Message from Management
Dear Fellow Shareholders and Friends,
March 15, 2007
In my nearly thirty-five years as an Ohio Valley banker, 2006 was one of only
three years in which our company reported a decrease in annual earnings. It is
no pleasure to report to you that our company's net earnings for 2006 decreased
23.1% and earnings per share were down 22.6%. Nor does it please me to report
that our company increased its provision for loan loss expense by $3.8 million
due to higher non-performing loans and charge-offs and that our ratio of net
chargeoffs to average loans increased from .31% to .54%.
However, what does please me is that last year, in one of the more challenging
banking environments, in one of the more challenging economies, and one of the
most challenging locations, the Midwest, the more than 250 people who work for
our company:
o Earned nearly $5.4 million,
o Increased the dividend to our shareholders more than 5% per share,
o Increased our total assets to more than three quarters of a billion dollars,
o Increased noninterest income by $308 thousand,
o Opened a beautiful new office in Jackson, Ohio, and
o Decreased non interest expense by $160 thousand, improving our efficiency
ratio to 61.2%.
The annual report that follows this message gives complete details on the
financial results of our company for 2006 and selected previous years. A good
friend of OVB once told me, "Experience is good, even though some of it's bad!"
Another friend of OVB said, "Rough seas make for good sailors and strong ships."
I think your sailors are better and your ship is stronger from the experience of
2006. The ship is stronger for two reasons: at December 31, 2006, the total
capital of our company was more than $60 Million and more than 80% of our
shareholders were enrolled in the dividend reinvestment and stock purchase plan.
We thank you for your continued support of OVBC and submit this report for your
review. By the way, if you'd like to know who those friends were who shared the
two comments with me, come to this year's annual meeting May 9th and I'll tell
you.
Sincerely,
Jeffrey E. Smith
President and Chief Executive Officer
SELECTED FINANCIAL DATA
Years Ended December 31
SUMMARY OF OPERATIONS: 2006 2005 2004 2003 2002
(dollars in thousands, except per share data)
Total interest income $ 52,421 $ 46,071 $ 43,490 $ 45,160 $ 47,771
Total interest expense 23,931 18,137 16,146 17,645 20,810
Net interest income 28,490 27,934 27,344 27,515 26,961
Provision for loan losses 5,662 1,797 2,353 4,339 5,470
Total other income 5,830 5,522 7,992 5,982 5,634
Total other expenses 21,199 21,359 20,926 19,817 19,175
Income before income taxes 7,459 10,300 12,057 9,341 7,950
Income taxes 2,061 3,283 3,676 2,869 2,275
Net income 5,398 7,017 8,381 6,472 5,675
PER SHARE DATA(1):
Net income per share $ 1.27 $ 1.64 $ 1.93 $ 1.49 $ 1.31
Cash dividends per share $ .67 $ .63 $ .75 $ .57 $ .54
Book value per share $14.38 $13.90 $13.19 $12.44 $11.64
Weighted average number of common
shares outstanding 4,230,551 4,278,562 4,338,598 4,350,288 4,322,875
AVERAGE BALANCE SUMMARY:
Total loans $ 626,418 $ 599,345 $ 590,006 $ 559,854 $ 538,148
Securities (2) 86,179 84,089 86,598 86,609 76,020
Deposits 585,301 542,730 537,162 509,676 489,513
Other borrowed funds (3) 81,975 92,520 96,361 100,590 98,938
Shareholders' equity 59,970 57,620 55,788 52,074 47,875
Total assets 760,932 726,489 722,281 693,197 667,561
PERIOD END BALANCES:
Total loans $ 625,164 $ 617,532 $ 600,574 $ 573,704 $ 559,561
Securities (2) 90,161 84,623 86,674 90,046 90,759
Deposits 593,786 562,866 535,153 507,509 497,404
Shareholders' equity 60,282 59,271 56,579 54,408 50,375
Total assets 764,361 749,719 729,120 707,327 696,356
KEY RATIOS:
Return on average assets .71% .97% 1.16% .93% .85%
Return on average equity 9.00% 12.18% 15.02% 12.43% 11.85%
Dividend payout ratio 52.56% 38.55% 38.89% 38.14% 40.79%
Average equity to average assets 7.88% 7.93% 7.72% 7.51% 7.17%
(1) Restated for stock splits as appropriate.
(2) Securities include interest-bearing balances with banks.
(3) Other borrowed funds include subordinated debentures.
3
CONSOLIDATED STATEMENTS OF CONDITION
As of December 31
2006 2005
---- ----
(dollars in thousands, except share and per share data)
ASSETS
Cash and noninterest-bearing deposits with banks $ 18,965 $ 18,516
Federal funds sold 1,800 1,100
--------- ---------
Total cash and cash equivalents 20,765 19,616
Interest-bearing deposits in other financial
institutions 508 510
Securities available-for-sale 70,267 66,328
Securities held-to-maturity
(estimated fair value: 2006 - $13,586,
2005 - $12,373) 13,350 12,088
Federal Home Loan Bank stock 6,036 5,697
Total loans 625,164 617,532
Less: Allowance for loan losses (9,412) (7,133)
--------- ---------
Net loans 615,752 610,399
Premises and equipment, net 9,812 8,299
Accrued income receivable 3,234 2,819
Goodwill 1,267 1,267
Bank owned life insurance 16,054 15,962
Other assets 7,316 6,734
--------- ---------
Total assets $ 764,361 $ 749,719
========= =========
LIABILITIES
Noninterest-bearing deposits $ 77,960 $ 82,561
Interest-bearing deposits 515,826 480,305
--------- ---------
Total deposits 593,786 562,866
Securities sold under agreements to repurchase 22,556 29,070
Other borrowed funds 63,546 76,173
Subordinated debentures 13,500 13,500
Accrued liabilities 10,691 8,839
--------- ---------
Total liabilities 704,079 690,448
--------- ---------
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value per share, 10,000,000
shares authorized; 2006 - 4,626,340 shares
issued, 2005 - 4,626,336 shares issued) 4,626 4,626
Additional paid-in-capital 32,282 32,282
Retained earnings 34,404 31,843
Accumulated other comprehensive loss (981) (1,231)
Treasury stock, at cost (2006 - 432,852 shares,
2005 - 361,365 shares) (10,049) (8,249)
--------- ---------
Total shareholders' equity 60,282 59,271
--------- ---------
Total liabilities and shareholders' equity $ 764,361 $ 749,719
========= =========
See accompanying notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 2006 2005 2004
------------------------------- ---- ---- ----
(dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 48,514 $ 42,621 $ 39,821
Securities:
Taxable 2,851 2,644 2,837
Tax exempt 474 475 552
Dividends 339 277 218
Other Interest 243 54 62
-------- -------- --------
52,421 46,071 43,490
Interest expense:
Deposits 18,594 12,973 11,326
Securities sold under agreements
to repurchase 895 641 278
Other borrowed funds 3,163 3,398 3,574
Subordinated debentures 1,279 1,125 968
-------- -------- --------
23,931 18,137 16,146
-------- -------- --------
Net interest income 28,490 27,934 27,344
Provision for loan losses 5,662 1,797 2,353
Net interest income after provision -------- -------- --------
for loan losses 22,828 26,137 24,991
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 2,987 3,096 3,318
Trust fees 221 211 203
Income from bank owned life insurance 907 589 606
Gain on sale of loans 104 120 63
Gain on sale of ProCentury Corp. --- --- 2,463
Other 1,611 1,506 1,339
-------- -------- --------
5,830 5,522 7,992
Noninterest expense:
Salaries and employee benefits 12,497 12,837 12,592
Occupancy 1,338 1,309 1,285
Furniture and equipment 1,120 1,206 1,208
Corporation franchise tax 669 673 616
Data processing 687 633 504
Other 4,888 4,701 4,721
-------- -------- --------
21,199 21,359 20,926
-------- -------- --------
Income before income taxes 7,459 10,300 12,057
Provision for income taxes 2,061 3,283 3,676
-------- -------- --------
NET INCOME $ 5,398 $ 7,017 $ 8,381
======== ======== ========
Earnings per share $ 1.27 $ 1.64 $ 1.93
======== ======== ========
See accompanying notes to consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2006, 2005 and 2004
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, 2004 $ 3,658 $30,962 $23,343 $ 624 $ (4,179) $54,408
Comprehensive income:
Net income --- --- 8,381 --- --- 8,381
Change in unrealized gain on
available-for-sale securities --- --- --- (1,277) --- (1,277)
Income tax effect --- --- --- 434 --- 434
-------
Total comprehensive income --- --- --- --- --- 7,538
Common Stock issued to ESOP,
4,600 shares 5 146 --- --- --- 151
Common Stock issued through
dividend reinvestment, 27,016 shares 27 823 --- --- --- 850
Cash dividends, $.75 per share --- --- (3,259) --- --- (3,259)
Shares acquired for treasury, 99,359 shares --- --- --- --- (3,109) (3,109)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2004 3,690 31,931 28,465 (219) (7,288) 56,579
Comprehensive income:
Net income --- --- 7,017 --- --- 7,017
Change in unrealized loss on
available-for-sale securities --- --- --- (1,534) --- (1,534)
Income tax effect --- --- --- 522 --- 522
-------
Total comprehensive income --- --- --- --- --- 6,005
Shares from stock split, 25%:
Common stock, 922,030 shares (including
treasury stock of 64,742 shares) 922 --- (922) --- --- ---
Cash paid in lieu of fractional shares
in stock split --- --- (12) --- --- (12)
Common Stock issued to ESOP,
9,500 shares 9 231 --- --- --- 240
Common Stock issued through
dividend reinvestment, 4,978 shares 5 120 --- --- --- 125
Cash dividends, $.63 per share --- --- (2,705) --- --- (2,705)
Shares acquired for treasury, 37,653 shares --- --- --- --- (961) (961)
------- ------- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 2005 $ 4,626 $32,282 $31,843 $(1,231) $(8,249) $59,271
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
======= ======= ======= ======= ======== =======
See accompanying notes to consolidated financial statements
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2006 2005 2004
------------------------------- ---- ---- ----
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,398 $ 7,017 $ 8,381
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,021 1,147 1,237
Net amortization and accretion of securities 94 123 201
Proceeds from sale of loans in secondary market 4,038 4,918 1,598
Loans disbursed for sale in secondary market (3,933) (4,798) (1,535)
Gain on sale of loans (104) (120) (63)
Deferred tax (benefit) expense (903) (293) 63
Provision for loan losses 5,662 1,797 2,353
Common stock issued to ESOP --- 240 151
Federal Home Loan Bank stock dividend (338) (276) (218)
Gain on sale of ProCentury Corp. --- --- (2,463)
Loss on sale of other real estate owned 55 12 ---
Change in accrued income receivable (415) (176) 57
Change in accrued liabilities 1,852 1,254 1,255
Change in other assets (290) (314) (844)
------- ------- -------
Net cash provided by operating activities 12,137 10,531 10,173
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available-for-sale 12,261 20,714 30,715
Purchases of securities available-for-sale (15,907) (19,952) (29,755)
Proceeds from maturities of securities
held-to-maturity 354 1,159 1,874
Purchases of securities held-to-maturity (1,625) (1,265) (1,056)
Change in interest-bearing deposits in other banks 2 15 334
Net change in loans (11,589) (18,969) (30,163)
Proceeds from sale of other real estate owned 734 100 388
Proceeds from sale of ProCentury Corp. --- --- 4,394
Proceeds from sale of premises and equipment --- 87 ---
Purchases of premises and equipment (2,534) (673) (955)
Proceeds from bank owned life insurance 174 125 850
Purchases of bank owned life insurance --- (1,510) (272)
------- ------- -------
Net cash used in investing activities (18,130) (20,294) (24,496)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits 30,920 27,713 27,644
