UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 30, 2005 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 0-20914 ------- OHIO VALLEY BANC CORP ---------------------- (Exact name of Registrant as specified in its charter) Ohio ------------------------------------------- (State or other jurisdiction of incorporation or organization) 31-1359191 ---------- (I.R.S. Employer Identification Number) 420 Third Avenue, Gallipolis, Ohio 45631 ---------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 446-2631 Not Applicable ------------------------ Former name, former address and formal fiscal year, if changed since last report Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). X Yes No The number of common shares of the registrant outstanding as of July 31, 2005 was 4,277,389.
OHIO VALLEY BANC CORP FORM 10-Q QUARTER ENDED JUNE 30, 2005 ================================================================================ PART I - FINANCIAL INFORMATION 3 Item 1 - Financial Statements (Unaudited) 3 Consolidated Balance Sheets 3 Consolidated Statements Of Income 4 Condensed Consolidated Statements of Changes in Shareholders' Equity 5 Condensed Consolidated Statements of Cash Flows 6 Notes to the Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 - Quantitative and Qualitative Disclosure About Market Risk 21 Item 4 - Controls and Procedures 21 PART II - OTHER INFORMATION 22 Item 1 - Legal Proceedings 22 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 22 Item 3 - Defaults Upon Senior Securities 23 Item 4 - Submission of Matters to a Vote of Security Holders 23 Item 5 - Other Information 23 Item 6 - Exhibits 24 SIGNATURES 25 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OHIO VALLEY BANC CORP CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands, except share and per share data) ================================================================================ June 30, December 31, 2005 2004 ------------ ------------ ASSETS Cash and cash equivalents $ 16,271 $ 16,279 Interest-bearing deposits in other banks 531 525 Securities available-for-sale 72,908 74,155 Securities held-to-maturity (estimated fair value: 2005 - $11,851; 2004 - $12,534) 11,349 11,994 Total loans 594,304 600,574 Less: Allowance for loan losses (6,863) (7,177) ------------ ------------ Net loans 587,441 593,397 Premises and equipment, net 8,791 8,860 Accrued income receivable 2,724 2,643 Goodwill 1,267 1,267 Bank owned life insurance 14,218 13,988 Other assets 6,234 6,012 ------------ ------------ Total assets $ 721,734 $ 729,120 ============ ============ LIABILITIES Noninterest-bearing deposits $ 66,145 $ 69,936 Interest-bearing deposits 463,121 465,217 ------------ ------------ Total deposits 529,266 535,153 Securities sold under agreements to repurchase 26,485 39,753 Other borrowed funds 84,900 76,550 Subordinated debentures 13,500 13,500 Accrued liabilities 9,542 7,585 ----------- ------------ Total liabilities 663,693 672,541 ----------- ------------ SHAREHOLDERS' EQUITY Common stock ($1.00 par value per share, 10,000,000 shares authorized; 2005 - 4,611,860 shares issued, 2004 - 3,689,828 shares issued) 4,612 3,690 Additional paid-in capital 31,931 31,931 Retained earnings 29,560 28,465 Accumulated other comprehensive loss (428) (219) Treasury stock, at cost (2005 - 334,471; 2004 - 258,970 shares) (7,634) (7,288) ----------- ------------ Total shareholders' equity 58,041 56,579 ----------- ------------ Total liabilities and shareholders' equity $ 721,734 $ 729,120 =========== ============ ================================================================================ See notes to consolidated financial statements. 3
OHIO VALLEY BANC CORP CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data) ================================================================================ Three months ended Six months ended June 30, June 30, 2005 2004 2005 2004 --------- --------- --------- --------- Interest and dividend income: Loans, including fees $ 10,245 $ 9,798 $ 20,326 $ 19,757 Securities Taxable 657 700 1,339 1,434 Tax exempt 119 139 242 284 Dividends 67 52 127 104 Other Interest 27 33 33 35 --------- --------- --------- --------- 11,115 10,722 22,067 21,614 Interest expense: Deposits 3,084 2,813 5,942 5,554 Securities sold under agreements to repurchase 132 49 243 91 Other borrowed funds 828 879 1,710 1,830 Subordinated debentures 277 234 541 469 --------- --------- --------- --------- 4,321 3,975 8,436 7,944 --------- --------- --------- --------- Net interest income 6,794 6,747 13,631 13,670 Provision for loan losses 330 373 648 1,141 --------- --------- --------- --------- Net interest income after provision for loan losses 6,464 6,374 12,983 12,529 Noninterest income: Service charges on deposit accounts 810 839 1,515 1,598 Trust fees 53 54 107 106 Income from bank owned insurance 144 148 292 311 Gain on sale of loans 28 3 56 10 Gain on sale of ProCentury Corp. -- 2,463 -- 2,463 Other 382 298 700 623 --------- --------- --------- --------- 1,417 3,805 2,670 5,111 Noninterest expense: Salaries and employee benefits 3,143 3,080 6,325 6,120 Occupancy 317 322 651 651 Furniture and equipment 296 318 592 601 Data processing 168 182 331 360 Other 1,410 1,444 2,919 2,802 --------- --------- --------- --------- 5,334 5,346 10,818 10,534 --------- --------- --------- --------- Income before income taxes 2,547 4,833 4,835 7,106 Provision for income taxes 814 1,581 1,532 2,289 --------- --------- --------- --------- NET INCOME $ 1,733 $ 3,252 $ 3,303 $ 4,817 ========= ========= ========= ========= Earnings per share $ 0.40 $ 0.75 $ .77 $ 1.11 ========= ========= ========= ========= ================================================================================ See notes to consolidated financial statements 4
OHIO VALLEY BANC CORP CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands, except share and per share data) ================================================================================ Three months ended Six months ended June 30, June 30, 2005 2004 2005 2004 --------- --------- --------- --------- Balance at beginning of period $ 56,927 $ 54,476 $ 56,579 $ 54,408 Comprehensive income: Net income 1,733 3,252 3,303 4,817 Change in unrealized gain (loss) on available-for-sale securities 546 (1,621) (318) (1,512) Income tax effect (186) 551 108 514 --------- --------- --------- --------- Total comprehensive income 2,093 2,182 3,093 3,819 Proceeds from issuance of common stock through dividend reinvestment plan --- 242 --- 505 Cash paid in lieu of fractional shares in stock split (12) --- (12) --- Cash dividends (686) (659) (1,338) (1,288) Shares acquired for treasury (281) (203) (281) (1,406) --------- --------- --------- --------- Balance at end of period $ 58,041 $ 56,038 $ 58,041 $ 56,038 ========= ========= ========= ========= Cash dividends per share $ 0.16 $ 0.15 $ 0.31 $ 0.29 ========= ========= ========= ========= Shares from stock split, 25% Common stock 922,030 --- 922,030 --- ========= ========= ========= ========= Treasury stock 64,742 --- 64,742 --- ========= ========= ========= ========= Shares from common stock issued through dividend reinvestment plan 1 6,958 2 16,102 ========= ========= ========= ========= Shares acquired for treasury 10,759 5,890 10,759 46,374 ========= ========= ========= ========= ================================================================================ See notes to the consolidated financial statements. 5
