"ONE NAME"
"ONE GOAL"
MESSAGE FROM MANAGEMENT
by CEO/President Jeff Smith & Chairman Jim Dailey
Dear Shareholders,
2004 was an unprecedented year for Ohio Valley Banc Corp. Your company achieved
records in: total earnings, total earnings per share, core earnings, and core
earnings per share. In addition, your company finished the year with
consolidated total assets at a record $729 million.
2004 was a year that saw every member of the Ohio Valley Banc Corp. team
contributing to your company's success. The Directors, Officers, Employees, and
You, our Shareholders each did their part in delivering these results. Your
Board saw their 2000 decision to invest in ProCentury Corp (formerly ProFinance
Holdings) return a $2.4 million pre-tax gain. Your Officers and Employees worked
diligently in our core businesses of lending and collecting to continue to
improve asset quality in a difficult economy. Your retail bankers opened
accounts, gathered deposits, and issued certificates faced with the challenges
of complying with a multitude of regulations ranging from the U. S. Patriot Act
to the Office of Foreign Asset Control (OFAC). Your auditing staff saw the
continued burden of Sarbanes- Oxley as Section 404 was implemented. While each
task was handled as it was presented, many were not without cost, both in
dollars and time.
While the efforts were challenging, the results were gratifying and our Owners
shared in the success with a 5th Dividend in December of $.19 per share and set
their own record as they reinvested more than $1.4 million in our Dividend
Reinvestment and Stock Purchase Plan (DRIP).
That brings us to the theme of this year's Annual Report: "One Name. . .One
Goal". Because of you and your predecessors, Ohio Valley Bank with its far
reaching family of companies, employees, and shareholders has stood the test of
time. Our goal continues to be to serve the families of our communities. Thank
you for your loyal support in our efforts. We sincerely hope you find the
enclosed report a "snapshot" of the results your company achieved in 2004 and
you will find the opportunity to join us in Gallipolis on April 13, 2005 for
your Annual Meeting.
Sincerely,
Jeffrey E. Smith
President and CEO
James L. Dailey
Chairman of the Board
Thank you Jim,
This report on the progress of Ohio Valley Banc Corp. would not be complete
without recognizing the contributions of Jim Dailey. As we consider his upcoming
retirement effective April 13, 2005, I want to take this opportunity to applaud
this "Dentist turned Banker" for his unique vision and leadership as a Director;
President; CEO; and, most recently, Chairman in making Ohio Valley Banc Corp.
what it is today. His "fingerprints" are all over this institution and, like his
predecessors, he has moved the bar even higher for those who follow. Our
challenge is to continue what you have begun.
Jeff
SELECTED FINANCIAL DATA
Years Ended December 31
SUMMARY OF OPERATIONS: 2004 2003 2002 2001 2000
(dollars in thousands, except per share data)
Total interest income $ 43,490 $ 45,160 $ 47,771 $ 47,585 $ 45,195
Total interest expense 16,146 17,645 20,810 24,235 24,065
Net interest income 27,344 27,515 26,961 23,350 21,130
Provision for loan losses 2,353 4,339 5,470 3,503 1,890
Total other income 7,992 5,982 5,634 5,129 3,858
Total other expenses 20,926 19,817 19,175 18,171 16,978
Income before income taxes 12,057 9,341 7,950 6,805 6,120
Income taxes 3,676 2,869 2,275 1,910 1,720
Net income 8,381 6,472 5,675 4,895 4,400
PER SHARE DATA:
Net income per share $ 2.42 $ 1.86 $ 1.64 $ 1.41 $ 1.25
Cash dividends per share $ .94 $ .71 $ .67 $ .79 $ .59
Book value per share $16.49 $15.55 $14.55 $13.42 $12.76
Weighted average number of common
shares outstanding 3,470,878 3,480,230 3,458,300 3,461,856 3,516,205
AVERAGE BALANCE SUMMARY:
Total loans $ 590,006 $ 559,854 $ 538,148 $ 473,998 $ 432,165
Securities (1) 86,598 86,609 76,020 70,857 74,733
Deposits 537,162 509,676 489,513 441,255 428,874
Other borrowed funds (2) 96,361 100,590 98,938 74,525 47,311
Shareholders' equity 55,788 52,074 47,875 45,329 42,773
Total assets 722,281 693,197 667,561 590,193 544,306
PERIOD END BALANCES:
Total loans $ 600,574 $ 573,704 $ 559,561 $ 508,660 $ 448,303
Securities (1) 86,674 90,046 90,759 76,796 76,402
Deposits 535,153 507,509 497,404 455,861 432,371
Shareholders' equity 56,579 54,408 50,375 46,300 44,492
Total assets 729,120 707,327 696,356 634,999 561,658
KEY RATIOS:
Return on average assets 1.16% .93% .85% .83% .81%
Return on average equity 15.02% 12.43% 11.85% 10.80% 10.29%
Dividend payout ratio 38.89% 38.14% 40.79% 55.84% 47.14%
Average equity to average assets 7.72% 7.51% 7.17% 7.68% 7.86%
(1) Securities include interest-bearing balances with banks.
(2) Other borrowed funds include subordinated debentures.
5
CONSOLIDATED STATEMENTS OF CONDITION
As of December 31
2004 2003
---- ----
(dollars in thousands, except share and per share data)
ASSETS
Cash and cash equivalents $ 16,279 $ 17,753
Interest-bearing deposits in other banks 525 859
Securities available-for-sale 74,155 76,352
Securities held-to-maturity
(estimated fair value: 2004 - $12,534,
2003 - $13,547) 11,994 12,835
Total loans 600,574 573,704
Less: Allowance for loan losses (7,177) (7,593)
--------- ---------
Net loans 593,397 566,111
Premises and equipment, net 8,860 9,142
Accrued income receivable 2,643 2,700
Goodwill 1,267 1,267
Bank owned life insurance 13,988 13,222
Other assets 6,012 7,086
--------- ---------
Total assets $ 729,120 $ 707,327
========= =========
LIABILITIES
Noninterest-bearing deposits $ 69,936 $ 62,235
Interest-bearing deposits 465,217 445,274
--------- ---------
Total deposits 535,153 507,509
Securities sold under agreements to repurchase 39,753 24,018
Other borrowed funds 76,550 101,562
Subordinated debentures 13,500 13,500
Accrued liabilities 7,585 6,330
--------- ---------
Total liabilities 672,541 652,919
--------- ---------
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 10,000,000
shares authorized; 2004 - 3,689,828 shares
issued, 2003 - 3,658,212 shares issued) 3,690 3,658
Additional paid-in-capital 31,931 30,962
Retained earnings 28,465 23,343
Accumulated other comprehensive income (219) 624
Treasury stock, at cost (2004 - 258,970 shares,
2003 - 159,611 shares) (7,288) (4,179)
--------- ---------
Total shareholders' equity 56,579 54,408
--------- ---------
Total liabilities and shareholders' equity $ 729,120 $ 707,327
========= =========
See accompanying notes to consolidated financial statements
6
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 2004 2003 2002
------------------------------- ---- ---- ----
(dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 39,821 $ 41,462 $ 43,947
Securities:
Taxable 2,837 2,739 2,612
Tax exempt 552 685 735
Dividends 218 203 225
Other Interest 62 71 252
-------- -------- --------
43,490 45,160 47,771
Interest expense:
Deposits 11,326 12,322 15,129
Securities sold under agreements
to repurchase 278 204 361
Other borrowed funds 3,574 4,175 4,427
Subordinated debentures 968 944 893
-------- -------- --------
16,146 17,645 20,810
-------- -------- --------
Net interest income 27,344 27,515 26,961
Provision for loan losses 2,353 4,339 5,470
Net interest income after provision -------- -------- --------
for loan losses 24,991 23,176 21,491
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 3,318 3,160 3,118
Trust fees 203 215 215
Income from bank owned insurance 606 657 684
Gain on sale of loans 63 444 76
Gain on sale of ProCentury Corp. 2,463
Other 1,339 1,506 1,541
-------- -------- --------
7,992 5,982 5,634
Noninterest expense:
Salaries and employee benefits 12,592 11,571 10,641
Occupancy 1,285 1,308 1,274
Furniture and equipment 1,208 1,031 1,083
Corporation franchise tax 616 591 395
Data processing 504 554 484
Other 4,721 4,762 5,298
-------- -------- --------
20,926 19,817 19,175
-------- -------- --------
Income before income taxes 12,057 9,341 7,950
Provision for income taxes 3,676 2,869 2,275
-------- -------- --------
NET INCOME $ 8,381 $ 6,472 $ 5,675
======== ======== ========
Earnings per share $ 2.42 $ 1.86 $ 1.64
======== ======== ========
See accompanying notes to consolidated financial statements
7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2004, 2003 and 2002
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Shareholders'
(dollars in thousands, except share and Stock Capital Earnings Income(Loss) Stock Equity
per share data) ------- ------- ------- ----------- -------- -------
BALANCES AT JANUARY 1, 2002 $ 3,579 $29,207 $15,979 $ 1,043 $ (3,508) $46,300
Comprehensive income:
Net income 5,675 5,675
Net change in unrealized gain
on available-for-sale securities 600 600
Income tax effect (204) (204)
-------
Total comprehensive income 6,071
Common Stock issued to ESOP,
12,800 shares 13 272 285
Common Stock issued through
dividend reinvestment, 28,285 shares 28 613 641
Cash dividends, $.67 per share (2,315) (2,315)
Shares acquired for treasury, 27,125 shares (607) (607)
------- ------- ------- ------- -------- -------
BALANCES AT DECEMBER 31, 2002 3,620 30,092 19,339 1,439 (4,115) 50,375
Comprehensive income:
Net income 6,472 6,472
Net change in unrealized gain
on available-for-sale securities (1,235) (1,235)
Income tax effect 420 420
-------
Total comprehensive income 5,657
Common Stock issued to ESOP,
7,400 shares 7 191 198
Common Stock issued through
dividend reinvestment, 30,477 shares 31 679 710
Cash dividends, $.71 per share (2,468) (2,468)
Shares acquired for treasury, 2,496 shares (64) (64)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2003 3,658 30,962 23,343 624 (4,179) 54,408
Comprehensive income:
Net income 8,381 8,381
Net change in unrealized gain
on available-for-sale securities (1,277) (1,277)
Income tax effect 434 434
-------
Total comprehensive income 7,538
Common Stock issued to ESOP,
4,600 shares 5 146 151
Common Stock issued through
dividend reinvestment, 27,016 shares 27 823 850
Cash dividends, $.94 per share (3,259) (3,259)
Shares acquired for treasury, 99,359 shares (3,109) (3,109)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2004 $ 3,690 $31,931 $28,465 $ (219) $(7,288) $56,579
======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2004 2003 2002
------------------------------- ---- ---- ----
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,381 $ 6,472 $ 5,675
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,237 1,086 1,165
Net amortization and accretion of securities 201 243 123
Proceeds from sale of loans in secondary market 1,598 20,952 5,913
Loans disbursed for sale in secondary market (1,535) (20,508) (5,837)
Gain on sale of loans (63) (444) (76)
Deferred tax benefit 63 (364) (392)
Provision for loan losses 2,353 4,339 5,470
Common stock issued to ESOP 151 198 285
FHLB stock dividend (218) (203) (225)
Gain on sale of ProCentury Corp. (2,463)
Change in accrued income receivable 57 444 276
Change in accrued liabilities 1,255 (260) (1,118)
Change in other assets (456) 1,268 (691)
------- ------- -------
Net cash provided by operating activities 10,561 13,223 10,568
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available-for-sale 30,715 41,953 30,491
Purchases of securities available-for-sale (29,755) (44,271) (43,469)
Proceeds from maturities of securities
held-to-maturity 1,874 2,965 2,005
Purchases of securities held-to-maturity (1,056) (1,855) (2,046)
Change in interest-bearing deposits in other banks 334 646 (241)
Net change in loans (29,775) (19,602) (55,183)
Proceeds from sale of other real estate owned (388) (2,152) (370)
Proceeds from sale of ProCentury Corp. 4,394
Purchases of premises and equipment (955) (1,981) (710)
Purchases of insurance contracts (272)
------- ------- -------
Net cash used in investing activities (24,884) (24,297) (69,523)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits 27,644 10,105 41,543
Cash dividends (3,259) (2,468) (2,315)
Proceeds from issuance of common stock 850 710 641
Purchases of treasury stock (3,109) (64) (607)
Change in securities sold under agreements to repurchase 15,735 (9,034) 3,778
Proceeds from subordinated debentures 8,500
Proceeds from FHLB borrowings 11,000 7,503 16,065
Repayment of FHLB borrowings (20,633) (15,439) (13,040)
Change in other short-term borrowings (15,379) 14,063 1,553
------- ------- -------
Net cash provided by financing activities 12,849 5,376 56,118
------- ------- -------
CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents (1,474) (5,698) (2,837)
Cash and cash equivalents at beginning of year 17,753 23,451 26,288
------- ------- -------
Cash and cash equivalents at end of year $16,279 $17,753 $23,451
======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $16,246 $18,562 $21,659
Cash paid for income taxes 3,472 2,960 2,675
Non-cash transfers from loans to other real estate owned 524 3,796 521
See accompanying notes to consolidated financial statements
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in thousands, except share and per share data
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Ohio Valley Banc Corp. (the Company) and its wholly-owned
subsidiaries, The Ohio Valley Bank Company (the Bank), Loan Central, a consumer
finance company and Ohio Valley Financial Services Agency, LLC, an insurance
agency. As further discussed in Note I, trusts that had previously been
consolidated with the Company are now reported separately. All material
intercompany accounts and transactions have been eliminated.
