Message from Management
Dear Fellow Shareholder,
Following is your report on the operations of Ohio Valley Banc Corp. for 2007.
This report, perhaps more than in any other year, evidences the disciplined,
dedicated, and diligent work of some 250 employees who, contrary to most of our
industry peers, increased net earnings from the previous year (by 16.7%),
increased earnings per share from the previous year (by 19.7%) and improved
asset quality from the previous year (by 74%), as measured by the reduction in
nonperforming assets. The seeds for 2007's results were sown in December of
2006, when your Board took some bold steps to effect, what could be described
as, "a full court press" on asset quality which generated the results referenced
above.
We could not talk about 2007 without mentioning what has been referred to as
"the melt down in the mortgage industry" or "the sub-prime slime". These
problems are not characteristic of nor did they originate in community banking.
We believe a buyer of a house should own it...not lease it. We believe we have
an obligation to use our best analytic processes to insure a borrower's
repayment success...not failure.
The aggressive tactics of many mortgage brokers fed by the insatiable appetites
of Wall Street created a prescription for disaster that, while neither
characteristic of nor the fault of community banking, will affect community
banking customers when they try to sell or refinance their own homes. According
to the Associated Press (1), the US Conference of Mayors has projected that the
rise in foreclosures will result in a $166 billion loss in the gross domestic
product in 2008. The sub-prime fall out encouraged us to become actively
involved in a solution through education. Our Get Smart About Credit classroom
program facilitated by Ohio Valley Bank loan officers was successfully piloted
by 123 high school students in Gallia County, Ohio, in October 2007.
While our core markets were spared the heavy weight of sub-prime problems, some
of our Gallia County and Mason County customers were subjected to what we
believe was an organized debit and credit card fraud scheme. I was no exception
as my own card was compromised. One of your Directors said, "With convenience,
comes consequences." Debit and credit cards do indeed bring convenience, but
sometimes consequences as well. Your employees spent hundreds of hours working
with our customers to resolve and restore their account balances following the
guerilla tactics of these electronic thieves. My final comment on this topic is:
I want to extend my sincerest "thanks" to our state and local law enforcement
officials who worked with us as well as the other banks in both Gallia County
and Mason County. I'm convinced their help mitigated what could have been an
even more serious problem for not just our customers, but accountholders of all
area banks.
On a separate note, November 1, 2007, marked the 135th year of banking service
to our customers at Ohio Valley Bank. During that period, the bank has enjoyed
the service of many outstanding directors and employees. During my 35 years with
OVB, I have had the good fortune to work for and with many of those and other
great community business minds. One of those was Merrill Evans. The bank and the
community lost a great supporter when we lost Merrill in September of last year.
Merrill was a bank Director for 24 years, a member of the Executive Committee
for 19 years, a member of the Corp. Board for 10 years, and named Director
Emeritus in 2003. Merrill was a builder, a trader, and an entrepreneur. While he
was all these, to me, he was a mentor, a friend, and a confidant. His legacy at
Ohio Valley Bank and our community continues even to this day.
Sincerely,
Jeffrey E. Smith
President and CEO
(1) Associated Press, January 11, 2008, "Cleveland Sues Banks Over Foreclosures"
Ohio Valley Banc Corp. is made up of three companies. The largest, Ohio Valley
Bank, celebrated its 135th anniversary this year. Ohio Valley Bank operates 16
offices in two states. Loan Central is a finance company with six offices in
Ohio. Ohio Valley Financial Services is an insurance agency in Jackson, Ohio.
Together these three companies make up the OVBC family...a group that works very
hard to give back to its communities.
Innovative Thinking in 2007
In the very beginning of the year, we began to look at business banking in a
whole new light. OVB Business Solutions was launched under the anthem of "What
will you do with all your free time?". Daily banking chores force employees out
of the office and take up crucial selling time. The OVB Business Suite of
products and services is tailored to small business and focuses on moving some
of those daily tasks to OVB where we can streamline and automate them. The
flagship of Business Solutions is Free Small Business Checking. The free
business checking account, which includes business debit cards, was a first for
many of our communities' retailers.
In the third quarter, we took an innovative approach to expansion. Expanding,
via building branches, usually means moving outside your established territory;
however, in a bold move, Ohio Valley Bank and Loan Central opened locations
within their respective market areas. These locations have already proven their
worth and are providing a better infrastructure to grow on.
Loan Central opened its sixth office, a satellite office in Ironton, Ohio. Ohio
Valley Bank opened its sixteenth office inside Holzer Medical Center in
Gallipolis, Ohio. The in-hospital branch was a first for OVB and for the market
area. It is now deemed a necessity for the hundreds of doctors, nurses, staff
and patients that enjoy the convenience.
The third quarter also brought an innovation in how we think about people. Many
bankers' hearts race when they know that they are going to receive a visit from
a bank examiner. After all, it is the examiner's job to find out what you are
doing wrong and report it. But, why is that a bad thing? Isn't that how we grow
and improve? After examining dozens of banks, wouldn't these folks be the
ultimate banking experts? With those ideas in mind, our newest director was
elected, David W. Thomas, former Chief Examiner of the Ohio Department of
Commerce, Division of Financial Institutions.
For more than a decade, Ohio Valley Bank has positioned itself as one of the
area's leaders in implementing new technology. Near the end of the third quarter
of 2007, OVB launched a new platform for opening deposit accounts online, the
fourth in the nation to offer this specific service. This convenient new service
allows the customer to open accounts at home, without ever setting foot in a
bank branch. In just three months and with no advertising, the "e-branch"
collected initial deposits of more than $85,000 for new accounts. Work is well
underway to bring online loans, credit cards, and mortgages to customers in
2008.
At year end, Ohio Valley Bank's last innovation came in the form of proactive
identity theft protection. Too many services just pick up the pieces after
identity theft has occurred. This type of scam is not only financially
devastating, but also takes an emotional toll. OVB chose to start offering
services from LifeLock, a company known for its services that work to prevent
identity theft. LifeLock memberships are now available through www.ovbc.com.
These new offerings combined with the tried-and-true permitted Ohio Valley Banc
Corp.'s companies to reinvest more than ever before in its communities in 2007.
Thank you for your contribution to that success.
SELECTED FINANCIAL DATA
Years Ended December 31
SUMMARY OF OPERATIONS: 2007 2006 2005 2004 2003
(dollars in thousands, except per share data)
Total interest income $ 54,947 $ 52,421 $ 46,071 $ 43,490 $ 45,160
Total interest expense 26,420 23,931 18,137 16,146 17,645
Net interest income 28,527 28,490 27,934 27,344 27,515
Provision for loan losses 2,252 5,662 1,797 2,353 4,339
Total other income 5,236 5,830 5,522 7,992 5,982
Total other expenses 22,583 21,199 21,359 20,926 19,817
Income before income taxes 8,928 7,459 10,300 12,057 9,341
Income taxes 2,631 2,061 3,283 3,676 2,869
Net income 6,297 5,398 7,017 8,381 6,472
PER SHARE DATA(1):
Earnings per share $ 1.52 $ 1.27 $ 1.64 $ 1.93 $ 1.49
Cash dividends declared
per share $ .71 $ .67 $ .63 $ .75 $ .57
Book value per share $15.10 $14.38 $13.90 $13.19 $12.44
Weighted average number of common
shares outstanding 4,131,621 4,230,551 4,278,562 4,338,598 4,350,288
AVERAGE BALANCE SUMMARY:
Total loans $ 628,891 $ 626,418 $ 599,345 $ 590,006 $ 559,854
Securities (2) 91,724 86,179 84,089 86,598 86,609
Deposits 595,610 585,301 542,730 537,162 509,676
Other borrowed funds (3) 74,196 81,975 92,520 96,361 100,590
Shareholders' equity 60,549 59,970 57,620 55,788 52,074
Total assets 769,554 760,932 726,489 722,281 693,197
PERIOD END BALANCES:
Total loans $ 637,103 $ 625,164 $ 617,532 $ 600,574 $ 573,704
Securities (2) 100,713 90,161 84,623 86,674 90,046
Deposits 589,026 593,786 562,866 535,153 507,509
Shareholders' equity 61,511 60,282 59,271 56,579 54,408
Total assets 783,418 764,361 749,719 729,120 707,327
KEY RATIOS:
Return on average assets .82% .71% .97% 1.16% .93%
Return on average equity 10.40% 9.00% 12.18% 15.02% 12.43%
Dividend payout ratio 46.66% 52.56% 38.55% 38.89% 38.14%
Average equity to average assets 7.87% 7.88% 7.93% 7.72% 7.51%
(1) Restated for stock splits as appropriate.
(2) Securities include interest-bearing balances with banks and FHLB stock.
(3) Other borrowed funds include subordinated debentures.
1
CONSOLIDATED STATEMENTS OF CONDITION
As of December 31
2007 2006
---- ----
(dollars in thousands, except share and per share data)
ASSETS
Cash and noninterest-bearing deposits with banks $ 15,584 $ 18,965
Federal funds sold 1,310 1,800
--------- ---------
Total cash and cash equivalents 16,894 20,765
Interest-bearing deposits in other financial
institutions 633 508
Securities available-for-sale 78,063 70,267
Securities held-to-maturity
(estimated fair value: 2007 - $15,764,
2006 - $13,586) 15,981 13,350
Federal Home Loan Bank stock 6,036 6,036
Total loans 637,103 625,164
Less: Allowance for loan losses (6,737) (9,412)
--------- ---------
Net loans 630,366 615,752
Premises and equipment, net 9,871 9,812
Accrued income receivable 3,254 3,234
Goodwill 1,267 1,267
Bank owned life insurance 16,339 16,054
Other assets 4,714 7,316
--------- ---------
Total assets $ 783,418 $ 764,361
========= =========
LIABILITIES
Noninterest-bearing deposits $ 78,589 $ 77,960
Interest-bearing deposits 510,437 515,826
--------- ---------
Total deposits 589,026 593,786
Securities sold under agreements to repurchase 40,390 22,556
Other borrowed funds 67,002 63,546
Subordinated debentures 13,500 13,500
Accrued liabilities 11,989 10,691
--------- ---------
Total liabilities 721,907 704,079
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (See Note K)
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000
shares authorized; 2007 - 4,641,747 shares
issued, 2006 - 4,626,340 shares issued) 4,642 4,626
Additional paid-in capital 32,664 32,282
Retained earnings 37,763 34,404
Accumulated other comprehensive loss (115) (981)
Treasury stock, at cost (2007 - 567,403 shares,
2006 - 432,852 shares) (13,443) (10,049)
--------- ---------
Total shareholders' equity 61,511 60,282
--------- ---------
Total liabilities and shareholders' equity $ 783,418 $ 764,361
========= =========
See accompanying notes to consolidated financial statements
2
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 2007 2006 2005
------------------------------- ---- ---- ----
(dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 50,671 $ 48,514 $ 42,621
Securities:
Taxable 3,079 2,851 2,644
Tax exempt 555 474 475
Dividends 398 339 277
Other interest 244 243 54
-------- -------- --------
54,947 52,421 46,071
Interest expense:
Deposits 21,315 18,594 12,973
Securities sold under agreements
to repurchase 1,051 895 641
Other borrowed funds 2,911 3,163 3,398
Subordinated debentures 1,143 1,279 1,125
-------- -------- --------
26,420 23,931 18,137
-------- -------- --------
Net interest income 28,527 28,490 27,934
Provision for loan losses 2,252 5,662 1,797
Net interest income after provision -------- -------- --------
for loan losses 26,275 22,828 26,137
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 2,982 2,987 3,096
Trust fees 230 221 211
Income from bank owned life insurance 757 907 589
Gain on sale of loans 102 104 120
Loss on sale of other real estate owned (777) (55) (12)
Other 1,942 1,666 1,518
-------- -------- --------
5,236 5,830 5,522
Noninterest expense:
Salaries and employee benefits 13,045 12,497 12,837
Occupancy 1,467 1,338 1,309
Furniture and equipment 1,086 1,120 1,206
Corporation franchise tax 671 669 673
Data processing 844 687 633
Other 5,470 4,888 4,701
-------- -------- --------
22,583 21,199 21,359
-------- -------- --------
Income before income taxes 8,928 7,459 10,300
Provision for income taxes 2,631 2,061 3,283
-------- -------- --------
NET INCOME $ 6,297 $ 5,398 $ 7,017
======== ======== ========
Earnings per share $ 1.52 $ 1.27 $ 1.64
======== ======== ========
See accompanying notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2007, 2006 and 2005
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, 2005 $ 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
Comprehensive income:
Net income --- --- 5,398 --- --- 5,398
Change in unrealized loss on
available-for-sale securities --- --- --- 379 --- 379
Income tax effect --- --- --- (129) --- (129)
-------
Total comprehensive income --- --- --- --- --- 5,648
Common stock issued through
dividend reinvestment, 4 shares --- --- --- --- --- ---
Cash dividends, $.67 per share --- --- (2,837) --- --- (2,837)
Shares acquired for treasury, 71,487 shares --- --- --- --- (1,800) (1,800)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2006 4,626 32,282 34,404 (981) (10,049) 60,282
Comprehensive income:
Net income --- --- 6,297 --- --- 6,297
Change in unrealized loss on
available-for-sale securities --- --- --- 1,313 --- 1,313
Income tax effect --- --- --- (447) --- (447)
-------
Total comprehensive income --- --- --- --- --- 7,163
Common stock issued to ESOP,
