Attached files
| file | filename |
|---|---|
| 10-K/A - FORM 10-K/A 123109 - OHIO VALLEY BANC CORP | secform10ka_2009.htm |
| EX-32 - SECTION 1350 CERTIFICATIONS - OHIO VALLEY BANC CORP | exhibit32amend_2009.htm |
| EX-31.2 - CERTIFICATION - PRINCIPAL FINANCIAL OFFICER - OHIO VALLEY BANC CORP | exhibit31-2amend_2009.htm |
| EX-31.1 - CERTIFICATION - PRINCIPAL EXECUTIVE OFFICER - OHIO VALLEY BANC CORP | exhibit31-1amend_2009.htm |
EXHIBIT
13
2009 Annual Report to
Shareholders
A
Message from Management
Dear
Shareholders, Customers, and Friends,
Your
company experienced an eventful year in 2009. There were challenges like
increased FDIC premiums and the fallout from the big bank bailouts. There were
opportunities
such as the introduction of our new OVB Classroom Adventures, which
brings local bankers into the classroom for lessons on financial literacy. There
was sorrow
for the loss of long-time Director and friend Robert H. Eastman. Yet
there were triumphs
experienced through an increase in dividends and launches of Ohio Valley
Bank's new Visa Rewards credit card and Loan Central's new 3-Option Tax Refund
Loan program.
In a
recent letter to shareholders, we tried to imagine the bank as it was when it
first opened its doors on November 1st, 1872. We imagine those days of family
and faith; days when honesty and hard work paid dividends beyond monetary
reward. Back then, they didn't have to worry about Sarbanes-Oxley or FDIC
assessment fees. Their only concern was in serving their friends and neighbors,
a commitment we still honor today.
Perhaps
that's why Ohio Valley Bank has been around for more than 137 years and why our
share performance has remained steady, performing well above our peer group (SNL
$500 million - $1 billion Bank Index, chart on page 5). Maybe that's why OVBC's
companies brought in a consolidated net income of over $6 million for the year
of 2009, even after an increase in FDIC premiums of over a million dollars.
Based on
the FDIC's restoration plan, we expect the heightened assessment levels to
continue. On December 30, 2009, financial institutions were required to prepay
their FDIC premiums through 2012. Ohio Valley Bank's assessment amount was
nearly $3.6 million, which will be expensed over the next three years. This
action insures our depositors; but, as you can see, it comes at a high price.
Unfortunately, it's a cost incurred as a result of a problem that wasn't created
by the carefully managed community banks like Ohio Valley Bank.
Careful
management is a passion that has been passed from generation to generation in
this institution. It is one of many traditions still honored by those that don
an OVB name tag as they enter the lobby doors each morning. It is tradition like
careful, conservative management and outstanding service that will help us
weather threats in today’s U.S. financial industry.
However,
as always, we hope to do more than weather the storm. In addition to the efforts
by our 250+ employees to hold down expenses; we are actively seeking new sources
of revenue and ways to expand on current services. Our marriage of tradition and
technology helps us in this endeavor. Wherever our customers lead…wireless,
paperless, self serve, hands free…we will support them. We will support them
just as our predecessors did when they introduced the county's first free
parking, the first drive-thru window, and the first ATM. When applied
effectively, technology enhances our life, and in doing so,
strengthens our community and our company.
On the
pages that follow, we share our commitment to you, our shareholders, and to the
communities in which we serve.
Sincerely,
Jeffrey
E. Smith
Chairman
and CEO
Ohio
Valley Banc Corp.
Thomas E.
Wiseman
President
and COO
Ohio
Valley Banc Corp.
A Tradition of Service …Every bank offers checking accounts. Every bank offers savings and loans. However we’ve found (and I’m sure you have to) that not all banks are equal. It seems that too often,traditional community banks are left behind when it comes to offering the technology we’ve come to expect in today’s world. And the big banks...well, that’s just it. They aresometimes too big. They hide behind their technology, using it to completely replace human contact. They’ve forgotten their beginnings and those that got them to where they are now.Tradition Meets TechnologyOur secret? We marry the best of the traditional community bank with the technology of the big banks. We call it “Tradition Meets Technology”. Our focus on aggressively seeking newfinancial technology takes us above and beyond the typical community bank. In 2009 alone, Ohio Valley Bank began projects in debit/credit card rewards and a major expansion of ourmobile banking offering. Also in 2009, Loan Central debuted its unprecedented 3-Option Tax Refund Loans.Technology certainly makes a difference; however, we would be just like those faceless big banks if it were not for the second part...Tradition. OVB’s tradition of service is what keeps usgrounded. It reminds us where we came from and who we serve. That’s why Ohio Valley Bank bankers teach financial literacy in school and at 4-H camp. OVB continues to support ourcommunities including our local business owners; such as Eastman’s Foodland. In 2010, the Eastman family will celebrate the 30th Anniversary of their American company.The extra care we take to protect the needs of our customers is second nature. It’s been that way since the doors opened in 1872.We’ve also found that our unique marriage of Tradition and Technology turns the chore of banking into a fond experience.When you ask elementary teacher Beth Covey, why she uses OVB’s iPhone application, she will probably say its because of convenience. The iPhone “app” is easy to use, but theconvenience that Beth is referring to is that if she has a question, she can call or email OVB’s Internet Call Center, where a local person (not a machine or a random operator in India)answers the phone and assists her.When traveling software salesman Dave Rusie forgot that his online CD was maturing, he was relieved to see a friendly email in his Inbox. Internet Call Center Representative JamieStapleton assisted him with the maturing CD. The best part...Dave didn’t have to alter his travel plans; he didn’t even have to enter the state.
When carpet store owner Jon Mollohan decided to expand into the cleaning business, he knew that he would need to upgrade his credit card processing. He was amazed by the savingsand ease-of-use that OVB’s merchant services provided. His new machine takes up less space, needs less attention, and each transaction costs less. Ohio Valley Bank’s Bank Carddepartment was in constant contact with him during the switch over.When Accounting Manager Jean Adkins is reconciling accounts for Holzer Medical Center, she downloads the account statements through eDelivery. She recalls an instance when thestatement file was too big for her computer to download. She called OVB and within minutes, an OVB manager was at the door with a printed copy.Ken Holley enjoys eDelivery too. In 2009, he was the lucky winner of a Gold Membership for the Columbus Zoo. Perhaps Ken will be able to visit the Asian Elephant that OVB“adopted”. In October, for every person who switched to eDelivery paperless bank statements, Ohio Valley Bank made a donation to the Zoo’s Adopt-an-Animal program. Ohio ValleyBank won three awards for the ground-breaking “Save a Tree. Feed an Animal.” program.All this aside, we’re sure that one of the most memorable bank visits of the year was experienced by our Main Office customers in July. One day they were surprised to find that thelobby was transformed into a French bistro overnight. The decorations, food, and waitress costumes were part of a “Serving You” event dreamed up by Assistant Vice PresidentBrenda Henson. The event added a little fun to the week and was the talk of the town as photos of the lobby hit the newspaper and were traded on Facebook.While customers will remember the lobby, OVB employees will always remember 2009 as a farewell to the traditional 2 o’clock cut-off. Since October 1st, transactions made at an OVBoffice before closing have been processed on the same business day. Some traditions die hard as they should. This project required alot of time and strategy to achieve; however, itwas well worth the trouble. The extension, like all of the stories shared here, enhanced the banking experience for our customers.
PERFORMANCE TOTAL RETURN PERFORMANCE Year ended December 31, 2009 This is a comparison of five-year cumulative total returns among Ohio Valley Banc Corp.'s common shares, the S & P 500 Index, and SNL $500 Million-$1 Billion Bank Asset-Size Index. The SNL Index represents stock performance of 85 of the nation's banks located throughout the United States with total assets between $500 Million and $1 Billion (including Ohio Valley Banc Corp.) Calculations are based on an investment of $100 on December 31, 2004 and assumes reinvestment of dividends. Period Ending ---------------------------------------------------------- 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 -------- -------- -------- -------- -------- -------- OVBC $100.00 $ 98.48 $101.31 $103.86 $ 80.38 $ 96.97 SNL $500M-$1B $100.00 $104.29 $118.61 $ 95.04 $ 60.90 $ 58.00 S&P 500 $100.00 $104.91 $121.48 $128.16 $ 80.74 $102.11Annual Report on Form 10-K A copy of Ohio Valley Banc Corp.'s annual report on Form 10-K, as filed with the Securities and Exchange Commission, will be forwarded without charge to any shareholder upon written request to: Ohio Valley Banc Corp., Attention: Larry E. Miller, Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and proxy statement are also available on the company's Web site, www.ovbc.com. Contact Information Ohio Valley Banc Corp. 420 Third Avenue, P.O. Box 240, Gallipolis, Ohio 45631 740.446.2631 or 800.468.6682 Web: www.ovbc.com E-mail: investorrelations@ovbc.comOHIO VALLEY BANK 16 locations Gallipolis, Ohio Main Office - 420 Third Ave. Mini Bank - 437 Fourth Ave. Inside Foodland - 236 Second Ave. Inside Walmart - 2145 Eastern Ave. 3035 State Route 160 Inside Holzer - 100 Jackson Pike Loan Office - Walmart Plaza, 2145 Eastern Ave. Columbus, Ohio 3700 South High St. Jackson, Ohio 740 East Main St. Pomeroy, Ohio Inside Sav-a-Lot - 700 W. Main St. Rio Grande, Ohio 27 North College Ave. South Point, Ohio Inside Walmart - 354 Private Drive Waverly, Ohio 507 West Emmitt Ave. Huntington, West Virginia 3331 U.S. Route 60 East Milton, West Virginia 280 East Main St. Point Pleasant, West Virginia 328 Viand St. Web Branch www.ovbc.com or www.ohiovalleybank.com
Ohio Valley Bank ATMs can be found at each office and also at these convenient locations....FoodlandState Rt. 160, Bidwell, OhioHolzer Medical Center Cafeteria100 Jackson Pike, Gallipolis, OhioFoodland409 N. Front Street, Oak Hill, OhioTom's Convenient Store1929 Tennyson Rd., Piketon, OhioBob Evans Sausage ShopState Rt. 588, Rio Grande, OhioBPRt 35 & 5 Mile Creek, Fraziers Bottom, West VirginiaOne Stop501 8th Street, Huntington, West VirginiaSunoco Foodmart3175 Route 60 E., Huntington, West VirginiaPleasant Valley Hospital2520 Valley Drive, Point Pleasant, West VirginiaLOAN CENTRAL 6 locations Gallipolis, Ohio 2145 Eastern Avenue Jackson, Ohio 345 Main Street Ironton, Ohio 710 Park Avenue South Point, Ohio 348 County Road 410 Waverly, Ohio 505 West Emmitt Avenue Wheelersburg, Ohio 326 Center StreetBUSINESS PROFILE Ohio Valley Banc Corp. commenced operations on October 23, 1992, as a one-bank holding company with The Ohio Valley Bank Company being the wholly-owned subsidiary. The Company's headquarters are located at 420 Third Avenue in Gallipolis, Ohio. The Ohio Valley Bank Company was organized on September 24, 1872. The Bank is insured under the Federal Deposit Insurance Act and is chartered under the banking laws of the State of Ohio. In April 1996, the Banc Corp. opened a consumer finance company operating under the name of Loan Central, Inc. Ohio Valley Financial Services, an agency specializing in life insurance, was formed as a subsidiary of the Corp. in June 2000. The Corp. also has minority holdings in ProAlliance. OVBC OFFICERS Jeffrey E. Smith, Chairman of the Board and Chief Executive Officer Thomas E. Wiseman, President and Chief Operating Officer
E. Richard Mahan, Senior Vice President & Chief Credit Officer Larry E. Miller, II, Senior Vice President & Secretary Katrinka V. Hart, Senior Vice President & Risk Management Mario P. Liberatore, Vice President Cherie A. Barr, Vice President Sandra L. Edwards, Vice President Jennifer L. Osborne, Vice President Tom R. Shepherd, Vice President Scott W. Shockey, Vice President & Chief Financial Officer Bryan F. Stepp, Vice President Paula W. Clay, Assistant Secretary Cindy H. Johnston, Assistant Secretary OVBC DIRECTORS Jeffrey E. Smith Chairman & CEO, Ohio Valley Banc Corp. and Ohio Valley Bank Thomas E. Wiseman President & COO, Ohio Valley Banc Corp. and Ohio Valley Bank David W. Thomas, Lead Director Former Chief Examiner, Ohio Division of Financial Institutionsbank supervision and regulation Lannes C. Williamson President, L. Williamson Pallets, Inc.sawmill, pallet manufacturing, and wood processing Steven B. Chapman Certified Public Accountant, Chapman & Burris CPAs, LLC Anna P. Barnitz Treasurer & CFO, Bob's Market & Greenhouses, Inc.wholesale horticultural products and retail landscaping stores Brent A. Saunders Attorney, Halliday, Sheets & Saunders President & CEO, Holzer Consolidated Health SystemshealthcareHarold A. Howe self employedreal estate investment and rental propertyRobert E. Daniel Management Coach/Project Manager, Holzer Clinicmultispecialty physician group practice Roger D. Williams Former President, Bob Evans Restaurantsrestaurant operator and food products DIRECTORS EMERITUS W. Lowell Call Barney A. Molnar James L. Dailey C. Leon Saunders Art E. Hartley, Sr. Wendell B. Thomas Charles C. LanhamWEST VIRGINIA ADVISORY BOARD Mario P. Liberatore Lannes C. Williamson Anna P. Barnitz John C. Musgrave Richard L. Handley Stephen L. Johnson Gregory K. Hartley E. Allen Bell Trenton M. Stover John A. MyersOHIO VALLEY BANK DIRECTORS Jeffrey E. Smith Anna P. Barnitz Thomas E. Wiseman Brent A. Saunders David W. Thomas Robert E. Daniel Lannes C. Williamson Roger D. Williams Harold A. Howe Steven B. Chapman OHIO VALLEY BANK OFFICERS Jeffrey E. Smith Chairman of the Board & Chief Executive Officer Thomas E. Wiseman President and Chief Operating Officer
E. Richard Mahan Executive Vice President & Chief Credit Officer Larry E. Miller, II Executive Vice President & Secretary Katrinka V. Hart Executive Vice President & Risk Management SENIOR VICE PRESIDENTS Mario P. Liberatore West Virginia Bank Group Sandra L. Edwards Financial Bank Group Jennifer L. Osborne Retail Lending Group Tom R. Shepherd Chief Deposit Officer Scott W. Shockey Chief Financial Officer Bryan F. Stepp Commercial Lending VICE PRESIDENTS Patricia L. Davis Research & Technical Applications Richard D. Scott Trust Bryan W. Martin Facilities & Technical Services Patrick H. Tackett Retail Lending Group Molly K. Tarbett Loss Prevention Manager Marilyn E. Kearns Director of Human Resources David K. Nadler Financial Analyst & Strategic Plan Coordinator Fred K. Mavis Business Development Officer Rick A. Swain Western Division Branch AdministratorFrank W. Davison Management Information SystemsASSISTANT VICE PRESIDENTS Philip E. Miller Region Manager Franklin County Melissa P. Mason Trust Officer Diana L. Parks Internal Auditor Christopher S. Petro Comptroller Linda L. Plymale Transit Officer Kimberly R. Williams Systems Officer Deborah A. Carhart Shareholder Relations Gregory A. Phillips Indirect Lending Manager Pamela D. Edwards Commercial Loan Operations Paula W. Clay Assistant Secretary Cindy H. Johnston Assistant Secretary Christopher L. Preston Regional Branch Administrator I-64 Angela G. King Regional Branch Administrator Gallia/Meigs Bryna S. Butler Director e-Services and Corporate Communications Kyla R. Carpenter Director of Marketing Toby M. Mannering Collection Manager Joe J. Wyant Region Region Manager Jackson County Allen W. Elliott Bank Card Manager Brenda G. Henson Manager, Deposit ServicesTamela D. LeMaster Regional Branch Administrator Gallia/Meigs D. Jeremy Perkins Network SystemsGabriel U. Stewart Chief Information Security OfficerASSISTANT CASHIERS Richard P. Speirs Maintenance Technical Supervisor Stephanie L. Stover Retail Lending Operations Manager Raymond G. Polcyn Retail Lending Manager Gallia-Meigs SuperBanks Tyrone J. Thomas Assistant Manager Franklin County Region Linda L. Hart Assistant Manager Waverly Office Miquel D. McCleese Assistant Manager Columbus Office Randall L. Hammond Security OfficerLori A. Edwards Secondary Market ManagerBrandon O. Huff AS400 AdministratorLois J. Scherer Assistant Transit OfficerLOAN CENTRAL OFFICERS Katrinka V. Hart Chairman of the Board Cherie A. Barr President Timothy R. Brumfield Secretary & Manager, Gallipolis Office T. Joe Wilson Manager, South Point Office Joseph I. Jones Manager, Waverly OfficeJohn J. Holtzapfel Manager, Wheelersburg OfficeDeborah G. Moore Manager, Jackson Office
SELECTED FINANCIAL DATA Years Ended December 312009 2008 2007 2006 2005-------------------------------------------------------------------------------(dollars in thousands, except share and per share data) SUMMARY OF OPERATIONS: Total interest income $ 47,623 $ 51,533 $ 54,947 $ 52,421 $ 46,071 Total interest expense 16,932 20,828 26,420 23,931 18,137 Net interest income 30,691 30,705 28,527 28,490 27,934 Provision for loan losses 3,212 3,716 2,252 5,662 1,797 Total other income 7,747 6,193 5,236 5,830 5,522 Total other expenses 26,309 23,325 22,583 21,199 21,359 Income before income taxes 8,917 9,857 8,928 7,459 10,300 Income taxes 2,272 2,729 2,631 2,061 3,283 Net income 6,645 7,128 6,297 5,398 7,017 PER SHARE DATA: Earnings per share $ 1.67 $ 1.77 $ 1.52 $ 1.27 $ 1.64 Cash dividends declared per share $ .80 $ .76 $ .71 $ .67 $ .63 Book value per share $16.70 $15.83 $15.10 $14.38 $13.90 Weighted average number of common shares outstanding 3,983,034 4,018,367 4,131,621 4,230,551 4,278,562 AVERAGE BALANCE SUMMARY: Total loans $ 641,878 $ 629,225 $ 628,891 $ 626,418 $ 599,345 Securities (1) 134,117 101,100 91,724 86,179 84,089 Deposits 652,453 606,126 595,610 585,301 542,730 Other borrowed funds (2) 62,405 74,178 74,196 81,975 92,520 Shareholders' equity 64,941 61,346 60,549 59,970 57,620 Total assets 818,952 782,312 769,554 760,932 726,489 PERIOD END BALANCES: Total loans $ 651,356 $ 630,391 $ 637,103 $ 625,164 $ 617,532 Securities (1) 113,307 99,218 100,713 90,161 84,623 Deposits 647,644 592,361 589,026 593,786 562,866 Shareholders' equity 66,521 63,056 61,511 60,282 59,271 Total assets 811,988 781,108 783,418 764,361 749,719 KEY RATIOS: Return on average assets .81% .91% .82% .71% .97% Return on average equity 10.23% 11.62% 10.40% 9.00% 12.18% Dividend payout ratio 47.95% 42.94% 46.66% 52.56% 38.55% Average equity to average assets 7.93% 7.84% 7.87% 7.88% 7.93% (1) Securities include interest-bearing balances with banks and FHLB stock. (2) Other borrowed funds include subordinated debentures. 1
CONSOLIDATED STATEMENTS OF CONDITION
As of December 31
2009 2008
-------------------------------------------------------------------------------
(dollars in thousands, except share and per share data)
ASSETS
Cash and noninterest-bearing deposits with banks $ 9,101 $ 16,650
Interest-bearing deposits with banks 6,569 611
Federal funds sold --- 1,031
--------- ---------
Total cash and cash equivalents 15,670 18,292
Securities available for sale 83,868 75,340
Securities held to maturity
(estimated fair value: 2009 - $16,834,
2008 - $17,241) 16,589 16,986
Federal Home Loan Bank stock 6,281 6,281
Total loans 651,356 630,391
Less: Allowance for loan losses (8,198) (7,799)
--------- ---------
Net loans 643,158 622,592
Premises and equipment, net 10,132 10,232
Accrued income receivable 2,896 3,172
Goodwill 1,267 1,267
Bank owned life insurance 18,734 18,153
Prepaid FDIC insurance 3,567 ---
Other assets 9,826 8,793
--------- ---------
Total assets $ 811,988 $ 781,108
========= =========
LIABILITIES
Noninterest-bearing deposits $ 86,770 $ 85,506
Interest-bearing deposits 560,874 506,855
--------- ---------
Total deposits 647,644 592,361