Nature of Operations: The Company provides financial services through 21 offices
located in central and southeastern Ohio as well as western West Virginia. Its
primary deposit products are checking, savings, and term certificate accounts,
and its primary lending products are residential mortgage, commercial, and
installment 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 operations of businesses. Other financial instruments include deposit
accounts in other financial institutions and federal funds sold.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Areas
involving the use of management's estimates and assumptions that are more
susceptible to change in the near term involve the allowance for loan losses,
the fair value of certain securities, the fair value of financial instruments
and the determination and carrying value of impaired loans.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
noninterest-bearing deposits with banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods. The Company reports
net cash flows for customer loan transactions, deposit transactions, short-term
borrowings and interest-bearing deposits with other financial institutions.
Securities: The Company classifies securities into held-to-maturity and
available-for-sale categories. Held-to-maturity securities are those which the
Company has the positive intent and ability to hold to maturity and are reported
at amortized cost. Securities classified as available-for-sale include equity
securities and other securities that management intends to sell or 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 as a separate
component of equity, net of tax. Other securities such as Federal Home Loan Bank
stock are carried at cost.
Premium amortization is deducted from, and discount accretion is added to,
interest income on securities using the level yield method. Gains and losses are
recognized upon the sale of specific identified securities on the completed
transaction basis. Securities are written down to fair value when a decline in
fair value is not temporary.
Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on an accrual basis using the interest method
and includes amortization of net deferred loan fees and costs over the loan
term. Interest income is not reported when full loan repayment is in doubt,
typically when the loan is impaired or payments are past due over 90 days.
Payments received on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
11
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
Concentrations of Credit Risk:
The Company, through its subsidiaries, 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 loan portfolio at December 31,
2004:
% of Total Loans
----------------
Real Estate loans 37.84%
Commercial and industrial loans 37.64%
Consumer loans 24.47%
All other loans .05%
----------------
100.00%
================
Approximately 3.36% of total loans are unsecured.
The Bank, in the normal course of its operations, conducts business with
correspondent financial institutions. Balances in correspondent accounts,
investments in federal funds, certificates of deposit and other short-term
securities are closely monitored to ensure that prudent levels of credit and
liquidity risks are maintained. At December 31, 2004, the Bank's primary
correspondent balance was $9,088 on deposit at Fifth Third Bank, Cincinnati,
Ohio.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Buildings and related components
are depreciated using the straight-line or declining balance methods with useful
lives ranging from 7 to 39 years. Furniture, fixtures and equipment are
depreciated using the straight-line or declining balance methods with useful
lives ranging from 3 to 8 years.
Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of
foreclosure is included in other assets. Such real estate is carried at the
lower of investment in the loan or estimated fair value of the property less
estimated selling costs. Any reduction to fair value at the time of acquisition
is accounted for as a loan charge-off. Any subsequent reduction in fair value is
recorded as a loss on other assets. Costs incurred to carry other real estate
are charged to expense. Other real estate owned totaled $2,018 at December 31,
2004 and $2,084 at December 31, 2003.
Goodwill: Goodwill results from business acquisitions and represents the excess
of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Goodwill is assessed at least
annually for impairment and any such impairment will be recognized in the period
identified.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Per Share Amounts: Earnings per share is based on net income divided by the
following weighted average number of shares outstanding during the periods:
3,470,878 for 2004, 3,480,230 for 2003 and 3,458,300 for 2002. The Company had
no dilutive securities outstanding for any period presented.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale which are also recognized as separate
components of equity.
12
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Bank Owned Life Insurance: The Company has purchased life insurance policies on
certain officers. These policies are recorded at their cash surrender value, or
the amount that could be currently realized.
ESOP: Compensation expense is based on the market price of shares as they are
committed to be allocated to participant accounts.
New Accounting Pronouncements: In March 2004, the Financial Accounting Standards
Board ("FASB") ratified the consensus reached by the Emerging Issues Task Force
in Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). The basic model developed to
evaluate whether an investment within scope of EITF 03-1 is
other-thantemporarily impaired involves a three-step process including
determining whether an investment is impaired (fair value less amortized cost),
evaluating whether the impairment is other-than-temporary and, if
other-than-temporary, requiring recognition of an impairment equal to the
difference between the investment's cost and fair value. In September 2004, the
FASB issued Staff Position ("FSP") No. 03-1-1 which delayed the effective date
for the measurement and recognition guidance contained in paragraphs 10-20 of
EITF 03-1. The delay of the effective date for paragraphs 10-20 will be
superseded concurrent with the final issuance of proposed FSP EITF Issue 03-1-a,
"Implication Guidance for the Application of Paragraph 16 of EITF 03-1, 'The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.'" The amount of other-than-temporary impairment to be recognized,
if any, will be dependent on market conditions, management's intent and ability
to hold investments until a forecasted recovery, and the finalization of this
proposed guidance by the FASB.
Also in March 2004, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan
Commitments" ("SAB 105"). This bulletin was issued to inform registrants of the
SEC's view that the fair value of the recorded loan commitments, that are
required to follow derivative accounting under FASB 133, Accounting for
Derivative Instruments and Hedging Activities, should not consider the expected
future cash flows related to the associated servicing of the future loan. The
provisions of SAB 105 must be applied to loan commitments accounted for as
derivatives that are entered into after March 31, 2004. The adoption of this
Staff Accounting Bulletin in the second quarter of 2004 did not have a material
impact on the Company.
In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued AICPA Statement of
Position No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in
a Transfer" ("SOP 03-3"), to address accounting for differences between the
contractual cash flows of certain loans and debt securities and the cash flows
expected to be collected when loans or debt securities are acquired in a
transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to such loans and debt securities
purchased or acquired in purchase business combinations and do not apply to
originated loans. The application of SOP 03-3 limits the interest income,
including accretion of purchase price discounts that may be recognized for
certain loans and debt securities. Additionally, SOP 03-3 requires that the
excess of contractual cash flows over cash flows expected to be collected
(nonaccretable difference) not be recognized as an adjustment of yield or
valuation allowance, such as the allowance for loan and lease losses. Subsequent
to the initial investment, increases in expected cash flows generally should be
recognized prospectively through adjustment of the yield on the loan or debt
security over its remaining life. Decreases in expected cash flows should be
recognized as impairment. SOP 03-3 is effective for loans and debt securities
acquired in fiscal years beginning after December 15, 2004. The Company does not
anticipate that this guidance will have a material impact on the financial
condition, results of operations, or cash flows.
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. Such financial instruments are recorded
when they are funded. See Note K for more specific disclosure related to loan
commitments.
Dividend Restrictions: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders. These restrictions pose no practical limit
on the ability of the bank or holding company to pay dividends at historical
levels. See Note P for more specific disclosure related to dividend
restrictions.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank
of $277 and $7,411 was required to meet regulatory reserve and clearing
requirements at year end 2004 and 2003. These balances do not earn interest.
13
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Industry Segment Information: While the chief decision-makers monitor the
revenue streams of the various products and services, the identifiable segments
are not material and operations are managed and financial performance is
evaluated on a Company-wide basis. Accordingly, all of the financial service
operations are considered by management to be aggregated in one reportable
segment.
Reclassifications: The consolidated financial statements for 2003 and 2002 have
been reclassified to conform with the presentation for 2004. Such
reclassifications had no effect on the net results of operations.
NOTE B - SECURITIES
Securities are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
---- ----- ------ -----
December 31, 2004
-----------------
U.S. Government agency securities $19,992 $ 153 $ (58) $20,087
Mortgage-backed securities 49,073 96 (522) 48,647
FHLB stock 5,421 5,421
------- ------ ----- -------
Total securities $74,486 $ 249 $(580) $74,155
======= ====== ===== =======
December 31, 2003
-----------------
U.S. Government agency securities $36,789 $1,047 $ (51) $37,785
Mortgage-backed securities 33,415 140 (191) 33,364
FHLB stock 5,203 5,203
------- ------ ----- -------
Total securities $75,407 $1,187 $(242) $76,352
======= ====== ===== =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
---- ----- ------ -----
December 31, 2004
-----------------
Obligations of states and
political subdivisions $11,910 $ 567 $ (24) $12,453
Mortgage-backed securities 84 (3) 81
------- ------ ----- -------
Total securities $11,994 $ 567 $ (27) $12,534
======= ====== ===== =======
December 31, 2003
---------------------------
Obligations of states and
political subdivisions $12,724 $ 741 $ (25) $13,440
Mortgage-backed securities 111 (4) 107
------- ------ ----- -------
Total securities $12,835 $ 741 $ (29) $13,547
======= ====== ===== =======
14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES (continued)
At year-end 2004 and 2003, there were no holdings of securities of any one
issuer, other than the U.S. Government and its agencies, in an amount greater
than 10% of shareholders' equity.
Securities with a carrying value of approximately $71,823 at December 31,2004
and $71,804 at December 31, 2003 were pledged to secure public deposits,
repurchase agreements and for other purposes as required or permitted by law.
The amortized cost and estimated fair value of debt securities at December 31,
2004, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because certain issuers may have the right to call
or prepay the debt obligations prior to their contractual maturities.
Available-for-Sale Held-to-Maturity
---------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Debt Securities: Cost Value Cost Value
------- ------- ------- -------
Due in one year or less $10,491 $10,618 $ 927 $ 939
Due in one to five years 9,501 9,469 2,728 2,818
Due in five to ten years 5,313 5,665
Due after ten years 2,942 3,031
Mortgage-backed securities 49,073 48,647 84 81
------- ------- ------- -------
Total debt securities $69,065 $68,734 $11,994 $12,534
======= ======= ======= =======
There were no sales of debt and equity securities during 2004, 2003 and
2002.
Securities with unrealized losses not recognized in income are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2004 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Description of Securities
-------------------------
U.S. Government agency securities ........ $ 1,941 $ (58) $ 1,941 $ (58)
Mortgage-backed securities ............... $22,987 $ (241) 16,683 (284) 39,670 (525)
Obligations of states and
political subdivisions ................. 129 (1) 1,095 (23) 1,224 (24)
------- ------ ------- ------- ------- -------
$23,116 $ (242) $19,719 $ (365) $42,835 $ (607)
======= ====== ======= ======= ======= =======
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2003 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Description of Securities
-------------------------
U.S. Government agency securities ........ $ 1,949 $ (51) $ 1,949 $ (51)
Mortgage-backed securities ............... 20,152 (185) $ 1,650 $ (10) 21,802 (195)
Obligations of states and
political subdivisions ................. 1,023 (18) 75 (7) 1,098 (25)
------- ------ ------- ------- ------- -------
$23,124 $ (254) $ 1,725 $ (17) $24,849 $ (271)
======= ====== ======= ======= ======= =======
Unrealized losses on the Company's securities have not been recognized into
income because the issuers'securities are of high credit quality, management has
the intent and ability to hold for the foreseeable future, and the decline in
fair value is largely due to increases in market interest rates. The fair value
is expected to recover as the bonds approach their maturity date or reset date.