9,500 shares 10 238 --- --- --- 248
Common stock issued through
dividend reinvestment, 5,907 shares 6 144 --- --- --- 150
Cash dividends, $.71 per share --- --- (2,938) --- --- (2,938)
Shares acquired for treasury, 134,551 shares--- --- --- --- (3,394) (3,394)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2007 $ 4,642 $32,664 $37,763 $ (115) $(13,443) $61,511
======= ======= ======= ======= ======== =======
See accompanying notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2007 2006 2005
------------------------------- ---- ---- ----
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,297 $ 5,398 $ 7,017
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 987 1,021 1,147
Net amortization and accretion of securities 66 94 123
Proceeds from sale of loans in secondary market 4,300 4,038 4,918
Loans disbursed for sale in secondary market (4,198) (3,933) (4,798)
Gain on sale of loans (102) (104) (120)
Deferred tax (benefit) expense 908 (903) (293)
Provision for loan losses 2,252 5,662 1,797
Common stock issued to ESOP 248 --- 240
Federal Home Loan Bank stock dividend --- (338) (276)
Loss on sale of other real estate owned 777 55 12
Change in accrued income receivable (20) (415) (176)
Change in accrued liabilities 1,298 1,852 1,254
Change in other assets (1,528) (290) (314)
------- ------- -------
Net cash provided by operating activities 11,285 12,137 10,531
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available-for-sale 8,969 12,261 20,714
Purchases of securities available-for-sale (15,509) (15,907) (19,952)
Proceeds from maturities of securities
held-to-maturity 1,009 354 1,159
Purchases of securities held-to-maturity (3,649) (1,625) (1,265)
Change in interest-bearing deposits in other banks (125) 2 15
Net change in loans (19,498) (11,589) (18,969)
Proceeds from sale of other real estate owned 4,274 734 100
Proceeds from sale of premises and equipment --- --- 87
Purchases of premises and equipment (1,046) (2,534) (673)
Proceeds from bank owned life insurance 71 174 ---
Purchases of bank owned life insurance --- --- (1,510)
------- ------- -------
Net cash used in investing activities (25,504) (18,130) (20,294)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits (4,760) 30,920 27,713
Cash dividends (2,938) (2,837) (2,705)
Cash paid in lieu of fractional shares in stock split --- --- (12)
Proceeds from issuance of common stock 150 --- 125
Purchases of treasury stock (3,394) (1,800) (961)
Change in securities sold under agreements to repurchase 17,834 (6,514) (10,683)
Proceeds from Federal Home Loan Bank borrowings 20,000 5,000 13,521
Repayment of Federal Home Loan Bank borrowings (14,061) (22,146) (18,157)
Change in other short-term borrowings (2,483) 4,519 4,259
Proceeds from subordinated debentures 8,500 --- ---
Repayment of subordinated debentures (8,500) --- ---
------- ------- -------
Net cash provided by financing activities 10,348 7,142 13,100
------- ------- -------
CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents (3,871) 1,149 3,337
Cash and cash equivalents at beginning of year 20,765 19,616 16,279
------- ------- -------
Cash and cash equivalents at end of year $16,894 $20,765 $19,616
======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $25,854 $22,014 $17,188
Cash paid for income taxes 878 3,623 3,502
Non-cash transfers from loans to other real estate owned 2,632 573 170
Non-cash transfers from retained earnings to common stock
for stock split --- --- 922
See accompanying notes to consolidated financial statements
5
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 22 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 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
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
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2007:
% of Total Loans
----------------
Residential real estate loans 39.31%
Commercial real estate loans 30.85%
Consumer loans 20.06%
Commercial and industrial loans 8.65%
All other loans 1.13%
----------------
100.00%
================
Approximately 4.39% 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, 2007, the Bank's primary
correspondent balance was $7,964 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 $261 at December 31,
2007 and $1,903 at December 31, 2006.
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, 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: 4,131,621 for 2007; 4,230,551 for 2006; 4,278,562 for 2005. 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.
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
The Company adopted FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes ("FIN 48"), as of January 1, 2007. A tax position is recognized as
a benefit only if it is "more likely then not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
"more likely than not" test, no tax benefit is recorded. The adoption of FIN 48
had no impact on the Company's financial statements.
The Company recognizes interest and/or penalties related to income tax
matters in income tax expense.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale which are also recognized as separate
components of equity.
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.
Recent Accounting Pronouncements: Accounting for Postretirement Benefits
Pertaining to Life Insurance Arrangements: In July 2006, the Emerging Issues
Task Force ("EITF") of FASB issued a draft abstract for EITF Issue No. 06-04,
"Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements" (EITF Issue No. 06-04).
This draft abstract from EITF reached a consensus that for an endorsement
split-dollar life insurance arrangement within the scope of this Issue, an
employer should recognize a liability for future benefits in accordance with
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". The Task Force concluded that a liability for the benefit obligation
under SFAS No. 106 has not been settled through the purchase of an endorsement
type life insurance policy. In September 2006, FASB agreed to ratify the
consensus reached in EITF Issue No. 06-04. This new accounting standard will be
effective for fiscal years beginning after December 15, 2007. At December 31,
2007, the Company owned $16,339 of bank owned life insurance policies. These
life insurance policies are generally subject to endorsement split-dollar life
insurance arrangements. These arrangements were designed to provide a pre-and
postretirement benefit for senior officers and directors of the Company. The
Company's management has completed its evaluation of the impact of the adoption
of EITF Issue No. 06-4 on the Company's financial statements. Based on the most
recent analysis performed by management, the Company believes there will be a
charge of approximately $706 to retained earnings on January 1, 2008.
Fair Value Measurements: In February 2007, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 gives entities the
option to measure eligible financial assets and financial liabilities at fair
value on an instrument by instrument basis, that are otherwise not permitted to
be accounted for at fair value under other accounting standards. The fair value
option permits companies to choose to measure eligible items at fair value at
specified election dates. Subsequent changes in fair value must be reported in
earnings. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company did not elect the fair
value option for any financial assets or financial liabilities as of January 1,
2008; therefore, adoption did not have a material impact.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value in United States generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement establishes a fair
value hierarchy about the assumptions used to measure fair value and clarifies
assumptions about risk and the effect of a restriction on the sale or use of an
asset. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. Management believes that the impact of
adoption will result in enhanced audited footnote disclosures; however,
management believes that the adoption will not materially impact the
Consolidated Balance Sheets, the Consolidated Statements of Income, the
Consolidated Statements of Changes in Stockholders' Equity, or the Consolidated
Statements of Cash Flows.
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In February 2008, the FASB issued Staff Position ("FSP") 157-2, "Effective
Date of FASB Statement No. 157". This FSP delays the effective date of FAS 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. Non-financial assets and liabilities may include (but not be
limited to) (i) non-financial assets and liabilities initially valued at fair
value in a business combination, but not measured at fair value in subsequent
periods, (ii) reporting units measured at fair value in the first step of a
goodwill impairment test described in SFAS No. 142, and (iii) non-financial
assets and liabilities measured at fair value in the second step of a goodwill
impairment test described in SFAS No. 142.
Accounting for Written Loan Commitments Recorded at Fair Value: On November 5,
2007, the SEC issued Staff Accounting Bulletin No. 109, "Written Loan
Commitments Recorded at Fair Value through Earnings ("SAB 109"). Previously, SAB
105, "Application of Accounting Principles to Loan Commitments," stated that in
measuring the fair value of a derivative loan commitment, a company should not
incorporate the expected net future cash flows related to the associated
servicing of the loan. SAB 109 supercedes SAB 105 and indicates that the
expected net future cash flows related to the associated servicing of the loan
should be included in measuring fair value for all written loan commitments that
are accounted for at fair value through earnings. SAB 105 also indicated that
internally-developed intangible assets should not be recorded as part of the
fair value of a derivative loan commitment, and SAB 109 retains that view. SAB
109 is effective for derivative loan commitments issued or modified in fiscal
quarters beginning after December 15, 2007. The Company does not expect the
impact of this standard to be material.
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 $8,312 and $11,281 was required to meet regulatory
reserve and clearing requirements at year end 2007 and 2006. 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 2006 and 2005 have
been reclassified to conform with the presentation for 2007. These
reclassifications had no effect on the net results of operations.
10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES
Securities are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
---- ----- ------ -----
December 31, 2007
-----------------
U.S. Government sponsored
entity securities $39,002 $ 462 $ (17) $39,447
Mortgage-backed securities 39,235 37 (656) 38,616
------- ------ -------- -------
Total securities $78,237 $ 499 $ (673) $78,063
======= ====== ======= =======
December 31, 2006
-----------------
U.S. Government sponsored
entity securities $25,495 $ 3 $ (315) $25,183
Mortgage-backed securities 46,260 13 (1,189) 45,084
------- ------ -------- -------
Total securities $71,755 $ 16 $(1,504) $70,267
======= ====== ======= =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
---- ----- ------ -----
December 31, 2007
-----------------
Obligations of states and
political subdivisions $15,933 $ 236 $(451) $15,718
Mortgage-backed securities 48 --- (2) 46
------- ------ ----- -------
Total securities $15,981 $ 236 $(453) $15,764
======= ====== ===== =======
December 31, 2006
-----------------
Obligations of states and
political subdivisions $13,293 $ 279 $ (41) $13,531
Mortgage-backed securities 57 --- (2) 55
------- ------ ----- -------
Total securities $13,350 $ 279 $ (43) $13,586
======= ====== ===== =======
At year-end 2007 and 2006, 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 $78,843 at December 31,
2007 and $71,544 at December 31, 2006 were pledged to secure public deposits,
repurchase agreements and for other purposes as required or permitted by law.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES (continued)
The amortized cost and estimated fair value of debt securities at December
31, 2007, 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 $ 8,990 $ 8,981 $ 811 $ 815
Due in one to five years 27,509 27,916 5,953 6,079
Due in five to ten years 2,503 2,550 3,061 3,140
Due after ten years --- --- 6,108 5,684
Mortgage-backed securities 39,235 38,616 48 46
------- ------- ------- -------
Total debt securities $78,237 $78,063 $15,981 $15,764
======= ======= ======= =======
There were no sales of debt or equity securities during 2007, 2006 and
2005.
Securities with unrealized losses not recognized in income are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2007 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Description of Securities
-------------------------
U.S. Government sponsored
entity securities $ 1,983 $ (17) --- --- $ 1,983 $ (17)
Mortgage-backed securities 663 (4) $32,938 $ (654) 33,601 (658)
Obligations of states and
political subdivisions --- --- 5,443 (451) 5,443 (451)
------- ------ ------- ------- ------- -------
$ 2,646 $ (21) $38,381 $(1,105) $41,027 $(1,126)
======= ====== ======= ======= ======= =======
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2006 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Description of Securities
-------------------------
U.S. Government sponsored
entity securities $ 8,966 $ (32) $15,214 $ (283) $24,180 $ (315)
Mortgage-backed securities --- --- 41,027 (1,191) 41,027 (1,191)
Obligations of states and
political subdivisions --- --- 1,883 (41) 1,883 (41)
------- ------ ------- ------- ------- -------
$ 8,966 $ (32) $58,124 $(1,515) $67,090 $(1,547)
======= ====== ======= ======= ======= =======
Unrealized losses on the Company's debt securities have not been recognized
into income because the issuers' securities are of high credit quality,
management has the intent and ability to hold them for the foreseeable future,
and the decline in fair value is largely due to increases in market interest
rates. 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, 2007 represents an other-than-temporary
impairment.
