OVBC
Ohio Valley Banc Corp.
Annual Report 2017
Sometimes putting Community First means getting your hands dirty!
Community
A Message from Management
Dear Neighbors and Friends,
Congratulations! Ohio Valley Bank, a subsid-
iary of YOUR company, celebrated its 145th
year in business in 2017. Ohio Valley Bank also
reached a significant
milestone by closing
out the year with
over $1 billion in
assets. These accom-
plishments would
not have been possi-
ble without the un-
wavering support of
our community and
the generosity of shareholders like you.
During 2017, our supporters also mourned loss-
es, though not of the financial kind. We were
saddened by the passing of our eighth president,
Jim Dailey, and longtime banker and director,
Leon Saunders. Know that the lessons of service
these great men taught us are well woven into
the fabric of today’s Ohio Valley Banc Corp.
As we look to 2018, we are inspired by an acute
sense of community. Our hope is that our ac-
tions surpass our words. Community First is
truly at the heart of our purpose. Whether its
handing out a check for a new construction proj-
ect, posting a congratulating ad in a school event
program, or getting our hands dirty helping with
a fundraiser to support youth programs, we are
committed to not only help our communities
exist, but to thrive.
Within these pages you will find the annual re-
porting of a company run by your friends and
neighbors, real people of and for
the communities in which they
live and work. As a result of their
diligence, your company earned
$7.5 million in net income for the
year, an increase of 8.5 percent
over the prior year.
If you have any questions regard-
ing this Annual Report, we invite
you to reach out to us. Our door is always open.
We do hope to see you at this year’s Annual
Shareholders Meeting. Make special note of the
date. This year’s meeting will be a week later
than usual. It is scheduled for Wednesday, May
16, 2018. As is tradition, the meeting will be
held at the Morris & Dorothy Haskins Ariel
Theatre and will start promptly at 5 p.m. with
social hour before. Please join us.
Sincerely,
Jeffrey E. Smith
Chairman of the Board President and CEO
Ohio Valley Banc Corp. Ohio Valley Banc Corp.
Thomas E. Wiseman
significant milestone...$1 billionin assets It’s about a COMPANY that invests
in the future of its COMMUNITY
because it’s the right thing to do.
Tom Wiseman talks with Jerry Davis about one group’s dream to transform
the abandoned train depot into the Gallipolis Railroad Freight Station Mu-
seum. The museum opened in 2017 with monetary and volunteer help from
OVB and other generous contributors.
Right Top Row L-R: OVB’s annual Veterans Appreciation Luncheon,
OVB’s Dan Short recognizes Eastern High School Students of the Month,
OVB’s Kimberly Broyles and Emily Conway volunteer with many others at
Rockets Over Rio.
Middle Row: OVB’s Brian Hall takes a break on his trip to help hurri-
cane victims in Houston, Maranda Prevatt and Niki Kazee give Marco a hug
at the OVB Barboursville Customer Appreciation Day, Loan Officer Ryan
Young throws the first pitch at a Gallia Academy varsity baseball game.
Bottom Row: OVB volunteers at Special Olympics, Bankers put in some
sweat equity at Field of Hope, Mason County 4-Hers learn the basics of
banking from OVB’s Hope Roush at 4-H Camp.
2 Community First!
Ohio Valley Banc Corp. 3
$399,467
$4,971,154.91
4 Community First!
2017 in Reviewby the Numbers
$399,467 Dollars given to local charities, schools,
and organizations through donations and
sponsorships.
$804,069.50 Cash back earned by OVB Rewards Checking
accountholders.
5,023 Loan Central customers received
their tax refund early through our
loan program.
$4,971,154.91 Deposited using a cell phone or tablets.
3,496 Hours (or 437 work days) Ohio Valley Bank and
Loan Central employees actively volunteered in
their communities during bank hours.
$109,045,393.43 Loaned to individuals in our community to help
them finance their ambitions and dreams.
1,034,780 Transactions conducted at Ohio Valley Bank
offices.
over 600 Students learned how to handle their money
responsibly courtesy of fun financial literacy
programs provided for free from OVB.
Ohio Valley Banc Corp. 5
OVBC DIRECTORS
OVBC OFFICERS
Jeffrey E. Smith
Chairman, Ohio Valley Banc Corp. and Ohio Valley Bank
Jeffrey E. Smith
Chairman of the Board
Thomas E. Wiseman
President & CEO, Ohio Valley Banc Corp. and Ohio Valley
Bank
David W. Thomas, Lead Director
Former Chief Examiner, Ohio Division of Financial Institu-
tions
bank supervision and regulation
Thomas E. Wiseman
President and Chief Executive Officer
Larry E. Miller, II
Chief Operating Officer and Secretary
Katrinka V. Hart-Harris
Senior Vice President
Anna P. Barnitz
Treasurer & CFO, Bob’s Market & Greenhouses, Inc.
wholesale horticultural products and retail landscaping
stores
Brent A. Saunders
Chairman of the Board, Holzer Health System
Attorney, Halliday, Sheets & Saunders
healthcare
Harold A. Howe
Self-employed, Real Estate Investment and Rental Property
Brent R. Eastman
President and Co-owner, Ohio Valley Supermarkets
Partner, Eastman Enterprises
John G. Jones
Retired President, MBD, Ohio Valley Bank
Kimberly A. Canady
Owner, Canady Farms, LLC
agricultural products and agronomy services
Edward J. Robbins
President & CEO, Ohio Valley Veneer, Inc.
wood harvesting, processing and manufacturing of dry
lumber & flooring in Ohio, Kentucky, and Tennessee
OHIO VALLEY BANK DIRECTORS
Jeffrey E. Smith
Thomas E. Wiseman
David W. Thomas
Harold A. Howe
Anna P. Barnitz
Brent A. Saunders
Brent R. Eastman
John G. Jones
Kimberly A. Canady
Edward J. Robbins
6 Community First!
Scott W. Shockey
Senior Vice President & Chief Financial Officer
Mario P. Liberatore, Vice President
Cherie A. Elliott, Vice President
Jennifer L. Osborne, Vice President
Tom R. Shepherd, Vice President
Bryan F. Stepp, Vice President
Frank W. Davison, Vice President
Bryan W. Martin, Vice President
Ryan J. Jones, Vice President
Paula W. Clay, Assistant Secretary
Cindy H. Johnston, Assistant Secretary
LOAN CENTRAL OFFICERS
Larry E. Miller, II
Cherie A. Elliott
Timothy R. Brumfield
John J. Holtzapfel
Chairman of the Board
President
Vice President & Secretary
Manager, Gallipolis Office
Compliance Officer &
Manager, Wheelersburg Office
Manager, Waverly Office
Manager, South Point Office
T. Joe Wilson
Joseph I. Jones
Gregory G. Kauffman Manager, Chillicothe Office
Steven B. Leach
Manager, Jackson Office
WEST VIRGINIA ADVISORY BOARD
Mario P. Liberatore
Richard L. Handley
Trenton M. Stover
Stephen L. Johnson
E. Allen Bell
John A. Myers
DIRECTORS EMERITUS
W. Lowell Call
Steven B. Chapman
Robert E. Daniel
Barney A. Molnar
Wendell B. Thomas
Lannes C. Williamson
OHIO VALLEY BANK OFFICERS
EXECUTIVE OFFICERS
Jeffrey E. Smith
Thomas E. Wiseman President and Chief Executive Officer
Larry E. Miller, II
Chief Operating Officer and Secretary
Katrinka V. Hart-Harris Executive Vice President,
Chairman of the Board
Scott W. Shockey
Mario P. Liberatore
Special Projects
Executive Vice President,
Chief Financial Officer
President, OVB West Virginia
SENIOR VICE PRESIDENTS
Jennifer L. Osborne
Tom R. Shepherd
Bryan F. Stepp
Frank W. Davison
Bryan W. Martin
Ryan J. Jones
Retail Lending
Chief Deposit Officer
Chief Credit Officer
Financial Bank Group
Chief Administrative Officer
Chief Risk Officer
Trust
Corporate Banking
Director of Human Resources
Business Development Officer
Western Division Branch Manager
Corporate Communications
Branch Administration/CRM
VICE PRESIDENTS
Richard D. Scott
Patrick H. Tackett
Marilyn E. Kearns
Fred K. Mavis
Rick A. Swain
Bryna S. Butler
Tamela D. LeMaster
Christopher L. Preston Branch Administration
Business Development
Consumer Lending
Internal Audit Liaison
Loan Operations
Director of Marketing
Director of Customer Support
Director of Cultural Enhancement
Corporate Banking
Senior Compliance Officer
Lender/
Business Development Officer
Business Development/
Lending Administration-MBC
Senior Credit Officer
Business Development Officer
Trust
Gregory A. Phillips
Diana L. Parks
John A. Anderson
Kyla R. Carpenter
Allen W. Elliott
E. Kate Cox
Brian E. Hall
Daniel T. Roush
Gary L. Crabtree
Shawn R. Siders
Jay D. Miller
Jody M. DeWees
Christopher S. Petro Comptroller
Adam D. Massie
ASSISTANT VICE PRESIDENTS
Melissa P. Wooten
BSA Officer/Loss Prevention
Facilities Manager
Secondary Market Manager
Assistant Secretary
Assistant Secretary
Region Manager Jackson County
Manager Deposit Services
Chief Information Security Officer
Shareholder Relations Manager
& Trust Officer
Kimberly R. Williams Systems Officer
Paula W. Clay
Cindy H. Johnston
Joe J. Wyant
Brenda G. Henson
Gabriel U. Stewart
Randall L. Hammond Security Officer/Loss Prevention
Barbara A. Patrick
Richard P. Speirs
Lori A. Edwards
Raymond G. Polcyn Manager of Loan Production Office
Retail Lending Operations Manager
Stephanie L. Stover
Systems Administrator
Brandon O. Huff
Regional Branch Administrator
Anita M. Good
Customer Support Manager
Angela S. Kinnaird
Risk Administration Officer
Laura F. Conger
Lender/
Lonnie L. Hunt
Business Development Officer
Lender/
Business Development Officer
Human Resources Officer
Business Development Officer
Terri M. Camden
Shelly N. Boothe
Ruth R. Murphy
ASSISTANT CASHIERS
Lois J. Scherer
Linda K. Roe
EFT Officer
Lead Cultural Engineer &
Talent Development Specialist
Glen P. Arrowood, II Manager of Indirect Lending
Michelle L. Hammond Escrow Supervisor/
Patricia G. Hapney
Anthony W. Staley
Jon C. Jones
Daniel F. Short
Pamela K. Smith
William F. Richards
Lead Mortgage Loan Documentation
Retail Lending & Personal Banker
Product Development
Business Sales & Support
Western Cabell Region Manager
Meigs Region Manager
Eastern Cabell Region Manager
Advertising Manager
LEADERSHIP
Ohio Valley Banc Corp. 7
Athens, Ohio
Loan Office - 2097 East State Street Suite C
Gallia County, Ohio
Main Office - 420 Third Avenue
Mini Bank - 437 Fourth Avenue
Inside Walmart - 2145 Eastern Avenue
Jackson Pike - 3035 State Route 160
Inside Holzer - 100 Jackson Pike
Loan Office - Walmart Plaza, 2145 Eastern Avenue
Rio Grande - 27 North College Avenue
Jackson County, Ohio
Upper Main - 740 East Main Street
Downtown - 400 East Main Street
Oak Hill - 116 Jackson Street
Wellston - 123 South Ohio Avenue
Mt. Sterling, Ohio
255 Yankeetown Street
New Holland, Ohio
25 North Main Street
Pomeroy, Ohio
Inside Sav-a-Lot - 700 West Main Street
Waverly, Ohio
507 West Emmitt Avenue
Barboursville, West Virginia
6431 East State Route 60
Milton, West Virginia
280 East Main Street
Point Pleasant, West Virginia
328 Viand Street
8 Community First!
Chillicothe, Ohio
1080 N. Bridge Street, Unit 43
Gallipolis, Ohio
2145 Eastern Avenue
Jackson, Ohio
420 East Main Street
South Point, Ohio
348 County Road 410
Waverly, Ohio
505 West Emmitt Avenue
Wheelersburg, Ohio
326 Center Street
OHIO VALLEY BANC CORP.
ANNUAL REPORT 2017
FINANCIALS
SELECTED FINANCIAL DATA
(dollars in thousands, except share and per share data)
SUMMARY OF OPERATIONS:
2017
Years Ended December 31
2015
2014
2016
2013
$
Total interest income …………………………………… $
Total interest expense …………………………………...
Net interest income ……………………………………...
Provision for loan losses …………………………….…..
Total other income ……………………………………....
Total other expenses ………………………………….....
Income before income taxes ………………………….....
Income taxes ………………………………………….....
Net income ……………………………………………....
45,708
3,975
41,733
2,564
9,435
36,609
11,995
4,486
7,509
$
$
39,348
3,022
36,326
2,826
8,239
32,899
8,840
1,920
6,920
36,334
2,839
33,495
1,090
8,597
29,619
11,383
2,809
8,574
36,355
2,875
33,480
2,787
9,793
29,293
11,193
3,120
8,073
$
35,958
3,573
32,385
477
8,518
29,375
11,051
2,939
8,112
PER SHARE DATA:
Earnings per share ………………………………………. $
Cash dividends declared per share …………….………... $
Book value per share ……………………………………. $
Weighted average number of common shares
outstanding …………………………………………..
AVERAGE BALANCE SUMMARY:
1.60
0.84
23.26
$
$
$
1.59
0.82
22.40
$
$
$
2.08
0.89
21.97
$
$
$
1.97
0.84
20.94
$
$
$
2.00
0.73
19.62
4,685,067
4,351,748
4,117,675
4,099,194
4,064,083
753,204
Total loans ………………………………………………. $
Securities(1) ………………………………………………
193,199
845,227
Deposits ………………………………………………….
Other borrowed funds(2) ………………………………….
47,663
Shareholders’ equity ……………………………………..
108,110
Total assets ……………………………………………… 1,014,115
$
$
$
644,690
196,389
749,054
39,553
98,133
899,209
589,953
188,754
694,218
32,878
88,720
828,444
581,690
170,314
673,410
31,225
83,887
799,448
$
PERIOD END BALANCES:
769,319
Total loans ………………………………………………. $
Securities(1) ………………………………………………
189,941
856,724
Deposits ………………………………………………….
109,361
Shareholders’ equity ……………………………………..
Total assets ……………………………………………… 1,026,290
$
$
$
734,901
151,985
790,452
104,528
954,640
585,752
155,900
660,746
90,470
796,285
594,768
137,274
646,830
86,216
778,668
$
555,314
175,809
664,061
26,572
77,989
779,113
566,319
133,173
628,877
80,419
747,368
KEY RATIOS:
Return on average assets ……………………...…………
Return on average equity ……………………………......
Dividend payout ratio …………………………………...
Average equity to average assets ………………………..
0.74 %
6.95 %
52.36 %
10.66 %
0.77 %
7.05 %
51.79 %
10.91 %
1.03 %
9.66 %
42.74 %
10.71 %
1.01 %
9.62 %
42.62 %
10.49 %
1.04 %
10.40 %
36.56 %
10.01 %
(1) Securities include interest-bearing deposits with banks and restricted investments in bank stocks.
(2) Other borrowed funds include subordinated debentures.
9
CONSOLIDATED STATEMENTS OF CONDITION
As of December 31
2017
2016
(dollars in thousands, except share and per share data)
Assets
Cash and noninterest-bearing deposits with banks ………….……………………….
Interest-bearing deposits with banks ..............................................................................
Total cash and cash equivalents ............................................................................
$
Certificates of deposit in financial institutions……………………………………….....
Securities available for sale …………………………………………………………….
Securities held to maturity (estimated fair value: 2017 - $18,079; 2016 - $19,171)……
Restricted investments in bank stocks ………………………………………………….
Total loans
.....................................................................................................................
Less: Allowance for loan losses ………………………………………………….
Net loans …………………………………………………………………….
Premises and equipment, net …………………………………………………………..
Other real estate owned ………………………………………………………………..
Accrued interest receivable ……………………………………………………………
Goodwill ………………………………………………………………………………
Other intangible assets, net ..……………………………………………………………
Bank owned life insurance and annuity assets ………………………………………..
Other assets ……………………………………………………………………………
Total assets ……………………………………………………………….....
Liabilities
Noninterest-bearing deposits …………………………………………………………...
Interest-bearing deposits ……………………………………………………………….
Total deposits …..............................................................................................
Other borrowed funds …………………………………………………………………
Subordinated debentures ………………………………………………………………
Accrued liabilities …......................................................................................................
Total liabilities ……………………………………………………………….
$
$
Commitments and Contingent Liabilities (See Note L)
Shareholders’ Equity
Common stock ($1.00 stated value per share, 10,000,000 shares authorized;
2017 – 5,362,005 shares issued; 2016 - 5,325,504 shares issued) ………………..
Additional paid-in capital ………………………………………………………………
Retained earnings ………………………………………………………………………
Accumulated other comprehensive loss ….…………………………………………….
Treasury stock, at cost (659,739 shares) ………………………………………………
Total shareholders’ equity ………………….………………………………
12,664
61,909
74,573
1,820
101,125
17,581
7,506
769,319
(7,499 )
761,820
13,281
1,574
2,503
7,371
514
28,675
7,947
1,026,290
253,655
603,069
856,724
35,949
8,500
15,756
916,929
----
5,362
47,895
72,694
(878 )
(15,712 )
109,361
$
$
$
12,512
27,654
40,166
1,670
96,490
18,665
7,506
734,901
(7,699 )
727,202
12,783
2,129
2,315
7,801
670
29,349
7,894
954,640
209,576
580,876
790,452
37,085
8,500
14,075
850,112
----
5,326
46,788
69,117
(991 )
(15,712 )
104,528
Total liabilities and shareholders’ equity ……………………………………
$
1,026,290
$
954,640
See accompanying notes to consolidated financial statements
10
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31
(dollars in thousands, except per share data)
2017
2016
2015
Interest and dividend income:
Loans, including fees …………….……………………………………………………...
Securities:
$
Taxable ……………………………………………………………………………..
Tax exempt …………………………………………………………………………
Dividends …………………………………………………………………………………
Other interest …………………………………………………………………………….
Interest expense:
Deposits …………………………………………………………………………………..
Other borrowed funds ………………………………………………………………….
Subordinated debentures …………………………………………………………………
Net interest income ……………………………………………………………………..
Provision for loan losses …………………………………………………………………
Net interest income after provision for loan losses …………………………………
Noninterest income:
Service charges on deposit accounts …………………………………………………….
Trust fees …………………………………………………………………………………
Income from bank owned life insurance and annuity assets …………………………….
Mortgage banking income ………………………………………………………………
Electronic refund check / deposit fees …………………………………………………..
Debit / credit card interchange income ………………………………………………….
Gain (loss) on other real estate owned ………………………………………………….
Gain on sale of securities…………………………………………………………………
Other ……………………………………………………………………………………
Noninterest expense:
Salaries and employee benefits ………………………………………………………….
Occupancy ………………………………………………………………………………..
Furniture and equipment ………………………………………………………………..
Professional fees ……..………………………………………………………………..
Marketing expense ……..………………………………………………………………..
FDIC insurance …………………………………………………………………………...
Data processing …………………………………………………………………………..
Software ……..…………………………………………………………………………..
Foreclosed assets ………………………………………………………………………..
Amortization of intangibles ……………………………………………………………..
Merger related expenses…………………………………………………………………..
Other …………………………………………………………………………………….
Income before income taxes ……………………………………………………….
Provision for income taxes …………………………………………………………........
NET INCOME ……………………………………………………………....... $
42,182 $
36,266 $
33,481
2,116
411
392
607
45,708
2,843
884
248
3,975
41,733
2,564
39,169
2,137
240
1,226
265
1,692
3,376
(189 )
----
688
9,435
20,809
1,770
1,049
1,792
1,034
465
2,081
1,486
499
156
39
5,429
36,609
11,995
4,486
7,509 $
1,961
445
302
374
39,348
2,154
664
204
3,022
36,326
2,826
33,500
1,977
227
725
227
2,048
2,594
(467 )
----
908
8,239
18,874
1,846
922
1,362
915
455
1,455
1,316
357
68
930
4,399
32,899
8,840
1,920
6,920 $
1,849
526
293
185
36,334
2,191
478
170
2,839
33,495
1,090
32,405
1,573
221
681
242
2,371
2,399
99
163
848
8,597
17,498
1,599
801
1,375
860
583
1,259
1,123
347
----
----
4,174
29,619
11,383
2,809
8,574
Earnings per share ………………………………………………………………………. $
1.60 $
1.59 $
2.08
See accompanying notes to consolidated financial statements
11
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
For the years ended December 31
(dollars in thousands)
2017
2016
2015
NET INCOME …………………………………………………………………….......... $
7,509 $
6,920 $
8,574
Other comprehensive income (loss):
Change in unrealized gain (loss) on available for sale securities …………………….
Reclassification adjustment for realized (gains) …………………..………………….
Related tax (expense) benefit ………………………………………………………..
Total other comprehensive income (loss), net of tax …………………………….
171
----
171
(58 )
113
(1,963 )
----
(1,963 )
667
(1,296 )
(830 )
(163 )
(993 )
338
(655 )
Total comprehensive income …………………………………………………………….
$
7,622 $
5,624 $
7,919
See accompanying notes to consolidated financial statements
12
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
For the years ended December 31, 2017, 2016, and 2015
(dollars in thousands, except share and per share data)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury
Stock
Total
Shareholders'
Equity
Balances at January 1, 2015 ……. $
4,777 $
35,318 $
60,873 $
960 $
(15,712 ) $
86,216
Net income …………………………
Other comprehensive
income (loss), net ..........................
Cash dividends, $.89 per share ……
----
----
----
----
----
----
8,574
----
----
8,574
----
(3,665 )
(655 )
----
----
----
(655 )
(3,665 )
90,470
Balances at December 31, 2015 …
4,777
35,318
65,782
305
(15,712 )
Net income ………………………..
Other comprehensive
income (loss), net ……………….
Common stock issued to ESOP,
24,572 shares ……………………
Acquisition – Milton Bancorp, Inc.
523,518 shares ………………….
Cash dividends, $.82 per share ……
----
----
25
524
----
Balances at December 31, 2016 …
5,326
Net income …………………………
Other comprehensive
income (loss), net .........................
Common stock issued to ESOP,
15,118 shares ……………………
Common stock issued through
dividend reinvestment,
21,383 shares …………………….
Cash dividends, $.84 per share ……
----
----
15
21
----
----
----
550
10,920
----
46,788
----
----
413
694
----
6,920
----
----
6,920
----
----
----
(3,585 )
69,117
(1,296 )
----
(1,296 )
----
----
575
----
----
----
----
11,444
(3,585 )
(991 )
(15,712 )
104,528
7,509
----
----
7,509
----
----
113
----
----
----
113
428
----
(3,932 )
----
----
----
----
715
(3,932 )
Balances at December 31, 2017 … $
5,362 $
47,895 $
72,694 $
(878 ) $
(15,712 ) $
109,361
See accompanying notes to consolidated financial statements
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
2017
2016
2015
$
7,509 $
6,920 $
8,574
For the years ended December 31
(dollars in thousands)
Cash flows from operating activities:
Net income .………………………………………………………………………………...........
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment ………………………………………………….....
Net (accretion) of purchase accounting adjustments ………………………………………....
Net amortization of securities ………………………………………………………………...
Net realized (gain) on sale of securities ……………………………………………………...
Proceeds from sale of loans in secondary market ……………………………………………
Loans disbursed for sale in secondary market ………………………………………............
Amortization of mortgage servicing rights …………………………………………………..
Gain on sale of loans …………………………………………………………………………
Amortization of intangible assets ……………………………………………………………
Deferred tax (benefit) expense ……………………………………………………………….