Management does not believe any individual unrealized losses at December 31,
2004 represents an other-than-temporary impairment.
NOTE C - LOANS
Loans are comprised of the following at December 31:
2004 2003
---- ----
Real estate loans $227,234 $217,636
Commercial and industrial loans 226,058 220,724
Consumer loans 146,965 134,720
All other loans 317 624
-------- --------
Total Loans $600,574 $573,704
======== ========
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses for
the years ended December 31:
2004 2003 2002
---- ---- ----
Balance, beginning of year $7,593 $7,069 $6,251
Loans charged-off:
Real estate 823 1,110 636
Commercial 1,661 2,267 2,272
Consumer 2,267 2,661 2,656
------ ------ ------
Total loans charged-off 4,751 6,038 5,564
Recoveries of loans:
Real estate 583 279 119
Commercial 556 1,057 158
Consumer 843 887 635
------ ------ ------
Total recoveries of loans 1,982 2,223 912
Net loan charge-offs (2,769) (3,815) (4,652)
Provision charged to operations 2,353 4,339 5,470
------ ------ ------
Balance, end of year $7,177 $7,593 $7,069
====== ====== ======
Information regarding impaired loans is as follows:
2004 2003
---- ----
Balance of impaired loans $5,573 $1,988
====== ======
Less portion for which no specific
allowance is alloctade $ 619 $ 801
====== ======
Portion of impaired loan balance for which
an allowance for credit losses is allocated $4,954 $1,187
====== ======
Portion of allowance for loan losses allocated
to the impaired loan balance $1,986 $ 475
====== ======
Average investment in impaired loans for the year $5,711 $2,082
====== ======
Past due - 90 days or more and still accruing $1,402 $ 659
====== ======
Nonaccrual $1,618 $2,655
====== ======
Interest on impaired loans was not material for years ending 2004, 2003 or 2002.
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31:
2004 2003
---- ----
Land $ 1,428 $ 1,428
Buildings 7,897 7,648
Leasehold improvements 2,453 2,173
Furniture and equipment 9,945 9,519
------- -------
21,723 20,768
Less accumulated depreciation 12,863 11,626
------- -------
Total Premises and Equipment $ 8,860 $ 9,142
======= =======
The following is a summary of the future minimum lease payments for facilities
leased by the Company. Lease payments were $334 in 2004 and $350 in 2003.
2005 $ 342
2006 317
2007 264
2008 188
2009 91
Thereafter 10
------
$1,212
======
NOTE F - DEPOSITS
Following is a summary of interest-bearing deposits at December 31:
2004 2003
---- ----
NOW accounts $110,901 $113,423
Savings and Money Market 46,031 46,603
Time:
IRA accounts 37,272 38,427
Certificates of Deposit:
In denominations under $100,000 170,328 162,570
In denominations of $100,000 or more 100,685 84,251
-------- --------
Total time deposits 308,285 285,248
-------- --------
Total interest-bearing deposits $465,217 $445,274
======== ========
Following is a summary of total time deposits by remaining maturity at
December 31:
2004
------
Within one year $162,051
From one to two years 99,675
From two to three years 19,265
From three to four years 16,463
From four to five years 8,836
Thereafter 1,995
--------
Total $308,285
========
Brokered deposits, included in time deposits, were $32,965 and $17,147 at
December 31, 2004 and 2003, respectively.
17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are financing arrangements that
have overnight maturity terms. At maturity, the securities underlying the
agreements are returned to the Company. Information concerning securities sold
under agreements to repurchase is summarized as follows at December 31:
2004 2003
------- -------
Balance outstanding at period-end $39,753 $24,018
------- -------
Weighted average interest rate at period-end 1.77% .80%
------- -------
Average amount outstanding during the year $24,743 $23,396
------- -------
Approximate weighted average interest rate
during the year 1.12% .87%
------- -------
Maximum amount outstanding as of any month-end $39,753 $35,213
------- -------
Securities underlying these agreements at
year-end were as follows:
Carrying value of securities $48,283 $45,292
------- -------
Fair Value $47,928 $45,658
------- -------
The Company had securities sold under agreements to repurchase with overnight
maturity terms totaling $20,046 at December 31, 2004 and $7,512 at December 31,
2003 with two large commercial accounts.
NOTE H - OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2004 and 2003 are comprised of
advances from the Federal Home Loan Bank (FHLB) of Concinnati, promissory notes
and Federal Reserve Bank (FRB) Notes.
FHLB Borrowings Promissory Notes FRB Notes Totals
--------------- ---------------- --------- -------
2004 $67,222 $ 5,355 $ 3,973 $ 76,550
2003 $90,729 $ 7,031 $ 3,802 $101,562
Pursuant to collateral agreements with the FHLB, advances are secured by
$206,569 in qualifying mortgage loans and $5,421 in FHLB stock at December 31,
2004. Fixed rate FHLB advances of $67,022 mature through 2010 and have interest
rates ranging from 2.54% to 6.62%. In addition, one variable rate FHLB borrowing
of $200 matures in 2005 and has an interest rate of 2.38%.
At December 31, 2004, the Company had a cash management line of credit
enabling it to borrow up to $30,000 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 $29,800 available on this line of credit at December 31,
2004.
Based on the Company's current FHLB stock ownership, total assets and
pledgeable residential first mortgage loans, the Company had the ability to
obtain borrowings up to a maximum of $153,000 at December 31, 2004.
Promissory notes, issued primarily by the Company, have fixed rates of
3.00% to 4.25% and are due at various dates through a final maturity date of
November 30, 2005. A total of $3,249 represented promissory notes from related
parties. See Note L for further discussion of related party transactions.
FRB notes consist of the collection of tax payments from Bank customers
under the Treasury Tax and Loan program. These funds have a variable interest
rate and are callable on demand by the U.S. Treasury. At December 31, 2004, the
interest rate for the Company's FRB notes was 1.87%. Various investment
securities from the Bank used to collateralize FRB notes totaled $6,060 at
December 31, 2004.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $29,500 at December 31,
2004 and $27,000 at December 31, 2003.
Scheduled principal payments over the next five years:
FHLB borrowings Promissory notes FRB Notes Total
--------------- ---------------- --------- -----
2005 $17,880 $5,248 $3,973 $ 27,101
2006 22,107 107 22,214
2007 8,061 8,061
2008 9,010 9,010
2009 3,007 3,007
Thereafter 7,157 7,157
------- ------ ------ --------
$67,222 $5,355 $3,973 $ 76,550
======= ====== ====== ========
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
On March 26, 2002, a trust formed by the Company issued $8,500 of 5.6%
floating rate trust preferred securities as part of a pooled offering of such
securities. The Company issued subordinated debentures to the trust in exchange
for the proceeds of the offering, which debentures represent the sole asset of
the trust. The Company may redeem all or a portion of these subordinated
debentures at par value beginning March 26, 2007. The subordinated debentures
must be redeemed no later than March 26, 2032. The Company used the net proceeds
from the sale of these securities to provide additional capital to the Bank to
support growth. Debt issuance costs of $256 were incurred and capitalized and
will amortize as a yield adjustment through expected maturity. At December 31,
2004, the current variable rate was 6.1%.
On September 7, 2000, a trust formed by the Company issued $5,000 of 10.6%
fixed rate trust preferred securities as part of a pooled offering of such
securities. The Company issued subordinated debentures to the trust in exchange
for the proceeds of the offering, which debentures represent the sole asset of
the trust. The Company may redeem all or a portion of these subordinated
debentures beginning September 7, 2010 at a premium of 105.30% with the call
price declining .53% per year until reaching a call price of par at year twenty
through maturity. The subordinated debentures must be redeemed no later than
September 7, 2030. Debt issuance costs of $166 were incurred and capitalized and
will amortize as a yield adjustment through expected maturity.
Prior to 2003, the trusts were consolidated in the Company's financial
statements, with the trust preferred securities issued by the trust reported in
liabilities and the subordinated debentures eliminated in consolidation. Under
new accounting guidance, FASB Interpretation No. 46, as revised in December
2003, the trusts are no longer 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, as these are no longer eliminated in consolidation. Since
the Company's equity interest in the trusts cannot be received until the
subordinated debentures are repaid, these amounts have been netted. The effect
of no longer consolidating the trust changes certain balance sheet
classifications but does not change the Company's equity or net income.
NOTE J - INCOME TAXES
The provision for federal income taxes consists of the following components:
2004 2003 2002
---- ---- ----
Current tax expense $3,613 $3,233 $2,667
Deferred tax (benefit) 63 (364) (392)
------ ------ ------
Total income taxes $3,676 $2,869 $2,275
====== ====== ======
The source of gross deferred tax assets and gross deferred tax liabilities
at December 31:
2004 2003
---- ----
Items giving rise to deferred tax assets:
Allowance for loan losses $2,503 $2,648
Deferred compensation 1,021 852
Unrealized loss on securities available-for-sale 113
Deferred loan fees/costs 138 77
Other 151 49
Items giving rise to deferred tax liabilities:
Investment accretion (52) (60)
Depreciation (94) (57)
FHLB stock dividends (783) (707)
Unrealized gain on securities available-for-sale (321)
Prepaid expenses (105)
Intangibles (88) (52)
Other (51) (47)
------ ------
Net deferred tax asset $2,753 $2,382
====== ======
19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES (continued)
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:
2004 2003 2002
---- ---- ----
Statutory tax $4,099 $3,176 $2,703
Effect of nontaxable interest
and dividends (189) (236) (254)
Nondeductible interest expense 18 23 30
Income from bank owned insurance (166) (187) (198)
Effect of state income tax 56 97
Other items (142) (4) (6)
------ ------ ------
Total income taxes $3,676 $2,869 $2,275
====== ====== ======
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. The Bank's exposure to credit loss
in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit, and financial
guarantees written, is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for instruments recorded on the balance
sheet.
Following is a summary of such commitments at December 31:
2004 2003
----- -----
Fixed rate $ 730 $ 731
Variable rate 50,447 49,926
Standby letters of credit 10,490 7,839
The interest rate on fixed rate commitments ranged from 4.875% to 7.25% at
December 31, 2004.
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.
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.
The bank subsidiary of the Company is required to maintain average reserve
balances with the Federal Reserve Bank or as cash in the vault. The amount of
those reserve balances for the year ended December 31, 2004, was approximately
$7,516.
20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies in which they are
affiliated were loan customers during 2004. A summary of activity on these
borrower relationships with aggregate debt greater than $60 is as follows:
Total loans at January 1, 2004 $ 5,409
New loans 3,142
Repayments (2,120)
Other changes 288
-------
Total loans at December 31, 2004 $ 6,719
=======
Other changes include adjustments for loans applicable to one reporting
period that are excludable from the other reporting period. In addition, certain
directors, executive officers and companies in which they are affiliated were
recipients of promissory notes issued by the Company in the amount of $3,249.
NOTE M - EMPLOYEE BENEFITS
The Bank has a profit-sharing plan for the benefit of its employees and their
beneficiaries. Contributions to the plan are determined by the Board of
Directors. Contributions charged to expense were $164, $152 and $149 for 2004,
2003 and 2002.