Securities sold under agreements to repurchase 31,641 24,070
Other borrowed funds 42,709 76,774
Subordinated debentures 13,500 13,500
Accrued liabilities 9,973 11,347
--------- ---------
Total liabilities 745,467 718,052
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (See Note K) --- ---
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value per share, 10,000,000
shares authorized; 2009 - 4,643,748 shares
issued; 2008 - 4,642,748 shares issued) 4,644 4,643
Additional paid-in capital 32,704 32,683
Retained earnings 44,211 40,752
Accumulated other comprehensive income 674 690
Treasury stock, at cost (2009 and 2008 - 659,739 shares)
(15,712) (15,712)
--------- ---------
Total shareholders' equity 66,521 63,056
--------- ---------
Total liabilities and shareholders' equity $ 811,988 $ 781,108
========= =========
See accompanying notes to consolidated financial statements
2
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 2009 2008 2007
------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 44,076 $ 47,272 $ 50,671
Securities:
Taxable 2,748 3,109 3,079
Tax exempt 451 535 555
Dividends 290 323 398
Other interest 58 294 244
-------- -------- --------
47,623 51,533 54,947
Interest expense:
Deposits 13,683 16,636 21,315
Securities sold under agreements
to repurchase 75 421 1,051
Other borrowed funds 2,085 2,682 2,911
Subordinated debentures 1,089 1,089 1,143
-------- -------- --------
16,932 20,828 26,420
-------- -------- --------
Net interest income 30,691 30,705 28,527
Provision for loan losses 3,212 3,716 2,252
Net interest income after provision -------- -------- --------
for loan losses 27,479 26,989 26,275
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 2,816 3,073 2,982
Trust fees 227 240 230
Income from bank owned life insurance 1,460 757 757
Mortgage banking income 758 100 74
Electronic refund check / deposit fees 528 272 110
Gain(loss) on sale of other real estate owned 38 (31) (777)
Other 1,920 1,782 1,860
-------- -------- --------
7,747 6,193 5,236
Noninterest expense:
Salaries and employee benefits 14,973 14,057 13,045
Occupancy 1,599 1,562 1,467
Furniture and equipment 1,204 1,048 1,086
Corporation franchise tax 713 606 671
FDIC insurance 1,625 268 70
Data processing 670 773 844
Other 5,525 5,011 5,400
-------- -------- --------
26,309 23,325 22,583
-------- -------- --------
Income before income taxes 8,917 9,857 8,928
Provision for income taxes 2,272 2,729 2,631
-------- -------- --------
NET INCOME $ 6,645 $ 7,128 $ 6,297
======== ======== ========
Earnings per share $ 1.67 $ 1.77 $ 1.52
======== ======== ========
See accompanying notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2009, 2008 and 2007
(dollars in thousands, except share and per share data)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Shareholders'
Stock Capital Earnings Income(Loss) Stock Equity
------------------------------------------------------------------------------------------------------------------------
BALANCES AT JANUARY 1, 2007 $ 4,626 $32,282 $34,404 $ (981) $(10,049) $60,282
Comprehensive income:
Net income --- --- 6,297 --- --- 6,297
Change in unrealized loss on
available for sale securities --- --- --- 1,313 --- 1,313
Income tax effect --- --- --- (447) --- (447)
-------
Total comprehensive income --- --- --- --- --- 7,163
Common stock issued to ESOP,
9,500 shares 10 238 --- --- --- 248
Common stock issued through
dividend reinvestment, 5,907 shares 6 144 --- --- --- 150
Cash dividends, $.71 per share --- --- (2,938) --- --- (2,938)
Shares acquired for treasury, 134,551 shares--- --- --- --- (3,394) (3,394)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2007 4,642 32,664 37,763 (115) (13,443) 61,511
Cumulative-effect adjustment in adopting
EITF No. 06-04 --- --- (1,078) --- --- (1,078)
Comprehensive income:
Net income --- --- 7,128 --- --- 7,128
Change in unrealized loss on
available for sale securities --- --- --- 1,220 --- 1,220
Income tax effect --- --- --- (415) --- (415)
-------
Total comprehensive income --- --- --- --- --- 7,933
Common stock issued to ESOP,
1,000 shares 1 19 --- --- --- 20
Common stock issued through
dividend reinvestment, 1 share --- --- --- --- --- ---
Cash dividends, $.76 per share --- --- (3,061) --- --- (3,061)
Shares acquired for treasury, 92,336 shares --- --- --- --- (2,269) (2,269)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2008 4,643 32,683 40,752 690 (15,712) 63,056
Comprehensive income:
Net income --- --- 6,645 --- --- 6,645
Change in unrealized gain on
available for sale securities --- --- --- (24) --- (24)
Income tax effect --- --- --- 8 --- 8
-------
Total comprehensive income --- --- --- --- --- 6,629
Common stock issued to ESOP,
1,000 shares 1 21 --- --- --- 22
Cash dividends, $.80 per share --- --- (3,186) --- --- (3,186)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2009 $ 4,644 $32,704 $44,211 $ 674 $(15,712) $66,521
======= ======= ======= ======= ======== =======
See accompanying notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2009 2008 2007
---------------------------------------------------------------------------------------------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,645 $ 7,128 $ 6,297
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,071 939 987
Net amortization of securities 280 101 66
Proceeds from sale of loans in secondary market 57,815 11,703 4,300
Loans disbursed for sale in secondary market (57,057) (11,603) (4,226)
Amortization of mortgage serviging rights 129 54 25
Impairment of mortgage servicing rights 91 27 28
Gain on sale of loans (978) (181) (127)
Deferred tax (benefit) expense (2) (102) 908
Provision for loan losses 3,212 3,716 2,252
Common stock issued to ESOP 22 20 248
Earnings on bank owned life insurance (1,460) (757) (687)
Federal Home Loan Bank stock dividend --- (245) ---
(Gain)loss on sale of other real estate owned (38) 31 777
Change in accrued income receivable 276 82 (20)
Change in accrued liabilities (1,374) (1,720) 1,298
Change in other assets (3,704) 156 (841)
------- ------- -------
Net cash provided by operating activities 4,928 9,349 11,285
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available for sale 41,099 24,643 8,969
Purchases of securities available for sale (49,922) (20,792) (15,509)
Proceeds from maturities of securities
held to maturity 1,858 2,046 1,009
Purchases of securities held to maturity (1,470) (3,060) (3,649)
Net change in loans (25,527) (991) (19,498)
Proceeds from sale of other real estate owned 1,050 617 4,274
Purchases of premises and equipment (971) (1,300) (1,046)
Proceeds from bank owned life insurance 1,034 --- 71
Purchases of bank owned life insurance (304) (1,204) ---
------- ------- -------
Net cash used in investing activities (33,153) (41) (25,379)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits 55,283 3,335 (4,760)
Cash dividends (3,186) (3,061) (2,938)
Proceeds from issuance of common stock --- --- 150
Purchases of treasury stock --- (2,269) (3,394)
Change in securities sold under agreements to repurchase 7,571 (16,320) 17,834
Proceeds from Federal Home Loan Bank borrowings 6,050 13,000 20,000
Repayment of Federal Home Loan Bank borrowings (16,005) (16,014) (14,061)
Change in other short-term borrowings (24,110) 12,786 (2,483)
Proceeds from subordinated debentures --- --- 8,500
Repayment of subordinated debentures --- --- (8,500)
------- ------- -------
Net cash provided by (used in) financing activities 25,603 (8,543) 10,348
------- ------- -------
CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents (2,622) 765 (3,746)
Cash and cash equivalents at beginning of year 18,292 17,527 21,273
------- ------- -------
Cash and cash equivalents at end of year $15,670 $18,292 $17,527
======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $17,791 $22,637 $25,854
Cash paid for income taxes 2,730 2,827 878
Non-cash transfers from loans to other real estate owned 1,749 5,049 2,632
See accompanying notes to consolidated financial statements
5
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in thousands, except share and per share data
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Ohio Valley Banc Corp. ("Ohio Valley") is a financial
holding company registered under the Bank Holding Company Act of 1956. Ohio
Valley has one banking subsidiary, The Ohio Valley Bank Company (the "Bank"), as
well as a subsidiary that engages in consumer lending to individuals with higher
credit risk history and a subsidiary insurance agency that facilitates the
receipts of insurance commissions.
The Company provides a full range of commercial and retail banking services
from 21 offices located in central and southeastern Ohio and western West
Virginia. It accepts deposits in checking, savings, time and money market
accounts and makes personal, commercial, floor plan, student, construction and
real estate loans. Substantially all loans are secured by specific items of
collateral, including business assets, consumer assets, and commercial and
residential real estate. Commercial loans are expected to be repaid from cash
flow from business operations. The Company also offers safe deposit boxes, wire
transfers and other standard banking products and services. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation. In addition to
accepting deposits and making loans, the Bank invests in U. S. Government and
agency obligations, interest-bearing deposits in other financial institutions
and investments permitted by applicable law.
The Bank's trust department provides a wide variety of fiduciary services
for trusts, estates and benefit plans and also provides investment and security
services as an agent for its customers.
Principles of Consolidation: The consolidated financial statements include the
accounts of Ohio Valley and its wholly-owned subsidiaries, the Bank, Loan
Central, a consumer finance company, and Ohio Valley Financial Services Agency,
LLC, an insurance agency. Ohio Valley and its subsidiaries are collectively
referred to as the "Company". All material intercompany accounts and
transactions have been eliminated.
Industry Segment Information: Internal financial information is primarily
reported and aggregated in two lines of business, banking and consumer finance.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Areas involving the use of management's
estimates and assumptions that are more susceptible to change in the near term
involve the allowance for loan losses, mortgage servicing rights, deferred tax
assets, the fair value of certain securities, the fair value of financial
instruments and the determination and carrying value of impaired loans.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
interest and noninterest-bearing deposits with banks and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods. The Company
reports net cash flows for customer loan transactions, deposit transactions,
short-term borrowings and interest-bearing deposits with other financial
institutions.
Securities: The Company classifies securities into held to maturity and
available for sale categories. Held to maturity securities are those which the
Company has the positive intent and ability to hold to maturity and are reported
at amortized cost. Securities classified as available for sale include
securities that could be sold for liquidity, investment management or similar
reasons even if there is not a present intention of such a sale. Available for
sale securities are reported at fair value, with unrealized gains or losses
included in other comprehensive income, net of tax.
Premium amortization is deducted from, and discount accretion is added to,
interest income on securities using the level yield method without anticipating
prepayments, except for mortgage-backed securities where prepayments are
anticipated. Gains and losses are recognized upon the sale of specific
identified securities on the completed transaction basis.
Other-Than-Temporary-Impairments of Securities: In determining an
other-than-temporary-impairment ("OTTI"), management considers many factors,
including: (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of the
issuer, (3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the Company has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
anticipated recovery. The assessment of whether an OTTI decline exists involves
a high degree of subjectivity and judgment and is based on the information
available to management at a point in time.
When an OTTI occurs, the amount of the OTTI recognized in earnings depends
on whether an entity intends to sell the security or it is more likely than not
it will be required to sell the security before recovery of its amortized cost
basis, less any current-period creditloss. If an entity intends to sell or it is
more likely than not it will be required to sell the security before recovery of
its amortized costbasis, less any current-period credit loss, the OTTI shall be
recognized in earnings equal to the entire difference between the investment's
amortized cost basis and its fair value at the balance sheet date. If an entity
does not intend to sell the security and it is notmore likely than not that the
entity will be required to sell the security before recovery of its amortized
cost basis less any currentperiodloss, the OTTI shall be separated into the
amount representing the credit loss and the amount related to all other factors.
The amount of the total OTTI related to the credit loss is determined based on
the present value of cash flows expected to be collected and isrecognized in
earnings. The amount of the total OTTI related to other factors is recognized in
other comprehensive income, net of applicable taxes. The previous amortized cost
basis less the OTTI recognized in earnings becomes the new amortized cost basis
of the investment.
FHLB Stock: Federal Home Loan Bank stock is carried at cost because its fair
value is difficult to determine due to restrictions placed on its
transferability.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Interest income is reported on an accrual basis
using the interest method and includes amortization of net deferred loan fees
and costs over the loan term using the level yield method without anticipating
prepayments.
Interest income is discontinued and the loan moved to non-accrual status
when full loan repayment is in doubt, typically when the loan is impaired or
payments are past due over 90 days unless the loan is well-secured or in process
of collection. Past due status is based on the contractual terms of the loan. In
all cases, loans are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful. Nonaccrual loans and
loans past due 90 days still on accrual include both smaller balance homogeneous
loans that are collectively evaluated for impairment and individually classified
impaired loans.
All interest accrued but not received for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is accounted
for on the cash-basis method until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, 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. The
general component covers non-classified loans and classified loans that are not
reviewed for impairment, 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. Troubled debt restructurings are measured
at the present value of estimated future cash flows using the loan's effective
rate at inception.
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk: The Company grants residential, consumer and
commercial loans to customers located primarily in the southeastern Ohio and
western West Virginia areas.
The following represents the composition of the Company's loan portfolio at
December 31:
% of Total Loans
-----------------
2009 2008
------ ------
Residential real estate loans 36.66% 40.09%
Commercial real estate loans 32.13% 31.50%
Consumer loans 20.91% 20.13%
Commercial and industrial loans 9.03% 7.11%
All other loans 1.27% 1.17%
------ ------
100.00% 100.00%
====== ======
Approximately 3.76% of total loans are unsecured.
The Bank, in the normal course of its operations, conducts business with
correspondent financial institutions. Balances in correspondent accounts,
investments in federal funds, certificates of deposit and other short-term
securities are closely monitored to ensure that prudent levels of credit and
liquidity risks are maintained. At December 31, 2009, the Bank's primary
correspondent balance was $6,186 on deposit at the Federal Reserve Bank,
Cleveland, Ohio.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation, which is computed using the
straight-line or declining balance methods over the estimated useful life of the
owned asset and, for leasehold improvement, over the remaining term of the
leased facility. The useful lives range from 3 to 8 years for equipment,
furniture and fixtures and 7 to 39 years for buildings and improvements.
Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of
foreclosure is included in other assets. Such real estate is carried at the
lower of investment in the loan or estimated fair value of the property less
estimated selling costs. Any reduction to fair value at the time of acquisition
is accounted for as a loan charge-off. Any subsequent reduction in fair value is
recorded as a loss on other assets. Costs incurred to carry other real estate
are charged to expense. Other real estate owned totaled $5,392 and $4,693 at
December 31, 2009 and 2008.
Goodwill: Goodwill results from business acquisitions and represents the excess
of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Goodwill is assessed at least
annually for impairment and any such impairment will be recognized in the period
identified.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
Mortgage Servicing Rights: A mortgage servicing right ("MSR") is a contractual
agreement where the right to service a mortgage loan is sold by the original
lender to another party. When the Company sells mortgage loans to the secondary
market, it retains the servicing rights to these loans. The Company's MSR is
recognized separately when acquired through sales of loans and is initially
recorded at fair value with the income statement effect recorded in mortgage
banking income. Subsequently, the MSR is then amortized in proportion to and
over the period of estimated future servicing income of the underlying loan. The
MSR is then evaluated for impairment periodically based upon the fair value of
the rights as compared to the carrying amount, with any impairment being
recognized through a valuation allowance. Fair value of the MSR is based on
market prices for comparable mortgage servicing contracts. Impairment is
determined by stratifying rights into groupings based on predominant risk
characteristics, such as interest rate, loan type and investor type. If the
Company later determines that all or a portion of the impairment no longer
exists for a particular grouping, a reduction of the allowance may be recorded
as an increase to income At December 31, 2009 and 2008, the Company's MSR asset
portfolio was $474 and $191, respectively.
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Per Share Amounts: Earnings per share is based on net income divided by the
following weighted average number of common shares outstanding during the
periods: 3,983,034 for 2009; 4,018,367 for 2008; 4,131,621 for 2007. Ohio Valley
had no dilutive securities outstanding for any period presented.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized. The Company
recognizes interest and/or penalties related to income tax matters in income tax
expense.
A tax position is recognized as a benefit only if it is "more likely than
not" that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the "more likely than not" test, no tax benefit is
recorded. The Company recognizes interest and/or penalties related to income tax
matters in income tax expense.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity, net of tax.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Bank Owned Life Insurance: The Company has purchased life insurance policies on
certain key executives. Bank owned life insurance is recorded at the amount that
can be realized under the insurance contract at the balance sheet date, which is
the cash surrender value adjusted for other charges or other amounts due that
are probable at settlement.