Cash dividends (2,837) (2,705) (3,259)
Cash paid in lieu of fractional shares in stock split --- (12) ---
Proceeds from issuance of common stock --- 125 850
Purchases of treasury stock (1,800) (961) (3,109)
Change in securities sold under agreements to repurchase (6,514) (10,683) 15,735
Proceeds from Federal Home Loan Bank borrowings 5,000 13,521 11,000
Repayment of Federal Home Loan Bank borrowings (22,146) (18,157) (20,633)
Change in other short-term borrowings 4,519 4,259 (15,379)
------- ------- -------
Net cash provided by financing activities 7,142 13,100 12,849
------- ------- -------
CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents 1,149 3,337 (1,474)
Cash and cash equivalents at beginning of year 19,616 16,279 17,753
------- ------- -------
Cash and cash equivalents at end of year $20,765 $19,616 $16,279
======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $22,014 $17,188 $16,246
Cash paid for income taxes 3,623 3,502 3,472
Non-cash transfers from loans to other real estate owned 573 170 524
Non-cash transfers from retained earnings to common stock
for stock split --- 922 ---
See accompanying notes to consolidated financial statements
7
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 20 offices
located in central and southeastern Ohio as well as western West Virginia. The
Company's primary deposit products are checking, savings, and term certificate
accounts, and its primary lending products are residential mortgage, commercial,
and installment loans. Substantially all loans are secured by specific items of
collateral, including business assets, consumer assets, and commercial and
residential real estate. Commercial loans are expected to be repaid from cash
flow from business operations. Other financial instruments include deposit
accounts in other financial institutions and federal funds sold.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Areas involving the use of management's
estimates and assumptions that are more susceptible to change in the near term
involve the allowance for loan losses, the fair value of certain securities, the
fair value of financial instruments and the determination and carrying value of
impaired loans.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
noninterest-bearing deposits with banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods. The Company reports
net cash flows for customer loan transactions, deposit transactions, short-term
borrowings and interest-bearing deposits with other financial institutions.
Securities: The Company classifies securities into held-to-maturity and
available-for-sale categories. Held-to-maturity securities are those which the
Company has the positive intent and ability to hold to maturity and are reported
at amortized cost. Securities classified as available-for-sale include equity
securities and other securities that management intends to sell or that could be
sold for liquidity, investment management or similar reasons even if there is
not a present intention of such a sale. Available-for-sale securities are
reported at fair value, with unrealized gains or losses included as a separate
component of equity, net of tax. Other securities, such as Federal Home Loan
Bank stock, are carried at cost.
Premium amortization is deducted from, and discount accretion is added to,
interest income on securities using the level yield method. Gains and losses are
recognized upon the sale of specific identified securities on the completed
transaction basis. Securities are written down to fair value when a decline in
fair value is other than temporary.
Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on an accrual basis using the interest method and
includes amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when the loan is impaired or payments are past due over 90 days. Payments
received on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
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
8
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, 2006:
% of Total Loans
----------------
Commercial real estate loans 30.93%
Commercial and industrial loans 7.58%
Residential real estate loans 38.16%
Consumer loans 22.39%
All other loans .94%
----------------
100.00%
================
Approximately 3.51% 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, 2006, the Bank's primary
correspondent balance was $10,071 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 $1,903 at December 31,
2006 and $2,064 at December 31, 2005.
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: 4,230,551 for 2006; 4,278,562 for 2005; 4,338,598 for 2004. Ohio Valley
had no dilutive securities outstanding for any period presented. The weighted
average number of shares outstanding have been retroactively adjusted to reflect
the effect of the stock split.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
9
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale which are also recognized as separate
components of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Bank Owned Life Insurance: The Company has purchased life insurance policies on
certain officers. These policies are recorded at their cash surrender value, or
the amount that could be currently realized.
ESOP: Compensation expense is based on the market price of shares as they are
committed to be allocated to participant accounts.
New Accounting Pronouncements: In July 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109 (FIN 48), which prescribes a recognition threshold and
measurement attribute for a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. The Company has
determined that the adoption of FIN 48 will not have a material effect on its
financial condition, results of operations and cash flows.
Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. 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 $11,281 and $10,804 was required to meet regulatory
reserve and clearing requirements at year end 2006 and 2005. 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 2005 and 2004 have
been reclassified to conform with the presentation for 2006. These
reclassifications had no effect on the net results of operations.
10
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, 2006
-----------------
U.S. Government agency 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
======= ====== ======= =======
December 31, 2005
-----------------
U.S. Government agency securities $18,487 --- $ (320) $18,167
Mortgage-backed securities 49,706 $ 10 (1,555) 48,161
------- ------ -------- -------
Total securities $68,193 $ 10 $(1,875) $66,328
======= ====== ======= =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
---- ----- ------ -----
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
======= ====== ===== =======
December 31, 2005
-----------------
Obligations of states and
political subdivisions $12,019 $ 341 $ (53) $12,307
Mortgage-backed securities 69 --- (3) 66
------- ------ ----- -------
Total securities $12,088 $ 341 $ (56) $12,373
======= ====== ===== =======
At year-end 2006 and 2005, there were no holdings of securities of any one
issuer, other than the U.S. Government and its agencies, in an amount greater
than 10% of shareholders' equity.
Securities with a carrying value of approximately $71,544 at December 31,
2006 and $69,614 at December 31, 2005 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, 2006, 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 --- --- $ 626 $ 630
Due in one to five years $25,495 $25,183 5,664 5,727
Due in five to ten years --- --- 2,136 2,237
Due after ten years --- --- 4,867 4,937
Mortgage-backed securities 46,260 45,084 57 55
------- ------- ------- -------
Total debt securities $71,755 $70,267 $13,350 $13,586
======= ======= ======= =======
There were no sales of debt or equity securities during 2006, 2005 and
2004.
Securities with unrealized losses not recognized in income are as follows:
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 agency 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)
======= ====== ======= ======= ======= =======
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
December 31, 2005 Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ----- ----- ----- ----- -----
Description of Securities
-------------------------
U.S. Government agency securities ........ $13,271 $ (228) $ 1,908 $ (92) $15,179 $ (320)
Mortgage-backed securities ............... 16,944 (352) 30,878 (1,206) 47,822 (1,558)
Obligations of states and
political subdivisions ................. 976 (14) 1,153 (39) 2,129 (53)
------- ------ ------- ------- ------- -------
$31,191 $ (594) $33,939 $(1,337) $65,130 $(1,931)
======= ====== ======= ======= ======= =======
Unrealized losses on the Company's debt securities have not been recognized
into income because the issuers' securities are of high credit quality,
management has the intent and ability to hold for the foreseeable future, and
the decline in fair value is largely due to increases in market interest rates.
The fair value is expected to recover as the bonds approach their maturity date
or reset date. Management does not believe any individual unrealized loss at
December 31, 2006 represents an other-than-temporary impairment.
NOTE C - LOANS
Loans are comprised of the following at December 31:
2006 2005
---- ----
Commercial real estate $193,359 $182,031
Commercial and industrial 47,389 54,505
Residential Real estate 238,549 235,008
Consumer 139,961 145,815
All other 5,906 173
-------- --------
Total Loans $625,164 $617,532
======== ========
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:
2006 2005 2004
---- ---- ----
Balance, beginning of year $7,133 $7,177 $7,593
Loans charged-off:
Commercial (1) 3,079 1,295 1,661
Residential real estate 432 349 823
Consumer 2,120 2,263 2,267
------ ------ ------
Total loans charged-off 5,631 3,907 4,751
Recoveries of loans:
Commercial (1) 946 912 556
Residential real estate 204 336 583
Consumer 1,097 818 843
------ ------ ------
Total recoveries of loans 2,247 2,066 1,982
Net loan charge-offs (3,384) (1,841) (2,769)
Provision charged to operations 5,663 1,797 2,353
------ ------ ------
Balance, end of year $9,412 $7,133 $7,177
====== ====== ======
Information regarding impaired loans is as follows:
2006 2005
---- ----
Balance of impaired loans $17,402 $7,983
Less portion for which no specific
allowance is allocated 2,959 2,828
------ ------
Portion of impaired loan balance for which
an allowance for credit losses is allocated $14,443 $5,155
====== ======
Portion of allowance for loan losses allocated
to the impaired loan balance $4,962 $2,603
====== ======
Average investment in impaired loans for the year $18,774 $8,315
====== ======
Past due - 90 days or more and still accruing $1,375 $1,317
====== ======
Nonaccrual $12,017 $1,240
====== ======
Interest recognized on impaired loans was $939, $495 and $284 for years ending
2006, 2005 and 2004, 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:
2006 2005
---- ----
Land $ 1,364 $ 1,341
Buildings 9,908 8,045
Leasehold improvements 2,452 2,493
Furniture and equipment 11,043 10,427
------- -------
24,767 22,306
Less accumulated depreciation 14,955 14,007
------- -------
Total Premises and Equipment $ 9,812 $ 8,299
======= =======
The following is a summary of the future minimum lease payments for facilities
leased by the Company. Lease payments were $386 in 2006 and $385 in 2005.