The Company maintains an Employee Stock Ownership Plan (ESOP) covering
substantially all of its employees. The Company makes discretionary
contributions to the plan which are allocated to plan participants based on
relative compensation. The total number of shares held by the Plan, all of which
have been allocated to participant accounts were 162,592 and 163,723 at December
31, 2004 and 2003. In addition, the Bank made contributions to its ESOP Trust as
follows:
Years ended December 31
2004 2003 2002
---- ---- ----
Number of shares issued 4,600 7,400 12,800
====== ====== ======
Value of stock contributed $ 151 $ 198 $ 285
Cash contributed 176 105 158
----- ----- -----
Total charged to expense $ 327 $ 303 $ 443
===== ===== =====
Life insurance contracts with a cash surrender value of $13,988 have been
purchased by the Company, the owner of the policies. The purpose of these
contracts was to replace a current group life insurance program for executive
officers, implement a deferred compensation plan for directors and executive
officers, implement a director retirement plan and implement a supplemental
retirement plan for certain officers. Under the deferred compensation plan, the
Company pays each participant the amount of fees deferred plus interest over the
participant's desired term, upon termination of service. Under the director
retirement plan, participants are eligible to receive ongoing compensation
payments upon retirement subject to length of service. The supplemental
retirement plan provides payments to select executive officers upon retirement
based upon a compensation formula determined by the Board of Directors. The
present value of payments expected to be provided are accrued during the service
period of the covered individuals. Expenses related to the plans for each of the
last three years amounted to $436, $312 and $267.
NOTE N - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes for the years ended
December 31, are as follow:
2004 2003 2002
Net unrealized holding gains(losses) ---- ---- ----
on available-for-sale securities $(1,277) $(1,229) $ 600
Tax effect 434 414 (204)
------- ------- -------
Other comprehensive income(loss) $ (843) $ (815) $ 396
======= ======= =======
21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents: For these short-term instruments, the carrying amount
is a reasonable estimate of fair value.
Interest-bearing Deposits in Other Banks: For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Securities: For securities, fair value equals quoted market price, if available.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar instruments. The fair value for FHLB stock is
estimated at carrying value.
Loans: The fair value of fixed rate loans is estimated by discounting future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
fair market value of loan commitments and standby letters of credits is not
material at December 31, 2004 or 2003. The fair value for variable rate loans is
estimated to be equal to carrying value.
Deposit Liabilities: The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
Borrowings: For other borrowed funds and subordinated debentures, rates
currently available to the Bank for debt with similar terms and remaining
maturities are used to estimate fair value. For securities sold under agreements
to repurchase, carrying value is a reasonable estimate of fair value.
Accrued Interest Receivable and Payable: For accrued interest receivable and
payable, the carrying amount is a reasonable estimate of fair value.
In addition, other assets and liabilities that are not defined as financial
instruments were not included in the disclosures below, such as premises and
equipment and life insurance contracts.
The estimated fair values of the Company's financial instruments at December
31, are as follows:
2004 2003
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 16,279 $ 16,279 $ 17,753 $ 17,753
Interest-bearing deposits
in other banks 525 525 859 859
Securities 86,149 86,689 89,187 89,899
Loans 593,397 597,373 566,111 574,942
Accrued interest receivable 2,643 2,643 2,700 2,700
Financial liabilities:
Deposits (535,153) (533,708) (507,509) (509,945)
Securities sold under agreements
to repurchase (39,753) (39,753) (24,018) (24,018)
Other borrowed funds (76,550) (77,698) (101,562) (104,914)
Subordinated debentures (13,500) (14,179) (13,500) (13,742)
Accrued interest payable (3,310) (3,310) (3,410) (3,410)
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.
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and 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 about components, risk weightings and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion and plans for capital restoration are required.
At year-end, consolidated actual capital levels and minimum required levels for
the Company and Bank were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2004
Total capital (to risk weighted assets)
Consolidated $76,175 13.3% $45,804 8.0% $57,255 10.0%
The Ohio Valley Bank Company 71,589 12.7 45,254 8.0 56,568 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 69,018 12.1 22,902 4.0 34,353 6.0
The Ohio Valley Bank Company 64,712 11.4 22,627 4.0 33,941 6.0
Tier 1 capital (to average assets)
Consolidated 69,018 9.4 29,239 4.0 36,549 5.0
The Ohio Valley Bank Company 64,712 9.0 28,887 4.0 36,109 5.0
2003
Total capital (to risk weighted assets)
Consolidated $72,864 13.3% $43,841 8.0% $54,802 10.0%
The Ohio Valley Bank Company 65,324 12.1 43,071 8.0 53,838 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 66,003 12.0 21,921 4.0 32,881 6.0
The Ohio Valley Bank Company 58,587 10.9 21,535 4.0 32,303 6.0
Tier 1 capital (to average assets)
Consolidated 66,003 9.5 27,728 4.0 34,660 5.0
The Ohio Valley Bank Company 58,587 8.5 27,533 4.0 34,416 5.0
At year-end 2004 and 2003, the most recent regulatory notifications
categorized the Company and Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the institution's
category.
Dividends paid by the subsidiaries are the primary source of funds
available to the Company for payment of dividends to shareholders and for other
working capital needs. The payment of dividends by the subsidiaries to the
Company is subject to restrictions by regulatory authorities. These restrictions
generally limit dividends to the current and prior two years retained earnings.
At December 31, 2004, approximately $12,180 of the subsidiaries' retained
earnings were available for dividends under these guidelines. In addition to
these restrictions, as a practical matter, dividend payments cannot reduce
regulatory capital levels below minimum regulatory guidelines. These
restrictions do not presently limit the Company from paying dividends at its
historical level.
23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Ohio Valley Banc Corp. In this
information, the parent's investment in 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.
CONDENSED STATEMENTS OF CONDITION at December 31:
Assets 2004 2003
---- ----
Cash and cash equivalents $ 2,010 $ 3,430
Interest-bearing balances with subsidiaries --- 4
Investment in subsidiaries 68,383 62,806
Notes receivable - subsidiaries 5,218 6,943
Other assets 247 2,083
------- -------
Total assets $75,858 $75,266
======= =======
Liabilities
Notes Payable $ 5,355 $ 7,031
Subordinated debentures 13,500 13,500
Other liabilities 424 327
------- -------
Total liabilities $19,279 $20,858
------- -------
Shareholders' Equity
Total shareholders' equity 56,579 54,408
------- -------
Total liabilities and shareholders' equity $75,858 $75,266
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31:
2004 2003 2002
---- ---- ----
Income:
Interest on loans $ --- $ 1 2
Interest on notes 213 223 203
Other operating income 75 47 42
Dividends from bank subsidiary 1,000 3,904 4,428
Gain on sale of ProCentury Corp. 2,463 --- ---
Expenses:
Interest on notes 217 225 219
Interest on subordinated debentures 968 944 921
Operating expenses 209 242 208
------ ------ ------
Income before income taxes and equity in
undistributed earnings of subsidiaries 2,357 2,764 3,327
Income tax benefit (expense) (439) 378 365
Equity in undistributed earnings of subsidiaries 6,463 3,330 1,983
------ ------ ------
Net Income $8,381 $6,472 $5,675
====== ====== ======
24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31: 2004 2003 2002
---- ---- ----
Cash flows from operating activities:
Net income $8,381 $6,472 $5,675
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries(6,463) (3,330) (1,983)
Gain on sale of ProCentury Corp. (2,463) --- ---
Change in other assets (58) 20 49
Change in other liabilities 107 (15) (185)
------ ------ ------
Net cash provided by (used in)
operating activities (496) 3,147 3,556
------ ------ ------
Cash flows from investing activities:
Capital contributions to subsidiaries --- --- (8,000)
Change in other long-term investments --- --- (263)
Proceeds from sale of ProCentury Corp. 4,394 --- ---
Change in other short-term investments 1,725 (1,645) (2,258)
Change in subsidiary line of credit --- 34 16
------ ------ ------
Net cash provided by (used in)
investing activities 6,119 (1,611) (10,505)
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt --- --- 8,762
Change in other short-term borrowings (1,676) 1,687 1,557
Cash dividends paid (3,259) (2,468) (2,315)
Proceeds from issuance of common stock 1,001 908 926
Purchases of treasury stock (3,109) (64) (607)
------ ------ ------
Net cash provided by (used in)
financing activities (7,043) 63 8,323
------ ------ ------
Cash and cash equivalents:
Change in cash and cash equivalents (1,420) 1,599 1,374
Cash and cash equivalents at beginning of year 3,430 1,831 457
------ ------ ------
Cash and cash equivalents at end of year $2,010 $3,430 $1,831
====== ====== ======
25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - GAIN ON SALE OF PROCENTURY
On April 26, 2004, the Company sold 450,000 common shares of ProCentury
Corp. ("ProCentury"), a Columbus-based property and casualty insurer, which
represented 9% of ProCentury's outstanding common stock. The transaction was
completed as part of ProCentury's initial public offering. The sale of stock,
which represented 100% of the Company's ownership in ProCentury, resulted in a
pre-tax gain of $2,463 and an after-tax gain of $1,625 ($.47 cents per share).
The Company's investment in ProCentury was made in October of 2000 to allow for
more diversification of operations by becoming part of a property and casualty
insurance underwriter as made permissible by the Gramm-Leach-Bliley Act of 1999.
The Company decided to liquidate its investment to utilize the cash proceeds to
enhance the Company's core business of banking through branch renovations and
expansion.
NOTE S - CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited)
Quarters Ended
2004 Mar. 31 Jun. 30 Sept. 30 Dec. 31
Total interest income $10,891 $10,722 $10,912 $10,965
Total interest expense 3,968 3,975 4,020 4,183
Net interest income 6,923 6,747 6,892 6,782
Provision for loan losses 768 373 471 741
Net Income (1) 1,566 3,252 1,670 1,893
Net income per share $ .45 $ .94 $ .48 $ .55
2003
Total interest income $11,611 $11,493 $11,179 $10,877
Total interest expense 4,695 4,511 4,267 4,172
Net interest income 6,916 6,982 6,912 6,705
Provision for loan losses 1,385 1,246 996 712
Net Income 1,460 1,572 1,590 1,850
Net income per share $ .42 $ .45 $ .46 $ .53
2002
Total interest income $11,609 $11,887 $12,119 $12,156
Total interest expense 5,236 5,191 5,280 5,103
Net interest income 6,373 6,696 6,839 7,053
Provision for loan losses 1,142 813 1,541 1,974
Net Income 1,252 1,353 1,409 1,661
Net income per share $ .36 $ .39 $ .41 $ .48
(1) During the second quarter of 2004, the Company sold its interest of
ProCentury resulting in an after-tax gain of $1,625 ($.47 cents per share).
26
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON FINANCIAL STATEMENTS
Board of Directors and Shareholders
Ohio Valley Banc Corp.
Gallipolis, Ohio
We have audited the accompanying consolidated statements of condition of Ohio
Valley Banc Corp., as of December 31, 2004 and 2003 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ohio Valley Banc
Corp. as of December 31, 2004 and 2003 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
/s/CROWE CHIZEK AND COMPANY LLC
Crowe Chizek and Company LLC
Columbus, Ohio
February 11, 2005
27
SUMMARY OF COMMON STOCK DATA
OHIO VALLEY BANC CORP.
Years ended December 31, 2004 and 2003
INFORMATION AS TO STOCK PRICES AND DIVIDENDS: The market for the common stock of
the Company is not highly active and trading has historically been limited. On
February 9, 1996, the Company's common stock was established on NASDAQ
securities market under the symbol "OVBC". Prior to this date a limited market
was created beginning in the first quarter of 1992 through The Ohio Company.
The following table shows bid and ask quotations for the Company's common
stock during 2004 and 2003. The range of market price is compiled from data
provided by the broker based on limited trading. The quotations are inter-dealer
prices, without retail markup, markdown, or commission, and may not represent
actual transactions.