ESOP: Compensation expense is based on the market price of shares as they are
committed to be allocated to participant accounts.
Adoption of New Accounting Standards: In June 2009, the Financial Accounting
Standards Board ("FASB") replaced Statement of Financial Accounting Standards
("SFAS") No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, with Statement 162, The Hierarchy
of Generally Accepted Accounting Principles, and to establish the FASB
Accounting Standards Codification (the "ASC") as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the Securities and Exchange Commission
("SEC") under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The ASC was effective for financial
statements issued for periods after September 15, 2009 and did not have a
material impact on the Company's financial position and results of operations.
In April 2009, the FASB issued Staff Position ("FSP") No. 115-2 and No.
124-2, Recognition and Presentation of Other-Than- Temporary Impairments (ASC
320-10), which amended existing guidance for determining whether impairment is
other-thantemporary for debt securities. The requires an entity to assess
whether it intends to sell, or it is more likely than not that it will be
required to sell, a security in an unrealized loss position before recovery of
its amortized cost basis. If either of these criteria is met, the entire
difference between amortized cost and fair value is recognized as impairment
through earnings. For securities that do not meet the aforementioned criteria,
the amount of impairment is split into two components as follows: 1)
other-than-temporary impairment ("OTTI") related to other factors, which is
recognized in other comprehensive income and 2) OTTI related to credit loss,
which must be recognized in the income statement. The credit loss is determined
as the difference between the present value of the cash flows expected to be
collected and the amortized cost basis. Additionally, disclosures about
other-than-temporary impairments for debt and equity securities were expanded.
ASC 320-10 was effective for interim and annual reporting periods ending June
15, 2009, with early adoption permitted for periods ending after March 15, 2009.
The Company adopted the provisions of this pronouncement for the period ending
June 15, 2009, as required. The adoption of this pronouncement did not have a
material impact on the Company's financial position and results of operations.
10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When
the Volume and Level of Activity for the Asset and Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (ASC 820-10). This
FSP emphasizes that the objective of a fair value measurement does not change
even when market activity for the asset or liability has decreased
significantly. Fair value is the price that would be received for an asset sold
or paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. When observable transactions or quoted
prices are not considered orderly, then little, if any, weight should be
assigned to the indication of the asset or liability's fair value. Adjustments
to those transactions or prices would be needed to determine the appropriate
fair value. The FSP, which was applied prospectively, was effective for interim
and annual reporting periods ending after June 15, 2009 with early adoption for
periods ending after March 15, 2009. The Company adopted the provisions of this
pronouncement for the period ending June 15, 2009, as required. The adoption of
this pronouncement did not have a material impact on the Company's financial
position and results of operations.
Effect of Newly Issued But Not Yet Effective Accounting Standards: In June 2009,
the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an
Amendment of FASB Statement No. 140 (ASU 1009-16). The new accounting
requirement amends previous guidance relating to the transfers of financial
assets and eliminates the concept of a qualifying special purpose entity. This
Statement must be applied as of the beginning of each reporting entity's first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter. This Statement must be applied to transfers occurring on or
after the effective date. Additionally, on and after the effective date, the
concept of a qualifying special-purpose entity is no longer relevant for
accounting purposes. Therefore, formerly qualifying special-purpose entities
should be evaluated for consolidation by reporting entities on and after the
effective date in accordance with the applicable consolidation guidance.
Additionally, the disclosure provisions of this Statement were also amended and
apply to transfers that occurred both before and after the effective date of
this Statement. The effect of adopting this new guidance is not expected to have
a material impact on the Company's financial position and results of operations.
In June 2009, FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (ASU 2009-17), which amended guidance for consolidation of variable
interest entities by replacing the quantitative-based risks and rewards
calculation for determining which enterprise, if any, has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a
variable interest entity that most significantly impact the entity's economic
performance and (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. This Statement also requires
additional disclosures about an enterprise's involvement in variable interest
entities. This Statement will be effective as of the beginning of each reporting
entity's first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. Early adoption is prohibited. The effect of
adopting this new guidance is not expected to have a material impact on the
Company's financial position and results of operations.
Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. These financial instruments are
recorded when they are funded. See Note K for more specific disclosure related
to loan commitments.
Dividend Restrictions: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Bank to Ohio Valley or by Ohio
Valley to its shareholders. See Note O for more specific disclosure related to
dividend restrictions.
Restrictions on Cash: Cash on hand or on deposit with Fifth Third Bank and the
Federal Reserve Bank of $7,897 and $8,066 was required to meet regulatory
reserve and clearing requirements at year-end 2009 and 2008. The balances at
Fifth Third Bank do not earn interest.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in Note N. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Reclassifications: The consolidated financial statements for 2008 and 2007 have
been reclassified to conform with the presentation for 2009. These
reclassifications had no effect on the net results of operations.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES
Securities are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available for Sale Cost Gains Losses Value
---- ----- ------ -----
December 31, 2009
-----------------
U.S. Treasury securities $10,548 $ 10 $ (1) $10,557
U.S. Government sponsored
entity securities 33,561 561 --- 34,122
Agency mortgage-backed
securities, residential 38,737 560 (108) 39,189
------- ------ -------- -------
Total securities $82,846 $1,131 $ (109) $83,868
======= ====== ======== =======
December 31, 2008
-----------------
U.S. Government sponsored
entity securities $30,623 $1,243 $ --- $31,866
Agency mortgage-backed
securities, residential 43,671 82 (279) 43,474
------- ------ -------- -------
Total securities $74,294 $1,325 $ (279) $75,340
======= ====== ======== =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held to Maturity Cost Gains Losses Value
---- ----- ------ -----
December 31, 2009
-----------------
Obligations of states and
political subdivisions $16,553 $ 287 $ (41) $16,799
Agency mortgage-backed
securities, residential 36 --- (1) 35
------- ------ ------ -------
Total securities $16,589 $ 287 $ (42) $16,834
======= ====== ====== =======
December 31, 2008
-----------------
Obligations of states and
political subdivisions $16,946 $ 327 $ (70) $17,203
Agency mortgage-backed
securities, residential 40 --- (2) 38
------- ------ ------ -------
Total securities $16,986 $ 327 $ (72) $17,241
======= ====== ====== =======
At year-end 2009 and 2008, there were no holdings of securities of any one
issuer, other than the U.S. Government and its agencies, in an amount greater
than 10% of shareholders' equity.
Securities with a carrying value of approximately $80,671 at December 31,
2009 and $73,539 at December 31, 2008 were pledged to secure public deposits,
repurchase agreements and for other purposes as required or permitted by law.
The amortized cost and estimated fair value of debt securities at December
31, 2009, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because certain issuers may have the right to call
or prepay the debt obligations prior to their contractual maturities.
Available for Sale Held to Maturity
---------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Debt Securities: Cost Value Cost Value
------- ------- ------- -------
Due in one year or less $33,083 $33,193 $ 2,097 $ 2,151
Due in one to five years 11,026 11,486 1,775 1,847
Due in five to ten years --- --- 4,259 4,361
Due after ten years --- --- 8,422 8,440
Agency mortgage-backed
securities, residential 38,737 39,189 36 35
------- ------- ------- -------
Total debt securities $82,846 $83,868 $16,589 $16,834
======= ======= ======= =======
There were no sales of debt or equity securities during 2009, 2008 and
2007.
12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Securities with unrealized losses not recognized in income are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2009 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Securities Available for Sale
-----------------------------
U.S. Treasury securities $ 3,028 $ (1) $ --- $ --- $ 3,028 $ (1)
Agency mortgage-backed
securities, residential 9,054 (108) --- --- 9,054 (108)
------- ------ ------- ------- ------- -------
$12,082 $ (109) $ --- $ --- $12,082 $ (109)
======= ====== ======= ======= ======= =======
Securities Held to Maturity
-----------------------------
Agency mortgage-backed
securities, residential $ --- $ --- $ 25 $ (1) $ 25 $ (1)
Obligations of states and
political subdivisions 767 (13) 1,389 (28) 2,156 (41)
------- ------ ------- ------- ------- -------
$ 767 $ (13) $ 1,414 $ (29) $ 2,181 $ (42)
======= ====== ======= ======= ======= =======
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2008 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Securities Available for Sale
-----------------------------
Agency mortgage-backed
securities, residential $12,759 $ (178) $18,914 $ (101) $31,673 $ (279)
------- ------ ------- ------- ------- -------
$12,759 $ (178) $18,914 $ (101) $31,673 $ (279)
======= ====== ======= ======= ======= =======
Securities Held to Maturity
-----------------------------
Agency mortgage-backed
securities, residential $ --- $ --- $ 37 $ (2) $ 37 $ (2)
Obligations of states and
political subdivisions --- --- 2,879 (70) 2,879 (70)
------- ------ ------- ------- ------- -------
$ --- $ --- $ 2,916 $ (72) $ 2,916 $ (72)
======= ====== ======= ======= ======= =======
Unrealized losses on the Company's debt securities have not been recognized
into income because the issuers' securities are of high credit quality,
management has the intent and ability to hold them for the foreseeable future,
and the decline in fair value is largely due to increases in market interest
rates and other market conditions. The fair value is expected to recover as the
bonds approach their maturity date or reset date. Management does not believe
any individual unrealized loss at December 31, 2009 and 2008 represents an
other-than-temporary impairment.
NOTE C - LOANS
Loans are comprised of the following at December 31:
2009 2008
---- ----
Residential Real estate $238,761 $252,693
Commercial real estate 209,300 198,559
Commercial and industrial 58,818 44,824
Consumer 136,229 126,911
All other 8,248 7,404
-------- --------
Total Loans $651,356 $630,391
======== ========
The Bank originated refund anticipation loans that contributed fee income of
$397 in 2009, $265 in 2008 and $94 in 2007.
13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses for
the years ended December 31:
2009 2008 2007
---- ---- ----
Balance, beginning of year $7,799 $6,737 $9,412
Loans charged off:
Commercial (1) 627 1,164 4,002
Residential real estate 1,172 225 422
Consumer 2,532 2,140 1,617
------ ------ ------
Total loans charged off 4,331 3,529 6,041
Recoveries of loans:
Commercial (1) 730 95 248
Residential real estate 41 61 166
Consumer 747 719 700
------ ------ ------
Total recoveries of loans 1,518 875 1,114
Net loan charge-offs (2,813) (2,654) (4,927)
Provision charged to operations 3,212 3,716 2,252
------ ------ ------
Balance, end of year $8,198 $7,799 $6,737
====== ====== ======
Information regarding impaired loans (restated for 2008) is as follows:
2009 2008
---- ----
Balance of impaired loans $27,644 $21,153
Less portion for which no specific
allowance is allocated 11,575 5,513
------- -------
Portion of impaired loan balance for which
an allowance for credit losses is allocated $16,069 $15,640
======= =======
Portion of allowance for loan losses allocated
to the impaired loan balance $ 3,928 $ 3,854
======= =======
Average investment in impaired loans for the year $27,927 $20,860
======= =======
Past due - 90 days or more and still accruing $ 1,639 $ 1,878
======= =======
Nonaccrual $ 3,619 $ 3,396
======= =======
Interest recognized on impaired loans was $1,690, $1,021, and $674 for
years ending 2009, 2008 and 2007, respectively. Accrual basis income was not
materially different from cash basis income for the periods presented.
Nonaccrual loans and loans past due 90 days still on accrual include both
smaller balance homogeneous loans that are collectively evaluated for impairment
and individually classified impaired loans. In 2009, the Company changed its methodology for identifying impaired
loans. Amounts as of December 31, 2008 have been reclassified to be consistent
with the 2009 methodology. The change resulted in reclassifying current or
performing loans as impaired loans for which full payment under the original
terms is not probable. As of December 31, 2008, $13,054 of loans were
reclassified as impaired loans and the related general allowance for loan losses
allocation of $2,450 was reclassified as a specific allowance for loan losses.
Prior to the change in methodology, the general allowance for loan losses
allocation related to these loans was based on historical credit losses, and
these allocations were materially consistent with amounts that would have been
determined had the loans been classified as impaired. The reclassification had
no impact on the allowance for loan losses, the provision for loan losses, net
income or retained earnings.
(1) Includes commercial and industrial and commercial real estate loans
14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31:
2009 2008
---- ----
Land $ 1,805 $ 1,570
Buildings 10,144 10,220
Leasehold improvements 2,897 2,822
Furniture and equipment 13,213 12,489
------- -------
28,059 27,101
Less accumulated depreciation 17,927 16,869
------- -------
Total premises and equipment $10,132 $10,232
======= =======
The following is a summary of the future minimum lease payments for facilities
leased by the Company. Lease expense was $462 in 2009, $448 in 2008 and $405 in
2007.
2010 $ 417
2011 382
2012 344
2013 293
2014 186
Thereafter 109
------
$1,731
======
NOTE F - DEPOSITS
Following is a summary of interest-bearing deposits at December 31:
2009 2008
---- ----
NOW accounts $ 91,998 $ 80,855
Savings and Money Market 142,478 118,289
Time:
In denominations under $100,000 186,228 183,397
In denominations of $100,000 or more 140,170 124,314
-------- --------
Total time deposits 326,398 307,711
-------- --------
Total interest-bearing deposits $560,874 $506,855
======== ========
Following is a summary of total time deposits by remaining maturity at
December 31, 2009:
2010 $180,318
2011 90,211
2012 29,805
2013 15,639
2014 9,427
Thereafter 998
--------
Total $326,398
========
Brokered deposits, included in time deposits, were $34,741 and $17,906 at
December 31, 2009 and 2008, respectively.
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are financing arrangements
that have overnight maturity terms. At maturity, the securities underlying the
agreements are returned to the Company. Information concerning securities sold
under agreements to repurchase is summarized as follows at December 31:
2009 2008
---- ----
Balance outstanding at period-end $31,641 $24,070
------- -------
Weighted average interest rate at period-end .25% .70%
------- -------
Average amount outstanding during the year $27,540 $28,040
------- -------
Approximate weighted average interest rate
during the year .27% 1.50%
------- -------
Maximum amount outstanding as of any month-end $32,718 $35,309
------- -------
Securities underlying these agreements at
year-end were as follows:
Carrying value of securities $37,837 $51,690
------- -------
Fair Value $38,433 $52,083
------- -------
NOTE H - OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2009 and 2008 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
--------------- ---------------- --------- -------
2009 $38,209 $ 4,247 $ 253 $ 42,709
2008 $68,715 $ 5,479 $ 2,580 $ 76,774
Pursuant to collateral agreements with the FHLB, advances are secured by
$213,975 in qualifying mortgage loans and $6,280 in FHLB stock at December 31,
2009. Fixed rate FHLB advances of $38,209 mature through 2033 and have interest
rates ranging from 2.13% to 6.62%. There were no variable-rate FHLB borrowings
at December 31, 2009.
At December 31, 2009, the Company had a cash management line of credit
enabling it to borrow up to $75,000 from the FHLB. All cash management advances
have an original maturity of 90 days. The line of credit must be renewed on an
annual basis. There was $75,000 available on this line of credit at December 31,
2009.
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 $158,500 at December 31,
2009. Of this maximum borrowing capacity of $158,500, the Company had $95,091
available to use as additional borrowings, of which, $75,000 could be used for
short-term, cash management advances as mentioned above.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of
2.00% to 5.00% and are due at various dates through a final maturity date of
December 8, 2014. A total of $400 represented promissory notes payable by Ohio
Valley to related parties. See Note L for further discussion of related party
transactions.
FRB notes consist of the collection of tax payments from Bank customers
under the Treasury Tax and Loan program. These funds have a variable interest
rate and are callable on demand by the U.S. Treasury. The interest rate for the
Company's FRB notes was zero percent at December 31, 2009 and December 31, 2008.
Various investment securities from the Bank used to collateralize FRB notes
totaled $3,290 at December 31, 2009 and $5,880 at December 31, 2008.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $25,200 at December 31,
2009 and $45,850 at December 31, 2008.
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - OTHER BORROWED FUNDS (continued)
Scheduled principal payments over the next five years:
FHLB Borrowings Promissory Notes FRB Notes Totals
--------------- ---------------- --------- ------
2010 $26,065 $2,456 $ 253 $28,774
2011 6,062 --- --- 6,062
2012 64 646 --- 710
2013 2,567 --- --- 2,567
2014 2,569 1,145 --- 3,714
Thereafter 882 --- --- 882
------- ------ ------ -------
$38,209 $4,247 $ 253 $42,709
======= ====== ====== =======
NOTE I - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
On September 7, 2000, a trust formed by Ohio Valley issued $5,000 of 10.6%
fixed rate trust preferred securities as part of a pooled offering of such
securities. The Company issued subordinated debentures to the trust in exchange
for the proceeds of the offering, which debentures represent the sole asset of
the trust. The Company may redeem all or a portion of these subordinated
debentures beginning September 7, 2010 at a premium of 105.30% with the call
price declining .53% per year until reaching a call price of par at year twenty
through maturity. The subordinated debentures must be redeemed no later than
September 7, 2030. Debt issuance costs of $166 were incurred and capitalized and
will amortize as a yield adjustment through expected maturity.
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of
adjustable-rate trust preferred securities as part of a pooled offering of such
securities. The rate on these trust preferred securities will be fixed at 6.58%
for five years, and then convert to a floating-rate term on March 15, 2012,
based on a rate equal to the 3-month LIBOR plus 1.68%. There were no debt
issuance costs incurred with these trust preferred securities. The Company
issued subordinated debentures to the trust in exchange for the proceeds of the
offering. The subordinated debentures must be redeemed no later than June 15,
2037.
On March 26, 2007, the proceeds from these new trust preferred securities
were used to pay off $8,500 in higher cost trust preferred security debt that
was issued on March 26, 2002. This repayment of $8,500 in trust preferred
securities was the result of an early call feature that allowed the Company to
redeem the entire amount of these subordinated debentures at par value. These
higher cost subordinated debentures, which were floating based on a rate equal
to the 3-month LIBOR plus 3.60%, not to exceed 11.00%, were redeemed at a
floating rate of 8.97%. The replacement of this higher cost debt was a strategy
by management to lower interest expense and improve the net interest margin.
Under the provisions of the related indenture agreements, the interest
payable on the trust preferred securities is deferrable for up to five years and
any such deferral is not considered a default. During any period of deferral,
the Company would be precluded from declaring or paying dividends to
shareholders or repurchasing any of the Company's common stock. Under generally
accepted accounting principles, the trusts are not consolidated with the
Company. Accordingly, the Company does not report the securities issued by the
trust as liabilities, and instead reports as liabilities the subordinated
debentures issued by the Company and held by the trust. Since the Company's
equity interest in the trusts cannot be received until the subordinated
debentures are repaid, these amounts have been netted.