Provision for loan losses ……………………………………………………………………..
Common stock issued to ESOP ………………………………………………………………
Earnings on bank owned life insurance and annuity assets …………………………………
(Gain) loss on sale of other real estate owned ……………………………………………….
Net write-down of other real estate owned …………………………………………………..
Change in accrued interest receivable ……………………………………………………….
Change in accrued liabilities …………………………………………………………………
Change in other assets ……………………………………………………………………….
Net cash provided by operating activities ……………………………………………….
Cash flows from investing activities:
Net cash acquired from Milton Bancorp, Inc. acquisition ……………………………………….
Proceeds from sales of securities available for sale ………………………………………...
Proceeds from maturities of securities available for sale ………………………………………...
Purchases of securities available for sale …………………………………………………………
Proceeds from maturities of securities held to maturity ……………………………………........
Purchases of securities held to maturity ……………………………………………………….....
Proceeds from maturities of certificates of deposit in financial institutions……………………...
Purchases of certificates of deposit in financial institutions……………………………………...
Purchases of restricted investments in bank stocks ………………………………………………
Net change in loans ……………………………………………………………………………….
Proceeds from sale of other real estate owned …………………………………………………..
Purchases of premises and equipment ………………………………………………………….
Proceeds from bank owned life insurance and annuity assets ……………………………………
Purchases of bank owned life insurance and annuity assets ……………………………………...
Net cash (used in) investing activities ……………………………………………………
Cash flows from financing activities:
Change in deposits ……………………………………………………………………………….
Proceeds from common stock through dividend reinvestment …………………………………
Cash dividends …………………………………………………………………………………....
Proceeds from Federal Home Loan Bank borrowings ……………………………………………
Repayment of Federal Home Loan Bank borrowings ……………………………………………
Change in other long-term borrowings ………………………………………………………….
Change in other short-term borrowings ………………………………………………………….
Net cash provided by financing activities ……………………………………………….
1,277
(526 )
378
----
7,857
(7,592 )
71
(336 )
156
1,907
2,564
428
(1,226 )
134
55
(188 )
1,681
347
14,496
----
----
20,389
(25,177 )
1,419
(389 )
245
(395 )
----
(37,918 )
1,466
(1,727 )
2,107
(2,200 )
(42,180 )
66,444
715
(3,932 )
4,785
(5,318 )
(459 )
(144 )
62,091
1,126
(255 )
407
----
6,455
(6,228 )
79
(306 )
68
(725 )
2,826
575
(725 )
(22 )
489
(496 )
1,461
1,717
13,366
1,770
----
18,591
(20,256 )
3,089
(1,528 )
490
(445 )
(566 )
(38,299 )
403
(1,683 )
----
----
(38,434 )
10,150
----
(3,585 )
11,102
(1,883 )
3,899
21
19,704
Cash and cash equivalents:
Change in cash and cash equivalents ……………………………………………………………
Cash and cash equivalents at beginning of year ………………………………………………...
Cash and cash equivalents at end of year ………………………………………………..
$
Supplemental disclosure:
Cash paid for interest ……………………………………………………………………………...
Cash paid for income taxes ………………………………………………………………………..
Proceeds from bank owned life insurance and annuity assets not settled …………………………
Transfers from loans to other real estate owned …………………………………………………..
Other real estate owned sales financed by the Ohio Valley Bank Company ……………………..
Issuance of common stock for Milton Bancorp, Inc. acquisition …………………………………
Net assets acquired from Milton Bancorp, Inc. acquisition, excluding cash and cash equivalents..
$
34,407
40,166
74,573 $
(5,364 )
45,530
40,166 $
3,724 $
2,236
1,993
1,337
237
----
----
2,930 $
1,725
----
957
316
11,444
3,140
See accompanying notes to consolidated financial statements
14
872
----
432
(163 )
6,746
(6,504 )
93
(335 )
----
591
1,090
----
(681 )
(99 )
----
(13 )
473
(678 )
10,398
----
10,550
15,085
(33,251 )
3,482
(626 )
245
(980 )
----
5,049
458
(1,950 )
----
(3,000 )
(4,938 )
13,916
----
(3,665 )
400
(1,671 )
----
113
9,093
14,553
30,977
45,530
2,784
2,450
----
1,381
189
----
----
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”), an
Ohio state-chartered bank that is a member of the Federal Reserve Bank and is regulated primarily by the Ohio Division of
Financial Institutions and the Federal Reserve Board. Ohio Valley also has a subsidiary that engages in consumer lending to
individuals with higher credit risk history, Loan Central, Inc.; a subsidiary insurance agency that facilitates the receipts of
insurance commissions, Ohio Valley Financial Services Agency, LLC; and a limited purpose property and casualty insurance
company, OVBC Captive, Inc. The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC ("Ohio Valley REO"), an
Ohio limited liability company, to which the Bank transfers certain real estate acquired by the Bank through foreclosure for
sale by Ohio Valley REO. Ohio Valley and its subsidiaries are collectively referred to as the “Company.”
The Company provides a full range of commercial and retail banking services from 25 offices located in 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, Inc., Ohio Valley Financial Services Agency, LLC, and OVBC Captive, Inc. 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: To prepare financial statements in conformity with accounting principles generally accepted in the U.S.,
management makes estimates and assumptions based on available information. These estimates and assumptions affect the
amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, noninterest-bearing deposits with banks, federal
funds sold and interest-bearing deposits with banks with maturity terms of less than 90 days. 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.
Certificates of deposit in financial institutions: Certificates of deposit in financial institutions are carried at cost and have
maturity terms of 90 days or greater. The longest maturity date is September 30, 2019.
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 trade date.
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
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 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 credit loss. 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 cost basis, 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 not more likely than not that the entity will be required to sell the security before recovery
of its amortized cost basis less any current-period loss, 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 is recognized 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.
Restricted Investments in Bank Stocks: The Bank is a member of the Federal Home Loan Bank (“FHLB”)
system. Additionally, the Bank is a member of the Federal Reserve Bank (“FRB”) system. Members are required to own a
certain amount of stock based on their level of borrowings and other factors and may invest in additional amounts. FHLB stock
and FRB stock are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate
recovery of par value. Both cash and stock dividends are reported as income. The Company has additional investments in other
restricted bank stocks that are not material to the financial statements.
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. The amount of the Company’s
recorded investment is not materially different than the amount of unpaid principal balance for loans.
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 90 days or over 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
or over and still accruing 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. 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.
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which
the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt
restructurings and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of
shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using
the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance
homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and
accordingly, they are not separately identified for impairment disclosure. Troubled debt restructurings are measured at the
present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is
considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt
restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting
policy for the allowance for loan losses.
The general component covers non-impaired loans and impaired loans that are not individually reviewed for
impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined
by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years for the
consumer and real estate portfolio segment and 5 years for the commercial portfolio segment. The total loan portfolio’s actual
loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These
economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of
and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending
management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of
changes in credit concentrations. The following portfolio segments have been identified: Commercial and Industrial,
Commercial Real Estate, Residential Real Estate, and Consumer.
Commercial and industrial loans consist of borrowings for commercial purposes to individuals, corporations,
partnerships, sole proprietorships, and other business enterprises. Commercial and industrial loans are generally secured by
business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made
to finance capital expenditures or operations. The Company’s risk exposure is related to deterioration in the value of collateral
securing the loan should foreclosure become necessary. Generally, business assets used or produced in operations do not
maintain their value upon foreclosure, which may require the Company to write down the value significantly to sell.
Commercial real estate consists of nonfarm, nonresidential loans secured by owner-occupied and nonowner-occupied
commercial real estate as well as commercial construction loans. An owner-occupied loan relates to a borrower purchased
building or space for which the repayment of principal is dependent upon cash flows from the ongoing business operations
conducted by the party, or an affiliate of the party, who owns the property. Owner-occupied loans that are dependent on cash
flows from operations can be adversely affected by current market conditions for their product or service. A nonowner-
occupied loan is a property loan for which the repayment of principal is dependent upon rental income associated with the
property or the subsequent sale of the property. Nonowner-occupied loans that are dependent upon rental income are primarily
impacted by local economic conditions which dictate occupancy rates and the amount of rent charged. Commercial
construction loans consist of borrowings to purchase and develop raw land into 1-4 family residential properties. Construction
loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are
secured by raw land and the subsequent improvements. Repayment of the loans to real estate developers is dependent upon
the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn
in the market for those properties, there may be significant erosion in value which may be absorbed by the Company.
17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
Residential real estate loans consist of loans to individuals for the purchase of 1-4 family primary residences with
repayment primarily through wage or other income sources of the individual borrower. The Company’s loss exposure to these
loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair
value of the property at origination.
Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other
loans to individuals for household, family, and other personal expenditures, both secured and unsecured. These loans typically
have maturities of 6 years or less with repayment dependent on individual wages and income. The risk of loss on consumer
loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult
to locate if repossession is necessary. The Company has allocated the highest percentage of its allowance for loan losses as a
percentage of loans to the other identified loan portfolio segments due to the larger dollar balances associated with such
portfolios.
At December 31, 2017, there were no changes to the accounting policies or methodologies within any of the
Company’s loan portfolio segments from the prior period.
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 as of December 31:
% of Total Loans
2016
2017
38.92 %
Residential real estate loans ………………………. 40.19 %
29.12 %
27.74 %
Commercial real estate loans ……………………..
18.15 % 18.27 %
Consumer loans ………………………………….
13.69 %
13.92 %
Commercial and industrial loans ……………........
100.00 %
100.00 %
Approximately 4.86% of total loans were unsecured at December 31, 2017, down from 5.61% at December 31, 2016.
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, 2017, the Bank’s primary
correspondent balance was $60,872 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 method over the estimated useful life of the owned asset and, for leasehold
improvement, over the remaining term of the leased facility, whichever is shorter. The useful lives range from 3 to 8 years for
equipment, furniture and fixtures and 7 to 39 years for buildings and improvements.
Foreclosed assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell
when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer
mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in
the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These
assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent
to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Foreclosed
assets totaled $1,574 and $2,129 at December 31, 2017 and 2016.
Goodwill: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price
over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1,
2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any
noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition
date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life are not amortized,
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
but tested for impairment at least annually. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
The Company has selected December 31 as the date to perform its annual qualitative impairment test. Given that the Company
has been profitable and had positive equity, the qualitative assessment indicated that it was more likely than not that the fair
value of goodwill was more than the carrying amount, resulting in no impairment.
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, 2017 and 2016, the Company’s MSR assets were $360 and $387, respectively.
Earnings Per Share: Earnings per share is based on net income divided by the following weighted average number of common
shares outstanding during the periods: 4,685,067 for 2017; 4,351,748 for 2016; 4,117,675 for 2015. 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. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized at the time of enactment of such change in tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be realized. On December 22, 2017, the Tax Cuts
and Jobs Act (“TCJA”) was enacted, which among other things, reduced the federal income tax rate from 34% to 21%
effective January 1, 2018. This required the Company’s deferred tax assets and liabilities to be revalued using the 21% federal
tax rate enacted. The effect was recorded in the fourth quarter tax provision.
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 (loss). Other
comprehensive income (loss) 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 and Annuity Assets: 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.
The Company also purchased an annuity investment for a certain key executive that earns interest.
Employee Stock Ownership Plan: Compensation expense is based on the market price of shares as they are committed to be
allocated to participant accounts.
19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
Dividend Reinvestment Plan: The Company maintains a Dividend Reinvestment Plan. The plan enables shareholders to elect
to have their cash dividends on all or a portion of shares held automatically reinvested in additional shares of the Company’s
common stock. The stock is issued out of the Company’s authorized shares and credited to participant accounts at fair market
value. Dividends are reinvested on a quarterly basis.
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 L 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 P for more specific disclosure related to dividend
restrictions.
Restrictions on Cash: Cash on hand or on deposit with a third-party correspondent and the Federal Reserve Bank of $61,915
and $28,102 was required to meet regulatory reserve and clearing requirements at year-end 2017 and 2016. The balances on
deposit with a third-party correspondent do not earn interest.
Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on
the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of
a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”),
or (3) an instrument with no hedging designation (“stand-alone derivative”).
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest
expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are
reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of
the items being hedged.
At December 31, 2017 and 2016, the Company’s only derivatives on hand were interest rate swaps, which are
classified as stand-alone derivatives. See Note H for more specific disclosures related to interest rate swaps.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in Note O. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Reclassifications: The consolidated financial statements for 2016 and 2015 have been reclassified to conform with the
presentation for 2017. These reclassifications had no effect on the net results of operations or shareholders’ equity.
Adoption of New Accounting Standards: In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09,
"Revenue from Contracts with Customers (Topic 606)". The ASU creates a new topic, Topic 606, to provide guidance on
revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for
the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative
information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual
periods, beginning after December 15, 2017, with early adoption permitted on January 1, 2017. The adoption of ASU 2014-09
did not have a material effect on the Company's financial statements. The Company's primary sources of revenues are derived
from interest and dividends earned on loans, investment securities and other financial instruments that are not within the scope
of ASU 2014-09.
In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial
Liabilities". The update provides updated accounting and reporting requirements for both public and non-public entities. The
20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
most significant provisions that will impact the Company are: 1) measurement of equity securities at fair value, with the changes
in fair value recognized in the income statement; 2) elimination of the requirement to disclose the method(s) and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments at amortized cost on the
balance sheet; 3) utilization of the exit price notion when measuring the fair value of financial instruments for disclosure
purposes; and 4) requirement of separate presentation of both financial assets and liabilities by measurement category and form
of financial asset on the balance sheet or accompanying notes to the financial statements. The update will be effective for
interim and annual periods beginning after December 15, 2017, using a cumulative-effect adjustment to the balance sheet as of
the beginning of the year of adoption. Early adoption is not permitted. The adoption of ASU 2016-01 did not have a material
effect on the Company's financial statements.
In February 2016, the FASB issued an update (ASU 2016-02, Leases) which will require lessees to record most leases
on their balance sheet and recognize leasing expenses in the income statement. Operating leases, except for short-term leases
that are subject to an accounting policy election, will be recorded on the balance sheet for lessees by establishing a lease liability
and corresponding right-of-use asset. The guidance in this ASU will become effective for interim and annual reporting periods
beginning after December 15, 2018, with early adoption permitted. Management is currently evaluating the impact of this
update on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses". ASU 2016-13 requires
entities to report "expected" credit losses on financial instruments and other commitments to extend credit rather than the
current "incurred loss" model. These expected credit losses for financial assets held at the reporting date are to be based on
historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced
disclosures to help investors and other financial statement users better understand significant estimates and judgments used in
estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. These disclosures
include qualitative and quantitative requirements that provide additional information about the amounts recorded in the
financial statements. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2019. Early adoption is permitted, for annual periods and interim periods within those annual periods, beginning
after December 15, 2018. Management is currently in the developmental stages of implementing the ASU. A steering
committee has been established, models are being evaluated, and available historical information is being collected, in order to
assess the expected credit losses. However, the impact to the financial statements is still yet to be determined.
In August 2016, the FASB issued an update (ASU 2016-15, Statement of Cash Flows) which addresses eight specific
cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments
are presented and classified in the statement of cash flows. The amendments in this Update apply to all entities, including
business entities and not-for-profit entities that are required to present a statement of cash flows, and are effective for public
business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period. The adoption of ASU 2016-15 is not expected to have a material
effect on the Company’s financial statements.
In January 2017, the FASB issued an update (ASU 2017-04, Intangibles – Goodwill and Other) which is intended to
simplify the measurement of goodwill in periods following the date on which the goodwill is initially recorded. Under the
amendments in this update, an entity should perform its annual or interim goodwill impairment test by comparing the fair value
of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the
carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. A public
business entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this update for its
annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Adoption by the Company
is not expected to have a material impact on the consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income”. The purpose of this Update is to allow a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from the TCJA. The Update is effective for public business
entities for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is
permitted, including adoption in an interim period. The adoption of ASU 2018-02 is not expected to have a material effect on
the Company’s financial statements.
21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note B – Business Combinations
As of the close of business on August 5, 2016, Ohio Valley completed its merger with Milton Bancorp, Inc. (“Milton
Bancorp”) pursuant to the terms of the Agreement and Plan of Merger dated as of January 7, 2016, by and between Ohio Valley
and Milton Bancorp, as amended (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, Milton Bancorp
was merged with and into Ohio Valley. Immediately following the Merger, The Milton Banking Company (“Milton Bank”)
was merged with and into the Bank. As a result of the Merger and in accordance with the terms of the Merger Agreement,
each Milton Bancorp share was converted into the right to receive either 1,636 Ohio Valley common shares, no par value, or
cash in the amount of $37,219, subject to certain allocation procedures set forth in the Merger Agreement pursuant to which
80% of the 400 outstanding Milton Bancorp common shares were converted into the right to receive Ohio Valley common
shares and the remaining 20% of the outstanding Milton Bancorp common shares were converted into the right to receive cash.
Each of the 1,237 Milton Bancorp preferred shares issued and outstanding were converted into the right to receive a cash
payment in the amount of $3,600 per preferred share. The consideration paid for Milton Bancorp totaled $18,875, of which
$11,444 was the market value of the Company’s common shares and $7,431 was cash. Ohio Valley financed part of the cash
portion of the purchase price through $5,000 in borrowed funds. Milton Bank's results of operations were included in the
Company's results beginning August 6, 2016. Merger-related expenses of $930 were recorded to the Company’s income
statement for the year ended December 31, 2016. The fair value of the common shares issued as part of the consideration paid
for Milton Bancorp was determined in the basis of the closing price of the Company's common shares on the acquisition date.
After the Merger, the Company's assets totaled approximately $950 million and branches increased to 25 locations.
Goodwill of $6,534 arising from the acquisition consisted largely of synergies from combining the operations of the
companies. As the acquisition was treated as a nontaxable stock acquisition transaction, the goodwill was not deductible for
tax purposes. The following table summarizes the consideration paid for Milton Bancorp and the amounts of the assets acquired
and liabilities assumed recognized at the acquisition date:
Consideration:
Cash …………………………………………………………………………………… $ 7,431
11,444
Equity instruments ………..…………………………………………………………...
Fair value of total consideration transferred …………………………………………….. $ 18,875
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents ……………………………………………………………. $ 9,201
5,868
Securities ………..………………………………………………………….................
Restricted investments in bank stock……………………………………………….....
364
Loans ………..…………………………………………………………....................... 112,479
1,826
Premises and equipment .……………………………………………………..............
641
Other real estate owned .………………………………………………………..........
272
Bank owned life insurance ………..………………………………………………......
738
Core deposit intangible asset ………..……………………………………………......
612
Other assets ………..……………………………………………….............................
132,001
Total assets acquired ………..…………………………………………………..
Deposits ………..……………………………………………….................................. 119,669
(9 )
Other liabilities ………..……………………………………………….......................
Total liabilities assumed ………..……………………………………………..... 119,660
Total identifiable net assets ………..………………………………………
12,341
Goodwill ………………………………………………………………………………..
6,534
$ 18,875
The fair value of net assets acquired included fair value adjustments to certain receivables that were not considered
impaired as of the acquisition date. This consisted of non-impaired loans with a fair value of $111,558 and gross contractual
amounts receivable of $112,249 on the date of acquisition. The fair value adjustments were determined using discounted
contractual cash flows. The Company also acquired purchase credit impaired loans that management deemed to be not material
for disclosure.
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Securities
The following table summarizes the amortized cost and fair value of securities available for sale and securities held to
maturity at December 31, 2017 and 2016 and the corresponding amounts of gross unrealized gains and losses recognized in
accumulated other comprehensive income (loss) and gross unrecognized gains and losses:
Securities Available for Sale
December 31, 2017
U.S. Government sponsored entity securities …………………
Agency mortgage-backed securities, residential ………………
Total securities …………………………………………..
December 31, 2016
U.S. Government sponsored entity securities …………………
Agency mortgage-backed securities, residential ………………
Total securities …………………………………………..
Securities Held to Maturity
December 31, 2017
Obligations of states and political subdivisions ……………….
Agency mortgage-backed securities, residential ………………
Total securities …………………………………………..
December 31, 2016
Obligations of states and political subdivisions ……………….
Agency mortgage-backed securities, residential ………………
Total securities ……………………………………………
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
13,622 $
88,833
102,455 $
---- $
300
300 $
(149 ) $
(1,481 )
(1,630 ) $
13,473
87,652
101,125
10,624 $
87,367
97,991 $
---- $
495
495 $
(80 ) $
(1,916 )
(1,996 ) $
10,544
85,946
96,490
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Estimated
Fair Value
17,577 $
4
17,581 $
18,661 $
4
18,665 $
533 $
----
533 $
654 $
----
654 $
(35 ) $
----
(35 ) $
18,075
4
18,079
(148 ) $
----
(148 ) $
19,167
4
19,171
$
$
$
$
$
$
$
$
At year-end 2017 and 2016, 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.
There were no sales of debt securities during 2017 and 2016. During 2015, proceeds from the sales of debt securities
totaled $10,550 with gross gains of $163 recognized.
Securities with a carrying value of approximately $70,078 at December 31, 2017 and $72,397 at December 31, 2016
were pledged to secure public deposits and repurchase agreements and for other purposes as required or permitted by law.
Unrealized losses on the Company’s debt securities have not been recognized into income because the issuers’
securities are of high credit quality as of December 31, 2017, and management does not intend to sell and it is likely that
management will not be required to sell the securities prior to their anticipated recovery. Management does not believe any
individual unrealized loss at December 31, 2017 and 2016 represents an other-than-temporary impairment.
23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Securities (continued)
The amortized cost and estimated fair value of debt securities at December 31, 2017, 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. Securities not due at a single maturity are shown separately.
Debt Securities:
Available for Sale
Held to Maturity
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Due in one year or less ………………………………………..
Due in one to five years ………………………………………
Due in five to ten years ……………………………………….
Due after ten years ……………………………………………
Agency mortgage-backed securities, residential ……………..
Total debt securities …………………………………….
$
$
4,601 $
9,021
----
----
88,833
102,455 $
4,593 $
8,880
----
----
87,652
101,125 $
809 $
7,356
9,204
208
4
17,581 $
819
7,559
9,497
200
4
18,079
The following table summarizes securities with unrealized losses at December 31, 2017 and December 31, 2016,
aggregated by major security type and length of time in a continuous unrealized loss position:
December 31, 2017
Securities Available for Sale
U.S. Government sponsored entity
Less than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
securities ………………………. $
6,910 $
(97 ) $
6,563 $
(52 ) $
13,473 $
(149 )
Agency mortgage-backed securities,
residential ……………………...
Total available for sale …... $
37,421
(434 )
44,331 $ (531 ) $
31,763
38,326 $
(1,047 )
(1,099 ) $
69,184
82,657 $
(1,481 )
(1,630 )
Securities Held to Maturity
Obligations of states and political
Less than 12 Months
Fair
Value
Unrecognized
Loss
12 Months or More
Fair
Value
Unrecognized
Loss
Total
Fair
Value
Unrecognized
Loss
subdivisions …………………… $
Total held to maturity ……. $
362 $
362 $
(2 ) $
(2 ) $
1,502 $
1,502 $
(33 ) $
(33 ) $
1,864 $
1,864 $
(35 )
(35 )
December 31, 2016
Securities Available for Sale
U.S. Government sponsored entity
Less than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
securities ………………………. $
10,544 $
(80 ) $
---- $
---- $
10,544 $
(80 )
Agency mortgage-backed securities,
residential ……………………...