2007 $ 355
2008 291
2009 180
2010 60
2011 43
Thereafter 30
------
$ 959
======
NOTE F - DEPOSITS
Following is a summary of interest-bearing deposits at December 31:
2006 2005
---- ----
NOW accounts $ 78,484 $ 95,498
Savings and Money Market 91,660 57,473
Time:
IRA accounts 38,731 36,779
Certificates of Deposit:
In denominations under $100,000 174,129 165,276
In denominations of $100,000 or more 132,822 125,279
-------- --------
Total time deposits 345,682 327,334
-------- --------
Total interest-bearing deposits $515,826 $480,305
======== ========
Following is a summary of total time deposits by remaining maturity at
December 31:
2006
------
Within one year $226,220
From one to two years 97,288
From two to three years 15,495
From three to four years 3,697
From four to five years 903
Thereafter 2,079
--------
Total $345,682
========
Brokered deposits, included in time deposits, were $26,935 and $38,083 at
December 31, 2006 and 2005, 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:
2006 2005
------- -------
Balance outstanding at period-end $22,556 $29,070
------- -------
Weighted average interest rate at period-end 4.20% 3.32%
------- -------
Average amount outstanding during the year $22,692 $24,694
------- -------
Approximate weighted average interest rate
during the year 3.94% 2.60%
------- -------
Maximum amount outstanding as of any month-end $28,312 $29,070
------- -------
Securities underlying these agreements at
year-end were as follows:
Carrying value of securities $40,258 $44,763
------- -------
Fair Value $39,163 $43,344
------- -------
The Company sold securities under agreements to repurchase with overnight
maturity terms totaling $5,723 at December 31, 2006 and $10,958 at December 31,
2005 with one large commercial account.
NOTE H - OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2006 and 2005 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
--------------- ---------------- --------- -------
2006 $55,690 $ 5,393 $ 2,463 $ 63,546
2005 $66,385 $ 5,113 $ 4,675 $ 76,173
Pursuant to collateral agreements with the FHLB, advances are secured by
$218,928 in qualifying mortgage loans and $6,036 in FHLB stock at December 31,
2006. Fixed rate FHLB advances of $45,239 mature through 2010 and have interest
rates ranging from 3.16% to 6.62%. In addition, variable rate FHLB borrowings of
$10,450 matured in 2006 and carried an interest rate of 5.34%.
At December 31, 2006, 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 $49,550 available on this line of credit at December 31,
2006.
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 $162,082 at December 31,
2006.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of
4.75% to 6.25% and are due at various dates through a final maturity date of
September 30, 2008. A total of $3,268 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. At December 31, 2006, the
interest rate for the Company's FRB notes was 5.04%. Various investment
securities from the Bank used to collateralize FRB notes totaled $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 $41,950 at December 31,
2006 and $27,950 at December 31, 2005.
Scheduled principal payments over the next five years:
FHLB borrowings Promissory notes FRB Notes Totals
--------------- ---------------- --------- ------
2007 $22,516 $3,993 $2,463 $ 28,972
2008 18,010 1,400 --- 19,410
2009 8,005 --- --- 8,005
2010 7,006 --- --- 7,006
2011 6 --- --- 6
Thereafter 147 --- --- 147
------- ------ ------ --------
$55,690 $5,393 $2,463 $ 63,546
======= ====== ====== ========
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
On March 26, 2002, a trust formed by Ohio Valley issued $8,500 of floating
rate trust preferred securities as part of a pooled offering of such securities.
Floating rate is based on a rate equal to the 3-month LIBOR plus 3.60%, not to
exceed 11.00%. The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering, which debentures represent the sole
asset of the trust. The Company may redeem all or a portion of these
subordinated debentures at par value beginning March 26, 2007. The subordinated
debentures must be redeemed no later than March 26, 2032. The Company used the
net proceeds from the sale of these securities to provide additional capital to
the Bank to support growth. Debt issuance costs of $256 were incurred and
capitalized and will amortize as a yield adjustment through expected maturity.
At December 31, 2006, the current variable rate was 9.0%.
On September 7, 2000, a trust formed by Ohio Valley issued $5,000 of 10.6%
fixed rate trust preferred securities as part of a pooled offering of such
securities. The Company issued subordinated debentures to the trust in exchange
for the proceeds of the offering, which debentures represent the sole asset of
the trust. The Company may redeem all or a portion of these subordinated
debentures beginning September 7, 2010 at a premium of 105.30% with the call
price declining .53% per year until reaching a call price of par at year twenty
through maturity. The subordinated debentures must be redeemed no later than
September 7, 2030. Debt issuance costs of $166 were incurred and capitalized and
will amortize as a yield adjustment through expected maturity.
NOTE J - INCOME TAXES
The provision for income taxes consists of the following components:
2006 2005 2004
---- ---- ----
Current tax expense $2,964 $3,576 $3,613
Deferred tax (benefit)expense (903) (293) 63
------ ------ ------
Total income taxes $2,061 $3,283 $3,676
====== ====== ======
The source of gross deferred tax assets and gross deferred tax liabilities
at December 31:
2006 2005
---- ----
Items giving rise to deferred tax assets:
Allowance for loan losses $3,275 $2,488
Deferred compensation 1,206 1,135
Unrealized loss on securities available-for-sale 506 635
Deferred loan fees/costs 280 244
Depreciation 86 ---
Other 330 251
Items giving rise to deferred tax liabilities:
Investment accretion (2) (1)
Depreciation --- (7)
FHLB stock dividends (995) (880)
Prepaid expenses (120) (117)
Intangibles (160) (124)
Other (65) (57)
------ ------
Net deferred tax asset $4,341 $3,567
====== ======
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:
2006 2005 2004
---- ---- ----
Statutory tax $2,536 $3,502 $4,099
Effect of nontaxable interest $211 (161) (189)
Nondeductible interest expense 33 19 18
Income from bank owned insurance (264) (158) (166)
Effect of state income tax 119 111 56
Other items (152) (30) (142)
------ ------ ------
Total income taxes $2,061 $3,283 $3,676
====== ====== ======
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. The Bank's exposure to credit loss
in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit, and financial
guarantees written, is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for instruments recorded on the balance
sheet.
Following is a summary of such commitments at December 31:
2006 2005
----- -----
Fixed rate $ 1,491 $ 1,487
Variable rate 57,009 53,852
Standby letters of credit 15,002 11,255
The interest rate on fixed rate commitments ranged from 6.63% to 9.00% at
December 31, 2006.
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
$7,039 and $7,107 for the years ended December 31, 2006 and 2005, respectively.
NOTE L - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies in which they are
affiliated were loan customers during 2006. A summary of activity on these
borrower relationships with aggregate debt greater than $120 is as follows:
Total loans at January 1, 2006 $13,758
New loans 502
Repayments (1,265)
Other changes (225)
-------
Total loans at December 31, 2006 $12,770
=======
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 the Company in the amount of $3,268.
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 $171, $172, and
$164, for 2006, 2005 and 2004.
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 227,710 and 218,489 at
December 31, 2006 and 2005. In addition, the Bank made contributions to its ESOP
Trust as follows:
Years ended December 31
2006 2005 2004
---- ---- ----
Number of shares issued 8,500 9,500 5,750
====== ====== ======
Value of stock contributed $ 222 $ 240 $ 151
Cash contributed 121 102 176
----- ----- -----
Total charged to expense $ 343 $ 342 $ 327
===== ===== =====
Life insurance contracts with a cash surrender value of $16,054 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 $262, $340, and $436.
NOTE N - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes for the years ended
December 31, are as follow:
2006 2005 2004
---- ---- ----
Net unrealized holding gains (losses)
on available-for-sale securities $ 379 $(1,534) $(1,277)
Tax effect (129) 522 434
------- ------- -------
Other comprehensive income (loss) $ 250 $(1,012) $ (843)
======= ======= =======
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. The fair value for FHLB stock is
estimated at carrying value.
Loans: The fair value of fixed rate loans is estimated by discounting future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
fair market value of loan commitments and standby letters of credits was not
material at December 31, 2006 or 2005. 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:
2006 2005
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 20,765 $ 20,765 $ 19,616 $ 19,616
Interest-bearing deposits
in other banks 508 508 510 510
Securities 89,653 89,889 84,113 84,398
Loans 615,752 621,362 610,399 607,183
Accrued interest receivable 3,234 3,234 2,819 2,819
Financial liabilities:
Deposits (593,786) (591,809) (562,866) (559,933)
Securities sold under agreements
to repurchase (22,556) (22,556) (29,070) (29,070)
Other borrowed funds (63,546) (63,302) (76,173) (76,042)
Subordinated debentures (13,500) (14,070) (13,500) (14,164)
Accrued interest payable (6,176) (6,176) (4,259) (4,259)
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
------ ----- ------ ----- ------ -----
2006
Total capital (to risk weighted assets)
Consolidated $81,057 13.4% $48,358 8.0% $60,447 10.0%
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 6.0
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 5.0
Bank 67,163 8.9 30,318 4.0 37,897 5.0
2005
Total capital (to risk weighted assets)
Consolidated $79,853 13.5% $47,352 8.0% $59,190 10.0%
Bank 73,255 12.5 46,802 8.0 58,503 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 72,720 12.3 23,676 4.0 35,514 6.0
Bank 66,422 11.4 23,401 4.0 35,102 6.0
Tier 1 capital (to average assets)
Consolidated 72,720 9.9 29,511 4.0 36,888 5.0
Bank 66,422 9.1 29,163 4.0 36,454 5.0
At year-end 2006 and 2005, 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, 2007, approximately $2,456 of the subsidiaries' retained earnings
were available for dividends under these guidelines. In addition to these
restrictions, as a practical matter, dividend payments cannot reduce regulatory
capital levels below minimum regulatory guidelines. These restrictions do not
presently limit Ohio Valley from paying dividends at its historical level.
