MESSAGE FROM MANAGEMENT
Dear Shareholders & Friends,
You will be pleased to know that excluding the 2004 sale of the company's
ProCentury investment, operating earnings for 2005 were up 3.9 percent.
Increased asset quality, increased loan volume, increased net interest income,
increased net interest margin, and control of overhead costs resulted in the
thirteenth consecutive year of operating earnings growth accompanied by record
total assets. Total assets for the year increased 2.8 percent to just under $750
million by year end.
Simplicity in the form of an idea to "Make Banking Easy" was the theme for 2005.
You will notice that this report is "simply" black and white, a visual reminder
of this theme. On the pages that follow, you will read about the efforts of our
employees to make our services easier for the customer to both obtain and use.
During the year, we also took a great deal of time in strategic planning. The
year-long process resulted in a new mission for the company. You will hear much
about the new mission at our Annual Shareholders Meeting on May 10th in
Gallipolis, Ohio. It is my sincere hope that you will join us. In the meantime,
we thank you for your continued support of OVBC and submit this report for your
review.
Sincerely,
/s/JEFFREY E. SMITH
Jeffrey E. Smith
President and CEO
TO MAKE BANKING EASY,
YOUR OVBC FAMILY IS WORKING TO BE THE PREFERRED...
PROVIDER OF FINANCIAL SERVICES
On September 1, 2005, Ohio Valley Bank gave FREE Online Bill Pay to its
customers. A month later, the routine of applying for a loan got a whole lot
easier with the Bank's FastTrack online service that allows the customer to do
the paperwork ahead of time in the comfort of their own home.
DISTRIBUTOR OF FINANCIAL PRODUCTS
During 2005, OVB successfully developed and launched three new/expanded banking
products. These were the Market-Watch money market account, Easy Checking, and a
vast new suite of traditional and Roth I.R.A. products.
SOLVER OF FINANCIAL PROBLEMS
The highest gas prices in history hit many small companies hard in the wallet.
Members of the Commercial Lending team worked with these businesses to insure
their future. Loan Central reached out to private citizens achieving a record
year for Tax Refund Loans.
SOURCE OF FINANCIAL INFORMATION
In 2005, OVB continued to speak to groups, young and old, about financial
matters. OVB Boot Camp, an innovative new program for 4-H members was piloted in
Gallia County. Members of the Risk Management Group spoke to area senior
citizens groups about identity theft and common scams. Our experienced trainers
started a new teller training program at Buckeye Hills Career Center in Rio
Grande, Ohio.
{BAR GRAPH}
2005 2004 2003 2002 2001
----- ----- ----- ----- -----
DIVIDENDS PER SHARE $0.63 $0.75* $0.57 $0.54 $0.63*
*In 2001 reflects Freedom Dividend, in 2004 reflects ProCentury Dividend
INCOME PER SHARE $1.64 $1.93* $1.49 $1.31 $1.13
*Reflects Procentury Sale
SELECTED FINANCIAL DATA
Years Ended December 31
SUMMARY OF OPERATIONS: 2005 2004 2003 2002 2001
(dollars in thousands, except per share data)
Total interest income $ 46,071 $ 43,490 $ 45,160 $ 47,771 $ 47,585
Total interest expense 18,137 16,146 17,645 20,810 24,235
Net interest income 27,934 27,344 27,515 26,961 23,350
Provision for loan losses 1,797 2,353 4,339 5,470 3,503
Total other income 5,522 7,992 5,982 5,634 5,129
Total other expenses 21,359 20,926 19,817 19,175 18,171
Income before income taxes 10,300 12,057 9,341 7,950 6,805
Income taxes 3,283 3,676 2,869 2,275 1,910
Net income 7,017 8,381 6,472 5,675 4,895
PER SHARE DATA(1):
Net income per share $ 1.64 $ 1.93 $ 1.49 $ 1.31 $ 1.13
Cash dividends per share $ .63 $ .75 $ .57 $ .54 $ .63
Book value per share $13.90 $13.19 $12.44 $11.64 $10.73
Weighted average number of common
shares outstanding 4,278,562 4,338,598 4,350,288 4,322,875 4,327,320
AVERAGE BALANCE SUMMARY:
Total loans $ 599,345 $ 590,006 $ 559,854 $ 538,148 $ 473,998
Securities (2) 84,089 86,598 86,609 76,020 70,857
Deposits 542,730 537,162 509,676 489,513 441,255
Other borrowed funds (3) 92,520 96,361 100,590 98,938 74,525
Shareholders' equity 57,620 55,788 52,074 47,875 45,329
Total assets 726,489 722,281 693,197 667,561 590,193
PERIOD END BALANCES:
Total loans $ 617,532 $ 600,574 $ 573,704 $ 559,561 $ 508,660
Securities (2) 84,623 86,674 90,046 90,759 76,796
Deposits 562,866 535,153 507,509 497,404 455,861
Shareholders' equity 59,271 56,579 54,408 50,375 46,300
Total assets 749,719 729,120 707,327 696,356 634,999
KEY RATIOS:
Return on average assets .97% 1.16% .93% .85% .83%
Return on average equity 12.18% 15.02% 12.43% 11.85% 10.80%
Dividend payout ratio 38.55% 38.89% 38.14% 40.79% 55.84%
Average equity to average assets 7.93% 7.72% 7.51% 7.17% 7.68%
(1) Restated for stock splits as appropriate.
(2) Securities include interest-bearing balances with banks.
(3) Other borrowed funds include subordinated debentures.
4
CONSOLIDATED STATEMENTS OF CONDITION
As of December 31
2005 2004
---- ----
(dollars in thousands, except share and per share data)
ASSETS
Cash and noninterest-bearing deposits with banks $ 18,516 $ 16,279
Federal funds sold 1,100 ---
--------- ---------
Total cash and cash equivalents 19,616 16,279
Interest-bearing deposits in other financial
institutions 510 525
Securities available-for-sale 66,328 68,734
Securities held-to-maturity
(estimated fair value: 2005 - $12,373,
2004 - $12,534) 12,088 11,994
FHLB stock 5,697 5,421
Total loans 617,532 600,574
Less: Allowance for loan losses (7,133) (7,177)
--------- ---------
Net loans 610,399 593,397
Premises and equipment, net 8,299 8,860
Accrued income receivable 2,819 2,643
Goodwill 1,267 1,267
Bank owned life insurance 15,962 13,988
Other assets 6,734 6,012
--------- ---------
Total assets $ 749,719 $ 729,120
========= =========
LIABILITIES
Noninterest-bearing deposits $ 82,561 $ 69,936
Interest-bearing deposits 480,305 465,217
--------- ---------
Total deposits 562,866 535,153
Securities sold under agreements to repurchase 29,070 39,753
Other borrowed funds 76,173 76,550
Subordinated debentures 13,500 13,500
Accrued liabilities 8,839 7,585
--------- ---------
Total liabilities 690,448 672,541
--------- ---------
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 10,000,000
shares authorized; 2005 - 4,626,336 shares
issued, 2004 - 3,689,828 shares issued) 4,626 3,690
Additional paid-in-capital 32,282 31,931
Retained earnings 31,843 28,465
Accumulated other comprehensive loss (1,231) (219)
Treasury stock, at cost (2005 - 361,365 shares,
2004 - 258,970 shares) (8,249) (7,288)
--------- ---------
Total shareholders' equity 59,271 56,579
--------- ---------
Total liabilities and shareholders' equity $ 749,719 $ 729,120
========= =========
See accompanying notes to consolidated financial statements
5
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 2005 2004 2003
------------------------------- ---- ---- ----
(dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 42,621 $ 39,821 $ 41,462
Securities:
Taxable 2,644 2,837 2,739
Tax exempt 475 552 685
Dividends 277 218 203
Other Interest 54 62 71
-------- -------- --------
46,071 43,490 45,160
Interest expense:
Deposits 12,973 11,326 12,322
Securities sold under agreements
to repurchase 641 278 204
Other borrowed funds 3,398 3,574 4,175
Subordinated debentures 1,125 968 944
-------- -------- --------
18,137 16,146 17,645
-------- -------- --------
Net interest income 27,934 27,344 27,515
Provision for loan losses 1,797 2,353 4,339
Net interest income after provision -------- -------- --------
for loan losses 26,137 24,991 23,176
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 3,096 3,318 3,160
Trust fees 211 203 215
Income from bank owned insurance 589 606 657
Gain on sale of loans 120 63 444
Gain on sale of ProCentury Corp. --- 2,463 ---
Other 1,506 1,339 1,506
-------- -------- --------
5,522 7,992 5,982
Noninterest expense:
Salaries and employee benefits 12,837 12,592 11,571
Occupancy 1,309 1,285 1,308
Furniture and equipment 1,206 1,208 1,031
Corporation franchise tax 673 616 591
Data processing 633 504 554
Other 4,701 4,721 4,762
-------- -------- --------
21,359 20,926 19,817
-------- -------- --------
Income before income taxes 10,300 12,057 9,341
Provision for income taxes 3,283 3,676 2,869
-------- -------- --------
NET INCOME $ 7,017 $ 8,381 $ 6,472
======== ======== ========
Earnings per share $ 1.64 $ 1.93 $ 1.49
======== ======== ========
See accompanying notes to consolidated financial statements
6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2005, 2004 and 2003
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, 2003 $ 3,620 $30,092 $19,339 $ 1,439 $ (4,115) $50,375
Comprehensive income:
Net income --- --- 6,472 --- --- 6,472
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, $.57 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
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, $.75 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
Comprehensive income:
Net income --- --- 7,017 --- --- 7,017
Change in unrealized loss
on available-for-sale securities --- --- --- (1,534) --- (1,534)
Income tax effect --- --- --- 522 --- 522
-------
Total comprehensive income --- --- --- --- --- 6,005
Shares from stock split, 25%:
Common stock, 922,030 shares (including
treasury stock of 64,742 shares) 922 --- (922) --- --- ---
Cash paid in lieu of fractional shares
in stock split --- --- (12) --- --- (12)
Common Stock issued to ESOP,
9,500 shares 9 231 --- --- --- 240
Common Stock issued through
dividend reinvestment, 4,978 shares 5 120 --- --- --- 125
Cash dividends, $.63 per share --- --- (2,705) --- --- (2,705)
Shares acquired for treasury, 37,653 shares --- --- --- --- (961) (961)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2005 $ 4,626 $32,282 $31,843 $(1,231) $(8,249) $59,271
======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2005 2004 2003
------------------------------- ---- ---- ----
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,017 $ 8,381 $ 6,472
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,147 1,237 1,086
Net amortization and accretion of securities 123 201 243
Proceeds from sale of loans in secondary market 4,918 1,598 20,952
Loans disbursed for sale in secondary market (4,798) (1,535) (20,508)
Gain on sale of loans (120) (63) (444)
Deferred tax (benefit) expense (293) 63 (364)
Provision for loan losses 1,797 2,353 4,339
Common stock issued to ESOP 240 151 198