Total available for sale …... $
64,043
74,587 $
(1,916 )
(1,996 ) $
----
---- $
----
---- $
64,043
74,587 $
(1,916 )
(1,996 )
Securities Held to Maturity
Obligations of states and political
Less than 12 Months
Fair
Value
Unrecognized
Loss
12 Months or More
Fair
Value
Unrecognized
Loss
Total
Fair
Value
Unrecognized
Loss
subdivisions …………………… $
Total held to maturity ……. $
3,813 $
3,813 $
(148 ) $
(148 ) $
---- $
---- $
---- $
---- $
3,813 $
3,813 $
(148 )
(148 )
24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D - Loans and Allowance for Loan Losses
Loans are comprised of the following at December 31:
Residential real estate …………………………………………………………………………..
Commercial real estate:
Owner-occupied ……………………………………………………………………………..
Nonowner-occupied …………………………………………………………………………
Construction …………………………………………………………………………………
Commercial and industrial …………………………………………………………………….
Consumer:
Automobile ……………………………………………………………………………………
Home equity …………………………………………………………………………………
Other …………………………………………………………………………………………
Less: Allowance for loan losses ………………………………………………………………
2017
2016
$
309,163 $
286,022
73,573
101,571
38,302
107,089
68,626
21,431
49,564
769,319
(7,499 )
77,605
90,532
45,870
100,589
59,772
20,861
53,650
734,901
(7,699 )
Loans, net ………………………………………………………………………………………
$
761,820 $
727,202
The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended
December 31, 2017, 2016 and 2015:
December 31, 2017
Allowance for loan losses:
Beginning balance ……………………………….
Provision for loan losses ……...............................
Loans charged off ……………………………….
Recoveries ……………………………………….
Total ending allowance balance ……………
Residential
Real Estate
Commercial
Real Estate
Commercial
& Industrial Consumer
Total
$
$
939 $
1,016
(745 )
260
1,470 $
4,315 $
(632 )
(1,067 )
362
2,978 $
907 $
658
(627 )
86
1,024 $
1,538 $
1,522
(1,642 )
609
2,027 $
7,699
2,564
(4,081 )
1,317
7,499
December 31, 2016
Allowance for loan losses:
Beginning balance ……………………………….
Provision for loan losses ……...............................
Loans charged off ……………………………….
Recoveries ……………………………………….
Total ending allowance balance ……………
Residential
Real Estate
Commercial
Real Estate
Commercial
& Industrial Consumer
Total
$
$
1,087 $
(63 )
(384 )
299
939 $
1,959 $
2,287
(63 )
132
4,315 $
2,589 $
(1,112 )
(586 )
16
907 $
1,013 $
1,714
(2,170 )
981
1,538 $
6,648
2,826
(3,203 )
1,428
7,699
December 31, 2015
Allowance for loan losses:
Beginning balance ……………………………….
Provision for loan losses ………………………..
Loans charged off ……………………………….
Recoveries ………………………………………
Total ending allowance balance ……………
Residential
Real Estate
Commercial
Real Estate
Commercial
& Industrial Consumer
Total
$
$
1,426 $
103
(828 )
386
1,087 $
4,195 $
(469 )
(1,971 )
204
1,959 $
1,602 $
777
(24 )
234
2,589 $
1,111 $
679
(1,428 )
651
1,013 $
8,334
1,090
(4,251 )
1,475
6,648
25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D - Loans and Allowance for Loan Losses (continued)
The following table presents the balance in the allowance for loan losses and the recorded investment of loans by
portfolio segment and based on impairment method as of December 31, 2017 and 2016:
December 31, 2017
Allowance for loan losses:
Ending allowance balance attributable to loans:
Residential
Real Estate
Commercial
Real Estate
Commercial
& Industrial Consumer
Total
Individually evaluated for impairment ….……...... $
Collectively evaluated for impairment ……….......
Total ending allowance balance ………………. $
---- $
1,470
1,470 $
94 $
2,884
2,978 $
---- $
1,024
1,024 $
---- $
2,027
2,027 $
94
7,405
7,499
Loans:
Loans individually evaluated for impairment ……… $
Loans collectively evaluated for impairment ………
Total ending loans balance …….……………… $
1,420 $
307,743
309,163 $
7,333 $
206,113
213,446 $
9,154 $
97,935
107,089 $
201 $
139,420
139,621 $
18,108
751,211
769,319
December 31, 2016
Allowance for loan losses:
Ending allowance balance attributable to loans:
Residential
Real Estate
Commercial
Real Estate
Commercial
& Industrial Consumer
Total
Individually evaluated for impairment ….……...... $
Collectively evaluated for impairment ……….......
Total ending allowance balance ………………. $
---- $
939
939 $
2,535 $
1,780
4,315 $
241 $
666
907 $
205 $
1,333
1,538 $
2,981
4,718
7,699
Loans:
Loans individually evaluated for impairment ……… $
Loans collectively evaluated for impairment ………
Total ending loans balance …….……………… $
717 $
285,305
286,022 $
13,111 $
200,896
214,007 $
8,465 $
92,124
100,589 $
416 $
133,867
134,283 $
22,709
712,192
734,901
26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D – Loans and Allowance for Loan Losses (continued)
The following table presents information related to loans individually evaluated for impairment by class of loans as
of the years ended December 31, 2017, 2016 and 2015:
December 31, 2017
With an allowance recorded:
Commercial real estate:
Nonowner-occupied ……………. $
With no related allowance recorded:
Residential real estate ……………
Commercial real estate:
Owner-occupied ………………
Nonowner-occupied …………..
Construction …………………..
Commercial and industrial ……….
Consumer:
Home equity ……………………
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for
Loan Losses
Allocated
Average
Impaired
Loans
Interest
Income
Recognized
Cash Basis
Interest
Recognized
372 $
372 $
94 $
378 $
17 $
1,420
1,420
----
851
66
3,427
4,989
352
9,154
3,427
3,534
----
9,154
----
----
----
----
2,456
3,521
----
8,544
184
81
19
481
203
201
----
208
7
17
66
184
81
19
481
7
Total ………………………………… $
19,917 $
18,108 $
94 $
15,958 $
855 $
855
December 31, 2016
With an allowance recorded:
Commercial real estate:
Owner-occupied ………………. $
Nonowner-occupied …………..
Commercial and industrial ……….
Consumer:
Home equity ……………………
With no related allowance recorded:
Residential real estate ……………
Commercial real estate:
Owner-occupied ………………
Nonowner-occupied …………..
Construction …………………..
Commercial and industrial ……….
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for
Loan Losses
Allocated
Average
Impaired
Loans
Interest
Income
Recognized
Cash Basis
Interest
Recognized
5,477 $
384
392
5,477 $
384
392
2,435 $
100
241
3,185 $
390
391
300 $
19
----
416
416
205
421
21
300
19
----
21
717
717
----
726
31
31
3,638
5,078
1,001
8,073
3,091
3,632
527
8,073
----
----
----
----
3,005
3,572
522
7,681
178
79
136
381
178
79
136
381
Total ………………………………… $
25,176 $
22,709 $
2,981 $
19,893 $
1,145 $
1,145
27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D – Loans and Allowance for Loan Losses (continued)
December 31, 2015
With an allowance recorded:
Commercial real estate:
Owner-occupied ………………. $
Nonowner-occupied …………..
Commercial and industrial ……….
Consumer:
Home equity ……………………
With no related allowance recorded:
Residential real estate ……………
Commercial real estate:
Owner-occupied ………………
Nonowner-occupied …………..
Construction …………………..
Commercial and industrial ……….
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for
Loan Losses
Allocated
Average
Impaired
Loans
Interest
Income
Recognized
Cash Basis
Interest
Recognized
204 $
396
4,355
204 $
396
4,355
204 $
107
1,850
204 $
402
3,545
13 $
75
149
218
218
3
219
8
1,001
1,001
----
809
45
3,812
5,178
680
4,336
3,265
2,773
680
4,336
----
----
----
----
2,747
3,439
544
3,985
181
49
----
180
13
75
149
8
45
181
49
----
180
700
Total ……………………………….. $
20,180 $
17,228 $
2,164 $
15,894 $
700 $
The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees.
Nonaccrual loans and loans past due 90 days or more and still accruing include both smaller balance homogenous
loans that are collectively evaluated for impairment and individually classified as impaired loans.
The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company
obtains physical possession of the property (through legal title or through a deed in lieu). As of December 31, 2017 and
December 31, 2016, other real estate owned for residential real estate properties totaled $262 and $938, respectively. In
addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $2,410 and
$1,492 as of December 31, 2017 and December 31, 2016, respectively.
The following table presents the recorded investment of nonaccrual loans and loans past due 90 days or more and still
accruing by class of loans as of December 31, 2017 and 2016:
Loans Past Due 90 Days
And Still Accruing
Nonaccrual
December 31, 2017
Residential real estate …………………………………………………... $
Commercial real estate:
Owner-occupied ………………………………………………………
Nonowner-occupied …………………………………………………
Construction ………………………………………………………….
Commercial and industrial …………………………………………….
Consumer:
Automobile ………………………………………………………….
Home equity …………………………………………………………..
Other ………………………………………………………………….
Total ……………………………………………………………………… $
131
----
----
----
----
127
----
76
334
$
$
5,906
476
2,454
444
337
86
283
126
10,112
28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D – Loans and Allowance for Loan Losses (continued)
Loans Past Due 90 Days
And Still Accruing
Nonaccrual
December 31, 2016
Residential real estate …………………………………………………... $
Commercial real estate:
Owner-occupied ………………………………………………………
Nonowner-occupied …………………………………………………
Construction ………………………………………………………….
Commercial and industrial …………………………………………….
Consumer:
Automobile ………………………………………………………….
Home equity …………………………………………………………..
Other ………………………………………………………………….
Total ……………………………………………………………………… $
132
28
----
----
----
121
----
46
327
$
$
3,445
1,571
2,506
527
867
5
34
6
8,961
The following table presents the aging of the recorded investment of past due loans by class of loans as of December
31, 2017 and 2016:
December 31, 2017
Residential real estate ……………. $
Commercial real estate:
Owner-occupied ……………….
Nonowner-occupied …………..
Construction …………………..
Commercial and industrial ……….
Consumer:
Automobile ……………………
Home equity …………………..
Other ………………………….
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
Or More
Past Due
Total
Past Due
Loans Not
Past Due
Total
5,383 $
671 $
1,673 $
7,727 $
301,436 $
309,163
194
140
----
303
1,257
90
865
161
----
----
243
346
272
218
160
2,238
169
191
151
27
76
515
2,378
169
737
1,754
389
1,159
73,058
99,193
38,133
106,352
66,872
21,042
48,405
73,573
101,571
38,302
107,089
68,626
21,431
49,564
Total ……………………………….. $
8,232 $
1,911 $
4,685 $
14,828 $
754,491 $
769,319
December 31, 2016
Residential real estate ……………. $
Commercial real estate:
Owner-occupied ……………….
Nonowner-occupied …………..
Construction …………………..
Commercial and industrial ……….
Consumer:
Automobile ……………………
Home equity …………………..
Other ………………………….
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
Or More
Past Due
Total
Past Due
Loans Not
Past Due
Total
3,728 $
953 $
2,201 $
6,882 $
279,140 $
286,022
134
261
66
1,283
1,091
349
685
366
18
52
483
221
45
155
1,325
2,506
182
800
126
----
46
1,825
2,785
300
2,566
1,438
394
886
75,780
87,747
45,570
98,023
58,334
20,467
52,764
77,605
90,532
45,870
100,589
59,772
20,861
53,650
Total ……………………………….. $
7,597 $
2,293 $
7,186 $
17,076 $
717,825 $
734,901
Troubled Debt Restructurings:
A troubled debt restructuring (“TDR”) occurs when the Company has agreed to a loan modification in the form of a
concession for a borrower who is experiencing financial difficulty. All TDR’s are considered to be impaired. The
modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate
of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with
similar risk; a reduction in the contractual principal and interest payments of the loan; or short-term interest-only payment
terms.
29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D – Loans and Allowance for Loan Losses (continued)
The Company has allocated reserves for a portion of its TDR’s to reflect the fair values of the underlying collateral or
the present value of the concessionary terms granted to the customer.
The following table presents the types of TDR loan modifications by class of loans as of December 31, 2017 and
December 31, 2016:
December 31, 2017
Residential real estate:
TDR’s
Performing to
Modified
Terms
TDR’s Not
Performing to
Modified
Terms
Total
TDR’s
Interest only payments ………………………………………………………..
$
697 $
---- $
697
Commercial real estate:
Owner-occupied
Interest only payments ……………………………………………………….
Reduction of principal and interest payments …………………………………
Maturity extension at lower stated rate than market rate ……………………..
Credit extension at lower stated rate than market rate ………………………..
Nonowner-occupied
Interest only payments ………………………………………………………..
Rate reduction ………………………………………………………………..
Credit extension at lower stated rate than market rate ………………………..
Commercial and industrial
997
554
1,466
410
560
372
570
----
----
----
1,961
----
----
997
554
1,466
410
2,521
372
570
Interest only payments ………………………………………………………
9,154
----
9,154
Consumer:
Home equity
Maturity extension at lower stated rate than market rate ……………………..
Total TDR’s ……………………………………………………………………………
$
----
14,780 $
201
2,162 $
201
16,942
TDR’s
Performing to
Modified
Terms
TDR’s Not
Performing to
Modified
Terms
Total
TDR’s
December 31, 2016
Residential real estate:
Interest only payments ………………………………………………………..
$
717 $
---- $
717
Commercial real estate:
Owner-occupied
Interest only payments ……………………………………………………….
Rate reduction ………………………………………………………………..
Reduction of principal and interest payments …………………………………
Maturity extension at lower stated rate than market rate ……………………..
Nonowner-occupied
Interest only payments ………………………………………………………..
Rate reduction ………………………………………………………………..
Credit extension at lower stated rate than market rate ………………………..
Commercial and industrial
Interest only payments ………………………………………………………
Credit extension at lower stated rate than market rate ……………………….
Consumer:
Home equity
284
----
579
1,582
600
384
574
8,074
----
----
232
----
----
2,210
----
----
----
391
284
232
579
1,582
2,810
384
574
8,074
391
Maturity extension at lower stated rate than market rate ……………………..
Credit extension at lower stated rate than market rate ……………………….
Total TDR’s ……………………………………………………………………………
$
213
203
13,210 $
----
----
2,833 $
213
203
16,043
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D – Loans and Allowance for Loan Losses (continued)
At December 31, 2017, the balance in TDR loans increased $899, or 5.6%, from year-end 2016. The Company’s
specific allocations in reserves to customers whose loan terms have been modified in TDR’s totaled $94 at December 31, 2017,
as compared to $546 in reserves at December 31, 2016. At December 31, 2017, the Company had $846 in commitments to
lend additional amounts to customers with outstanding loans that are classified as TDR’s, as compared to $2,427 at December
31, 2016.
The following table presents the pre- and post-modification balances of TDR loan modifications by class of loans that
occurred during the years ended December 31, 2017 and 2016:
TDR’s
Performing to Modified
Terms
TDR’s Not
Performing to Modified
Terms
Number
of
Loans
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
December 31, 2017
Commercial real estate:
Owner-occupied
Interest only payments …………………………………….
Credit extension at lower stated rate than market rate …….
1
1
$
997 $
412
997 $
412
---- $
----
Total TDR’s ……………....……………………………………….
2
$
1,409 $
1,409 $
---- $
----
----
----
The troubled debt restructurings described above had no impact on the allowance for loan losses and resulted in no
charge-offs during the year ended December 31, 2017.
TDR’s
Performing to Modified
Terms
TDR’s Not
Performing to Modified
Terms
Number
of
Loans
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
December 31, 2016
Commercial real estate:
Nonowner-occupied
Interest only payments …………………………………….
Credit extension at lower stated rate than market rate …….
1
1
$
---- $
574
---- $
574
226 $
----
Total TDR’s ……………....……………………………………….
2
$
574 $
574 $
226 $
226
----
226
The troubled debt restructurings described above increased the allowance for loan losses by $11 and resulted in charge-
offs of $11 during the year ended December 31, 2016.
The Company had no TDR's that occurred during the year ended December 31, 2017 and 2015 that experienced any
payment defaults within twelve months following their loan modification. During the twelve months ended December 31,
2016, the Company placed one commercial real estate TDR totaling $226 on nonaccrual status. Excluding this $226 commercial
real estate loan, there were no other TDR's described above at December 31, 2016 that experienced any payment defaults within
twelve months following their loan modification. A default is considered to have occurred once the TDR is past due 90 days
or more or it has been placed on nonaccrual. TDR loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D - Loans and Allowance for Loan Losses (continued)
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to
service their debt, such as: current financial information, historical payment experience, credit documentation, public
information, and current economic trends, among other factors. These risk categories are represented by a loan grading scale
from 1 through 11. The Company analyzes loans individually with a higher credit risk rating and groups these loans into
categories called “criticized” and ”classified” assets. The Company considers its criticized assets to be loans that are graded 8
and its classified assets to be loans that are graded 9 through 11. The Company’s risk categories are reviewed at least annually
on loans that have aggregate borrowing amounts that meet or exceed $500.
The Company uses the following definitions for its criticized loan risk ratings:
Special Mention. Loans classified as special mention indicate considerable risk due to deterioration of repayment (in the
earliest stages) due to potential weak primary repayment source, or payment delinquency. These loans will be under constant
supervision, are not classified and do not expose the institution to sufficient risks to warrant classification. These deficiencies
should be correctable within the normal course of business, although significant changes in company structure or policy may
be necessary to correct the deficiencies. These loans are considered bankable assets with no apparent loss of principal or
interest envisioned. The perceived risk in continued lending is considered to have increased beyond the level where such loans
would normally be granted. Credits that are defined as a troubled debt restructuring should be graded no higher than special
mention until they have been reported as performing over one year after restructuring.
The Company uses the following definitions for its classified loan risk ratings:
Substandard. Loans classified as substandard represent very high risk, serious delinquency, nonaccrual, or unacceptable credit.
Repayment through the primary source of repayment is in jeopardy due to the existence of one or more well defined weaknesses
and the collateral pledged may inadequately protect collection of the loans. Loss of principal is not likely if weaknesses are
corrected, although financial statements normally reveal significant weakness. Loans are still considered collectible, although
loss of principal is more likely than with special mention loan grade 8 loans. Collateral liquidation considered likely to satisfy
debt.
Doubtful. Loans classified as doubtful display a high probability of loss, although the amount of actual loss at the time of
classification is undetermined. This should be a temporary category until such time that actual loss can be identified, or
improvements made to reduce the seriousness of the classification. These loans exhibit all substandard characteristics with the
addition that weaknesses make collection or liquidation in full highly questionable and improbable. This classification consists
of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value.
Loss is deferred until certain important and reasonable specific pending factors which may strengthen the credit can be more
accurately determined. These factors may include proposed acquisitions, liquidation procedures, capital injection, and receipt
of additional collateral, mergers, or refinancing plans. A doubtful classification for an entire credit should be avoided when
collection of a specific portion appears highly probable with the adequately secured portion graded substandard.
Loss. Loans classified as loss are considered uncollectible and are of such little value that their continuance as bankable assets
is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather it is
not practical or desirable to defer writing off this asset yielding such a minimum value even though partial recovery may be
affected in the future. Amounts classified as loss should be promptly charged off.
Criticized and classified loans will mostly consist of commercial and industrial and commercial real estate loans. The
Company considers its loans that do not meet the criteria for a criticized and classified asset rating as pass rated loans, which
will include loans graded from 1 (Prime) to 7 (Watch). All commercial loans are categorized into a risk category either at the
time of origination or re-evaluation date.
32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D - Loans and Allowance for Loan Losses (continued)
As of December 31, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category
of commercial loans by class of loans is as follows:
December 31, 2017
Commercial real estate:
Owner-occupied …………………………………………………
Nonowner-occupied …………………………………………….
Construction …………………………………………………….
Commercial and industrial ………………………………………..
Total …………………………………………………………………
December 31, 2016
Commercial real estate:
Owner-occupied …………………………………………………
Nonowner-occupied …………………………………………….
Construction …………………………………………………….
Commercial and industrial ………………………………………..
Total …………………………………………………………………
Pass
Criticized
Classified
Total
64,993 $
93,197
37,735
91,097
287,022 $
934 $
3,776
156
6,058
10,924 $
7,646 $
4,598
411
9,934
22,589 $
73,573
101,571
38,302
107,089
320,535
Pass
Criticized
Classified
Total
66,495 $
83,103
45,325
94,091
289,014 $
428 $
2,364
----
188
2,980 $
10,682 $
5,065
545
6,310
22,602 $
77,605
90,532
45,870
100,589
314,596
$
$
$
$
The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau) but
not thereafter. The Company focuses mostly on the performance and repayment ability of the borrower as an indicator of credit
risk and does not consider a borrower’s credit score to be a significant influence in the determination of a loan’s credit risk
grading.
For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan,
which was previously presented, and by payment activity. The following table presents the recorded investment of residential
and consumer loans by class of loans based on payment activity as of December 31, 2017 and December 31, 2016:
Consumer
December 31, 2017
Performing ………………………………………
Nonperforming ………………………………….
Total …………………………………………….
December 31, 2016
Performing ………………………………………
Nonperforming ………………………………….
Total …………………………………………….
Automobile Home Equity Other
$
68,413 $
213
68,626 $
21,148 $
283
21,431 $
49,362 $
202
49,564 $
303,126 $
6,037
309,163 $
$
Residential
Real Estate
Consumer
Automobile Home Equity Other
$
59,646 $
126
59,772 $
20,827 $
34
20,861 $
53,598 $
52
53,650 $
282,445 $
3,577
286,022 $
$
Residential
Real Estate
Total
442,049
6,735
448,784
Total
416,516
3,789
420,305
The Company, through its subsidiaries, grants residential, consumer, and commercial loans to customers located
primarily in the southeastern area of Ohio as well as the western counties of West Virginia. Approximately 4.86% of total
loans were unsecured at December 31, 2017, down from 5.61% at December 31, 2016.
33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note E - Premises and Equipment
Following is a summary of premises and equipment at December 31:
Land ………………………………………………………………………………………...
Buildings …………………………………………………………………………………..
Leasehold improvements …………………………………………………………………..
Furniture and equipment …………………………………………………………………..
$
Less accumulated depreciation ……………………………………………………………..
Total premises and equipment ………………………………………………………..
$
2017
2016
2,641 $
13,913
1,267
5,675
23,496
10,215
13,281 $
2,348
13,247
1,238
5,085
21,918
9,135
12,783
The following is a summary of the future minimum operating lease payments for facilities leased by the Company.
Operating lease expense was $344 in 2017, $464 in 2016, and $464 in 2015.
2018 ………………………………………………………………………………………………………………
2019 ………………………………………………………………………………………………………………
2020 ………………………………………………………………………………………………………………
2021 ………………………………………………………………………………………………………………
2022 ………………………………………………………………………………………………………………
Thereafter …………………………………………………………………………………………………………
$
$
253
68
64
40
7
----
432
Note F – Goodwill and Intangible Assets
Goodwill: The change in goodwill during the year is as follows:
Beginning of year………………………………………………………………………………....... $
Acquired goodwill ……………………………………………………………………………….
Impairment ………………………………………………………………………………………
Finalization of Milton acquisition accounting …………………………………………………..
End of year………………………………………………………………………………................ $
7,801 $
----
----
(430 )
7,371 $
1,267
6,534
----
----
7,801
2017
2016
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2017
and 2016, the Company’s reporting unit had positive equity and the Company elected to perform a qualitative assessment to
determine if it was more likely than not that fair value of the reporting unit exceeded its carrying value, including goodwill.
The qualitative assessment indicated that it is more likely than not that fair value of goodwill is more than the carrying value,
resulting in no impairment. Therefore, the Company did not proceed to step one of the annual goodwill impairment testing
requirement.
Acquired intangible assets: Acquired intangible assets were as follows at year-end:
Amortized intangible assets:
Core deposit intangibles …………..…………………………….......
$
738 $
224 $
738 $
68
Aggregate amortization expense was $156 for 2017 and $68 for 2016.