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 2006 2005
---- ----
Cash and cash equivalents $ 2,980 $ 3,669
Investment in subsidiaries 70,875 69,324
Notes receivable - subsidiaries 5,338 4,918
Other assets 389 301
------- -------
Total assets $79,582 $78,212
======= =======
Liabilities
Notes Payable $ 5,394 $ 5,113
Subordinated debentures 13,500 13,500
Other liabilities 406 328
------- -------
Total liabilities 19,300 18,941
------- -------
Shareholders' Equity
Total shareholders' equity 60,282 59,271
------- -------
Total liabilities and shareholders' equity $79,582 $78,212
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31:
2006 2005 2004
---- ---- ----
Income:
Interest on notes $ 261 $ 243 $ 213
Other operating income 68 88 52
Dividends from Bank 5,000 5,700 1,000
Gain on sale of ProCentury Corp. --- --- 2,463
Expenses:
Interest on notes 264 250 217
Interest on subordinated debentures 1,279 1,125 968
Operating expenses 279 268 209
------ ------ ------
Income before income taxes and equity in
undistributed earnings of subsidiaries 3,507 4,388 2,334
Income tax benefit (expense) 590 441 (439)
Equity in undistributed earnings of subsidiaries 1,301 2,188 6,486
------ ------ ------
Net Income $5,398 $7,017 $8,381
====== ====== ======
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:
2006 2005 2004
---- ---- ----
Cash flows from operating activities:
Net income $5,398 $7,017 $8,381
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings
of subsidiaries (1,301) (2,188) (6,463)
Gain on sale of ProCentury Corp. --- --- (2,463)
Change in other assets 4 181 (58)
Change in other liabilities (13) (96) 107
------ ------ ------
Net cash provided by (used in)
operating activities 4,088 4,914 (496)
------ ------ ------
Cash flows from investing activities:
Proceeds from sale of ProCentury Corp. --- --- 4,394
Change in other short-term investments (420) 300 1,725
------ ------ ------
Net cash provided by (used in)
investing activities (420) 300 6,119
------ ------ ------
Cash flows from financing activities:
Change in other short-term borrowings 280 (242) (1,676)
Cash dividends paid (2,837) (2,705) (3,259)
Cash paid in lieu of fractional shares
in stock split --- (12) ---
Proceeds from issuance of common shares --- 365 1,001
Purchases of treasury shares (1,800) (961) (3,109)
------ ------ ------
Net cash provided by (used in)
financing activities (4,357) (3,555) (7,043)
------ ------ ------
Cash and cash equivalents:
Change in cash and cash equivalents (689) 1,659 (1,420)
Cash and cash equivalents at beginning of year 3,669 2,010 3,430
------ ------ ------
Cash and cash equivalents at end of year $2,980 $3,669 $2,010
====== ====== ======
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - GAIN ON SALE OF PROCENTURY
On April 26, 2004, Ohio Valley sold 450,000 common shares of ProCentury
Corp. ("ProCentury"), a Columbus-based property and casualty insurer, which
represented 9% of ProCentury's outstanding common stock. The transaction was
completed as part of ProCentury's initial public offering. The sale of stock,
which represented 100% of Ohio Valley's ownership in ProCentury, resulted in a
pre-tax gain of $2,463 and an after-tax gain of $1,625 ($.37 cents per share).
Ohio Valley's investment in ProCentury was made in October of 2000 to allow for
more diversification of operations by becoming part of a property and casualty
insurance underwriter as made permissible by the Gramm-Leach-Bliley Act of 1999.
Ohio Valley decided to liquidate its investment to utilize the cash proceeds to
enhance the Company's core business of banking through branch renovations and
expansion.
NOTE S - CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited)
Quarters Ended
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
Net income 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
Net income per share $ .37 $ .40 $ .41 $ .46
2004 Mar. 31 Jun. 30 Sept. 30 Dec. 31
Total interest income $10,891 $10,722 $10,912 $10,965
Total interest expense 3,968 3,975 4,020 4,183
Net interest income 6,923 6,747 6,892 6,782
Provision for loan losses 768 373 471 741
Net Income (2) 1,566 3,252 1,670 1,893
Net income per share $ .36 $ .75 $ .38 $ .44
(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.
(2) During the second quarter of 2004, Ohio Valley sold its interest of
ProCentury resulting in an after-tax gain of $1,625 ($.37 cents per
share).
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, 2006 and 2005, 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, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ohio Valley
Banc Corp. as of December 31, 2006 and 2005, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2006, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Ohio
Valley Banc Corp.'s internal control over financial reporting as of December 31,
2006, 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 13, 2007 expressed an unqualified opinion thereon.
/s/CROWE CHIZEK AND COMPANY LLC
Crowe Chizek and Company LLC
Columbus, Ohio
March 13, 2007
24
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM - INTERNAL CONTROLS
Board of Directors and Shareholders
Ohio Valley Banc Corp.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls Over Financial Reporting, that Ohio
Valley Banc Corp. maintained effective internal control over financial reporting
as of December 31, 2006 based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO). Ohio Valley Banc Corp's. management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Ohio Valley Banc Corp.
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on criteria
established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO). Also in our
opinion, Ohio Valley Banc Corp. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO).
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated statements
of condition of Ohio Valley Banc Corp. as of December 31, 2006 and 2005, 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, 2006 and
our report dated March 13, 2007 expressed an unqualified opinion on those
consolidated financial statements.
/s/CROWE CHIZEK AND COMPANY LLC
Crowe Chizek and Company LLC
Columbus, Ohio
March 13, 2007
25
MANAGEMENT'S REPORT ON INTERNAL CONTROLS
OVER FINANCIAL REPORTING
Board of Directors and Shareholders
Ohio Valley Banc Corp.
The management of Ohio Valley Banc Corp (the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. The Company's internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal control
over financial reporting includes those policies and procedures that: (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
The system of internal control over financial reporting as it relates to
the consolidated financial statements is evaluated for effectiveness by
management. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed Ohio Valley Banc Corp's system of internal control over
financial reporting as of December 31, 2006, 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, 2006, its system of internal control over
financial reporting is effective and meets the criteria of the "Internal Control
Integrated Framework".
Crowe Chizek and Company LLC, independent registered public accounting
firm, has issued an attestation report dated March 13, 2007 on management's
assessment of the Company's internal control over financial reporting. That
report is contained in Ohio Valley's Annual Report to Shareholders under the
heading "Report of Independent Registered Public Accounting Firm - Internal
Controls".
Ohio Valley Banc Corp
/s/JEFFREY E. SMITH
Jeffrey E. Smith
President, CEO
/s/SCOTT W. SHOCKEY
Scott W. Shockey
Vice President, CFO
26
SUMMARY OF COMMON STOCK DATA
OHIO VALLEY BANC CORP.
Years ended December 31, 2006 and 2005
INFORMATION AS TO STOCK PRICES AND DIVIDENDS: On February 9, 1996, Ohio Valley's
common shares began to be quoted on 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, 2005. The range of market price is compiled from data provided by the
broker based on limited trading. The quotations are inter-dealer prices, without
retail markup, markdown, or commission, and may not represent actual
transactions
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
2005 High Low
- ---- ------ ------
First Quarter $28.00 $26.00
Second Quarter 29.53 25.55
Third Quarter 26.18 24.99
Fourth Quarter 25.30 24.84
Shown below is a table which reflects the dividends paid per share on Ohio
Valley's common shares. As of December 31, 2006, the number of holders of common
shares was 2,120, an increase from 2,096 shareholders at December 31, 2005.
Dividends per share 2006 2005
- ------------------- ---- ----
First Quarter $.16 $.15
Second Quarter .17 .16
Third Quarter .17 .16
Fourth Quarter .17 .16
27
PERFORMANCE GRAPH
OHIO VALLEY BANC CORP
Year ended December 31, 2006
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, 2001 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 eleven
(111) 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 111 banks in
the SNL Index.
TOTAL RETURN PERFORMANCE
OVBC, SNL $500M-$1B Bank Index and S&P 500
2001-2006
Period Ending
----------------------------------------------------------
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
-------- -------- -------- -------- -------- --------
OVBC $100 $ 87.73 $117.23 $148.39 $146.14 $150.34
SNL $500M-$1B $100 $127.67 $184.09 $208.62 $217.57 $247.44
S&P 500 $100 $ 77.90 $100.25 $111.15 $116.61 $135.03
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 $5,398 for 2006, a decrease
of 23.1% from 2005. Net income was down 16.3% in 2005. Net income per share was
$1.27 for 2006, a decrease of 22.6% from 2005. Net income per share was down
15.0% in 2005. The decrease in net income and earnings per share for 2006 was
primarily due to a $3,865 increase in provision for loan loss expense as a
result of higher nonperforming loans and charge offs from year-end 2005. The
decrease in net income and earnings per share for 2005 was primarily due to the
Company's sale of its minority interest in an insurance investment in ProCentury
Corp. in the second quarter of 2004. This second quarter sale resulted in an
after-tax gain of $1,625, or $.37 per share, that was included in the earnings
of 2004.
Asset growth for 2006 was $14,642, or 2.0%, resulting in total assets at
year-end of $764,361. The Company's return on assets (ROA) was .71% for 2006
compared to .97% in 2005 and 1.16% in 2004. Return on equity (ROE) was 9.00% for
2006 compared to 12.18% in 2005 and 15.02% in 2004. The decreases in both ROA
and ROE for 2006 and 2005 are the result of lower earnings for each year caused
by provision expense increases in 2006 and revenue from sale of ProCentury in
2004.
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, 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, 2006. 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 $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 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). Net interest income (FTE)
increased $547 in 2005, an increase of 2.0% compared to the $27,603 earned in
2004. The increase in net interest income for 2005 was attributable to a higher
level of interest-earning assets (primarily from growth in loans) and a higher
net interest margin (primarily from continued short-term rate increases as well
as growth in non-interest bearing funding sources).
For 2006, average earning assets grew $32,100, or 4.7%, as compared to
growth of $3,378, or .5% in 2005. Driving this continued growth in earning
assets was a strong increase in average loan balances. Average total loans
expanded $27,073, or 4.5%, for 2006 and finished with a total percentage of
loans to earning assets of 87.4%. This compares to average loan growth of
$9,339, or 1.6%, with loans representing 87.5% of earning assets for 2005. The
growth in average loans was largely comprised of commercial loan participations
as well as real estate mortgages. Average securities represent the next highest
portion of earning assets, finishing at 11.9% of earning assets for 2006 and
12.2% for 2005. 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.