2004 Low Bid High Bid Low Ask High Ask
- ---- ------- -------- ------- --------
First Quarter $28.00 $30.54 $28.50 $31.34
Second Quarter 30.01 35.68 30.25 37.00
Third Quarter 30.50 33.00 31.32 33.39
Fourth Quarter 31.25 32.50 31.27 33.50
2003 Low Bid High Bid Low Ask High Ask
- ---- ------- -------- ------- --------
First Quarter $20.51 $23.19 $20.61 $23.48
Second Quarter 22.00 23.43 22.45 23.90
Third Quarter 23.00 24.22 23.48 24.74
Fourth Quarter 24.50 27.05 24.75 27.34
Dividends per share 2004 2003
- ------------------- ---- ----
First Quarter $.18 $.17
Second Quarter .19 .18
Third Quarter .19 .18
Fourth Quarter
Normal Dividend .19 .18
Special Dividend .19
Shown above is a table which reflects the dividends paid per share on the
Company's common stock. This disclosure is based on the weighted average number
of shares for each year and does not indicate the amount paid on the actual
shares outstanding at the end of each quarter. As of December 31, 2004, the
number of holders of common stock was 2,026 an increase from 1,995 shareholders
at December 31, 2003.
On November 16, 2004, the company's Board of Directors declared a special
extra cash dividend of $.19 per share on the outstanding shares of Ohio Valley
Banc Corp. stock payable on December 15, 2004 to shareholders of record December
1, 2004. The special dividend was approved so that OVBC shareholders could share
in the successful return on their Company's investment in ProCentury Corp.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this discussion is to provide an analysis of the Company's
financial condition and results of operations which is not otherwise apparent
from the audited consolidated financial statements included in this report. The
accompanying consolidated financial information has been prepared by management
in conformity with accounting principles generally accepted in the United States
of America (US GAAP) and is consistent with that reported in the consolidated
statements. Reference should be made to those statements and the selected
financial data presented elsewhere in this report for an understanding of the
following tables and related discussion. All dollars are reported in thousands,
except share and per share data.
RESULTS OF OPERATIONS:
SUMMARY
Ohio Valley Banc Corp. generated net income of $8,381 for 2004, an increase
of 29.5% from 2003. Net income was up 14.0% in 2003. Net income per share of
$2.42 for 2004 represented continued growth from $1.86 in 2003 and $1.64 in
2002. The gain in net income and earnings per share for 2004 was primarily due
to the Company's sale of its minority interest in an insurance investment in
ProCentury Corp [Nasdaq: PROS]. This second quarter sale resulted in an
after-tax gain of $1,625 or $.47 per share.
Asset growth for 2004 was $21,793 or 3.1% resulting in total assets at
year-end of $729,120. The Company's return on assets (ROA) increased to 1.16%
for 2004 compared to .93% in 2003 and .85% in 2002. Return on equity (ROE) was
15.02% for 2004 compared to 12.43% in 2003 and 11.85% in 2002. The average of
the bid and ask price for the Company's stock was $32.88 at December 31, 2004
compared to $26.74 at year-end 2003 and $20.61 at year-end 2002.
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 (i.e., loans and investments) and interest expense incurred on
interest-bearing liabilities (i.e., deposits and borrowings). Net interest
income is affected by changes in both the average volume and mix of the balance
sheet and the level of interest rates for financial instruments. Changes in net
interest income are measured by net interest margin and net interest spread. Net
interest margin is expressed as net interest income divided by average
interest-earning assets. Net interest spread is the difference between the
average yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities. Both of these are reported on a tax equivalent
basis. Net interest margin is greater than net interest spread due to the
interest earned on interest-earning assets funded from noninterest bearing
funding sources, primarily demand deposits and shareholders' equity. Following
is a discussion of changes in interest-earning assets, interest-bearing
liabilities and the associated impact on interest income and interest expense
for the three years ending December 31, 2004. Tables I and II have been prepared
to summarize the significant changes outlined in this analysis.
Net interest income on a fully tax equivalent basis (FTE) decreased $228 in
2004, a decrease of 0.8% compared to the $27,831 earned in 2003. The decrease
was primarily attributable to a decrease in the net interest margin which
completely offset the benefits of higher earning assets. Net interest income
(FTE) increased $547 in 2003, an increase of 2.0% compared to the $27,284 earned
in 2002. The growth in net interest income for 2003 was attributable to a higher
level of interest-earning assets partially offset by a decrease in the net
interest margin.
For 2004, average earning assets grew by 4.4% as compared to growth of 3.7%
in 2003. Driving this continued growth in earning assets was the growth in
average loan balances. Average total loans expanded $30,152 or 5.4% for 2004 and
represented 86.6% of earning assets. This compares to average loan growth of
$21,706 or 4.0% with loans representing 85.8% of earning assets for 2003.
Average securities represent the next highest portion of earning assets with
12.6% of earning assets for 2004 and 13.1% in 2003. Management continues to
focus on generating loan growth as this portion of earning assets provides the
greatest return to the Company. Although loans comprise a larger percentage of
earning assets, management is comfortable with the current level of loans based
on collateral values, the balance of the allowance for loan losses and the
Company's well-capitalized status. Management maintains securities at a dollar
level adequate enough to provide ample liquidity and cover pledging
requirements.
Average interest-bearing liabilities increased 3.5% between 2003 and 2004
and increased 3.3% between 2002 and 2003. The composition of interest-bearing
liabilities consists mostly of time deposits at 52.3% and NOW accounts at 19.0%
in 2004, which are up from their 51.8% and 18.5% composition in 2002,
respectively. This change in interest-bearing liabilities came mostly in the
area of other borrowed money, which represented 16.3% of interest-bearing
liabilities in 2004 as compared to 17.9% in 2002. This shift in composition from
2002 to 2004 has proven to be a cost effective source of funding with the
average cost of both time deposits and NOW accounts currently at 2.61% compared
to the average cost of other borrowed money at 4.71%. Average time deposits were
mostly influenced by growth in brokered CD deposits and average NOW accounts
were mostly influenced by growth in public fund deposits.
The net interest margin decreased .22% to 4.05% in 2004 from 4.27% in 2003.
This is compared to a .07% decrease in the net interest margin in 2003.
Contributing to the decrease in net interest margin in 2004 was the decrease in
the net interest rate spread of .20% with lower asset yields of .55% being
partially offset by lower funding costs of .35%. Contributing to the decrease in
yield on earning assets was a decrease in the return on average loans of .66%
from 2003. Total interest expense declined 8.5% due to the costs of time
deposits decreasing .50%, the cost of borrowings decreasing .38% and the cost of
NOW accounts decreasing .10%, all impacted by the sustained low rate environment
in 2004. The impact of interest free funds on the net interest margin decreased
from .38% in 2003 to .36% in 2004. The .02% decrease in the contribution of
interest free funding sources combined with .20% decrease in the net interest
spread yielded the .22% decrease in the net interest margin. The 2003 decrease
in net interest margin of .07% was due to a .07% decrease in the contribution of
interest free funding sources combined with no change in the net interest spread
with lower asset yields of .68% being offset by lower funding costs of .68%.
In 2005, the Company will continue to target loan growth in the core market
areas of southeastern Ohio as well as the growing West Virginia markets to
enhance net interest income. The Company has structured its balance sheet to
limit its exposure to interest rate risk during the record low rate environment
of 2003 and most of 2004. The emphasis has been to grow short-term variable rate
assets and similar term liabilities to maintain a relatively "match funded"
interest rate position. As a result, as short-term rates began to rise in the
third quarter of 2004, the net interest margin began to stabilize. With the
interest rate risk position now more balanced coupled with short-term rates on
the rise in 2005, management feels the net interest margin should continue to
level off and the negative impacts to net interest income minimal.
NONINTEREST INCOME AND EXPENSE
Total noninterest income increased $2,010 in 2004, a 33.6% gain over 2003.
Total noninterest income increased 6.2% in 2003. Contributing most to the growth
in noninterest income was the sale of the Company's interest in ProCentury
Corp., a Columbus-based property and casualty insurer, on April 26, 2004. The
sale of stock ownership in ProCentury Corp., which was part of an initial public
offering, resulted in gross income of $2,463 recognized. For additional
information on the ProCentury Corp. transaction, please refer to Note R of the
Company's consolidated financial statements under the caption "Gain on Sale of
ProCentury". Growth in noninterest income was also driven by the Company's
service charge revenue on deposit accounts, which was up $158 or 5.0% in 2004,
and $42 or 1.3% in 2003. This growth in service charge income primarily came
from overdraft fees relative to the consistent average growth in the Company's
transaction account balances (i.e. demand deposits). The Company's average
demand deposit balances were up $4,719 or 7.7% in 2004 and up $3,755 or 6.5% in
2003. Partially offsetting the gain in noninterest income was a decrease in the
Company's net gain on sale of loans by $381 or 85.8%. The Company was in a heavy
period of mortgage refinancing in 2003 during a historical low-rate environment.
This refinancing volume declined in 2004 and has resulted in the Company having
sold 18 loans to the secondary market in 2004 as compared to 196 loans in 2003.
Income earned on life insurance contracts from the Company's supplemental
retirement program was down $51 or 7.8% in 2004 and down $27 or 3.9% in 2003,
due to a lower earnings credit rate tied to each of the policies. For 2004,
other noninterest income decreased $167 or 11.1% as compared to 2003 largely due
to the elimination of a quarterly fee associated with joint marketing services
between the Company and ProCentury Corp. The second quarter liquidation of
ProCentury Corp. effectively terminated these quarterly services for 2004 which
resulted in a decrease of $174. This decrease was partially offset by increases
in other noninterest income areas such as loan insurance income, loan service
fees and debit/credit card income. Additionally, other noninterest income in
2003 decreased $35 or 2.3% as compared to 2002 due to decreases in loan
insurance income caused by state mandated premium reductions partially offset by
increases in loan service fees and debit/credit card income.
Total noninterest expense increased $1,109 or 5.6% in 2004 and $642 or 3.4%
in 2003. The most significant expense in this category is salary and employee
benefits which increased $1,021 or 8.8% from 2003 to 2004. Contributing most to
this increase were annual merit increases, rising benefit costs and increases to
incentive compensation plans in relation to the successful growth in earnings
experienced in 2004. Further contributing to the salary increase was the
Company's full-time equivalent employee base increasing from 262 employees at
year-end 2003 to 270 employees at year-end 2004. Salaries and employee benefits
expense also increased $930 or 8.7% from 2002 to 2003. Occupancy and furniture
and equipment expenses were up $154 or 6.6% in 2004 driven by depreciation on
the Company's various investments in facility upgrades (Milton, West Virginia
office), operating system upgrades (AS400), as well as newer "up-to-date"
personal computer systems to help improve employee and network efficiency. In
2003, occupancy and furniture and equipment expenses were relatively stable,
decreasing $18 or .8%. Corporation franchise tax increased $25 or 4.2% in 2004
due to capital growth at the Bank level. Corporation franchise tax increased
$196 or 49.6% in 2003 largely due to the reversal of a tax assessment in 2002
that was originally charged to expense in 2001 related to the exclusion of
intercompany indebtedness for taxable net worth. Data processing expenses
decreased $50 or 9.0% in 2004 largely due to the negotiation of lower data
processing fees on the Company's debit and credit cards. Data processing
expenses increased $70 or 14.5% in 2003 largely due to the Company's
debit/credit card and ATM activities. Other noninterest expenses were down
slightly by $41 or .9% in 2004 and down $536 or 10.1% in 2003. The larger
variance in 2003 was largely driven by a one time charge off of fraudulent
checks in 2002, with the impact net of recoveries being $384 at the end of 2003.
The Company's efficiency ratio for 2004 remained steady at 58.7% as compared to
58.5% in 2003, where the Company's noninterest expense had slightly outpaced the
growth in revenue sources (net interest income and noninterest income). The
efficiency ratio for 2003 was also up slightly finishing at 58.5% as compared to
58.1% in 2002.
FINANCIAL CONDITION:
SECURITIES
Management's goal in structuring the portfolio is to maintain a prudent
level of liquidity while providing an acceptable rate of return without
sacrificing asset quality. Maturing securities have historically provided
sufficient liquidity such that management has not sold a debt security in
several years.