2017
2016
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note F – Goodwill and Intangible Assets (continued)
Estimated amortization expense for each of the next five years:
2018 ………………………………………………………………………………………………………………
2019 ………………………………………………………………………………………………………………
2020 ………………………………………………………………………………………………………………
2021 ………………………………………………………………………………………………………………
2022 ………………………………………………………………………………………………………………
Thereafter …………………………………………………………………………………………………………
Total …………………………………………………………………………………………………………
$
$
135
114
94
74
53
44
514
Note G - Deposits
Following is a summary of interest-bearing deposits at December 31:
2017
2016
NOW accounts ……………………………………………………………………………….
Savings and Money Market …………………………………………………………………..
Time:
In denominations of $250,000 or less …………………………………………………….
In denominations of more than $250,000 …………………………………………………
Total time deposits ……………………………………………………………………...
Total interest-bearing deposits ………………………………………………………….
$
$
158,650 $
241,018
181,690
21,711
203,401
603,069 $
Following is a summary of total time deposits by remaining maturity at December 31, 2017:
2018 ………………………………………………………………………………………………………………
2019 ………………………………………………………………………………………………………………
2020 ………………………………………………………………………………………………………………
2021 ………………………………………………………………………………………………………………
2022 ………………………………………………………………………………………………………………
Thereafter …………………………………………………………………………………………………………
Total …………………………………………………………………………………………………………
$
$
155,051
237,761
168,546
19,518
188,064
580,876
109,278
43,077
22,696
14,413
13,578
359
203,401
Brokered deposits, included in time deposits, were $34,363 and $22,463 at December 31, 2017 and 2016, respectively.
Note H - Interest Rate Swaps
The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the
amount, sources, and duration of its assets and liabilities. The Company utilizes interest rate swap agreements as part of its
asset/liability management strategy to help manage its interest rate risk position. As part of this strategy, the Company provides
its customer with a fixed-rate loan while creating a variable-rate asset for the Company by the customer entering into an interest
rate swap with the Company on terms that match the loan. The Company offsets its risk exposure by entering into an offsetting
interest rate swap with an unaffiliated institution. These interest rate swaps do not qualify as designated hedges; therefore, each
swap is accounted for as a standalone derivative. At December 31, 2017, the Company had interest rate swaps associated with
commercial loans with a notional value of $7,234 and a fair value of $57. This is compared to interest rate swaps with a
notional value of $9,725 and a fair value of $22 at December 31, 2016. The notional amount of the interest rate swaps does
not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and
the other terms of the individual interest rate swap agreement. To further offset the risk exposure related to market value
fluctuations of its interest rate swaps, the Company maintains collateral deposits on hand with a third-party correspondent,
which totaled $350 at December 31, 2017 and December 31, 2016.
35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note I - Other Borrowed Funds
Other borrowed funds at December 31, 2017 and 2016 are comprised of advances from the Federal Home Loan Bank
(“FHLB”) of Cincinnati and promissory notes. At December 31, 2017 and 2016, FHLB Borrowings included $29 and $73 in
capitalized lease obligations, respectively.
FHLB Borrowings
Promissory Notes
Totals
2017 …………………………
2016 …………………………
$28,625
$29,203
$7,324
$7,882
$ 35,949
$ 37,085
Pursuant to collateral agreements with the FHLB, advances are secured by $299,673 in qualifying mortgage loans,
$80,036 in commercial loans and $5,365 in FHLB stock at December 31, 2017. Fixed-rate FHLB advances of $28,596 mature
through 2042 and have interest rates ranging from 1.53% to 3.31% and a year-to-date weighted average cost of 2.15% and
2.08% at December 31, 2017 and 2016, respectively. There were no variable-rate FHLB borrowings at December 31, 2017.
At December 31, 2017, the Company had a cash management line of credit enabling it to borrow up to $80,000 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 $80,000 available on this line of credit at December 31, 2017.
Based on the Company’s current FHLB stock ownership, total assets and pledgeable loans, the Company had the
ability to obtain borrowings from the FHLB up to a maximum of $232,588 at December 31, 2017. Of this maximum borrowing
capacity of $232,588, the Company had $143,992 available to use as additional borrowings, of which $80,000 could be used
for short-term, cash management advances, as mentioned above.
Promissory notes, issued primarily by Ohio Valley, are due at various dates through a final maturity date of August 1,
2026, and have fixed rates ranging from 1.25% to 4.09% and a year-to-date weighted average cost of 2.77% at December 31,
2017, as compared to 2.34% at December 31, 2016. At December 31, 2017, there was one $360 promissory note payable by
Ohio Valley to related parties. See Note M for further discussion of related party transactions. Promissory notes payable to
other banks totaled $3,440 at December 31, 2017.
Letters of credit issued on the Bank’s behalf by the FHLB to collateralize certain public unit deposits as required by
law totaled $60,000 at December 31, 2017 and $45,000 at December 31, 2016.
Scheduled principal payments over the next five years:
2018 ………………………………………………………………………………..
2019 ………………………………………………………………………………..
2020 ………………………………………………………………………………..
2021 ………………………………………………………………………………..
2022 ………………………………………………………………………………..
Thereafter ………………………………………………………………………….
FHLB
Borrowings
Promissory
Notes
Totals
$
$
3,255 $
2,724
2,541
2,239
2,153
15,713
28,625 $
2,261 $
2,599
519
541
564
840
7,324 $
5,516
5,323
3,060
2,780
2,717
16,553
35,949
Note J - Subordinated Debentures and Trust Preferred Securities
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 was fixed at 6.58% for five years, and then
converted to a floating-rate term on March 15, 2012, based on a rate equal to the 3-month LIBOR plus 1.68%. The interest
rate on these trust preferred securities was 3.27% at December 31, 2017 and 2.64% at December 31, 2016. 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.
36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note J - Subordinated Debentures and Trust Preferred Securities (continued)
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. The subordinated debentures may be
included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
Note K - Income Taxes
On December 22, 2017, the TCJA was signed into law, which included several provisions that will affect the
Company’s federal income tax expense, including reducing the federal income tax rate to 21% effective January 1, 2018. As
a result of the rate reduction, the Company is required to re-measure, through income tax expense in the period of enactment,
the deferred tax assets and liabilities using the enacted rate at which these items are expected to be recovered or settled. The
re-measurement of the Company’s net deferred tax asset resulted in additional 2017 income tax expense of $1.8 million
The provision for income taxes consists of the following components:
Current tax expense ……………………………………………………………….
Deferred tax (benefit) expense …………………………………………………….
Total income taxes …………………………………………………………..
2017
2016
2015
$
$
2,579 $
1,907
4,486 $
2,645
(725 )
1,920
$
$
2,218
591
2,809
The source of deferred tax assets and deferred tax liabilities at December 31:
Items giving rise to deferred tax assets:
Allowance for loan losses ………………………………………………………………..
Unrealized loss on securities available for sale …………………………………………
Deferred compensation ………………………………………………………………….
Deferred loan fees/costs …………………………………………………………………
Other real estate owned …………………………………………………………………
Accrued bonus …………..………………………………………………………………
Purchase accounting adjustments ………………………………………………………
Net operating loss …………………………………………………………………………
Other ……………………………………………………………………………………..
Items giving rise to deferred tax liabilities:
Mortgage servicing rights ……………………………………………………………….
FHLB stock dividends ………………………………………………………………….
Prepaid expenses ………………………………………………………………………..
Depreciation and amortization ………………………………………………………….
Other ……………………………………………………………………………………
Net deferred tax asset ……………………………………………………………………….
$
$
2017
2016
1,631 $
279
1,466
130
377
234
56
148
212
(78 )
(676 )
(149 )
(627 )
(3 )
3,000 $
2,538
510
2,194
248
719
240
305
258
275
(134 )
(1,078 )
(283 )
(823 )
(4 )
4,965
37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note K - Income Taxes (continued)
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 the future reversals of existing taxable
temporary differences, deductions against forecasted income and tax planning strategies.
At December 31, 2017, the Company’s deferred tax asset related to Section 382 net operating loss carryforwards was
$705, which will expire in 2026.
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:
2017
2016
2015
$
Statutory tax ……………………………………………………..
Effect of nontaxable interest …………………………………….
Effect of nontaxable insurance premiums ……………………….
Income from bank owned insurance, net ………………………..
Effect of postretirement benefits …………………………………
Effect of nontaxable life insurance death proceeds ……………..
Impact from TCJA ………………………………………………..
Effect of state income tax ………………………………………..
Tax credits ……………………………………………………….
Milton Merger Costs ……………………………………………..
Other items ……………………………………………………….
4,078 $
(514 )
(303 )
(230 )
(78 )
(175 )
1,783
70
(191 )
4
42
3,006 $
(433 )
(340 )
(239 )
(19 )
----
----
64
(211 )
73
19
3,870
(437 )
(336 )
(210 )
71
(11 )
----
66
(221 )
----
17
Total income taxes ……………………………………………….
$
4,486 $
1,920 $
2,809
At December 31, 2017 and December 31, 2016, 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. As previously
reported, the Internal Revenue Service (“IRS”) has proposed that Loan Central, as a tax return preparer, be assessed a penalty
for allegedly negotiating or endorsing checks issued by the U.S. Treasury to taxpayers. The penalty would amount to
approximately $1.2 million. Loan Central appealed this matter within the IRS, and the appeals office has returned the matter
to the examination office for further action. The matter may still be resolved at the IRS. If the matter is not resolved at the
IRS, the matter may have to be resolved through the judicial system. Based on consultation with legal counsel, management
remains confident that it is highly unlikely that the penalty recommendation will be sustained. Therefore, the Company did
not recognize any interest and/or penalties related to this matter for the periods presented.
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 2014. The tax years 2014-2016 remain open to federal and state
examinations.
Note L - 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.
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note L - Commitments and Contingent Liabilities (continued)
Following is a summary of such commitments at December 31:
Fixed rate ……………………………………………………………………………………...
Variable rate ………………………………………………………………………………......
Standby letters of credit ………………………………………………………………………
$
96 $
64,624
4,139
271
61,786
5,134
2017
2016
The interest rate on fixed-rate commitments ranged from 3.75% to 6.25% at December 31, 2017.
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 income-producing commercial properties.
The Company participates as a facilitator of tax refunds pursuant to a clearing agreement with a third-party tax refund
product provider. The clearing agreement is effective through December 31, 2019 and is renewable in 3-year increments. The
agreement requires the Bank to process electronic refund checks (“ERC’s”) and electronic refund deposits (“ERD’s”) presented
for payment on behalf of taxpayers containing taxpayer refunds. The Bank receives a fee paid by the third-party tax refund
product provider for each transaction that is processed. The agreement is subject to termination if the Bank fails to perform the
required clearing services and/or the Bank’s regulators would require the Bank to cease offering the product presented within
the agreement.
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 M - Related Party Transactions
Certain directors, executive officers and companies with which they are affiliated were loan customers during 2017.
A summary of activity on these borrower relationships with aggregate debt greater than $120 is as follows:
Total loans at January 1, 2017 ……………………………………………………………………………………………. $
New loans ……………………………………………………………………………………………………………
Repayments ………………………………………………………………………………………………………….
Other changes ………………………………………………………………………………………………………..
$
Total loans at December 31, 2017
5,945
25
(221 )
2,678
8,427
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.
Deposits from principal officers, directors, and their affiliates at year-end 2017 and 2016 were $44,877 and $38,867.
In addition, the Company had one promissory note outstanding with a director at year-end 2017 and 2016 totaling $360. The
note has a three-year term beginning December 8, 2016 and carried an interest rate of 1.75%.
Note N - 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 $340, $290, and $288 for
2017, 2016 and 2015.
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note N - Employee Benefits (continued)
Ohio Valley maintains an Employee Stock Ownership Plan (ESOP) covering substantially all employees of the
Company. Ohio Valley issues shares to the ESOP, purchased by the ESOP with subsidiary cash contributions, 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 361,584 and 350,170 at December 31, 2017 and 2016. In addition, the subsidiaries
made contributions to its ESOP Trust as follows:
Years ended December 31
2016
2017
2015
Number of shares issued ……………………………………………………………
15,118
24,572
Fair value of stock contributed ………………………………………………………
$
428 $
575 $
Cash contributed ……………………………………………………………………..
250
----
Total expense …………………………………………………………………………
$
678 $
575 $
----
----
674
674
Life insurance contracts with a cash surrender value of $26,633 and annuity assets of $2,042 at December 31, 2017
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 supplemental retirement plans 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 plans provide payments to select executive
officers upon retirement based upon a compensation formula determined by Ohio Valley’s Board of Directors. The present
value of payments expected to be provided are accrued during the service period of the covered individuals and amounted to
$6,740 and $6,328 at December 31, 2017 and 2016. Expenses related to the plans for each of the last three years amounted to
$490, $399, and $338. In association with the split-dollar life insurance plan, the present value of the postretirement benefit
totaled $2,776 at December 31, 2017 and $3,007 at December 31, 2016.
During 2017, the Company collected $2,107 in proceeds on two BOLI policies and recorded $1,993 in proceeds
expected to be received from the settlement of two other BOLI policies. This resulted in a $3,586 reduction to BOLI assets
and a net gain of $514 that was recorded to income. The proceeds of $1,993 had not yet been collected by year-end 2017 and,
therefore, were recorded as other assets at December 31, 2017.
Note O - Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. There are three levels of inputs that may be used to measure fair values:
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, or 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.
40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note O - Fair Value of Financial Instruments (continued)
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: The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where
quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities
where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash
flows or other market indicators (Level 3). During times when trading is more liquid, broker quotes are used (if available) to
validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are
reviewed and incorporated into the calculations.
Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried
at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is
commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by
the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments
are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate
collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted
or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and
management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.
Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs
to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value
less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single
valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are
routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales
and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs
for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general
appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and
licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions
and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management’s own
assumptions of fair value based on factors that include recent market data or industry-wide statistics. On an as-needed basis,
the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs that
typically approximate 10%.
41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note O - Fair Value of Financial Instruments (continued)
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, 2017, Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
U.S. Government sponsored entity securities ……………………….......
Agency mortgage-backed securities, residential ………………………..
---- $
----
13,473
87,652
----
----
Fair Value Measurements at December 31, 2016, Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
U.S. Government sponsored entity securities ……………………….......
Agency mortgage-backed securities, residential ………………………..
---- $
----
10,544
85,946
----
----
There were no transfers between Level 1 and Level 2 during 2017 or 2016.
Assets and Liabilities Measured on a Nonrecurring Basis
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:
Fair Value Measurements at December 31, 2017, Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Impaired loans:
Commercial real estate:
Nonowner-occupied ……………………………………….
Construction ……….………………………………………..
----
----
---- $
----
216
756
Other real estate owned:
Commercial real estate:
Construction ……………………………………………….
----
----
822
42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note O - Fair Value of Financial Instruments (continued)
Fair Value Measurements at December 31, 2016, Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Impaired loans:
Commercial real estate:
Owner-occupied ……………………………………….
Nonowner-occupied ……………………………………….
Commercial and industrial ……………………………………..
----
----
----
---- $
----
----
3,536
1,985
298
Other real estate owned:
Commercial real estate:
Construction ……………………………………………….
----
----
754
At December 31, 2017, the recorded investment of impaired loans measured for impairment using the fair value of
collateral for collateral-dependent loans totaled $972, with no corresponding valuation allowance, resulting in no impact to
provision expense and no charge-offs during the year ended December 31, 2017. At December 31, 2016, the recorded
investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled
$8,732, with a corresponding valuation allowance of $2,913, resulting in an increase of $2,509 in provision expense during the
year ended December 31, 2016, with no corresponding charge-offs recognized.
Other real estate owned that was measured at fair value less costs to sell at December 31, 2017 had a net carrying
amount of $822, which is made up of the outstanding balance of $2,217, net of a valuation allowance of $1,395 at December
31, 2017. There was $68 in net appreciation during 2017. Other real estate owned that was measured at fair value less costs to
sell at December 31, 2016 had a net carrying amount of $754, which is made up of the outstanding balance of $2,217, net of a
valuation allowance of $1,463 at December 31, 2016. There were $393 in corresponding write-downs during 2016.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments
measured at fair value on a non-recurring basis at December 31, 2017 and December 31, 2016:
December 31, 2017
Impaired loans:
Commercial real estate:
Fair
Value
Valuation
Technique(s)
Unobservable
Input(s)
Range
(Weighted
Average)
Nonowner-occupied …………………..... $
Construction ……………………………..
216 Sales approach
756 Sales approach
Adjustment to comparables 1.6% to 50%
Adjustment to comparables 1.3% to 55.9%
26.7%
32.9%
Other real estate owned:
Commercial real estate:
Construction ……….……..…………….
822 Sales approach
Adjustment to comparables 5% to 40%
18.1%
December 31, 2016
Impaired loans:
Commercial real estate:
Fair
Value
Valuation
Technique(s)
Unobservable
Input(s)
Range
(Weighted
Average)
Owner-occupied ………………………... $ 3,536 Sales approach
Cost approach
1,985 Sales approach
298 Sales approach
Nonowner-occupied …………………..
Commercial and industrial …………………
Adjustment to comparables
Adjustment to comparables 0% to 29.5%
Adjustment to comparables 0% to 250%
Adjustment to comparables 0.9% to 9.7%
0% to 65%
13.7%
14.8%
58.6%
5.2%
Other real estate owned:
Commercial real estate:
Construction ……….……..…………….
754 Sales approach
Adjustment to comparables 0% to 30%
11.7%
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note O - Fair Value of Financial Instruments (continued)
The carrying amounts and estimated fair values of financial instruments at December 31, 2017 and December 31,
2016 are as follows:
Financial Assets:
Cash and cash equivalents ……………………….....
Certificates of deposit in financial institutions……....
Securities available for sale …………………………
Securities held to maturity ………………………….
Restricted investments in bank stocks …..………......
Loans, net …………………………………………..
Accrued interest receivable …………………………
$
Financial Liabilities:
Deposits …………………………………………….
Other borrowed funds ………………………………
Subordinated debentures ……………………………
Accrued interest payable ……………………………
Financial Assets:
Cash and cash equivalents ……………………….....
Certificates of deposit in financial institutions……....
Securities available for sale …………………………
Securities held to maturity ………………………….
Restricted investments in bank stocks …..………......
Loans, net …………………………………………..
Accrued interest receivable …………………………
$
Financial Liabilities:
Deposits …………………………………………….
Other borrowed funds ………………………………
Subordinated debentures ……………………………
Accrued interest payable ……………………………
Fair Value Measurements at December 31, 2017 Using:
Carrying
Value
Level 1
Level 2
Level 3
Total
74,573 $
1,820
101,125
17,581
7,506
761,820
2,503
74,573 $
----
----
----
N/A
----
----
---- $
1,820
101,125
9,020
N/A
----
268
---- $
----
----
9,059
N/A
760,746
2,235
74,573
1,820
101,125
18,079
N/A
760,746
2,503
856,724
35,949
8,500
792
253,655
----
----
4
602,268
34,810
6,678
788
----
----
----
----
855,923
34,810
6,678
792
Fair Value Measurements at December 31, 2016 Using:
Carrying
Value
Level 1
Level 2
Level 3
Total
40,166 $
1,670
96,490
18,665
7,506
727,202
2,315
40,166 $
----
----
----
N/A
----
----
---- $
1,670
96,490
9,541
N/A
----
224
---- $
----
----
9,630
N/A
727,079
2,091
40,166
1,670
96,490
19,171
N/A
727,079
2,315
790,452
37,085
8,500
513
209,576
----
----
4
581,340
35,948
5,821
509
----
----
----
----
790,916
35,948
5,821
513
44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note O - Fair Value of Financial Instruments (continued)
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified
as Level 1.
Certificates of deposit in financial institutions: The carrying amounts of certificates of deposit in financial institutions
approximate fair values and are classified as Level 2.
Securities Held to Maturity: The fair values for securities held to maturity are determined in the same manner as securities
held for sale and discussed earlier in this note. Level 3 securities consist of nonrated municipal bonds and tax credit (“QZAB”)
bonds.
Restricted Investments in Bank Stocks: It is not practical to determine the fair value of Federal Home Loan Bank, Federal
Reserve Bank and United Bankers Bank stock due to restrictions placed on its transferability.
Loans: Fair values of loans are estimated as follows: The fair value of fixed rate loans is estimated by discounting future cash
flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in
a Level 3 classification. For variable rate loans that reprice frequently and with no significant change in credit risk, fair values
are based on carrying values resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value
as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
Deposit Liabilities: The fair values disclosed for noninterest-bearing deposits are, by definition, equal to the amount payable
on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of
variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date
resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows
calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits resulting in a Level 2 classification.
Other Borrowed Funds: The carrying values of the Company’s short-term borrowings, generally maturing within ninety days,
approximate their fair values resulting in a Level 2 classification. The fair values of the Company’s long-term borrowings are
estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements
resulting in a Level 2 classification.
Subordinated Debentures: The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow
analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Accrued Interest Receivable and Payable: The carrying amount of accrued interest approximates fair value resulting in a
classification that is consistent with the earning assets and interest-bearing liabilities with which it is associated.
Off-balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees
currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing. The fair value of commitments is not material.
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.
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note P - 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. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S.
banks (Basel III rules) became effective for the Company and the Bank on January 1, 2015 with full compliance with all of the
requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the final rules,
minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules
include a new common equity tier 1 capital to risk-weighted assets ratio of 4.5% and a capital conservation buffer of 2.5% of
risk-weighted assets. The capital conservation buffer began to phase in on January 1, 2016 at 0.625%, and as of January 1,
2017, was 1.25%. The buffer will be phased in over a four-year period, increasing by the same amount on each subsequent
January 1, until fully phased-in on January 1, 2019. Further, Basel III rules increased the minimum ratio of tier 1 capital to risk-
weighted assets increased from 4.0% to 6.0% and all banks are now subject to a 4.0% minimum leverage ratio. The required
total risk-based capital ratio was unchanged. Failure to maintain the required common equity tier 1 capital conservation buffer
will result in potential restrictions on a bank's ability to pay dividends, repurchase stock and/or pay discretionary compensation
to its employees.
Effective May 15, 2015, the Federal Reserve Board amended the Small Bank Holding Company Policy to increase
from $500 million to $1 billion the asset threshold for a bank to qualify under the Policy. Pursuant to that Policy, at December
31, 2016, the Company was not subject to the consolidated capital requirements. As the Company has assets in excess of $1
billion, it must satisfy capital adequacy requirements. In addition, the Company must be “well capitalized” under Federal
Reserve Board regulations in order to engage in certain activities permitted only for bank holding companies that also meet
financial holding company requirements.
Prompt corrective action regulations applicable to insured depository institutions provide five classifications: 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 capital
restoration plans are required. At year-end 2017 and 2016, the Bank met the capital requirements to be deemed well capitalized
under the regulatory framework for prompt corrective action. The Company's capital also met the requirements for the
Company to be deemed well capitalized. There have been no events since year-end 2017 and 2016 that impacted the well
capitalized status of the Company or the Bank.
At year-end, consolidated actual capital levels and minimum required capital adequacy (excluding the capital
conservation buffer) and well capitalized levels for the Company and the Bank were:
2017
Total capital (to risk weighted assets)
Consolidated ……………………
Bank …………………………….
Common equity Tier 1 capital (to risk
weighted assets)
Consolidated ……………………
Bank …………………………….
Tier 1 capital (to risk weighted assets)
Consolidated ……………………
Bank …………………………….
Tier 1 capital (to average assets)
Consolidated ……………………
Bank …………………………….