FHLB stock dividend (276) (218) (203)
Gain on sale of ProCentury Corp. --- (2,463) ---
Loss on sale of other real estate owned 12 --- ---
Change in accrued income receivable (176) 57 444
Change in accrued liabilities 1,254 1,255 (260)
Change in other assets (314) (844) (884)
------- ------- -------
Net cash provided by operating activities 10,531 10,173 11,071
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available-for-sale 20,714 30,715 41,953
Purchases of securities available-for-sale (19,952) (29,755) (44,271)
Proceeds from maturities of securities
held-to-maturity 1,159 1,874 2,965
Purchases of securities held-to-maturity (1,265) (1,056) (1,855)
Change in interest-bearing deposits in other banks 15 334 646
Net change in loans (18,969) (30,163) (21,754)
Proceeds from sale of other real estate owned 100 388 2,152
Proceeds from sale of ProCentury Corp. --- 4,394 ---
Proceeds from sale of premises and equipment 87 --- ---
Purchases of premises and equipment (673) (955) (1,981)
Purchases of insurance contracts (1,510) (272) ---
------- ------- -------
Net cash used in investing activities (20,294) (24,496) (22,145)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits 27,713 27,644 10,105
Cash dividends (2,705) (3,259) (2,468)
Cash paid in lieu of fractional shares in stock split (12) --- ---
Proceeds from issuance of common stock 125 850 710
Purchases of treasury stock (961) (3,109) (64)
Change in securities sold under agreements to repurchase (10,683) 15,735 (9,034)
Proceeds from FHLB borrowings 13,521 11,000 7,503
Repayment of FHLB borrowings (18,157) (20,633) (15,439)
Change in other short-term borrowings 4,259 (15,379) 14,063
------- ------- -------
Net cash provided by financing activities 13,100 12,849 5,376
------- ------- -------
CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents 3,337 (1,474) (5,698)
Cash and cash equivalents at beginning of year 16,279 17,753 23,451
------- ------- -------
Cash and cash equivalents at end of year $19,616 $16,279 $17,753
======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $17,188 $16,246 $18,562
Cash paid for income taxes 3,502 3,472 2,960
Non-cash transfers from loans to other real estate owned 170 524 3,796
Non-cash transfers from retained earnings to common stock
for stock split 922 --- ---
See accompanying notes to consolidated financial statements
8
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. ("Ohio Valley") 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. Ohio Valley and its subsidiaries are collectively referred to
as the "Company". 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. The
Company's 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 business operations . 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 U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Areas involving the use of management's
estimates and assumptions that are more susceptible to change in the near term
involve the allowance for loan losses, 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 other than 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.
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
9
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 grants residential, consumer and commercial loans to customers
located primarily in the southeastern Ohio and western West Virginia areas.
The following represents the composition of the Company's loan portfolio at
December 31, 2005:
% of Total Loans
----------------
Commercial and industrial loans 38.30%
Real Estate loans 38.06%
Consumer loans 23.61%
All other loans .03%
----------------
100.00%
================
Approximately 3.14% 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, 2005, the Bank's primary
correspondent balance was $9,444 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, which is computed using the
straight-line or declining balance methods over the estimated useful life of the
owned asset and, for leasehold improvement, over the remaining term of the
leased facility. The useful lives range from 3 to 8 years for equipment,
furniture and fixtures and 7 to 39 years for buildings and improvements.
Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of
foreclosure is included in other assets. Such real estate is carried at the
lower of investment in the loan or estimated fair value of the property less
estimated selling costs. Any reduction to fair value at the time of acquisition
is accounted for as a loan charge-off. Any subsequent reduction in fair value is
recorded as a loss on other assets. Costs incurred to carry other real estate
are charged to expense. Other real estate owned totaled $2,064 at December 31,
2005 and $2,018 at December 31, 2004.
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.
Stock Split: On April 13, 2005, the Ohio Valley's Board of Directors declared a
five-for-four stock split, effected in the form of a stock dividend, on Ohio
Valley's common shares. Each shareholder of record on April 25, 2005, received
an additional common share for every four common shares then held. The common
shares were issued on May 10, 2005. The stock split was recorded by transferring
from retained earnings an amount equal to the stated value of the shares issued.
The Company retained the current par value of $1.00 per share for all common
shares. Earnings and cash dividends per share amounts have been retroactively
adjusted to reflect the effect of the stock split.
Per Share Amounts: Earnings per share is based on net income divided by the
following weighted average number of common shares outstanding during the
periods: 4,278,562 for 2005; 4,338,598 for 2004 and 4,350,288 for 2003. Ohio
Valley had no dilutive securities outstanding for any period presented. The
weighted average number of shares outstanding have been retroactively adjusted
to reflect the effect of the stock split.
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.
10
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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: During 2005, the Company adopted SOP 03-3, which
requires that a valuation allowance for loans acquired in a transfer, including
in a business combination, reflect only losses incurred after acquisition rather
than at the closing of the acquisition. SOP 03-3 applies to any loan acquired in
a transfer that shows evidence of credit quality deterioration since it was
made. This new standard had no effect on the Company's financial statements and
results of operations during 2005.
Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. These financial instruments are
recorded when they are funded. See Note K for more specific disclosure related
to loan commitments.
Dividend Restrictions: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Bank to Ohio Valley or by Ohio
Valley to its shareholders. These restrictions pose no practical limit on the
ability of the Bank or Ohio Valley 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 Fifth Third Bank and the
Federal Reserve Bank of $10,804 and $9,365 was required to meet regulatory
reserve and clearing requirements at year end 2005 and 2004. These balances do
not earn interest.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in Note 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 management monitors 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 2004 and 2003 have
been reclassified to conform with the presentation for 2005. These
reclassifications had no effect on the net results of operations.
11
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, 2005
-----------------
U.S. Government agency securities $18,487 --- $ (320) $18,167
Mortgage-backed securities 49,706 $ 10 (1,555) 48,161
------- ------ -------- -------
Total securities $68,193 $ 10 $(1,875) $66,328
======= ====== ======= =======
December 31, 2004
-----------------
U.S. Government agency securities $19,992 $ 153 $ (58) $20,087
Mortgage-backed securities 49,073 96 (522) 48,647
------- ------ ----- -------
Total securities $69,065 $ 249 $(580) $68,734
======= ====== ===== =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
---- ----- ------ -----
December 31, 2005
-----------------
Obligations of states and
political subdivisions $12,019 $ 341 $ (53) $12,307
Mortgage-backed securities 69 --- (3) 66
------- ------ ----- -------
Total securities $12,088 $ 341 $ (56) $12,373
======= ====== ===== =======
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
======= ====== ===== =======
At year-end 2005 and 2004, 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 $69,614 at December 31,
2005 and $71,823 at December 31, 2004 were pledged to secure public deposits,
repurchase agreements and for other purposes as required or permitted by law.
12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES (continued)
The amortized cost and estimated fair value of debt securities at December
31, 2005, 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 $ 2,988 $ 2,988 $ 175 $ 174
Due in one to five years 15,499 15,179 4,836 4,913
Due in five to ten years --- --- 3,272 3,426
Due after ten years --- --- 3,736 3,794
Mortgage-backed securities 49,706 48,161 69 66
------- ------- ------- -------
Total debt securities $68,193 $66,328 $12,088 $12,373
======= ======= ======= =======
There were no sales of debt or equity securities during 2005, 2004 and
2003.
Securities with unrealized losses not recognized in income are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2005 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Description of Securities
-------------------------
U.S. Government agency securities ........ $13,271 $ (228) $ 1,908 $ (92) $15,179 $ (320)
Mortgage-backed securities ............... 16,944 (352) 30,878 (1,206) 47,822 (1,558)
Obligations of states and
political subdivisions ................. 976 (14) 1,153 (39) 2,129 (53)
------- ------ ------- ------- ------- -------
$31,191 $ (594) $33,939 $(1,337) $65,130 $(1,931)
======= ====== ======= ======= ======= =======
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)
======= ====== ======= ======= ======= =======
Unrealized losses on the Company's debt securities have not been recognized
into income because the issuers' securities are of high credit quality,
management has the intent and ability to hold 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 loss at
December 31, 2005 represents an other-than-temporary impairment.