NOTE C - LOANS
Loans are comprised of the following at December 31:
2007 2006
---- ----
Residential Real estate $250,483 $238,549
Commercial real estate 196,523 193,359
Commercial and industrial 55,090 47,389
Consumer 127,832 139,961
All other 7,175 5,906
-------- --------
Total Loans $637,103 $625,164
======== ========
12
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:
2007 2006 2005
---- ---- ----
Balance, beginning of year $9,412 $7,133 $7,177
Loans charged off:
Commercial (1) 4,002 3,079 1,295
Residential real estate 422 432 349
Consumer 1,617 2,120 2,263
------ ------ ------
Total loans charged off 6,041 5,631 3,907
Recoveries of loans:
Commercial (1) 248 946 912
Residential real estate 166 204 336
Consumer 700 1,097 818
------ ------ ------
Total recoveries of loans 1,114 2,247 2,066
Net loan charge-offs (4,927) (3,384) (1,841)
Provision charged to operations 2,252 5,663 1,797
------ ------ ------
Balance, end of year $6,737 $9,412 $7,133
====== ====== ======
Information regarding impaired loans is as follows:
2007 2006
---- ----
Balance of impaired loans $6,871 $17,402
Less portion for which no specific
allowance is allocated 2,568 2,959
------- -------
Portion of impaired loan balance for which
an allowance for credit losses is allocated $ 4,303 $14,443
======= =======
Portion of allowance for loan losses allocated
to the impaired loan balance $ 1,312 $ 4,962
======= =======
Average investment in impaired loans for the year $ 6,918 $18,774
======= =======
Past due - 90 days or more and still accruing $ 927 $ 1,375
======= =======
Nonaccrual $ 2,734 $12,017
======= =======
Interest recognized on impaired loans was $401, $939 and $495 for years ending
2007, 2006 and 2005, respectively. Accrual basis income was not materially
different from cash basis income for the periods presented.
(1) Includes commercial and industrial and commercial real estate loans
13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31:
2007 2006
---- ----
Land $ 1,565 $ 1,364
Buildings 9,953 9,908
Leasehold improvements 2,771 2,452
Furniture and equipment 11,511 11,043
------- -------
25,800 24,767
Less accumulated depreciation 15,929 14,955
------- -------
Total Premises and Equipment $ 9,871 $ 9,812
======= =======
The following is a summary of the future minimum lease payments for facilities
leased by the Company. Lease payments were $405 in 2007 and $386 in 2006.
2008 $ 385
2009 283
2010 156
2011 132
2012 121
Thereafter 121
------
$1,198
======
NOTE F - DEPOSITS
Following is a summary of interest-bearing deposits at December 31:
2007 2006
---- ----
NOW accounts $ 65,618 $ 78,484
Savings and Money Market 103,712 91,660
Time:
IRA accounts 44,050 38,731
Certificates of Deposit:
In denominations under $100,000 170,565 174,129
In denominations of $100,000 or more 126,492 132,822
-------- --------
Total time deposits 341,107 345,682
-------- --------
Total interest-bearing deposits $510,437 $515,826
======== ========
Following is a summary of total time deposits by remaining maturity at
December 31:
2007
------
Within one year $283,856
From one to two years 37,653
From two to three years 10,077
From three to four years 5,774
From four to five years 1,955
Thereafter 1,792
--------
Total $341,107
========
Brokered deposits, included in time deposits, were $21,820 and $26,935 at
December 31, 2007 and 2006, respectively.
14
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:
2007 2006
------- -------
Balance outstanding at period-end $40,390 $22,556
------- -------
Weighted average interest rate at period-end 2.91% 4.20%
------- -------
Average amount outstanding during the year $27,433 $22,692
------- -------
Approximate weighted average interest rate
during the year 3.83% 3.94%
------- -------
Maximum amount outstanding as of any month-end $40,390 $28,312
------- -------
Securities underlying these agreements at
year-end were as follows:
Carrying value of securities $49,290 $40,258
------- -------
Fair Value $48,829 $39,163
------- -------
The Company sold securities under agreements to repurchase with overnight
maturity terms totaling $12,379 at December 31, 2007 and $5,723 at December 31,
2006 with one large commercial account.
NOTE H - OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2007 and 2006 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
--------------- ---------------- --------- -------
2007 $55,779 $ 5,723 $ 5,500 $ 67,002
2006 $55,690 $ 5,393 $ 2,463 $ 63,546
Pursuant to collateral agreements with the FHLB, advances are secured by
$223,994 in qualifying mortgage loans and $6,036 in FHLB stock at December 31,
2007. Fixed rate FHLB advances of $51,179 mature through 2033 and have interest
rates ranging from 2.13% to 6.62%. In addition, variable rate FHLB borrowings of
$4,600 matured in 2007 and carried an interest rate of 4.28%.
At December 31, 2007, the Company had a cash management line of credit
enabling it to borrow up to $60,000 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 $55,400 available on this line of credit at December 31,
2007.
Based on the Company's current FHLB stock ownership, total assets and
pledgeable residential first mortgage loans, the Company had the ability to
obtain borrowings from the FHLB up to a maximum of $165,921 at December 31,
2007.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of
4.30% to 6.25% and are due at various dates through a final maturity date of
September 30, 2008. A total of $3,768 represented promissory notes payable by
Ohio Valley to related parties. See Note L for further discussion of related
party transactions.
FRB notes consist of the collection of tax payments from Bank customers
under the Treasury Tax and Loan program. These funds have a variable interest
rate and are callable on demand by the U.S. Treasury. The interest rate for the
Company's FRB notes was 4.00% at December 31, 2007 and 5.04% at December 31,
2006.Various investment securities from the Bank used to collateralize FRB notes
totaled $5,945 at December 31, 2007 and $6,070 at December 31, 2006.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize
certain public unit deposits as required by law totaled $34,950 at December 31,
2007 and $41,950 at December 31, 2006.
Scheduled principal payments over the next five years:
FHLB Borrowings Promissory Notes FRB Notes Totals
--------------- ---------------- --------- ------
Year Ended 2008 $20,614 $5,723 $5,500 $31,837
Year Ended 2009 16,006 --- --- 16,006
Year Ended 2010 19,006 --- --- 19,006
Year Ended 2011 6 --- --- 6
Year Ended 2012 6 --- --- 6
Thereafter 141 --- --- 141
------- ------ ------ -------
$55,779 $5,723 $5,500 $67,002
======= ====== ====== =======
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
On September 7, 2000, a trust formed by Ohio Valley issued $5,000 of 10.6%
fixed rate trust preferred securities as part of a pooled offering of such
securities. The Company issued subordinated debentures to the trust in exchange
for the proceeds of the offering, which debentures represent the sole asset of
the trust. The Company may redeem all or a portion of these subordinated
debentures beginning September 7, 2010 at a premium of 105.30% with the call
price declining .53% per year until reaching a call price of par at year twenty
through maturity. The subordinated debentures must be redeemed no later than
September 7, 2030. Debt issuance costs of $166 were incurred and capitalized and
will amortize as a yield adjustment through expected maturity.
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of
adjustable-rate trust preferred securities as part of a pooled offering of such
securities. The rate on these trust preferred securities will be fixed at 6.58%
for five years, and then convert to a floating-rate term on March 15, 2012,
based on a rate equal to the 3-month LIBOR plus 1.68%. There were no debt
issuance costs incurred with these trust preferred securities. The Company
issued subordinated debentures to the trust in exchange for the proceeds of the
offering. The subordinated debentures must be redeemed no later than June 15,
2037.
On March 26, 2007, the proceeds from these new trust preferred securities
were used to pay off $8,500 in higher cost trust preferred security debt that
was issued on March 26, 2002. This repayment of $8,500 in trust preferred
securities was the result of an early call feature that allowed the Company to
redeem the entire amount of these subordinated debentures at par value. These
higher cost subordinated debentures, which were floating based on a rate equal
to the 3-month LIBOR plus 3.60%, not to exceed 11.00%, were redeemed at a
floating rate of 8.97%. The replacement of this higher cost debt was a strategy
by management to lower interest rate pressures and improve net interest margin.
Under the provisions of the related indenture agreements, the interest
payable on the trust preferred securities is deferrable for up to five years and
any such deferral is not considered a default. During any period of deferral,
the Company would be precluded from declaring or paying dividends to
shareholders or repurchasing any of the Company's common stock. Under FASB
Interpretation No. 46, as revised, the trusts are not consolidated with the
Company. Accordingly, the Company does not report the securities issued by the
trust as liabilities, and instead reports as liabilities the subordinated
debentures issued by the Company and held by the trust. Since the Company's
equity interest in the trusts cannot be received until the subordinated
debentures are repaid, these amounts have been netted.
NOTE J - INCOME TAXES
The provision for income taxes consists of the following components:
2007 2006 2005
---- ---- ----
Current tax expense $1,723 $2,964 $3,576
Deferred tax (benefit)expense 908 (903) (293)
------ ------ ------
Total income taxes $2,631 $2,061 $3,283
====== ====== ======
The source of gross deferred tax assets and gross deferred tax liabilities
at December 31:
2007 2006
---- ----
Items giving rise to deferred tax assets:
Allowance for loan losses $2,343 $3,275
Deferred compensation 1,278 1,206
Unrealized loss on securities available-for-sale 59 506
Deferred loan fees/costs 293 280
Depreciation 150 86
Other 252 330
Items giving rise to deferred tax liabilities:
Investment accretion (3) (2)
FHLB stock dividends (995) (995)
Prepaid expenses (130) (120)
Intangibles (196) (160)
Other (65) (65)
------ ------
Net deferred tax asset $2,986 $4,341
====== ======
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:
2007 2006 2005
---- ---- ----
Statutory tax $3,036 $2,536 $3,502
Effect of nontaxable interest (282) (211) (161)
Nondeductible interest expense 47 33 19
Income from bank owned insurance (210) (264) (158)
Effect of state income tax 114 119 111
Other items (74) (152) (30)
------ ------ ------
Total income taxes $2,631 $2,061 $3,283
====== ====== ======
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES (continued)
The adoption of FIN 48 at January 1, 2007 had no impact on the Company's
financial statements. At January 1, 2007 and December 31, 2007, the Company had
no unrecognized tax benefits recorded. The Company does not expect the amount of
unrecognized tax benefits to significantly change within the next 12 months.
The Company is subject to U.S. federal income tax as well as West Virginia
state income tax. The Company is no longer subject to federal examination for
years prior to 2004. The Company's 2003-2005 West Virginia state income tax
returns were examined by taxing authority and no additional liability was
assessed. The tax years 2004-2006 remain open to federal examination, and the
2006 tax year remains open to state examination.
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:
2007 2006
----- -----
Fixed rate $ 2,127 $ 1,491
Variable rate 65,391 57,009
Standby letters of credit 14,607 15,002
The interest rate on fixed rate commitments ranged from 6.25% to 10.50% at
December 31, 2007.
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
$7,066 and $7,039 for the years ended December 31, 2007 and 2006, respectively.
NOTE L - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies in which they are
affiliated were loan customers during 2007. A summary of activity on these
borrower relationships with aggregate debt greater than $120 is as follows:
Total loans at January 1, 2007 $12,770
New loans 707
Repayments (1,816)
Other changes 148
-------
Total loans at December 31, 2007 $11,809
=======
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 with which they are affiliated were recipients of interest-bearing
promissory notes issued by Ohio Valley in the amount of $3,768 at December 31,
2007 and $3,268 at December 31, 2006.
17
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, $171 and
$172, for 2007, 2006 and 2005.
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 225,148 and 227,710 at
December 31, 2007 and 2006. In addition, the Bank made contributions to its ESOP
Trust as follows:
Years ended December 31
2007 2006 2005
---- ---- ----
Number of shares issued 1,000 8,500 9,500
====== ====== ======
Value of stock contributed $ 26 $ 222 $ 240
Cash contributed 318 121 102
----- ----- -----
Total charged to expense $ 344 $ 343 $ 342
===== ===== =====
Life insurance contracts with a cash surrender value of $16,339 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 $294, $262, and $340.
NOTE N - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes for the years ended
December 31, are as follow:
2007 2006 2005
---- ---- ----
Net unrealized holding gains (losses)
on available-for-sale securities $ 1,313 $ 379 $(1,534)
Tax effect (447) (129) 522
------- ------- -------
Other comprehensive income (loss) $ 866 $ 250 $(1,012)
======= ======= =======
18
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.
Federal Home Loan Bank stock: It is not practicable to determine the fair value
of Federal Home Loan Bank stock due to restrictions placed on its
transferability.