Actual
Amount
Ratio
Minimum
Regulatory
Capital Ratio
Minimum
To Be Well
Capitalized (1)
$
118,456
107,929
16.6 %
15.3
8.0%
8.0
N/A
10.0%
102,457
100,759
110,957
100,759
110,957
100,759
14.3
14.3
15.5
14.3
11.0
10.1
4.5
4.5
6.0
6.0
4.0
4.0
N/A
6.5
N/A
8.0
N/A
5.0
(1) For the Company, these amounts are required to engage in activities permissible only for a bank holding company
that meets the financial holding company requirements. For the Bank, these are the amounts required for the Bank
to be deemed well capitalized under the prompt corrective action regulations.
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note P – Regulatory Matters (continued)
Actual
Amount Ratio
Minimum
Regulatory
Capital Ratio
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
Amount
Ratio
2016
Total capital (to risk weighted assets)
Consolidated …………………… $ 113,515
Bank ……………………………. 104,317
16.4 %
15.3
N/A
8.0%
N/A
$ 68,289
Common equity Tier 1 capital (to risk
weighted assets)
Consolidated ……………………
Bank …………………………….
Tier 1 capital (to risk weighted assets)
97,316
96,946
Consolidated …………………… 105,816
96,946
Bank …………………………….
Tier 1 capital (to average assets)
Consolidated …………………… 105,816
96,946
Bank …………………………….
14.0
14.2
15.3
14.2
11.2
10.4
N/A
4.5
N/A
6.0
N/A
4.0
N/A
44,388
N/A
54,631
N/A
46,461
N/A
10.0 %
N/A
6.5
N/A
8.0
N/A
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 and state law. These restrictions generally limit dividends to the current and prior two
years retained earnings of the Bank and Loan Central, Inc., and 90% of the prior year’s net income of OVBC Captive, Inc. At
January 1, 2018 approximately $5,162 of the subsidiaries’ retained earnings were available for dividends under these
guidelines. In addition to these restrictions, dividend payments cannot reduce regulatory capital levels below minimum
regulatory guidelines. The amount of dividends payable by the Bank is also restricted if the Bank does not hold a capital
conservation buffer. The Board of Governors of the Federal Reserve System also has a policy requiring 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.
Note Q - Parent Company Only Condensed Financial Information
Below is condensed financial information of Ohio Valley. In this information, Ohio Valley’s investment in its
subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries since acquisition. This information should
be read in conjunction with the consolidated financial statements of the Company.
CONDENSED STATEMENTS OF CONDITION
Assets
Cash and cash equivalents ………………………………………………………………..
Investment in subsidiaries ………………………………………………………………..
Notes receivable – subsidiaries ……………………………………………………………
Other assets ………………………………………………………………………………..
Total assets …………………………………………………………………………..
Liabilities
Notes payable ……………………………………………………………………………..
Subordinated debentures …………………………………………………………………
Other liabilities ……………………………………………………………………………
Total liabilities ……………………………………………………………………....
$
$
$
Years ended December 31:
2016
2017
$
3,292
118,775
3,320
67
125,454 $
7,324 $
8,500
269
16,093
2,747
115,057
3,420
52
121,276
7,882
8,500
366
16,748
Shareholders’ Equity
Total shareholders’ equity ……………………………………………………………
Total liabilities and shareholders’ equity ……………………………………………
$
109,361
125,454 $
104,528
121,276
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note Q - Parent Company Only Condensed Financial Information (continued)
CONDENSED STATEMENTS OF INCOME
Income:
Years ended December 31:
2016
2017
2015
Interest on notes …………………………………………………………………
Dividends from subsidiaries ……………………………………………………..
$
51 $
4,400
52 $
6,900
53
3,500
Expenses:
Interest on notes ………..………………………………………………………..
Interest on subordinated debentures ……………………………………………..
Operating expenses ………………………………………………………………
Income before income taxes and equity in undistributed earnings of subsidiaries..
Income tax benefit ………………………………………………………………..
Equity in undistributed earnings of subsidiaries …………………………………
Net Income …………………………………………………………………
Comprehensive Income ……………………………………………………
$
$
211
248
332
3,660
244
3,605
7,509 $
$
7,622
136
204
667
5,945
256
719
6,920 $
$
5,624
53
170
345
2,985
167
5,422
8,574
7,919
(5,422 )
----
(16 )
(141 )
2,995
----
(100 )
(100 )
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net Income …………………………………………………………………........
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries …………………………….
Common stock issued to ESOP
……………………………………………..
Change in other assets …………………………………………………........
Change in other liabilities …………………………………………………..
Net cash provided by operating activities ………………………………….
Years ended December 31:
2016
2017
2015
$
7,509 $
6,920 $
8,574
(3,605 )
428
(15 )
(97 )
4,220
(719 )
575
11
318
7,105
Cash flows from investing activities:
Cash paid for Milton Bancorp, Inc. acquisition ………………………………….
Change in notes receivable …………………………………………………........
Net cash provided by (used in) investing activities …………………………
----
100
100
(7,431 )
461
(6,970 )
Cash flows from financing activities:
Change in notes payable …………………………………………………….........
Proceeds from common stock through dividend reinvestment ……………………
Cash dividends paid ………………………………………………………………
Net cash provided by (used in) financing activities …………………………...
(558 )
715
(3,932 )
(3,775 )
3,964
----
(3,585 )
379
128
----
(3,665 )
(3,537 )
Cash and cash equivalents:
Change in cash and cash equivalents …………………………………………….
Cash and cash equivalents at beginning of year ………………………………….
Cash and cash equivalents at end of year …………………………………….
$
545
2,747
3,292 $
514
2,233
2,747 $
(642 )
2,875
2,233
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note R - 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
92.7%, 91.6%, and 90.9% of total consolidated revenues for the years ended December 31, 2017, 2016 and 2015, 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. All goodwill
is in the Banking segment.
Segment information is as follows:
Year Ended December 31, 2017
Consumer
Finance
Total
Company
Banking
$
38,366 $
2,415
8,834
34,079
3,973
6,733
1,013,386
3,367 $
149
601
2,530
513
776
12,904
41,733
2,564
9,435
36,609
4,486
7,509
1,026,290
Banking
$
Year Ended December 31, 2016
Consumer
Finance
Total
Company
33,019 $
2,665
7,589
30,257
1,530
6,156
941,907
3,307 $
161
650
2,642
390
764
12,733
36,326
2,826
8,239
32,899
1,920
6,920
954,640
Banking
$
Year Ended December 31, 2015
Consumer
Finance
Total
Company
3,320 $
30,175 $
1,055 35
717
7,880
2,636
26,983
462
2,347
904
7,670
13,570
782,715
33,495
1,090
8,597
29,619
2,809
8,574
796,285
Net interest income …………………………………………………………………...
Provision expense …………………………………………………………………….
Noninterest income ………………………………………………………………......
Noninterest expense …………………………………………………………………..
Tax expense …………………………………………………………………………..
Net income ……………………………………………………………………………
Assets ………………………………………………………………………………...
Net interest income …………………………………………………………………...
Provision expense …………………………………………………………………….
Noninterest income ………………………………………………………………......
Noninterest expense …………………………………………………………………..
Tax expense …………………………………………………………………………..
Net income ……………………………………………………………………………
Assets ………………………………………………………………………………...
Net interest income ………………………………………………………………......
Provision expense ……………………………………………………………………
Noninterest income ………………………………………………………………......
Noninterest expense …………………………………………………………………
Tax expense ………………………………………………………………………….
Net income …………………………………………………………………………..
Assets ………………………………………………………………………………
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note S - Consolidated Quarterly Financial Information (unaudited)
2017
Total interest income ………………………………………………
Total interest expense ………………………………………………
Net interest income ………………………………………………..
Provision for loan losses (1) ………………………………………..
Noninterest income (3) ……………………………………………..
Noninterest expense ……………………………………………….
Net income ………………………………………………………
Mar. 31
Jun. 30
Sept. 30
Dec. 31
Quarters Ended
$
$
10,989
11,738 $
918
873
10,071
10,865
175
145
3,113
2,112
9,375 9,876
1,741
3,217
11,317 $
1,049
10,268
1,601
2,282
9,222
1,653
11,664
1,135
10,529
643
1,928
8,136
898
Earnings per share …………………………………………………
$
0.69 $
0.37
$
0.35 $
0.19
2016
Total interest income ………………………………………………
Total interest expense ……………………………………………..
Net interest income ………………………………………………..
Provision for loan losses (2) ………………………………………..
Noninterest income (3) ……………………………………………..
Noninterest expense ……………………………………………….
Net income ……………………………………………………
$
9,770 $
670
9,100
479
3,235
7,969
2,832
8,913
707
8,206
141
1,861
7,773
1,706
8,985
9,824 $
$
10,841
839 806
10,035
1,708 498
1,450
8,828 8,329
2,024
1,693
358
Earnings per share …………………………………………………
$
0.69 $
0.41
$
0.08 $
0.43
2015
Total interest income ………………………………………………
Total interest expense ……………………………………………..
Net interest income ………………………………………………..
Provision for loan losses (4) ………………………………………..
Noninterest income (3) ……………………………………………..
Noninterest expense ……………………………………………….
Net income ………………………………………………………
9,627 $
$
697
8,930
(78)
3,489
7,427
3,624
$
8,866
717
8,149
799
1,917
7,554
1,410
9,016 $
731
8,285
(11 )
1,584
7,727
1,642
8,825
694
8,131
380
1,607
6,911
1,898
Earnings per share …………………………………………………
$
0.88 $
0.34
$
0.40 $
0.46
(1) During the third quarter of 2017, the Company experienced higher provision expense that was primarily related to general
increases in specific allocations and increases in charge-offs within the commercial and residential real estate portfolios.
(2) During the third quarter of 2016, the Company experienced higher provision expense that was primarily related to an
increase in specific allocations impacted by the decline in collateral values of two impaired commercial real estate loan
relationships. A re-appraisal of the commercial properties securing the loans identified further collateral depreciation, which
resulted in a $2,435 increase to the specific allocations related to the loans.
(3) The Company’s noninterest income was significantly impacted by seasonal tax refund processing fees. The Bank serves
as a facilitator for the clearing of tax refunds for a single tax refund product provider. The Bank processes electronic refund
checks/deposits associated with taxpayer refunds, and will, in turn, receive a fee paid by the third-party tax refund product
provider for each transaction processed. Due to the seasonal nature of tax refund transactions, the majority of income was
recorded during the first quarter.
(4) During the first and third quarters of 2015, the Company experienced negative provision expense as a result of lower general
allocations of the allowance for loan losses. General allocations were impacted by improved economic trends that include:
decreasing historical loan loss factor, lower delinquencies and lower classified/criticized assets.
50
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Ohio Valley Banc Corp.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of condition of Ohio Valley Banc Corp. (the "Company") as of December 31,
2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). We also
have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established
in Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
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 the Company’s financial statements and an
opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
We have served as the Company’s auditor since 1992.
Louisville, Kentucky
March 16, 2018
51
Crowe Horwath LLP
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, 2017,
in relation to criteria for effective internal control over financial reporting as described in the 2013 “Internal Control Integrated
Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
assessment, management concluded that, as of December 31, 2017, 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, 2018 on the
Company's consolidated financial statements and 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.
Thomas E. Wiseman
President, CEO
Scott W. Shockey
Senior Vice President, CFO
March 16, 2018
52
SUMMARY OF COMMON STOCK DATA
OHIO VALLEY BANC CORP.
Years ended December 31, 2017 and 2016
INFORMATION AS TO STOCK PRICES AND DIVIDENDS: Ohio Valley’s common shares are traded 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, 2016.
2017
First Quarter
High
Low
$
29.50 $
26.02
Second Quarter
37.50
28.14
Third Quarter
38.30
29.05
Fourth Quarter
43.85
34.80
2016
First Quarter
High
Low
$
24.80 $
21.70
Second Quarter
22.65
21.40
Third Quarter
22.40
21.60
Fourth Quarter
29.34
22.20
Shown below is a table which reflects the dividends declared per share on Ohio Valley’s common shares. As of
February 28, 2018, the number of holders of record of common shares was 2,166.
Dividends per share
First Quarter
$
Second Quarter
Third Quarter
Fourth Quarter
2017
2016
.21
$
.21
.21
.21
.21
.21
.19
.21
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 amount of retained earnings for the
current and prior two years of the Bank and Loan Central, Inc., and 90% of the prior year’s net income of OVBC Captive, Inc.
The amount of dividends payable by the Bank is also restricted if the Bank does not hold a capital conservation buffer. The
ability of Ohio Valley to borrow funds from the Bank is limited as to amount and terms by banking regulations.
In addition, a policy of the Board of Governors of the Federal Reserve System 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 deferrable 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.
53
PERFORMANCE GRAPH
OHIO VALLEY BANC CORP.
Year ended December 31, 2017
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 $1 Billion-$5 Billion Bank Asset-Size Index
(indicated “SNL $1 Billion-$5 Billion Bank Index) for fiscal years indicated. Prior to 2017, the Company was
included in SNL Securities SNL $500 Million-$1 Billion Bank Asset-Size Index (indicated “SNL $500 Million-$1
Billion Bank Index” on the Performance Graph). Information reflected on the graph assumes an investment of $100
on December 31, 2012 in each of the common shares of the Company, the S & P 500 Index, and the SNL Indices.
Cumulative total return assumes reinvestment of dividends. The SNL $1 Billion-$5 Billion Bank Index represents
stock performance of 151 of the nation's banks and the SNL $500 Million-$1 Billion Bank Index represents stock
performance of 36 of the nation’s banks located throughout the United States within the respective asset ranges as
selected by SNL Securities of Charlottesville, Virginia. The Company is included as one of the 151 banks in the
SNL $1 Billion-$5 Billion Bank Index.
54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and which could
cause actual results to differ materially from those expressed in such forward looking statements. These
factors include, but are not limited to: changes in political, economic or other factors, such as inflation
rates, recessionary or expansive trends, taxes, the effects of implementation of legislation and the
continuing economic uncertainty in various parts of the world; 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, 2017. 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.
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide an analysis of the financial condition and results of
operations of Ohio Valley Banc Corp. (“Ohio Valley” or the “Company”) that 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
financial 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 generated net income of $7,509 for 2017, an increase of $589, or 8.5% from 2016.
Earnings per share were $1.60 for 2017, an increase of 0.6% from 2016. The increase in net income and
earnings per share for 2017 was largely impacted by higher net interest and noninterest income, which
were collectively up $6,603, or 14.8%, over 2016. The positive contributions from gross revenues were
partially offset by an increase in noninterest expense of $3,710, or 11.3%, over 2016. The Company’s
comparative earnings during 2017 and 2016 were greatly impacted by the acquisition of Milton Bancorp,
Inc. (“Milton Bancorp”) on August 5, 2016. Immediately following the merger, Milton Bancorp's wholly-
owned subsidiary, The Milton Banking Company (“Milton Bank”), was merged with and into the Bank.
The acquisition resulted in the addition of $131,986 in assets and 5 branch locations in Jackson, Madison
55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and Pickaway counties in Ohio. Having Milton Bank for a full twelve months in 2017 versus just five
months in 2016 contributed to increases within most of the Company’s income and expense categories.
During 2017, the Company’s net interest income finished strong at $41,733, representing an
increase of $5,407, or 14.9%, from 2016. Average earning assets increased during 2017 by $105,324, or
12.5%, as compared to 2016, coming primarily from loans and taxable investment securities. The growth
in average earning assets was primarily attributable to the acquisition of Milton Bank during the third
quarter of 2016. Milton Bank branches were responsible for over 56% of the average loan growth
experienced during 2017, benefiting largely from the full-year effect. During 2017, the Company also
experienced organic loan growth within its existing markets, impacted mostly from its West Virginia and
Athens, Ohio locations. Complementing average earning asset growth was an increase in the Company’s
net interest margin, which finished at 4.49% in 2017, as compared to 4.40% in 2016. Contributing to the
increase in net interest margin was a general increase in interest rates and higher loan balances relative to
total earning assets.
The Company’s noninterest income also finished strong during 2017, increasing $1,196, or 14.5%,
from 2016. The year-to-date increase in noninterest income was impacted by a larger customer deposit
base associated with the Milton Bank acquisition. As a result, the volume of debit and credit card
transactions grew during 2017, which helped to generate a 30.1% increase in interchange income. A larger
customer base also contributed to an 8.1% increase in service charges on deposit accounts. Noninterest
income growth was further impacted by bank owned life insurance (“BOLI”) and annuity assets, which
grew over 69% during 2017. This was largely the result of $514 in net bank owned life insurance proceeds
that were collected during 2017 in conjunction with the Company's investment in various benefit plans
for its directors and key employees. Increases in noninterest income were also impacted by lower losses
on the sale of other real estate owned (“OREO”), related to the lower appraised value on one land
development property during the fourth quarter of 2016. Partially offsetting increases in noninterest
income were lower tax processing fees through the Company’s electronic refund check/deposit
(“ERC/ERD”) transactions, which decreased 17.4%. ERC/ERD transactions involve the payment of a tax
refund to the taxpayer after the Bank has received the refund from the federal/state government. In addition
to a reduced number of tax refunds being processed during 2017, the per item fees received by the
Company were lower under the new contract entered into with the third-party tax refund product provider
in October 2014 that impacted 2017’s tax season.
The Company’s noninterest expenses during 2017 increased $3,710, or 11.3%, over 2016. The
increase was impacted by the acquisition of Milton Bank, which contributed to general increases in most
noninterest expense categories related to having a larger organization after the merger. The Company saw
its salary and employee benefit expense grow by $1,935, or 10.3%, during 2017, as compared to 2016.
The increase was largely the result of adding Milton Bank employees, as well as annual merit increases
and higher health insurance costs. Noninterest expense growth was also affected by increases to
professional fees, data processing costs, and various “other” noninterest expenses that included costs to
maintain OREO properties, customer incentive costs and consulting fees. Noninterest expense increases
were partially offset by the effects of lower merger costs during 2017, as compared to 2016. As part of
the Milton Bank acquisition in 2016, the Company incurred $930 in merger-related expenses that
consisted largely of services to combine the operating systems of both companies, as well as investment
banking, accounting, and legal services. As a result, merger expenses were down $891, or 95.8%, in 2017.
The Company’s provision for income taxes totaled $4,486 in 2017, compared to $1,920 in 2016,
which further reduced operating income. The increase was related to the Tax Cuts and Jobs Act (“TCJA”)
enacted on December 22, 2017. The TCJA made broad and complex changes to the Internal Revenue
Code, which will impact the Company, including a reduction of the federal income tax rate from 34% to
56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
21%, as well as the introduction of business-related exclusions, deductions and credits. The reduction of
the federal tax rate required the Company’s deferred tax assets and liabilities to be revalued using the 21%
federal tax rate enacted. The revaluation resulted in a $1,783 adjustment to tax expense that was recorded
in the fourth quarter of 2017.
For 2016, Ohio Valley generated net income of $6,920 for 2016, a decrease of 19.3% from 2015.
Earnings per share were $1.59 for 2016, a decrease of 23.6% from 2015. The decrease in net income and
earnings per share for 2016 was largely impacted by higher provision for loan loss expense and merger
related expenses, which were up $1,736 and $930, respectively, over 2015. The increase in provision for
loan loss expense came mostly from higher specific allocations of the allowance for loan losses associated
with two commercial real estate loan relationships during 2016. Management’s analysis of both collateral
dependent impaired loans identified asset impairment, which resulted in charges to provision expense of
$2,435 during the year ended 2016. Partially offsetting these specific allocation increases was a reduction
of $1,155 in specific reserves on one commercial and industrial loan relationship due to improvements in
the borrower’s credit quality and economic performance. The increase in merger expenses was related to
the Company’s acquisition of Milton Bancorp in 2016.
During 2016, the Company’s net interest income finished strong at $36,326, representing an
increase of $2,831, or 8.5%, from 2015. Average earning assets increased during 2016 by $62,372, or
8.0%, as compared to 2015, coming primarily from loans and investment securities. The growth in
average earning assets was primarily attributable to the acquisition of Milton Bank during the third quarter
of 2016. At the time of closing, the majority of Milton Bank’s earning assets consisted of $113,298 in
loans and $6,214 in securities. Further impacting average loan growth was the Company’s new Athens,
Ohio loan production office, which generated over $12,300 in average loan growth during 2016.
Complementing average earning asset growth was an increase in the Company’s net interest margin,
which finished at 4.40% in 2016, as compared to 4.39% in 2015. Contributing to the increase in net
interest margin were higher asset yields combined with lower funding costs.
The benefits of higher net interest income after provision for loan losses in 2016 were completely
offset by a 17.3% increase in net noninterest expense (noninterest expense less noninterest income) during
2016, as compared to 2015. Noninterest income decreased $358, or 4.2%, from 2015, while noninterest
expense increased $3,280, or 11.1%, over 2015. The decrease in noninterest income was affected by lower
gains on the sale of OREO, mostly from the lower appraised value on one land development property
during the fourth quarter of 2016. Further impacting lower noninterest income was a decrease in tax
processing fees through the Company’s ERC/ERD transactions. Although the Bank experienced a higher
volume of tax refunds processed in 2016, tax refund processing fees were still lower than the year before,
decreasing $323, or 13.6%, as compared to 2015. The decrease in total fees was due to the new contract
that was previously mentioned with the third-party tax refund product provider that reduced the per item
fees. Partially offsetting some of the decreases to noninterest income during 2016 were positive
contributions from service charges on deposit accounts, which increased $404, or 25.7%, impacted mostly
by the acquisition of Milton Bank. Furthermore, debit/credit card interchange income increased $195, or
8.1%, primarily from the Company’s continued marketing approach in offering incentives to customers
to utilize the Bank’s debit and credit cards for purchases. The Company’s growth in noninterest expenses
during 2016 was also impacted by the acquisition of Milton Bank, which contributed to general increases
in most noninterest expense categories related to having a larger organization after the merger. The
Company saw its salary and employee benefit expense grow by $1,376, or 7.9%, during 2016, as compared
to 2015. The increase was related to adding Milton Bank employees, annual merit increases, and higher
health insurance expense. Noninterest expense during 2016 was also impacted by merger expenses. As
previously mentioned, the Company recorded $930 in one-time merger related expenses that consisted
57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
largely of services to combine the operating systems of both companies, as well as investment banking,
accounting, and legal services. Noninterest expense growth was also affected by increases in occupancy,
furniture and equipment, data processing and software expense.
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 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 the
percentage of net interest income to 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 exceeds
the net interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing
demand deposits and stockholders' equity, also support interest-earning assets. 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 ended December 31, 2017. Tables I and II have been
prepared to summarize the significant changes outlined in this analysis.
Comparing 2017 to 2016, net interest income of $42,511 on an FTE basis increased $5,526, or
14.9%. This change reflected the impact of 12.5% average earning asset growth, a 9 basis point increase
in the net interest margin to 4.49%, partially offset by 12.0% average interest-bearing liability growth.
Average earning asset growth included a $108,514, or 16.8%, increase in average loans and a $5,925, or
5.5%, increase in average taxable securities. Average interest-bearing liability growth included a $59,543,
or 11.3%, increase in average interest-bearing deposits and an $8,110, or 26.1%, increase in average other
borrowed funds. The net interest margin expansion reflected a 15 basis point positive impact from the mix
and yield on earning assets and a 4 basis point increase in the benefit from noninterest-bearing funding
(i.e., demand deposits, shareholders' equity), partially offset by a 10 basis point increase in funding costs.