NOTE C - LOANS
Loans are comprised of the following at December 31:
2005 2004
---- ----
Commercial and industrial loans $236,536 $226,058
Real estate loans 235,008 227,234
Consumer loans 145,815 146,965
All other loans 173 317
-------- --------
Total Loans $617,532 $600,574
======== ========
13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses for
the years ended December 31:
2005 2004 2003
---- ---- ----
Balance, beginning of year $7,177 $7,593 $7,069
Loans charged-off:
Real estate 349 823 1,110
Commercial 1,295 1,661 2,267
Consumer 2,263 2,267 2,661
------ ------ ------
Total loans charged-off 3,907 4,751 6,038
Recoveries of loans:
Real estate 336 583 279
Commercial 912 556 1,057
Consumer 818 843 887
------ ------ ------
Total recoveries of loans 2,066 1,982 2,223
Net loan charge-offs (1,841) (2,769) (3,815)
Provision charged to operations 1,797 2,353 4,339
------ ------ ------
Balance, end of year $7,133 $7,177 $7,593
====== ====== ======
Information regarding impaired loans is as follows:
2005 2004
---- ----
Balance of impaired loans $7,983 $5,573
Less portion for which no specific
allowance is allocated 2,828 619
------ ------
Portion of impaired loan balance for which
an allowance for credit losses is allocated $5,155 $4,954
====== ======
Portion of allowance for loan losses allocated
to the impaired loan balance $2,603 $1,986
====== ======
Average investment in impaired loans for the year $8,315 $5,711
====== ======
Past due - 90 days or more and still accruing $1,317 $1,402
====== ======
Nonaccrual $1,240 $1,618
====== ======
Interest on impaired loans was $495, $284 and $76 for years ending 2005, 2004
and 2003, respectively. Accrual basis income was not materially different from
cash basis income for the periods presented.
14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31:
2005 2004
---- ----
Land $ 1,341 $ 1,428
Buildings 8,045 7,897
Leasehold improvements 2,493 2,453
Furniture and equipment 10,427 9,945
------- -------
22,306 21,723
Less accumulated depreciation 14,007 12,863
------- -------
Total Premises and Equipment $ 8,299 $ 8,860
======= =======
The following is a summary of the future minimum lease payments for facilities
leased by the Company. Lease payments were $385 in 2005 and $334 in 2004.
2006 $ 389
2007 351
2008 285
2009 176
2010 57
Thereafter 41
------
$1,299
======
NOTE F - DEPOSITS
Following is a summary of interest-bearing deposits at December 31:
2005 2004
---- ----
NOW accounts $ 95,498 $110,901
Savings and Money Market 57,473 46,031
Time:
IRA accounts 36,779 37,272
Certificates of Deposit:
In denominations under $100,000 165,276 170,328
In denominations of $100,000 or more 125,279 100,685
-------- --------
Total time deposits 327,334 308,285
-------- --------
Total interest-bearing deposits $480,305 $465,217
======== ========
Following is a summary of total time deposits by remaining maturity at
December 31:
2005
------
Within one year $219,201
From one to two years 66,831
From two to three years 26,618
From three to four years 9,219
From four to five years 3,412
Thereafter 2,053
--------
Total $327,334
========
Brokered deposits, included in time deposits, were $38,083 and $32,965 at
December 31, 2005 and 2004, respectively.
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are financing arrangements that
have overnight maturity terms. At maturity, the securities underlying the
agreements are returned to the Company. Information concerning securities sold
under agreements to repurchase is summarized as follows at December 31:
2005 2004
------- -------
Balance outstanding at period-end $29,070 $39,753
------- -------
Weighted average interest rate at period-end 3.32% 1.77%
------- -------
Average amount outstanding during the year $24,694 $24,743
------- -------
Approximate weighted average interest rate
during the year 2.60% 1.12%
------- -------
Maximum amount outstanding as of any month-end $29,070 $39,753
------- -------
Securities underlying these agreements at
year-end were as follows:
Carrying value of securities $44,763 $48,283
------- -------
Fair Value $43,344 $47,928
------- -------
The Company sold securities under agreements to repurchase with overnight
maturity terms totaling $12,868 at December 31, 2005 and $20,046 at December 31,
2004 with two large commercial accounts.
NOTE H - OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2005 and 2004 are comprised of
advances from the Federal Home Loan Bank("FHLB") of Cincinnati, promissory notes
and Federal Reserve Bank ("FRB") Notes.
FHLB borrowings Promissory Notes FRB Notes Totals
--------------- ---------------- --------- -------
2005 $66,385 $ 5,113 $ 4,675 $ 76,173
2004 $67,222 $ 5,355 $ 3,973 $ 76,550
Pursuant to collateral agreements with the FHLB, advances are secured by
$209,225 in qualifying mortgage loans and $5,697 in FHLB stock at December 31,
2005. Fixed rate FHLB advances of $62,385 mature through 2010 and have interest
rates ranging from 2.84% to 6.62%. In addition, variable rate FHLB borrowings of
$4,000 matured in 2005 and carried an interest rate of 4.33%.
At December 31, 2005, the Company had a cash management line of credit
enabling it to borrow up to $35,000 from the FHLB. All cash management advances
have an original maturity of 90 days. The line of credit must be renewed on an
annual basis. There was $31,000 available on this line of credit at December 31,
2005.
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 $154,981 at December 31, 2005.
Promissory notes, issued primarily by the Company, have fixed rates of
3.25% to 6.25% and are due at various dates through a final maturity date of
September 30, 2008. A total of $3,257 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, 2005, the
interest rate for the Company's FRB notes was 4.00%. Various investment
securities from the Bank used to collateralize FRB notes totaled $6,070 at
December 31, 2005.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $27,950 at December 31,
2005 and $29,500 at December 31, 2004.
Scheduled principal payments over the next five years:
FHLB borrowings Promissory notes FRB Notes Totals
--------------- ---------------- --------- ------
2006 $26,150 $3,722 $4,675 $ 34,547
2007 12,061 1,291 --- 13,352
2008 18,010 100 --- 18,110
2008 3,005 --- --- 3,005
2010 7,006 --- --- 7,006
Thereafter 153 --- --- 153
------- ------ ------ --------
$66,385 $5,113 $4,675 $ 76,173
======= ====== ====== ========
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
On March 26, 2002, a trust formed by Ohio Valley 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,
2005, the current variable rate was 8.1%.
On September 7, 2000, a trust formed by Ohio Valley issued $5,000 of 10.6%
fixed rate trust preferred securities as part of a pooled offering of such
securities. The Company issued subordinated debentures to the trust in exchange
for the proceeds of the offering, which debentures represent the sole asset of
the trust. The Company may redeem all or a portion of these subordinated
debentures beginning September 7, 2010 at a premium of 105.30% with the call
price declining .53% per year until reaching a call price of par at year twenty
through maturity. The subordinated debentures must be redeemed no later than
September 7, 2030.Debt issuance costs of $166 were incurred and capitalized and
will amortize as a yield adjustment through expected maturity.
NOTE J - INCOME TAXES
The provision for income taxes consists of the following components:
2005 2004 2003
---- ---- ----
Current tax expense $3,576 $3,613 $3,233
Deferred tax (benefit)expense (293) 63 (364)
------ ------ ------
Total income taxes $3,283 $3,676 $2,869
====== ====== ======
The source of gross deferred tax assets and gross deferred tax liabilities
at December 31:
2005 2004
---- ----
Items giving rise to deferred tax assets:
Allowance for loan losses $2,488 $2,503
Deferred compensation 1,135 1,021
Unrealized loss on securities available-for-sale 635 113
Deferred loan fees/costs 244 138
Other 251 151
Items giving rise to deferred tax liabilities:
Investment accretion (1) (52)
Depreciation (7) (94)
FHLB stock dividends (880) (783)
Prepaid expenses (117) (105)
Intangibles (124) (88)
Other (57) (51)
------ ------
Net deferred tax asset $3,567 $2,753
====== ======
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:
2005 2004 2003
---- ---- ----
Statutory tax $3,502 $4,099 $3,176
Effect of nontaxable interest
and dividends (161) (189) (236)
Nondeductible interest expense 19 18 23
Income from bank owned insurance (158) (166) (187)
Effect of state income tax 111 56 97
Other items (30) (142) (4)
------ ------ ------
Total income taxes $3,283 $3,676 $2,869
====== ====== ======
17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. The Bank's exposure to credit loss
in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit, and financial
guarantees written, is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for instruments recorded on the balance
sheet.
Following is a summary of such commitments at December 31:
2005 2004
----- -----
Fixed rate $ 1,487 $ 730
Variable rate 53,852 50,447
Standby letters of credit 11,255 10,490
The interest rate on fixed rate commitments ranged from 5.75% to 7.95% at
December 31, 2005.
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 is required to maintain average reserve balances with the Federal
Reserve Bank or cash in the vault. The amount of those reserve balances was
$7,107 and $7,516 for the years ended December 31, 2005 and 2004, respectively.
NOTE L - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies in which they are
affiliated were loan customers during 2005. A summary of activity on these
borrower relationships with aggregate debt greater than $60 is as follows:
Total loans at January 1, 2005 $ 6,719
New loans 7,240
Repayments (1,132)
Other changes 931
-------
Total loans at December 31, 2005 $13,758
=======
Other changes include adjustments for loans applicable to one reporting
period that are excludable from the other reporting period, such as changes in
persons included. 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 $3,107.
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - EMPLOYEE BENEFITS
The Bank has a profit-sharing plan for the benefit of its employees and
their beneficiaries. Contributions to the plan are determined by the Board of
Directors of Ohio Valley . Contributions charged to expense were $172, $164, and
$152 for 2005, 2004 and 2003.