OHIO VALLEY BANC CORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands, except per share data) ================================================================================ Six months ended June 30, 2005 2004 ------------ ------------ Net cash from operating activities: $ 6,040 $ 10,748 Investing activities: Proceeds from maturities of securities available-for-sale 12,023 15,754 Purchases of securities available- for-sale (11,029) (11,077) Proceeds from maturities of securities held-to-maturity 639 824 Purchases of securities held-to-maturity --- (1,056) Change in interest-bearing deposits in other banks (6) (396) Net change in loans 5,360 (18,726) Proceeds from sale of other real estate owned (100) (163) Purchases of premises and equipment (499) (549) ------------ ------------ Net cash from (used) in investing activities 6,388 (15,389) Financing activities: Change in deposits (5,887) 32,149 Cash dividends (1,338) (1,288) Cash paid in lieu of fractional shares in stock split (12) --- Proceeds from issuance of common stock --- 505 Purchases of treasury stock (281) (1,406) Change in securities sold under agreements to repurchase (13,268) (3,239) Proceeds from long-term borrowings 5,521 3,000 Repayment of long-term borrowings (9,403) (12,958) Change in other short-term borrowings 12,232 (13,233) ------------ ------------ Net cash from (used) in financing activities (12,436) 3,530 ------------ ------------ Change in cash and cash equivalents (8) (1,111) Cash and cash equivalents at beginning of period 16,279 17,753 ------------ ------------ Cash and cash equivalents at end of period $ 16,271 $ 16,642 ============ ============ SUPPLEMENTAL DISCLOSURE - ----------------------- Cash paid for interest $ 7,933 $ 7,995 Cash paid for income taxes 1,835 1,837 Non-cash tranfers from loans to other real estate owned 60 174 ================================================================================ See notes to consolidated financial statements. 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) ================================================================================ NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. (the "Company") and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the "Bank"), Loan Central, Inc., a consumer finance company, and Ohio Valley Financial Services Agency, LLC, an insurance agency. All material intercompany accounts and transactions have been eliminated in consolidation. These interim financial statements are prepared without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at June 30, 2005, and its results of operations and cash flows for the periods presented. The results of operations for the six months ending June 30, 2005 are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2005. The accompanying consolidated financial statements do not purport to contain all the necessary financial disclosures required by accounting principles generally accepted in the United States of America (US GAAP) that might otherwise be necessary in the circumstances. The Annual Report of the Company for the year ended December 31, 2004 contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements. The accounting and reporting policies followed by the Company conform to US GAAP. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses is particularly subject to change. The majority of the Company's income is derived from commercial and retail lending activities. Management considers the Company to operate in one segment, banking. INCOME TAX Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. CASH FLOW For consolidated financial statement classification and cash flow reporting purposes, cash and cash equivalents include cash on hand, noninterest-bearing deposits with banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The Company reports net cash flows for customer loan transactions, deposit transactions, short-term borrowings and interest-bearing deposits with other financial institutions. ================================================================================ 7
EARNINGS PER SHARE Earnings per share is computed based on the weighted average shares outstanding during the period. Weighted average shares outstanding were 4,287,619 and 4,336,053 for the three months ending June 30, 2005 and 2004, respectively. Weighted average shares outstanding were 4,288,093 and 4,355,750 for the six months ending June 30, 2005 and 2004, respectively. STOCK SPLITS On April 13, 2005, the Company's Board of Directors declared a five-for-four stock split, effected in the form of a stock dividend, on the shares of the Company's common stock. Each shareholder of record on April 25, 2005, received an additional share of common stock for every four shares of common stock then held. The stock was issued on May 10, 2005. The stock split was recorded by transferring from retained earnings an amount equal to the stated value of the shares issued. The Company retained the current par value of $1.00 per share for all shares of common stock. Earnings and cash dividends per share amounts have been retroactively adjusted to reflect the effect of the stock split. LOANS Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income on loans is reported on an accrual basis using the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income on loans is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Loan losses are charged against the allowance when management confirms that a loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. ================================================================================ 8
ACCOUNTING PRONOUNCEMENTS In March 2004, the Financial Accounting Standards Board ("FASB") ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1"). The basic model developed to evaluate whether an investment within scope of EITF 03-1 is other-than-temporarily impaired involves a three-step process including determining whether an investment is impaired (fair value less amortized cost), evaluating whether the impairment is other-than-temporary and, if other-than-temporary, requiring recognition of an impairment equal to the difference between the investment's cost and fair value. In September 2004, the FASB issued Staff Position ("FSP") No. 03-1-1 which delayed the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1. The delay of the effective date for paragraphs 10-20 will be superseded concurrent with the final issuance of proposed FSP EITF Issue 03-1-a, "Implication Guidance for the Application of Paragraph 16 of EITF 03-1, 'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.'" The amount of other-than-temporary impairment to be recognized, if any, will be dependent on market conditions, management's intent and ability to hold investments until a forecasted recovery, and the finalization of this proposed guidance by the FASB. To date, this guidance has not had a material impact on the Company's financial condition, results of operations, or cash flows. In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued AICPA Statement of Position No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"), to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 only applies to loans and debt securities purchased or acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for loan and lease losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004. This guidance has not had a material impact on the Company's financial condition, results of operations, or cash flows. NOTE 2 - LOANS Total loans as presented on the balance sheet are comprised of the following classifications: June 30, December 31, 2005 2004 ---------------- ---------------- Real estate loans $ 226,708 $ 227,234 Commercial and industrial loans 220,947 226,058 Consumer loans 146,413 146,965 Other loans 236 317 ---------------- ---------------- $ 594,304 $ 600,574 ================ ================ At June 30, 2005 and December 31, 2004, loans on nonaccrual status were approximately $1,582 and $1,618, respectively. Loans past due more than 90 days and still accruing at June 30, 2005 and December 31, 2004 were $1,242 and $1,402, respectively. ================================================================================ 9