17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES
The provision for income taxes consists of the following components:
2009 2008 2007
---- ---- ----
Current tax expense $2,274 $2,831 $1,723
Deferred tax (benefit)expense (2) (102) 908
------ ------ ------
Total income taxes $2,272 $2,729 $2,631
====== ====== ======
The source of deferred tax assets and deferred tax liabilities at December 31:
2009 2008
---- ----
Items giving rise to deferred tax assets:
Allowance for loan losses $2,848 $2,712
Deferred compensation 1,430 1,362
Deferred loan fees/costs 356 294
Depreciation --- 21
Other 155 189
Items giving rise to deferred tax liabilities:
Mortgage servicing rights (165) (66)
FHLB stock dividends (1,081) (1,081)
Unrealized gain on securities available for sale (348) (356)
Depreciation (93) ---
Prepaid expenses (150) (168)
Intangibles (268) (232)
Other (1) (2)
------ ------
Net deferred tax asset $2,683 $2,673
====== ======
The Company determined that it was not required to establish a valuation
allowance for deferred tax assets since management believes that the deferred
tax assets are likely to be realized through a carry back to taxable income in
prior years or the future reversals of existing taxable temporary differences.
The difference between the financial statement tax provision and amounts
computed by applying the statutory federal income tax rate of 34% to income
before taxes is as follows:
2009 2008 2007
---- ---- ----
Statutory tax $3,032 $3,351 $3,036
Effect of nontaxable interest (264) (282) (282)
Nondeductible interest expense 24 34 47
Income from bank owned insurance (196) (192) (186)
Effect of nontaxable life insurance death proceeds (189) --- (24)
Effect of state income tax 74 1 114
Tax credits (212) (193) (78)
Other items 3 10 4
------ ------ ------
Total income taxes $2,272 $2,729 $2,631
====== ====== ======
At December 31, 2008 and December 31, 2009, the Company had no unrecognized
tax benefits. The Company does not expect the amount of unrecognized tax
benefits to significantly change within the next twelve months.
The Company is subject to U.S. federal income tax as well as West Virginia
state income tax. The Company is no longer subject to federal or state
examination for years prior to 2006. The tax years 2006-2008 remain open to
federal and state examinations.
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. The Bank's exposure to credit loss
in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit, and financial
guarantees written, is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for instruments recorded on the balance
sheet.
Following is a summary of such commitments at December 31:
2009 2008
------ ------
Fixed rate $ 827 $ 577
Variable rate 57,564 63,839
Standby letters of credit 12,012 13,524
The interest rate on fixed rate commitments ranged from 5.50% to 8.63% at
December 31, 2009.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and incomeproducing commercial
properties.
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material effect on financial condition or results of operations.
NOTE L - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies in which they are
affiliated were loan customers during 2009. A summary of activity on these
borrower relationships with aggregate debt greater than $120 is as follows:
Total loans at January 1, 2009 $ 8,411
New loans 609
Repayments (615)
Other changes (1,071)
-------
Total loans at December 31, 2009 $ 7,334
=======
Other changes include adjustments for loans applicable to one reporting
period that are excludable from the other reporting period, such as changes in
persons classified as directors, executive officers and companies' affiliates.
In addition, certain directors, executive officers and companies with which they
are affiliated were recipients of interest-bearing promissory notes issued by
Ohio Valley in the amount of $400 at December 31, 2009 and $3,521 at December
31, 2008.
19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - EMPLOYEE BENEFITS
The Bank has a profit-sharing plan for the benefit of its employees and
their beneficiaries. Contributions to the plan are determined by the Board of
Directors of Ohio Valley. Contributions charged to expense were $196, $187 and
$172, for 2009, 2008 and 2007.
Ohio Valley maintains an Employee Stock Ownership Plan (ESOP) covering
substantially all employees of the Company. Ohio Valley makes discretionary
contributions to the ESOP, which are allocated to ESOP participants based on
relative compensation. The total number of shares held by the ESOP, all of which
have been allocated to participant accounts, were 226,480 and 227,177 at
December 31, 2009 and 2008. In addition, the Bank made contributions to its ESOP
Trust as follows:
Years ended December 31
2009 2008 2007
---- ---- ----
Number of shares issued 1,000 1,000 1,000
====== ====== ======
Fair value of stock contributed $ 22 $ 20 $ 26
Cash contributed 371 340 318
----- ----- -----
Total expense $ 393 $ 360 $ 344
===== ===== =====
Life insurance contracts with a cash surrender value of $18,734 at December
31, 2009 have been purchased by the Company, the owner of the policies. The
purpose of these contracts was to replace a current group life insurance program
for executive officers, implement a deferred compensation plan for directors and
executive officers, implement a director retirement plan and implement a
supplemental retirement plan for certain officers. Under the deferred
compensation plan, Ohio Valley pays each participant the amount of fees deferred
plus interest over the participant's desired term, upon termination of service.
Under the director retirement plan, participants are eligible to receive ongoing
compensation payments upon retirement subject to length of service. The
supplemental retirement plan provides payments to select executive officers upon
retirement based upon a compensation formula determined by Ohio Valley's Board
of Directors. The present value of payments expected to be provided are accrued
during the Expenses related to the plans for each of the last three years
amounted to $321, $328, and $294. service period of the covered individuals and
amounted to $4,114 and $3,914 at December 31, 2009 and 2008. In association with
the split-dollar life insurance plan, the present value of the postretirement
benefit totaled $1,303 at December 31, 2009 and $1,125 at December 31, 2008.
20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
The measurement of fair value under US GAAP uses a hierarchy intended to
maximize the use of observable inputs and minimize the use of unobservable
inputs. This hierarchy uses three levels of inputs to measure the fair value of
assets and liabilities as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
Level 2: Significant other observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities, quoted prices in markets that
are not active, and other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant, unobservable inputs that reflect a company's own
assumptions about the assumptions that market participants would use in pricing
an asset or liability. The following is a description of the Company's valuation
methodologies used to measure and disclose the fair values of its financial
assets and liabilities on a recurring or nonrecurring basis:
Securities Available For Sale: Securities classified as available for sale are
reported at fair value utilizing Level 2 inputs. For these securities, the
Company obtains fair value measurements using pricing models that vary based on
asset class and include available trade, bid and other market information. Fair
value of securities available for sale may also be determined by matrix pricing,
which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted prices for the specific
securities, but rather by relying on the securities' relationship to other
benchmark quoted securities.
Impaired Loans: Some impaired loans are reported at the fair value of the
underlying collateral adjusted for selling costs. Collateral values are
estimated using Level 3 inputs based on third party appraisals.
Mortgage Servicing Rights: Fair value is based on market prices for comparable
mortgage servicing contracts.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
Fair Value Measurements at December 31, 2009, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
U.S. Treasury securities ---- $ 10,557 ----
U.S. Government sponsored entity
securities ---- 34,122 ----
Agency mortgage-backed securities,
residential ---- 39,189 ----
Fair Value Measurements at December 31, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
U.S. Government sponsored entity
securities ---- $ 31,866 ----
Agency mortgage-backed securities,
residential ---- 43,474 ----
21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Assets and Liabilities Measured on a Nonrecurring Basis Assets and liabilities measured at fair value on a nonrecurring basis (restated for 2008) are summarized below:
Fair Value Measurements at December 31, 2009, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Impaired Loans ---- ---- $12,141
Mortgage servicing rights ---- ---- 474
Fair Value Measurements at December 31, 2008, Using
------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
------------------- ----------------- --------------
Assets:
Impaired Loans ---- ---- $11,786
Impaired loans, which are usually measured for impairment using the fair
value of the collateral, had a principal balance of $27,644 at December 31,
2009. The portion of this impaired loan balance for which a specific allowance
for credit losses was allocated totaled $16,069, resulting in a specific
valuation allowance of $3,928. This led to an additional provision for loan loss
expense of $74. At December 31, 2008, impaired loans had a principal balance
of $21,153. The portion of this impaired loan balance for which a specific
allowance for credit losses was allocated totaled $15,640, resulting in a
specific valuation allowance of $3,854. The specific valuation allowance for
those loans has increased from $3,854 at December 31, 2008 to $3,928 at December
31, 2009.
Mortgage servicing rights, which are carried at lower of cost or fair
value, were carried at their fair value of $474, which is made up of the
outstanding balance of $620, net of a valuation allowance of $146 at December
31, 2009, resulting in a charge of $91 for the year ending December 31, 2009.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents: For these short-term instruments, the carrying amount
is a reasonable estimate of fair value.
Interest-bearing Deposits in Other Banks: For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Securities classified as available for sale are reported at fair value. For
these securities, the Company obtains fair value measurements using pricing
models that vary based on asset class and include available trade, bid and other
market information. Fair value of securities may also be determined by matrix
pricing, which is a mathematical technique used widely in the industry to value
debt securities without relying exclusively on quoted prices for the specific
securities, but rather by relying on the securities' relationship to other
benchmark quoted securities.
Federal Home Loan Bank stock: It is not practical to determine the fair value of
Federal Home Loan Bank stock due to restrictions placed on its transferability.
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Loans: The fair value of fixed rate loans is estimated by discounting future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
fair value of loan commitments and standby letters of credits was not material
at December 31, 2009 or 2008. The fair value for variable rate loans is
estimated to be equal to carrying value. This fair value represents an entry
price in accordance with ASC 825. While ASC 820 amended ASC 825 in several
respects, this approach to fair value remains an acceptable approach under
generally accepted accounting principles.
Deposit Liabilities: The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
Borrowings: For other borrowed funds and subordinated debentures, rates
currently available to the Bank for debt with similar terms and remaining
maturities are used to estimate fair value. For securities sold under agreements
to repurchase, carrying value is a reasonable estimate of fair value.
Accrued Interest Receivable and Payable: For accrued interest receivable and
payable, the carrying amount is a reasonable estimate of fair value.
In addition, other assets and liabilities that are not defined as financial
instruments were not included in the disclosures below, such as premises and
equipment and life insurance contracts.
The estimated fair values of the Company's financial instruments at
December 31, are as follows:
2009 2008
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 15,670 $ 15,670 $ 18,292 $ 18,292
Securities 100,457 100,702 92,326 92,581
Federal Home Loan Bank stock 6,281 N/A 6,281 N/A
Loans 643,158 661,005 622,592 637,422
Accrued interest receivable 2,896 2,896 3,172 3,172
Financial liabilities:
Deposits 647,644 649,530 592,361 591,742
Securities sold under agreements
to repurchase 31,641 31,641 24,070 24,070
Other borrowed funds 42,709 43,276 76,774 78,777
Subordinated debentures 13,500 13,712 13,500 13,718
Accrued interest payable 4,075 4,075 4,933 4,933
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and, additionally for banks, prompt corrective action regulations,
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators. Failure to meet capital requirements can initiate regulatory action.
Management believes as of December 31, 2009, the Company and Bank meet all
capital adequacy requirements to which it is subject.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year-end, consolidated actual capital levels and minimum required levels
for the Company and the Bank were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2009
Total capital (to risk weighted assets)
Consolidated $85,941 13.6% $50,588 8.0% $63,235 N/A
Bank 79,583 12.7 50,059 8.0 62,574 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 78,033 12.3 25,294 4.0 37,941 N/A
Bank 71,760 11.5 25,030 4.0 37,545 6.0
Tier 1 capital (to average assets)
Consolidated 78,033 9.6 32,507 4.0 40,633 N/A
Bank 71,760 8.9 32,112 4.0 40,140 5.0
2008
Total capital (to risk weighted assets)
Consolidated $82,205 13.5% $48,783 8.0% $60,979 N/A
Bank 76,642 12.7 48,155 8.0 60,194 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 74,581 12.2 24,391 4.0 36,587 N/A
Bank 69,158 11.5 24,078 4.0 36,116 6.0
Tier 1 capital (to average assets)
Consolidated 74,581 9.7 30,788 4.0 38,485 N/A
Bank 69,158 9.1 30,355 4.0 37,944 5.0
Dividends paid by the subsidiaries are the primary source of funds
available to Ohio Valley for payment of dividends to shareholders and for other
working capital needs. The payment of dividends by the subsidiaries to Ohio
Valley is subject to restrictions by regulatory authorities. These restrictions
generally limit dividends to the current and prior two years retained earnings.
At January 1, 2010, approximately $4,155 of the subsidiaries' retained earnings
were available for dividends under these guidelines. In addition to these
restrictions, as a practical matter, dividend payments cannot reduce regulatory
capital levels below minimum regulatory guidelines
24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Ohio Valley. In this
information, Ohio Valley's investment in its subsidiaries is stated at cost plus
equity in undistributed earnings of the subsidiaries since acquisition. This
information should be read in conjunction with the consolidated financial
statements of the Company.
CONDENSED STATEMENTS OF CONDITION
Years ended December 31:
2009 2008
Assets ---- ----
Cash and cash equivalents $ 1,215 $ 1,169
Investment in subsidiaries 78,910 75,440
Notes receivable - subsidiaries 4,230 5,461
Other assets 302 295
------- -------
Total assets $84,657 $82,365
======= =======
Liabilities
Notes payable $ 4,247 $ 5,479
Subordinated debentures 13,500 13,500
Other liabilities 389 330
------- -------
Total liabilities 18,136 19,309
------- -------
Shareholders' Equity
Total shareholders' equity 66,521 63,056
------- -------
Total liabilities and shareholders' equity $84,657 $82,365
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31:
2009 2008 2007
---- ---- ----
Income:
Interest on notes $ 156 $ 259 $ 311
Other operating income 56 33 35
Dividends from subsidiaries 4,000 6,250 5,000
Expenses:
Interest on notes 157 261 314
Interest on subordinated debentures 1,089 1,089 1,143
Operating expenses 230 309 227
------ ------ ------
Income before income taxes and equity in
undistributed earnings of subsidiaries 2,736 4,883 3,662
Income tax benefit 423 458 450
Equity in undistributed earnings of subsidiaries 3,486 1,787 2,185
------ ------ ------
Net Income $6,645 $7,128 $6,297
====== ====== ======
25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31:
2009 2008 2007
---- ---- ----
Cash flows from operating activities:
Net income $6,645 $7,128 $6,297
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings
of subsidiaries (3,486) (1,787) (2,185)
Change in other assets (7) 133 (39)
Change in other liabilities 59 (3) (73)
------ ------ ------
Net cash provided by
operating activities 3,211 5,471 4,000
------ ------ ------
Cash flows from investing activities:
Change in notes receivable 1,231 197 (320)
------ ------ ------
Net cash provided by (used in)
investing activities 1,231 197 (320)
------ ------ ------
Cash flows from financing activities:
Change in notes payable (1,232) (244) 329
Proceeds from subordinated debentures --- --- 8,500
Repayment of subordinated debentures --- --- (8,500)
Cash dividends paid (3,186) (3,061) (2,938)
Proceeds from issuance of common shares 22 20 398
Purchases of treasury shares --- (2,269) (3,394)
------ ------ ------
Net cash used in financing activities (4,396) (5,554) (5,605)
------ ------ ------
Cash and cash equivalents:
Change in cash and cash equivalents 46 114 (1,925)
Cash and cash equivalents at beginning of year 1,169 1,055 2,980
------ ------ ------
Cash and cash equivalents at end of year $1,215 $1,169 $1,055
====== ====== ======
26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - SEGMENT INFORMATION
The reportable segments are determined by the products and services
offered, primarily distinguished between banking and consumer finance. They are
also distinguished by the level of information provided to the chief operating
decision maker, who uses such information to review performance of various
components of the business which are then aggregated if operating performance,
products/services, and customers are similar. Loans, investments, and deposits
provide the majority of the net revenues from the banking operation, while loans
provide the majority of the net revenues for the consumer finance segment. All
Company segments are domestic.
Total revenues from the banking segment, which accounted for the majority
of the Company's total revenues, totaled 93.4%, 94.0% and 94.8% of total
consolidated revenues for the years ending December 31, 2009, 2008 and 2007,
respectively.
The accounting policies used for the Company's reportable segments are the
same as those described in Note A - Summary of Significant Accounting Policies.
Income taxes are allocated based on income before tax expense. Transactions
among reportable segments are made at fair value.
Segment information for the years ended December 31, is as follows:
Year Ended December 31, 2009
-------------------------------------
Consumer Total
Banking Finance Company
-------- -------- --------
Net interest income $ 27,817 $ 2,874 $ 30,691
Provision expense $ 3,049 $ 163 $ 3,212
Tax expense $ 1,843 $ 429 $ 2,272
Net income $ 5,810 $ 835 $ 6,645
Assets $797,276 $ 14,712 $811,988
Year Ended December 31, 2008
-------------------------------------
Consumer Total
Banking Finance Company
-------- -------- --------
Net interest income $ 28,067 $ 2,638 $ 30,705
Provision expense $ 3,479 $ 237 $ 3,716
Tax expense $ 2,357 $ 372 $ 2,729
Net income $ 6,405 $ 723 $ 7,128
Assets $767,485 $ 13,623 $781,108
Year Ended December 31, 2007
-------------------------------------
Consumer Total
Banking Finance Company
-------- -------- --------
Net interest income $ 26,216 $ 2,311 $ 28,527
Provision expense $ 2,125 $ 127 $ 2,252
Tax expense $ 2,298 $ 333 $ 2,631
Net income $ 5,645 $ 652 $ 6,297
Assets $770,958 $ 12,460 $783,418
27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited)
Quarters Ended
Mar. 31 Jun. 30 Sept. 30 Dec. 31
2009 ------- ------- -------- -------
Total interest income $12,611 $11,710 $11,733 $11,569
Total interest expense 4,331 4,407 4,285 3,909
Net interest income 8,280 7,303 7,448 7,660
Provision for loan losses(1) 848 296 957 1,111
Net Income 2,051 1,396 1,700 1,498
Earnings per share $ .51 $ .35 $ .43 $ .38
2008
Total interest income $13,734 $12,853 $12,657 $12,289
Total interest expense 6,059 5,298 4,933 4,538
Net interest income 7,675 7,555 7,724 7,751
Provision for loan losses 701 916 693 1,406
Net Income 1,965 1,731 1,885 1,547
Earnings per share $ .48 $ .43 $ .47 $ .39
2007
Total interest income $13,502 $13,720 $13,784 $13,941
Total interest expense 6,431 6,554 6,779 6,656
Net interest income 7,071 7,166 7,005 7,285
Provision for loan losses 386 616 332 918
Net Income 1,775 1,686 1,833 1,003
Earnings per share $ .42 $ .41 $ .45 $ .24
(1) During the second quarter of 2009, the Bank experienced a decrease in its
provision expense as a result of a $648 loan recovery from a commercial
loan relationship.