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, 2007 or 2006. 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:
2007 2006
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 16,894 $ 16,894 $ 20,765 $ 20,765
Interest-bearing deposits
in other banks 633 633 508 508
Securities 94,044 93,827 83,617 83,853
Federal Home Loan Bank stock 6,036 --- 6,036 ---
Loans 630,366 639,273 615,752 621,362
Accrued interest receivable 3,254 3,254 3,234 3,234
Financial liabilities:
Deposits (589,026) (588,045) (593,786) (591,809)
Securities sold under agreements
to repurchase (40,390) (40,390) (22,556) (22,556)
Other borrowed funds (67,002) (68,124) (63,546) (63,302)
Subordinated debentures (13,500) (14,121) (13,500) (14,070)
Accrued interest payable (6,742) (6,742) (6,176) (6,176)
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.
19
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
------ ----- ------ ----- ------ -----
2007
Total capital (to risk weighted assets)
Consolidated $80,578 13.1% $49,037 8.0% $61,296 N/A
Bank 75,119 12.4 48,364 8.0 60,455 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 73,841 12.0 24,518 4.0 36,777 N/A
Bank 68,682 11.4 24,182 4.0 36,273 6.0
Tier 1 capital (to average assets)
Consolidated 73,841 9.5 31,081 4.0 38,851 N/A
Bank 68,682 9.0 30,656 4.0 38,320 5.0
2006
Total capital (to risk weighted assets)
Consolidated $81,057 13.4% $48,358 8.0% $60,447 N/A
Bank 76,275 12.8 47,743 8.0 59,679 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 73,478 12.2 24,179 4.0 36,268 N/A
Bank 67,163 11.3 23,871 4.0 35,807 6.0
Tier 1 capital (to average assets)
Consolidated 73,478 9.6 30,695 4.0 38,369 N/A
Bank 67,163 8.9 30,318 4.0 37,897 5.0
At year-end 2007 and 2006, 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 January 1, 2008, approximately $1,556 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.
20
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
Years ended December 31:
Assets 2007 2006
---- ----
Cash and cash equivalents $ 1,055 $ 2,980
Investment in subsidiaries 73,926 70,875
Notes receivable - subsidiaries 5,658 5,338
Other assets 428 389
------- -------
Total assets $81,067 $79,582
======= =======
Liabilities
Notes payable $ 5,723 $ 5,394
Subordinated debentures 13,500 13,500
Other liabilities 333 406
------- -------
Total liabilities 19,556 19,300
------- -------
Shareholders' Equity
Total shareholders' equity 61,511 60,282
------- -------
Total liabilities and shareholders' equity $81,067 $79,582
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31:
2007 2006 2005
---- ---- ----
Income:
Interest on notes $ 311 $ 261 $ 243
Other operating income 35 68 88
Dividends from Bank 5,000 5,000 5,700
Expenses:
Interest on notes 314 264 250
Interest on subordinated debentures 1,143 1,279 1,125
Operating expenses 227 279 268
------ ------ ------
Income before income taxes and equity in
undistributed earnings of subsidiaries 3,662 3,507 4,388
Income tax benefit 450 590 441
Equity in undistributed earnings of subsidiaries 2,185 1,301 2,188
------ ------ ------
Net Income $6,297 $5,398 $7,017
====== ====== ======
21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31:
2007 2006 2005
---- ---- ----
Cash flows from operating activities:
Net income $6,297 $5,398 $7,017
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings
of subsidiaries (2,185) (1,301) (2,188)
Change in other assets (39) 4 181
Change in other liabilities (73) (13) (96)
------ ------ ------
Net cash provided by
operating activities 4,000 4,088 4,914
------ ------ ------
Cash flows from investing activities:
Change in other short-term investments (320) (420) 300
------ ------ ------
Net cash provided by (used in)
investing activities (320) (420) 300
------ ------ ------
Cash flows from financing activities:
Change in other short-term borrowings 329 280 (242)
Proceeds from subordinated debentures 8,500 --- ---
Repayment of subordinated debentures (8,500) --- ---
Cash dividends paid (2,938) (2,837) (2,705)
Cash paid in lieu of fractional shares
in stock split --- --- (12)
Proceeds from issuance of common shares 398 --- 365
Purchases of treasury shares (3,394) (1,800) (961)
------ ------ ------
Net cash used in financing activities (5,605) (4,357) (3,555)
------ ------ ------
Cash and cash equivalents:
Change in cash and cash equivalents (1,925) (689) 1,659
Cash and cash equivalents at beginning of year 2,980 3,669 2,010
------ ------ ------
Cash and cash equivalents at end of year $1,055 $2,980 $3,669
====== ====== ======
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited)
Quarters Ended
2007 Mar. 31 Jun. 30 Sept. 30 Dec. 31
Total interest income $13,502 $13,720 $13,784 $13,941
Total interest expense 6,431 6,554 6,779 6,656
Net interest income 7,071 7,166 7,005 7,285
Provision for loan losses 386 616 332 918
Net Income 1,775 1,686 1,833 1,003
Earnings per share $ .42 $ .41 $ .45 $ .24
2006 Mar. 31 Jun. 30 Sept. 30 Dec. 31
Total interest income $12,640 $13,034 $13,407 $13,340
Total interest expense 5,287 5,810 6,299 6,535
Net interest income 7,353 7,224 7,108 6,805
Provision for loan losses (1) 666 791 474 3,731
Net Income 1,739 1,826 1,817 16
Earnings per share $ .41 $ .43 $ .43 $ ---
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
Earnings per share $ .37 $ .40 $ .41 $ .46
(1) During the fourth quarter of 2006, the Bank increased the allowance
for loan losses to account for increases in its nonaccrual loan
balances and historical loan loss factors resulting in a provision
expense charge of $3,731.
23
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, 2007 and 2006, 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, 2007. These
financial statements are the responsibility of Ohio Valley Banc Corp.'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, 2007 and 2006, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2007, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Ohio Valley Banc Corp.'s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
14, 2008 expressed an unqualified opinion thereon.
/s/CROWE CHIZEK AND COMPANY LLC
Crowe Chizek and Company LLC
Columbus, Ohio
March 14, 2008
24
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM - INTERNAL CONTROL
Board of Directors and Shareholders
Ohio Valley Banc Corp.
We have audited Ohio Valley Banc Corp.'s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (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 included in the accompanying Management's Report On Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, 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, Ohio Valley Banc Corp. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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, 2007 and 2006, 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, 2007 and
our report dated March 14, 2008 expressed an unqualified opinion on those
consolidated financial statements.
/s/CROWE CHIZEK AND COMPANY LLC
Crowe Chizek and Company LLC
Columbus, Ohio
March 14, 2008
25
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Board of Directors and Shareholders
Ohio Valley Banc Corp.
The management of Ohio Valley Banc Corp. (the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. The Company's internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal control
over financial reporting includes those policies and procedures that: (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
The system of internal control over financial reporting as it relates to
the consolidated financial statements is evaluated for effectiveness by
management. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed Ohio Valley Banc Corp's system of internal control over
financial reporting as of December 31, 2007, 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, 2007, 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 audit report dated March 14, 2008 on the Company's internal
control over financial reporting. That report is contained in Ohio Valley's
Annual Report to Shareholders under the heading "Report of Independent
Registered Public Accounting Firm - Internal Control".
Ohio Valley Banc Corp
/s/JEFFREY E. SMITH
Jeffrey E. Smith
President, CEO
/s/SCOTT W. SHOCKEY
Scott W. Shockey
Vice President, CFO
26
SUMMARY OF COMMON STOCK DATA
OHIO VALLEY BANC CORP.
Years ended December 31, 2007 and 2006
INFORMATION AS TO STOCK PRICES AND DIVIDENDS: On February 9, 1996, Ohio Valley's
common shares began to be quoted on The NASDAQ Stock Market under the symbol
"OVBC". The following table summarizes the high and low sales prices for Ohio
Valley's common shares on the NASDAQ Global Market for each quarterly period
since January 1, 2006.
2007 High Low
- ---- ------ ------
First Quarter $26.50 $24.86
Second Quarter 25.70 24.15
Third Quarter 25.73 25.00
Fourth Quarter 25.95 24.60
2006 High Low
- ---- ------ ------
First Quarter $25.50 $25.00
Second Quarter 25.45 25.15
Third Quarter 26.00 25.15
Fourth Quarter 25.77 25.15
Shown below is a table which reflects the dividends declared per share on
Ohio Valley's common shares. As of March 13, 2008, the number of holders of
record of common shares was 2,136, an increase from 2,120 shareholders at
December 31, 2006.
Dividends per share 2007 2006
- ------------------- ---- ----
First Quarter $.17 $.16
Second Quarter .18 .17
Third Quarter .18 .17
Fourth Quarter .18 .17
27
PERFORMANCE GRAPH
OHIO VALLEY BANC CORP.
Year ended December 31, 2007
The following graph sets forth a comparison of five-year cumulative total
returns among the Company's common shares (indicated "Ohio Valley Banc Corp." on
the Performance Graph), the S & P 500 Index (indicated "S & P 500" on the
Performance Graph), and SNL Securities SNL $500 Million-$1 Billion Bank
Asset-Size Index (indicated "SNL" on the Performance Graph) for the fiscal years
indicated. Information reflected on the graph assumes an investment of $100 on
December 31, 2002 in each of the common shares of the Company, the S & P 500
Index, and the SNL Index. Cumulative total return assumes reinvestment of
dividends. The SNL Index represents stock performance of one hundred four (104)
of the nation's banks located throughout the United States with total assets
between $500 Million and $1 Billion as selected by SNL Securities of
Charlottesville, Virginia. The Company is included as one of the 104 banks in
the SNL Index.
TOTAL RETURN PERFORMANCE
OVBC, SNL $500M-$1B Bank Index and S&P 500
2002-2007
Period Ending
----------------------------------------------------------
12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07
-------- -------- -------- -------- -------- --------
OVBC $100.00 $133.61 $169.13 $166.56 $171.35 $175.66
SNL $500M-$1B $100.00 $144.19 $163.41 $170.41 $193.81 $155.31
S&P 500 $100.00 $128.69 $142.69 $149.69 $173.34 $182.85
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
Ohio Valley Banc Corp. generated net income of $6,297 for 2007, an increase
of 16.7% from 2006. Net income was down 23.1% in 2006. Earnings per share was
$1.52 for 2007, an increase of 19.7% from 2006. Earnings per share was down
22.6% in 2006. The increase in net income and earnings per share for 2007 was
primarily due to a $3,410 decrease in provision for loan loss expense in 2007 as
a result of lower nonperforming loans and charge-offs from year-end 2006. The
lower provision expense for 2007 can be attributed mostly to the specific
allocations made to the allowance for loan losses in the fourth quarter of 2006
that resulted in $3,731 in provision expense, which contributed to the decrease
in 2006's net income and earnings per share.
Asset growth for 2007 was $19,057, or 2.5%, resulting in total assets at
year-end of $783,418. The Company's return on assets (ROA) was .82% for 2007
compared to .71% in 2006 and .97% in 2005. Return on equity (ROE) was 10.40% for
2007 compared to 9.00% in 2006 and 12.18% in 2005. The changes in both ROA and
ROE for 2007 and 2006 were largely the result of the significant changes in
provision expense during both years causing lower earnings in 2006 and higher
earnings in 2007.
NET INTEREST INCOME
The most significant portion of the Company's revenue, net interest income,
results from properly managing the spread between interest income on earning
assets and interest expense incurred on interest-bearing liabilities. The
Company earns interest and dividend income from loans, investment securities and
short-term investments while incurring interest expense on interest-bearing
deposits, securities sold under agreements to repurchase ("repurchase
agreements") and short and long-term borrowings. Net interest income is affected
by changes in both the average volume and mix of 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, 2007. 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 $121 in
2007, an increase of 0.4% compared to the $28,770 earned in 2006. The increase
was primarily attributable to a higher level of interest-earning assets, mostly
from growth in securities and loans, partially offset by a lower net interest
margin (caused by a higher average balance of loans on nonaccrual status and an
increased pressure in funding costs due to the lagging effect of short-term rate
increases experienced during the first half of 2006). Net interest income on a
fully tax equivalent basis (FTE) increased $620 in 2006, an increase of 2.2%
compared to the $28,150 earned in 2005. The increase was primarily attributable
to a higher level of interest-earning assets (primarily from growth in loans)
partially offset by a lower net interest margin (primarily from continued
short-term rate increases during the first half of 2006 causing average costs on
interest-bearing funding sources to grow at a faster pace than average yields on
interest-earning assets).