NOTE 3 - ALLOWANCE FOR LOAN LOSSES Following is an analysis of changes in the allowance for loan losses for the six months ended June 30: 2005 2004 ---------------- ---------------- Balance - January 1, $ 7,177 $ 7,593 Loans charged off: Real estate 259 414 Commercial 1,127 1,059 Consumer 1,038 963 ---------------- ---------------- Total loans charged off 2,424 2,436 Recoveries of loans: Real estate 214 209 Commercial 784 138 Consumer 464 492 ---------------- ---------------- Total recoveries 1,462 839 ---------------- ---------------- Net loan charge-offs (962) (1,597) Provision charged to operations 648 1,141 ---------------- ---------------- Balance - June 30, $ 6,863 $ 7,137 ================ ================ Information regarding impaired loans is as follows: June 30, December 31, 2005 2004 -------------- --------------- Balance of impaired loans $ 5,056 $ 5,573 ============== =============== Less portion for which no specific allowance is allocated $ 490 $ 619 ============== =============== Portion of impaired loan balance for which a specific allowance for credit losses is allocated $ 4,566 $ 4,954 ============== =============== Portion of allowance for loan losses specifically allocated for the impaired loan balance $ 1,932 $ 1,986 ============== =============== Average investment in impaired loans year-to-date $ 5,292 $ 5,711 ============== =============== Interest on impaired loans was not material for the six-month periods ended June 30, 2005 and 2004. NOTE 4 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company, through its subsidiaries, grants residential, consumer, and commercial loans to customers located primarily in the central and southeastern areas of Ohio as well as the western counties of West Virginia. Approximately 3.27% of total loans were unsecured at June 30, 2005 as compared to 3.36% at December 31, 2004. ================================================================================ 10
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit, standby letters of credit and financial guarantees. The contract amounts of these instruments are not included in the consolidated financial statements. At June 30, 2005, the contract amounts of these instruments totaled approximately $60,127 as compared to $61,667 at December 31, 2004. Since many of these instruments are expected to expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. NOTE 5 - OTHER BORROWED FUNDS Other borrowed funds at June 30, 2005 and December 31, 2004 are comprised of advances from the Federal Home Loan Bank (FHLB) of Cincinnati, promissory notes and Federal Reserve Bank (FRB) Notes. FHLB Borrowings Promissory Notes FRB Notes Totals --------------- ---------------- --------- ---------- 2005 $ 74,764 $ 7,478 $ 2,658 $ 84,900 2004 $ 67,222 $ 5,355 $ 3,973 $ 76,550 Pursuant to collateral agreements with the FHLB, advances are secured by $204,356 in qualifying first mortgage loans and $5,548 in FHLB stock at June 30, 2005. Fixed rate FHLB advances of $63,139 mature through 2010 and have interest rates ranging from 2.54% to 6.62%. In addition, variable rate FHLB borrowings totaling $11,625 mature in 2005 with an interest rate of 3.53%. At June 30, 2005, the Company had a cash management line of credit enabling it to borrow up to $35,000 from the FHLB. All cash management advances have an original maturity of 90 days. The line of credit must be renewed on an annual basis. At June 30, 2005, $23,375 was available on this line of credit. Based on the Company's current FHLB stock ownership, total assets and pledgeable residential first mortgage loans, the Company had the ability to obtain borrowings from the FHLB up to a maximum of $151,375 at June 30, 2005. Promissory notes, issued primarily by the Company, have fixed rates of 2.40% to 4.50% and are due at various dates through a final maturity date of December 13, 2006. FRB notes consist of the collection of tax payments from Bank customers under the Treasury Tax and Loan program. These funds have a variable interest rate and are callable on demand by the U.S. Treasury. At June 30, 2005, the interest rate for the Company's FRB notes was 2.91%. Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $30,500 at June 30, 2005 and $29,500 at December 31, 2004. Various investment securites from the Bank used to collateralize FRB notes totaled $6,070 at June 30, 2005 and $6,060 at December 31, 2004. ================================================================================ 11
At June 30, 2005, scheduled principal payments through December 31 over the next five years are as follows: FHLB Borrowings Promissory Notes FRB Notes Totals --------------- ---------------- --------- ---------- 2005 $ 20,422 $ 5,721 $ 2,658 $ 28,801 2006 22,107 1,757 ---- 23,864 2007 8,061 ---- ---- 8,061 2008 14,010 ---- ---- 14,010 2009 3,007 ---- ---- 3,007 Thereafter 7,157 ---- ---- 7,157 ---------------- ---------------- ---------- ---------- $ 74,764 $ 7,478 $ 2,658 $ 84,900 ================ ================ ========== ========== NOTE 6 - GAIN ON SALE OF PROCENTURY On April 26, 2004, the Company sold 450,000 common shares of ProCentury Corp. ("ProCentury"), a Columbus-based property and casualty insurer, which represented 9% of ProCentury's outstanding common stock. The transaction was completed as part of ProCentury's initial public offering. The sale of stock, which represented 100% of the Company's ownership in ProCentury, resulted in a pre-tax gain of $2,463 and an after-tax gain of $1,625 ($.38 cents per share). The Company's investment in ProCentury was made in October of 2000 to allow for more diversification of operations by becoming part of a property and casualty insurance underwriter. The Company decided to liquidate its investment in 2004 to utilize the cash proceeds to enhance the Company's core business of banking through branch renovations and expansion. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in thousands, except share and per share data) The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries at June 30, 2005, compared to December 31, 2004, and the consolidated results of operations for the quarterly and year-to-date periods ending June 30, 2005 compared to the same periods in 2004. The purpose of this discussion is to provide the reader a more thorough understanding of the consolidated financial statements. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10-Q. The Company's Board of Directors approved a five-for-four stock split on April 13, 2005. The additional common shares resulting from the stock split were distributed on May 10, 2005 to stockholders of record as of April 25, 2005. The consolidated financial statements, notes and references to share and per share data have been retroactively restated for the stock split. Comparison of Financial Condition at June 30, 2005 and December 31, 2004 -------------------------------------- Introduction The consolidated total assets of the Company decreased $7,386 or 1.0% during the first six months of 2005 to finish at $721,734. This decrease in assets was primarily due to a decrease in the Company's loan portfolio and available-for-sale securities, which are down $6,270 and $1,247, respectively, 12
