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| OVBC > SEC Filings for OVBC > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as "believes," "anticipates," "expects," and similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control, which could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to, the risk factors discussed in Part I, Item 1A of Ohio Valley's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and Ohio Valley's other securities filings. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements as a result of unanticipated future events.
The Company is primarily engaged in commercial and retail banking, offering a blend of commercial and consumer banking services within central and southeastern Ohio as well as western West Virginia. The banking services offered by the Bank include the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; and the making of construction and real estate loans. The Bank also offers individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. As part of its lending function, the Bank also offers credit card services. Loan Central engages in consumer finance, offering smaller balance personal and mortgage loans to individuals with higher credit risk history. Loan Central's line of business also includes seasonal tax refund loan services during the January through April periods. Ohio Valley Financial Services sells life insurance.
For the three months ended September 30, 2009, net income decreased by $185, or 9.8%, compared to the same quarterly period in 2008, to finish at $1,700. Earnings per share for the third quarter of 2009 decreased $.04, or 8.5%, compared to the same quarterly period in 2008, to finish at $.43 per share. For the nine months ended September 30, 2009, net income decreased by $434, or 7.8%, compared to the same period in 2008, to finish at $5,147. Earnings per share for the first nine months of 2009 finished at $1.29, a decrease of 6.5% from the same period in 2008. The percentage decrease in nominal dollar net income for both the quarterly and year-to-date periods ended September 30, 2009 exceeded the net income earnings per share percentage decrease due to the Company's stock repurchase program, with increases in treasury stock repurchases from a year ago lowering the weighted average number of common shares outstanding. The annualized net income to average asset ratio, or return on assets (ROA), and net income to average equity ratio, or return on equity (ROE), both decreased to 0.84% and 10.66% at September 30, 2009, as compared to 0.95% and 12.20%, respectively, at September 30, 2008.
The Company's decrease in earnings during both the three months and nine months ended September 30, 2009 as compared to the same periods in 2008 was primarily the result of increases in FDIC premiums that have been assessed on all FDIC insured institutions. With the increases in FDIC premiums, along with a special assessment that was charged by the FDIC in June 2009, the Company's FDIC insurance expense increased $201 and $1,148 during the third quarter and year-to-date period of 2009, respectively, as compared to the same periods in 2008. Partially offsetting the significant FDIC insurance expense increases was noninterest income improvement of 38.9% during the third quarter of 2009 and 28.8% during the year-to-date period ending September 30, 2009, as compared to the same periods in 2008. 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 gain on sale of loans to the secondary market and seasonal tax clearing services performed during the first half of 2009.
Comparison of Financial Condition at September 30, 2009 and December 31, 2008
The following discussion focuses, in more detail, on the consolidated financial condition of the Company at September 30, 2009 compared to December 31, 2008. The purpose of this discussion is to provide the reader a more thorough understanding of the consolidated financial statements. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10-Q.
Cash and Cash Equivalents
The Company's cash and cash equivalents consist of cash and non-interest bearing balances due from banks and federal funds sold. The amounts of cash and cash equivalents fluctuate on a daily basis due to customer activity and liquidity needs. At September 30, 2009, cash and cash equivalents had decreased $7,593, or 42.9%, to $10,088 as compared to $17,681 at December 31, 2008. The decrease in cash and cash equivalents was largely affected by the Company's preference to utilize its interest-bearing Federal Reserve Bank clearing account to maintain its excess funds. The Federal Reserve Bank clearing account became interest-bearing during the fourth quarter of 2008. Further affecting the decrease in cash and cash equivalents were increased loan balances and investment security purchases during the first nine months of 2009. 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.
Interest-Bearing Deposits in Other Financial Institutions
At September 30, 2009, the Company had a total of $12,834 invested as interest-bearing deposits in other financial institutions, an increase from only $611 at December 31, 2008. This increase is largely the result of the Company's increased liquidity position due to excess deposit liability growth. 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. 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.
While interest-bearing deposits in other financial institutions at September 30, 2009 remain up from year-end 2008, this balance represents a significant decrease from the $37,606 deposit balance at June 30, 2009. The Company was effective during the third quarter of 2009 in re-investing these liquid funds back into higher yielding assets such as loans, and to a lesser extent, investment securities. The Company will continue to re-deploy these interest-bearing deposits into higher yielding assets to improve the net interest margin when opportunities arise.
Securities
During the first nine months of 2009, investment securities increased $15,595 to finish at $107,921, an increase of 16.9% as compared to year-end 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 $26,557, or 83.3%, as a result of several new purchases during the second and third quarters 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 $29,061 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 September 30, 2009, the Company's repurchase agreements increased 24.0%, increasing the need to secure these balances. This increase was partially offset by decreases in both mortgage-backed securities and obligations of states and political subdivisions, which were down $9,250, or 21.3%, and $1,712, or 10.1%, respectively, from year-end 2008. Typically, the primary advantage of mortgage-backed securities has been the increased cash flows due to the more rapid (monthly) repayment of principal as compared to other types of investment securities, which deliver proceeds upon maturity or call date. 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 $13,465 from January 1, 2009 through September 30, 2009. For the remainder of 2009, the Company's focus will be to generate interest revenue primarily through loan growth, as loans generate the highest yields of total earning assets.