The balance of total securities decreased $3,038 or 3.4% as compared to
2003 with the ratio of securities to total assets also decreasing to 11.8% at
December 31, 2004 compared to 12.6% at December 31, 2003. The Company's demand
for securities has shifted from investing in U.S. Government agency securities
which are down $17,698 or 46.8% to mortgage-backed securities which are up
$15,256 or 45.6% over 2003. The increase in mortgage-backed securities is
anticipated to improve the Company's investment portfolio with a higher rate of
return and a more rapid repayment of principal as compared to U.S. Government
agency securities. Due to the sustained low rate environment and its respective
market conditions, the yield on reinvestment opportunities for securities has
continued to decline in 2004. The weighted average FTE yield on debt securities
at year-end 2004 was 4.53% as compared to 4.66% at year-end 2003. 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 2004, total loans increased $26,870 or 4.7% to reach $600,574. The
largest contributor was consumer loans which experienced growth of $12,245 or
9.1%. Consumer loan growth came primarily from originations in the areas of
automobiles (both direct and indirect), recreational vehicles and mobile homes
which were collectively up $8,570 or 9.7% from year-end 2003. Indirect
automobile lending, which represents the largest portion of the consumer loan
portfolio, increased $3,280 or 6.9% to reach $51,070 at December 31, 2004, and
is subject to the same underwriting as the Company's regular loans. The
Company's West Virginia markets of Cabell and Kanawha counties contributed most
to the auto indirect lending growth, which increased $3,444 from year-end 2003.
In addition, home equity capital line balances were up $1,498 or 8.4% over 2003.
The Company believes the growth in the consumer loan portfolio is attributable
to the low interest rate environment which allowed for more aggressive loan
pricing.
In 2004, real estate loans increased $9,598 or 4.4%. During 2003, the
Company's real estate loan portfolio was impacted by a heavy period of mortgage
refinancing triggered by a record low rate interest environment. This prompted
the Company's risk-management strategy of selling a significant portion of its
30 year fixed rate real estate loan originations to the secondary market while
growing its 1 year adjustable rate products and retaining them in the portfolio.
Since the heavy period of mortgage refinancing has declined, the Company has
increased its fixed rate loan originations. For 2004, real estate loan growth
was comprised mostly of the Company's 15 and 20 year fixed rate originations
which were up $7,734 or 13.7% from year-end 2003 and its 1 year adjustable rate
products which were up $5,169 or 6.9% from year-end 2003. Partially offsetting
this growth in real estate loans was a decrease in the Company's 30 year fixed
rate originations which were down $4,126 or 7.5% from year-end 2003. Real estate
loans represent the largest portion of the total loan portfolio at 38% as of
December 31, 2004.
Loan increases in 2004 also came from commercial loans which experienced
growth of $5,334 or 2.4%. The commercial loan area originated over $133,000 in
loans for 2004. Approximately 74% of these loans were originated in Gallia,
Jackson, Pike and Franklin counties in Ohio and 10% were originated from the
West Virginia markets. The Company's commercial loan growth was positively
impacted by the sustained low interest rate environment experienced during 2004
contributing to a higher volume of business opportunities. Continued growth in
commercial loans for 2005 will be dependent upon economic conditions as well as
a general demand for loans in the Company's market areas.
Tables V, VI, and VII have been provided to enhance the understanding of
the loan portfolio and the allowance for potential loan losses. Management
evaluates the adequacy of the allowance for loan losses quarterly based on
several factors including, but not limited to, general economic conditions, loan
portfolio composition, prior loan loss experience, and management's estimate of
probable losses. 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. 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.
The ratio of net charge-offs to average total loans for the year ending
2004 was .47% down from .68% for the year ending 2003, due mostly to the $1,046
or 27.4% decrease in net charge-offs within the real estate and consumer loan
portfolios. This decrease in net charge-offs is related to the Company's
improved nonperforming loan status as well as the strong emphasis management
continues to place on asset quality within the Company's loan portfolio.
Nonperforming loans, which include nonaccrual loans and accruing loans past due
90 days or more, are returned to performing status when the loan is brought
current and has performed in accordance with contractual terms. Nonperforming
loans were approximately $3,020 at December 31, 2004 compared to $3,314 at the
end of 2003. As a result, the Company's nonperforming loans as a percentage of
total loans improved to .50% at year-end 2004 as compared to .58% at year-end
2003. Nonperforming assets to total assets also decreased to .69% at December
31, 2004 as compared to .76% at year-end 2003. Nonperforming assets still
included a single line representing .25% of total assets at December 31, 2004.
For 2004, provision expense was down $1,986 or 45.8% compared to the
provision expense for 2003. This decrease in provision expense was largely
associated with the decrease in net charge-offs as a percent of average total
loans as well as a decline in both nonperforming loans and expected losses. At
December 31, 2004, the allowance for loan losses totaled $7,177, or 1.20% of
total loans, down $416 from December 31, 2003 when the allowance was 1.32% of
total loans. Management decreased the allowance as a percent of total loans in
2004 due to the decline in nonperforming loans caused by improvements in asset
quality as well as lower portfolio risk. Based on this quarterly evaluation,
management feels the allowance is adequate to absorb probable incurred losses in
the portfolio based on collateral values as well as a high relative volume of
real estate mortgages.
DEPOSITS
Interest-earning assets are funded primarily by core deposits. The
accompanying table IV shows the composition of total deposits as of December 31,
2004. Total deposits grew $27,644 or 5.4% to reach $535,153 by year-end 2004.
Leading the growth in deposits were time deposits which increased $23,037 or
8.1% over 2003. This growth was primarily driven by increases in the Company's
brokered CD issuances of $15,703 or 91.4% during the fiscal year of 2004.
Management continues to utilize these deposit sources from local and national
markets to not only supplement deposit growth, but also fund growth in earning
assets and reduce other borrowed funds. Additionally, the Company's
interest-free funding source, noninterest bearing demand deposits, increased
$7,701 or 12.4% during 2004 mostly from business checking account balances.
Partially offsetting total deposit growth was a decrease in the Company's
interest-bearing demand deposits which were down $2,522 or 2.2% as compared to
2003. Driving this variance were decreases in the Company's Gold Club and public
fund NOW products that totaled $4,381, partially offset by a $2,706 increase in
the Company's Shareholder Gold product, which offers a NOW account and many
banking benefits to Company shareholders. Furthermore, savings and money market
deposits decreased $572 or 1.2% as compared to 2003.
FUNDS BORROWED
During 2004, the Company's total borrowings, consisting of securities sold
under agreements to repurchase ("repurchase agreements") and other borrowed
funds, decreased to $116,303 at December 31, 2004 compared to $125,580 at
December 31, 2003. The Company's other borrowed funds decreased $25,012 or 24.6%
from year-end 2003. Other borrowed funds consist primarily of Federal Home Loan
Bank (FHLB) advances and promissory notes. FHLB advances are subject to
collateral agreements and are secured by qualifying first mortgage loans and
FHLB stock. With the growth in deposits outpacing asset growth, management was
able to reduce short-term borrowings from the FHLB by $13,875 and long-term
fixed rate borrowings from the FHLB by $9,632 from year-end 2003. Based on the
sustained low interest rate environment in 2004, management preferred funding
asset growth with term deposits rather than variable rate borrowings. Management
will continue to evaluate borrowings from the FHLB as an alternative funding
source in 2005. Promissory notes are primarily associated with funding loans at
Loan Central and were issued with various terms through a final maturity date of
2006. The decrease in total borrowings was partially offset by a $15,735 or
65.5% increase in repurchase agreements largely due to seasonal account balance
increases with two large commercial accounts.
OFF-BALANCE SHEET ARRANGEMENTS
The disclosures required for off-balance sheet arrangements are discussed
in Note I and Note K.
CAPITAL RESOURCES
The Company maintains a capital level that exceeds regulatory requirements
as a margin of safety for its depositors and shareholders. Shareholders' equity
totaled $56,579 at December 31, 2004, compared to $54,408 at December 31, 2003,
which represents growth of 4.0%. All of the capital ratios exceeded the
regulatory minimum guidelines as identified in Note P "Regulatory Matters".
Cash dividends paid of $3,259 for 2004 represents a 32.1% increase over the
cash dividends paid during 2003. The key factor for the increase in cash
dividends paid is due to the special "ProCentury" dividend paid in the fourth
quarter of $.19 per share which increased the number of dividend distributions
to five as compared to four distributions in 2003. Management deemed the special
dividend appropriate to allow shareholders to participate in the successful
return on their Company's investment in ProCentury Corp. which was liquidated in
the second quarter of 2004 and contributed an after-tax gain of $1,625 or $.47
cents per share. Additionally, the increase in cash dividends for 2004 was due
in part to an increase in the dividend rate paid per share.
The Company maintains a dividend reinvestment and stock purchase plan. The
plan allows shareholders to purchase additional shares of company stock. A
benefit of the plan is to permit the shareholders to reinvest cash dividends as
well as make supplemental purchases without the usual payment of brokerage
commissions. During 2004, shareholders invested more than $1,400 through the
dividend reinvestment and stock purchase plan. These proceeds resulted in the
issuance of 27,016 new shares and the acquisition of 19,120 existing shares
through open market purchases for a total of 46,136 shares. At December 31,
2004, approximately 79% of the shareholders were enrolled in the dividend
reinvestment plan. Members' reinvestment of dividends and supplemental purchases
in 2004 represented 45% of year-to-date dividends paid. In addition, as part of
the Company's stock repurchase program in 2004, management purchased 99,359
shares in the open market. The current stock repurchase program limits the
number of shares to be repurchased to 175,000 shares. At December 31, 2004, the
Company could repurchase an additional 75,831 shares under the existing share
repurchase program which will expire on February 15, 2005.
INTEREST RATE SENSITIVITY AND LIQUIDITY
The Company's goal for interest rate sensitivity management is to maintain
a balance between steady net interest income growth and the risks associated
with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of
the Company's financial condition to adverse movements in interest rates.
Accepting this risk can be an important source of profitability, but excessive
levels of IRR can threaten the Company's earnings and capital.
The Company evaluates IRR through the use of an earnings simulation model
to analyze net interest income sensitivity to changing interest rates. The
modeling process starts with a base case simulation, which assumes a flat
interest rate scenario. The base case scenario is compared to rising and falling
interest rate scenarios assuming a parallel shift in all interest rates.
Comparisons of net interest income and net income fluctuations from the flat
rate scenario illustrate the risks associated with the projected balance sheet
structure.
The Company's Asset/Liability Committee monitors and manages IRR within
Board approved policy limits. The current IRR policy limits anticipated changes
in net interest income over a 12 month horizon to plus or minus 10% of the base
net interest income assuming a parallel rate shock of up 100, 200 and 300 basis
points and down 100 basis points. Based on the current interest rate
environment, management did not test interest rates down 200 and 300 basis
points.
The IRR analysis shows the Company's balance sheet is mostly liability
sensitive at December 31, 2004. During rising interest rates, the change in net
interest income decreases and during declining interest rates, the change in net
interest income increases. The estimated change in net interest income reflects
minimal IRR exposure and is well within the policy guidelines established by the
Board. During 2003, management aggressively targeted variable rate loans coupled
with longer term funding sources to reduce IRR. During 2004, management
emphasized variable rate and short-term duration assets funded by comparable
term liabilities to maintain a relatively balanced IRR position.
Liquidity management should focus on matching the cash inflows and outflows
within the Company's natural market for loans and deposits. This goal is
accomplished by maintaining sufficient asset liquidity along with stable core
deposits. The primary sources of liquidity are interest-bearing balances with
banks, federal funds sold and the maturity and repayment of investments and
loans as well as cash flows provided from operations. The Company has classified
$74,155 in securities as available for sale at December 31, 2004. In addition,
the Federal Home Loan Bank in Cincinnati offers advances to the Bank which
further enhances the Bank's ability to meet liquidity demands. At December 31,
2004, the Bank could borrow an additional $51,000 from the Federal Home Loan
Bank. The Bank also has the ability to purchase federal funds from several of
its correspondent banks. See the consolidated statement of cash flows for
further cash flow information. Management does not rely on any single source of
liquidity and monitors the level of liquidity based on many factors affecting
the Company's financial condition.
INFLATION
Consolidated financial data included herein has been prepared in accordance
with US GAAP. Presently, US GAAP requires the Company to measure financial
position and operating results in terms of historical dollars with the exception
of securities available for sale, which are carried at fair value. Changes in
the relative value of money due to inflation or deflation are generally not
considered.