The increase in average volume of earning assets partially offset by the increase in interest-bearing
liabilities was key to the success of 2017’s net interest income improvement. The volume increase in
average earning assets was responsible for producing $6,205 in additional FTE interest income during
2017 over 2016, partially offset by $456 in additional interest expense from the volume increase in average
interest-bearing liabilities. Average earning assets for 2017 increased $105,324, or 12.5%, from the prior
year, reflecting the full year impact of the Milton Bank acquisition. This growth in earning assets
contributed to average balance growth in the commercial, residential real estate, and consumer loan
portfolios, which were collectively up $108,514, or 16.8%, during 2017. The Milton Bank branches were
responsible for over $60,900 in average loan growth during 2017. During 2017, the Company also
experienced organic loan growth within its existing markets, impacted mostly from its West Virginia and
Athens, Ohio locations. The Company’s West Virginia offices, located in Mason and Cabell counties,
generated over $21,500 in average loans during 2017, particularly within the commercial loan portfolio
segment. Further impacting average loan growth was the Company’s Athens, Ohio loan production office,
which opened in late 2015. The new office has served to enhance the Company’s market presence in
Athens County, generating over $12,900 in average loans during 2017. The acquisition of Milton Bank
loans combined with the success in West Virginia and Athens County has contributed to a larger
58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
composition of average loans to average earning assets at year-end 2017 of 79.6%, as compared to 76.7%
for 2016.
Further impacting growth in average earning assets during 2017 was a higher level of average
securities. While average tax exempt securities were down 5.6% from the prior year, average taxable
securities increased $5,925, or 5.5%, particularly from purchases within the U.S. Government sponsored
entity and Agency mortgage-backed investment segments. While the Company’s average net investment
securities have increased 4.2% during 2017, their percentage of earning assets has declined, averaging
13.4% for 2017, compared to 14.5% for 2016. The Company has focused on growing earning assets
primarily through loans, which has contributed to this lower asset composition of securities. Management
continues to focus on generating loan growth as loans provide the greatest return to the Company.
Management maintains securities at a dollar level adequate enough to provide ample liquidity and cover
pledging requirements.
The Company’s earnings from interest-bearing deposits with banks was also a contributor to the
growth in interest income during 2017. For 2017, average interest-bearing deposits with banks were down
$8,327, or 11.2%, from 2016, which had a negative impact on earnings based on volume. These effects
from lower volume were completely offset by positive effects from the average yield, which contributed
to most of the $233, or 62.3%, increase in interest income from deposits with banks during 2017. Balances
within interest-bearing deposits with banks are driven primarily by the Company’s use of its Federal
Reserve Bank clearing account, which had consistently been trending upward in recent years. The
Company continues to utilize its Federal Reserve clearing account to manage seasonal tax refund checks
and deposits and fund earning asset growth. This interest-bearing account carried an interest rate of 0.50%
during most of 2016. In December 2016, the Federal Reserve increased short-term rates by 25 basis points,
and then again in each of March, June and December 2017 by another 25 basis points. These short-term
rate adjustments have increased the Federal Reserve clearing account's interest rate from 0.50% of a year
ago to 1.50%. The timing of the December 2016 and March 2017 rate adjustments benefited the Company,
as it entered into the first quarter of 2017 experiencing significant levels of excess funds impacted by the
large volume of ERC/ERD transactions that were maintained within the Federal Reserve clearing account.
These ERC/ERD deposits occur primarily during the first half of the year and are the result of the
Company’s relationship with a third-party tax refund product provider. The Company acts as the
facilitator for these ERC/ERD transactions and earns a fee for each cleared item. For the short time the
Company holds such refunds, constituting noninterest-bearing deposits, the Company increases its
deposits with the Federal Reserve. This causes the interest-bearing balances with banks to represent a
large percentage of earning assets during the time the Company holds the refunds, although such balances
decrease at year-end. However, this short-term average balance growth in deposits was completely offset
by the need to fund loan growth during 2017. The Company experienced a 16.8% increase in average
loans during 2017, part of which included organic loan originations from the West Virginia and Athens,
Ohio markets. The Company was able to redeploy funds from its Federal Reserve Bank clearing account
to help manage the earning asset growth that was evident in 2017, which fits within management’s strategy
of investing assets into higher yielding products while minimizing interest expense. With the Company
using more of its short-term Federal Reserve funds to satisfy loan demand, this led to a lower composition
of average interest-bearing balances with banks, finishing at 7.0% of average earning assets in 2017, as
compared to 8.9% in 2016.
Average interest-bearing liabilities increased $67,653, or 12.0%, from 2016 to 2017. The growth
in interest-bearing deposits during 2017 was mostly impacted by the Milton Bank merger, which resulted
in the acquisition of $119,215 in deposits from 2016. Average time deposits grew $21,451, or 12.8%,
59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME
Table I
(dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing balances with banks
Securities:
2017
December 31
2016
2015
Average
Balance
Income/
Expense
Yield/
Average
Average
Balance
Income/
Expense
Yield/
Average
Average
Balance
Income/
Expense
Yield/
Average
$
66,159 $
607
0.92 % $
74,486 $
374
0.50 % $
73,383
$
185
0.25 %
Taxable ......................................
Tax exempt ................................
113,699
13,341
2,508
617
Loans ............................................
753,204
42,754
2.21
4.63
5.68
107,774
2,263
14,129
671
644,690
36,699
2.10
4.75
5.69
99,201
16,170
589,953
Total interest-earning assets ..........
946,403
46,486
4.91 %
841,079
40,007
4.76 %
778,707
2,142
792
33,881
37,000
2.16
4.90
5.74
4.75 %
Noninterest-earning assets:
Cash and due from banks ..............
Other nonearning assets ................
Allowance for loan losses .............
Total noninterest-earning assets …
12,235
62,867
(7,390 )
67,712
11,014
54,195
(7,079 )
58,130
10,347
47,186
(7,796 )
49,737
Total assets .....................................
$ 1,014,115
$ 899,209
$ 828,444
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
NOW accounts ..............................
$ 157,796 $
464
0.29 % $ 143,180 $
Savings and money market ...........
Time deposits ................................
Other borrowed money .................
Subordinated debentures ...............
239,236
189,035
39,163
8.500
575
1,804
884
248
0.24
0.95
2.26
2.91
383
464
215,760
167,584
1,307
31,053
8.500
664
204
0.27 % $ 125,104
$
0.21
0.78
2.14
2.40
200,575
168,969
24,378
8.500
462
431
1,298
478
170
0.37 %
0.21
0.77
1.96
2.00
Total int.-bearing liabilities ...........
633,730
3,975
0.63 %
566,077
3,022
0.53 %
527,526
2,839
0.54 %
Noninterest-bearing liabilities:
Demand deposit accounts ..............
Other liabilities .............................
259,160
13,115
Total noninterest-bearing liabilities
272,275
Shareholders’ equity .....................
108,110
Total liabilities and shareholders’
equity ...........................................
$ 1,014,115
222,530
12,469
234,999
98,133
199,570
12,628
212,198
88,720
$ 899,209
$ 828,444
Net interest earnings ......................
$
42,511
$
36,985
$
34,161
Net interest earnings as a percent of
interest-earning assets ...................
Net interest rate spread .................
Average interest-bearing liabilities to
average earning assets ......................
4.49 %
4.28 %
66.96 %
4.40 %
4.23 %
67.30 %
4.39 %
4.21 %
67.74 %
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.
60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE
Table II
(dollars in thousands)
Interest income
Interest-bearing balances with banks .............
Securities:
Taxable ..........................................................
Tax exempt ....................................................
Loans .............................................................
Total interest income ...................................
Interest expense
NOW accounts ...............................................
Savings and money market ............................
Time deposits.................................................
Other borrowed money ..................................
Subordinated debentures ................................
Total interest expense ..................................
Net interest earnings ....................................
2017
Increase (Decrease)
From Previous Year Due to
Volume Yield/Rate Total
2016
Increase (Decrease)
From Previous Year Due to
Volume Yield/Rate Total
$
(46 ) $
279 $
233 $
3 $
186 $
189
128
(37 )
6,160
6,205
117
(17 )
(105 )
274
245
(54 )
6,055
6,479
181
(97 )
3,118
3,205
(60 )
(24 )
(300 )
(198 )
121
(121 )
2,818
3,007
41
53
181
181
----
456
$ 5,749 $
40
81
60
58
111
33
316
497
(11 )
39
220
140
44
44
----
222
953
497
(223 ) $ 5,526 $ 2,983 $
(79 )
(139 )
33
----
9
20
186
46
34
34
183
(39 )
(159 ) $ 2,824
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.
during 2017, impacted mostly by the Milton Bank time deposits from 2016 and a special CD offering
during the second half of 2017 that generated additional retail funds. The composition of average time
deposits to interest-bearing liabilities has trended upward, representing 29.8% and 29.6% of total interest-
bearing liabilities at year-end 2017 and 2016, respectively. The growth in earning assets during 2017
caused the Company to use more of its time deposits as funding sources, which contributed to higher
composition levels. The higher average cost associated with time deposits, combined with higher portfolio
balances in 2017, contributed to over half of the interest expense increase of 2017.
The Company’s core deposit segment of interest-bearing liabilities consist of NOW, savings and
money market accounts. During 2017, average balances on these deposits increased $38,092, or 10.6%,
and together represented 62.7% of average interest-bearing liabilities in 2017, as compared to 63.4% in
2016. This decreasing shift in composition was impacted by a higher composition of time deposits and
borrowed funds during 2017, which were used to help fund earning asset growth. This overall composition
shift to lower NOW, savings and money market balances combined with a higher composition of time
deposits from 2016 to 2017 contributed to a 10 basis point increase in the average cost of funds from
0.53% at year-end 2016 to 0.63% at year-end 2017.
61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition, the Company’s other borrowings and subordinated debentures collectively increased
$8,110, or 20.5%, during 2017. The increase was primarily from the use of FHLB borrowings to fund the
purchases of specific earning assets that were originated during both 2017 and 2016. Borrowings and
subordinated debentures continue to represent the smallest composition of average interest-bearing
liabilities, finishing at 7.5% and 7.0% at year-end 2017 and 2016, respectively. While the overall
composition is small compared to interest-bearing deposits, it did shift to a higher composition percentage
of interest-bearing liabilities from 2016 to 2017, as a result of utilizing more FHLB borrowings to fund
earning asset growth. This shift to more higher-costing liabilities contributed to more interest expense in
2017.
Comparing 2016 to 2015, net interest income of $36,985 on an FTE basis increased $2,824, or
8.3%. This change reflected the impact of 8.0% average earning asset growth, a 1 basis point increase in
the net interest margin to 4.40%, partially offset by 7.3% average interest-bearing liability growth.
Average earning asset growth included a $54,737, or 9.3%, increase in average loans and an $8,573, or
8.6%, increase in average taxable securities. Average interest-bearing liability growth included a $31,876,
or 6.4%, increase in average interest-bearing deposits and a $6,675, or 27.4%, increase in average other
borrowed funds. The net interest margin expansion reflected a 1 basis point positive impact from the mix
and yield on earning assets, a 1 basis point positive impact from the decrease in funding costs, partially
offset by a 1 basis point decrease in the benefit from noninterest-bearing funding (i.e., demand deposits,
shareholders' equity).
The increase in average volume of earning assets partially offset by the increase in interest-bearing
liabilities was a key contributor to the success of 2016’s net interest income improvement. The volume
change in average earning assets produced $3,205 in additional interest income during 2017 over 2016,
while being partially offset by $222 in additional interest expense from the volume change in average
interest-bearing liabilities. Average earning assets for 2016 was largely impacted by a 9.3% increase in
average loans. Average loan growth was impacted by the acquisition of Milton Bank on August 5, 2016,
which contributed to increases in commercial, residential real estate and consumer loan balances. Further
impacting average loan growth was the addition of the Company’s loan production office in Athens, Ohio
in the fourth quarter of 2015. Loan demand in the Athens County market responded very well, producing
$19,282 in outstanding loan balances and year-to-date average loan increase of $12,354 at December 31,
2016, as compared to the same period in 2015. The acquisition of Milton Bank loans combined with the
success in Athens County has contributed to a larger composition of average loans to average earning
assets at year-end 2016 of 76.7%, as compared to 75.8% at year-end 2015.
Further impacting growth in average earning assets during 2016 was a higher level of average
securities. While average tax exempt securities were down 12.6% from the prior year, average taxable
securities increased $8,573, or 8.6%, particularly from purchases within the Agency mortgage-backed
investment segments. The Company also acquired $6,214 in securities as part of the Milton Bank merger,
which contributed to the net increase in average securities for the year ended December 31, 2016. While
the Company’s average net investment securities have increased 5.7% during 2016, their percentage of
earning assets has declined, averaging 14.5% for 2016, compared to 14.8% for 2015. The Company has
focused on growing earning assets primarily through loans, which has contributed to this lower asset
composition of securities.
Further contributing to average earning asset growth during 2016 was a $1,103, or 1.5% increase
in interest-bearing deposits with banks, driven primarily by the Company’s use of its Federal Reserve
Bank clearing account. Although the Company experienced loan growth in 2016, much of this was from
the acquisition of Milton Bank loans. However, the Company also experienced organic loan growth,
impacted by the Athens, Ohio market. As loan volume was increasing during 2016, the Company used
62
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
more of its short-term Federal Reserve funds to satisfy loan demand. This led to a lower composition of
average interest-bearing balances with banks, finishing at 8.9% of average earning assets in 2016, as
compared to 9.4% in 2015.
Average interest-bearing liabilities increased 7.3% between 2015 and 2016. The growth in
interest-bearing deposits during 2016 was in large part to the Milton Bank merger, which resulted in the
acquisition of $119,215 in deposits. Interest-bearing liabilities continue to be comprised largely of time
deposits, which represented 29.6% and 32.0% of total interest-bearing liabilities at year-end 2016 and
2015, respectively. As interest rates on time deposits continued to readjust to current market rates during
2016, competitive pricing pressures grew, contributing to a continued maturity runoff of time deposits
during 2016 and 2015.
The Company’s core deposit segment of interest-bearing liabilities, which include NOW and
savings and money market accounts, together represented 63.4% of average interest-bearing liabilities in
2016, compared to 61.7% in 2015. As CD market rates continued to adjust downward in 2016, and the
spread between a short-term CD rate and a statement savings rate remained minimal, many customers
chose to invest balances into a more liquid product.
In addition, the Company’s other borrowings and subordinated debentures continued to represent
the smallest composition of average interest-bearing liabilities, finishing at 7.0% and 6.2% at year-end
2016 and 2015, respectively. During 2016, the Company utilized a portion of its FHLB borrowing
capacity to fund specific fixed-rate loans with similar maturity terms which led to the composition shift
increase.
The overall composition shift to higher demand, NOW, savings and money market balances
combined with a lower composition of time deposits from 2015 to 2016 served as a cost effective
contribution to the net interest margin. The average cost of the “growing” interest-bearing NOW, savings
and money market account core segment was 0.24% and 0.27% during the years ended 2016 and 2015,
respectively. The higher average cost of the time deposit, other borrowed money and subordinated
debenture segments was 1.05% and 0.96% during the years ended 2016 and 2015, respectively.
During 2017, total interest income on average earning assets increased $6,360, or 16.2%, as
compared to 2016. During 2016, total interest income on average earning assets increased $3,014, or
8.3%, as compared to 2015. The changes in interest income during both comparison periods were
impacted most by the commercial loan portfolio. During the third quarter of 2016, the Bank acquired
$113,298 in loans as part of the Milton Bank merger, of which 36% were comprised of commercial loans.
The Company benefited from having the effects of these loans for twelve months in 2017 versus five
months in 2016. Furthermore, the Company experienced growing commercial loan demand within its
West Virginia locations and new loan production office that opened in Athens, Ohio during the fourth
quarter of 2016. Management was pleased with the loan volume production in response to the Company’s
new market presence in Athens county and growing West Virginia market. These positive contributions
helped to generate increases of 22.1% and 9.8% in average commercial loan balances during 2017 and
2016, respectively. As a result, commercial interest and fee revenue grew by $3,634, or 25.9%, and
$1,272, or 10.0%, during the years ended 2017 and 2016, respectively.
The Company’s interest and fees from its residential real estate loan portfolio increased by $891,
or 7.2%, and $685, or 5.9%, during the years ended 2017 and 2016, respectively. The acquired loan
balances of Milton Bank from 2016 consisted of 42% in residential real estate loan balances, which
contributed most to the increase in real estate loan revenue during 2017 and 2016. When excluding the
real estate revenue generated by the Milton Bank branches during 2017 and 2016, the Company’s real
estate revenue represents a decrease of $113, or 0.99%, and $204, or 1.8%, during the years ended 2017
and 2016, respectively. A contributing factor to the decline in real estate revenue, excluding Milton Bank,
63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
is a composition shift from higher-yielding, long-term, fixed-rate loan balances to lower-yielding,
adjustable-rate mortgage originations. This shift to more lower-yielding loans has placed additional
pressure on asset yields. Furthermore, the Company continues to sell a portion of its long-term, fixed-rate
real estate loans to the Federal Home Loan Mortgage Corporation, while retaining the servicing rights for
those mortgages. While this strategy has generated loan sale and servicing fee revenue within noninterest
income, it has also contributed to lower interest and fee revenues during 2017 and 2016.
During the year ended 2017, consumer loan interest and fees increased $1,391, or 14.0%, as
compared to 2016, and increased $828, or 9.1%, as compared to 2015. The improvement in consumer
loan revenue during 2017 and 2016 was impacted most by the acquired loans of Milton Bank, which
consisted of 22% in consumer loan balances at the time of acquisition. Further impacting consumer loan
revenue was the average balance growth associated with increased auto loan financings and unsecured
consumer loan balances.
The Company’s interest income from taxable investment securities improved during both 2017
and 2016, increasing $245, or 10.8%, in 2017 and $121, or 5.6%, in 2016. Average balance growth during
2017 and 2016 has contributed to higher interest income, largely from increased purchases of U.S.
Government sponsored entity securities and Agency mortgage-backed securities during both periods. In
addition, taxable investments of $6,214 were acquired as part of the Milton Bank merger from 2016.
Interest income during 2017 was also positively affected by an 11 basis point increase in yield from 2016,
primarily due to investment purchases, and reinvestment of maturities at market rates higher than the
average portfolio yield. This is compared to a 6 basis point decrease in yield on taxable securities from
2015 to 2016, related to the portfolio of taxable securities acquired from Milton Bank in 2106 that carried
a lower average yield than the Company’s overall taxable securities yield prior to the merger.
Total interest expense incurred on the Company’s interest-bearing liabilities increased $953, or
31.5%, during 2017, and increased $183, or 6.4%, during 2016. The increases in both 2017 and 2016
were mostly impacted by Milton Bank acquired deposits that generated more interest expense. The
Company’s strategy continues to focus on funding earning asset growth with lower cost, core deposit
funding sources to further reduce, or limit growth in, interest expense. However, with average earning
assets increasing at 12.5% during 2017, primarily from loans, the Company accepted more time deposits,
which contributed to most of the interest expense increase. Time deposits were impacted by the acquired
Milton Bank time deposits, the use of brokered CDs and a special CD offering during the second half of
2017 that generated additional retail funds. Interest-bearing deposits for 2017 and 2016 continue to be
comprised more of average core deposit balances in NOW, savings and money market balances, which
are lower in cost. But due to the accelerated asset growth in 2017, the Company accepted brokered
deposits and conducted the special CD offering to obtain funds for loan originations. Thus, the Company’s
composition of average time deposits increased from 2016 to 2017, while the average composition of
NOW, savings and money market balances decreased during the same period. This contributed to an
increase in the Company’s weighted average costs from 0.53% at year-end 2016 to 0.63% at year-end
2017. However, the Company’s interest expense continues to be minimized by a sustained low-rate
environment that has impacted the repricings of various Bank deposit products. Even though the
composition of average time deposits increased from the prior year, the year-to-date growth in interest-
bearing deposits came mostly from core deposits, which increased $38,092, or 10.6%, from 2016 to 2017,
as compared to a $21,451, or 12.8%, increase in average time deposits. Comparing 2016 to 2015, the
Company’s interest expense increase was minimal in large part due to a sustained low-rate environment,
an increased composition of lower cost NOW, savings and money market balances, and a lower weighted
average cost of interest-bearing deposits and borrowings.
64
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company’s interest expenses were also impacted by other borrowed money and subordinated
debentures, which were up collectively by $264, or 30.4%, during the year ended 2017, and $220, or
34.0%, during the year ended 2016. The increase was primarily from the average growth in FHLB
borrowings, which were used to fund the purchases of specific earning assets that were originated during
both 2017 and 2016.
During 2017 and 2016, the Company benefited from a growing composition of higher-yielding,
average loan balances resulting from the Milton Bank acquisition, as well as organic loan growth. A
sustained low-rate environment has also limited the expense exposure associated with the increase in time
deposits and other borrowings during 2017 and 2016. Furthermore, the Company still maintains a higher
deposit mix of lower-costing core deposits. As a result, the net interest margin has improved from 4.39%
in 2015 to 4.40% in 2016 and 4.49% in 2017. However, the trend of margin expansion will continue to
be challenged. The Company will face pressure on its net interest income and margin improvement if
loan balances do not continue to expand and become a larger component of overall earning assets. The
Company is still faced with limited opportunities at which interest rates on core deposits can adjust
downward. With interest rates so low, the Company’s core deposit accounts are perceived to be at, or
near, their interest rate floors. In addition, the Company’s CDs are continuing to reprice to market rates
that are trending up. The Company will continue to focus on growing the average loan portfolio and re-
deploying the excess liquidity retained within the Federal Reserve account into higher yielding assets as
opportunities arise. 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.
PROVISION EXPENSE
Credit risk is inherent in the business of originating loans. The Company sets aside an allowance
for loan losses through charges to income, which are reflected in the consolidated statement of income as
the provision for loan losses. Provision for loan loss is recorded to achieve an allowance for loan losses
that is adequate to absorb losses in the Company’s loan portfolio. Management performs, on a quarterly
basis, a detailed analysis of the allowance for loan losses that encompasses loan portfolio composition,
loan quality, loan loss experience and other relevant economic factors.
The Company’s provision expense during the years ended 2017, 2016 and 2015 totaled $2,564,
$2,826 and $1,090, respectively. The Company experienced a $262 decrease in provision expense during
2017, while provision expense increased $1,736 from 2015 to 2016. Lower provision expense during
2017 was impacted by a decrease in specific allocations partially offset by an increase in general
allocations. Specific allocations of the allowance for loan losses identify loan impairment by measuring
fair value of the underlying collateral and the present value of estimated future cash flows. Specific
allocations during 2017 decreased by $2,887 from December 31, 2016 as a result of the financial
performance improvement of one commercial real estate loan relationship. Prior to 2017, specific reserves
of $1,681 were necessary as a result of collateral impairment. During the first quarter of 2017, a re-
evaluation of this borrower’s financial performance identified significant improvement, which resulted in
a credit quality upgrade to the borrower relationship and no identified collateral impairment at December
31, 2017. Further contributing to lower specific reserves at year-end 2017 were the charge-offs of several
collateral dependent specific allocations. Total charge-offs of $612 on one commercial real estate loan
relationship and $399 on one commercial and industrial loan relationship were recorded as a result of asset
impairment. However, these specific reserves had already been allocated for prior to 2017, which resulted
in no corresponding provision expense impact in 2017.
65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The decreases in provision expense during 2017 from lower specific allocations were partially
offset by a $2,687 increase in general allocations, largely impacted by the addition of new risk factors.
During the first quarter of 2017, the Company continued to experience lower historical loan loss factors,
which prompted management to evaluate the exposure to losses incurred during an economic downturn.
Based on historical losses incurred outside the Company's lookback period, management determined it
would be necessary to include an economic risk factor to add general reserves for losses based upon the
difference in the Company's current historical loss factors and risks in the portfolio. Furthermore,
management evaluated recent changes in loan underwriting standards, which may expose the loan
portfolio to additional credit risk. As a result, an economic risk factor was added, which contributed to
additional general reserves.