from year-end 2004. The excess funds available as a result of declining loan balances were used to support the decline in the Company's securities sold under agreements to repurchase ("repurchase agreements"), which decreased by $13,268 from year-end 2004. In addition, other borrowed funds increased $8,350 during the first six months of 2005. Cash and Cash Equivalents The Company's cash and cash equivalents consist of cash and balances due from banks and federal funds sold. The amounts of cash and cash equivalents fluctuate on a daily basis due to customer activity and liquidity needs. At June 30, 2005, cash and cash equivalents were relatively unchanged at $16,271 as compared to $16,279 at December 31, 2004. Management believes that the current balance of cash and cash equivalents remains at a level that will meet cash obligations and provide adequate liquidity. Further information regarding the Company's liquidity can be found under the caption "Liquidity" in this management's discussion and analysis. Securities During the first six months of 2005, investment securities decreased $1,892 or 2.2% driven by a decrease in U.S. government agency securities of $1,602 or 8.0% as compared to year-end 2004. The Company's demand for U.S. government agency securities has primarily been to satisfy pledging requirements for repurchase agreements and public fund deposits. In this first half of 2005, the Company's repurchase agreements have decreased 33.4%, lowering the need to secure these balances and producing the slight runoff in U.S. government agency securities. While the Company's focus is to generate interest revenue primarily though loan growth, management will continue to invest excess funds in securities when opportunities arise. Mortgage-backed securities continue to make up the largest portion of the Company's investment portfolio, totaling $48,953, or 58.1% of total investments at June 30, 2005. Mortgage-backed securities provide increased cash flows due to the more rapid repayment of principal as compared to other investment security types which deliver proceeds upon maturity or call date. Loans During the first six months of 2005, total loans were down $6,270 or 1.0% from year-end 2004, due to economic factors and lower loan demand. Loan demand has steadily improved since the first quarter period of 2005 when balances were down $10,601 or 1.8% from year-end 2004. Total loan declines were led by commercial loans, which were down $5,111 or 2.3% from year-end 2004 to finish at $220,947. While the general demand for commercial loan opportunities has declined in this first half of 2005, the Company also experienced several loan payoffs from commercial business customers in the first quarter due to the challenged economy, especially in Ohio. The primary market areas for the Company's commercial loans are in the areas of Gallia, Jackson and Franklin counties in Ohio, which accounted for 47.6% of total originations for the first half of 2005 and the growing West Virginia markets, which accounted for 19.9% of total originations for the same time period. Commercial loan volume in the second half of 2005 will continue to be dependent upon economic conditions as well as general demand for loans in the Company's market area. During the first six months of 2005, total real estate loans were relatively stable, decreasing $526 or 0.2% from year-end 2004 to finish at $226,708, an improvement from the first three months of 2005 when real estate loans were down $3,734 or 1.6% from year-end 2004. The reduction in loans was mostly impacted by the Company's fixed rate real estate loans, which decreased $3,691 or 3.2% for the six-month period ending June 30, 2005. While the economy continues to experience a rising rate environment resulting in several short-term rate 13
increases since June 2004, long-term rates have not been as responsive, remaining at a flat to declining level. As a result, the Company has sold over $2,000 in 30 year fixed rate mortgages to the secondary market during the first half of 2005. Furthermore, the high volume of refinancings in 2003 and a portion of 2004 at historical low interest rates have reduced consumer demand for fixed rate real estate loans during the first half of 2005. However, since the seasonally low volume period of the first quarter, loan demand has steadily increased in the second quarter of 2005, prompting growth in the Company's one year adjustable rate loans which are up $5,063 or 6.3% from year-end 2004. The remaining real estate loan portfolio decrease came from the Company's other variable rate real estate loan products. During the first six months of 2005, consumer loans also were relatively stable, decreasing $552 or 0.4% from year-end 2004 to finish at $146,413, an improvement from the first three months of 2005 when consumer loans were down $2,227 or 1.5% from year-end 2004. Consumer loan decreases were led by automobile loans, both direct and indirect, which were down $4,126 or 5.3% from year-end 2004. While the automobile lending segment continues to represent the largest portion of the Company's consumer loan portfolio, economic factors and a rising rate environment have had an impact on the recent declining loan volume within this area. The Company was under a sustained low rate environment for 2003 and much of 2004, which created better pricing opportunities for customers and, in turn, yielded additional consumer demand for automobile loans during this period. As rates have been aggressively moving up, continued competition with alternative methods of financing, such as captive finance companies which continue to offer 0% interest rate loans, has challenged automobile loan growth during the first half of 2005. The decrease in automobile loans was partially offset by an increase in the demand for mobile home loans which were up $1,755 or 21.7%. The increase came primarily from the growing Cabell County market of West Virginia. While total loan balances are currently down, the Company remains committed to sound underwriting practices without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the portfolio. With steady improvements continuing in loan demand throughout second quarter, management is more optimistic regarding future loan growth. Allowance for Loan Losses During the first six months of 2005, the Company experienced a $635 or 39.8% decrease in net charge offs as compared to the same period in 2004, mostly from increased collection efforts within the commercial loan portfolio. Furthermore, the Company's nonperforming loan balance continues to remain relatively stable, ending at $2,824 as