Ohio Valley maintains an Employee Stock Ownership Plan (ESOP) covering
substantially all employees of the Company. Ohio Valley makes discretionary
contributions to the ESOP which are allocated to ESOP participants based on
relative compensation. The total number of shares held by the ESOP, all of which
have been allocated to participant accounts were 218,489 and 203,240 at December
31, 2005 and 2004. In addition, the Bank made contributions to its ESOP Trust as
follows:
Years ended December 31
2005 2004 2003
---- ---- ----
Number of shares issued 9,500 5,750 9,250
====== ====== ======
Value of stock contributed $ 240 $ 151 $ 198
Cash contributed 102 176 105
----- ----- -----
Total charged to expense $ 342 $ 327 $ 303
===== ===== =====
Life insurance contracts with a cash surrender value of $15,962 have been
purchased by the Company, the owner of the policies. The purpose of these
contracts was to replace a current group life insurance program for executive
officers, implement a deferred compensation plan for directors and executive
officers, implement a director retirement plan and implement a supplemental
retirement plan for certain officers. Under the deferred compensation plan, Ohio
Valley pays each participant the amount of fees deferred plus interest over the
participant's desired term, upon termination of service. Under the director
retirement plan, participants are eligible to receive ongoing compensation
payments upon retirement subject to length of service. The supplemental
retirement plan provides payments to select executive officers upon retirement
based upon a compensation formula determined by Ohio Valley's Board of
Directors. The present value of payments expected to be provided are accrued
during the service period of the covered individuals. Expenses related to the
plans for each of the last three years amounted to $340, $436, and $312.
NOTE N - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes for the years ended
December 31, are as follow:
2005 2004 2003
---- ---- ----
Net unrealized holding losses
on available-for-sale securities $(1,534) $(1,277) $(1,229)
Tax effect 522 434 414
------- ------- -------
Other comprehensive loss $(1,012) $ (843) $ (815)
======= ======= =======
19
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 was not
material at December 31, 2005 or 2004. 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:
2005 2004
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 19,616 $ 19,616 $ 16,279 $ 16,279
Interest-bearing deposits
in other banks 510 510 525 525
Securities 84,113 84,398 86,149 86,689
Loans 610,399 607,183 593,397 597,373
Accrued interest receivable 2,819 2,819 2,643 2,643
Financial liabilities:
Deposits (562,866) (559,933) (535,153) (533,708)
Securities sold under agreements
to repurchase (29,070) (29,070) (39,753) (39,753)
Other borrowed funds (76,173) (76,042) (76,550) (77,698)
Subordinated debentures (13,500) (14,164) (13,500) (14,179)
Accrued interest payable (4,259) (4,259) (3,310) (3,310)
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.
20
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 the Bank were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2005
Total capital (to risk weighted assets)
Consolidated $79,853 13.5% $47,352 8.0% $59,190 10.0%
Bank 73,255 12.5 46,802 8.0 58,503 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 72,720 12.3 23,676 4.0 35,514 6.0
Bank 66,422 11.4 23,401 4.0 35,102 6.0
Tier 1 capital (to average assets)
Consolidated 72,720 9.9 29,511 4.0 36,888 5.0
Bank 66,422 9.1 29,163 4.0 36,454 5.0
2004
Total capital (to risk weighted assets)
Consolidated $76,175 13.3% $45,804 8.0% $57,255 10.0%
Bank 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
Bank 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
Bank 64,712 9.0 28,887 4.0 36,109 5.0
At year-end 2005 and 2004, the most recent regulatory notifications
categorized the Company and the Bank as well capitalized under the regulatory
framework for prompt corrective action. No conditions or events have occurred
since that notification that management believes have changed the status of the
Company or the Bank as well capitalized.
Dividends paid by the subsidiaries are the primary source of funds
available to Ohio Valley for payment of dividends to shareholders and for other
working capital needs. The payment of dividends by the subsidiaries to Ohio
Valley is subject to restrictions by regulatory authorities. These restrictions
generally limit dividends to the current and prior two years retained earnings.
At December 31, 2005, approximately $11,359 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 Ohio Valley from paying dividends at its
historical level.
21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Ohio Valley. In this
information, Ohio Valley's investment in its subsidiaries is stated at cost plus
equity in undistributed earnings of the subsidiaries since acquisition. This
information should be read in conjunction with the consolidated financial
statements of the Company.
CONDENSED STATEMENTS OF CONDITION at December 31:
Assets 2005 2004
---- ----
Cash and cash equivalents $ 3,669 $ 2,010
Investment in subsidiaries 69,324 68,148
Notes receivable - subsidiaries 4,918 5,218
Other assets 301 482
------- -------
Total assets $78,212 $75,858
======= =======
Liabilities
Notes Payable $ 5,113 $ 5,355
Subordinated debentures 13,500 13,500
Other liabilities 328 424
------- -------
Total liabilities $18,941 $19,279
------- -------
Shareholders' Equity
Total shareholders' equity 59,271 56,579
------- -------
Total liabilities and shareholders' equity $78,212 $75,858
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31:
2005 2004 2003
---- ---- ----
Income:
Interest on loans --- --- $ 1
Interest on notes $ 243 $ 213 223
Other operating income 88 52 41
Dividends from Bank 5,700 1,000 3,904
Gain on sale of ProCentury Corp. --- 2,463 ---
Expenses:
Interest on notes 250 217 225
Interest on subordinated debentures 1,125 968 944
Operating expenses 268 209 242
------ ------ ------
Income before income taxes and equity in
undistributed earnings of subsidiaries 4,388 2,334 2,758
Income tax benefit (expense) 441 (439) 378
Equity in undistributed earnings of subsidiaries 2,188 6,486 3,336
------ ------ ------
Net Income $7,017 $8,381 $6,472
====== ====== ======
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31:
2005 2004 2003
---- ---- ----
Cash flows from operating activities:
Net income $7,017 $8,381 $6,472
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries(2,188) (6,463) (3,330)
Gain on sale of ProCentury Corp. --- (2,463) ---
Change in other assets 181 (58) 20
Change in other liabilities (96) 107 (15)
------ ------ ------
Net cash provided by (used in)
operating activities 4,914 (496) 3,147
------ ------ ------
Cash flows from investing activities:
Proceeds from sale of ProCentury Corp. --- 4,394 ---
Change in other short-term investments 300 1,725 (1,645)
Change in subsidiary line of credit --- --- 34
------ ------ ------
Net cash provided by (used in)
investing activities 300 6,119 (1,611)
------ ------ ------
Cash flows from financing activities:
Change in other short-term borrowings (242) (1,676) 1,687
Cash dividends paid (2,705) (3,259) (2,468)
Cash paid in lieu of fractional shares
in stock split (12) --- ---
Proceeds from issuance of common shares 365 1,001 908
Purchases of treasury shares (961) (3,109) (64)
------ ------ ------
Net cash provided by (used in)
financing activities (3,555) (7,043) 63
------ ------ ------
Cash and cash equivalents:
Change in cash and cash equivalents 1,659 (1,420) 1,599
Cash and cash equivalents at beginning of year 2,010 3,430 1,831
------ ------ ------
Cash and cash equivalents at end of year $3,669 $2,010 $3,430
====== ====== ======
23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - GAIN ON SALE OF PROCENTURY
On April 26, 2004, Ohio Valley 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 Ohio Valley's ownership in ProCentury, resulted in a
pretax gain of $2,463 and an after-tax gain of $1,625 ($.37 cents per share).
Ohio Valley'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.
Ohio Valley 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
2005 Mar. 31 Jun. 30 Sept. 30 Dec. 31
Total interest income $10,952 $11,115 $11,773 $12,231
Total interest expense 4,115 4,321 4,678 5,023
Net interest income 6,837 6,794 7,095 7,208
Provision for loan losses 317 330 501 649
Net Income 1,570 1,732 1,736 1,979
Net income per share $ .37 $ .40 $ .41 $ .46
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 $ .36 $ .75 $ .38 $ .44
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 $ .34 $ .36 $ .37 $ .42
(1) During the second quarter of 2004, Ohio Valley sold its interest of
ProCentury resulting in an after-tax gain of $1,625 ($.37 cents per share).
24
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON FINANCIAL STATEMENTS
Board of Directors and Shareholders
Ohio Valley Banc Corp.
We have audited the accompanying consolidated statements of condition of
Ohio Valley Banc Corp. as of December 31, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Ohio
Valley Banc Corp.'s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 23, 2006 expressed an unqualified opinion thereon.
/s/CROWE CHIZEK AND COMPANY LLC
Crowe Chizek and Company LLC
Columbus, Ohio
February 23, 2006
25
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM - INTERNAL CONTROLS
Board of Directors and Shareholders
Ohio Valley Banc Corp.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls Over Financial Reporting, that Ohio
Valley Banc Corp. maintained effective internal control over financial reporting
as of December 31, 2005 based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO). Ohio Valley Banc Corp's. management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Ohio Valley Banc Corp.
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO). Also in our
opinion, Ohio Valley Banc Corp. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO).
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated statements
of condition of Ohio Valley Banc Corp. as of December 31, 2005 and 2004, 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, 2005 and
our report dated February 23, 2006 expressed an unqualified opinion on those
consolidated financial statements.
/s/CROWE CHIZEK AND COMPANY LLC
Crowe Chizek and Company LLC
Columbus, Ohio
February 23, 2006
26
MANAGEMENT'S REPORT ON INTERNAL CONTROLS
OVER FINANCIAL REPORTING
Board of Directors and Shareholders
Ohio Valley Banc Corp.
The management of Ohio Valley Banc Corp (the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. The Company's internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal control
over financial reporting includes those policies and procedures that: (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
The system of internal control over financial reporting as it relates to
the consolidated financial statements is evaluated for effectiveness by
management. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed Ohio Valley Banc Corp's system of internal control over
financial reporting as of December 31, 2005, in relation to criteria for
effective internal control over financial reporting as described in "Internal
Control Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
concluded that, as of December 31, 2005, its system of internal control over
financial reporting is effective and meets the criteria of the "Internal Control
Integrated Framework".
Crowe Chizek and Company LLC, independent registered public accounting
firm, has issued an attestation report dated February 23, 2006 on management's
assessment of the Company's internal control over financial reporting. That
report is contained in Ohio Valley's Annual Report to Shareholders under the
heading "Report of Independent Registered Public Accounting Firm - Internal
Controls".