The provision expense increase from 2015 to 2016 was largely impacted by higher specific
allocations from year-end 2015. When re-evaluating the impaired loan balances to their corresponding
collateral values at December 31, 2016, a specific allocation of $2,535 was needed to fund the allowance
for loan losses of the commercial real estate loan segment, up from the $311 specific allocation at
December 31, 2015. This higher reserve allocation was impacted mostly by two impaired commercial
real estate loan relationships that required specific reserves of $2,435 at year-end 2016, and required a
corresponding increase to provision for loan losses expense. This was partially offset by a decrease in the
specific allocations within the commercial and industrial loan segment, which lowered from $1,850 at
December 31, 2015 to $241 at December 31, 2016. This was due to a reduction in specific reserves that
were previously related to one commercial and industrial loan relationship. Prior to 2016, specific reserves
of $1,155 were necessary as a result of collateral impairment. During the second quarter of 2016, a re-
evaluation of this borrower’s financial performance identified significant improvement, which resulted in
a credit quality upgrade to the borrower relationship and no identified collateral impairment at December
31, 2016.
Provision expense during 2016 was also impacted by general allocations. The Company’s general
allocation evaluates several factors that include: average historical loan loss trends, economic risk, asset
quality, and changes in classified and criticized assets. At December 31, 2016, general allocations totaled
$4,718 as compared to $4,484 at December 31, 2015, mostly from an increase in the loan loss history of
the consumer loan segment. During 2015, the Company experienced improvements (declines) in its
average loan loss history, as well as declines in its classified asset portfolio, resulting in lower provision
expense and general allocations in 2015, as compared to 2014.
During 2017, the Company’s net charge-offs totaled $2,764, as compared to $1,775 in net charge-
offs recognized during 2016. The increase was largely due to the charge-offs of $612 on one commercial
real estate loan relationship and $399 on one commercial and industrial loan relationship that contained
specific allocations. The charge-off did not have a corresponding impact to provision expense since the
allocations had already been provided for prior to 2017. However, the charge-offs would impact the
general allocation of the allowance for loan losses during 2017 as identified by the average loan loss
history factor. During 2016, the Company’s net charge-offs totaled $1,775, as compared to $2,776 in net
charge-offs recognized during 2015. The decrease was largely due to the charge-off of a specific
allocation of one impaired commercial real estate loan during 2015. The charge-off did not have an impact
to provision expense since the allocation was already provided for during 2014. The remaining charge-
off increases came primarily from consumer loans. The effect of lower charge-offs during 2016 had a
direct effect in partially offsetting the provision expense increases impacted by higher classified assets
and collateral value impairments.
Management believes that the allowance for loan losses was adequate at December 31, 2017 to
absorb probable losses in the portfolio. The allowance for loan losses was 0.98% of total loans at
66
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2017, as compared to 1.05% at December 31, 2016 and 1.13% at December 31, 2015.
Future provisions to the allowance for loan losses will continue to be based on management’s quarterly
in-depth evaluation that is discussed in further detail under the caption “Critical Accounting Policies -
Allowance for Loan Losses” within this Management’s Discussion and Analysis.
NONINTEREST INCOME
During 2017, total noninterest income increased $1,196, or 14.5%, as compared to 2016. The
increase in noninterest revenue was impacted by the inclusion of Milton Bank's customer deposit base for
a full year. The larger deposit base contributed to year-to-date improvements in debit and credit card
interchange income and service charges on deposit accounts, which increased collectively by $942, or
20.6%, during 2017, as compared to 2016. The volume of transactions utilizing the Company’s credit card
and Jeanie® Plus debit card continue to increase from a year ago. The Company continues to promote
the use of the Company’s credit and debit cards by offering incentive based cards that permit their users
to redeem accumulated points for merchandise, as well as cash incentives paid, particularly to business
users based on transaction criteria. While incenting debit/credit card customers has increased customer
use of electronic payments, which has contributed to higher interchange revenue, the strategy also fits well
with the Company's emphasis on growing and enhancing its customer relationships.
Also contributing to noninterest income growth was earnings from tax-free 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 2017,
the Company recorded $2,107 in cash proceeds and $1,993 in anticipated cash proceeds related to three
BOLI participants, which yielded net BOLI proceeds of $514 that were recorded to income. This amount
contributed to the 69.1% year-to-date increase in BOLI and annuity asset income of $501 during 2017, as
compared to 2016.
Further increasing noninterest income for 2017 were lower losses on OREO properties, which
finished with a net loss of $189 at year-end 2017, as compared to a net loss of $467 at year-end 2016.
OREO losses were elevated in 2016 mostly from the lower appraised value of one land development
property during the fourth quarter of 2016. A re-evaluation of this property resulted in a $393 impairment
charge that was recorded as a write-down to the OREO property’s carrying value.
Partially offsetting growth in noninterest income during 2017 was a reduction in seasonal tax
refund processing revenue classified as ERC/ERD fees. During the year ended 2017, the Company’s
ERC/ERD fees decreased by $356, or 17.4%, as compared to the same period in 2016, largely due to
reduced transaction fees associated with each refund facilitated. In the fourth quarter of 2014, the Bank
entered into a new agreement with a third-party tax refund product provider. Due to competitive pressures,
the new agreement provided for a different fee structure, including different fees depending upon the tax
refund product selected, and fees that were lower for each refund facilitated, with a reduction in per
transaction fees in future years. As a result, the lower fee structure caused tax processing revenues to be
lower than the year before. Furthermore, the Company experienced a decrease in the number of ERC/ERD
transactions that were facilitated. As a result of ERC/ERD fee activity being mostly seasonal, the majority
of income was recorded during the first half of 2017. While ERC/ERD fees were down, management
continues to be pleased with the significant contribution this revenue source has made, accounting for
17.9% of total noninterest income at year-end 2017.
The Company’s remaining noninterest income categories were down $169, or 12.4%, during the
year ended 2017 as compared to 2016. The decrease was in large part due to higher loss reserves and
claims paid associated with the Captive.
67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During 2016, total noninterest income decreased $358, or 4.2%, as compared to 2015. The decline
in noninterest revenue was primarily from lower gains on the sale of OREO properties, which finished
with a net loss of $467 at year-end 2016, as compared to a net gain of $99 at year-end 2015. The net
OREO loss in 2016 was mostly from a $393 impairment charge recorded during the fourth quarter of 2016
on the land development property previously mentioned.
The Company’s noninterest income was also negatively impacted by a reduction in seasonal tax
refund processing revenue classified as ERC/ERD fees. During the year ended 2016, the Company’s
ERC/ERD fees decreased by $323, or 13.6%, as compared to the same period in 2015, largely due to
reduced transaction fees associated with each refund facilitated.
Also decreasing in 2016 were gains on the sale of securities. As earning asset yields during 2015
were declining, the Company took opportunities to sell some of its lower-yielding investment securities.
During the second and third quarters of 2015, the Company recorded gross gains of $163 on the sale of
$10,387 in Agency mortgage-backed securities, while reinvesting the proceeds into higher-yielding
securities. The shift of balances to higher-yielding assets had a positive effect on the margin in 2015. The
Company did not sell any of its securities during 2016.
Partially offsetting the declines in noninterest income were noninterest earnings from the Milton
Bank acquisition. In total, the Company benefited from $293 in noninterest income generated by the
Milton Bank acquisition during the second half of 2016, consisting mostly of $214 in service charges on
deposit accounts. As a result, the Company’s service charges on deposit accounts increased $404, or
25.7%, during 2016. Further impacting service charge income was a volume increase in overdraft items
during 2016.
Noninterest income earnings also came from debit and credit interchange income, which increased
$195, or 8.1%, during the year ended 2016 as compared to 2015. This increase included $75 in debit card
interchange income from Milton Bank branches.
The Company’s remaining noninterest income categories were up $95, or 4.8%, during the year
ended 2016 as compared to 2015. This increase was in large part due to earnings from tax-free BOLI
investments.
NONINTEREST EXPENSE
Management continues to work diligently to minimize the growth in noninterest expense. For
2017, total noninterest expense increased $3,710, or 11.3%. The increase was impacted by the acquisition
of Milton Bank, which contributed to general increases in most noninterest expense categories related to
having a larger organization after the merger for a full year. Milton Bank’s noninterest expense was
$2,415 during 2017 as compared to $1,174 during 2016, coming mostly from salaries and employee
benefits, as well as building and equipment costs.
The Company’s largest noninterest expense item, salaries and employee benefits, increased
$1,935, or 10.3%, during 2017 as compared to 2016. The increase was largely from the personnel costs
associated with Milton Bank, which contributed $1,694 to this line item during 2017 as compared to $754
during 2016. The remaining increase of $622 to salaries and employee benefit expense was largely due
to annual merit increases and higher health insurance expense. During 2017, the Company experienced a
higher full-time equivalent employee base, increasing from 297 employees at year-end 2016 to 305
employees at year-end 2017.
The Company also experienced increases in data processing expense, which increased $626, or
43.0%, during 2017, as compared to 2016. Data processing charges grew as a result of higher transaction
volume associated with debit and credit cards, as well as higher processing charges from the Company's
68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Big Rewards customer incentive platform. Higher transaction volume was impacted by the addition of
Milton Bank customers.
Noninterest expense was further impacted by increases in professional fees, which were up $430,
or 31.6%, during 2017, as compared to 2016. This increase was impacted by legal expense associated with
the recovery efforts on loan deficiency balances.
Other noninterest expenses increased $1,030, or 23.4%, during 2017, as compared to 2016. This
increase was impacted by various activities, including OREO maintenance (up $386), consulting fees (up
$223), customer incentives (up $154), and state examination costs (up $134). OREO maintenance deals
with the costs associated with property assets that have been acquired through foreclosure. For 2017,
these expenses included the costs of maintaining various commercial real estate properties, which consist
of taxes, management fees and general maintenance. Increases in consulting fees were associated with
revenue enhancement and efficiency improvement strategies during 2017. Customer incentive costs
continued to trend higher during 2017 as part of management’s emphasis on further building and
maintaining core deposit relationships while increasing interchange revenue. Examination fees were
impacted by the reinstatement of annual assessments on state-chartered banks during the fourth quarter of
2017. Due to the timing of reinstatement, the 2017 annual assessment by the Ohio Division of Financial
Institutions covered just the second half of the year.
Partially offsetting overhead expense increases were lower merger related expenses, which
decreased $891, or 95.8%, during 2017, as compared to 2016. Merger expenses were related to the 2016
acquisition of Milton Bancorp and Milton Bank. During the first quarter of 2016, the Company executed
the merger agreement with Milton Bancorp. The merger was eventually finalized on August 5, 2016.
Merger expenses consisted largely of services to combine the operating systems of both companies, as
well as investment banking, accounting, and legal services. The Company incurred the majority of its
merger related expenses during 2016. The remaining merger related expenses were minimal in 2017.
The remaining noninterest expense categories increased $580, or 9.9%, during the year-ended
2017, as compared to 2016. The increases were primarily due to higher software and marketing expenses,
as well as higher costs related to assets in process of foreclosure.
During 2016, total noninterest expense increased $3,280, or 11.1%. The increase was impacted
by the acquisition of Milton Bank, which contributed to general increases in most noninterest expense
categories related to having a larger organization after the merger. Milton Bank’s noninterest expense
was $1,174 during 2016, coming mostly from salaries and employee benefits, as well as building and
equipment costs. Excluding the impact from Milton Bank, the Company’s total noninterest expense would
have increased $2,106, or 7.1%, during 2016.
The Company’s largest noninterest expense item, salaries and employee benefits, increased
$1,376, or 7.9%, during 2016 as compared to 2015. The increase was largely from the personnel costs
associated with Milton Bank, which contributed $754 to this line item during 2016. The remaining
increase of $622 to salaries and employee benefit expense was largely due to annual merit increases and
higher health insurance expense. During 2016, the Company experienced a higher full-time equivalent
employee base, increasing from 248 employees at year-end 2015 to 297 employees at year-end 2016, in
large part due to the addition of Milton Bank employees.
Noninterest expense during 2016 was also impacted by $930 in one-time merger related expenses
related to the acquisition of Milton Bancorp and Milton Bank. The merger was closed on August 5, 2016.
Merger expenses consisted largely of services to combine the operating systems of both companies, as
well as investment banking, accounting, and legal services.
Noninterest expense
impacted by occupancy and
furniture/equipment costs, which collectively increased $368, or 15.3%, as compared to 2015. This
69
increases during 2016 were also
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increase was impacted mostly by the fixed assets acquired as part of the Milton Bank merger during the
third quarter of 2016. As part of the merger, the Company acquired five full-service branch facilities, one
administrative building, and one building that is leased out to a third party. In total, Milton Bank’s
premises and equipment expenses totaled $315, consisting mostly of depreciation, repair and maintenance,
and utility costs.
Data processing expenses during 2016 increased $196, or 15.6%, as compared to 2015, in relation
to the growth in transaction volume with the Company’s debit and credit cards, which was also affected
by the addition of Milton Bank customers. Higher data processing charges were also impacted by the
Company’s Big Rewards customer incentive platform.
The Company also recognized a $193, or 17.2%, increase in software expense during 2016.
Software costs were partly affected by the addition of Milton Bank and their transition to new system
resources. The Company continues to utilize the software applications available in the banking industry
to maximize computer network efficiencies and enhance customer convenience.
The remaining noninterest expense categories increased $217, or 3.0%, during the year-ended
2016, as compared to 2015. The increases were primarily due to higher marketing, consulting and
customer incentive expenses, partially offset by lower FDIC assessment expense.
The Company's efficiency ratio is defined as noninterest expense as a percentage of fully tax-
equivalent net interest income plus noninterest income. The effects from provision expense are excluded
from the efficiency ratio. Management continues to place emphasis on managing its balance sheet mix
and interest rate sensitivity as well as developing more innovative ways to generate noninterest revenue.
During 2017, the Company was successful in generating more net interest income primarily due to higher
average earning assets while minimizing funding costs, which contributed to a 9 basis point improvement
in the net interest margin. Income growth from interchange income and BOLI and annuity asset
investments caused noninterest revenues to grow by 14.5%, while overhead expenses were up 11.3% from
the prior year. These factors have caused the level of net revenues to outpace overhead expenses during
2017. As a result, the Company's efficiency number improved to 70.5% at December 31, 2017, as
compared to 72.8% at December 31, 2016. During 2016, the Company experienced a nominal increase to
its net interest margin as a result of higher earning asset yields complemented by higher average earning
asset growth and lower funding costs. Noninterest revenues also decreased by 4.2%, while overhead
expenses were up 11.1% from the prior year. As a result, net revenue levels during 2016 were outpaced
by higher overhead expense, causing the efficiency ratio to increase (regress) to 72.8% at December 31,
2016, as compared to 69.3% at December 31, 2015.
PROVISION FOR INCOME TAXES
The provision for income taxes during 2017 totaled $4,486 compared to $1,920 in 2016 and $2,809
in 2015. The effective tax rates for 2017, 2016 and 2015 were 37.4%, 21.7% and 24.7%, respectively.
Included in the 2017 results was a $1,783 tax expense adjustment related to the TCJA enacted on
December 22, 2017. The TCJA, among other things, reduced the federal income tax rate from 34% to
21% effective January 1, 2018. This required the Company’s deferred tax assets and liabilities to be
revalued using the 21% federal tax rate.
FINANCIAL CONDITION:
CASH AND CASH EQUIVALENTS
The Company’s cash and cash equivalents consist of cash, as well as interest- and non-interest
bearing balances due from banks. The amounts of cash and cash equivalents fluctuate on a daily basis
70
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
due to customer activity and liquidity needs. At December 31, 2017, cash and cash equivalents had
increased $34,407, or 85.7%, to $74,573 as compared to $40,166 at December 31, 2016. The increase in
cash and cash equivalents was impacted by excess funds associated with deposit liability growth
maintained within the Company’s interest-bearing Federal Reserve Bank clearing account from year-end
2016. The Company continues to utilize its interest-bearing Federal Reserve Bank clearing account to
manage seasonal tax refund deposits, as well as to fund earning asset growth and maturities of retail CD’s.
The increase in funds since year-end 2016 was largely impacted by a significant surge in business checking
deposits related to one depositor relationship during the fourth quarter of 2017. This temporary growth in
excess funds has since normalized during the first quarter of 2018. The interest rate paid on both the
required and excess reserve balances is based on the targeted federal funds rate established by the Federal
Open Market Committee. Short-term rate increases of 25 basis points during each of March 2017, June
2017 and December 2017 caused the federal funds rate to finish at 1.50% at December 31, 2017. The
interest rate increases had a corresponding effect on the interest revenue growth experienced during the
twelve months of 2017 on Federal Reserve Bank clearing account balances. The 1.50% interest rate is
higher than the rate the Company would have received from its investments in federal funds sold.
Furthermore, Federal Reserve Bank balances are 100% secured.
Investment Portfolio Composition
at December 31, 2017
As liquidity levels vary continuously based on consumer activities, amounts of cash and cash
equivalents can vary widely at any given
point in time. The Company’s focus will be
to invest available funds into longer-term,
loans,
higher-yielding assets, primarily
the opportunities arise. Further
when
information
the Company’s
liquidity can be found under the caption
this Management’s
“Liquidity”
Discussion and Analysis.
US Government sponsored entities
11.35%
Mtg-backed
73.84%
Municipals
14.81%
regarding
in
at December 31, 2016
US Government sponsored entities
9.16%
Mtg-backed
74.64%
Municipals
16.20%
CERTIFICATES OF DEPOSIT IN
FINANCIAL INSTITUTIONS
At December 31, 2017, the Company
had $1,820 in certificates of deposit owned
by the Captive, up slightly from year-end
2016. The deposits on hand at December
31, 2017 consist of eight certificates with
remaining maturity terms ranging from less
than 12 months up to 34 months.
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. During 2017, the balance of total securities increased
$3,551, or 3.1%, compared to year-end 2016. The Company’s investment securities portfolio is made up
mostly of Agency mortgage-backed securities, representing 73.8% of total investments at December 31,
2017. During the year ended 2017, the Company invested $18,105 in new Agency mortgage-backed
securities, while receiving principal repayments of $15,863. The monthly repayment of principal has been
71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECURITIES
Table III
As of December 31, 2017
(dollars in thousands)
Within
One Year
After One but Within
Five Years
After Five but Within
Ten Years
MATURING
Amount Yield
Amount Yield
Amount Yield
After Ten Years
Amount Yield
U.S. Government
sponsored entity
securities ....................... $
Obligations of states and
political subdivisions .....
Agency mortgage-backed
securities, residential .....
Total securities................. $
4,593 0.94 % $
8,880
1.89 % $
----
----
$
----
----
819
3.65 %
7,559
5.25 %
9,497
5.57 %
200
2.50 %
681
6,093
4.01 % 53,736
1.65 % $ 70,175
2.57 %
32,824
2.77 % $ 42,321
2.33 %
3.06 % $
415
615
2.88 %
2.76 %
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 category based on estimated average lives. Securities are shown at their fair values, which include the market
value adjustments for available for sale securities.
the primary advantage of Agency mortgage-backed securities as compared to other types of investment
securities, which deliver proceeds upon maturity or call date.
Management has not had to sell a debt security during 2017 and 2016 in order to maintain
sufficient liquidity, as maturing securities have historically accomplished this.
Since 2008, the reinvestment rates on debt securities have shown limited returns due to the
sustained low rate environment. The weighted average FTE yield on debt securities was 2.29% at year-
end 2017 and year-end 2016, as compared to 2.43% at year-end 2015. As a result of minimal returns on
debt securities, the Company’s focus will be to generate interest revenue primarily through loan growth,
as loans generate the highest yields of total earning assets. 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.
LOANS
In 2017, the Company's primary category of earning assets and most significant source of interest
income, total loans, increased $34,418, or 4.7%, to finish at $769,319. The increase in loan balances from
year-end 2016 came primarily from the Company’s West Virginia and Athens, Ohio market areas. The
impact of higher loan balances came mostly from residential real estate, consumer automobile and
commercial and industrial loans, while commercial real estate and other consumer loan balances declined
from year-end 2016. Management continues to place emphasis on its commercial lending, which
generally yields a higher return on investment as compared to other types of loans.
Generating residential real estate loans remains a significant focus of the Company’s lending
efforts. The residential real estate loan segment comprises the largest portion of the Company's overall
loan portfolio at 40.2% and consists primarily of one- to four-family residential mortgages and carries
many of the same customer and industry risks as the commercial loan portfolio. During 2017, total
residential real estate loan balances increased $23,141, or 8.1%, from year-end 2016. This growth was
largely impacted by higher balances within the Athens, Ohio and West Virginia markets, which were up
$9,502 and $8,243, respectively. The Company's growth in residential real estate loans was further
impacted by the Bank's warehouse lending volume. Warehouse lending consists of a line of credit
72
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer
18.15%
Residential Real
Estate
40.19%
Loan Portfolio Composition
at December 31, 2017
provided by the Bank to another mortgage lender that makes loans for the purchase of one- to four-family
residential real estate properties. The mortgage lender eventually sells the loans and repays the Bank.
From year-end 2016, warehouse lending balances increased $3,505 to finish at $9,031 at year-end 2017.
The real estate loan portfolio is also impacted by loan construction projects. During the period when a
borrower's one- to four-family residential home is being built, it is first classified as a construction loan.
At the completion of this construction phase, the loan is re-classified to a residential real estate loan. At
December 31, 2017, construction
loans were down 16.5%, indicating
a higher transition of loan balances
from commercial real estate to
residential real estate. Total loan
production within the real estate
portfolio consists of
increasing
adjustable-rate
short-term
mortgages partially offset by
fixed-rate
long-term
decreasing
mortgages.
of
part
As
interest rate risk
management's
strategy, the Company continues to
sell most of its long-term fixed-rate
residential mortgages to the Federal
Home Loan Mortgage Corporation,
while maintaining the servicing
rights for
those mortgages. A
customer that does not qualify for a
long-term, secondary market loan
may choose from one of
the
Company's other adjustable-rate
which
mortgage
contributed to higher balances of
adjustable-rate mortgages
from
year-end 2016.
Residential Real
Estate
38.92%
at December 31, 2016
Commercial &
Industrial
13.92%
Commercial
Real Estate
27.74%
Consumer
18.27%
products,
Commercial
Real Estate
29.12%
Commercial &
Industrial
13.69%
lending
The commercial
segment increased $5,939, or 1.9%,
from year-end 2016, which came
mostly from the commercial and
industrial loan portfolio, which increased $6,500, or 6.5%, from year-end 2016. The increase was
impacted by loan originations from the West Virginia market area, primarily during the first quarter of
2017. Commercial and industrial loans consist 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.
The commercial real estate loan segment comprises the largest portion of the Company's total
commercial loan portfolio at December 31, 2017, representing 66.6%. Commercial real estate consists of
owner-occupied, nonowner-occupied and construction loans. Owner-occupied loans consist of nonfarm,
nonresidential properties. A commercial owner-occupied loan is a borrower purchased building or space
for which the repayment of principal is dependent upon cash flows from the ongoing operations conducted
73
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
by the party, or an affiliate of the party, who owns the property. Owner-occupied loans of the Company
include loans secured by hospitals, churches, and hardware and convenience stores. Nonowner-occupied
loans are property loans for which the repayment of principal is dependent upon rental income associated
with the property or the subsequent sale of the property, such as apartment buildings, condominiums,
hotels and motels. These loans are primarily impacted by local economic conditions, which dictate
occupancy rates and the amount of rent charged. Commercial construction loans are extended to
individuals as well as corporations for the construction of an individual property or multiple properties
and are secured by raw land and the subsequent improvements. Commercial real estate also includes loan
participations with other banks outside the Company’s primary market area. Although the Company is
not actively seeking to participate in loans originated outside its primary market area, it has taken
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. Commercial real estate loans totaled $213,446 at
December 31, 2017, which was comparable to the $214,007 in commercial real estate loans at year-end
2016. Larger payoffs in 2017 caused owner-occupied loans to decrease $4,032, or 5.5%, from year-end
2016, while a higher number of one- to four-family residential homes completed their building phase,
causing construction loans to decrease $7,568, or 16.5%, from year-end 2016. Partially offsetting these
decreases was an increase in nonowner-occupied loan originations within the Milton Bank, Athens, Ohio
and West Virginia market areas, causing these loan balances to grow by $11,039, or 12.2%, from year-
end 2016. 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, the effects of
competitive pressure and normal underwriting considerations. Management will continue to place
emphasis on its commercial lending, which generally yields a higher return on investment as compared to
other types of loans.