of June 30, 2005 as compared to $3,020 at year-end 2004 and $2,477 at June 30, 2004, which emphasizes management's continued focus on asset quality. The Company's ratio of nonperforming loans as a percentage of total loans was .48% at June 30, 2005 as compared to .50% at year-end 2004 and .42% at June 30, 2004. Due to stable asset quality impacted by sound underwriting practices and lower portfolio risk, the ratio of allowance for loan losses to total loans decreased to 1.15% at June 30, 2005 as compared to 1.21% at June 30, 2004. Management believes that the allowance for loan losses is reflective of probable incurred losses in the loan portfolio. Deposits During the first six months of 2005, total deposits were down $5,887 or 1.1% from year-end 2004, primarily due to decreases in time deposits and noninterest bearing demand deposits. Time deposits decreased $6,333 or 2.1% from year-end 2004 largely due to the maturity of one large commercial CD of over $6,000 in the first quarter of 2005 as well as a decrease in the Company's brokered CD and network CD issuances of $3,956 or 6.4% from year-end 2004. As interest rates continue to rise, wholesale funding rates from brokered and network CD deposits are increasing at a faster pace than retail rates on CD deposits. This has 14
prompted a shift in emphasis back to retail funding which has caused an increase in traditional CD deposits of $3,811 or 1.9% over year-end 2004, partially offsetting the declines in wholesale funding. This shift back to more traditional funding also generated an increase in the Company's interest bearing demand deposits, which were up $4,237 or 2.7% during the first six months of 2005. This increase was largely from the Company's Gold Club - NOW account, which was up $2,944 or 5.44% from year-end 2004, in large part to a special rate offering for new Gold Club accounts that began in June 2005. The Gold Club product offers customers a NOW account combined with other banking benefits that include a higher interest rate, unlimited check writing and free services and discounts. The Company's interest-free funding source, noninterest bearing demand deposits, decreased $3,791 or 5.4% during the first six months of 2005. This decrease occurred mostly in business checking account balances, which were down $3,603 or 9.2% compared to year-end 2004. Securities Sold Under Agreements to Repurchase Repurchase agreements, which are financing arrangements that have overnight maturity terms, were down $13,268 or 33.4% from year-end 2004. This decline was mostly due to typical seasonal fluctuations of two commercial accounts in the first quarter of 2005. Other Borrowed Funds Other borrowed funds are primarily advances from the FHLB, which are used to fund loan growth and short-term liquidity needs. During the first six months of 2005, other borrowed funds were up $8,350 or 10.9% from December 31, 2004 primarily due to short-term FHLB advances which were up $11,425. Shareholders' Equity Total shareholders' equity at June 30, 2005 of $58,041 was up by $1,462 as compared to the balance of $56,579 on December 31, 2004. Contributing most to this increase was year-to-date net income of $3,303 less cash dividends paid of $1,338, or $.31 per share year-to-date, adjusted for the five-for-four stock split in May 2005. Management's decision to effect a five-for-four stock split was generated by a desire to make the Company's common stock more accessible to smaller investors. Partially offsetting the growth in capital was an increase in the amount of treasury stock repurchases. The Company had treasury stock totaling $7,634 at June 30, 2005, an increase of $346 as compared to the total at year-end 2004. The Company anticipates repurchasing additional common shares from time to time as authorized by its stock repurchase program. Most recently, the Company's Board of Directors authorized the repurchase of up to 175,000 shares of the Company's common stock through open market and privately negotiated purchases between August 16, 2005 and February 16, 2006. Further offsetting the growth in capital was a decrease in the market value of available-for-sale securities held by the Company, which lowered shareholders' equity by $210, net of deferred income taxes. At June 30, 2005, the Company had an unrealized loss, net of deferred income taxes, of $428 as compared to an unrealized loss, net of deferred income taxes, of $219 at December 31, 2004. The Company has approximately 86.5% of its securities classified as available-for-sale. As a result, the securities and shareholders' equity sections of the Company's balance sheet are more sensitive to the changing market values of securities than if the securities were classified as held-to-maturity. 15
Comparison of Results of Operations for the Quarter and Year-To-Date Periods Ended June 30, 2005 and 2004 ---------------------------- For the three months ended June 30, 2005, net income totaled $1,733, down $1,519 or 46.7% from the $3,252 reported a year ago. For the six months ended June 30, 2005, net income totaled $3,303, down $1,514 or 31.4% from the $4,817 earned a year ago. Comparing June 30, 2005 to June 30, 2004, the annualized year-to-date return on assets decreased from 1.35% to 0.93%, while return on equity decreased from 17.57% to 11.71%. Second quarter 2005 earnings per share was $.40, down 46.7% from last year's $.75 second quarter earnings per share. During the first six months of 2005, earnings per share was $.77, down 30.6% from last year's $1.11 per share. The quarterly and year-to-date decreases in net income and earnings per share were due to the previously disclosed sale of the Company's interest in ProCentury, a Columbus-based property and casualty insurer, which resulted in an after-tax gain of $1,625 or $.38 per share in the second quarter of 2004. For additional information on 2004's ProCentury transaction, please refer to Note 6 of the Company's consolidated financial statements under the caption "Gain on Sale of ProCentury" located on page 12 of this Form 10-Q. Continued improvements in the Company's asset quality generated positive gains to income by lowering provision expense $43 and $493, respectively, for the quarterly and year-to-date periods of 2005 as compared to 2004, respectively. Net Interest Income For the second quarter of 2005, net interest income was up $47 or 0.7% as compared to the second quarter of 2004. Through the first six months of 2005, net interest income was down $39 or .3% as compared to the same period in 2004. The stability of both the quarterly and year-to-date changes to net interest income were primarily due to the improvement in net interest margin due to the rising rate environment with significant increases in short-term rates over the past year. Total interest income increased $393 or 3.7% for the second quarter of 2005 and increased $453 or 2.1% through the first six months of 2005 as compared to the same periods in 2004. Growth in 2005's year-to-date average earning assets of $2,971 or 0.4% as compared to the same period in 2004 was complemented with a 12 basis point increase in asset yields, growing from 6.49% to 6.61% for the same time period. This growth in asset yields can be attributed to the rising rate environment that has generated consistent increases in short-term interest rates since June 2004. The increase in short-term