29
Average interest-bearing liabilities increased 4.3% between 2005 and 2006
and decreased .4% between 2004 and 2005. Interest-bearing liabilities in 2006
were comprised mostly of time deposits and NOW accounts, which together
represented 70.2% of total interest-bearing liabilities, down from 71.6% in 2005
and 71.3% in 2004. Other borrowed money represents the next highest portion of
interest-bearing liabilities, finishing at 13.3% of interest-bearing liabilities
for 2006, down from 15.7% in 2005 and 16.3% in 2004. The reason for this
composition decrease in 2006 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 12.7% in 2006 as
compared to 8.5% in 2005 and 8.2% in 2004. Introduced in 2005, the Market Watch
product offered 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 helped to support loan
growth and also repayment of other borrowed money. This shift in composition in
2006 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 2006 was
2.42%, as compared to the much higher average cost of other borrowed money at
5.42%. The average cost of time deposits grew from 3.28% in 2005 to 4.24% in
2006.
The net interest margin decreased .09% to 4.02% in 2006 from 4.11% in 2005.
This is compared to a .06% increase in the net interest margin in 2005. During
2006, there was an increase of .13% in interest free funds (i.e. demand
deposits, shareholders' equity) from .43% in 2005 to .56% in 2006. 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 .22%, with
higher asset yields of .59% being completely offset by higher funding costs of
..81%. Contributing to the increase in yield on earning assets was an increase in
the return on average loans of .65% from 2005. The significant change in loan
yields can be attributed to the rising rate environment that has generated
consistent increases in short-term interest rates that have been evident since
June 2004. Between June 2004 and June 2006, the Federal Reserve's Open Market
Committee increased the target federal funds rate 425 basis points, causing a
similar increase in short-term market interest rates. The Company's commercial
and participation loan portfolios were most sensitive to the increase in
short-term interest rates, with weighted average loan yields increasing 82 basis
points from 6.98% in 2005 to 7.80% in 2006. Market driven longer-term interest
rates have risen very little during this same period, causing the Company's real
estate loan portfolio yields to increase at a slower pace than commercial and
participation loans. 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
nonaccrual loan balances, which are up $10,777 from 2005 to finish at $12,017 in
2006. This has resulted in less interest income being recognized and a negative
impact to the net interest margin. Further contributing to this net interest
margin compression was total interest expense, which increased 31.9% from 2005
due to higher repricing rates and larger average earning asset balances that
required additional funding. The increase came mostly from costs incurred on the
Company's time deposits and savings and money market accounts, which increased
..96% and 1.42%, respectively, from 2005. Time deposits have been more responsive
to the rising rate environment experienced during 2005 and 2006. Savings and
money market accounts were impacted mostly by a consumer demand for the Market
Watch product.
In summary, the .13% increase in the contribution of interest free funding
sources that was completely offset by the .22% decrease in the net interest rate
spread yielded the .09% decrease in the net interest margin for 2006. The 2005
increase in net interest margin of .06% was from a .07% increase in interest
free funds partially offset by a .01% decrease in the net interest spread, with
higher asset yields of .34% being offset by higher funding costs of .35%.
While the frequency and size of changes in market interest rates are
difficult to predict, management believes that the Federal Reserve has reached
its "target" zone of economic stability and anticipates no future interest rate
increases for 2007. 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 anticipated combinations of modest earning
asset growth and a compressing net interest margin should continue to challenge
net interest income growth in 2007. 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 increased $308, or 5.6%, in 2006 as compared to
2005. Contributing most to the increase in noninterest income was earnings from
the Company's bank owned life insurance ("BOLI") contracts, which increased
$318, or 54.0%, in 2006 as compared to 2005. BOLI activity was impacted by
additional investments in life insurance contracts purchased during 2005, higher
earnings rate on such contracts and life insurance proceeds received in 2006.
The Company's average investment balance in BOLI for 2006 was $16,052, an
increase of $1,551, or 10.7%, as compared to 2005. Other noninterest income was
also up $105, or 7.0%, in 2006 as compared to 2005. Debit card interchange fees
were the key drivers of other noninterest income, increasing $67, or 16.2% in
2006 as compared to 2005. The volume of transactions utilizing the Company's
Jeanie(R) Plus debit card continue to increase over a year ago. The Company's
30
customers used their Jeanie(R) Plus debit cards to complete 1,008,792
transactions during 2006, up 20.1% from the 839,766 transactions during 2005,
derived mostly from gasoline and restaurant purchases. Other noninterest income
growth also came from insurance commissions on credit insurance. Partially
offsetting the year-to-date increases from BOLI and other noninterest revenue
was a decrease in the Company's service charge on deposit accounts, lowering
$109, or 3.5%, in 2006 as compared to 2005, due to the growth in the number of
Easy Checking accounts featuring no service charge or minimum balance
requirements. The Easy Checking account, a transaction account with electronic
features, increases the Company's core deposits, increases interchange fees and
decreases processing costs. In 2005, total noninterest income decreased $2,470,
or 30.9%, compared to 2004 in large part to the sale of ProCentury Corp., a
Columbus-based property and casualty insurer, on April 26, 2004. The sale of
stock ownership in ProCentury Corp. resulted in gross income of $2,463
recognized in the 2004 fiscal period. For additional information on the
ProCentury Corp. transaction, please refer to Note R of the Company's
consolidated financial statements under the caption "Gain on Sale of
ProCentury".
Total noninterest expense decreased $160, or .7%, in 2006 and increased
$433, or 2.1%, in 2005. The most significant expense in this category is salary
and employee benefits, which decreased $340, or 2.6%, from 2005 to 2006.
Contributing most to this decrease was a reduction in employee incentive
compensation due to 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. During 2005, salaries and employee benefits expense
increased $245, or 1.9%, from 2004 due to annual merit increases and rising
benefit costs. During 2005, the Company experienced a lower full-time equivalent
employee base, decreasing from 270 employees at year-end 2004 to 265 employees
at year-end 2005, partially offsetting increases in salaries and employee
benefits. 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. In late 2006, the Company
invested over $2,000 to replace its Jackson, Ohio facility and ceased operations
in its Jackson superbank facility. The depreciation expenses on this new
facility will have more of an impact in 2007 than 2006. In 2005, occupancy and
furniture and equipment expenses were relatively stable, increasing just $22, or
..9%, as there were no new material facility upgrades. Corporation franchise tax
was relatively stable during 2006, decreasing $4, or .6%, and increasing $57, or
9.3%, in 2005 based on capital levels at the Bank for both periods. During 2006,
data processing expenses increased $54, or 8.5%, primarily from the
transactional volume increase in the Company's Jeanie(R) Plus debit cards.
During 2005, data processing expenses increased $129, or 25.6%, due to volume
increases and the negotiation of lower data processing fees on debit and credit
cards in the prior 2004 fiscal period. Other noninterest expenses were up $183,
or 3.4%, during 2006 in large part due to increases in various loan and
collection expenses associated with higher nonperforming loan balances. During
2005, the Company's other noninterest expenses decreased $20, or .4%, from lower
legal and check clearing costs. The Company's efficiency ratio, which is
noninterest expense as a percentage of fully tax-equivalent net interest income
plus noninterest income, for 2006 improved to 61.2%, decreasing 2.29% from 2005,
as a result of successful noninterest revenue growth and lower overhead costs.
Conversely, in 2005, the efficiency ratio was up 4.75% to finish at 63.5%,
largely due to the gain on sale of ProCentury Corp. that was included in 2004's
noninterest earnings. Excluding ProCentury Corp., the Company's efficiency ratio
in 2005 was up just .4% with the Company's noninterest expense slightly
outpacing the growth in revenue sources (net interest income and noninterest
income).
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
31
customer activity and liquidity needs. At December 31, 2006, cash and cash
equivalents had increased $1,149, or 5.9%, to $20,765 as compared to $19,616 at
December 31, 2005. This increase was primarily attributable to the Company's
improved liquidity position from time deposit growth. Management believes that
the current balance of cash and cash equivalents remains at a level that will
meet cash obligations and provide adequate liquidity.
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 $5,201, or 6.6%, as compared to
2005 with the ratio of securities to total assets also increasing to 10.9% at
December 31, 2006, compared to 10.5% at December 31, 2005. This trend of higher
security investments was driven by increases in U.S. government agency
securities of $7,016, or 38.6%, and municipal bonds of $1,274, or 10.6%, as
compared to year-end 2005. The growth in U.S. government agencies and municipal
bonds 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 $3,089, or 6.4%,
from year-end 2005. The Company continues to benefit from the advantages of
mortgage-backed securities, which make up the largest portion of the Company's
investment portfolio, totaling $45,141, or 54.0% of total investments at
December 31, 2006. 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
totaled $7,272 from January 1, 2006 to December 31, 2006. With the general
increase in interest rates evident during 2006, the reinvestment rates on debt
securities also responded, producing higher returns in 2006 as compared to 2005.
The weighted average FTE yield on debt securities at year-end 2006 was 4.44% as
compared to 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.
32
LOANS
In 2006, the Company's primary category of earning assets, total loans,
increased $7,632, or 1.2%, to reach $625,164. Most of this increase occurred in
2006's first quarter period where loans were up from year-end 2005 by $8,841, or
1.4%. Total loan growth was mostly influenced by commercial loans increasing
$4,212, or 1.8%, from year-end 2005. Commercial loans include both commercial
real estate and commercial and industrial loans. This overall 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. Commercial loan growth during 2006 was primarily driven by loan
participations with other banks outside the Company's primary market area, which
increased $9,038, or 47.8%. 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. This
growth in participation loans was partially offset by a decrease in the
remaining commercial loan balances of $4,826, or 2.2%, in large part due to
significant payoffs from three commercial real estate accounts. The commercial
loan portfolio consists primarily of rental property loans (15.7% of portfolio),
medical industry loans (13.1% of portfolio), hotel and motel loans (9.6% of
portfolio), and land development loans (9.1% of portfolio). The primary market
areas for the Company's commercial loans, excluding loan participations, are in
the areas of Gallia, Jackson, Pike and Franklin counties in Ohio, which
accounted for 66.0% of total originations during 2006, and the growing West
Virginia markets, which accounted for 22.2% of total originations for the same
time period. While management believes lending opportunities exist in the
Company's markets, future commercial lending activities will depend upon
economic and related conditions, such as general demand for loans in the
Company's primary markets, interest rates offered by the Company and normal
underwriting considerations. Additionally, the potential for larger than normal
commercial loan payoffs may continue to limit loan growth during 2007.