Ohio Valley Banc Corp
/s/JEFFREY E. SMITH
Jeffrey E. Smith
President, CEO
/s/SCOTT W. SHOCKEY
Scott W. Shockey
Senior Vice President, CFO
27
SUMMARY OF COMMON STOCK DATA
OHIO VALLEY BANC CORP.
Years ended December 31, 2005 and 2004
INFORMATION AS TO STOCK PRICES AND DIVIDENDS: On February 9, 1996, Ohio Valley's
common shares began to be quoted on NASDAQ securities market under the symbol
"OVBC". The following table shows bid and ask quotations for Ohio Valley's
common shares during 2005 and . 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.
2005 Low Bid High Bid Low Ask High Ask
- ---- ------- -------- ------- --------
First Quarter $26.00 $27.21 $26.58 $28.00
Second Quarter 25.55 27.19 25.76 29.44
Third Quarter 25.00 25.77 25.15 26.95
Fourth Quarter 25.00 25.10 25.10 25.45
2004 Low Bid High Bid Low Ask High Ask
- ---- ------- -------- ------- --------
First Quarter $22.40 $24.43 $22.80 $25.07
Second Quarter 24.01 28.54 24.20 29.60
Third Quarter 24.40 26.40 25.06 26.71
Fourth Quarter 25.00 26.00 25.02 26.80
Shown below is a table which reflects the dividends paid per share on Ohio
Valley's common shares. 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, 2005, the
number of holders of common shares was 2,096, an increase from 2,026
shareholders at December 31, 2004.
On November 16, 2004, Ohio Valley's Board of Directors declared a special
extra cash dividend of $.16 per share on the outstanding common shares of Ohio
Valley stock payable on December 15, 2004 to shareholders of record December 1,
2004. The special dividend was approved so that Ohio Valley's shareholders could
share in the successful return on the investment in ProCentury Corp.
Dividends per share 2005 2004
- ------------------- ---- ----
First Quarter $.15 $.14
Second Quarter .16 .15
Third Quarter .16 .15
Fourth Quarter
Normal Dividend .16 .15
Special Dividend --- .16
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The purpose of this discussion is to provide an analysis of the Company's
financial condition and results of operations which is not otherwise apparent
from the audited consolidated financial statements included in this report. The
accompanying consolidated financial information has been prepared by management
in conformity with U.S. generally accepted accounting principles ("US GAAP") and
is consistent with that reported in the consolidated statements. Reference
should be made to those statements and the selected financial data presented
elsewhere in this report for an understanding of the following tables and
related discussion. All dollars are reported in thousands, except share and per
share data.
RESULTS OF OPERATIONS:
SUMMARY
The Company generated net income of $7,017 for 2005, a decrease of 16.3%
from 2004. Net income was up 29.5% in 2004. Net income per share was $1.64 for
2005, a decrease of 15.0% from 2004. Net income per share was up 29.5% in 2004.
The decrease in net income and earnings per share for 2005 was primarily due to
the Company's sale of its minority interest in an insurance investment in
ProCentury Corp. [Nasdaq: PROS] in the second quarter of 2004. This second
quarter sale resulted in an after-tax gain of $1,625 or $.37 per share that was
included in the year-to-date earnings of 2004. Excluding the sale of ProCentury
Corp, net income for 2005 was up $261 or 3.9% from 2004 and net income per share
was up $0.08 or 5.1% from 2004.
Asset growth for 2005 was $20,599 or 2.8% resulting in total assets at
year-end of $749,719. The Company's return on assets ("ROA") was .97% for 2005
compared to 1.16% in 2004 and .93% in 2003. Return on equity ("ROE") was 12.18%
for 2005 compared to 15.02% in 2004 and 12.43% in 2003.
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, 2005. 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) increased $547 in
2005, an increase of 2.0% compared to the $27,603 earned in 2004. The increase
was primarily attributable to a higher level of interest-earning assets
(primarily from growth in loans) and a higher net interest margin (primarily
from continued short-term rate increases as well as growth in non-interest
bearing funding sources). Net interest income (FTE) decreased $228 in 2004, a
decrease of .8% compared to the $27,831 earned in 2003. The decrease in net
interest income for 2004 was attributable to a decrease in the net interest
margin (primarily from a record low rate environment for most of 2004) which
completely offset the benefits of higher earning assets.
For 2005, average earning assets grew $3,378 or .5% as compared to growth
of $29,007 or 3.1% in 2004. Driving this continued growth in earning assets was
the increase in average loan balances. Average total loans expanded $9,339 or
1.6% for 2005 and finished with a higher percentage of loans to earning assets
at 87.5% as compared to 2004. This compares to average loan growth of $30,152 or
5.4% with loans representing 86.6% of earning assets for 2004. Average
securities represent the next highest portion of earning assets, finishing at
12.2% of earning assets for 2005 and 12.6% for 2004. Management continues to
focus on generating loan growth as this portion of earning assets provides the
greatest return to the Company. Management maintains securities at a dollar
level adequate enough to provide liquidity and cover pledging requirements.
Average interest-bearing liabilities decreased .4% between 2004 and 2005
and increased 3.5% between 2003 and 2004. The decline in funding sources from
average interest-bearing liabilities during 2005 was offset by growth in
non-interest bearing funding sources such as demand deposits and shareholders'
equity. Interest-bearing liabilities in 2005 were comprised mostly of time
deposits and NOW accounts, which together represented 71.6% of total
interest-bearing liabilities, up from 71.3% in 2004 and 69.9% in 2003. Other
borrowed money represents the next highest portion of interest-bearing
liabilities, finishing at 15.7% of interest-bearing liabilities for 2005, 16.3%
for 2004 and 17.6% for 2003. This shift in composition from 2003 to 2005 in
growing time deposits and NOW accounts offset by lower borrowings serves as a
cost effective contribution to the net interest margin. The average cost of
both time deposits and NOW accounts in 2005 was 3.0% compared to the much higher
average cost of other borrowed money at 4.89%, a 189 basis point savings.
The net interest margin increased .06% to 4.11% in 2005 from 4.05% in 2004.
This is compared to a .22% decrease in the net interest margin in 2004.
Contributing to the increase in net interest margin in 2005 was a .07% increase
in interest free funds (i.e. demand deposits, shareholders' equity) from .36% in
2004 to .43% in 2005. The impact from interest free funds was partially offset
by a decrease in the net interest rate spread on interest sensitive assets and
liabilities of .01%, with higher asset yields of .34% being completely offset by
higher funding costs of .35%. Contributing to the increase in yield on earning
assets was an increase in the return on average loans of .36% from 2004. Total
interest expense increased 12.3% from 2004 due to the costs of NOW accounts
increasing .46%, the cost of time deposits increasing .30% and the cost of
borrowings increasing .18%, all impacted by a sustained rising rate environment
during 2005. In summary, the .07% increase in the contribution of interest free
funding sources partially offset by the .01% decrease in the net interest rate
spread yielded the .06% increase in the net interest margin for 2005. The 2004
decrease in net interest margin of .22% was from a .02% decrease in interest
free funds combined with a .20% decrease in the net interest spread, with lower
asset yields of .55% being offset by lower funding costs of .35%.
In 2006, the Company will continue to target loan growth in the core market
areas of southeastern Ohio as well as the growing West Virginia markets. Since
the balance sheet is structured to limit exposure to interest rate risk and
management is focused on profitable loan growth, the net interest margin should
remain relatively stable in 2006. The combination of expected earning asset
growth with a stable net interest margin will enhance net interest income growth
for 2006.
NONINTEREST INCOME AND EXPENSE
Total noninterest income decreased $2,470 or 30.9% in 2005 as compared to
2004. Contributing most to the decrease 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 to
noninterest income of $2,463. 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". For 2005, the Company
experienced growth in interchange fees on debit and credit cards, which were up
$87 or 21.2% over 2004. Furthermore, with long-term interest rates not as
sensitive to the rise in rates during 2005, the Company took additional
opportunities to sell long-term fixed rate real estate loans to the secondary
market. The Company sold 47 loans to the secondary market in 2005 as compared to
18 loans in 2004. This yielded an increase in income on sale of loans of $57 or
90.5% over 2004. Offsetting these increases in noninterest income was a decrease
in the Company's service charge on deposit accounts income, which was down $222
or 6.7% from 2004. This was primarily from overdraft fees which decreased $167
or 6.8% from 2004 as a result of overdraft volume being down in 2005. In
addition, service charge fees were down $36 or 9.5% from 2004 in large part to
the growth in number of service charge free checking accounts in 2005, which was
part of the Company's strategy to attract new customers. In 2004, total
noninterest income increased $2,010 or 33.6% over 2003 in large part to the sale
of ProCentury Corp. which contributed gross income of $2,463 to noninterest
earnings. Partially offsetting the ProCentury Corp. sale was a decline in the
gain on sale of loans of $381 or 85.8% due to a decline in mortgage refinancing
volume as mortgage rates rose during 2004.