In management's opinion, changes in interest rates affect the financial
institution to a far greater degree than changes in the inflation rate. While
interest rates are greatly influenced by changes in the inflation rate, they do
not change at the same rate or in the same magnitude as the inflation rate.
Rather, interest rate volatility is based on changes in the expected rate of
inflation, as well as monetary and fiscal policies. A financial institution's
ability to be relatively unaffected by changes in interest rates is a good
indicator of its capability to perform in today's volatile economic environment.
The Company seeks to insulate itself from interest rate volatility by ensuring
that rate sensitive assets and rate sensitive liabilities respond to changes in
interest rates in a similar time frame and to a similar degree.
CRITICAL ACCOUNTING POLICIES
The most significant accounting policies followed by the Company are
presented in Note A to the consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Management views
critical accounting policies to be those which are highly dependent on
subjective or complex judgments, estimates and assumptions, and where changes in
those estimates and assumptions could have a significant impact on the financial
statements. Management currently views the adequacy of the allowance for loan
losses to be a critical accounting policy.
Allowance for Loan Losses: To arrive at the total dollars necessary to maintain
an allowance level sufficient to absorb probable losses incurred at a specific
financial statement date, management has developed procedures to establish and
then evaluate the allowance once determined. The allowance consists of the
following components: specific allocation, general allocation and other
estimated general allocation.
To arrive at the amount required for the specific allocation component, the
Company evaluates loans for which a loss may be incurred either in part or
whole. To achieve this task, the Company has created a quarterly report
("Watchlist") which lists the loans from each loan portfolio that management
deems to be potential credit risks. The criteria to be placed on this report
are: past due 60 or more days, nonaccrual and loans management has determined to
be potential problem loans. These loans are reviewed and analyzed for potential
loss by the Large Loan Review Committee which consists of the President and
members of senior management with lending authority. The function of the
Committee is to review and analyze large borrowers for credit risk, scrutinize
the Watchlist and evaluate the adequacy of the allowance for loan losses and
other credit related issues. The Committee has established a grading system to
evaluate the credit risk of each commercial borrower on a scale of 1 (least
risk) to 10 (greatest risk). After the Committee evaluates each relationship
listed in the report, a specific loss allocation may be assessed. The specific
allocation is currently made up of amounts allocated to the commercial loan
portfolio.
Included in the specific allocation are impaired loans, which consist of
loans with balances of $200 or more on nonaccrual status or non-performing in
nature. These loans are also individually analyzed and a specific allocation may
be assessed based on expected credit loss. Collateral dependent loans will be
evaluated to determine a fair value of the collateral securing the loan.
Non-performing loan balances continue to decline from the previous year (down
10%). Any changes in the impaired allocation will be reflected in the total
specific allocation.
The second component (general allowance) consists of the total loan
portfolio balances minus loan balances already reviewed (specific allocation). A
quarterly large loan report is prepared to provide management with a "snapshot"
of information on larger-balance loans (of $550 or greater), including loan
grades, collateral values, etc. This tool allows management to monitor this
group of borrowers. Therefore only small balance commercial loans and
homogeneous loans (consumer and real estate loans) have not been specifically
reviewed to determine minor delinquencies, current collateral values and present
credit risk. The Company utilizes actual historic loss experience as a factor to
calculate the probable losses for this component of the allowance for loan
losses. This risk factor reflects an actual 1 year or 3 year performance
evaluation of credit losses per loan portfolio, whichever is greater. The risk
factor is achieved by taking the average charge off per loan portfolio for the
last 12 or 36 consecutive months, whichever is greater, and dividing it by the
average loan balance for each loan portfolio over the same time period. The
Company believes that by using the greatest of the 12 or 36 month average loss
risk factor, the estimated allowance will more accurately reflect current
probable losses.
The final component used to evaluate the adequacy of the allowance includes
five additional areas that management believes can have an impact on collecting
all principal due. These areas are: 1) delinquency trends, 2) current local
economic conditions, 3) non-performing loan trends, 4) recovery vs. charge off,
and 5) personnel changes. Each of these areas is given a percentage factor, from
a low of 10% to a high of 30%, determined by the importance of the impact it may
have on the allowance. After evaluating each area, an overall factor of 13% was
determined for this reporting period. To calculate the impact of other economic
conditions on the allowance, the total general allowance is multiplied by this
factor. These dollars are then added to the other two components to provide for
economic conditions in the Company's assessment area. The Company's assessment
area takes in a total of ten counties in Ohio and West Virginia. Each assessment
area has its individual economic conditions; however, the Company has chosen to
average the risk factors for compiling the economic risk factor.
The adequacy of the allowance may be determined by certain specific and
nonspecific allocations; however, the total allocation is available for any
credit losses that may impact the loan portfolios.
CONCENTRATIONS OF CREDIT RISK
The Company maintains a diversified credit portfolio, with real estate
loans currently comprising the most significant portion. Credit risk is
primarily subject to loans made to businesses and individuals in central and
southeastern Ohio as well as western West Virginia. Management believes this
risk to be general in nature, as there are no material concentrations of loans
to any industry or consumer group. To the extent possible, the Company
diversifies its loan portfolio to limit credit risk by avoiding industry
concentrations.
FORWARD LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this report constitute "forward looking statements'
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934 and as defined in the Private Securities
Litigation Reform Act of 1995. Such statements are often, but not always,
identified by the use of such words as "believes," "anticipates," "expects," and
similar expressions. Such statements involve various important assumptions,
risks, uncertainties, and other factors, many of which are beyond our control
that could cause actual results to differ materially from those expressed in
such forward looking statements. These factors include, but are not limited to:
changes in political, economic or other factors such as inflation rates,
recessionary or expansive trends, and taxes; competitive pressures; fluctuations
in interest rates; the level of defaults and prepayment on loans made by the
Company; unanticipated litigation, claims, or assessments; fluctuations in the
cost of obtaining funds to make loans; and regulatory changes. Readers are
cautioned not to place undue reliance on such forward looking statements, which
speak only as of the date hereof. The Company undertakes no obligation and
disclaims any intention to republish revised or updated forward looking
statements, whether as a result of new information, unanticipated future events
or otherwise.
CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME
Table I
December 31
------------------------------------------------------------------------------------
2004 2003 2002
(dollars in thousands) -------------------------- -------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
ASSETS
- ------
Interest-earning assets:
Interest-bearing balances $ 879 $ 7 .79% $ 1,360 $ 8 .61% $ 1,607 15 .91%
with banks
Federal funds sold 4,708 55 1.17 5,842 63 1.07 14,643 237 1.62
Securities:
Taxable 73,046 3,055 4.18 71,361 2,942 4.12 59,831 2,837 4.74
Tax exempt 12,673 809 6.38 13,888 996 7.17 14,582 1,051 7.21
Loans 590,006 39,823 6.75 559,854 41,467 7.41 538,148 43,954 8.17
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
earning assets 681,312 43,749 6.42% 652,305 45,476 6.97% 628,811 48,094 7.65%
Noninterest-earning assets:
Cash and due from banks 15,809 15,797 15,871
Other nonearning assets 32,779 32,515 29,594
Allowance for loan losses (7,619) (7,420) (6,715)
-------- -------- --------
Total noninterest-
earning assets 40,969 40,892 38,750
-------- -------- --------
Total assets $722,281 $693,197 $667,561
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $112,546 1,783 1.58% $110,648 1,858 1.68% $102,393 2,203 2.15%
Savings and Money Market 48,574 318 .65 48,050 386 .80 42,264 522 1.23
Time deposits 309,744 9,225 2.98 289,399 10,078 3.48 287,032 12,404 4.32
Repurchase agreements 24,743 278 1.12 23,396 204 .87 23,090 361 1.56
Other borrowed money 96,361 4,542 4.71 100,590 5,119 5.09 98,938 5,320 5.38
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
bearing liabilities 591,968 16,146 2.73% 572,083 17,645 3.08% 553,717 20,810 3.76%
Noninterest-bearing liabilities:
Demand deposit accounts 66,298 61,579 57,824
Other liabilities 8,227 7,461 8,145
-------- -------- --------
Total noninterest-
bearing liabilities 74,525 69,040 65,969
Shareholders' equity 55,788 52,074 47,875
-------- -------- --------
Total liabilities and
shareholders' equity $722,281 $693,197 $667,561
======== ======== ========
Net interest earnings $27,603 $27,831 $27,284
======= ======= =======
Net interest earnings as a percent
of interest-earning assets 4.05% 4.27% 4.34%
----- ----- -----
Net interest rate spread 3.69% 3.89% 3.89%
----- ----- -----
Average interest-bearing liabilities
to average earning assets 86.89% 87.70% 88.06%
===== ===== =====
Fully taxable equivalent yields are calculated assuming a 34% tax rate, net of
nondeductible interest expense. Average balances are computed on an average
daily basis. The average balance for available-for-sale securities includes the
market value adjustment. However, the calculated yield is based on the
securities' amortized cost. Average loan balances include nonaccruing loans.
Loan income includes cash received on nonaccruing loans.
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE
Table II
2004 2003
----------------------------- ----------------------------
(dollars in thousands) Increase (Decrease) Increase (Decrease)
From Previous Year Due to From Previous Year Due to
----------------------------- ----------------------------
Volume Yield/Rate Total Volume Yield/Rate Total
------ ---------- ----- ------ ---------- -----
INTEREST INCOME
- ---------------
Interest-bearing balances
with banks $ (3) $ 2 $ (1) $ (3) $ (4) $ (7)
Federal funds sold (13) 5 (8) (111) (63) (174)
Securities:
Taxable 70 43 113 504 (399) 105
Tax exempt (83) (104) (187) (49) (6) (55)
Loans 2,159 (3,803) (1,644) 1,723 (4,210) (2,487)
------- ------- ------- ------- ------- -------
Total interest income 2,130 (3,857) (1,727) 2,064 (4,682) (2,618)
INTEREST EXPENSE
- ----------------
NOW accounts 32 (107) (75) 167 (512) (345)
Savings and Money Market 4 (72) (68) 64 (200) (136)
Time deposits 675 (1,528) (853) 101 (2,427) (2,326)
Repurchase agreements 12 62 74 5 (162) (157)
Other borrowed money (209) (368) (577) 88 (289) (201)
------- ------- ------- ------- ------- -------
Total interest expense 514 (2,013) (1,499) 425 (3,590) (3,165)
------- ------- ------- ------- ------- -------
Net interest earnings $ 1,616 $(1,844) $ (228) $ 1,639 $(1,092) $ 547
======= ======= ======= ======= ======= =======
The change in interest due to both volume and rate has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each. Fully taxable equivalent yield assumes a 34% tax
rate, net of related nondeductible interest expense.
SECURITIES
Table III
MATURING
---------------------------------------------------------------------------
As of December 31, 2004 Within After One but After Five but
(dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years
-------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Obligations of U.S. Government
agency securities $10,618 6.11% $ 9,469 3.75% --- --- --- ---
Obligations of states and
political subdivisions 927 6.88% 2,728 6.03% $ 5,313 7.11% $2,942 5.03%
Mortgage-backed securities --- --- 44,815 3.72% 3,916 4.06% --- ---
------- ---- ------- ---- ------- ---- ------ ----
Total debt securiities $11,545 6.18% $57,012 3.84% $ 9,229 5.82% $2,942 5.03%
======= ==== ======= ==== ======= ==== ====== ====
Tax equivalent adjustments have been made in calculating yields on obligations
of states and political subdivisions using a 34% rate. Weighted average yields
are calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security. Mortgage-backed securities, which have
prepayment provisions, are assigned to a maturity based on estimated average
lives. Securities are shown at their carrying values which include the market
value adustments for available-for-sale securities.