28
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Ohio Valley Banc Corp.
We have audited the accompanying consolidated statements of condition of Ohio
Valley Banc Corp. (the "Company") as of December 31, 2009 and 2008, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2009. We
also have audited the Company's internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the Company's internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ohio Valley Banc
Corp. as of December 31, 2009 and 2008, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2009, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, Ohio Valley Banc Corp. maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/CROWE HORWATH LLP
Crowe Horwath LLP
Columbus, Ohio
March 16, 2010
29
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Board of Directors and Shareholders
Ohio Valley Banc Corp.
The management of Ohio Valley Banc Corp. (the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. The Company's internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal control
over financial reporting includes those policies and procedures that: (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
The system of internal control over financial reporting as it relates to
the consolidated financial statements is evaluated for effectiveness by
management. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed Ohio Valley Banc Corp.'s system of internal control
over financial reporting as of December 31, 2009, in relation to criteria for
effective internal control over financial reporting as described in "Internal
Control Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
concluded that, as of December 31, 2009, its system of internal control over
financial reporting is effective and meets the criteria of the "Internal Control
Integrated Framework".
Crowe Horwath LLP, independent registered public accounting firm, has
issued an audit report dated March 16, 2010 on the Company's internal control
over financial reporting. That report is contained in Ohio Valley's Annual
Report to Shareholders under the heading "Report of Independent Registered
Public Accounting Firm".
Ohio Valley Banc Corp
/s/JEFFREY E. SMITH
Jeffrey E. Smith
Chairman, CEO
/s/SCOTT W. SHOCKEY
Scott W. Shockey
Vice President, CFO
March 9, 2010
30
SUMMARY OF COMMON STOCK DATA
OHIO VALLEY BANC CORP.
Years ended December 31, 2009 and 2008
INFORMATION AS TO STOCK PRICES AND DIVIDENDS: On February 9, 1996, Ohio Valley's
common shares began to be quoted on The NASDAQ Stock Market under the symbol
"OVBC". The following table summarizes the high and low sales prices for Ohio
Valley's common shares on the NASDAQ Global Market for each quarterly period
since January 1, 2008.
2009 High Low
---- ------ ------
First Quarter $22.29 $18.00
Second Quarter 32.31 21.30
Third Quarter 30.69 25.34
Fourth Quarter 28.50 20.34
2008 High Low
---- ------ ------
First Quarter $26.65 $25.00
Second Quarter 26.25 25.00
Third Quarter 25.50 20.00
Fourth Quarter 21.80 17.65
Shown below is a table which reflects the dividends declared per share on
Ohio Valley's common shares. As of March 12, 2010, the number of holders of
record of common shares was 2,142, an increase from 2,124 shareholders at March
13, 2009.
Dividends per share 2009 2008
------------------- ---- ----
First Quarter $.20 $.19
Second Quarter .20 .19
Third Quarter .20 .19
Fourth Quarter .20 .19
Dividends paid by the subsidiaries are the primary source of funds
available to Ohio Valley for payment of dividends to shareholders and for other
working capital needs. The payment of dividends by the subsidiaries to Ohio
Valley is subject to restrictions by regulatory authorities. These restrictions
generally limit dividends to the current and prior two years retained earnings.
In addition, FRB policy requires Ohio Valley to provide notice to the FRB
in advance of the payment of a dividend to Ohio Valley's shareholders under
certain circumstances, and the FRB may disapprove of such dividend payment if
the FRB determines the payment would be an unsafe or unsound practice.
Dividend restrictions are also listed within the provisions of Ohio
Valley's trust preferred security arrangements. Under the provisions of these
agreements, the interest payable on the trust preferred securities is deferral
for up to five years and any such deferral would not be considered a default.
During any period of deferral, Ohio Valley would be precluded from declaring or
paying dividends to its shareholders or repurchasing any of its common stock.
31
PERFORMANCE GRAPH
OHIO VALLEY BANC CORP.
Year ended December 31, 2009
The following graph sets forth a comparison of five-year cumulative total
returns among the Company's common shares (indicated "Ohio Valley Banc Corp." on
the Performance Graph), the S & P 500 Index (indicated "S & P 500" on the
Performance Graph), and SNL Securities SNL $500 Million-$1 Billion Bank
Asset-Size Index (indicated "SNL" on the Performance Graph) for the fiscal years
indicated. Information reflected on the graph assumes an investment of $100 on
December 31, 2004 in each of the common shares of the Company, the S & P 500
Index, and the SNL Index. Cumulative total return assumes reinvestment of
dividends. The SNL Index represents stock performance of eighty-five (85) of the
nation's banks located throughout the United States with total assets between
$500 Million and $1 Billion as selected by SNL Securities of Charlottesville,
Virginia. The Company is included as one of the 85 banks in the SNL Index.
TOTAL RETURN PERFORMANCE
OVBC, SNL $500M-$1B Bank Index and S&P 500
2004-2009
Period Ending
----------------------------------------------------------
12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
-------- -------- -------- -------- -------- --------
OVBC $100.00 $ 98.48 $101.31 $103.86 $ 80.38 $ 96.97
SNL $500M-$1B $100.00 $104.29 $118.61 $ 95.04 $ 60.90 $ 58.00
S&P 500 $100.00 $104.91 $121.48 $128.16 $ 80.74 $102.11
32
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDIION AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide an analysis of the Company's
financial condition and results of operations which is not otherwise apparent
from the audited consolidated financial statements included in this report. The
accompanying consolidated financial information has been prepared by management
in conformity with U.S. generally accepted accounting principles ("US GAAP") and
is consistent with that reported in the consolidated statements. Reference
should be made to those statements and the selected financial data presented
elsewhere in this report for an understanding of the following tables and
related discussion. All dollars are reported in thousands, except share and per
share data.
RESULTS OF OPERATIONS:
SUMMARY
Ohio Valley Banc Corp. generated net income of $6,645 for 2009, a decrease
of 6.8% from 2008. Earnings per share were $1.67 for 2009, a decrease of 5.6%
from 2008. The decrease in net income and earnings per share for 2009 was
primarily due to higher costs related to deposit assessments by the Federal
Deposit Insurance Corporation ("FDIC"). Such costs rose to $1,625 in 2009 from
$268 in 2008 and reflected higher assessment rates and a $373 second quarter
2009 special assessment levied by the FDIC on insured financial institutions to
rebuild the Deposit Insurance Fund. The higher FDIC costs reduced 2009's net
income and earnings per share by $896 and $0.22, respectively. Partially
offsetting the significant FDIC insurance expense increase was noninterest
income improvement of 25.1% during 2009. The growth in noninterest income was
largely due to life insurance proceeds collected in the third quarter of 2009 as
well as increased transaction volume related to the Company's mortgage banking
activity and seasonal tax clearing services performed during the first half of
2009. During 2008, Ohio Valley Banc Corp. generated net income of $7,128, an
increase of 13.2% from 2007. Earnings per share were $1.77 for 2008, an increase
of 16.4% from 2007. The increase in net income and earnings per share for 2008
was primarily due to a 7.6% net interest income expansion as a result of the
lower short-term interest rate environment initiated by the Federal Reserve
Bank. Growth in income also came from noninterest income improvement of 18.6%
over 2007 due to lower losses on the sale of other real estate owned ("OREO").
Total assets during 2009 increased $30,880, or 4.0%, resulting in total
assets at year-end of $811,988. The Company's annualized net income to average
asset ratio, or return on assets ("ROA") was .81% for 2009 compared to .91% in
2008 and .82% in 2007. The annualized net income to average equity ratio, or
return on equity ("ROE") was 10.23% for 2009 compared to 11.62% in 2008 and
10.40% in 2007. The decrease in both the Company's ROA and ROE was due to the
higher assessments and special assessment imposed by the FDIC during 2009. The
higher FDIC costs reduced 2009's ROA and ROE by 11 basis points and 138 basis
points, respectively. Prior to 2009, the Company experienced increasing trends
in both ROA and ROE for 2008 and 2007 as a result of improved earnings
performance due to net interest and noninterest income activities in 2008 and a
significant decrease in provision expense during 2007.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
The most significant portion of the Company's revenue, net interest income,
results from properly managing the spread between interest income on earning
assets and interest expense incurred on interest-bearing liabilities. The
Company earns interest and dividend income from loans, investment securities and
short-term investments while incurring interest expense on interest-bearing
deposits, securities sold under agreements to repurchase ("repurchase
agreements") and short- and long-term borrowings. Net interest income is
affected by changes in both the average volume and mix of assets and liabilities
and the level of interest rates for financial instruments. Changes in net
interest income are measured by net interest margin and net interest spread. Net
interest margin is expressed as net interest income divided by average
interest-earning assets. Net interest spread is the difference between the
average yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities. Both of these are reported on a fully
tax-equivalent ("FTE") basis. Net interest margin is greater than net interest
spread due to the interest earned on interest-earning assets funded from
noninterest bearing funding sources, primarily demand deposits and shareholders'
equity. Following is a discussion of changes in interest-earning assets,
interest-bearing liabilities and the associated impact on interest income and
interest expense for the three years ending December 31, 2009. Tables I and II
have been prepared to summarize the significant changes outlined in this
analysis.
Net interest income on an FTE basis decreased $22 in 2009, or 0.07%,
compared to the $31,068 earned in 2008. The decrease was primarily attributable
to a compressing net interest margin caused by a continued decrease in
short-term interest rates initiated by the Federal Reserve Board in 2007.
Further impacting the decrease to net interest income was an increase in higher
relative balances being invested in overnight or short-term earning assets such
as taxable investment securities and interest-bearing balances with banks, which
return lower yields. Net interest income on an FTE basis increased $2,177 in
2008, an increase of 7.5% compared to the $28,891 earned in 2007. The increase
was primarily attributable to an expanding net interest margin caused by lower
funding costs combined with a higher level of interest-earning assets, mostly
from growth in taxable securities and interest-bearing balances with banks.
For 2009, average earning assets grew $40,136, or 5.5%, as compared to
growth of $10,834, or 1.5%, in 2008. Driving this continued growth in earning
assets for 2009 was average interest-bearing balances with banks, increasing to
$27,077 at year-end 2009, up from $5,710 at year-end 2008 and $549 at year-end
2007. The larger increase in 2009 was due to the Company's excess liquidity
position, primarily resulting from average deposit growth exceeding the growth
in average loans. As loan growth continued at a mild pace throughout much of
2009, more excess funds from core deposit growth, on average, were temporarily
invested into interest-bearing balances with banks. This caused these
short-term, lower yielding instruments to represent a large percentage of
earning assets, finishing at 3.5% of earning assets at year-end 2009 as compared
to 0.8% at year-end 2008. Excess funds from average core deposit growth were
also invested into average taxable securities balances, which expanded $14,518,
or 17.6%, for 2009 and represented 12.5% of earning assets at year-end 2009.
This compares to average taxable securities growth of $5,858, or 7.6%, for 2008
representing 11.2% of earning assets at year-end 2008. The growth in average
securities was largely comprised of U.S. government sponsored entity securities.
Average loans, the Company's highest portion of earning assets, increased
MANAGEMENT'S DISCUSSION AND ANALYSIS
$12,653, or 2.0%, during 2009, while remaining relatively stable during 2008,
increasing just $334, or 0.1%. The growth in average loans was largely from
commercial loans. Although average loan balances increased during 2009, it
represented a smaller portion of earning assets, finishing at 82.7% of earning
assets for 2009 as compared to 85.5% for 2008, as most of the earning asset
growth in 2009 came from short-term balances with banks and securities.
Management continues to focus on generating loan growth as this portion of
earning assets provides the greatest return to the Company. Although loans make
up the largest percentage of earning assets, management is comfortable with the
current level of loans based on collateral values, the balance of the allowance
for loan losses, strict underwriting standards and the Company's
well-capitalized status. Management maintains securities at a dollar level
adequate enough to provide ample liquidity and cover pledging requirements.
Average interest-bearing liabilities increased 4.2% between 2009 and 2008
and increased 0.6% between 2007 and 2008. The larger increase in 2009 came
mostly from time deposits, which increased $19,942, or 6.4%. Interest-bearing
liabilities in 2009 were comprised largely of time deposits and NOW accounts,
which together represented 65.2% of total interest-bearing liabilities, as
compared to 64.1% in 2008 and 67.9% in 2007. Other borrowed money represented
7.5% of total interest-bearing liabilities in 2009, as compared to 9.7% in 2008
and 9.8% in 2007. The composition of other borrowed funds as well as time
deposits and NOW accounts has declined from 2007 to 2009. The primary reason for
this composition decrease was from growth in the Company's savings and money
market accounts, primarily its Market Watch product, which together represented
a higher composition of total interest-bearing liabilities at 20.9% in 2009 as
compared to 19.5% in 2008 and 15.7% in 2007. Introduced in 2005, the Market
Watch product offers customers tiered rates that are competitive with other
offerings in the Company's market areas. The increased demand for the Market
Watch product was largely the result of promotional pricing during 2008 and
2009. The consumer preference for this product has generated a significant
amount of funding dollars which have helped to support earning asset growth,
maturity runoff of time deposits and payoffs on other borrowed funds. This
composition shift from 2007 to 2009 with higher savings and money market
balances and lower time deposits has served as a cost effective contribution to
the net interest margin. The average cost of savings and money market accounts
was 1.21%, 1.70% and 2.78% during the years ending 2009, 2008 and 2007,
respectively. This is compared to the much higher average cost of time deposits
of 3.24%, 4.17% and 4.88% during the years ending 2009, 2008 and 2007,
respectively.
The net interest margin decreased 23 basis points to 4.00% in 2009 from
4.23% in 2008. Conversely, this compared to a 24 basis points increase in the
net interest margin in 2008. During 2009, there was a decrease of 9 basis points
from the contributions of interest free funds (i.e. demand deposits,
shareholders' equity) from 0.52% in 2008 to 0.43% in 2009. The net interest
margin was further impacted by a decrease in the net interest rate spread on
interest sensitive assets and liabilities of 14 basis points, with the average
cost of interest-bearing liabilities decreasing 73 basis points from 3.34% to
2.61% being completely offset by the average yield on interest-earning assets
decreasing 87 basis points from 7.05% to 6.18%.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Lower asset yields caused interest income on an FTE basis to decrease
$3,918, or 7.5%, from 2008. Lower asset yields in 2009 were partly due to the
growth in earning asset composition being comprised mostly of shorter-term
average interest-bearing balances with banks and taxable securities, which
yielded just 0.21% and 3.13% during 2009, respectively. During most of 2009, the
Company experienced limited loan growth, primarily due to lower residential real
estate loan balances, while experiencing an increasing trend of higher core
deposit growth. Further contributing to lower asset yields were loan yields
decreasing 64 basis points from 2008 to 2009. This negative effect reflects the
decrease in short-term interest rates initiated by the Federal Reserve Board in
2007. The Company's commercial, participation and real estate loan portfolios
have been most sensitive to these decreases in short-term interest rates since
2007, particularly the prime interest rate. The prime interest rate began 2008
at 7.25% and decreased 200 basis points in the first quarter, 25 basis points in
the second quarter and 175 basis points in the fourth quarter to end 2008 at
3.25%. During 2009, the prime interest rate remained at 3.25%, allowing for
additional asset repricings as a lagging effect. During 2008, lower asset yields
caused interest income on an FTE basis to decrease $3,415, or 6.2%, from 2007.
Lower asset yields were largely the result of loan yields decreasing 55 basis
points from 2007 to 2008, attributed to the decreases in short-term interest
rates initiated by the Federal Reserve since 2007.
Partially offsetting these negative effects to interest income in 2009 were
positive contributions from real estate fees. During the end of 2008 and
entering 2009, the nation's long-term interest rates that are tied to fixed-rate
mortgages became increasingly affordable. At March 31, 2009 and December 31,
2008, the 30-year treasury rate was 3.56% and 2.69%, respectively, as compared
to 4.31% at September 30, 2008. This was responsible for a significant increase
in the demand for real estate refinancings that would allow consumers to take
advantage of historical low rates. This also allowed the Company to originate a
significant volume of real estate loans that were sold to the secondary market.
Both the significant volume of refinancings and secondary market loan
originations during the early part of 2009 resulted in the Company's real estate
fees increasing $342, or 67.0%, during 2009 as compared to 2008. Further
contributing to interest income was additional fee income from increased
originations of the Company's refund anticipation loans ("RAL") in early 2009.
Participating with a third-party tax software provider has given the Company the
opportunity to make RAL loans during the tax refund loan season, typically from
January through March. RAL loans are short-term cash advances against a
customer's anticipated income tax refund. During 2009, the Company had
recognized $397 in RAL fees as compared to $265 during 2008 and $94 during 2007.
RAL fees have been subject to scrutiny by various governmental and consumer
groups who have questioned the fairness and legality of RAL fees and the risks
to which such business subjects the banks that offer RALs. The Bank may be
required by a regulator to terminate, and is considering terminating, the
offering of such loans. The Bank also has a separate agreement with the tax
software provider for the Companys electronic refund check/deposit (ERC/ERD)
clearing services. Through the ERC/ERD agreement, the Company serves as a
facilitator for the clearing of tax refunds. The ERC/ERD service does not
subject the Bank to the risks related to the RALs and has not been subject to
the same scrutiny. Nevertheless, if the Bank terminates its contract with the
tax software provider for the RAL business, the Bank may also lose the ERC/ERD
business.
In relation to lower earning asset yields for 2009, the Company's
interest-bearing liability costs decreased 73 basis points causing interest
expense to drop $3,896, or 18.7%, from 2008 to 2009 as a result of lower rates
paid on interest-bearing liabilities. Since the beginning of 2008, the Federal
Reserve Board has reduced the prime and federal funds interest rates by 400
basis points. The prime interest rate is currently at 3.25% and the target
federal funds rate has decreased to a range of 0.0% to 0.25%. The short-term
rate decreases impacted the repricings of various Bank deposit products,
including public fund NOW accounts, Gold Club and Market Watch accounts.
Contributing most to the decrease in funding costs were interest rates on time
MANAGEMENT'S DISCUSSION AND ANALYSIS
deposit balances (CD's), which continued to reprice at lower rates during 2009
(as a continued lagging effect to the Federal Reserve action to drop short-term
interest rates). The year-to-date weighted average costs of the Company's time
deposits have decreased from 4.88% at year-end 2007 to 4.17% at year-end 2008
and 3.24% at year-end 2009. During 2008, the Company's interest-bearing
liability costs decreased 93 basis points causing interest expense to drop
$5,592, or 21.2%, from 2007 to 2008. This was due to the previously mentioned
Federal Reserve rate reductions initiated in 2007 that caused a downward shift
in short-term interest causing the repricings of various Bank deposit products
during this time, including time deposits, public fund NOW accounts, Gold Club
and Market Watch accounts.
