidity relates to the Bank's ability to meet the cash demands and credit needs of its customers and is provided by the ability to readily convert assets to cash and raise funds in the market place. Total cash and cash equivalents, interest-bearing deposits with banks, held-to-maturity securities maturing within one year and securities available-for-sale of $97,917 represented 15.0% of total assets at March 31, 2002. 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 March 31, 2002, the Bank could borrow an additional $49 million from the Federal Home Loan Bank. The Company experienced an increase of $14,186 in cash and cash equivalents for the three months ended March 31, 2002. See the condensed consolidated statement of cash flows on page 4 for further cash flow information. CONCENTRATION OF CREDIT RISK The Company maintains a diversified credit portfolio, with real estate loans comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in central and southeastern Ohio as well as western West Virginia. Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group. To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations. FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements' within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as "believes," "anticipates," "expects," and similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control, 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 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. 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. 13
RATE SENSITIVITY ANALYSIS <TABLE> <CAPTION> Table VIII (dollars in thousands) As of March 31, 2002 Principal Amount Maturing in: There- Fair Value 2002 2003 2004 2005 2006 after Total 03/31/02 <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate-Sensitive Assets: Fixed interest rate loans $ 9,633 $ 7,880 $ 15,044 $ 22,844 $ 23,439 $265,290 $344,130 $347,571 Average interest rate 10.02% 11.53% 10.78% 9.81% 8.73% 7.93% 8.37% Variable interest rate loans $ 37,197 $ 9,447 $ 3,366 $ 4,650 $ 6,035 $112,851 $173,546 $174,848 Average interest rate 6.39% 5.97% 6.12% 6.44% 6.92% 6.90% 6.72% Fixed interest rate securities $ 19,531 $ 6,734 $ 10,683 $ 12,817 $ 1,500 $ 16,013 $ 67,278 $ 68,767 Average interest rate 4.04% 6.53% 6.57% 6.36% 5.83% 6.09% 5.66% Federal funds sold $ 24,600 $ 24,600 $ 24,600 Average interest rate 1.63% 1.63% Other interest-bearing assets $ 1,791 $ 1,791 $ 1,791 Average interest rate 0.75% 0.75% Total Rate-Sensitive Assets $ 92,752 $24,061 $ 29,093 $ 40,311 $ 30,974 $394,154 $611,345 $617,577 Average interest rate 4.90% 7.95% 8.69% 8.32% 8.24% 7.56% 7.31% Rate-Sensitive Liabilities: Noninterest-bearing checking $ 7,922 $ 6,844 $ 5,914 $ 5,109 $ 4,414 $ 28,044 $ 58,247 $ 58,247 Savings & Interest-bearing checking $ 22,551 $ 18,902 $ 15,856 $ 13,310 $ 11,180 $ 60,075 $141,874 $141,874 Average interest rate 1.85% 1.86% 1.88% 1.89% 1.90% 1.95% 1.90% Time deposits $120,847 $ 99,511 $ 34,082 $ 13,741 $ 9,646 $ 2,047 $279,874 $284,072 Average interest rate 4.48% 4.37% 4.51% 5.02% 4.91% 6.54% 4.50% Fixed interest rate borrowings $ 16,173 $ 15,572 $ 14,486 $ 11,114 $ 14,606 $ 19,184 $ 91,135 $ 92,319 Average interest rate 5.02% 5.18% 5.16% 5.26% 5.22% 6.89% 5.52% Variable interest rate borrowings $ 25,912 $ 25,912 $ 25,912 Average interest rate 3.07% 3.07% Total Rate-Sensitive Liabilities $193,405 $140,829 $ 70,338 $ 43,274 $ 39,846 $109,350 $597,042 $602,424 Average interest rate 3.85% 3.91% 3.67% 3.53% 3.64% 2.40% 3.54% <CAPTION> As of December 31, 2001 Principal Amount Maturing in: There- Fair Value 2002 2003 2004 2005 2006 after Total 12/31/01 <S> <C> <C> <C> <C> <C> <C> <C> <C> Total Rate-Sensitive Assets $ 97,688 $ 17,119 $ 31,670 $ 40,920 $ 30,418 $370,285 $588,100 $595,178 Average interest rate 5.70 9.20% 8.82% 8.59% 8.26% 7.74% 7.59% Total Rate-Sensitive Liabilities $241,620 $102,787 $ 58,432 $ 40,300 $ 33,796 $104,056 $580,991 $586,897 Average interest rate 4.13% 4.17% 3.69% 3.57% 3.53% 2.46% 3.72% Page 14 </TABLE>
OHIO VALLEY BANC CORP MATURITY ANALYSIS ================================================================================ Item 3. Quantitative and Qualitative Disclosure About Market Risk (continued) Based on the gap model, the Company's one year cumulative gap is liability sensitive, which would benefit the Company in a declining rate environment. Based on low interest rates, management has taken steps to guard against rising interest rates. Management has been offering fixed rate mortgage loans to be sold on the secondary market. Historically, the Company originated all mortgage loans to be held in its own portfolio. Furthermore, management has extended the average maturity of its funding sources by offering longer term certificates of deposit and borrowing wholesale funds for longer time periods. The result of the above strategies that were implemented starting last year is less exposure to interest rate risk. Part II - Other Information Item 1 - Legal Proceedings - -------------------------- None Item 2 - Changes in Securities and Use of Proceeds - -------------------------------------------------- None Item 3 - Defaults Upon Senior Securities - ---------------------------------------- None Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None Item 5 - Other Information - -------------------------- None Item 6 - Exhibits and Reports on Form 8-K - ------------------------------------------ B. The Company filed a report on Form 8-K dated January 18, 2002 related to the issuance of a news release announcing its earnings for the fourth quarter and year-to-date periods ending December 31, 2001. The Company filed a report on Form 8-K dated February 4, 2002 related to the approval of extending its Treasury Stock Repurchase Program to February 10, 2003 from February 10, 2002. The extension authorizes the repurchase of up to 175,000 shares, of which the Company had over 45,000 shares remaining at April 30, 2002. OHIO VALLEY BANC CORP. ------------------------------------------- Date May 14, 2002 /s/ Jeffrey E. Smith ------------------- ------------------------------------------- Jeffrey E. Smith President and Chief Executive Officer Date May 14, 2002 /s/ Larry E. Miller, II ------------------- ------------------------------------------- Larry E. Miller, II Senior Vice President and Treasurer ================================================================================ 15