While commercial loans, both commercial real estate and commercial and
industrial, comprise the largest portion of the Company's loan portfolio,
generating residential real estate loans remains a key focus of the Company's
lending efforts. In 2006, residential real estate loans increased $3,541, or
1.5%, to reach $238,549. Throughout the past fiscal year, consumer demand for
real estate loans has steadily increased due to the continuation of lower
mortgage rates that have not responded as much to the documented rise in
short-term interest rates. The Company's fixed-rate real estate loans have
become increasingly more popular than the adjustable-rate mortgage product. A
flattened yield curve influenced by these many short-term rate increases has led
to a specific demand for long-term, fixed-rate real estate loans, which still
remain affordable for the Company's mortgage consumers. Management continues to
feel comfortable with the Company's minimal interest rate risk exposure and, as
a result, the Company kept a large portion of its fixed-rate real estate
originations in its portfolio during 2006. This led to an increase in fixed-rate
real estate loan balances of $18,216, or 16.4%, from year-end 2005. To help
further satisfy this increasing demand in fixed-rate real estate loans, the
Company continues to originate and sell some fixed-rate mortgages to the
secondary market, but has sold just $4,038 in loans during 2006, which is below
the volume of originations sold during 2005. Partially offsetting real estate
loan growth was a decrease in the Company's one-year adjustable-rate mortgage
balances of $14,277, or 17.4%, as a result of the slowed volume of refinancing
that had been more aggressive during the 2004 and 2005 periods. The remaining
real estate loan portfolio balances decreased, primarily from the Company's
other variable-rate real estate loan products.
The Company's consumer loans fell $5,854, or 4.0%, from year-end 2005 to
finish at $139,961. This drop in consumer loans was mostly attributable to the
automobile lending segment, which decreased $6,811, or 9.8%, from year-end 2005.
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 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 continued rising rate environment during
2005 and most of 2006 have caused a decline in automobile loan volume. As rates
have aggressively moved up, 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 2006. Partially offsetting the decrease in auto loans was an
increase in the Company's capital line balances, primarily home equity loans,
which increased $507, or 2.5%, from year-end 2005.
The Company recognized an increase of $5,733 in other loans from year-end
2005. Other loans consist primarily of state and municipal loans and overdrafts.
This increase was largely due
33
to an increase in state and municipal loans of $5,691.
The Company was pleased with its total loan growth results during 2006.
Loan balances were largely driven by unseasonable commercial loan increases
during the first quarter of 2006. Since that quarter, general demand for
commercial loans has been flat, variable-rate real estate mortgages continue to
shift to longer term fixed-rate real estate products and consumer volume has
been declining. As a result, the Company expects total loan volume to continue
at a moderate pace throughout the fiscal period of 2007. For 2007, the Company
will continue to engage in sound underwriting practices within its loan
portfolio without sacrificing asset quality and avoiding exposure to unnecessary
risk that could weaken the credit quality of the portfolio.
ALLOWANCE FOR LOAN LOSS AND PROVISION EXPENSE
Tables IV, V, and VI have been provided to enhance the understanding of the
loan portfolio and the allowance for potential loan losses. Management evaluates
the adequacy of the allowance for loan losses quarterly based on several factors
including, but not limited to, 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 2006, the Company increased its provision for loan loss expense by
$3,865 as compared to 2005, which elevated its allowance for loan losses by
$2,279, or 32.0%, to finish at $9,412. This increase was primarily due to
increases in nonaccrual loan balances and loan charge-offs since year-end 2005.
During the fourth quarter of 2006, a loan relationship totaling $6,700, or 1.07%
of total loans, was determined by management to be impaired due to certain
events and subsequently placed on nonaccrual status. The loans are primarily
secured by commercial real estate and based on management's assessment of the
relationship, a specific allocation for loan losses was made totaling $2,000,
which required a corresponding increase in the provision for loan losses.
Additionally, management charged off $2,300 on existing nonperforming loans
during the fourth quarter of 2006. While the allowance for loan losses already
reflected the probable losses on these previously identified nonperforming
loans, the charge-offs increased the Company's historical loss experience for
commercial loans, resulting in an increase in the allowance for loan losses for
general allocations to reflect increased risk in the portfolio. Due to both the
increase in specific allocations of the allowance for loan losses and increased
loss history which called for an increase in the general allocations, management
provided $3,731 to the allowance for loan losses during the fourth quarter of
2006.
As a result of these fourth quarter events, the Company's ratio of net
charge-offs to average total loans for the year ending 2006 finished at .54%, up
from .31% for the year ending 2005, due mostly to the $1,750 increase in net
charge-offs within the commercial loan portfolio. The Company's nonperforming
loans, which consist of nonaccruing loans and accruing loans past due 90 days or
more, were approximately $13,392 at December 31, 2006, compared to $2,557 at the
end of 2005. The increase was primarily in nonaccrual loan balances. As a
result, the Company's nonperforming loans as a percentage of total loans
increased to 2.14% at year-end 2006 as compared to .41% at year-end 2005.
Nonperforming assets, which includes real estate acquired through foreclosure
and referred to as other real estate owned ("OREO"), to total assets also
increased to 2.00% at December 31, 2006, compared to .62% at year-end 2005.
Nonperforming loans and nonperforming assets included three commercial
relationships representing 1.63% of total loans and 1.33% of total assets at
December 31, 2006.
As a result of higher nonperforming loan balances, the ratio of allowance
for loan losses to total loans increased to 1.51% at December 31, 2006 as
compared to 1.16% at December 31, 2005. Management believes that the allowance
for loan losses is adequate and reflects probable incurred losses in the loan
portfolio. The actions that took place in the fourth quarter of 2006 were deemed
prudent and necessary by management and efforts to work diligently in resolving
and/or liquidating these problem credits within the nonperforming loan portfolio
will continue into 2007. Asset quality remains a key focus, as management
continues to stress not just loan growth, but quality in loan underwriting as
well.
34
DEPOSITS
Interest-earning assets are funded primarily by both interest 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, 2006. Total deposits grew $30,920, or 5.5%, to reach $593,786 by year-end
2006, resulting from the Company's efforts to attract deposits to fund loan
growth as well as the rise in interest rates. The increase in deposits came
primarily from growth in money market and time deposit balances.
Money market deposit balances were up $36,595 to finish at $58,941 at
year-end 2006 as compared to $22,346 at year-end 2005. This increase was from
the Company's new Market Watch money market account product, which generated
$38,473 in new deposit balances from year-end 2005. 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 $17,014, or 17.8%. This was primarily from decreases in the
Company's Gold Club and Shareholder Gold NOW products that totaled $14,960, or
29.8%, collectively.
Also supplementing deposit growth were time deposits, which increased
$18,348, or 5.6%, over 2005. Time deposits, particularly certificates of deposit
("CD's"), continue to be the most significant source of funding for the
Company's earning assets making up 58.2% of total deposits at December 31, 2006.
The Company's retail CD balances increased $36,665, or 13.5%, from year-end 2005
while wholesale funding deposits (i.e., brokered and network CD issuances)
decreased $18,317, or 32.8%, from year-end 2005. As interest rates have risen
during the first half of 2006, wholesale funding rates from brokered and network
CD deposits have increased at a faster pace than funding rates on retail CD
deposits, making retail CD deposits more affordable and cost effective to
utilize as a loan funding source. The weighted average cost for these wholesale
CD issuances in 2006 was 4.38%, while the weighted average cost for retail CD
issuances was 4.25%, a cost benefit of 13 basis points. The net increase in CD
balances as a result of the shift of emphasis back to retail funding was used to
fund loan originations and lower other borrowed funds during 2006.
Deposit growth was partially offset by a $4,601, or 5.6%, decrease in the
Company's noninterest-bearing demand deposits from year-end 2005, primarily from
seasonal decreases in business checking balances.
The Company will continue to experience increased competition for deposits
in its market areas, which should challenge its net growth in retail CD
balances. The Company will continue to target growth in these retail funds
during 2007, reflecting the Company's efforts to reduce its reliance on higher
cost funding.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Repurchase agreements, which are financing arrangements that have overnight
maturity terms, were down $6,514, or 22.4%, from year-end 2005. This decline was
mostly due to typical seasonal fluctuations of one commercial account.
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. During 2006, the Company's other borrowed funds decreased $12,627, or
16.6%, from year-end 2005. This was primarily due to the continued emphasis on
retail deposits as the primary source of funding for growth in earning assets.
Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB) advances
and promissory notes. FHLB advances are subject to collateral agreements and are
secured by qualifying first mortgage loans and FHLB stock. Promissory notes are
primarily associated with funding loans at Loan Central and were issued with
various terms through a final maturity date of 2008. Management utilized the
aggressive growth in retail proceeds to fund loans and repay FHLB borrowings
during 2006. Management will continue to evaluate borrowings from the FHLB as an
alternative funding source to help manage interest rate sensitivity and
liquidity in 2007.
OFF-BALANCE SHEET ARRANGEMENTS
The disclosures required for off-balance sheet arrangements are discussed
in Note I and Note K.
CAPITAL RESOURCES
The Company maintains a capital level that exceeds regulatory requirements
as a margin of safety for its depositors and shareholders. All of the capital
ratios exceeded the regulatory minimum guidelines as identified in Note P
"Regulatory Matters". Shareholders' equity totaled $60,282 at December 31, 2006,
compared to $59,271 at December 31, 2005, which represents growth of 1.7%.
Contributing most to this increase was year-to-date net income of $5,398.
Partially offsetting the growth in capital were cash dividends paid of $2,837,
or $.67 per share, year-to-date, and a $1,800 increase in the amount of treasury
stock repurchases. Cash dividends paid for 2006 represents a 4.9% increase as
compared to 2005.