Total noninterest expense increased $433 or 2.1% in 2005 and $1,109 or 5.6%
in 2004. The most significant expense in this category is salary and employee
benefits which increased $245 or 1.9% from 2004 to 2005. Contributing most to
this increase were annual merit increases and rising benefit costs. During 2005,
the Company's full-time equivalent employee base decreased from 270 employees at
year-end 2004 to 265 employees at year-end 2005, partially offsetting the
increases in salaries and employee benefits. Salaries and employee benefits
expense also increased $1,021 or 8.8% from 2003 to 2004 due to annual merit
increases, rising benefit costs and increases to incentive compensation plans in
relation to the successful growth in earnings experienced in 2004. However,
during 2004, the Company experienced a higher full-time equivalent employee
base, increasing from 262 employees at year-end 2003 to 270 employees at
year-end 2004, which contributed to the overall increase in salaries and
employee benefits. Occupancy and furniture and equipment expenses were
relatively stable during 2005, increasing just $22 or .9% as there were no new
material facility upgrades. In 2004, occupancy and furniture and equipment
expenses were up $154 or 6.6% 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. Corporation franchise tax
increased $57 or 9.3% in 2005 and $25 or 4.2% in 2004 due to capital growth at
the Bank level for both periods. During 2005, data processing expenses increased
$129 or 25.6% primarily from the volume increase in the Company's debit/credit
card and ATM transactions. Data processing
expenses decreased $50 or 9.0% in 2004 largely due to the negotiation of lower
data processing fees on debit and credit cards. Other noninterest expenses were
down by $20 or .4% in 2005. Included in this decrease were lower legal expenses
incurred in 2005, decreasing $113 or 52.8% from 2004. This was primarily due to
the recovery of $89 in legal costs associated with a large commercial loan that
had been paid prior to 2005. The Company was also able to lower its check
clearing expenses by $108 or 87.6% in 2005 by initiating a strategy of using a
correspondent deposit account that applied compensating balance credits to help
offset most of the monthly check clearing charges. Partially offsetting these
decreases in noninterest expense was an increase to accounting fees of $175
related to the costs of complying with the internal control and other
requirements of the Sarbanes-Oxley Act of 2002. During 2004, the Company's other
noninterest expense decreased $41 or .9%. The Company's efficiency ratio for
2005 was up 4.75% finishing at 63.5% as compared to 58.7% in 2004, largely due
to the gain on sale of ProCentury Corp. that is included in 2004's noninterest
earnings. Excluding ProCentury Corp., the Company's efficiency ratio was up just
..4% with the Company's noninterest expense slightly outpacing the growth in
revenue sources (net interest income and noninterest income). The efficiency
ratio for the fiscal year ended 2004 finished at 58.7% as compared to 58.5% in
2003.
FINANCIAL CONDITION:
SECURITIES
Management's goal in structuring the Company's investment 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 $2,036 or 2.4% as compared to
2004 with the ratio of securities to total assets also decreasing to 11.2% at
December 31, 2005 compared to 11.8% at December 31, 2004. This trend of lower
security investments was driven by a decrease in U.S.
government agency securities of $1,920 or 9.6% as compared to year-end 2004. The
Company's demand for U.S. government agency securities has primarily been to
satisfy pledging requirements for repurchase agreements and public fund
deposits. In 2005, the Company's repurchase agreements decreased 26.9%, reducing
the need to secure these balances and producing the runoff in U.S. government
agency securities. Mortgage-backed securities decreased $501 or 1.0% as compared
to year-end 2004. Mortgage-backed securities continue to make up the largest
portion of the Company's investment portfolio, totaling $48,230, or 57.3% of
total investments at year-end 2005 as compared to 56.6% at year-end 2004.
Mortgage-backed securities provide increased cash flows due to the more rapid
repayment of principal as compared to other types of investment securities which
deliver proceeds upon maturity or call date. While short-term rates were on the
rise during 2005, long-term reinvestment rates on debt securities were not as
responsive, producing lower returns in 2005 as compared to 2004. The weighted
average FTE yield on debt securities at year-end 2005 was 4.28% as compared to
4.53% at year-end 2004. Table III provides a summary of the portfolio by
category and remaining contractual maturity. Equity securities with no stated
maturity date are not included in Table III. While the Company's focus is to
generate interest revenue primarily through loan growth, management will
continue to invest excess funds in securities when opportunities arise.
LOANS
In 2005, total loans increased $16,958 or 2.8% to reach $617,532 in large
part to a strong period of seasonally high loan demand from July through
December 2005. During this second half period of 2005, total loan balances grew
$23,228 or 3.9% as compared to loan balances decreasing $6,270 or 1.0% during
the first six months of 2005. The largest contributor was commercial loans which
experienced growth of $10,478 or 4.6% from 2004. The general demand for
commercial loans initially decreased by $5,111 or 2.3% during the first half of
2005, with several loan payoffs from commercial business customers during this
period due to a challenged economy, especially in Ohio. Seasonal loan demand and
an increased volume of business opportunities caused commercial loan balances to
increase in the second half of 2005, resulting in a $15,589 or 7.1% growth in
loan balances during this period. During 2005,
the commercial loan area originated over $93,000 in loans. Approximately 58.4%
of these loans were originated in Gallia, Jackson, Pike and Franklin counties in
Ohio and 22.6% were originated from the growing West Virginia markets. The
composition of market originations has shifted more into West Virginia in 2005
when considering that in 2004, Ohio loan originations were 73.5% and West
Virginia loan originations were 9.5% of the total commercial loan originations.
Commercial loan volume for 2006 will continue to be dependent upon economic
conditions as well as general demand for loans in the Company's market area.
In 2005, real estate loans increased $7,774 or 3.4% to reach $235,008.
Throughout the first half of 2005, consumer demand for real estate loans had
been slowed by the heavy volume of refinancing at record low interest rates for
2003 and part of 2004 causing real estate balances to decrease $526 or .2%
during this six-month period. However, real estate loan demand steadily
increased throughout the second half of 2005 due to the continuation of lower
mortgage rates as well as the seasonal volume typical for this time period.
Furthermore, based on the Company's interest rate risk profile, management felt
comfortable keeping a portion of its fixed rate mortgages originated during 2005
for the loan portfolio. As a result, fixed rate loan balances grew $7,468 from
year-end 2004, driving the total growth in real estate loans for 2005. The
Company continues to sell some fixed rate mortgages to the secondary market and
has sold $4,798 in loans during 2005. The remaining real estate loan portfolio
balances increased primarily from the Company's variable rate real estate loan
products (1 year ARM).
The Company's consumer loans decreased $1,150 or .8% finishing at $145,815
at year-end 2005. The drop in consumer loans came primarily from originations in
automobile lending (both direct and indirect) which were below 2004's results by
$8,194 or 10.5%. While the automobile lending segment continues to represent the
largest portion of the Company's consumer loan portfolio, management's emphasis
on profitable loan growth contributed to a decline in loan volume within this
area. Furthermore, the rising rate environment of 2005 and continued competition
with alternative methods of financing, such as captive finance companies which
continue to offer low interest rate loans, challenged automobile loan growth
during the fiscal year of 2005. Partially offsetting the automobile segment
decline were increases in the Company's mobile home loans of $2,651 or 32.8%,
coming primarily from the West Virginia markets of Cabell and Kanawha counties.
Also, in the third quarter of 2005, the Company initiated an instant loan check
solicitation to its customers which generated approximately 483 originations and
grew consumer loan balances by $2,321 from year-end 2004. Furthermore, consumer
and home equity capital line balances have collectively grown $655 or 3.4% from
year-end 2004.
For 2006, the Company will continue to engage in sound underwriting
practices within its loan portfolio without sacrificing asset quality and
avoiding exposure to unnecessary risk that could weaken the portfolio.
Tables IV, V, and VI 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, local economic conditions, loan portfolio
composition and loan loss experience. 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
2005 was .31%, down from .47% for the year ending 2004, due mostly to the $949
or 70.6% decrease in net charge-offs within the commercial ($722) and real
estate ($227) 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 $2,557 at December 31, 2005 compared to
$3,020 at the end of 2004. As a result, the Company's nonperforming loans as a
percentage of total loans improved to .41% at year-end 2005 as compared to .50%
at year-end 2004. Nonperforming assets to total assets also decreased to .62% at
December 31, 2005 as compared to .69% at year-end 2004. Nonperforming assets
still included a single OREO property representing .25% of total assets at
December 31, 2005.
For 2005, provision expense was down $556 or 23.6% compared to the
provision expense for 2004. 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, 2005, the allowance for loan losses totaled $7,133, or 1.16% of
total loans, down $44 from December 31, 2004 when the allowance was 1.20% of
total loans. The allowance as a percent of total loans in 2005 decreased due to
the perceived lower portfolio risk resulting from the decline in nonperforming
loans and improved asset quality which contributed to less general allocations
to the portfolio. 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. Table VII
shows the composition of total deposits as of December 31, 2005. Total deposits
grew $27,713 or 5.2% to reach $562,866 by year-end 2005, primarily due to
increases in time deposits and noninterest bearing demand deposits. The
Company's time deposits increased $19,049 or 6.2% over 2004 largely from an
increase in retail CD balances of $25,226 partially offset by a decrease in the
Company's brokered CD and network CD issuances of $5,684 from year-end 2004. As
interest rates continued to rise in 2005, wholesale funding rates from brokered
and network CD deposits were increasing at a faster pace than retail rates on CD
deposits. The weighted average cost for these wholesale CD issuances in 2005 was
3.67%, up 42 basis points from 2004 while the weighted average cost for retail
CD issuances was 3.26%, up 26 basis points as compared to 2004. The net increase
in CD balances as a result of the shift of emphasis back to retail funding was
used to fund loan originations in 2005. This shift back to more traditional
funding also contributed to an increase in the Company's money market deposit
balances, which were up $13,324 to finish at $22,347 at year-end 2005 as
compared to $9,023 at year-end 2004. This increase was from the Company's new
Market Watch money market account product, which generated $16,493 in new
deposit balances from year-end 2004. Introduced in August 2005, the Market Watch
product is a limited transaction investment account with tiered rates that will
compete with current market rate offerings as well as other banking benefits.
The success of the Company's new Market Watch product was responsible for a
deposit balance shift from its interest-bearing demand deposits, causing a
decrease in NOW accounts of $15,403 or 13.9%. This was primarily from decreases
in the Company's Gold Club and Shareholder Gold NOW products that totaled
$13,362 or 21.0%, collectively. Also expanding total deposits for 2005 were the
Company's interest-free funding source, noninterest bearing demand deposits,
which increased $12,625 or 18.1% during 2005. This growth came mostly from
business and senior checking account balances which were collectively up $8,376
or 17.5% as compared to year-end 2004. The Company also continued to promote
free checking products to its customers during 2005, which increased from 2004
by $2,079 or 83.4%.