DEPOSITS
Table IV as of December 31
(dollars in thousands)
2004 2003 2002
---- ---- ----
Interest-bearing deposits:
NOW accounts $110,901 $113,423 $105,130
Money Market 9,023 8,917 10,255
Savings accounts 37,008 37,686 33,704
IRA accounts 37,272 38,427 38,295
Certificates of Deposit 271,013 246,821 251,023
-------- -------- --------
465,217 445,274 438,407
Noninterest-bearing deposits:
Demand deposits 69,936 62,235 58,997
-------- -------- --------
Total deposits $535,153 $507,509 $497,404
======== ======== ========
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Table V Years Ended December 31
(dollars in thousands) 2004 2003 2002 2001 2000
- ---------------------- ---- ---- ---- ---- ----
Commercial loans $4,657 $4,844 $3,358 $2,467 $2,200
Percentage of loans to total loans 37.69% 38.58% 36.94% 34.21% 31.36%
Real estate loans 642 833 1,318 1,177 867
Percentage of loans to total loans 37.84% 37.94% 40.07% 44.47% 46.78%
Consumer loans 1,878 1,916 2,393 2,607 2,318
Percentage of loans to total loans 24.47% 23.48% 22.99% 21.32% 21.86%
------- ------- ------- ------- -------
Allowance for Loan Losses $7,177 $7,593 $7,069 $6,251 $5,385
======= ======= ======= ======= =======
100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
Ratio of net charge-offs
to average loans .47% .68% .86% .56% .36%
======= ======= ======= ======= =======
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.
SUMMARY OF NONPERFORMING AND PAST DUE LOANS
Table VI
(dollars in thousands) 2004 2003 2002 2001 2000
- ---------------------- ---- ---- ---- ---- ----
Impaired loans $5,573 $1,988 $4,780 $2,621 $1,233
Past due-90 days or more and
still accruing 1,402 659 1,491 3,013 3,691
Nonaccrual 1,618 2,655 6,569 3,297 2,948
Accruing loans past due 90
days or more to total loans .23% .12% .27% .59% .82%
Nonaccrual loans as a % of
total loans .27% .46% 1.17% .65% .66%
Impaired loans as a % of total loans .93% .35% .85% .52% .28%
Allowance for loans losses as a
% of total loans 1.20% 1.32% 1.26% 1.23% 1.20%
Management believes that the impaired loan disclosures are comparable to
the nonperforming loan disclosures except that the impaired loan disclosures do
not include single family residential or consumer loans which are analyzed in
the aggregate for loan impairment purposes.
During 2004, the Company recognized $284 of interest income on impaired
loans. Individual loans not included above that management feels have loss
potential total approximately $1,986. The Company has no assets which are
considered to be troubled debt restructings that are not already included in the
table above.
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.
MATURITY AND REPRICING DATA OF LOANS
Table VII
As of December 31, 2004 Maturing/Repricing
(dollars in thousands)
Within After One but
One Year Within Five Years After Five Years Total
-------- ----------------- ---------------- -----
Commercial loans and other $155,087 $ 48,742 $ 22,546 $226,375
Real estate loans 95,862 16,026 115,346 227,234
Consumer loans 26,831 87,615 32,519 146,965
-------- -------- -------- --------
Total loans $277,780 $152,383 $170,411 $600,574
======== ======== ======== ========
Loans maturing or repricing after one year with:
Variable interest rates $ 47,461
Fixed interest rates 275,333
--------
Total $322,794
========
The following table presents the Company's estimated net interest income
sensitivity:
INTEREST RATE SENSITIVITY
Table VIII
Change in 12/31/04 12/31/03
Interest Rates % Change in % Change in
in Basis Points Net Interest Income Net Interest Income
- --------------- ------------------- -------------------
+300 (1.07%) +.09%
+200 (.42%) (.14%)
+100 (.11%) (.56%)
-100 +.35% +2.04%
CONTRACTUAL OBLIGATIONS
Table IX
The following table presents, as of December 31, 2004, significant fixed and
determinable contractual obligations to third parties by payment date. Further
discussion of the nature of each obligation is included in the referenced note
to the consolidated financial statements.
Payments Due In
(dollars in thousands)
Note One Year One to Three to Over
Reference or Less Three Years Five Years Five Years Total
--------- -------- ----------- ---------- ---------- ----------
Deposits without a stated maturity F $226,868 --- --- --- $226,868
Consumer and brokered time deposits F 162,051 $118,940 $ 25,299 $ 1,995 308,285
Repurchase agreements G 39,753 --- --- --- 39,753
Other borrowed funds H 27,101 30,275 12,017 7,157 76,550
Trust preferred obligations I --- --- --- 13,500 13,500
KEY RATIOS
Table X
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Return on average assets 1.16% .93% .85% .83% .81%
Return on average equity 15.02% 12.43% 11.85% 10.80% 10.29%
Dividend payout ratio 38.89% 38.14% 40.79% 55.84% 47.14%
Average equity to
average assets 7.72% 7.51% 7.17% 7.68% 7.86%
DIRECTOR & OFFICER LISTING
OVBC Directors
- --------------
James L. Dailey
Jeffrey E. Smith
Robert H. Eastman
W. Lowell Call
Thomas E. Wiseman
Lannes C. Williamson
Steven B. Chapman
Anna P Barnitz
Brent A. Saunders
OVBC Officers
- -------------
Jeffrey E. Smith
James L. Dailey
E. Richard Mahan
Larry E. Miller, II
Katrinka V. Hart
Sue Ann Bostic
Mario P. Liberatore
Cherie A. Barr
Sandra L. Edwards
David L. Shaffer
Jennifer L. Osborne
Tom R. Shepherd
Scott W. Shockey
Cindy H. Johnston
Paula W. Clay
Ohio Valley Bank Directors
- --------------------------
James L. Dailey
Jeffrey E. Smith
Robert H. Eastman
W. Lowell Call
Thomas E. Wiseman
Lannes C. Williamson
Harold A. Howe
Steven B. Chapman
Wendell B. Thomas
Anna P. Barnitz
Barney A. Molnar
Brent A. Saunders
Directors Emeritus
- ------------------
Keith R. Brandeberry
Merrill L. Evans
Art E. Hartley, Sr.
Charles C. Lanham
C. Leon Saunders
Warren F. Sheets
West Virginia Advisory Board
- ----------------------------
Lannes C. Williamson
Anna P. Barnitz
Mario P. Liberatore
Charles C. Lanham
Richard L. Handley
Gregory K. Hartley
Trenton M. Stover
R. Raymond Yauger
John C. Musgrave
Stephen L. Johnson
Barney A. Molnar
E. Allen Bell
Ohio Valley Bank Officers
- -------------------------
Jeffrey E. Smith President & Chief Executive Officer
James L. Dailey Chairman of the Board
E. Richard Mahan Executive Vice President & Secretary
Larry E. Miller, II Executive Vice President & Treasurer
Katrinka V. Hart Executive Vice President & Risk Management Officer
Sue Ann Bostic Senior Vice President, Administrative Services Group
Mario P. Liberatore Senior Vice President, West Virginia Bank Group
Sandra L. Edwards Senior Vice President, Financial Bank Group
David L. Shaffer Senior Vice President, Commercial Bank Group
Jennifer L. Osborne Senior Vice President, Retail Lending Group
Tom R. Shepherd Senior Vice President, Retail Deposit Group
Scott W. Shockey Senior Vice President and Chief Financial Officer
Patricia L. Davis Vice President, Research & Technical Applications
Richard D. Scott Vice President, Trust
Bryan W. Martin Vice President, Facilities & Technical Services
Patrick H. Tackett Vice President, Western Division Branch Administrator
Molly K. Tarbett Vice President, Loss Prevention Manager
Robert T. Hennesy Assistant VP, Indirect Lending Manager
Philip E. Miller Assistant VP, Region Manager Franklin County
Rick A. Swain Assistant VP, Region Manager Pike County
Judy K. Hall Assistant VP, Training and Educational Development
Melissa P. Mason Assistant VP, Trust Officer
Diana L. Parks Assistant VP, Internal Auditor
Christopher S. Petro Assistant VP and Comptroller
Linda L. Plymale Assistant VP, Transit Officer
Kimberly R. Williams Assistant VP, Systems Officer
Bryan F. Stepp Assistant VP, Business Development
Deborah A. Carhart Assistant VP, Shareholder Relations
Gregory A. Phillips Assistant VP, I-64 Retail Lending Manager
Pamela D. Edwards Assistant VP, Commercial Loan Operations
Marilyn Kearns Assistant VP, Director of Human Resources
Paula W. Clay Assistant VP, Assistant Secretary
Cindy H. Johnston Assistant VP, Assistant Secretary
Christopher L. Preston Assistant VP, Regional Branch Administration I-64
Angela G. King Assistant VP, Regional Branch Administrator Gallia/Meigs
Brenda G. Henson Assistant Cashier, Manager Customer Service
Kyla R. Carpenter Assistant Cashier and Marketing Officer
Richard P. Speirs Assistant Cashier, Maintenance Technical Supervisor
Stephanie L. Stover Assistant Cashier, Retail Lending Operations Manager
Bryna S. Butler Assistant Cashier for Corporate Communications
Raymond G. Polcyn Assistant Cashier,Retail Lending Manager for Gallia-Meigs
SuperBanks
Toby M. Mannering Assistant Cashier, Collections Manager
Tyrone J. Thomas Assistant Cashier, Assistant Manager Franklin County
Region
Frank W. Davison Assistant Cashier, AS/400 Administrator
Allen W. Elliott Assistant Cashier, Assistant Manager Indirect Lending
Tamela D. LeMaster Assistant Cashier, Regional Branch Manager I-64
Loan Central Officers
- ---------------------
Jeffrey E. Smith Chairman of the Board
Cherie A. Barr President
Timothy R. Brumfield Secretary & Manager, Gallipolis Office
Joseph I. Jones Manager, Waverly Office
T. Joe Wilson Manager, South Point Office
John J. Holtzapfel Manager, Wheelersburg Office
Deborah G. Moore Manager, Jackson Office
INVESTOR INFORMATION
- --------------------
VITAL STATISTICS
> Record earnings for 12 consecutive years
> Earnings per share for 2004 represented an increase of 30.1% over last year
(including sale of ProCentury stock).
> Approximately $729 million in assets
BUSINESS PROFILE
Ohio Valley Banc Corp. commenced operations on October 23, 1992, as a one-bank
holding company with The Ohio Valley Bank Company being the wholly-owned
subsidiary. The Company's headquarters are located at 420 Third Avenue in
Gallipolis, Ohio.
The Ohio Valley Bank Company was organized on September 24, 1872. The Bank is
insured under the Federal Deposit Insurance Act and is chartered under the
banking laws of the State of Ohio. The company currently operates sixteen
offices in Ohio and West Virginia.
In April 1996, the Banc Corp. opened a consumer finance company operating under
the name of Loan Central, Inc. with five offices in Ohio.
Ohio Valley Financial Services, an agency specializing in life insurance, was
formed as a subsidiary of the Corp. in June 2000.
The Company also has minority holdings in ProAlliance OVB Title Services.
FORM 10-K
A copy of the company's annual report on Form 10-K, as filed with the Securities
and Exchange Commission, will be forwarded without charge to any stockholder
upon written request to: Ohio Valley Banc Corp., Attention: E. Richard Mahan,
Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and proxy
statement are also available on the company's Web site, www.ovbc.com.
STOCK LISTING
Ohio Valley Banc Corp. stock is traded on The Nasdaq Stock Market under the
symbol OVBC.
HEADQUARTERS
Ohio Valley Banc Corp.
420 Third Avenue
P.O. Box 240
Gallipolis, Ohio 45631
740.446.2631 or 800.468.6682
Web: www.ovbc.com
E-mail: investorrelations@ovbc.com
FINANCIAL HIGHLIGHTS {bar graph}
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
NET INCOME ($000) ***$ 8,381 $ 6,472 $ 5,675 $ 4,895 $ 4,400
TOTAL ASSETS ($000) $729,120 $707,327 $696,356 $634,999 $561,658
INCOME PER SHARE ***$ 2.42 $ 1.86 $ 1.64 $ 1.41 $ 1.25
DIVIDENDS PER SHARE **$ .94 $ .71 $ .67 *$ .79 $ .59
* Reflects extra "Freedom Dividend"
** Reflects "ProCentury Dividend"
*** Reflects ProCentury sale