While the Company has finished 2009 with a decrease in the net interest
margin as compared to 2008, there has been margin improvement throughout the
second half of 2009. As previously mentioned, during the first quarter of 2009,
the Company experienced a significant volume of mortgage refinancings and RAL
loan volume which increased real estate and consumer loan fees and also the net
interest margin, which was 4.42% at the end of 2009's first quarter. It was also
during this time the Company experienced a significant increase in excess
deposits which led to temporary increases in lower yielding interest-bearing
deposits with banks and short-term taxable securities with maturity terms less
than one year. Entering the second quarter, the real estate and RAL fees began
to stabilize causing a decrease to the Company's second quarter net interest
margin of 3.78%. However, entering the second half of 2009, the Company improved
its net interest margin to 3.85% in the third quarter of 2009 and 3.99% in the
fourth quarter of 2009. The Company attributes this margin enhancement effect to
the re-investment of lower yielding interest-bearing deposits with banks earning
0.25% or less to higher yielding assets such as loans and longer-term investment
securities. Net interest margin will benefit as continued maturities of
short-term taxable securities can be re-invested to loans and other longer-term,
higher yielding investments.
It is difficult to speculate on future changes in net interest margin and
the frequency and size of changes in market interest rates. The past year has
seen the banking industry under significant stress due to declining real estate
values and asset impairments. The Federal Reserve Board's continued actions of
decreasing short-tem interest rates in 2008 were necessary to take steps in
repairing the recessionary problems and promote economic stability. The Company
believes it is reasonably possible the prime interest rate and the federal funds
rate will remain at the historically low levels for the majority of 2010.
However, there can be no assurance to that effect or as to the magnitude of any
change in market interest rates should a change be prompted by the Federal
Reserve Board, as such changes are dependent upon a variety of factors that are
beyond the Company's control. For additional discussion on the Company's rate
sensitive assets and liabilities, please see "Interest Rate Sensitivity and
Liquidity" and "Table VIII" within this Management's Discussion and Analysis.
NONINTEREST INCOME
Total noninterest income increased $1,554, or 25.1%, in 2009 as compared to
2008. Contributing most to the increase in noninterest income was bank owned
life insurance proceeds, seasonal tax refund processing fees and mortgage
banking income partially offset by a decrease in the Bank's service charge fees
on deposit accounts.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Noninterest income growth during 2009 came mostly from the Company's
earnings from tax-free bank owned life insurance ("BOLI") investments. BOLI
investments are maintained by the Company in association with various benefit
plans, including deferred compensation plans, director retirement plans and
supplemental retirement plans. During the third quarter of 2009, the Company
received BOLI proceeds resulting in a gain of $556 which led to a year-to-date
increase of $703, or 92.9%, in BOLI earnings for 2009.
Also contributing to 2009's noninterest income growth was the Company's
mortgage banking income. Mortgage banking income includes gains on the sale of
mortgage loans, mortgage servicing fees and mortgage servicing rights fees, net
of impairment. Historic low interest rates related to long-term fixed-rate
mortgage loans have caused consumers to refinance existing mortgages in order to
reduce their monthly costs. Despite the low level of home sales, consumers are
selectively purchasing real estate while locking in low long-term rates. To help
manage this consumer demand for longer-termed, fixed-rate real estate mortgages,
the Company took advantage of opportunities to sell most real estate loans to
the secondary market, mostly in the first half of 2009. The decision to sell
long-term fixed-rate mortgages at lower rates was also effective in minimizing
the interest rate risk exposure to rising rates. During the year ended December
31, 2009, the Company sold 432 loans totaling $57,815 to the secondary market as
compared to 109 loans totaling $11,703 during the year ended December 31, 2008.
This volume increase in loan sales contributed to total mortgage banking income
growth of $658, or 658.0%, during 2009 as compared to 2008. The Company
anticipates the mortgage banking loan sales to decline in 2010.
Further contributing to noninterest income growth was the Company's tax
refund processing fees classified as ERC/ERD fees. The Company began its
participation in a new tax refund loan service in 2006 where it serves as a
facilitator for the clearing of tax refunds for a tax software provider. The
Company is one of a limited number of financial institutions throughout the
U.S. that facilitates tax refunds through its relationship with this tax
software provider. During the year ended December 31, 2009, the Company's
ERC/ERD fees increased by $256, or 94.1%, as compared to 2008. As a result of
ERC/ERD activity being mostly seasonal, the majority of income was recorded
during the first half of 2009, with only minimal income recorded thereafter.
Growth in noninterest income also came from the net gains and losses on the
sales of OREO assets, classified as other noninterest income. This income was
the result of higher OREO losses experienced in 2008 combined with higher OREO
gains experienced during 2009. As a result, income from OREO sales increased $69
during 2009 as compared to 2008. The year-to-date increase was primarily the
result of a $41 loss incurred on the sale of one large real estate property
during the first quarter of 2008 and a $24 gain recognized on the sale of one
large real estate property during the second quarter of 2009.
Further enhancing growth in other noninterest income was debit card
interchange income, increasing $77, or 11.8%, during 2009 as compared to 2008.
The volume of transactions utilizing the Company's Jeanie(R) Plus debit card
continue to increase from a year ago. The Company's customers used their
MANAGEMENT'S DISCUSSION AND ANALYSIS
Jeanie(R) Plus debit cards to complete 1,473,913 transactions during 2009, up
11.7% from the 1,319,191 transactions during 2008, derived mostly from gasoline
and restaurant purchases.
Partially offsetting noninterest income growth was a decrease in the Bank's
service charge fees on deposit accounts, which declined by $257, or 8.4%, during
2009 as compared to 2008. The decrease was in large part due to a lower volume
of overdraft balances, as customers presented few er checks against
non-sufficient funds during 2009 as compared to 2008.
The total of all remaining noninterest income categories increased $48
during 2009 as compared to 2008. The total growth in noninterest income
demonstrates management's desire to leverage technology to enhance efficiency
and diversify the Company's revenue sources.
In 2008, total noninterest income increased $957, or 18.3%, as compared to
2007. Contributing most to this increase was lower losses on the sale of OREO of
$746, or 96.0%, from year-end 2007. This was largely due to the liquidation of a
large non-performing asset during the fourth quarter of 2007, creating a pretax
loss of $686 in 2007, causing a reverse effect in 2008. Further increasing
2008's noninterest income were increases to the Company's Electronic Refund
Check/Deposit fees of $162, or 147.3%, and service charge fees on deposit
accounts of $91, or 3.1%.
NONINTEREST EXPENSE
Total noninterest expense increased $2,984, or 12.8%, in 2009 and increased
$742, or 3.3%, in 2008. The growth in noninterest expense during 2009 was most
affected by a significant increase in the Company's FDIC insurance premium
expense, which was up $1,357, or 506.3%, during 2009 as compared to 2008. The
increase in deposit insurance expense was due to increases in the fee assessment
rates during 2009 and a special assessment applied to all FDIC insured
institutions as of June 30, 3009. With regard to the increase in fee assessment
rates, prior to the third quarter of 2008, the Company had benefited from its
share of available credits that were used to offset insurance assessments that
resulted in minimum quarterly insurance premiums, approximately $17 per quarter.
This assessment credit benefit was fully utilized by June 30, 2008. With the
elimination of this credit, the Company entered the third quarter of 2008 with
its deposits being assessed at an annual rate close to 7 basis points of total
deposits. In December 2008, the FDIC issued a rule increasing deposit insurance
assessment rates uniformly for all financial institutions for the first quarter
of 2009 by an additional 7 basis points on an annual basis.
In May 2009, the FDIC issued a final rule which levied a special assessment
applicable to all FDIC insured depository institutions totaling 5 basis points
of each institution's total assets less Tier 1 capital as of June 30, 2009, not
to exceed 10 basis points of total deposits. This special assessment, which
totaled $373 for the Company, was part of the FDIC's efforts to rebuild the
Deposit Insurance Fund back to an adequate level.
While these special assessments levied on all institutions were proven to
be vital in maintaining adequate insurance levels, the Deposit Insurance Fund
remained extremely low due to the continued high rate of bank failures during
2009. As a result, during the fourth quarter of 2009, the FDIC approved an
alternative to future special assessments, which would negatively impact the
Company's earnings. The alternative was to have all banks prepay twelve quarters
MANAGEMENT'S DISCUSSION AND ANALYSIS
worth of FDIC assessments on December 30, 2009. The prepayment, which includes
assumptions about future deposit and assessment rate growth, would be based on
third quarter deposits. The prepaid amount would be amortized over the entire
prepayment period. As a result of this ruling, on December 30, 2009, the Company
prepaid its assessment in the amount of $3,567. While the prepayment decreased
the amount of investable assets, the lost earnings on the amount of this
prepayment is significantly less than the impact of an additional special
assessment. Continuing declines in the Deposit Insurance Fund may result in the
FDIC imposing additional assessments in the future, which could adversely affect
the Company's capital levels and earnings.
Also contributing to the noninterest expense increase was salaries and
employee benefits, the Company's largest noninterest expense item, which
increased $916, or 6.5%, during 2009 as compared to 2008. The increase was
largely due to increased annual cost of living salary increases, higher
incentive costs and a higher full-time equivalent ("FTE") employee base. The
Company's FTE employees increased from 264 employees at December 31, 2008 on
staff to 270 employees at December 31, 2009. During 2008, salary and employee
benefits increased $1,012, or 7.8%, from 2007. This increase was in large part
due to increased health insurance benefit expenses, annual cost of living salary
increases and higher incentive costs due to higher corporate performance during
2008 as compared to 2007. During 2008, the Company also experienced a higher
full-time equivalent employee base, increasing from 256 employees at year-end
2007 to 264 employees at year-end 2008, further increasing salaries and employee
benefit expenses during 2008.
In 2009, occupancy and furniture and equipment expenses increased $193, or
7.4%, as compared to 2008. This was in large part due to the replacement of all
of the Company's automated teller machines ("ATM") during the second half of
2008. The investment of over $500 was necessary to upgrade each ATM location
with more current equipment to better service customer needs. All ATM's had been
fully replaced by the end of 2009's first quarter, with depreciation commencing
on most of these assets beginning January 2009. In 2008, occupancy and furniture
and equipment expenses increased $57, or 2.2%, as compared to 2007. This
increase was in large part due to the addition of a new banking facility located
within a hospital in Gallia County. The full service banking center was built
during 2007 at a cost of approximately $371 and serves as an additional market
presence to service the banking needs of the medical staff and patients along
the hospital's campus area. The facility was placed in service and depreciation
commenced during the fourth quarter of 2007. As a result, occupancy and
furniture and equipment expenses for this new facility increased $49 during 2008
as compared to 2007.
During 2009, corporation franchise tax increased $107, or 17.7%, as
compared to 2008. Conversely during 2008, corporation franchise tax decreased
$65, or 9.7%, as compared to 2007. The lower tax expense in 2008 was the result
of a tax credit the Company was able to apply for and receive in 2008 based on
the training programs that exist and are utilized within the Company for the
benefit of its employees. The one-time nature of the tax credit that was
utilized in 2008, created a reverse effect in 2009 causing most of the expense
increase.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Increases in the Company's other noninterest expenses were realized during
2009, increasing $514, or 10.3%, as compared to 2008. Leading the growth in this
area were increases to the Company's telecommunications costs, which increased
$213, or 38.7%, during 2009 as compared to 2008. During the second half of 2008,
the Company improved the communication lines between all of its branches to
achieve faster relay of information and increase work efficiency. This
investment upgrade of communication lines has equated to a $35 per month cost.
Other noninterest expense was increased by $119, or 14.4%, by higher supplies
and postage costs due to increased mailings and postal rates over 2008. In
addition, other noninterest expense increases came from the Company's loan
expense, which increased $113, or 69.9%, during 2009 as compared to 2008 due to
a larger than normal volume of recovered foreclosure costs that were collected
during 2008 that did not re-occur in 2009.
During 2008, other noninterest expenses were down $389, or 7.2%, in large
part due to decreases in the Company's foreclosure expenses, which were down
$487, or 90.5%, during 2008 as compared to 2007. This decrease was due to the
larger than normal volume of foreclosure costs that were incurred during 2007
associated with higher average nonperforming loan balances during that time.
The Company's efficiency ratio is defined as noninterest expense as a
percentage of FTE net interest income plus noninterest income. Management
continues to place emphasis on managing its balance sheet mix and interest rate
sensitivity to help expand the net interest margin as well as developing more
innovative ways to generate noninterest revenue. However, the recent
developments with rising FDIC insurance assessment rates and a special
assessment resulting in an additional charge of $373 has contributed to higher
overhead expense levels, which have outpaced revenue levels and have caused the
year-to-date efficiency ratio to increase from the prior period. The efficiency
ratio during 2009 increased to 67.8% from the 62.5% experienced during 2008.
FINANCIAL CONDITION:
CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents consist of cash, interest- and
noninterest-bearing deposits with banks and federal funds sold. The amounts of
cash and cash equivalents fluctuate on a daily basis due to customer activity
and liquidity needs. At December 31, 2009, cash and cash equivalents had
decreased $2,622, or 14.3%, to $15,670 as compared to $18,292 at December 31,
2008. The decrease in cash and cash equivalents was partially affected by
increased loan balances and investment security purchases during 2009 as
compared to year-end 2008. Within cash and cash equivalents, there was a shift
in asset balances from cash and non-interest deposits with banks to more dollars
being invested within interest-bearing deposits with banks. This composition
shift was largely due to the Company's preference to utilize its
interest-bearing Federal Reserve Bank clearing account to maintain its excess
funds. Historically, the Company has typically invested its excess funds with
various correspondent banks in the form of federal funds sold, a common strategy
performed by most banks. Beginning in the fourth quarter of 2008, the Company
began shifting its emphasis of maintaining its excess liquidity from federal
funds sold to its existing clearing account on hand at the Federal Reserve Bank.
MANAGEMENT'S DISCUSSION AND ANALYSIS
During this period in 2008, the Federal Reserve Board announced that it would
begin paying interest on depository institutions' required and excess reserve
balances. The interest rate paid on both the required and excess reserve
balances will be based on the targeted federal funds rate established by the
Federal Open Market Committee. As of the filing date of this report, the
interest rate calculated by the Federal Reserve remained at 0.25%. Prior to
this, the Federal Reserve Bank balances held by the Company were non-interest
bearing. This interest rate is similar to what the Company would have received
from its investments in federal funds sold, currently targeting a range of 0.0%
to 0.25%. Furthermore, Federal Reserve Bank balances are 100% secured.
As liquidity levels vary continuously based on consumer activities, amounts
of cash and cash equivalents can vary widely at any given point in time.
Management believes that the current balance of cash and cash equivalents
remains at a level that will meet cash obligations and provide adequate
liquidity. Further information regarding the Company's liquidity can be found
under the caption "Liquidity" in this Management's Discussion and Analysis.
SECURITIES
Management's goal in structuring the portfolio is to maintain a prudent
level of liquidity while providing an acceptable rate of return without
sacrificing asset quality. Maturing securities have historically provided
sufficient liquidity such that management has not sold a debt security in
several years, other than renewals or replacements of maturing securities.
The balance of total securities increased $8,131, or 8.8%, as compared to
2008, with the ratio of securities to total assets also increasing to 12.4% at
December 31, 2009, compared to 11.8% at December 31, 2008. The Company's
investment securities portfolio consists of U.S. Treasury securities, U.S.
Government sponsored entity ("GSE") securities, mortgage-backed securities and
obligations of states and political subdivisions. U.S. Treasury and GSE
securities collectively increased $12,813, or 40.2%, as a result of several new
purchases during the first half of 2009. During this period, the Company
continued to experience a significant increase in excess funds from growth in
total deposit balances. With the demand for loan balances at a relatively stable
pace for much of 2009, the Company invested the excess funds into new short-term
U.S. Treasury and GSE securities totaling $29,536 with maturities less than one
year and interest rate yields less than 1.0%. The Company's intention is to
re-invest these shorter-term securities into future loan growth or longer-term
securities if interest rates are increased in the near future. In addition to
helping achieve diversification within the Company's securities portfolio, U.S.
Treasury and GSE securities have also been used to satisfy pledging requirements
for repurchase agreements. At December 31, 2009, the Company's repurchase
agreements increased 31.5%, increasing the need to secure these balances. The
increases in U.S. Treasury and GSE securities were partially offset by decreases
in both mortgage-backed securities and obligations of states and political
subdivisions, which were down $4,289, or 9.9%, and $393, or 2.3%, respectively,
from year-end 2008. Mortgage-backed securities continue to make up the largest
portion of the Company's investment portfolio, totaling $39,225, or 39.0% of
total investments at December 31, 2009. However, this composition represents a
decrease from 47.1% at December 31, 2008 due to the increase in short-term U.S.
Treasury and GSE security purchases during 2009. Typically, the primary
MANAGEMENT'S DISCUSSION AND ANALYSIS
advantage of mortgage-backed securities has been the increased cash flows due to
the more rapid (monthly) repayment of principal as compared to other types of
investment securities, which deliver proceeds upon maturity or call date.
However, with the current interest rate environment, the cash flow that is being
collected is being reinvested at lower rates. Principal repayments from
mortgage-backed securities totaled $17,103 from January 1, 2009 through December
31, 2009.
With the general decrease in interest rates evident since 2007, the
reinvestment rates on debt securities continue to show lower returns during
2009. The weighted average FTE yield on debt securities at year-end 2009 was
3.38%, as compared to 4.34% at year-end 2008 and 4.55% at year-end 2007. Table
III provides a summary of the portfolio by category and remaining contractual
maturity. Issues classified as equity securities have no stated maturity date
and are not included in Table III. The Company will continue to focus on
generating interest revenue primarily through loan growth, as loans generate the
highest yields of total earning assets.
LOANS
In 2009, the Company's primary category of earning assets and most
significant source of interest income, total loans, increased $20,965, or 3.3%,
to finish at $651,356. Higher loan balances were mostly influenced by total
commercial loans, which were up $24,735, or 10.2%, from year-end 2009. The
Company's commercial loans include both commercial real estate and commercial
and industrial loans. Management continues to place emphasis on its commercial
lending, which generally yields a higher return on investment as compared to
other types of loans. The Company's commercial and industrial loan portfolio, up
$13,994, or 31.2%, from year-end 2008, consists of loans to corporate borrowers
primarily in small to mid-sized industrial and commercial companies that include
service, retail and wholesale merchants. Collateral securing these loans
includes equipment, inventory, and stock. Commercial real estate, the Company's
largest segment of commercial loans, increased $10,741, or 5.4%. This segment of
loans is mostly secured by commercial real estate and rental property.