For 2007, average earning assets grew $8,253, or 1.2%, as compared to
growth of $32,100, or 4.7%, in 2006. Driving this continued growth in earning
assets was an increase in average securities balances. Average securities, both
taxable and tax-exempt, expanded $5,575, or 6.5%, for 2007 and finished with a
total percentage of securities to earning assets of 12.6%. This compares to
average securities growth of $2,147, or 2.6%, with securities representing 11.9%
of earning assets for 2006. The growth in average securities was largely
comprised of U.S. government sponsored entity securities. Average loans
represent the next highest portion of earning asset growth, increasing $2,473,
or 0.4%, for 2007 and finished with a total percentage of loans to earning
assets of 86.7%. This compares to average loan growth of $27,073, or 4.5%, with
loans representing 87.4% of earning assets for 2006. The continued growth in
average loans was largely comprised of commercial loan participations as well as
real estate mortgages. Management continues to focus on generating loan growth
as this portion of earning assets provides the greatest return to the Company.
Although loans comprise a larger percentage of earning assets, management is
comfortable with the current level of loans based on collateral values, the
balance of the allowance for loan losses and the Company's well-capitalized
status. Management maintains securities at a dollar level adequate enough to
provide ample liquidity and cover pledging requirements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Average interest-bearing liabilities increased 0.7% between 2006 and 2007
and increased 4.3% between 2005 and 2006. Interest-bearing liabilities in 2007
were comprised primarily of time deposits and NOW accounts, which together
represented 67.9% of total interest-bearing liabilities, down from 70.2% in 2006
and 71.6% in 2005. Other borrowed money represented 12.0% of total
interest-bearing liabilities in 2007, down from 13.3% of interest-bearing
liabilities in 2006 and 15.7% in 2005. The reason for this composition decrease
was from growth in the Company's savings and money market accounts, primarily
its Market Watch product, which together represented a higher composition of
total interest-bearing liabilities at 15.7% in 2007 as compared to 12.7% in 2006
and 8.5% in 2005. Introduced in 2005, the Market Watch product offers customers
tiered rates that are competitive with other offerings in the Company's market
areas. The increased demand for the Market Watch product generated a significant
amount of funding dollars which have helped to support earning asset growth and
also repayment of other borrowed money. This continued shift in composition
during 2007 with higher savings and money market balances and lower borrowings
served as a cost effective contribution to the net interest margin and also
helped to partially offset the steady growth in average costs associated with
time deposits. The average cost of savings and money market accounts in 2007 was
2.78%, as compared to the much higher average cost of other borrowed money at
5.46%. The average cost of time deposits grew from 4.24% in 2006 to 4.88% in
2007.
The net interest margin decreased .03% to 3.99% in 2007 from 4.02% in 2006.
This is compared to a .09% decrease in the net interest margin in 2006. During
2007, there was an increase of .07% in interest free funds (i.e. demand
deposits, shareholders' equity) from .56% in 2006 to .63% in 2007. However, this
impact from interest free funds was completely offset by a decrease in the net
interest rate spread on interest sensitive assets and liabilities of .10%, with
higher asset yields of .28% being completely offset by higher funding costs of
..38%. Contributing to the increase in yield on earning assets was an increase in
the return on average loans of .32% from 2006.
The favorable increase in loan yields can be attributed to the rise in
short-term rates from prior periods as set by the Federal Reserve, which
did not begin to decrease again until September 2007. Between June 2004 and June
2006, the Federal Reserve increased the target federal funds rate 425 basis
points, causing a similar increase in short-term market interest rates. The
Company's commercial, participation and real estate loan portfolios have been
most sensitive to the increases in short-term interest rates. Particularly, the
Company continues to experience a customer demand shift from its one-year
adjustable-rate mortgages, with average balances down $20,177 in 2007, to its
thirty-year fixed-rate real estate mortgages, with average balances up $22,721
in 2007. This is due to the continuation of lower, more affordable, mortgage
rates that have not responded as much to the rise in short-term interest rates
of 2004, 2005 and part of 2006. As long-term interest rates continue to remain
relatively stable from a year ago, consumers continue to pay off and refinance
their one-year adjustable-rate mortgages, which yielded 6.07% during the
previous year in 2006. The Company's thirty-year fixed-rate real estate
mortgages yielded 7.21% in 2007.
While the Federal Reserve's actions to increase interest rates over the
past few years has been effective in allowing asset yields to grow, interest
rate pressures have been felt by an increase in the Company's total interest
expense, which increased 10.4% from 2006, as a result of higher funding costs,
competitive factors to retain deposits, and larger average earning asset
balances which required additional funding. In a changing interest rate
environment, rates on loans reprice more rapidly than interest rates paid on
deposits. In 2005 and the first half of 2006, net interest margins were
exceeding previous periods in relation to the actions by the Federal Reserve to
increase market rates of interest. As a result, interest rates on deposits have
increased, as a lagging impact of earlier Federal Reserve action, increasing
funding costs and decreasing the net interest margin. Increases in funding costs
came mostly from the Bank's time deposit accounts, which have been most
responsive to this lagging effect from previous market rate decreases. The
year-to-date weighted average cost of the Bank's time deposits grew 64 basis
points from 4.24% at year-end 2006 to 4.88% at year-end 2007. The change in
interest expense was further impacted by the Company's growth in average money
market accounts largely due to its Market Watch product with tiered market
rates. As a result, the year-to-date weighted average cost of the Bank's savings
and money market deposits grew 36 basis points from 2.42% at year-end 2006 to
2.78% at year-end 2007.
In summary, the .07% increase in the contribution of interest free funding
sources that was completely offset by the .10% decrease in the net interest rate
spread yielded the .03% decrease in the net interest margin for 2007. The 2006
decrease in net interest margin of .09% was from a .13% increase in interest
free funds completely offset by a .22% decrease in the net interest spread,
caused by higher asset yields of .59% being offset by higher funding costs of
..81%.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
During 2006 and 2007, loan yields and the rates paid on interest-bearing
liabilities increased due to the prior period increases in short-term rates
maintained by the Federal Reserve. In September 2007, the Federal Reserve began
lowering short-term interest rates, decreasing the target federal funds rate 100
basis points from 5.25% to 4.25% at December 31, 2007. The Federal Reserve
further reduced the federal funds rate by 125 basis points from 4.25% to 3.00%
in January 2008. While the frequency and size of changes in market interest
rates are difficult to predict, management believes that the Federal Reserve
will deliver additional rate decreases during 2008 to help improve and maintain
economic stability. There can be no assurance, however, to this effect as
changes in market interest rates are dependent upon a variety of factors that
are beyond the Company's control. The Company anticipates that the rates paid on
its interest-bearing liabilities will begin to decrease in 2008 as its
certificates of deposit mature and reprice with the current lower interest
rates. As a result, the Company estimates its net interest margin will expand
during 2008 as the deposit liabilities begin to reprice. For additional
discussion on the Company's rate sensitive assets and liabilities, please see
"Interest Rate Sensitivity and Liquidity" and "Table VIII" within this
Management's Discussion and Analysis.
NONINTEREST INCOME AND EXPENSE
Total noninterest income decreased $594, or 10.2%, in 2007 as compared to
2006. Contributing most to the decrease in noninterest income was the loss on
sale of real estate acquired through foreclosure ("OREO"). During the fourth
quarter of 2007, the Company's largest non-performing asset was liquidated
creating a pretax loss of $686. The sale of this OREO property was directly
attributable to management's strategy of being more aggressive in improving the
Company's nonperforming levels and, as a result, the ratio of nonperforming
assets to total assets improved to .5% at December 31, 2007 as compared to 2.0%
at December 31, 2006. Further decreasing noninterest income was the Company's
tax-free bank owned life insurance ("BOLI") investment proceeds. BOLI income was
down $150, or 16.5%, during 2007, driven mostly by tax-free life insurance
proceeds of $174 that were recorded in 2006 as compared to $71 in proceeds
during 2007.
Partially offsetting the year-to-date decreases from the loss on sale of
OREO and BOLI revenue were increases in other noninterest income, which include
rental income from OREO properties, debit card interchange fees and improvements
in the Company's tax refund processing fees. Rental income from OREO properties
totaled $213 during 2007 as compared to no income in 2006, primarily from one
large commercial facility located in Kanawha County, West Virginia and one hotel
facility located in Portsmouth, Ohio. Both properties were liquidated in 2007.
Debit card interchange fees were also key drivers in the growth of other
noninterest income, increasing $62, or 12.8%, in 2007 as compared to 2006. The
volume of transactions utilizing the Company's Jeanie(R) Plus debit card
continue to increase over a year ago. The Company's customers used their
Jeanie(R) Plus debit cards to complete 1,166,337 transactions during 2007, up
16.0% from the 1,008,792 transactions during 2006, derived mostly from gasoline
and restaurant purchases. Further enhancing the growth to other noninterest
income was an increase in tax refund processing fees. In 2006, the Company began
its participation in a new tax refund loan service where it serves as a
facilitator for the clearing of tax refunds for a tax software provider. The
Company is one of a limited number of financial institutions throughout the U.S.
that facilitates tax refunds through its relationship with this tax software
provider. These tax refunds are in the form of two items: Electronic Refund
Checks ("ERCs") and Electronic Refund Deposits ("ERDs"). ERC's and ERD's are
granted by tax preparers to taxpayers who wish to receive their funds
electronically via an ACH. The Company then facilitates the clearing of the
ERC/ERD items via a demand deposit business account. During 2007, the Company's
tax refund processing fees were up $27, or 71.8%, as compared to the same period
in 2006. All other noninterest income items during 2007 were relatively stable
as compared to 2006.
In 2006, total noninterest income increased $308, or 5.6%, mostly due to
the increase in earnings from BOLI activity, which increased $318, or 54.0%,
impacted by additional investments in life insurance contracts purchased during
2005, higher earnings rates on such contracts and life insurance proceeds
received in 2006.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Total noninterest expense increased $1,384, or 6.5%, in 2007 and decreased
$160, or 0.7%, in 2006. The most significant expense in this category is salary
and employee benefits, which increased $548, or 4.4%, from 2006 to 2007.
Contributing most to this increase were annual cost of living salary increases
as well as increases in employee incentive compensation due to higher corporate
performance during the fiscal period of 2007 as compared to 2006. During 2007,
the Company also experienced a slightly higher full-time equivalent employee
base, increasing from 254 employees at year-end 2006 to 256 employees at
year-end 2007, further increasing salaries and employee benefit expenses during
2007. During 2006, salary and employee benefits decreased $340, or 2.6%, from
2005, due to a reduction in employee incentive compensation from lower corporate
performance during the fiscal period of 2006 as compared to 2005. During 2006,
the Company also experienced a lower full-time equivalent employee base,
decreasing from 265 employees at year-end 2005 to 254 employees at year-end
2006, further reducing salaries and employee benefit expenses during 2006.
In 2007, occupancy and furniture and equipment expenses increased $95, or
3.9%, as compared to 2006. The increases were in large part due to the Company's
investment in its Jackson, Ohio facility. In late 2006, the Company invested
over $2,000 to replace its Jackson, Ohio facility and, during that time, ceased
operations in its Jackson superbank facility. The facility was placed in service
and depreciation commenced during the fourth quarter of 2006. In 2006, occupancy
and furniture and equipment expenses decreased $57, or 2.3%, as compared to
2005. This decrease was in large part due to the maturities of depreciation
terms on several asset acquisitions from previous years as well as the
decreasing nature of current depreciable assets that have incurred lower
depreciation expense during 2006. Corporation franchise tax was relatively
stable during 2007, increasing $2, or .3%, and decreasing $4, or .6%, in 2006,
based on capital levels at the Bank for both periods. During 2007 and 2006, data
processing expenses increased $157, or 22.9%, and $54, or 8.5%, respectively.
This continued growth in data processing costs came primarily from the
transactional volume increases in the Company's Jeanie(R) Plus debit cards
during 2006 and 2007.
Other noninterest expenses were up $582, or 11.9%, during 2007 in large
part due to increases in various loan and collection expenses associated with
higher average nonperforming loan balances. Loan expenses increased $360, or
132.5%, during 2007. Loan expenses (i.e., foreclosure costs) that have been
incurred as part of resolving nonperforming credits during 2007 were necessary
to improve asset quality and lower portfolio risk, which are evident in the
lower nonperforming loan levels (down 72.7%) and lower nonperforming asset
levels (down 74.4%) as compared to 2006. The Company's expense related to
fraudulent activities also contributed to the growth in other noninterest
expense, increasing $128, or 206.8%, during 2007 as compared to 2006. This
increase was largely due to costs associated with fraudulent activities in the
second half of 2007 on customer debit/credit cards that were compromised at the
point of sale. The Company minimized customers' fraudulent losses by placing
transaction holds on, blocking access to and reissuing thousands of debit/credit
cards to various customer accounts where such cards were compromised, primarily
in the Gallia County, Ohio and Mason County, West Virginia market areas.