Loans
The loan portfolio represents the Company's largest asset category and is its most significant source of interest income. During the first nine months of 2009, total loans increased $17,979, or 2.9%, from year-end 2008. Higher loan balances were mostly influenced by total commercial loans, which were up $22,196, or 9.1%, from year-end 2008. 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 $6,870, or 15.3%, 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 $15,326, or 7.7%. 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 (24.2% of portfolio), medical industry loans (11.6% of portfolio), land development loans (7.8% of portfolio), and hotel and motel loans (7.4% of portfolio). During the first nine of 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 64.5% of total originations. The growing West Virginia markets also accounted for 21.9% 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 the remainder of 2009.
Also contributing to the loan portfolio increase were consumer loans, which were up $8,237, or 6.5%, from year-end 2008. 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 $5,514, or 20.4%, from year-end 2008. The automobile indirect lending segment continues to represent the largest portion of the Company's consumer loan portfolio, representing 24.1% of total consumer loans at September 30, 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 $2,723, or 2.7%, 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
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 the first nine months of 2009, total residential real estate loan balances decreased $13,436, or 5.3%, from year-end 2008 to total $239,257. 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 the first nine months of 2009 to originate and sell fixed-rate mortgages to the secondary market. During the first three quarters of 2009, the Company sold $53,536 in loans as compared to $11,704 in secondary market loans that were sold during the entire year of 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 $13,956, or 7.4%, 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 $5,720, or 17.3%, from year-end 2008.
The remaining real estate loan portfolio balances increased $6,237 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.
The Company recognized an increase of $982 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 $987.
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 without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the credit quality of the portfolio. The Company has already seen the volume of secondary market loan sales stabilize during the third quarter of 2009 and anticipate that trend to continue for the remainder of 2009 as long-term interest rates begin to increase. At September 30, 2009, the 30-year treasury rate was 4.03% as compared to 2.69% at December 31, 2008. The Company anticipates total loan growth in 2009 to be challenged, with volume to continue at a stable pace throughout the rest of the year.
Allowance for Loan 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. During the first nine months of 2009, the Company's allowance for loan losses increased to $8,622, as compared to $7,799 at year-end 2008 and $6,797 at September 30, 2008. This surge in increased reserves was, in large part, due to the continued increase in the Company's nonperforming loan balances. Nonperforming loans at September 30, 2009 totaled 1.10% of total portfolio loans, an increase from the December 31, 2008 ratio of 0.84% and the September 30, 2008 ratio of
0.70%. Nonperforming loans have increased $1,862, or 35.3%, to finish at $7,136 at September 30, 2009 as compared to year-end 2008, while also increasing $2,802, or 64.7%, as compared to a year ago at September 30, 2008. The increase in nonperforming loans was mostly related to real estate mortgage borrowers, comprising about 72% of total nonperforming loans at September 30, 2009, with payment performance difficulties. Most of these real estate secured nonperforming loans have been placed on nonaccrual status. These troubled credits also impacted the Company's nonperforming assets, which increased $2,397, or 24.0%, to finish at $12,365 at September 30, 2009 as compared to year-end 2008, while also increasing $3,418, or 38.2%, as compared to a year ago at September 30, 2008. Approximately 34.1% of nonperforming assets is related to one large commercial borrowing classified as other real estate owned ("OREO"). During the first quarter of 2008, the Company experienced problems with one of its commercial borrowers that was unable to meet the debt requirements of its loans. During this time, the Company stopped recognizing interest income on the loans, reversed all interest that had been accrued and unpaid and classified the loans as nonperforming. During the second quarter of 2008, continued analysis of these loans was performed, which included the reviews of updated appraisals that reflected a decline in market values due to deteriorating market conditions. This analysis, along with continued loan deterioration of this large commercial borrower, prompted management to charge down the loan by $750, including estimated costs to sell, to the estimated fair value of the collateral. Subsequently, the Company transferred approximately $4,214 in loans to OREO as a result of reaching a settlement agreement with the borrower that included the Bank receiving deeds in lieu of foreclosure. The Company's ratio of nonperforming assets, which include these OREO properties, to total assets equated to 1.51% at September 30, 2009, an increase from 1.28% at year-end 2008 and 1.15% at September 30, 2008. Excluding the aforementioned large commercial borrowing classified as OREO, nonperforming assets to total assets would equal 1.00% at September 30, 2009. Both nonperforming loans and nonperforming assets at September 30, 2009 continue to be in various stages of resolution for which management believes such loans are adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses.
In addition to the nonperforming loans and nonperforming assets discussed above, there was $18,322 of loans held by the Company at September 30, 2009 classified as impaired, or for which management has concerns regarding the ability of the borrowers to meet existing repayment terms. 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. Impaired loans are considered in the determination of the overall adequacy of the allowance for loan losses.
During the first nine months of 2009, net charge-offs totaled $1,278, a decrease of $972 from the same period in 2008, mostly due to a large recovery from a previously charged off commercial loan during June 2009. This large commercial loan recovery totaling $648 not only lowered net charge-offs, but also lowered provision expense charges during the second quarter of 2009. Management believes that the allowance for loan losses is adequate and reflects probable incurred losses in the loan portfolio. Asset quality remains a key focus, as management continues to stress not just loan growth, but quality in loan underwriting as well.
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. During the first nine months of 2009, total deposits were up $61,310, or 10.4%, from year-end 2008. The change in deposits came primarily from increases in the Company's money market deposits, interest-bearing demand deposits and interest-bearing time deposit balances.
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