FUNDS BORROWED
During 2005, the Company's total borrowings, consisting of securities sold
under agreements to repurchase ("repurchase agreements") and other borrowed
funds, decreased to $105,243 at December 31, 2005 compared to $116,303 at
December 31, 2004. The Company's other borrowed funds remained relatively
stable, decreasing $377 or .5% from year-end 2004. 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. FHLB borrowings were able to remain level
in 2005 due to the Company's asset growth being funded primarily by its growth
in retail deposits. Management will continue to evaluate borrowings from the
FHLB as an alternative funding source in 2006. Promissory notes are primarily
associated with funding loans at Loan Central and were issued with various terms
through a final maturity date of 2008. A further decrease in total borrowings
was experienced with the Company's repurchase agreements being down by $10,683
or 26.9% largely due to seasonal fluctuations with a large commercial account.
OFF-BALANCE SHEET ARRANGEMENTS
The disclosures required for off-balance sheet arrangements are discussed
in Note I and Note K of the Notes to the Company's Consolidated Financial
Statements for the fiscal year ended December 31, 2005.
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 $59,271 at December 31, 2005, compared to $56,579 at December 31, 2004,
which represents growth of 4.8%. All of the capital ratios exceeded the
regulatory minimum guidelines as identified in Note P "Regulatory Matters" of
the Notes to the Company's Consolidated Financial Statements for the fiscal year
ended December 31, 2005.
Cash dividends paid of $2,705 for 2005 represents a 17.0% decrease in the
cash dividends paid during 2004. The key factor for the decrease in cash
dividends paid is due to the special "ProCentury" dividend paid in the fourth
quarter of 2004 totaling $.16 per share which increased the number of dividend
distributions to five as compared to four distributions in 2004. 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 $.37 cents per share. Excluding this special dividend of 2004, cash
dividends paid in 2005 represent an increase of 6.7% over the cash dividends
paid in 2004, due in part to an increase in the dividend rate paid per share in
2005.
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 2005, shareholders invested more than $1,351 through the
dividend reinvestment and stock purchase plan. These proceeds resulted in the
issuance of 4,978 new shares and the acquisition of 43,867 existing shares
through open market purchases for a total of 48,845 shares. At December 31,
2005, approximately 79% of the shareholders were enrolled in the dividend
reinvestment plan. Shareholders' reinvestment of dividends and supplemental
purchases in 2005 represented 49.9% of year-to-date dividends paid. In addition,
as part of the Company's stock repurchase program in 2005, management purchased
37,653 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, 2005,
the Company could repurchase an additional 149,110 shares under the existing
share repurchase program which will expire on February 16, 2006.
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 300 basis points.
The estimated change in net interest income reflects minimal interest rate
risk exposure and is well within the policy guidelines established by the Board.
At December 31, 2005, the Company's analysis of net interest income reflects a
modest liability sensitive position in a rising rate environment. Based on
current assumptions, an instantaneous increase in interest rates would
negatively impact net interest income primarily due to variable rate loans
reaching their annual interest rate cap or potentially their lifetime interest
rate cap. Furthermore, in a rising rate environment the prepayment amounts on
loans and mortgage-backed securities slows down, producing less cash flow to
reinvest at higher interest rates. In an instantaneous decrease in interest
rates, the analysis also produces a decline in net interest income. In a
decreasing rate environment, prepayment amounts on earning assets speed up
producing more cash flow to reinvest at lower interest rates. Since
interest-bearing liabilities do not demonstrate the optionality characteristics
of earning assets, the change in interest expense is linear as interest rates
move. As compared to December 31, 2004, the Company's interest rate risk profile
remained relatively stable.
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
$72,025 in securities as available for sale at December 31, 2005. 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,
2005, the Bank could borrow an additional $61,000 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 of the
Company and members of senior management with lending authority. The function of
the Committee is to review and analyze large borrowers for credit risk,
scrutinize the Watchlist and evaluate the adequacy of the allowance for loan
losses and other credit related issues. The Committee has established a grading
system to evaluate the credit risk of each commercial borrower on a scale of 1
(least risk) to 10 (greatest risk). After the Committee evaluates each
relationship listed in the report, a specific loss allocation may be assessed.
The specific allocation is currently made up of amounts allocated to the
commercial loan portfolio.
Included in the specific allocation are impaired loans, which consist of
loans with balances of $200 or more on nonaccrual status or non-performing in
nature. These loans are also individually analyzed and a specific allocation may
be assessed based on expected credit loss. Collateral dependent loans will be
evaluated to determine a fair value of the collateral securing the loan. 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).
The Large Loan Review Committee evaluates credit analysis reports that provide
management with a "snapshot" of information on borrowers with larger-balance
loans (aggregate balances of $1,000 or greater), including loan grades,
collateral values, etc. A list is prepared and updated quarterly that allows
management to monitor this group of borrowers. Therefore only small balance
commercial loans and homogeneous loans (consumer and real estate loans) have not
been specifically reviewed to determine minor delinquencies, current collateral
values and present credit risk. The Company utilizes actual historic loss
experience as a factor to calculate the probable losses for this component of
the allowance for loan losses. This risk factor reflects an actual 1 year or 3
year performance evaluation of credit losses per loan portfolio, whichever is
greater. The risk factor is achieved by taking the average net charge off per
loan portfolio for the last 12 or 36 consecutive months,
whichever is greater, and dividing it by the average loan balance for each loan
portfolio over the same time period. The Company believes that by using the
greater of the 12 or 36 month average loss risk factor, the estimated allowance
will more accurately reflect current probable losses.
The final component used to evaluate the adequacy of the allowance includes
five additional areas that management believes can have an impact on collecting
all principal due. These areas are: 1) delinquency trends, 2) current local
economic conditions, 3) non-performing loan trends, 4) recovery vs. charge off,
and 5) personnel changes. Each of these areas is given a percentage factor, from
a low of 10% to a high of 30%, determined by the importance of the impact it may
have on the allowance. After evaluating each area, an overall factor of 13% was
determined for this reporting period. To calculate the impact of other economic
conditions on the allowance, the total general allowance is multiplied by this
factor. These dollars are then added to the other two components to provide for
economic conditions in the Company's assessment area. The Company's assessment
area takes in a total of ten counties in Ohio and West Virginia. Each assessment
area has its individual economic conditions; however, the Company has chosen to
average the risk factors for compiling the economic risk factor.
The adequacy of the allowance may be determined by certain specific and
nonspecific allocations; however, the total allocation is available for any
credit losses that may impact the loan portfolios.
CONCENTRATIONS OF CREDIT
The Company maintains a diversified credit portfolio, with commercial 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
------------------------------------------------------------------------------------
2005 2004 2003
(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 $ 636 $ 15 2.33% $ 879 $ 7 .79% $ 1,360 $ 8 .61%
with banks
Federal funds sold 1,256 39 3.14 4,708 55 1.17 5,842 63 1.07
Securities:
Taxable 71,602 2,921 4.08 73,046 3,055 4.18 71,361 2,942 4.12
Tax exempt 11,851 691 5.83 12,673 809 6.38 13,888 996 7.17
Loans 599,345 42,621 7.11 590,006 39,823 6.75 559,854 41,467 7.41
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
earning assets 684,690 46,287 6.76% 681,312 43,749 6.42% 652,305 45,476 6.97%
Noninterest-earning assets:
Cash and due from banks 15,420 15,809 15,797
Other nonearning assets 33,687 32,779 32,515
Allowance for loan losses (7,308) (7,619) (7,420)
-------- -------- --------
Total noninterest-
earning assets 41,799 40,969 40,892
-------- -------- --------
Total assets $726,489 $722,281 $693,197
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $110,626 2,252 2.04% $112,546 1,783 1.58% $110,648 1,858 1.68%
Savings and Money Market 50,363 503 1.00 48,574 318 .65 48,050 386 .80
Time deposits 311,268 10,218 3.28 309,744 9,225 2.98 289,399 10,078 3.48
Repurchase agreements 24,694 641 2.60 24,743 278 1.12 23,396 204 .87
Other borrowed money 92,520 4,523 4.89 96,361 4,542 4.71 100,590 5,119 5.09
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
bearing liabilities 589,471 18,137 3.08% 591,968 16,146 2.73% 572,083 17,645 3.08%
Noninterest-bearing liabilities:
Demand deposit accounts 70,473 66,298 61,579
Other liabilities 8,925 8,227 7,461
-------- -------- --------
Total noninterest-
bearing liabilities 79,398 74,525 69,040
Shareholders' equity 57,620 55,788 52,074
-------- -------- --------
Total liabilities and
shareholders' equity $726,489 $722,281 $693,197
======== ======== ========