interest rates was most sensitive to the Company's commercial loan portfolio, with loan yields up 40 basis points from 6.07% at June 2004 to 6.47% at June 2005. With short-term rates on the rise, long-term interest rates continue to remain flat to declining, causing the Company's real estate and consumer loan portfolio yields to remain below 2004 levels. Total interest expense increased $346 or 8.7% for the second quarter of 2005 and increased $492 or 6.2% through the first six months of 2005 as compared to the same periods in 2004. The increase came mostly from interest expense incurred on the Bank's NOW account and CD deposits which have been more responsive to the rising rate environment experienced in the first half of 2005. As a result of this continued rise in rates, the Bank's average funding costs have increased 14 basis points from June 2004. The Company's net interest margin through the first six months of 2005 has decreased to 4.10% from 4.12% in the same period of 2004. While the Company's net interest margin is below a year ago, the Federal Reserve's actions to increase interest rates have allowed loan yields to stabilize and take some pressure off of the net interest margin. This is evident with the improvement of the Company's net interest margin in the second quarter of 2005 where it finished at 4.07%, an increase of 6 basis points over the same time period in 2004. 16
Since many of the Company's loans are variable-rate, the anticipated increases in rates for 2005 should result in higher interest income for the Company in the near term. However, deposit customers will similarly expect higher rates of interest on their accounts that could potentially offset some of this benefit of rising interest rates. For additional discussion on the Company's rate sensitive assets and liabilities, please see Item 3, Quantitative and Qualitative Disclosure About Market Risk on page 21 of this Form 10-Q. Provision Expense The Company's provision expense was relatively stable in the second quarter of 2005, finishing at $330, a decrease of $43 or 11.5% as compared to the same time period in 2004. The Company's provision expense finished at $648 through the first six months of 2005, down $493 or 43.2% as compared to the same period in 2004. These continued benefits of lower provision expense are directionally consistent with the Company's strong asset quality numbers and lower net charge-offs. Through the first six months of 2005, the ratio of the Company's nonperforming loans to total loans stood at 0.48% as compared to 0.42% at June 30, 2004. The combination of stable nonperforming loans, declining net charge offs and improved asset quality had a direct effect on the lower amounts of provision expense that were recorded to the allowance for loan losses in 2005 as compared to 2004. Future provisions to the allowance for loan losses will continue to be based on the quarterly evaluation that is discussed further in detail under the caption "Critical Accounting Policies - Allowance for Loan Losses" on page 19 of this Form 10-Q. Noninterest Income Total noninterest income decreased $2,388 or 62.8% for the second quarter in 2005 and decreased $2,441 or 47.8% through the first six months of 2005 as compared to the same periods in 2004. The declines in both periods were due to the previously disclosed sale of the Company's interest in ProCentury, a Columbus-based property and casualty insurer, on April 26, 2004. The sale of stock ownership in ProCentury, which was part of an initial public offering, resulted in gross income of $2,463 recognized in 2004. For additional information on the ProCentury transaction, please refer to Note 6 of the Company's consolidated financial statements under the caption "Gain on Sale of ProCentury" located on page 12 of this Form 10-Q. Excluding the impact from ProCentury, noninterest income would have been up $75 in the second quarter of 2005 and up $22 through the first six months of 2005 as compared to the same periods in 2004. Impacting the increases for both periods was growth in the Company's debit and credit card interchange income which was up $17 and $51, respectively, for the quarterly and year-to-date periods of 2005 as compared to the same periods in 2004. Further enhancing noninterest income was growth in the Company's gain on sale of secondary market real estate loans which were up $25 and $46, respectively, for the quarterly and year-to-date periods of 2005 as compared to the same periods in 2004. Partially offsetting these positive growth trends in noninterest income was a decrease in service charges on deposit accounts, down $29 and $83, respectively, for the quarterly and year-to-date periods of 2005 as compared to the same periods in 2004. The decrease was largely associated with less overdraft fee volume in 2005. Furthermore, checking account balances have decreased $5,031 since year-end 2004 and are down $2,313 as compared to June 30, 2004. Noninterest Expense Total noninterest expense in the second quarter of 2005 was mostly level with the noninterest expenses for the second quarter of 2004, decreasing just $12 or 0.2%. The Company's noninterest expense was up $284 or 2.7% for the six months ending 2005 as compared to the same period in 2004. Contributing most to the quarterly and year-to-date results were salaries and employee benefits, the Company's largest noninterest expense item, which increased $63 or 2.0% for the second quarter of 2005 and $205 or 3.4% for the first six months of 2005 as compared to the same periods in 2004. This increase was related to the rising 17
cost of medical insurance, benefit plans and annual merit increases. The Company's full-time equivalent employee base of 273 employees at June 30, 2005 was mostly unchanged from the 272 employees at June 30, 2004. Occupancy, furniture and equipment costs provided a benefit to noninterest expenses, decreasing $27 in the second quarter of 2005 and $9 for the first six months of 2005 as compared to the same periods in 2004. This was in large part due to the maturities of depreciation terms on several asset acquisitions from previous years. Data processing expenses also decreased $14 in the second quarter of 2005 and $29 in the first six months of 2005 as compared to the same periods in 2004 as a result of lower monthly processing fees on debit cards that were negotiated in 2004. The Company's other noninterest expenses decreased $34 in the second quarter of 2005 but increased $117 during the first six months of 2005 as compared to the same periods in 2004. The quarterly decrease was impacted mostly by lower monthly cash letter service fees that were negotiated going into 2005. The year-to-date increase in other noninterest expense is related to the significant growth in accounting fees which are up $151 from 2004 as a result of higher exam and audit fees associated with the new regulatory reporting environment under Section 404 of the Sarbanes-Oxley Act of 2002. Capital Resources All of the capital ratio's exceeded the regulatory minimum guidelines as identified in the following table: Company Ratios Regulatory Well 6/30/05 12/31/04 Minimum Capitalized ------- -------- ----------- ----------- Tier 1 risk-based capital 12.5% 12.1% 4.00% 6.0% Total risk-based capital ratio 13.7% 13.3% 8.00% 10.0% Leverage ratio 9.9% 9.4% 4.00% 5.0% Cash dividends paid of $686 