The Company anticipates repurchasing additional common shares from time to
time as authorized by its stock
35
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, 2007 to February 15, 2008, 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 2006, shareholders invested more than $1,336
through the dividend reinvestment and stock purchase plan. These proceeds
resulted in the issuance of 4 new shares and the acquisition of 52,679 existing
shares through open market purchases for a total of 52,683 shares. At December
31, 2006, approximately 81% of the shareholders were enrolled in the dividend
reinvestment plan. Members' reinvestment of dividends and supplemental purchases
in 2006 represented 47.1% of year-to-date dividends paid.
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.
The estimated change in net interest income reflects minimal interest rate
risk exposure and is well within the policy guidelines established by the Board.
At December 31, 2006, the Company's analysis of net interest income reflects a
modest liability sensitive position. Based on current assumptions, an
instantaneous increase in interest rates would negatively impact net interest
income primarily due to variable rate loans reaching their annual interest rate
cap or potentially their lifetime interest rate cap. Furthermore, in a rising
rate environment the prepayment amounts on loans and mortgage-backed securities
slow down producing less cash flow to reinvest at higher interest rates. During
an instantaneous decrease in interest rates, the opposite occurs producing a
nominal increase in net interest income. As compared to December 31, 2005, the
Company's interest rate risk profile has become more liability sensitive in
anticipation of interest rates peaking and potentially decreasing in 2007.
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
$66,328 in securities as available for sale at December 31, 2006. 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,
2006, the Bank could borrow an additional $65,000 from the Federal Home Loan
Bank. The Bank also has the ability to purchase federal funds from several of
its correspondent banks. See the consolidated statement of cash flows for
further cash flow information. Management does not rely on any single source of
liquidity and monitors the level of liquidity based on many factors affecting
the Company's financial condition.
INFLATION
Consolidated financial data included herein has been prepared in accordance
with US GAAP. Presently, US GAAP requires the Company to measure financial
position and operating results in terms of historical dollars with the exception
of securities available for sale, which are carried at fair value. Changes in
the relative value of money due to inflation or deflation are generally not
considered.
In management's opinion, changes in interest rates affect the financial
institution to a far greater degree than changes in the inflation rate. While
interest rates are greatly influenced by changes in the inflation rate, they do
not change at the same rate or in the same magnitude as the inflation rate.
Rather, interest rate volatility is based on changes in the expected rate of
inflation, as well as monetary and fiscal policies. A financial institution's
ability to be relatively unaffected by changes in interest rates is a good
indicator of its capability to perform in today's volatile economic environment.
The Company seeks to insulate itself from interest rate volatility by ensuring
that rate sensitive assets and rate sensitive liabilities respond to changes in
interest rates in a similar time frame and to a similar degree.
36
CRITICAL ACCOUNTING POLICIES
The most significant accounting policies followed by the Company are
presented in Note A to the consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Management views
critical accounting policies to be those which are highly dependent on
subjective or complex judgments, estimates and assumptions, and where changes in
those estimates and assumptions could have a significant impact on the financial
statements. Management currently views the adequacy of the allowance for loan
losses to be a critical accounting policy.
Allowance for loan losses: To arrive at the total dollars necessary to
maintain an allowance level sufficient to absorb probable losses incurred at a
specific financial statement date, management has developed procedures to
establish and then evaluate the allowance once determined. The allowance
consists of the following components: specific allocation, general allocation
and other estimated general allocation.
To arrive at the amount required for the specific allocation component, the
Company evaluates loans for which a loss may be incurred either in part or
whole. To achieve this task, the Company has created a quarterly report
("Watchlist") which lists the loans from each loan portfolio that management
deems to be potential credit risks. The criteria to be placed on this report
are: past due 60 or more days, nonaccrual and loans management has determined to
be potential problem loans. These loans are reviewed and analyzed for potential
loss by the Large Loan Review Committee, which consists of the President of the
Company and members of senior management with lending authority. The function of
the Committee is to review and analyze large borrowers for credit risk,
scrutinize the Watchlist and evaluate the adequacy of the allowance for loan
losses and other credit related issues. The Committee has established a grading
system to evaluate the credit risk of each commercial borrower on a scale of 1
(least risk) to 10 (greatest risk). After the Committee evaluates each
relationship listed in the report, a specific loss allocation may be assessed.
The specific allocation is currently made up of amounts allocated to the
commercial 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 an actual one-year or
three-year performance evaluation of credit losses per loan portfolio, whichever
is greater. The risk factor is achieved by taking the average net charge-off per
loan portfolio for the last 12 or 36 consecutive months, whichever is greater,
and dividing it by the average loan balance for each loan portfolio over the
same time period. The Company believes that by using the greater of the 12 or 36
month average loss risk factor, the estimated
37
allowance will more accurately reflect current probable losses.
The final component used to evaluate the adequacy of the allowance includes
five additional areas that management believes can have an impact on collecting
all principal due. These areas are: 1) delinquency trends, 2) current local
economic conditions, 3) non-performing loan trends, 4) recovery vs. charge-off,
and 5) personnel changes. Each of these areas is given a percentage factor, from
a low of 10% to a high of 30%, determined by the 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, 2006. 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.
38
CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME
Table I
December 31
------------------------------------------------------------------------------------
2006 2005 2004
(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 $ 579 $ 23 4.06% $ 636 $ 15 2.33% $ 879 $ 7 .79%
with banks
Federal funds sold 4,193 220 5.24 1,256 39 3.14 4,708 55 1.17
Securities:
Taxable 73,160 3,189 4.36 71,602 2,921 4.08 73,046 3,055 4.18
Tax exempt 12,440 688 5.53 11,851 691 5.83 12,673 809 6.38
Loans 626,418 48,581 7.76 599,345 42,621 7.11 590,006 39,823 6.75
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
earning assets 716,790 52,701 7.35% 684,690 46,287 6.76% 681,312 43,749 6.42%
Noninterest-earning assets:
Cash and due from banks 15,306 15,420 15,809
Other nonearning assets 36,655 33,687 32,779
Allowance for loan losses (7,819) (7,308) (7,619)
-------- -------- --------
Total noninterest-
earning assets 44,142 41,799 40,969
-------- -------- --------
Total assets $760,932 $726,489 $722,281
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $ 93,137 2,343 2.52% $110,626 2,252 2.04% $112,546 1,783 1.58%
Savings and Money Market 78,241 1,895 2.42 50,363 503 1.00 48,574 318 .65
Time deposits 338,593 14,356 4.24 311,268 10,218 3.28 309,744 9,225 2.98
Repurchase agreements 22,692 895 3.94 24,694 641 2.60 24,743 278 1.12
Other borrowed money 81,975 4,442 5.42 92,520 4,523 4.89 96,361 4,542 4.71
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
bearing liabilities 614,638 23,931 3.89% 589,471 18,137 3.08% 591,968 16,146 2.73%
Noninterest-bearing liabilities:
Demand deposit accounts 75,330 70,473 66,298
Other liabilities 10,994 8,925 8,227
-------- -------- --------
Total noninterest-
bearing liabilities 86,324 79,398 74,525
Shareholders' equity 59,970 57,620 55,788
-------- -------- --------
Total liabilities and
shareholders' equity $760,932 $726,489 $722,281
======== ======== ========
Net interest earnings $28,770 $28,150 $27,603
======= ======= =======
Net interest earnings as a percent
of interest-earning assets 4.02% 4.11% 4.05%
----- ----- -----
Net interest rate spread 3.46% 3.68% 3.69%
----- ----- -----
Average interest-bearing liabilities
to average earning assets 85.75% 86.09% 86.89%
===== ===== =====
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
2006 2005
----------------------------- ----------------------------
(dollars in thousands) Increase (Decrease) Increase (Decrease)
From Previous Year Due to From Previous Year Due to
----------------------------- ------------------------------
Volume Yield/Rate Total Volume Yield/Rate Total
------ ---------- ----- ------ ---------- -----
INTEREST INCOME
- ---------------
Interest-bearing balances
with banks $ (2) $ 10 $ 8 $ (2) $ 10 $ 8
Federal funds sold 141 40 181 (61) 45 (16)
Securities:
Taxable 65 204 269 (59) (75) (134)
Tax exempt 34 (37) (3) (51) (67) (118)
Loans 1,983 3,976 5,959 638 2,160 2,798
------- ------- ------- ------- ------- -------
Total interest income 2,221 4,193 6,414 465 2,073 2,538
INTEREST EXPENSE
- ----------------
NOW accounts (390) 481 91 (31) 500 469
Savings and Money Market 390 1,002 1,392 12 173 185
Time deposits 958 3,180 4,138 46 947 993
Repurchase agreements (56) 310 254 (1) 364 363
Other borrowed money (544) 463 (81) (184) 165 (19)
------- ------- ------- ------- ------- -------
Total interest expense 358 5,436 5,794 (158) 2,149 1,991
------- ------- ------- ------- ------- -------
Net interest earnings $ 1,863 $(1,243) $ 620 $ 623 $ (76) $ 547
======= ======= ======= ======= ======= =======
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, 2006 Within After One but After Five but
(dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years
-------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Obligations of U.S. Government
agency securities --- --- $25,183 4.49% --- --- --- ---
Obligations of states and
political subdivisions $ 626 6.60% 5,664 6.57% $ 2,136 7.49% $4,867 4.23%
Mortgage-backed securities 3,918 3.63% 39,268 4.04% 1,955 5.42% --- ---
------- ---- ------- ---- ------- ---- ------ ----
Total debt securiities $ 4,544 4.04% $70,115 4.41% $ 4,091 6.50% $4,867 4.23%
======= ==== ======= ==== ======= ==== ====== ====
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) 2006 2005 2004 2003 2002
- ---------------------- ---- ---- ---- ---- ----
Commercial loans (1) $7,806 $4,704 $4,657 $4,844 $3,358
Percentage of loans to total loans 39.45% 38.33% 37.69% 38.58% 36.94%
Residential real estate loans 310 623 642 833 1,318
Percentage of loans to total loans 38.16% 38.06% 37.84% 37.94% 40.07%
Consumer loans 1,296 1,806 1,878 1,916 2,393
Percentage of loans to total loans 22.39% 23.61% 24.47% 23.48% 22.99%
------- ------- ------- ------- -------
Allowance for Loan Losses $9,412 $7,133 $7,177 $7,593 $7,069
======= ======= ======= ======= =======
100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
Ratio of net charge-offs
to average loans .54% .31% .47% .68% .86%
======= ======= ======= ======= =======
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) 2006 2005 2004 2003 2002
- ---------------------- ---- ---- ---- ---- ----
Impaired loans $17,402 $7,983 $5,573 $1,988 $4,780
Past due-90 days or more and
still accruing 1,375 1,317 1,402 659 1,491
Nonaccrual 12,017 1,240 1,618 2,655 6,569
Accruing loans past due 90
days or more to total loans .22% .21% .23% .12% .27%
Nonaccrual loans as a % of
total loans 1.92% .20% .27% .46% 1.17%
Impaired loans as a % of total loans 2.78% 1.29% .93% .35% .85%
Allowance for loans losses as a
% of total loans 1.51% 1.16% 1.20% 1.32% 1.26%
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 2006, the Company recognized $939 of interest income on impaired
loans. Individual loans not included above that management feels have loss
potential total approximately $4,962. 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, 2006 Maturing/Repricing
(dollars in thousands)
Within After One but
One Year Within Five Years After Five Years Total
-------- ----------------- ---------------- -----
Commercial loans (1) $149,764 $ 48,158 $ 48,732 $246,654
Residential real estate loans 77,617 12,852 148,080 238,549
Consumer loans 27,184 77,555 35,222 139,961
-------- -------- -------- --------
Total loans $254,565 $138,565 $232,034 $625,164
======== ======== ======== ========
Loans maturing or repricing after one year with:
Variable interest rates $ 47,408
Fixed interest rates 323,191
--------
Total $370,599
========
(1) Includes commercial and industrial and commercial real estate loans.