During 2006, other noninterest expenses were up $187, or 4.0%, in large
part due to increases in various loan and collection expenses associated with
higher nonperforming loan balances.
The Company's efficiency ratio, which is noninterest expense as a
percentage of fully tax-equivalent net interest income plus noninterest income,
for 2007 finished at 66.1%, up from 61.2% in 2006. This less-improved efficiency
number is largely the result of higher loan costs that were incurred to better
the Company's nonperforming loan levels in 2007. Conversely, in 2006, the
efficiency ratio improved to 61.2%, down from 63.5% in 2005, as a result of
successful noninterest revenue growth and lower overhead costs in 2006.
FINANCIAL CONDITION:
CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents consist of cash and balances due
from banks and federal funds sold. The amounts of cash and cash equivalents
fluctuate on a daily basis due to customer activity and liquidity needs. At
December 31, 2007, cash and cash equivalents had decreased $3,871, or 18.6%, to
$16,894 as compared to $20,765 at December 31, 2006. The decreased levels of
cash and cash equivalents came primarily from funding the growth in earning
assets, satisfying maturing time deposits, and funding dividend disbursements
and treasury stock repurchases. As liquidity levels vary continuously based on
consumer activities, amounts of cash and cash equivalents can vary widely at any
given point in time. Management believes that the current balance of cash and
cash equivalents remains at a level that will meet cash obligations and provide
adequate liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
SECURITIES
Management's goal in structuring the portfolio is to maintain a prudent
level of liquidity while providing an acceptable rate of return without
sacrificing asset quality. Maturing securities have historically provided
sufficient liquidity such that management has not sold a debt security in
several years.
The balance of total securities increased $10,427, or 12.5%, as compared to
2006, with the ratio of securities to total assets also increasing to 12.0% at
December 31, 2007, compared to 10.9% at December 31, 2006. This trend of higher
security investments was driven by increases in U.S. government sponsored entity
securities of $14,264, or 56.6%, and municipal bonds of $2,640, or 19.9%, as
compared to year-end 2006. The growth in these two segments of investments was
the result of attractive yield opportunities and a desire to increase
diversification within the Company's securities portfolio. This growth was
partially offset by a decrease in mortgage-backed securities of $6,477, or
14.3%, from year-end 2006. The Company continues to benefit from the advantages
of investment grade mortgage-backed securities, which totaled $38,664, or 41.1%
of the Company's total investment portfolio at December 31, 2007. The primary
advantage of mortgage-backed securities has been the increased cash flows due to
the more rapid (monthly) repayment of principal as compared to other types of
investment securities, which deliver proceeds upon maturity or call date.
Principal repayments from mortgage-backed securities during 2007 totaled $6,979.
With the general increase in interest rates evident since 2004, the reinvestment
rates on debt securities continue to show favorable returns during 2007, 2006
and 2005. The weighted average FTE yield on debt securities at year-end 2007 was
4.55%, as compared to 4.44% at year-end 2006 and 4.28% at year-end 2005. Table
III provides a summary of the portfolio by category and remaining contractual
maturity. Issues classified as equity securities have no stated maturity date
and are not included in Table III. 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 2007, the Company's primary category of earning assets, total loans,
increased $11,939, or 1.9%, to reach $637,103. Higher loan balances were largely
due to growth in residential real estate loans, which were up $11,934, or 5.0%,
from year-end 2006 to total $250,483. Generating residential real estate loans
remains a key focus of the Company's lending efforts. The Company's residential
real estate loans consist primarily of one- to four-family residential mortgages
and carry many of the same customer and industry risks as the commercial real
estate loan portfolio. There continued to be a significant amount of movement
between variable-rate and fixed-rate mortgage refinancings during 2007. Since
year-end 2006, the Company's one-year adjustable-rate mortgage balances have
decreased $25,580, or 37.7%, to finish at $42,211. During 2006, consumer demand
for fixed-rate real estate loans steadily increased due to the continuation of
lower, more affordable, mortgage rates that had not responded as much to the
rise in short-term interest rates of 2004, 2005 and part of 2006. As long-term
interest rates continue to remain relatively stable from a year ago, consumers
continue to pay off and refinance their variable rate mortgages, resulting in
lower one-year adjustable-rate mortgage balances at the end of 2007 as compared
to year-end 2006. As a result, completely offsetting the decreases in
variable-rate real estate balances was the continued consumer preference of
fixed-rate real estate loans, which were up $36,970, or 25.2%, from year-end
2006 to finish at $183,696. Additionally, to help further satisfy this
increasing demand for fixed-rate real estate loans, the Company continues to
originate and sell some fixed-rate mortgages to the secondary market, and has
sold $4,299 during 2007, which is relatively unchanged from the volume sold in
2006. The remaining real estate loan portfolio balances increased $544,
primarily from a mix of the Company's other variable-rate real estate loan
products.
The Company's increasing real estate loan portfolio was enhanced by net
growth in its commercial loan balances (both commercial real estate and
commercial and industrial), which were up $10,865, or 4.5%, from year-end 2006.
This growth is consistent with the Company's continued emphasis on commercial
lending, which generally yields a higher return on investment as compared to
other types of loans. The Company's commercial loan portfolio consists of loans
to corporate borrowers primarily in small to mid-sized industrial and commercial
companies that include service, retail and wholesale merchants. Collateral
securing these loans includes equipment, inventory, stock, commercial real
estate and rental property. Commercial and industrial loans increased $7,701, or
16.3%, from year-end 2006, while commercial real estate loans increased $3,164,
or 1.6%, from year-end 2006. Commercial real estate, the Company's largest
segment of commercial loans, is largely driven by loan participations with other
banks outside the Company's primary market area. Although the Company is not
actively marketing participation loans outside its primary market area, it is
taking advantage of the relationships it has with certain lenders in those areas
where the Company believes it can profitably participate with an acceptable
level of risk. The commercial loan portfolio, including participation loans,
consists primarily of rental property loans (19.4% of portfolio), medical
industry loans (13.6% of portfolio), land development loans (12.1% of
portfolio), and hotel and motel loans (11.4% of portfolio). During 2007, the
primary market areas for the Company's commercial loan originations, excluding
loan participations, were in the areas of Gallia, Jackson, Logan, Vinton, Pike,
Preble and Franklin counties of Ohio, which accounted for 65.7% of total
originations. The growing West Virginia markets accounted for 17.7% of total
originations for the same time period. While management believes lending
opportunities exist in the Company's markets, future commercial lending
activities will depend upon economic and related conditions, such as general
demand for loans in the Company's primary markets, interest rates offered by the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Company and normal underwriting considerations. Additionally, the potential for
larger than normal commercial loan payoffs may limit loan growth during future
periods.
Increases in the Company's real estate and commercial loan balances were
partially offset by a decreasing consumer loan portfolio. The Company's consumer
loans fell $12,129, or 8.7%, from year-end 2006 to finish at $127,832. The
Company's consumer loans are secured by automobiles, mobile homes, recreational
vehicles and other personal property. Personal loans and unsecured credit card
receivables are also included as consumer loans. The decrease in consumer volume
was mostly attributable to the automobile lending segment, which decreased
$8,784, or 14.0%, from year-end 2006. 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 with higher returns
(i.e. commercial and real estate loans) has contributed most to the reduction in
loan volume within this area. Indirect automobile loans bear additional costs
from dealers that partially offset interest revenue and lower the rate of
return. Furthermore, economic factors and the rising rate environment from
previous years have caused a decline in automobile loan volume. As rates have
aggressively moved up since 2004, continued competition with local banks and
alternative methods of financing, such as captive finance companies offering
loans at below-market interest rates, have continued to challenge automobile
loan growth during 2007. Also contributing to the decreasing consumer portfolio
were all-terrain vehicle loans, which were down $1,419, or 28.7%, from year-end
2006, and the Company's capital line balances, primarily home equity loans,
which decreased $1,154 or 5.6%, from year-end 2006.
Additionally, the Company recognized an increase of $1,269, or 21.5%, in
other loans from year-end 2006. Other loans consist primarily of state and
municipal loans and overdrafts.
The Company will continue to monitor the relatively mild pace of its loan
portfolio growth during 2008. The Company's lending markets remain challenging
and have impacted loan growth due to increased payoffs and a flat to declining
level of loan originations during 2007, particularly within the consumer loan
portfolio. The Company continues to view consumer loans as a decreasing
portfolio due to higher loan costs, increased competition in automobile loans
and a lower return on investment as compared to the other loan portfolios. As a
result, the Company anticipates total loan growth to be marginal, with volume to
continue at a flat to moderate pace throughout 2008. The Company remains
committed to sound underwriting practices without sacrificing asset quality and
avoiding exposure to unnecessary risk that could weaken the credit quality of
the portfolio.
ALLOWANCE FOR LOAN LOSSES AND PROVISION EXPENSE
Tables IV and V have been provided to enhance the understanding of the loan
portfolio and the allowance for loan losses. Management evaluates the adequacy
of the allowance for loan losses quarterly based on several factors including,
but not limited to, general economic conditions, loan portfolio composition,
prior loan loss experience, and management's estimate of probable losses. Actual
losses on loans are reflected as reductions in the reserve and are referred to
as charge-offs. The amount of the provision for loan losses charged to operating
expenses is the amount necessary, in management's opinion, to maintain the
allowance for loan losses at an adequate level. The allowance required is
primarily a function of the relative quality of the loans in the loan portfolio,
the mix of loans in the portfolio and the rate of growth of outstanding loans.
During 2007, the Company decreased its provision for loan loss expense by
$3,410 as compared to 2006, which lowered its allowance for loan losses by
$2,675, or 28.4%, to finish at $6,737. The decrease in the allowance for loan
losses was in large part due to a decrease in nonperforming loan balances since
year-end 2006. During 2006, the level of nonperforming loans, which consist of
nonaccruing loans and accruing loans past due 90 days or more, had significantly
increased from $2,557 at year-end 2005 to $13,392 at year-end 2006. The
nonperforming loan balances increased primarily from three commercial loan
relationships secured by liens on commercial real estate and equipment, personal
guarantees and life insurance. During this time in the fourth quarter of 2006,
specific allocations were made on behalf of the portfolio risks and credit
deterioration of these nonperforming relationships, which required corresponding
increases in the provision for loan losses to adequately fund the allowance for
loan losses. During 2007, net charge-offs totaled $4,927, which were up $1,543,
or 45.6%, from 2006, due to commercial charge-offs of the specific allocations
that were already reflected in the allowance for loan losses from 2006. As part
of management's strategy to liquidate and resolve its nonperforming
relationships, the Company experienced improvements in the ratio of
nonperforming loans as a percentage of total loans, which finished 2007 at
0.57%, down from 2.14% at year-end 2006. The Company's ratio of nonperforming
assets, which includes OREO properties, as a percentage of total assets also
improved from 2.00% at year-end 2006 to 0.50% at December 31, 2007. This
improvement was due to the liquidation of the Company's largest non-performing
asset during the fourth quarter of 2007.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
As a result of lower nonperforming loan balances, the ratio of allowance
for loan losses to total loans decreased to 1.06% at December 31, 2007 as
compared to 1.51% at December 31, 2006. Management believes that the allowance
for loan losses at December 31, 2007 was adequate and reflected probable
incurred losses in the loan portfolio. There can be no assurance, however, that
adjustments to the allowance for loan losses will not be required in the future.
Changes in the circumstances of particular borrowers, as well as adverse
developments in the economy are factors that could change and make adjustments
to the allowance for loan losses necessary. The actions that took place in the
fourth quarter of 2006 were deemed prudent and necessary by management and
resulted in a lower nonperforming loan portfolio in 2007 which, in turn,
improved asset quality, lowered loan portfolio risk and created a much stronger
balance sheet going forward into 2008. Asset quality will continue to remain a
key focus, as management continues to stress not just loan growth, but quality
in loan underwriting as well.