Net interest earnings $28,150 $27,603 $27,831
======= ======= =======
Net interest earnings as a percent
of interest-earning assets 4.11% 4.05% 4.27%
----- ----- -----
Net interest rate spread 3.68% 3.69% 3.89%
----- ----- -----
Average interest-bearing liabilities
to average earning assets 86.09% 86.89% 87.70%
===== ===== =====
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
2005 2004
----------------------------- ----------------------------
(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 $ (2) $ 10 $ 8 $ (3) $ 2 $ (1)
Federal funds sold (61) 45 (16) (13) 5 (8)
Securities:
Taxable (59) (75) (134) 70 43 113
Tax exempt (51) (67) (118) (83) (104) (187)
Loans 638 2,160 2,798 2,159 (3,803) (1,644)
------- ------- ------- ------- ------- -------
Total interest income 465 2,073 2,538 2,130 (3,857) (1,727)
INTEREST EXPENSE
- ----------------
NOW accounts (31) 500 469 32 (107) (75)
Savings and Money Market 12 173 185 4 (72) (68)
Time deposits 46 947 993 675 (1,528) (853)
Repurchase agreements (1) 364 363 12 62 74
Other borrowed money (184) 165 (19) (209) (368) (577)
------- ------- ------- ------- ------- -------
Total interest expense (158) 2,149 1,991 514 (2,013) (1,499)
------- ------- ------- ------- ------- -------
Net interest earnings $ 623 $ (76) $ 547 $ 1,616 $(1,844) $ (228)
======= ======= ======= ======= ======= =======
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, 2005 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 $ 2,988 4.00% $15,179 4.04% --- --- --- ---
Obligations of states and
political subdivisions 175 4.55% 4,836 6.38% $ 3,272 7.39% $3,736 3.51%
Mortgage-backed securities --- --- 48,229 3.88% 1 8.00% --- ---
------- ---- ------- ---- ------- ---- ------ ----
Total debt securiities $ 3,163 4.03% $68,244 4.09% $ 3,273 7.39% $3,736 3.51%
======= ==== ======= ==== ======= ==== ====== ====
Tax equivalent adjustments have been made in calculating yields on obligations
of states and political subdivisions using a 34% rate. Weighted average yields
are calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security. Mortgage-backed securities, which have
prepayment provisions, are assigned to a maturity based on estimated average
lives. Securities are shown at their carrying values which include the market
value adustments for available-for-sale securities.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Table IV Years Ended December 31
(dollars in thousands) 2005 2004 2003 2002 2001
- ---------------------- ---- ---- ---- ---- ----
Commercial loans $4,704 $4,657 $4,844 $3,358 $2,467
Percentage of loans to total loans 38.33% 37.69% 38.58% 36.94% 34.21%
Real estate loans 623 642 833 1,318 1,177
Percentage of loans to total loans 38.06% 37.84% 37.94% 40.07% 44.47%
Consumer loans 1,806 1,878 1,916 2,393 2,607
Percentage of loans to total loans 23.61% 24.47% 23.48% 22.99% 21.32%
------- ------- ------- ------- -------
Allowance for Loan Losses $7,133 $7,177 $7,593 $7,069 $6,251
======= ======= ======= ======= =======
100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
Ratio of net charge-offs
to average loans .31% .47% .68% .86% .56%
======= ======= ======= ======= =======
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 V
(dollars in thousands) 2005 2004 2003 2002 2001
- ---------------------- ---- ---- ---- ---- ----
Impaired loans $7,983 $5,573 $1,988 $4,780 $2,621
Past due-90 days or more and
still accruing 1,317 1,402 659 1,491 3,013
Nonaccrual 1,240 1,618 2,655 6,569 3,297
Accruing loans past due 90
days or more to total loans .21% .23% .12% .27% .59%
Nonaccrual loans as a % of
total loans .20% .27% .46% 1.17% .65%
Impaired loans as a % of total loans 1.29% .93% .35% .85% .52%
Allowance for loans losses as a
% of total loans 1.16% 1.20% 1.32% 1.26% 1.23%
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 2005, the Company recognized $495 of interest income on impaired
loans. Individual loans not included above that management feels have loss
potential total approximately $2,603. 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 VI
As of December 31, 2005 Maturing/Repricing
(dollars in thousands)
Within After One but
One Year Within Five Years After Five Years Total
-------- ----------------- ---------------- -----
Commercial loans and other $153,151 $ 46,409 $ 37,149 $236,709
Real estate loans 96,919 12,322 125,767 235,008
Consumer loans 27,050 84,834 33,931 145,815
-------- -------- -------- --------
Total loans $277,120 $143,565 $196,847 $617,532
======== ======== ======== ========
Loans maturing or repricing after one year with:
Variable interest rates $ 44,584
Fixed interest rates 295,828
--------
Total $340,412
========
DEPOSITS
Table VII as of December 31
(dollars in thousands)
2005 2004 2003
---- ---- ----
Interest-bearing deposits:
NOW accounts $ 95,498 $110,901 $113,423
Money Market 22,347 9,023 8,917
Savings accounts 35,126 37,008 37,686
IRA accounts 36,779 37,272 38,427
Certificates of Deposit 290,555 271,013 246,821
-------- -------- --------
480,305 465,217 445,274
Noninterest-bearing deposits:
Demand deposits 82,561 69,936 62,235
-------- -------- --------
Total deposits $562,866 $535,153 $507,509
======== ======== ========
The following table presents the Company's estimated net interest income
sensitivity:
INTEREST RATE SENSITIVITY
Table VIII
Change in 12/31/05 12/31/04
Interest Rates % Change in % Change in
in Basis Points Net Interest Income Net Interest Income
- --------------- ------------------- -------------------
+300 (3.35%) (1.07%)
+200 (.86%) (.42%)
+100 (.09%) (.11%)
-100 (.25%) .35%
-200 (.45%) 2.56%
CONTRACTUAL OBLIGATIONS
Table IX
The following table presents, as of December 31, 2005, 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 $235,532 --- --- --- $235,532
Consumer and brokered time deposits F 219,201 $93,449 $ 12,631 $ 2,053 327,334
Repurchase agreements G 29,070 --- --- --- 29,070
Other borrowed funds H 34,547 31,462 10,011 153 76,173
Subordinated debentures I --- --- --- 13,500 13,500
KEY RATIOS
Table X
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Return on average assets .97% 1.16% .93% .85% .83%
Return on average equity 12.18% 15.02% 12.43% 11.85% 10.80%
Dividend payout ratio 38.55% 38.89% 38.14% 40.79% 55.84%
Average equity to
average assets 7.93% 7.72% 7.51% 7.17% 7.68%
DIRECTOR & OFFICER LISTING
OVBC Directors
- --------------
Jeffrey E. Smith
Robert H. Eastman
W. Lowell Call
Thomas E. Wiseman
Lannes C. Williamson
Steven B. Chapman
Anna P Barnitz
Brent A. Saunders
Harold A. Howe
Robert E. Daniel
Roger D. Williams
OVBC Officers
- -------------
Jeffrey E. Smith
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
- --------------------------
Jeffrey E. Smith
Robert H. Eastman
W. Lowell Call
Thomas E. Wiseman
Lannes C. Williamson
Harold A. Howe
Steven B. Chapman
Anna P. Barnitz
Barney A. Molnar
Brent A. Saunders
Robert E. Daniel
Roger D. Williams
Directors Emeritus
- ------------------
Keith R. Brandeberry
James L. Dailey
Merrill L. Evans
Art E. Hartley, Sr.
Charles C. Lanham
C. Leon Saunders
Warren F. Sheets
Wendell B. Thomas
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
John A. Myers
Ohio Valley Bank Officers
- -------------------------
Jeffrey E. Smith President & Chief Executive Officer
E. Richard Mahan Executive Vice President & Secretary
Larry E. Miller, II Executive Vice President & Treasurer
Katrinka V. Hart Executive Vice President & Risk Management
Senior Vice Presidents
Sue Ann Bostic Administrative Services Group
Mario P. Liberatore West Virginia Bank Group
Sandra L. Edwards Financial Bank Group
David L. Shaffer Commercial Bank Group
Jennifer L. Osborne Retail Lending Group
Tom R. Shepherd Retail Deposit Group
Scott W. Shockey Chief Financial Officer
Vice Presidents
Patricia L. Davis Research & Technical Applications
Richard D. Scott Trust
Bryan W. Martin Facilities & Technical Services
Patrick H. Tackett Western Division Branch Administrator
Molly K. Tarbett Loss Prevention Manager
Marilyn E. Kearns Director of Human Resources
Assistant Vice Presidents
Robert T. Hennesy Indirect Lending Manager
Philip E. Miller Region Manager Franklin County
Rick A. Swain Region Manager Pike County
Judith K. Hall Training and Educational Development
Melissa P. Mason Trust Officer
Diana L. Parks Internal Auditor
Christopher S. Petro Comptroller
Linda L. Plymale Transit Officer
Kimberly R. Williams Systems Officer
Deborah A. Carhart Shareholder Relations
Gregory A. Phillips I-64 Retail Lending Manager
Pamela D. Edwards Commercial Loan Operations
Paula W. Clay Assistant Secretary
Cindy H. Johnston Assistant Secretary
Chris L. Preston Regional Branch Administration I-64
Angela G. King Regional Branch Administrator Gallia/Meigs
Assistant Cashiers
Brenda G. Henson Manager Customer Service
Kyla R. Carpenter Marketing Officer
Richard P. Speirs Maintenance Technical Supervisor
Stephanie L. Stover Retail Lending Operations Manager
Bryna S. Butler Corporate Communications
Raymond G. Polcyn Retail Lending Manager for Gallia-Meigs SuperBanks
Toby M. Mannering Collections Manager
Tyrone J. Thomas Assistant Manager Franklin County Region
Frank W. Davison AS/400 Administrator
Allen W. Elliott Assistant Manager Indirect Lending
Tamela D. LeMaster Regional Branch Manager I-64
Michael D. Hart Security Officer
William T. Johnson Internal Control Coordinator
David K. Nadler Credit and Financial Analyst
Joe J. Wyant Region Manager Jackson County
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 13 consecutive years
> Just under $750 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.
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
HEADLINES IN 2005
Tom Wiseman Appointed Lead Director
Harold Howe Joins OVBC Board
Olive Street Annex Open for Operation
OVBC Declares 25% Stock Split and
Increases Cash Dividend Rate
OVB Welcomes New Directors Bob Daniel
and Roger Williams
Marilyn Kearns promoted to VP; David
Nadler, Mike Hart, and Todd Johnson
promoted to Assistant Cashier
Rio Grande OVB Gets New Drive-Thru ATM
OVB Assistant VPs Deb Carhart and Rick
Swain Graduate Bank Leadership Institute
OVB Approves 8,000 Square Foot Jackson
Expansion Project
OVB Matches Employee Donation for
Hurricane Relief
OVB Executive VP Larry Miller Earns High
Honors from Graduate School of Banking
Lawrence County Treasurer Unveils New
Tax Payment Program at OVB
OVB Names Jackson Native Joe Wyant as
New Officer