Commercial real estate includes loan participations with other banks outside the
Company's primary market area. Although the Company is not actively marketing
participation loans outside its primary market area, it is taking advantage of
the relationships it has with certain lenders in those areas where the Company
believes it can profitably participate with an acceptable level of risk. The
commercial loan portfolio, including participation loans, consists primarily of
rental property loans (22.0% of portfolio), medical industry loans (11.2% of
portfolio), hotel and motel loans (7.9% of portfolio) and land development loans
(7.8% of portfolio). During 2009, the primary market areas for the Company's
commercial loan originations, excluding loan participations, were in the areas
of Gallia, Jackson, Pike and Franklin counties of Ohio, which accounted for
68.3% of total originations. The growing West Virginia markets also accounted
for 18.9% of total originations for the same time period. While management
believes lending opportunities exist in the Company's markets, future commercial
lending activities will depend upon economic and related conditions, such as
general demand for loans in the Company's primary markets, interest rates
offered by the Company and normal underwriting considerations. Additionally, the
potential for larger than normal commercial loan payoffs may limit loan growth
during 2010.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Also contributing to the loan portfolio increase were consumer loans, which
were up $9,318, or 7.3%, from year-end 2009. The Company's consumer loans are
secured by automobiles, mobile homes, recreational vehicles and other personal
property. Personal loans and unsecured credit card receivables are also included
as consumer loans. The increase in consumer loans came mostly from the Company's
automobile indirect lending segment, which increased $5,733, or 21.2%, from
year-end 2008. The automobile indirect lending segment continues to represent
the largest portion of the Company's consumer loan portfolio, representing 24.0%
of total consumer loans at December 31, 2009. Prior to 2009, the Company's
indirect automobile segment was on a declining pace due to the growing economic
factors that had weakened the economy and consumer spending. During this time,
the Company's loan underwriting process and interest rates offered on indirect
automobile opportunities struggled to compete with the more aggressive lending
practices of local banks and alternative methods of financing, such as captive
finance companies offering loans at below-market interest rates related to this
segment. As the economy continues to be challenged, these banks and captive
finance companies that once were successful in getting the majority of the
indirect automobile opportunities are now struggling because of the losses they
have had to absorb as well as the overall decrease in demand for auto loans. As
a result, these businesses have had to tighten their operations and underwriting
processes, which has allowed the Company to compete better for a larger portion
of the indirect business within its local markets. Furthermore, the Company has
added several new auto dealer relationships that have contributed to more
business opportunities in 2009.
The remaining consumer loan products not discussed above were collectively
up $3,585, or 3.6%, which included general increases in loan balances from home
equity capital lines. While the total consumer loan portfolio was up from
year-end 2008, management will continue to place more emphasis on other loan
portfolios (i.e. residential real estate and commercial) that will promote
increased profitable loan growth and higher returns. Indirect automobile loans
bear additional costs from dealers that partially offset interest revenue and
lower the rate of return. Management believes that the volume of indirect
automobile opportunities will continue to stabilize and does not anticipate any
significant growth during 2010.
Generating residential real estate loans remains a key focus of the
Company's lending efforts. Residential real estate loan balances comprise the
largest portion of the Company's loan portfolio and consist primarily of one- to
four-family residential mortgages and carry many of the same customer and
industry risks as the commercial loan portfolio. During 2009, total residential
real estate loan balances decreased $13,932, or 5.5%, from year-end 2008 to
total $238,761. During the end of 2008 and first quarter of 2009, long-term
interest rates decreased to historic low levels that prompted a significant
surge of demand for these types of long-term fixed-rate real estate loans. At
March 31, 2009 and December 31, 2008, the 30-year treasury rate was 3.56% and
2.69%, respectively, as compared to 4.31% at September 30, 2008. Consumers
wanted to take advantage of the low rates and reduce their monthly costs. To
help manage interest rate risk and satisfy demand for longer-termed, fixed-rate
real estate loans, the Company gained significant opportunities during 2009 to
originate and sell fixed-rate mortgages to the secondary market. As a result,
during the year ended December 31, 2009, the Company sold 432 loans totaling
$57,815 to the secondary market as compared to 109 loans totaling $11,703 during
MANAGEMENT'S DISCUSSION AND ANALYSIS
the year ended December 31, 2008. The increased volume of loans sold to the
secondary market contributed to growth in real estate origination fees and
higher gains on sale revenue in 2009 as compared to 2008. The increase in demand
for real estate refinancings combined with the Company's emphasis on selling
loans to the secondary market to manage interest rate risk has led to a decrease
in the Company's longer-termed, fixed-rate real estate loans, which were down
$11,224, or 6.1%, from year-end 2008. Terms of these fixed-rate loans include
15-, 20- and 30-year periods. These origination and sale trends also contributed
to a lower balance of one-year adjustable-rate mortgages, which were down
$6,406, or 19.4%, from year-end 2008.
The remaining real estate loan portfolio balances increased $3,698
primarily from the Company's other variable-rate products. The Company believes
it has limited its interest rate risk exposure due to its practice of promoting
and selling residential mortgage loans to the secondary market.
Additionally, the Company recognized an increase of $844, or 11.4%, in
other loans from year-end 2008. Other loans consist primarily of state and
municipal loans and overdrafts. This increase was largely due to an increase in
state and municipal loan balances of $867.
The Company continues to monitor the pace of its loan volume. The
well-documented housing market crisis and other disruptions within the economy
have negatively impacted consumer spending, which has limited the lending
opportunities within the Company's market locations. Dramatic declines in the
housing market during the past year, with falling home prices and increasing
foreclosures and unemployment, have resulted in significant write-downs of asset
values by financial institutions. To combat this ongoing potential for loan
loss, the Company will continue to remain consistent in its approach to sound
underwriting practices and a focus on asset quality. The Company has already
seen the volume of secondary market loan sales stabilize during the third and
fourth quarters of 2009 and anticipate that trend to continue into 2010 as
long-term interest rates begin to increase. At September 30 and December 31,
2009, the 30-year treasury rate was 4.03% and 4.63%, respectively, as compared
to 2.69% at December 31, 2008. The Company anticipates total loan growth in 2010
to be challenged, with volume to continue at a stable pace throughout the rest
of the year.
ALLOWANCE FOR LOAN LOSSES AND PROVISION EXPENSE
Tables IV and V have been provided to enhance the understanding of the loan
portfolio and the allowance for loan losses. Management evaluates the adequacy
of the allowance for loan losses quarterly based on several factors including,
but not limited to, general economic conditions, loan portfolio composition,
prior loan loss experience, and management's estimate of probable incurred
losses. Management continually monitors the loan portfolio to identify potential
portfolio risks and to detect potential credit deterioration in the early
stages, and then establishes reserves based upon its evaluation of these
inherent risks. Actual losses on loans are reflected as reductions in the
reserve and are referred to as charge-offs. The amount of the provision for loan
losses charged to operating expenses is the amount necessary, in management's
opinion, to maintain the allowance for loan losses at an adequate level that is
reflective of probable and inherent loss. The allowance required is primarily a
function of the relative quality of the loans in the loan portfolio, the mix of
loans in the portfolio and the rate of growth of outstanding loans. Impaired
MANAGEMENT'S DISCUSSION AND ANALYSIS
loans are considered in the determination of the overall adequacy of the
allowance for loan losses.
During 2009, the Company realized a decrease in its provision for loan loss
expense by $504, or 13.6%, as compared to 2008. The lower provision charge in
2009 was mostly due to the specific allocations recorded by the Company on two
commercial loans in 2008 totaling $654. The loans were charged off in 2009 and
did not require a specific allocation as these were already reflected in the
allowance for loan losses for 2008. The increase in total charge-offs for 2009
of $802, or 22.7%, was partially offset by increased loan recoveries of $643, or
73.5%, due to a large recovery from a previously charged off commercial loan
during June 2009 that totaled $648. This limited the Company's net charge-off
increase to $159, or 6.0%, during 2009 as compared to 2008.
The Company's allowance for loan losses in 2009 increased $399, or 5.1%, to
finish at $8,198. The increase in the allowance for loan losses was in large
part due to increases in the Company's specific allocations on commercial loans
and general allocations associated with growth in loans experienced during 2009.
Specific allocations were also slightly impacted by growth in impaired loans. At
December 31, 2009, there was $27,644 of loans held by the Company classified as
impaired, or for which management has concerns regarding the ability of the
borrowers to meet existing repayment terms. This represents an increase to the
impaired loan balance at December 31, 2008 of $21,153. These impaired loans
reflect the distinct possibility that the Company will not be able to collect
all amounts due according to the contractual terms of the loan. Although these
loans have been identified as potential problem loans, they may never become
delinquent or classified as non-performing. The evaluation of the impaired loan
balances created just a $74 increase to the specific allocation requirement
based on the collateral values associated with these impaired loans during 2009.
The Company was successful in maintaining a stable level of nonperforming
loans from year-end 2008. Nonperforming loans consist of nonaccruing loans and
accruing loans past due 90 days or more. Nonperforming loans finished at $5,258
at year-end 2009 as compared to $5,274 at year-end 2008, requiring little change
to the specific allocations made on behalf of the portfolio risks and credit
deterioration of these nonperforming credits. As a result, the Company's ratio
of nonperforming loans to total loans decreased from 0.84% at December 31, 2008
to 0.81% at December 31, 2009. The Company experienced a slight increase in its
nonperforming assets to total assets ratio, increasing from 1.28% at December
31, 2008 to 1.31% at December 31, 2009, due to an increase in OREO properties of
$699.
As a result of higher net charge-offs, increased impaired loan allocations
and increased loan growth, the ratio of allowance for loan losses to total loans
increased slightly to 1.26% at December 31, 2009 as compared to 1.24% at
December 31, 2008. Management believes that the allowance for loan losses at
December 31, 2009 was adequate and reflected probable incurred losses in the
loan portfolio. There can be no assurance, however, that adjustments to the
allowance for loan losses will not be required in the future. Changes in the
circumstances of particular borrowers, as well as adverse developments in the
economy are factors that could change and make adjustments to the allowance for
loan losses necessary. Asset quality will continue to remain a key focus, as
management continues to stress not just loan growth, but quality in loan
underwriting as well.
MANAGEMENT'S DISCUSSION AND ANALYSIS
DEPOSITS
Deposits are used as part of the Company's liquidity management strategy to
meet obligations for depositor withdrawals, fund the borrowing needs of loan
customers, and to fund ongoing operations. Deposits, both interest- and
noninterest-bearing, continue to be the most significant source of funds used by
the Company to support earning assets. The Company seeks to maintain a proper
balance of core deposit relationships on hand while also utilizing various
wholesale deposit sources, such as brokered and internet certificates of deposit
("CD") balances, as an alternative funding source to efficiently manage the net
interest margin. Deposits are influenced by changes in interest rates, economic
conditions and competition from other banks. The accompanying table VII shows
the composition of total deposits as of December 31, 2009. Total deposits
increased $55,283, or 9.3%, to finish at $647,644 at year-end 2009, resulting
mostly from an increase in the Company's time deposits, interest-bearing demand
deposits and money market deposit balances.
Core relationship deposits are considered by management as a primary source
of the Bank's liquidity. The Bank focuses on these kinds of deposit
relationships with consumers from local markets who can maintain multiple
accounts and services at the Bank. The Company views core deposits as the
foundation of its long-term funding sources because it believes such core
deposits are more stable and less sensitive to changing interest rates and other
economic factors. As a result, the Bank's core customer relationship strategy
has resulted in a higher percentage of its deposits being held in money market
accounts and NOW accounts at year-end 2009, while a lesser percentage has
resulted in retail time deposits at year-end 2009. Furthermore, the Company's
core noninterest-bearing demand accounts have been maintained at comparable
levels to that of year-end 2008, increasing 1.5%.
Deposit growth came mostly from money market deposit balances, increasing
$18,019, or 21.0%, during 2009 as compared to year-end 2008. This increase was
primarily driven by the Company's Market Watch money market account product.
Introduced in 2005, the Market Watch product is a limited transaction investment
account with tiered rates that competes with current market rate offerings and
serves as an alternative to certificates of deposit for some customers. With an
added emphasis on further building and maintaining core deposit relationships,
the Company began marketing a special six-month introductory rate offer of 3.00%
APY during the first quarter of 2009 that would be for new Market Watch
accounts. This special offer was well received by the Bank's customers and
contributed to most of the money market year-to-date increase in 2009. As of
December 31, 2009, this program had gathered $99,811 in deposits, a 21.7%
increase from the balances at year-end 2008.
Further enhancing deposit growth was interest-bearing NOW account balances,
which increased $11,143, or 13.8%, during 2009 as compared to year-end 2008.
This growth was largely driven by public fund balances related to local city and
county school construction projects within Gallia County, Ohio.
Also contributing to growth in deposits were time deposits, increasing
$18,687, or 6.1%, from year-end 2008. Time deposits, particularly CD's, are the
most significant source of funding for the Company's earning assets, making up
50.4% of total deposits. With loan balances maintaining a relatively stable
growth pace, up just 3.3% from year-end 2008, there has not been an aggressive
MANAGEMENT'S DISCUSSION AND ANALYSIS
need to target new time deposits as a funding source. As market rates have
aggressively lowered since September 2007, the Company has seen the cost of its
retail CD balances reprice downward (as a lagging effect to the actions by the
Federal Reserve) to reflect current deposit rates. This lagging effect has
caused the interest rates on the Company's retail CD portfolio to stabilize and
become comparable to the interest rate offerings of its alternative funding
source, wholesale fund deposits. As market rates have fallen considerably from a
year ago, the Bank's CD customers have been more likely to consider re-investing
their matured CD balances with other institutions offering the most attractive
rates. This has led to an increased maturity runoff within its "customer
relation" retail CD portfolio. Furthermore, with the significant downturn in
economic conditions, the Bank's CD customers in general have experienced reduced
funds available to deposit with structured terms, choosing to remain more
liquid. As a result, the Company has experienced a shift within its time deposit
portfolio, with retail CD balances decreasing $18,203 from year-end 2008, while
utilizing more wholesale funding deposits (i.e., brokered and internet CD
issuances), which increased $36,890 from year-end 2008. The Bank increased its
use of brokered deposits mostly during the fourth quarter of 2008 and the first
quarter of 2009 with laddered maturities into the future. This trend of
utilizing brokered CD's selectively based on maturity and interest rate
opportunities not only fits well with management's strategy of funding the
balance sheet with low-costing wholesale funds, but it also assists to support
the interest rate risks associated with the limited loan originations of
longer-term fixed rate mortgages experienced during the first half of 2009.
Although brokered and internet CD's may exhibit more price volatility than core
deposits, management is comfortable with these sources of funds based on the
maturity distribution and overall policy limits established for these deposit
types.
The Company's interest-free funding source, noninterest bearing demand
deposits, also increased $1,264, or 1.5%, from year-end 2008, largely due to
growth in business checking account balances.
The Company will continue to experience increased competition for deposits
in its market areas, which should challenge its net growth. The Company will
continue to emphasize growth in its core deposits as well as to utilize its
wholesale CD funding sources, reflecting the Company's efforts to reduce its
reliance on higher cost funding and improving net interest income.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were up $7,571, or 31.5%, from year-end 2008. This increase was
mostly due to seasonal fluctuations of two commercial relationships during 2009.
FUNDS BORROWED
The Company also accesses other funding sources, including short-term and
long-term borrowings, to fund asset growth and satisfy short-term liquidity
needs. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB)
advances and promissory notes. During 2009, other borrowed funds were down
$34,065, or 44.4%, from year-end 2008. Management used the growth in deposit
proceeds to repay FHLB borrowings during 2009. While deposits continue to be the
primary source of funding for growth in earning assets, management will continue
MANAGEMENT'S DISCUSSION AND ANALYSIS
to utilize various wholesale borrowings to help manage interest rate sensitivity
and liquidity.
OFF-BALANCE SHEET ARRANGEMENTS
The disclosures required for off-balance sheet arrangements are discussed
in Note I and Note K.
CAPITAL RESOURCES
The Company maintains a capital level that exceeds regulatory requirements
as a margin of safety for its depositors. Total shareholders' equity at December
31, 2009 of $66,521 was up $3,465, or 5.5%, as compared to the balance of
$63,056 on December 31, 2008. Contributing most to this increase was
year-to-date net income of $6,645, partially offset by cash dividends paid of
$3,186, or $.80 per share, year-to-date. The Company had treasury stock totaling
$15,712 at December 31, 2009, unchanged from year-end 2008.
Furthermore, the Company benefits from a dividend reinvestment and stock
purchase plan that is administered by an independent agent of the Company. The
plan allows shareholders to purchase additional shares of company stock. A
benefit of the plan is to permit the shareholders to reinvest cash dividends as
well as make supplemental purchases without the usual payment of brokerage
commissions. During 2009, shareholders invested more than $1,194 through the
dividend reinvestment and stock purchase plan. These proceeds resulted in the
acquisition of 51,468 existing shares through open market purchases. At December
31, 2009, approximately 81% of the shareholders were enrolled in the dividend
reinvestment plan.
INTEREST RATE SENSITIVITY AND LIQUIDITY
The Company's goal for interest rate sensitivity management is to maintain
a balance between steady net interest income growth and the risks associated
with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of
the Company's financial condition to adverse movements in interest rates.
Accepting this risk can be an important source of profitability, but excessive
levels of IRR can threaten the Company's earnings and capital.
The Company evaluates IRR through the use of an earnings simulation model
to analyze net interest income sensitivity to changing interest rates. The
modeling process starts with a base case simulation, which assumes a flat
interest rate scenario. The base case scenario is compared to rising and falling
interest rate scenarios assuming a parallel shift in all interest rates.
Comparisons of net interest income and net income fluctuations from the flat
rate scenario illustrate the risks associated with the projected balance sheet
structure.