DEPOSITS
Interest-earning assets are funded generally by both interest-bearing and
noninterest-bearing core deposits. Deposits are influenced by changes in
interest rates, economic conditions and competition from other banks. The
accompanying table VII shows the composition of total deposits as of December
31, 2007. Total deposits decreased $4,760, or 0.8%, to finish at $589,026 at
year-end 2007, resulting mostly from maturity runoff in the Company's time
deposit balances. Time deposits, particularly certificates of deposit ("CD's"),
remain the most significant source of funding for the Company's earning assets,
making up 57.9% of total deposits. During 2007, time deposits decreased $4,575,
or 1.3%, from year-end 2006. This decrease was primarily due to maturity runoff
of the Company's wholesale CD balances (i.e. brokered CD's), decreasing $6,220,
or 16.5%, from year-end 2006, partially offset by relatively stable retail CD
balances, increasing $1,645, or 0.5%, from year-end 2006. With earning assets
being funded primarily through other borrowed funds and increased repurchase
agreement balances, there has not been an aggressive need to deploy time
deposits as a funding source. As market rates have steadied since June 2006, the
Company has seen the cost of its retail CD balances aggressively reprice upward
to reflect current deposit rates. Furthermore, during the first half of 2007,
the economy experienced increases in its wholesale funding rates, both short-
and long-term indices, also creating a cost increase to this funding source. As
a result, this lagging effect has caused the Company's retail and wholesale CD
portfolio to become comparable in cost to fund earning asset growth. The
Company's retail CD portfolio produced an average cost of 4.88% during 2007 as
compared to 4.25% during 2006, while the wholesale CD portfolio was 4.89% during
2007 as compared to 4.38% during 2006. As a result, management will continue to
utilize both retail and wholesale deposits as funding sources for future earning
asset growth.
Partially offsetting the decreases in time deposits was growth in the
Company's money market deposit balances, which were up $13,335, or 22.6%, to
finish at $72,276 at year-end 2007 as compared to $58,941 at year-end 2006. This
increase was from the Company's Market Watch money market account product, which
generated $13,557 in new deposit balances from year-end 2006. Introduced in
August 2005, the Market Watch product is a limited transaction investment
account with tiered rates that compete with current market rate offerings and
serve as an alternative to certificates of deposit for some customers. The
continued 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 $12,866, or 16.4%. This was primarily from decreases
in the Company's Gold Club and Public Fund NOW balances that totaled $14,173, or
25.0%, collectively.
Also partially offsetting time deposit decreases was growth in the
Company's noninterest-bearing demand deposits, which were up $629, or 0.8%, from
year-end 2006.
The Company will continue to experience increased competition for deposits
in its market areas, which should challenge net growth in its deposit balances.
The Company will continue to evaluate its deposit portfolio mix to properly
utilize both retail and wholesale funds to support earning assets and minimize
interest costs.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were up $17,834, or 79.1%, from year-end 2006. This increase was
mostly due to the fluctuation of various commercial accounts.
FUNDS BORROWED
The Company also accesses other funding sources, including short-term and
long-term borrowings, to fund asset growth and satisfy short-term liquidity
needs. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB)
advances and promissory notes. During 2007, other borrowed funds were up $3,456,
or 5.4%, from year-end 2006, and was caused by the need to fund earning assets
during 2007, which were up 3.1%. While deposits continue to be the primary focus
of funding for growth in earning assets, management will continue to utilize
various wholesale borrowings to help manage interest rate sensitivity and
liquidity.
OFF-BALANCE SHEET ARRANGEMENTS
The disclosures required for off-balance sheet arrangements are discussed
in Note I and Note K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
CAPITAL RESOURCES
The Company maintains a capital level that exceeds regulatory requirements
as a margin of safety for its depositors and shareholders. All of the capital
ratios exceeded the regulatory minimum guidelines as identified in Note P
"Regulatory Matters". Shareholders' equity totaled $61,511 at December 31, 2007,
compared to $60,282 at December 31, 2006, which represents growth of 2.0%.
Contributing most to this increase was year-to-date net income of $6,297 and
$398 in proceeds from the issuance of common stock. Partially offsetting the
growth in capital were cash dividends paid of $2,938, or $.71 per share,
year-to-date, and $3,394 in treasury stock repurchases. Cash dividends paid for
2007 represents a 3.6% increase as compared to 2006.
The Company may repurchase additional common shares from time to time as
authorized by its stock repurchase program. The Company's Board of Directors has
approved annual extensions to the plan. Most recently, the Board of Directors
extended the stock repurchase program from February 16, 2008 to February 15,
2009, and authorized Ohio Valley to repurchase up to 175,000 of its common
shares through open market and privately negotiated purchases.
Furthermore, 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 2007, shareholders invested more than $1,248
through the dividend reinvestment and stock purchase plan. These proceeds
resulted in the issuance of 5,907 new shares and the acquisition of 43,138
existing shares through open market purchases for a total of 49,045 shares. At
December 31, 2007, approximately 81% of the shareholders were enrolled in the
dividend reinvestment plan.
INTEREST RATE SENSITIVITY AND LIQUIDITY
The Company's goal for interest rate sensitivity management is to maintain
a balance between steady net interest income growth and the risks associated
with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of
the Company's financial condition to adverse movements in interest rates.
Accepting this risk can be an important source of profitability, but excessive
levels of IRR can threaten the Company's earnings and capital.
The Company evaluates IRR through the use of an earnings simulation model
to analyze net interest income sensitivity to changing interest rates. The
modeling process starts with a base case simulation, which assumes a flat
interest rate scenario. The base case scenario is compared to rising and falling
interest rate scenarios assuming a parallel shift in all interest rates.
Comparisons of net interest income and net income fluctuations from the flat
rate scenario illustrate the risks associated with the projected balance sheet
structure.
The Company's Asset/Liability Committee monitors and manages IRR within
Board approved policy limits. The current IRR policy limits anticipated changes
in net interest income 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, 200 and 300 basis points.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the simulation modeling. For example, although certain assets
and liabilities may have similar maturities or periods of repricing, they may
react in different degrees to changes in market rates. In addition, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market rates, while interest rates on other types may lag behind
changes in market rates. Further, in the event of a change in interest rates,
expected rates of prepayment on loans and mortgage-backed securities and early
withdrawals from certificates of deposit may deviate significantly from those
assumed in making the risk calculations. The Company's simulation models provide
results in extreme interest rate environments and results are used accordingly.
Reacting to changes in economic conditions, interest rates and market forces,
the Company has been able to alter the mix of short- and long-term loans and
investments, and increase or decrease the emphasis on fixed- and variable-rate
products in response to changing market conditions.
The estimated percentage change in net interest income due to a change in
interest rates was within the policy guidelines established by the Board. At
December 31, 2007, the Company's analysis of net interest income reflects a
liability sensitive position. Based on current assumptions, an instantaneous
decrease in interest rates would positively impact net interest income primarily
due to the duration of earning assets exceeding the duration of interest-bearing
liabilities. As compared to December 31, 2006, the Company's interest rate risk
profile has become more liability sensitive primarily due to the growth in
fixed-rate residential mortgages. Management was willing to assume additional
interest rate risk throughout 2007 with the anticipation of lower interest
rates. Since September 2007, the Federal Reserve has reduced short-term interest
rates 225 basis points, and management anticipates such reduction will have a
positive impact on net interest income.
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
$78,063 in securities as available for sale at December 31, 2007. 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,
2007, the Bank could borrow an additional $75,192 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
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 in
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 loans placed on this report are: loans
past due 60 or more days, nonaccrual loans 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 and real estate loan portfolios.
Included in the specific allocation analysis 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) is based upon total loan portfolio
balances minus loan balances already reviewed (specific allocation). The Large
Loan Review Committee evaluates credit analysis reports that provide management
with a "snapshot" of information on borrowers with larger-balance loans
(aggregate balances of $1,000 or greater), including loan grades, collateral
values, and other factors. A list is prepared and updated quarterly that allows
management to monitor this group of borrowers. Therefore, only small balance
commercial loans and homogeneous loans (consumer and real estate loans) are not
specifically reviewed to determine minor delinquencies, current collateral
values and present credit risk. The Company utilizes actual historic loss
experience as a factor to calculate the probable losses for this component of
the allowance for loan losses. This risk factor reflects a 3 year performance
evaluation of credit losses per loan portfolio. The risk factor is achieved by
taking the average net charge-off per loan portfolio for the last 36 consecutive
months and dividing it by the average loan balance for each loan portfolio over
the same time period. The Company believes that by using the 36 month average
loss risk factor, the estimated allowance will more accurately reflect current
probable losses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
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 degree of impact it may have on
the allowance. To calculate the impact of other economic conditions on the
allowance, the total general allowance is multiplied by this factor. These
dollars are then added to the other two components to provide for economic
conditions in the Company's assessment area. The Company's assessment area takes
in a total of ten counties in Ohio and West Virginia. Each assessment area has
its individual economic conditions; however, the Company has chosen to average
the risk factors for compiling the economic risk factor. The adequacy of the
allowance may be determined by certain specific and nonspecific allocations;
however, the total allocation is available for any credit losses that may impact
the loan portfolios.
CONCENTRATIONS OF CREDIT RISK
The Company maintains a diversified credit portfolio, with commercial
loans, both commercial real estate and commercial and industrial, 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. Additional
detailed information concerning a number of important factors which could cause
actual results to differ materially from the forward-looking statements
contained in management's discussion and analysis is available in the Company's
filings with the Securities and Exchange Commission, under the Securities
Exchange Act of 1934, including the disclosure under the heading "Item 1A. Risk
Factors" of Part 1 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2007. 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
------------------------------------------------------------------------------------
2007 2006 2005
(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 $ 549 $ 23 4.22% $ 579 $ 23 4.06% $ 636 $ 15 2.33%
with banks
Federal funds sold 4,428 221 5.00 4,193 220 5.24 1,256 39 3.14
Securities:
Taxable 76,748 3,477 4.53 73,160 3,189 4.36 71,602 2,921 4.08
Tax exempt 14,427 797 5.52 12,440 688 5.53 11,851 691 5.83
Loans 628,891 50,793 8.08 626,418 48,581 7.76 599,345 42,621 7.11
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
earning assets 725,043 55,311 7.63% 716,790 52,701 7.35% 684,690 46,287 6.76%
Noninterest-earning assets:
Cash and due from banks 14,137 15,306 15,420
Other nonearning assets 38,094 36,655 33,687
Allowance for loan losses (7,720) (7,819) (7,308)
-------- -------- --------
Total noninterest-
earning assets 44,511 44,142 41,799
-------- -------- --------
Total assets $769,554 $760,932 $726,489
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $ 78,636 1,924 2.45% $ 93,137 2,343 2.52% $110,626 2,252 2.04%
Savings and Money Market 97,240 2,705 2.78 78,241 1,895 2.42 50,363 503 1.00
Time deposits 341,686 16,686 4.88 338,593 14,356 4.24 311,268 10,218 3.28
Repurchase agreements 27,433 1,051 3.83 22,692 895 3.94 24,694 641 2.60
Other borrowed money 74,196 4,054 5.46 81,975 4,442 5.42 92,520 4,523 4.89
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
bearing liabilities 619,191 26,420 4.27% 614,638 23,931 3.89% 589,471 18,137 3.08%
Noninterest-bearing liabilities:
Demand deposit accounts 78,048 75,330 70,473
Other liabilities 11,766 10,994 8,925
-------- -------- --------
Total noninterest-
bearing liabilities 89,814 86,324 79,398
Shareholders' equity 60,549 59,970 57,620
-------- -------- --------
Total liabilities and
shareholders' equity $769,554 $760,932 $726,489
======== ======== ========
Net interest earnings $28,891 $28,770 $28,150
======= ======= =======
Net interest earnings as a percent
of interest-earning assets 3.99% 4.02% 4.11%
----- ----- -----
Net interest rate spread 3.36% 3.46% 3.68%
----- ----- -----
Average interest-bearing liabilities
to average earning assets 85.40% 85.75% 86.09%
===== ===== =====
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
2007 2006
----------------------------- ----------------------------
(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 $ (1) $ 1 -- $ (2) $ 10 $ 8
Federal funds sold 12 (11) $ 1 141 40 181
Securities:
Taxable 160 128 288 65 204 269
Tax exempt 110 (1) 109 34 (37) (3)
Loans 192 2,020 2,212 1,983 3,976 5,959
------- ------- ------- ------- ------- -------
Total interest income 473 2,137 2,610 2,221 4,193 6,414
INTEREST EXPENSE
- ----------------
NOW accounts (356) (63) (419) (390) 481 91
Savings and Money Market 503 307 810 390 1,002 1,392
Time deposits 132 2,198 2,330 958 3,180 4,138
Repurchase agreements 182 (26) 156 (56) 310 254
Other borrowed money (425) 37 (388) (544) 463 (81)
------- ------- ------- ------- ------- -------
Total interest expense 36 2,453 2,489 358 5,436 5,794
------- ------- ------- ------- ------- -------
Net interest earnings $ 437 $ (316) $ 121 $ 1,863 $(1,243) $ 620
======= ======= ======= ======= ======= =======
The change in interest due to volume and rate is determined as follows: Volume
Variance - change in volume multiplied by the previous year's rate; Yield/Rate
Variance - change in rate multiplied by the previous year's volume; Total
Variance - change in volume multiplied by the change in rate. The change in
interest due to both volume and rate has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the
change in each. Fully taxable equivalent yield assumes a 34% tax rate, net of
related nondeductible interest expense.