DEPOSITS
Table VII as of December 31
(dollars in thousands)
2006 2005 2004
---- ---- ----
Interest-bearing deposits:
NOW accounts $ 78,484 $ 95,498 $110,901
Money Market 58,941 22,347 9,023
Savings accounts 32,719 35,126 37,008
IRA accounts 38,731 36,779 37,272
Certificates of Deposit 306,951 290,555 271,013
-------- -------- --------
515,826 480,305 465,217
Noninterest-bearing deposits:
Demand deposits 77,960 82,561 69,936
-------- -------- --------
Total deposits $593,786 $562,866 $535,153
======== ======== ========
The following table presents the Company's estimated net interest income
sensitivity:
INTEREST RATE SENSITIVITY
Table VIII
Change in December 31, 2006 December 31, 2005
Interest Rates % Change in % Change in
Basis Points Net Interest Income Net Interest Income
- --------------- ------------------- -------------------
+300 (5.95%) (3.35%)
+200 (3.26%) (.86%)
+100 (1.37%) (.09%)
-100 1.10% (.25%)
-200 1.74% (.45%)
-300 2.65% .23%
CONTRACTUAL OBLIGATIONS
Table IX
The following table presents, as of December 31, 2006, 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 $248,104 --- --- --- $248,104
Consumer and brokered time deposits F 226,220 $112,783 $ 4,600 $ 2,078 345,681
Repurchase agreements G 22,556 --- --- --- 22,556
Other borrowed funds H 28,972 27,415 7,012 147 63,546
Subordinated debentures I --- --- --- 13,500 13,500
KEY RATIOS
Table X
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Return on average assets .71% .97% 1.16% .93% .85%
Return on average equity 9.00% 12.18% 15.02% 12.43% 11.85%
Dividend payout ratio 52.56% 38.55% 38.89% 38.14% 40.79%
Average equity to
average assets 7.88% 7.93% 7.72% 7.51% 7.17%
DIRECTOR & OFFICER LISTING
OVBC Directors
- --------------
Jeffrey E. Smith President and CEO, Ohio Valley Banc Corp.
Thomas E. Wiseman President, The Wiseman Agency, Inc.
W. Lowell Call Retired Executive, Bob Evans Farms, Inc.
Robert H. Eastman President, Ohio Valley Supermarkets, Inc.
Lannes C. Williamson President, L. Williamson Pallets, Inc.
Steven B. Chapman CPA, Chapman & Burris CPA's, LLC
Anna P Barnitz Treasurer & CFO, Bob's Market & Greenhouses, Inc.
Brent A. Saunders Attorney, Halliday, Sheets & Saunders
Harold A. Howe President, Ohio Valley Financial Services
Robert E. Daniel Administrator, Holzer Clinic
Roger D. Williams President, Bob Evans Restaurants
OVBC Officers
- -------------
Jeffrey E. Smith
E. Richard Mahan
Larry E. Miller, II
Katrinka V. Hart
Sue Ann Bostic
Mario P. Liberatore
Cherie A. Barr
Sandra L. Edwards
David L. Shaffer
Jennifer L. Osborne
Tom R. Shepherd
Scott W. Shockey
Paula W. Clay
Cindy H. Johnston
Ohio Valley Bank Directors
- --------------------------
Jeffrey E. Smith
Robert H. Eastman
W. Lowell Call
Thomas E. Wiseman
Lannes C. Williamson
Harold A. Howe
Steven B. Chapman
Anna P. Barnitz
Brent A. Saunders
Robert E. Daniel
Roger D. Williams
Directors Emeritus
- ------------------
James L. Dailey
Merrill L. Evans
Art E. Hartley, Sr.
Charles C. Lanham
C. Leon Saunders
Wendell B. Thomas
Barney A. Molnar
West Virginia Advisory Board
- ----------------------------
Mario P. Liberatore
Anna P. Barnitz
Richard L. Handley
Gregory K Harley
Charles C. Lanham
Trenton M. Stover
Lannes C. Williamson
R. Raymond Yauger
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 & Secretary
Larry E. Miller, II Executive Vice President & Treasurer
Katrinka V. Hart Executive Vice President & Risk Management
Senior Vice Presidents
Sue Ann Bostic Administrative Services Group
Mario P. Liberatore West Virginia Bank Group
Sandra L. Edwards Financial Bank Group
David L. Shaffer Commercial Bank Group
Jennifer L. Osborne Retail Lending Group
Tom R. Shepherd Retail Deposit Group
Scott W. Shockey Chief Financial Officer
Vice Presidents
Patricia L. Davis Research & Technical Applications
Richard D. Scott Trust
Bryan W. Martin Facilities & Technical Services
Patrick H. Tackett Western Division Branch Administrator
Molly K. Tarbett Loss Prevention Manager
Marilyn E. Kearns Director of Human Resources
Assistant Vice Presidents
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 Administration I-64
Angela G. King Regional Branch Administrator Gallia/Meigs
Frank W. Davison Chief Information Officer
David K. Nadler Credit and Financial Analyst
Assistant Cashiers
Brenda G. Henson Manager Customer Service
Kyla R. Carpenter Marketing Officer
Richard P. Speirs Maintenance Technical Supervisor
Stephanie L. Stover Retail Lending Operations Manager
Bryna S. Butler Corporate Communications
Raymond G. Polcyn Retail Lending Manager for Gallia-Meigs SuperBanks
Toby M. Mannering Collections Manager
Tyrone J. Thomas Assistant Manager Franklin County Region
Allen W. Elliott Assistant Manager Indirect Lending
Tamela D. LeMaster Regional Branch Manager I-64
Michael D. Hart Security Officer
William T. Johnson Internal Control Coordinator
Joe J. Wyant Region Manager Jackson County
Linda L. Hart Assistant Manager Waverly Office
Miquel D. McCleese Assistant Manager Columbus Office
Loan Central Officers
- ---------------------
Jeffrey E. Smith Chairman of the Board
Cherie A. Barr President
Timothy R. Brumfield Secretary & Manager, Gallipolis Office
Joseph I. Jones Manager, Waverly Office
T. Joe Wilson Manager, South Point Office
John J. Holtzapfel Manager, Wheelersburg Office
Deborah G. Moore Manager, Jackson Office
INVESTOR INFORMATION
- --------------------
BUSINESS PROFILE
Ohio Valley Banc Corp. commenced operations on October 23, 1992, as a one-bank
holding company with The Ohio Valley Bank Company being the wholly-owned
subsidiary. The Company's headquarters are located at 420 Third Avenue in
Gallipolis, Ohio.
The Ohio Valley Bank Company was organized on September 24, 1872. The Bank is
insured under the Federal Deposit Insurance Act and is chartered under the
banking laws of the State of Ohio. The company currently operates sixteen
offices in Ohio and West Virginia.
In April 1996, the Banc Corp. opened a consumer finance company operating under
the name of Loan Central, Inc. with five offices in Ohio.
Ohio Valley Financial Services, an agency specializing in life insurance, was
formed as a subsidiary of the Corp. in June 2000.
The Company also has minority holdings in ProAlliance.
The Company currently has over $750 million in assets.
FORM 10-K
A copy of the company's annual report on Form 10-K, as filed with the Securities
and Exchange Commission, will be forwarded without charge to any stockholder
upon written request to: Ohio Valley Banc Corp., Attention: E. Richard Mahan,
Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and proxy
statement are also available on the company's Web site, www.ovbc.com.
STOCK LISTING
Ohio Valley Banc Corp. stock is traded on The Nasdaq Stock Market under the
symbol OVBC.
HEADQUARTERS
Ohio Valley Banc Corp.
420 Third Avenue
P.O. Box 240
Gallipolis, Ohio 45631
740.446.2631 or 800.468.6682
Web: www.ovbc.com
E-mail: investorrelations@ovbc.com
MAKING HEADLINES IN 2006
Daniel & Williams Elected to OVBC Board
Loan Central Celebrates 10 Years
OVB's Davison Promoted to Asst. VP
OVB Plunges into Syracuse Community Pool Project
Commercial Loans Exceed $250 Million
Shepherd & Thomas Graduate Bank Leadership Institute
OVB's Nadler Promoted to Asst. VP; Hart Promoted to Asst. Cashier
OVB Receives Southeast Financial Literacy Achievement Award from Ohio School
Boards Association and Ohio Bankers League
OVB Announces New e-Delivery Service
OVB Jackson Ribbon-Cutting Benefits Local Charities
OVB's McCleese Promoted to Asst. Cashier Tom Wiseman Appointed Lead Director