Total loans also received positive contributions from the Company’s consumer loan portfolio,
which increased $5,338, or 4.0%, from year-end 2016. The Company’s consumer loans are primarily
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 consumer loan portfolio
during 2017 benefited mostly from automobile loans, which increased $8,854, or 14.8%, from year-end
2016. Automobile loans represent the Company's largest consumer loan segment at 49.2% of total
consumer loans. The Company continues to target more auto dealers within its market areas and offer
interest rates that are more competitive with local banks. Growth in automobile loans was partially offset
by decreases in other consumer loans, which were down 7.6%. The Company will continue to monitor its
auto lending segment while maintaining strict loan underwriting processes to limit future loss exposure.
The Company will continue to place more emphasis on loan portfolios (i.e. commercial and, to a
smaller extent, residential real estate) with higher returns than auto loans. Indirect automobile loans bear
additional costs from dealers that partially offset interest revenue and lower the rate of return.
The Company will continue to follow its secondary market strategy until long-term interest rates
increase back to a range that falls within an acceptable level of interest rate risk for the Company.
Furthermore, the Company will continue to monitor the pace of its loan volume and remain consistent in
its approach to sound underwriting practices and a focus on asset quality.
ALLOWANCE FOR LOAN LOSSES
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
74
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 loans, which include loans classified as TDR’s, are considered in the
determination of the overall adequacy of the allowance for loan losses.
Management continues to focus on improving asset quality and lowering credit risk while working
to maintain its relationships with its borrowers. During 2017, the Company’s allowance for loan losses
decreased $200, or 2.6%, to finish at $7,499, compared to $7,699 at year-end 2016. The allowance was
impacted by a decrease of $2,887 in specific allocations from year-end 2016. Specific allocations of the
allowance for loan losses identify loan impairment by measuring fair value of the underlying collateral
and the present value of estimated future cash flows. When re-evaluating the impaired loan balances to
their corresponding collateral values during 2017, it was determined that a commercial real estate loan
relationship was no longer impaired and no longer collateral dependent due to the borrower's financial
performance improvement. This resulted in the removal of that borrower's specific allocation of $1,681
that had previously been identified as impairment. Further contributing to lower specific reserves at year-
end 2017 were the charge-offs of several collateral dependent specific allocations. Total charge-offs of
$612 on one commercial real estate loan relationship and $399 on one commercial and industrial loan
relationship were recorded as a result of asset impairment. However, these specific reserves had already
been allocated for prior to 2017, which resulted in no corresponding provision expense impact in 2017.
Partially offsetting the decrease in specific allocations during 2017 was an increase in the
Company's general allocations of the allowance for loan losses from year-end 2016. As part of the
Company's quarterly analysis of the allowance for loan losses, management reviewed various factors that
directly impact the general allocation need of the allowance, which include: historical loan losses, loan
delinquency levels, local economic conditions and unemployment rates, criticized/classified asset
coverage levels and loan loss recoveries. Contributing most to elevated general allocations was the
addition of new risk factors during the first quarter of 2017 that caused the general allocation component
of the allowance for loan losses to increase $2,687, or 57.0%, from year-end 2016. During the first quarter
of 2017, the Company continued to experience lower historical loan loss factors, which prompted
management to evaluate the exposure to losses incurred during an economic downturn. Based on historical
losses incurred outside the Company's lookback period, management determined it would be necessary to
include an economic risk factor to add general reserves for losses based upon the difference in the
Company's current historical loss factors and risks in the portfolio. Furthermore, management evaluated
recent changes in loan underwriting standards, which may expose the loan portfolio to additional credit
risk. As a result, an economic risk factor was added, which contributed to additional general reserves.
Also contributing to higher general reserves were increases in nonperforming loans.
Nonperforming loans consist of nonaccruing loans and accruing loans past due 90 days or more. The
Company experienced a 12.8% increase in nonaccruing loans from year-end 2016, which caused an
increase in the ratio of nonperforming loans to total loans from 1.26% at December 31, 2016 to 1.36% at
December 31, 2017. While the nonperforming loan ratio increased (regressed) from year-end 2016, the
Company’s nonperforming assets to total assets ratio decreased (improved) to 1.17% at year-end 2017,
75
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Table IV
(dollars in thousands)
Years Ended December 31
2017
2016
2015
2014
2013
Commercial loans(1) .................................... $
Percentage of loans to total loans ..............
4,002 $
41.66 %
5,222 $
42.81 %
4,548 $
42.89 %
5,797 $
43.98 %
Residential real estate loans ........................
Percentage of loans to total loans ..............
Consumer loans(2)........................................
Percentage of loans to total loans ..............
1,470
40.19 %
2,027
18.15 %
939
38.92 %
1,538
18.27 %
1,087
38.22 %
1,013
18.89 %
1,426
37.60 %
1,111
18.42 %
4,193
43.21 %
1,169
38.73 %
793
18.06 %
Allowance for loan losses ........................ $
Ratio of net charge-offs to average loans
7,499 $
100.00 %
.37 %
7,699 $
100.00 %
.28 %
6,648 $
100.00 %
.47 %
8,334 $
100.00 %
.10 %
6,155
100.00 %
.22 %
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 commercial and industrial and commercial real estate loans.
(2) Includes automobile, home equity and other consumer loans.
SUMMARY OF NONPERFORMING, PAST DUE AND RESTRUCTURED LOANS
Table V
(dollars in thousands)
At December 31
Impaired loans............................................. $
Past due 90 days or more and still accruing
Nonaccrual ..................................................
Accruing loans past due 90 days or more to
total loans ..................................................
Nonaccrual loans as a % of total loans........
Impaired loans as a % of total loans ...........
Allowance for loan losses as a % of total
loans ..........................................................
2017
2016
2015
2014
2013
18,108 $
334
10,112
22,709 $
327
8,961
17,228 $
39
7,236
20,169 $
73
9,549
14,696
78
3,580
.04 %
1.32 %
2.35 %
.04 %
1.22 %
3.09 %
.01 %
1.23 %
2.94 %
.01 %
1.61 %
3.39 %
.02 %
.63 %
2.60 %
.97 %
1.05 %
1.13 %
1.40 %
1.09 %
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. All of the Company’s troubled debt restructurings are classified as impaired.
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.
76
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MATURITY AND REPRICING DATA OF LOANS
As of December 31, 2017
Table VI
(dollars in thousands)
Within One
Year
MATURING / REPRICING
After One
but Within
Five Years
After Five
Years
Residential real estate loans ............................................... $
Commercial loans(1)............................................................
Consumer loans(2) ...............................................................
Total loans ........................................................................ $
95,919 $
136,216
42,975
275,110 $
118,501 $
136,375
66,972
321,848 $
94,743 $
47,944
29,674
172,361 $
Total
309,163
320,535
139,621
769,319
Loans maturing or repricing after one year with:
Variable interest rates .................................................................................................................................. $
Fixed interest rates .......................................................................................................................................
Total ............................................................................................................................................................ $
264,468
229,741
494,209
(1) Includes commercial and industrial and commercial real estate loans.
(2) Includes automobile, home equity and other consumer loans.
compared to 1.20% at December 31, 2016. This was largely due to a 7.5% increase in Company assets
compared to a 5.3% increase in nonperforming assets. Nonperforming loans and nonperforming assets at
December 31, 2017 continue to be in various stages of resolution for which management believes loans
are adequately collateralized or otherwise appropriately considered in its determination of the adequacy
of the allowance for loan losses. General risks in the portfolio were positively impacted by lower impaired
loans at December 31, 2017, which decreased $4,601, or 20.3%, from year-end 2016. This was largely
from the upgrade of one commercial real estate loan relationship during the first quarter of 2017 resulting
from the borrower’s financial performance improvement which reduced repayment ability risk.
At December 31, 2017, the ratio of the allowance for loan losses decreased to .98%, compared to
1.05% at December 31, 2016. Management believes that the allowance for loan losses at December 31,
2017 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. Future provisions to the allowance for loan losses will continue to be based on
management’s quarterly in-depth evaluation that is discussed in further detail under the caption “Critical
Accounting Policies - Allowance for Loan Losses” within this Management’s Discussion and Analysis.
DEPOSITS
Deposits are used as part of the Company’s liquidity management strategy to meet obligations for
depositor withdrawals, to 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. Deposits are attractive sources of funding because of their
stability and generally low cost as compared with other funding sources. The Company seeks to maintain
77
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Demand
29.61%
IRA Accounts
5.29%
NOW Accounts
18.52%
CDs of 250M
or less
12.36%
Savings & Money Market
28.13%
Composition of Total Deposits
at December 31, 2017
a proper balance of core deposit relationships on hand while also utilizing various wholesale deposit
sources, such as brokered and internet CD balances, as an alternative funding source to manage efficiently
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, 2017, 2016 and 2015. At
December 31, 2017, the growth in deposit
balances came mostly from the Company’s
“core” deposits, which include noninterest-
bearing deposits, as well as interest-bearing
demand, savings, and money market
deposits. The Bank focuses on core deposit
relationships with consumers from local
markets who can maintain multiple
accounts and services at the Bank. The
Company 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
portion of its deposits being held in
noninterest-bearing demand accounts, and
interest-bearing NOW, savings and money
market accounts, at December 31, 2017
than at December 31, 2016. Total deposits
increased $66,272, or 8.4%, from the end of
2016 to finish at $856,724 at December 31,
2017. This deposit growth came primarily
from noninterest-bearing balances, which
increased $44,079, or 21.0%, from year-end
largely from business checking
2016,
the Company's
accounts. Growth
business checking accounts came primarily
from the Mason County, West Virginia
market area, increasing over $19.9 million
As previously
from year-end 2016.
mentioned, this increase in funds came primarily during the fourth quarter of 2017 with one depositor
relationship. The surge in deposits was temporary, and has since normalized during the first quarter of
2018. Noninterest deposits were also impacted by growth in incentive based checking account balances
from year-end 2016.
Savings & Money Market
30.08%
at December 31, 2016
CDs of 250M
or less
12.96%
CDs over 250M
6.09%
CDs over 250M
4.87%
NOW Accounts
19.62%
IRA Accounts
5.96%
Demand
26.51%
in
Further increases in the Company’s deposit balances came from time deposits, which increased
$15,337, or 8.2%, from year-end 2016. This was largely driven by the Company's use of wholesale
funding, which saw its brokered CD's increase by $11,648, or 48.4%, from year-end 2016. While the
Company's preference is to fund earning asset demand with retail core deposits, the use of wholesale
deposits was utilized to help satisfy the earning asset growth experienced during 2017. With market rates
remaining at historically low levels, the Company considers wholesale deposits to be a cost-effective
78
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPOSITS
Table VII
(dollars in thousands)
Interest-bearing deposits:
NOW accounts …………………………………………………
Money market …………………………………………………
Savings accounts ……………………………………………….
IRA accounts ……………………………………………………
Certificates of deposit ………………………………………….
$
2017
As of December 31
2016
2015
158,650 $
133,220
107,798
45,312
158,089
603,069
155,051 $
134,308
103,453
47,099
140,965
580,876
124,524
132,901
68,075
40,930
117,817
484,247
Noninterest-bearing deposits:
Demand deposits ………………………………………………
Total deposits …………………………………………………
253,655
856,724 $
209,576
790,452 $
176,499
660,746
$
funding source to help manage the growing demand for loans. Retail time deposits also increased 2.3%
from year-end 2016, largely from a short-term promotional CD offering by the Bank during the fourth
quarter of 2017 that carried a competitive rate to attract additional retail funding. While this special CD
offering was successful, many customers will continue to invest their balances into a more liquid product,
perhaps hoping for continued rising rates in the near future, based on the minimal spread that is still evident
between a short-term CD rate and a statement savings rate. The Company will continue to evaluate its
use of brokered CD’s to manage the Company’s liquidity position and interest rate risk associated with
longer-term, fixed-rate asset loan demand.
Interest-bearing deposit growth was also impacted by higher NOW, savings and money market
account balances. NOW accounts were up $3,599, or 2.3%, from year-end 2016, largely driven by growth
in public fund account balances. While the Company feels confident in the relationships it has with its
public fund customers, these balances will continue to experience larger fluctuations than other deposit
account relationships due to the nature of the account activity. Larger public fund account balance
fluctuations are, at times, seasonal and can be predicted while most other large fluctuations are outside of
management’s control. The Company values these public fund relationships it has secured and will
continue to market and service these accounts to maintain its long-term relationships. Savings and money
market account balances grew by $3,257, or 1.4%, from year-end 2016. Customers continue to utilize the
statement savings product, which was up 5.0% from year-end 2016. The Company also utilized more of
its brokered money market deposits to manage earning asset growth. Brokered money market deposits
increased to $15,014 at year-end 2017, as compared to $5,000 at year-end 2016. This growth partially
offset the decrease in the Company’s Market Watch account balances, which were down by $11,099, or
8.8%, from year-end 2016.
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 and retention
within its core deposit relationships during 2017, reflecting the Company’s efforts to reduce its reliance
on higher cost funding and improving net interest income.
79
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER BORROWED FUNDS
The Company also accesses other funding sources, including short-term and long-term
borrowings, to fund potential asset growth and satisfy short-term liquidity needs. Other borrowed funds
consist primarily of FHLB advances and promissory notes. During 2017, other borrowed funds were down
$1,136, or 3.1%, from year-end 2016. The decrease was largely due to the maturity repayment of a $3,000
advance during the third quarter of 2017. While deposits continue to be the primary source of funding for
growth in earning assets, management will continue to utilize FHLB advances and promissory notes to
help manage interest rate sensitivity and liquidity.
SUBORDINATED DEBENTURES
The Company received proceeds from the issuance of one trust preferred security on March 22,
2007 totaling $8,500 at a fixed rate of 6.58%. The trust preferred security is now at an adjustable rate
equal to the 3-month LIBOR plus 1.68%. The Company does not report the securities issued by the trust
as a liability, but instead, reports as a liability the subordinated debenture issued by the Company and held
by the trust.
OFF-BALANCE SHEET ARRANGEMENTS
As discussed in Notes I and L, the Company engages in certain off-balance sheet credit-related
activities, including commitments to extend credit and standby letters of credit, which could require the
Company to make cash payments in the event that specified future events occur. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. While these commitments are necessary to meet the financing
needs of the Company’s customers, many of these commitments are expected to expire without being
drawn upon. Therefore, the total amount of commitments does not necessarily represent future cash
requirements. Management does not anticipate that the Company’s current off-balance sheet activities
will have a material impact on the results of operations and financial condition.
CAPITAL RESOURCES
The Company maintains a capital level that exceeds regulatory requirements as a margin of safety
for its depositors. As detailed in Note P to the financial statements at December 31, 2017, the Bank’s
capital exceeded the requirements to be deemed “well capitalized” under applicable prompt corrective
action regulations. Total shareholders' equity at December 31, 2017 of $109,361 was up $4,833, or 4.6%,
as compared to the balance of $104,528 at December 31, 2016. Shareholders’ equity at December 31,
2017 included year-to-date net income of $7,509, partially offset by cash dividends paid of $3,932, or $.84
per share.
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.
80
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 static balance sheet and flat interest rates. 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 current 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.
The following table presents the Company’s estimated net interest income sensitivity:
December 31, 2016
% Change in
Change in
Interest Rates
Basis Points
December 31, 2017
% Change in
Net Interest Income Net Interest Income
INTEREST RATE SENSITIVITY
Table VIII
The estimated percentage change in net
interest income due to a change in interest rates
was within the policy guidelines established by
the Board. With the historical low interest rate
environment, management generally has been
focused on limiting the duration of assets, while
trying to extend the duration of our funding
sources to the extent customer preferences will
permit the Company to do so. At December 31,
2017, the interest rate risk profile reflects an asset
sensitive position, which produces higher net
interest income due to an increase in interest rates. In a declining rate environment, net interest income is
impacted by the interest rate on many deposit accounts not being able to adjust downward. With interest
rates so low, deposit accounts are perceived to be at or near an interest rate floor. As a result, net interest
income decreases in a declining interest rate environment. Overall, management is comfortable with the
current interest rate risk profile, which reflects minimal exposure to interest rate changes.
2.60%
1.92%
1.06%
(2.06%)
+300
+200
+100
-100
(.39%)
(.05%)
.09%
(1.72%)
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, totaling $176,507, represented 17.2% of total assets at December 31, 2017. In addition,
the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity
demands. At December 31, 2017, the Bank could borrow an additional $143,992 from the FHLB, of which
$80,000 could be used for short-term, cash management advances. Furthermore, the Bank has established
a borrowing line with the Federal Reserve. At December 31, 2017, this line had total availability of
$53,985. Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank. For
further cash flow information, see the condensed consolidated statement of cash flows. 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.
81
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 that 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 and business
combinations to be critical accounting policies.
Allowance for Loan Losses:
The allowance for loan losses is a valuation allowance for probable incurred credit losses. 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. A loan is impaired when, based on current information
and events, it is probable that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans generally consist of loans with balances of $200
or more on nonaccrual status or nonperforming in nature. Loans for which the terms have been modified,
and for which the borrower is experiencing financial difficulties, are considered troubled debt
restructurings and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-
by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
82
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
including the length and reasons for the delay, the borrower’s prior payment record, and the amount of
shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans are individually evaluated for impairment. If a loan
is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Smaller balance homogeneous loans, such as consumer and most
residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosure. Troubled debt restructurings are measured at the present value of
estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is
considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For
troubled debt restructurings that subsequently default, the Company determines the amount of reserve in
accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and impaired loans that are not individually
reviewed for impairment and is based on historical loss experience adjusted for current factors. The
historical loss experience is determined by portfolio segment and is based on the actual loss history
experienced by the Company over the most recent 3 years for the consumer and real estate portfolio
segment and 5 years for the commercial portfolio segment. The total loan portfolio's actual loss experience
is supplemented with other economic factors based on the risks present for each portfolio segment. These
economic factors include consideration of the following: levels of and trends in delinquencies and
impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans;
effects of any changes in risk selection and underwriting standards; other changes in lending policies,
procedures, and practices; experience, ability, and depth of lending management and other relevant staff;
national and local economic trends and conditions; industry conditions; and effects of changes in credit
concentrations. The following portfolio segments have been identified: Commercial Real Estate,
Commercial and Industrial, Residential Real Estate, and Consumer.
Commercial and industrial loans consist of borrowings for commercial purposes to individuals,
corporations, partnerships, sole proprietorships, and other business enterprises. Commercial and
industrial loans are generally secured by business assets such as equipment, accounts receivable,
inventory, or any other asset excluding real estate and generally made to finance capital expenditures or
operations. The Company’s risk exposure is related to deterioration in the value of collateral securing the
loan should foreclosure become necessary. Generally, business assets used or produced in operations do
CONTRACTUAL OBLIGATIONS
Table IX
The following table presents, as of December 31, 2017, 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)
Deposits without a stated maturity ..
Consumer and brokered time
deposits ...........................................
Other borrowed funds .....................
Subordinated debentures .................
Lease obligations ............................
Note
Reference
G
Less than
One Year
$ 653,323 $
One to
Three Years
Three to
Five Years
Over Five
Years
Total
---- $
---- $
---- $ 653,323
G
I
J
E
109,278
5,516
----
253
65,773
8,383
----
132
27,991
5,497
----
47
359
16,553
8,500
----
203,401
35,949
8,500
432
83
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
not maintain their value upon foreclosure, which may require the Company to write-down the value
significantly to sell.
Commercial real estate consists of nonfarm, nonresidential loans secured by owner-occupied and
nonowner-occupied commercial real estate as well as commercial construction loans. An owner-occupied
loan relates to a borrower purchased building or space for which the repayment of principal is dependent
upon cash flows from the ongoing business operations conducted by the party, or an affiliate of the party,
who owns the property. Owner-occupied loans that are dependent on cash flows from operations can be
adversely affected by current market conditions for their product or service. A nonowner-occupied loan
is a property loan for which the repayment of principal is dependent upon rental income associated with
the property or the subsequent sale of the property. Nonowner-occupied loans that are dependent upon
rental income are primarily impacted by local economic conditions which dictate occupancy rates and the
amount of rent charged. Commercial construction loans consist of borrowings to purchase and develop
raw land into one- to four-family residential properties. Construction loans are extended to individuals as
well as corporations for the construction of an individual or multiple properties and are secured by raw
land and the subsequent improvements. Repayment of the loans to real estate developers is dependent
upon the sale of properties to third parties in a timely fashion upon completion. Should there be delays in
construction or a downturn in the market for those properties, there may be significant erosion in value
which may be absorbed by the Company.
Residential real estate loans consist of loans to individuals for the purchase of one- to four-family
primary residences with repayment primarily through wage or other income sources of the individual
borrower. The Company’s loss exposure to these loans is dependent on local market conditions for
residential properties as loan amounts are determined, in part, by the fair value of the property at
origination.
Consumer loans are comprised of loans to individuals secured by automobiles, open-end home
equity loans and other loans to individuals for household, family, and other personal expenditures, both
secured and unsecured. These loans typically have maturities of 6 years or less with repayment dependent
on individual wages and income. The risk of loss on consumer loans is elevated as the collateral securing
these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession
is necessary. During the last several years, one of the most significant portions of the Company’s net loan
charge-offs have been from consumer loans. Nevertheless, the Company has allocated the highest
percentage of its allowance for loan losses as a percentage of loans to the other identified loan portfolio
segments due to the larger dollar balances associated with such portfolios.
KEY RATIOS
Table X
2017
2016
2015
2014
2013
Return on average assets .................
Return on average equity ................
Dividend payout ratio .....................
Average equity to average assets ....
.74 %
6.95 %
52.36 %
10.66 %
.77 %
7.05 %
51.79 %
10.91 %
1.03 %
9.66 %
42.74 %
10.71 %
1.01 %
9.62 %
42.62 %
10.49 %
1.04 %
10.40 %
36.56 %
10.01 %
84
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Combinations:
Business combinations are accounted for using the acquisition method. The cost of an acquisition
is measured as the aggregate of the consideration transferred and the amount of any noncontrolling interest
in the acquiree. Acquisition related transaction costs are expensed and included in other operational
results. When a business is acquired, the Company assesses the financial assets and liabilities assumed for
appropriate classification and designation in accordance with the contractual terms, economic
circumstances and pertinent conditions as of the acquisition date. We are required to record the assets
acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often
involve estimates based on third party valuations, such as appraisals, or internal valuations based on
discounted cash flow analyses or other valuation techniques that may include estimates of attrition,
inflation, asset growth rates, or other relevant factors. In addition, the determination of the useful lives
over which an intangible asset will be amortized is subjective. Under FASB ASC 350 (SFAS No. 142
Goodwill and Other Intangible Assets), goodwill and indefinite-lived assets recorded must be reviewed
for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the
asset might be impaired. An impairment loss must be recognized for any excess of carrying value over
fair value of the goodwill or the indefinite-lived intangible asset.
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 southeastern Ohio and western West Virginia. Management believes this risk to be general
in nature, as there are no material concentrations of loans to any industry or consumer group. To the
extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry
concentrations.
85
Ohio Valley Banc Corp.
Email: investorrelations@ovbc.com
Web: www.ovbc.com
Phone: 1-800-468-6682
Headquarters: 420 Third Avenue, Gallipolis, Ohio
Traded on The NASDAQ Global Market
Symbol OVBC