The Company's Asset/Liability Committee monitors and manages IRR within
Board approved policy limits. The current IRR policy limits anticipated changes
in net interest income to an instantaneous increase or decrease in market
interest rates over a 12 month horizon to +/- 5% for a 100 basis point rate
shock, +/- 7.5% for a 200 basis point rate shock and +/- 10% for a 300 basis
point rate shock. Based on the level of interest rates, management did not test
interest rates down 200 or 300 basis points.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The estimated percentage change in net interest income due to a change in
interest rates was within the policy guidelines established by the Board. During
2009, the interest rate risk profile became less exposed to rising interest
rates due to various balance sheet changes. For example, the duration of earning
assets shortened with higher relative balances being invested in variable rate
or short-term instruments. In addition, the balance of fixed-rate mortgages
decreased, as management chose to sell the majority of new originations and
refinancings to the secondary market. On the liability side of the balance
sheet, management emphasized longer-term CD specials and selected longer
maturity terms for brokered CD issuances. Furthermore, the balance of
nonmaturity deposits increased significantly from year end. These balances, such
as savings and NOW accounts, exhibit a low correlation to changes in interest
rates. Lastly, the balance of borrowed funds decreased due to a decline in
short-term borrowings, which are highly rate sensitive. Given the low rate
environment, the next move in interest rates would most likely be an increasing
trend. As a result, management would consider the current interest rate risk
profile more desirable than our profile at December 31, 2008.
Liquidity relates to the Company'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, held to maturity securities maturing within one year and available
for sale securities of $101,635 represented 12.5% of total assets at December
31, 2009. In addition, the FHLB offers advances to the Bank which further
enhances the Bank's ability to meet liquidity demands. At December 31, 2009, the
Bank could borrow an additional $95,091 from the FHLB, of which, $75,000 could
be used for short-term, cash management advances. Furthermore, the Bank has
established a borrowing line with the Federal Reserve. At December 31, 2009,
this line totaled $81,000. Lastly, the Bank also has the ability to purchase
federal funds from a correspondent bank. See the consolidated statement of cash
flows for further cash flow information. Management does not rely on any single
source of liquidity and monitors the level of liquidity based on many factors
affecting the Company's financial condition.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INFLATION
Consolidated financial data included herein has been prepared in accordance
with US GAAP. Presently, US GAAP requires the Company to measure financial
position and operating results in terms of historical dollars with the exception
of securities available for sale, which are carried at fair value. Changes in
the relative value of money due to inflation or deflation are generally not
considered.
In management's opinion, changes in interest rates affect the financial
institution to a far greater degree than changes in the inflation rate. While
interest rates are greatly influenced by changes in the inflation rate, they do
not change at the same rate or in the same magnitude as the inflation rate.
Rather, interest rate volatility is based on changes in the expected rate of
inflation, as well as monetary and fiscal policies. A financial institution's
ability to be relatively unaffected by changes in interest rates is a good
indicator of its capability to perform in today's volatile economic environment.
The Company seeks to insulate itself from interest rate volatility by ensuring
that rate sensitive assets and rate sensitive liabilities respond to changes in
interest rates in a similar time frame and to a similar degree.
CRITICAL ACCOUNTING POLICIES
The most significant accounting policies followed by the Company are
presented in Note A to the consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Management views
critical accounting policies to be those which are highly dependent on
subjective or complex judgments, estimates and assumptions, and where changes in
those estimates and assumptions could have a significant impact on the financial
statements. Management currently views the adequacy of the allowance for loan
losses to be a critical accounting policy.
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 allocations, general allocations and other
estimated general allocations.
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 ("Watch
List"), which lists the loans from each loan portfolio that management deems to
be potential credit risks. A loan will automatically be added to the Watch List
if the loan balance is over $200 and the loan is either delinquent 60 days or
more or nonaccrual. In addition, management may decide to add loans to the Watch
List that do not meet the above-mentioned criteria. 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. The function
of the Committee is to review and analyze large borrowers for credit risk,
scrutinize the Watch List 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
MANAGEMENT'S DISCUSSION AND ANALYSIS
(least risk) to 10 (greatest risk). After the Committee evaluates each
relationship listed in the report, a specific loss allocation may be assessed.
Included in the specific allocation analysis are impaired loans, which
generally consist of loans with balances of $200 or more on nonaccrual status or
non-performing in nature. Each loan is individually analyzed to determine if a
specific allocation is necessary based on expected potential credit loss.
Collateral dependent loans will be evaluated to determine a fair value of the
collateral securing the loan. Any changes in the impaired allocation will be
reflected in the total specific allocation.
The second component (general allowance) is based upon total loan portfolio
balances minus loan balances already reviewed (specific allocation). The Large
Loan Review Committee evaluates credit analysis reports that provide management
with a "snapshot" of information on borrowers with larger-balance loans
(aggregate balances of $1 million or greater), including loan grades, collateral
values, and other factors. A list is prepared and updated quarterly that allows
management to monitor this group of borrowers. Therefore, only small balance
commercial loans and homogeneous loans (consumer and real estate loans) are not
specifically reviewed to determine minor delinquencies, current collateral
values and present credit risk. The Company utilizes actual historic loss
experience as a factor to calculate the probable losses for this component of
the allowance for loan losses. This risk factor reflects a three-year
performance evaluation of credit losses per loan portfolio. The risk factor is
achieved by taking the average net charge-off per loan portfolio for the last 36
consecutive months and dividing it by the average loan balance for each loan
portfolio over the same time period. The Company believes that by using the 36
month average loss risk factor, the estimated allowance will more accurately
reflect current probable losses.
The final component used to evaluate the adequacy of the allowance includes
five additional areas that management believes can have an impact on collecting
all principal due. These areas are: 1) delinquency trends, 2) current local
economic conditions, 3) non-performing loan trends, 4) recovery vs. charge-off,
and 5) personnel changes. Each of these areas is given a percentage factor, from
a low of 2% to a high of 8%, determined by the degree of impact it may have on
the allowance. To calculate the impact of other economic conditions on the
allowance, the total general allowance is multiplied by this factor. These
dollars are then added to the other two components to provide for economic
conditions in the Company's assessment area. The Company's assessment area takes
in a total of ten counties in Ohio and West Virginia. Each assessment area has
its individual economic conditions; however, the Company has chosen to average
the risk factors for compiling the economic risk factor.
The adequacy of the allowance may be determined by certain specific and
nonspecific allocations; however, the total allocation is available for any
credit losses that may impact the loan portfolios.
CONCENTRATIONS OF CREDIT RISK
The Company maintains a diversified credit portfolio, with residential real
estate loans currently comprising the most significant portion. Credit risk is
primarily subject to loans made to businesses and individuals in central and
southeastern Ohio as well as western West Virginia. Management believes this
risk to be general in nature, as there are no material concentrations of loans
to any industry or consumer group. To the extent possible, the Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. Additional
detailed information concerning a number of important factors which could cause
actual results to differ materially from the forward-looking statements
contained in management's discussion and analysis is available in the Company's
filings with the Securities and Exchange Commission, under the Securities
Exchange Act of 1934, including the disclosure under the heading "Item 1A. Risk
Factors" of Part 1 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2009. Readers are cautioned not to place undue reliance
on such forward looking statements, which speak only as of the date hereof. The
Company undertakes no obligation and disclaims any intention to republish
revised or updated forward looking statements, whether as a result of new
information, unanticipated future events or otherwise.
CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME Table I December 31 ------------------------------------------------------------------------------------ 2009 2008 2007 (dollars in thousands) -------------------------- -------------------------- -------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- ASSETS ------ Interest-earning assets: Interest-bearing balances $ 27,077 $ 58 0.21% $ 5,710 $ 137 2.39% $ 549 $ 23 4.22% with banks Federal funds sold 18 --- 0.05 5,552 157 2.83 4,428 221 5.00 Securities: Taxable 97,124 3,038 3.13 82,606 3,432 4.15 76,748 3,477 4.53 Tax exempt 9,916 659 6.64 12,784 768 6.01 14,427 797 5.52 Loans 641,878 44,223 6.89 629,225 47,402 7.53 628,891 50,793 8.08 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- earning assets 776,013 47,978 6.18% 735,877 51,896 7.05% 725,043 55,311 7.63% Noninterest-earning assets: Cash and due from banks 8,524 15,029 14,137 Other nonearning assets 42,515 38,217 38,094 Allowance for loan losses (8,100) (6,811) (7,720) -------- -------- -------- Total noninterest- earning assets 42,939 46,435 44,511 -------- -------- -------- Total assets $818,952 $782,312 $769,554 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $ 92,550 $ 1,326 1.43% $ 88,110 $ 1,599 1.81% $ 78,636 $ 1,924 2.45% Savings and Money Market 135,728 1,636 1.21 121,392 2,061 1.70 97,240 2,705 2.78 Time deposits 331,130 10,721 3.24 311,188 12,976 4.17 341,686 16,686 4.88 Repurchase agreements 27,540 75 0.27 28,040 421 1.50 27,433 1,051 3.83 Other borrowed money 48,905 2,085 4.26 60,678 2,682 4.42 60,603 2,911 4.80 Subordinated debentures 13,500 1,089 8.07 13,500 1,089 8.07 13,593 1,143 8.41 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- bearing liabilities 649,353 16,932 2.61% 622,908 20,828 3.34% 619,191 26,420 4.27% Noninterest-bearing liabilities: Demand deposit accounts 93,045 85,436 78,048 Other liabilities 11,613 12,622 11,766 -------- -------- -------- Total noninterest- bearing liabilities 104,658 98,058 89,814 Shareholders' equity 64,941 61,346 60,549 -------- -------- -------- Total liabilities and shareholders' equity $818,952 $782,312 $769,554 ======== ======== ======== Net interest earnings $31,046 $31,068 $28,891 ======= ======= ======= Net interest earnings as a percent of interest-earning assets 4.00% 4.23% 3.99% ----- ----- ----- Net interest rate spread 3.57% 3.71% 3.36% ----- ----- ----- Average interest-bearing liabilities to average earning assets 83.68% 84.65% 85.40% ===== ===== =====Fully taxable equivalent yields are calculated assuming a 34% tax rate, net of nondeductible interest expense. Average balances are computed on an average daily basis. The average balance for available for sale securities includes the market value adjustment. However, the calculated yield is based on the securities' amortized cost. Average loan balances include nonaccruing loans. Loan income includes cash received on nonaccruing loans.
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE Table II 2009 2008 ----------------------------- ---------------------------- (dollars in thousands) Increase (Decrease) Increase (Decrease) From Previous Year Due to From Previous Year Due to ----------------------------- ------------------------------ Volume Yield/Rate Total Volume Yield/Rate Total ------ ---------- ----- ------ ---------- ----- INTEREST INCOME --------------- Interest-bearing balances with banks $ 136 $ (215) $ (79) $ 128 $ (14) $ 114 Federal funds sold (79) (78) (157) 47 (111) (64) Securities: Taxable 541 (935) (394) 255 (300) (45) Tax exempt (184) 75 (109) (96) 67 (29) Loans 938 (4,117) (3,179) 27 (3,418) (3,391) ------- ------- ------- ------- ------- ------- Total interest income 1,352 (5,270) (3,918) 361 (3,776) (3,415) INTEREST EXPENSE ---------------- NOW accounts 77 (350) (273) 213 (538) (325) Savings and Money Market 223 (648) (425) 570 (1,214) (644) Time deposits 790 (3,045) (2,255) (1,407) (2,303) (3,710) Repurchase agreements (7) (339) (346) 23 (653) (630) Other borrowed money (505) (92) (597) 3 (232) (229) Subordinated debentures --- --- --- (8) (46) (54) ------- ------- ------- ------- ------- ------- Total interest expense 578 (4,474) (3,896) (606) (4,986) (5,592) ------- ------- ------- ------- ------- ------- Net interest earnings $ 774 $ (796) $ (22) $ 967 $ 1,210 $ 2,177 ======= ======= ======= ======= ======= ======= The change in interest due to volume and rate is determined as follows: Volume Variance - change in volume multiplied by the previous year's rate; Yield/Rate Variance - change in rate multiplied by the previous year's volume; Total Variance - change in volume multiplied by the change in rate. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Fully taxable equivalent yield assumes a 34% tax rate, net of related nondeductible interest expense.
SECURITIES Table III MATURING --------------------------------------------------------------------------- As of December 31, 2009 Within After One but After Five but (dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years -------- ----------------- ---------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- U.S. Treasury securities $10,557 .41% $ --- --- $ --- --- $ --- --- U.S. Government sponsored entity securities 22,636 1.67% 11,486 4.40% --- --- --- --- Obligations of states and political subdivisions 2,097 7.15% 1,775 7.03% 4,259 5.01% 8,422 3.40% Agency mortgage-backed securities, residential 15,019 3.23% 21,090 3.85% 3,116 4.00 --- --- ------- ---- ------- ---- ------- ---- ------ ---- Total debt securiities $50,309 2.10% $34,351 4.20% $ 7,375 4.58% $ 8,422 3.40% ======= ==== ======= ==== ======= ==== ======= ==== Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions using a 34% rate. Weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Mortgage-backed securities, which have prepayment provisions, are assigned to a maturity based on estimated average lives. Securities are shown at their carrying values which include the market value adustments for available for sale securities.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES Table IV Years Ended December 31 (dollars in thousands) 2009 2008 2007 2006 2005 ---------------------- ---- ---- ---- ---- ---- Commercial loans (1) $5,777 $5,898 $5,273 $7,806 $4,704 Percentage of loans to total loans 42.43% 39.78% 40.63% 39.45% 38.33% Residential real estate loans 822 806 327 310 623 Percentage of loans to total loans 36.66% 40.09% 39.31% 38.16% 38.06% Consumer loans 1,599 1,095 1,137 1,296 1,806 Percentage of loans to total loans 20.91% 20.13% 20.06% 22.39% 23.61% ------- ------- ------- ------- ------- Allowance for Loan Losses $8,198 $7,799 $6,737 $9,412 $7,133 ======= ======= ======= ======= ======= 100.00% 100.00% 100.00% 100.00% 100.00% ======= ======= ======= ======= ======= Ratio of net charge-offs to average loans .44% .42% .78% .54% .31% ======= ======= ======= ======= ======= The above allocation is based on estimates and subjective judgments and is not necessarily indicative of the specific amounts or loan categories in which losses may ultimately occur. (1) Includes commercal and industrial and commercial real estate loans. SUMMARY OF NONPERFORMING AND PAST DUE LOANS Table V (dollars in thousands) 2009 2008 2007 2006 2005 ---------------------- ---- ---- ---- ---- ---- Impaired loans $27,644 $21,153 $ 6,871 $17,402 $7,983 Past due 90 days or more and still accruing 1,639 1,878 927 1,375 1,317 Nonaccrual 3,619 3,396 2,734 12,017 1,240 Accruing loans past due 90 days or more to total loans .25% .30% .14% .22% .21% Nonaccrual loans as a % of total loans .56% .54% .43% 1.92% .20% Impaired loans as a % of total loans 4.24% 3.36% 1.08% 2.78% 1.29% Allowance for loans losses as a % of total loans 1.26% 1.24% 1.06% 1.51% 1.16% Management believes that the impaired loan disclosures are comparable to the nonperforming loan disclosures except that the impaired loan disclosures do not include single family residential or consumer loans which are analyzed in the aggregate for loan impairment purposes. Management formally considers placing a loan on nonaccrual status when collection of principal or interest has become doubtful. Furthermore, a loan should not be returned to the accrual status unless either all delinquent principal or interest has been brought current or the loan becomes well secured and is in the process of collection.In 2009, the Company changed its methodology for identifying impaired loans. Amounts as of December 31, 2008 have been reclassified to be consistent with the 2009 methodology. The change resulted in reclassifying current or performing loans as impaired loans for which full payment under the original terms is not probable. As of December 31, 2008, $13,054 of loans were reclassified as impaired loans and the related general allowance for loan losses allocation of $2,450 was reclassified as a specific allowance for loan losses. Prior to the change in methodology, the general allowance for loan losses allocation related to these loans was based on historical credit losses, andthese allocations were materially consistent with amounts that would havebeen determined had the loans been classified as impaired. Thereclassification had no impact on the allowance for loan losses, the provisionfor loan losses, net income or retained earnings. Amounts as of December 31,2008 have been reclassified to be consistent with the 2009 methodology;however, amounts prior to December 31, 2008 have not been reclassified.
MATURITY AND REPRICING DATA OF LOANS Table VI As of December 31, 2009 Maturing/Repricing (dollars in thousands) Within After One but One Year Within Five Years After Five Years Total -------- ----------------- ---------------- ----- Residential real estate loans $ 35,181 $ 26,025 $177,555 $238,761 Commercial loans (1) 154,856 88,163 33,347 276,366 Consumer loans 35,121 67,509 33,599 136,229 -------- -------- -------- -------- Total loans $225,158 $181,697 $244,501 $651,356 ======== ======== ======== ======== Loans maturing or repricing after one year with: Variable interest rates $ 96,603 Fixed interest rates 329,595 -------- Total $426,198 ======== (1) Includes commercial and industrial and commercial real estate loans. DEPOSITS Table VII as of December 31 (dollars in thousands) 2009 2008 2007 ---- ---- ---- Interest-bearing deposits: NOW accounts $ 91,998 $ 80,855 $ 65,618 Money Market 103,644 85,625 72,276 Savings accounts 38,834 32,664 31,436 IRA accounts 49,841 46,574 44,050 Certificates of Deposit 276,557 261,137 297,057 -------- -------- -------- 560,874 506,855 510,437 Noninterest-bearing deposits: Demand deposits 86,770 85,506 78,589 -------- -------- -------- Total deposits $647,644 $592,361 $589,026 ======== ======== ======== The following table presents the Company's estimated net interest income sensitivity: INTEREST RATE SENSITIVITY Table VIII Change in December 31, 2009 December 31, 2008 Interest Rates % Change in % Change in Basis Points Net Interest Income Net Interest Income --------------- ------------------- ------------------- +300 (.26%) (5.47%) +200 (.58%) (4.12%) +100 (.58%) (2.30%) -100 .68% 2.54%
CONTRACTUAL OBLIGATIONS Table IX The following table presents, as of December 31, 2009, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. Payments Due In (dollars in thousands) Note One Year One to Three to Over Reference or Less Three Years Five Years Five Years Total --------- -------- ----------- ---------- ---------- ---------- Deposits without a stated maturity F $321,246 $ --- $ --- $ --- $321,246 Consumer and brokered time deposits F 180,318 120,016 25,066 998 326,398 Repurchase agreements G 31,641 --- --- --- 31,641 Other borrowed funds H 28,774 6,772 6,281 882 42,709 Subordinated debentures I --- --- --- 13,500 13,500 KEY RATIOS Table X 2009 2008 2007 2006 2005 ---- ---- ---- ---- ---- Return on average assets .81% .91% .82% .71% .97% Return on average equity 10.23% 11.62% 10.40% 9.00% 12.18% Dividend payout ratio 47.95% 42.94% 46.66% 52.56% 38.55% Average equity to average assets 7.93% 7.84% 7.87% 7.88% 7.93%