for the second quarter of 2005 and $1,338 for the first six months of 2005 represent a 4.1% quarterly increase and a 3.9% year-to-date increase over the cash dividends paid during the same periods in 2004. The quarterly dividend rate increased from $0.15 per share in 2004 to $0.16 per share in 2005 which contributed to an increase in the Company's year-to-date dividend rate from $0.29 to $0.31 per share in 2005 as compared to the same period in 2004. The dividend rate has increased in proportion to the consistent growth in retained earnings. At June 30, 2005, approximately 80% of the Company's shareholders were enrolled in the Company's dividend reinvestment plan. As part of the Company's stock purchase program, management will continue to utilize reinvested dividends and voluntary cash, if necessary, to purchase shares on the open market to be redistributed through the dividend reinvestment plan. Liquidity Liquidity relates to the Bank's ability to meet the cash demands and credit needs of its customers and is provided by the ability to readily convert assets to cash and raise funds in the market place. Total cash and cash equivalents, interest-bearing deposits with banks, held-to-maturity securities maturing within one year and securities available-for-sale of $90,055 represented 12.5% of total assets at June 30, 2005. In addition, the FHLB offers advances to the Bank which further enhances the Bank's ability to meet liquidity demands. At June 30, 2005, the Bank could borrow an additional $46 million from the FHLB. The Company's cash and cash equivalents remained relatively unchanged for the six months ended June 30, 2005, experiencing a decrease of only $8. For further cash flow information, see the condensed consolidated statement of cash flows on page 6 of this Form 10-Q. 18
Off-Balance Sheet Arrangements As discussed in Note 4 - "Concentrations of Credit Risk and Financial Instruments with Off-Balance Sheet Risk", the Company engages in certain off-balance sheet credit-related activities, including commitments to extend credit and standby letters of credit, which could require the Company to make cash payments in the event that specified future events occur. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. While off-balance sheet activities are necessary to meet the financing needs of the Company's customers, many of these commitments are expected to expire without being drawn upon; therefore, the total amount of commitments does not necessarily represent future cash requirements. Critical Accounting Policies The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the adequacy of the allowance for loan losses to be a critical accounting policy. Allowance for loan losses To arrive at the total dollars necessary to maintain an allowance level sufficient to absorb probable losses incurred at a specific financial statement date, management has developed procedures to establish and then evaluate the allowance once determined. The allowance consists of the following components: specific allocation, general allocation and other estimated general allocation. To arrive at the amount required for the specific allocation component, the Company evaluates loans for which a loss may be incurred either in part or whole. To achieve this task, the Company has created a quarterly report ("Watchlist") which lists the loans from each loan portfolio that management deems to be potential credit risks. The criteria to be placed on this report are: past due 60 or more days, nonaccrual and loans management has determined to be potential problem loans. These loans are reviewed and analyzed for potential loss by the Large Loan Review Committee which consists of the President of the Company and members of senior management with lending authority. The function of the Committee is to review and analyze large borrowers for credit risk, scrutinize the Watchlist and evaluate the adequacy of the allowance for loan losses and other credit related issues. The Committee has established a grading system to evaluate the credit risk of each commercial borrower on a scale of 1 (least risk) to 10 (greatest risk). After the Committee evaluates each relationship listed in the report, a specific loss allocation may be assessed. The specific allocation is currently made up of amounts allocated to the commercial loan portfolio. Included in the specific allocation are impaired loans, which consist of loans with balances of $200 or more on nonaccrual status or non-performing in nature. These loans are also individually analyzed and a specific allocation may be assessed based on expected credit loss. Collateral dependent loans will be evaluated to determine a fair value of the collateral securing the loan. Non-performing loan balances continue to decline from year-end 2004 (down 6%). Any changes in the impaired allocation will be reflected in the total specific allocation. The second component (general allowance) consists of the total loan portfolio 19
balances minus loan balances already reviewed (specific allocation). A quarterly large loan report is prepared to provide management with a "snapshot" of information on larger-balance loans (of $550 or greater), including loan grades, collateral values, etc. This tool allows management to monitor this group of borrowers. Therefore only small balance commercial loans and homogeneous loans (consumer and real estate loans) have not been specifically reviewed to determine minor delinquencies, current collateral values and present credit risk. The Company utilizes actual historic loss experience as a factor to calculate the probable losses for this component of the allowance for loan losses. This risk factor reflects an actual 1 year or 3 year performance evaluation of credit losses per loan portfolio, whichever is greater. The risk factor is achieved by taking the average net charge off per loan portfolio for the last 12 or 36 consecutive months, whichever is greater, and dividing it by the average loan balance for each loan portfolio over the same time period. The Company believes that by using the greater of the 12 or 36 month average loss risk factor, the estimated allowance will more accurately reflect current probable losses. The final component used to evaluate the adequacy of the allowance includes five additional areas that management believes can have an impact on collecting all principal due. These areas are: 1) delinquency trends, 2) current local economic conditions, 3) non-performing loan trends, 4) recovery vs. charge off, and 5) personnel changes. Each of these areas is given a percentage factor, from a low of 10% to a high of 30%, determined by the importance of the impact it may have on the allowance. After evaluating each area, an overall factor of 13% was determined for this reporting period. To calculate the impact of other economic conditions on the allowance, the total general allowance is multiplied by this factor. These dollars are then added to the other two components to provide for economic conditions in the Company's assessment area. The Company's assessment area takes in a total of ten counties in Ohio and West Virginia. Each assessment area has its individual economic conditions; however, the Company has chosen to average the risk factors for compiling the economic risk factor. The adequacy of the allowance may be determined by certain specific and nonspecific allocations; however, the total allocation is available for any credit losses that may impact the loan portfolios. Concentration of Credit Risk The Company maintains a diversified credit portfolio, with real estate loans currently comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in central and southeastern Ohio as well as western West Virginia. Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group. To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations. Forward Looking Statements Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as "believes," "anticipates," "expects," and similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control, which could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to: changes in political, economic or other factors such as inflation rates, recessionary or expansive trends, and taxes; competitive pressures; fluctuations in interest rates; the level of defaults and prepayment on loans; unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements as a result of unanticipated future events. 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company's goal for interest rate sensitivity management is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the Company's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability, but excessive levels of IRR can threaten the Company's earnings and capital. The Company evaluates IRR through the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The modeling process starts with a base case simulation, which assumes a flat interest rate scenario. The base case scenario is compared to rising and falling interest rate scenarios assuming a parallel shift in all interest rates. Comparisons of net interest income and net income fluctuations from the flat rate scenario illustrate the risks associated with the projected balance sheet structure. The Company's Asset/Liability Committee monitors and manages IRR within Board approved policy limits. The current IRR policy limits anticipated changes in net interest income over a 12 month horizon to plus or minus 10% of the base net interest income assuming a parallel rate shock of up 100, 200 and 300 basis points and down 100 basis points. Based on the current interest rate environment, management did not test interest rates down 200 and 300 basis points. The following table presents the Company's estimated net interest income sensitivity: June 30, 2005 December 31, 2004 Change in Interest Rates Percentage Change in Percentage Change in in Basis Points Net Interest Income Net Interest Income - ------------------------ -------------------- -------------------- +300 (1.35%) (1.07%) +200 (.27%) (.42%) +100 .09% (.11%) -100 .08% .35% The estimated change in net interest income reflects minimal interest rate risk exposure and is well within the policy guidelines established by the Board. At June 30, 2005, the Company's analysis of net interest income reflects a modest liability sensitive position. Based on current assumptions, an increase in interest rates in excess of 100 basis points would negatively impact net interest income. Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures With the participation of the President and Chief Executive Officer (the principal executive officer) and the Vice President and Chief Financial Officer (the principal financial officer) of the Company, the Company's management has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company's President and Chief Executive Officer and Vice President and Chief Financial Officer have concluded that: 21
o information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; o information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and o the Company's disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to the Company and its consolidated subsidiaries is made known to them, particularly during the period in which this Quarterly Report on Form 10-Q is being prepared. Changes in Internal Control Over Financial Reporting There were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter ended June 30, 2005, that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no pending legal proceedings involving the Company other than routine litigation incidental to its business. In the opinion of the Company's management, these proceedings should not, individually or in the aggregate, have a material adverse effect on the Company's results of operations or financial condition. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) Not Applicable. (b) Not Applicable. 22
(c) The following table provides information regarding the Company's repurchases of its common shares during the fiscal quarter ended June 30, 2005: <TABLE> <CAPTION> Total Number of Shares Maximum Number Total Number Average Purchased as Part of of Shares That May of Shares Price Paid per Publicly Announced Yet Be Purchased Period Purchased Share Plans or Programs Under the Plan or Programs -------------------------- ------------- -------------- ---------------------- -------------------------- <S> <C> <C> <C> <C> April 1 - 30, 2005 ---- ---- ---- 175,000 May 1 - 31, 2005 ---- ---- ---- 175,000 June 1 - 30, 2005 10,759 $26.17 10,759 164,241 -------------------------------------------------------------------------------------------- TOTAL 10,759 $26.17 10,759 164,241 ============================================================================================ </TABLE> (1) On June 15, 1999, the Company's Board of Directors authorized a stock repurchase program to repurchase up to 175,000 shares of the Company's common stock through open market and privately negotiated purchases. The Company's Board of Directors approved annual extensions to the plan. Most recently, the Board of Directors extended the stock repurchase program from August 16, 2005 to February 16, 2006, and authorized the Company to repurchase up to 175,000 shares of its common stock through open market and privately negotiated purchases. The timing of the purchases, the prices paid and actual number of shares purchased will depend upon market conditions and limitations imposed by applicable federal securities laws. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Shareholders on April 13, 2005, for the purpose of electing directors. Shareholders received proxy materials containing the information required by this item. Three directors, W. Lowell Call, Harold A. Howe and Brent A. Saunders were nominated for reelection and were reelected. The summary of voting of the 2,921,053 shares outstanding were as follows: Director Candidate For Against Abstain W. Lowell Call 2,914,181 6,872 ---- Harold A. Howe 2,914,048 7,005 ---- Brent A. Saunders 2,909,101 11,952 ---- ITEM 5. OTHER INFORMATION Not Applicable. 23
ITEM 6. EXHIBITS (a)Exhibits: 31.1 - Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) 31.2 - Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) 32 - Section 1350 Certification (Principal Executive Officer and Principal Financial Officer) 24
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OHIO VALLEY BANC CORP. Date August 9, 2005 By: /s/ Jeffrey E. Smith ------------------------------------------- Jeffrey E. Smith President and Chief Executive Officer Date August 9, 2005 By: /s/ Scott W. Shockey ------------------------------------------- Scott W. Shockey Vice President and Chief Financial Officer 25