SECURITIES
Table III
MATURING
---------------------------------------------------------------------------
As of December 31, 2007 Within After One but After Five but
(dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years
-------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
U.S. Government
sponsored entity securities $ 8,981 3.70% $27,916 4.77% $ 2,550 4.95% --- ---
Obligations of states and
political subdivisions 811 5.97% 5,953 6.90% 3,061 6.90% $6,108 3.84%
Mortgage-backed securities 671 1.53% 37,993 4.10% --- --- --- ---
------- ---- ------- ---- ------- ---- ------ ----
Total debt securiities $10,463 3.74% $71,862 4.59% $ 5,611 6.01% $6,108 3.84%
======= ==== ======= ==== ======= ==== ====== ====
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) 2007 2006 2005 2004 2003
- ---------------------- ---- ---- ---- ---- ----
Commercial loans (1) $5,273 $7,806 $4,704 $4,657 $4,844
Percentage of loans to total loans 40.63% 39.45% 38.33% 37.69% 38.58%
Residential real estate loans 327 310 623 642 833
Percentage of loans to total loans 39.31% 38.16% 38.06% 37.84% 37.94%
Consumer loans 1,137 1,296 1,806 1,878 1,916
Percentage of loans to total loans 20.06% 22.39% 23.61% 24.47% 23.48%
------- ------- ------- ------- -------
Allowance for Loan Losses $6,737 9,412 $7,133 $7,177 $7,593
======= ======= ======= ======= =======
100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
Ratio of net charge-offs
to average loans .78% .54% .31% .47% .68%
======= ======= ======= ======= =======
The above allocation is based on estimates and subjective judgments and is
not necessarily indicative of the specific amounts or loan categories in which
losses may ultimately occur.
(1) Includes commercal and industrial and commercial real estate loans.
SUMMARY OF NONPERFORMING AND PAST DUE LOANS
Table V
(dollars in thousands) 2007 2006 2005 2004 2003
- ---------------------- ---- ---- ---- ---- ----
Impaired loans $ 6,871 $17,402 $7,983 $5,573 $1,988
Past due-90 days or more and
still accruing 927 1,375 1,317 1,402 659
Nonaccrual 2,734 12,017 1,240 1,618 2,655
Accruing loans past due 90
days or more to total loans .14% .22% .21% .23% .12%
Nonaccrual loans as a % of
total loans .43% 1.92% .20% .27% .46%
Impaired loans as a % of total loans 1.08% 2.78% 1.29% .93% .35%
Allowance for loans losses as a
% of total loans 1.06% 1.51% 1.16% 1.20% 1.32%
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 2007, the Company recognized $401 of interest income on impaired
loans. Individual loans not included above that management feels have loss
potential total approximately $1,312. 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, 2007 Maturing/Repricing
(dollars in thousands)
Within After One but
One Year Within Five Years After Five Years Total
-------- ----------------- ---------------- -----
Commercial loans (1) $143,244 $ 73,605 $ 41,939 $258,788
Residential real estate loans 52,588 13,127 184,768 250,483
Consumer loans 26,339 69,004 32,489 127,832
-------- -------- -------- --------
Total loans $222,171 $155,736 $259,196 $637,103
======== ======== ======== ========
Loans maturing or repricing after one year with:
Variable interest rates $ 67,563
Fixed interest rates 347,369
--------
Total $414,932
========
(1) Includes commercial and industrial and commercial real estate loans.
DEPOSITS
Table VII as of December 31
(dollars in thousands)
2007 2006 2005
---- ---- ----
Interest-bearing deposits:
NOW accounts $ 65,618 $ 78,484 $ 95,498
Money Market 72,276 58,941 22,347
Savings accounts 31,436 32,719 35,126
IRA accounts 44,050 38,731 36,779
Certificates of Deposit 297,057 306,951 290,555
-------- -------- --------
510,437 515,826 480,305
Noninterest-bearing deposits:
Demand deposits 78,589 77,960 82,561
-------- -------- --------
Total deposits $589,026 $593,786 $562,866
======== ======== ========
The following table presents the Company's estimated net interest income
sensitivity:
INTEREST RATE SENSITIVITY
Table VIII
Change in December 31, 2007 December 31, 2006
Interest Rates % Change in % Change in
Basis Points Net Interest Income Net Interest Income
- --------------- ------------------- -------------------
+300 (8.23%) (5.95%)
+200 (5.09%) (3.26%)
+100 (2.47%) (1.37%)
-100 2.48% 1.10%
-200 5.01% 1.74%
-300 7.86% 2.65%
CONTRACTUAL OBLIGATIONS
Table IX
The following table presents, as of December 31, 2007, 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 $247,919 --- --- --- $247,919
Consumer and brokered time deposits F 283,856 $ 47,730 $ 7,729 $ 1,792 341,107
Repurchase agreements G 40,390 --- --- --- 40,390
Other borrowed funds H 31,837 35,012 12 141 67,002
Subordinated debentures I --- --- --- 13,500 13,500
KEY RATIOS
Table X
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Return on average assets .82% .71% .97% 1.16% .93%
Return on average equity 10.40% 9.00% 12.18% 15.02% 12.43%
Dividend payout ratio 46.66% 52.56% 38.55% 38.89% 38.14%
Average equity to
average assets 7.87% 7.88% 7.93% 7.72% 7.51%
DIRECTOR & OFFICER LISTING
OVBC Directors
- --------------
Jeffrey E. Smith President and CEO, Ohio Valley Banc Corp.
Thomas E. Wiseman President, The Wiseman Agency, Inc.
insurance and financial services
Robert H. Eastman President, Ohio Valley Supermarkets, Inc.
retail grocery stores
Lannes C. Williamson President, L. Williamson Pallets, Inc.
sawmill, pallet manufacturing, and wood processing
Steven B. Chapman CPA, Chapman & Burris CPA's, LLC
Certified Public Accountant, Chapman & Burris CPAs, LLC
Anna P. Barnitz Treasurer & CFO, Bob's Market & Greenhouses, Inc.
wholesale horticultural products and retail landscaping
stores
Brent A. Saunders Attorney, Halliday, Sheets & Saunders
Harold A. Howe President, Ohio Valley Financial Services Agency, LLC
Robert E. Daniel Administrator, Holzer Clinic
multispecialty physician group practice
Roger D. Williams President, Bob Evans Restaurants
restaurant operator and food products
David W. Thomas Former Chief Examiner, OH Division Financial Institutions
bank supervision and regulation
OVBC Officers
- -------------
Jeffrey E. Smith President and CEO
E. Richard Mahan Senior Vice President & Chief Credit Officer
Larry E. Miller, II Senior Vice President & Secretary
Katrinka V. Hart Senior Vice President & Risk Management
Mario P. Liberatore Vice President
Cherie A. Barr Vice President
Sandra L. Edwards Vice President
David L. Shaffer Vice President
Jennifer L. Osborne Vice President
Tom R. Shepherd Vice President
Scott W. Shockey Vice President & Chief Financial Officer
Paula W. Clay Assistant Secretary
Cindy H. Johnston Assistant Secretary
Ohio Valley Bank Directors
- --------------------------
Jeffrey E. Smith
Thomas E. Wiseman
Robert H. Eastman
Lannes C. Williamson
Harold A. Howe
Steven B. Chapman
Anna P. Barnitz
Brent A. Saunders
Robert E. Daniel
Roger D. Williams
David W. Thomas
Directors Emeritus
- ------------------
W. Lowell Call
James L. Dailey
Merrill L. Evans
Art E. Hartley, Sr.
Charles C. Lanham
Barney A. Molnar
C. Leon Saunders
Wendell B. Thomas
West Virginia Advisory Board
- ----------------------------
Mario P. Liberatore
Anna P. Barnitz
Richard L. Handley
Gregory K. Hartley
Charles C. Lanham
Trenton M. Stover
Lannes C. Williamson
John C. Musgrave
Stephen L. Johnson
E. Allen Bell
John A. Myers
Ohio Valley Bank Officers
- -------------------------
Jeffrey E. Smith President & Chief Executive Officer
E. Richard Mahan Executive Vice President & Chief Credit Officer
Larry E. Miller, II Executive Vice President & Secretary
Katrinka V. Hart Executive Vice President & Risk Management
Senior Vice Presidents
Mario P. Liberatore West Virginia Bank Group
Sandra L. Edwards Financial Bank Group
David L. Shaffer Commercial Bank Group
Jennifer L. Osborne Retail Lending Group
Tom R. Shepherd Chief Deposit Officer
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
David K. Nadler Financial Analyst & Strategic Plan Coordinator
Assistant Vice Presidents
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 Indirect Lending Manager
Pamela D. Edwards Commercial Loan Operations
Paula W. Clay Assistant Secretary
Cindy H. Johnston Assistant Secretary
Chris L. Preston Regional Branch Administrator I-64
Angela G. King Regional Branch Administrator Gallia/Meigs
Frank W. Davison Chief Information Officer
Bryna S. Butler Director e-Services and Corporate Communications
Kyla R. Carpenter Director of Marketing
William T. Johnson Enterprise Risk Analyst
Toby M. Mannering Collection Manager
Assistant Cashiers
Brenda G. Henson Manager Customer Service
Richard P. Speirs Maintenance Technical Supervisor
Stephanie L. Stover Retail Lending Operations Manager
Raymond G. Polcyn Retail Lending Manager Gallia-Meigs SuperBanks
Tyrone J. Thomas Assistant Manager Franklin County Region
Allen W. Elliott Assistant Manager Indirect Lending
Tamela D. LeMaster Regional Branch Manager I-64
Joe J. Wyant Region Manager Jackson County
Linda L. Hart Assistant Manager Waverly Office
Miquel D. McCleese Assistant Manager Columbus Office
Loan Central Officers
- ---------------------
Katrinka V. Hart Chairman of the Board
Cherie A. Barr President
Timothy R. Brumfield Secretary & Manager, Gallipolis Office
T. Joe Wilson Manager, South Point Office
Joseph I. Jones Manager, Waverly Office
John J. Holtzapfel Manager, Wheelersburg Office
Deborah G. Moore Manager, Jackson Office
INVESTOR INFORMATION
- --------------------
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.
In April 1996, the Banc Corp. opened a consumer finance company operating under
the name of Loan Central, Inc.
Ohio Valley Financial Services, an agency specializing in life insurance, was
formed as a subsidiary of the Corp. in June 2000. The Corp. also has minority
holdings in ProAlliance.
10-K Information
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: Larry E. Miller,
Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and proxy
statement are also available on the company's Web site, www.ovbc.com.
Contact Information
Ohio Valley Banc Corp.
420 Third Avenue
P.O. Box 240
Gallipolis, Ohio 45631
740.446.2631 or 800.468.6682
Web: www.ovbc.com
E-mail: investorrelations@ovbc.com
Ohio Valley Banc Corp. stock is traded on The NASDAQ Stock Market under
the symbol OVBC.
Ohio Valley Bank
16 locations
Gallipolis, Ohio
Main Office - 420 Third Ave.
Mini Bank - 437 Fourth Ave.
Inside Foodland - 236 Second Ave.
Inside Wal-Mart - 2145 Eastern Ave.
3035 State Route 160
Inside Holzer - 100 Jackson Pike
Columbus, Ohio
3700 South High St.
Jackson, Ohio
740 East Main St.
Pomeroy, Ohio
Inside Sav-a-Lot - 700 W. Main St.
Rio Grande, Ohio
27 North College Ave.
South Point, Ohio
Inside Wal-Mart - 354 Private Drive
Waverly, Ohio
507 West Emmitt Ave.
Cross Lanes, West Virginia
Inside Wal-Mart
Huntington, West Virginia
3331 U.S. Route 60 East
Milton, West Virginia
280 East Main St.
Point Pleasant, West Virginia
328 Viand St.
Loan Central
6 locations
Gallipolis, Ohio
2145 Eastern Avenue
Jackson, Ohio
345 Main Street
Ironton, Ohio
710 Park Avenue
South Point, Ohio
348 County Road 410
Waverly, Ohio
505 West Emmitt Avenue
Wheelersburg, Ohio
326 Center Street