-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QHHuRJZn2h1c9Io5ZDGfl8i6LOnmmvDWYy/5oZyjePvH2MX6PUNhxePHv6ca9AKC LDkGSrQzwe99r950vXi6fA== 0000894671-05-000050.txt : 20050316 0000894671-05-000050.hdr.sgml : 20050316 20050316134801 ACCESSION NUMBER: 0000894671-05-000050 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050316 DATE AS OF CHANGE: 20050316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO VALLEY BANC CORP CENTRAL INDEX KEY: 0000894671 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 311359191 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20914 FILM NUMBER: 05684532 BUSINESS ADDRESS: STREET 1: 420 THIRD AVE CITY: GALLIPOLIS STATE: OH ZIP: 45631 BUSINESS PHONE: 6144462631 10-K 1 sec10k123104.txt FORM10-K 12312004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: DECEMBER 31, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ended:___________________ Commission file number: 0-20914 Ohio Valley Banc Corp. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio --------------------------------------------- (State or other jurisdiction or organization) 31-1359191 --------------------------------------- (I.R.S. Employer Identification Number) 420 Third Avenue, Gallipolis, Ohio 45631 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 446-2631 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Shares, Without Par Value -------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S - K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes __X__ No _____ The aggregate market value of the common shares of the Registrant held by non-affiliates computed by reference to the average bid and asked price of the common shares as of June 30, 2004 was $108,077,532. The number of common shares of the Registrant outstanding as of February 28, 2004 was 3,430,859 common shares. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the 2004 Annual Report to Shareholders of Ohio Valley Banc Corp. (Exhibit 13) are incorporated by reference into Part I, Item 1 and Part II, Items 5, 6, 7, 7A and 8. (2) Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 13, 2005 are incorporated by reference into Part III,Items 10, 11, 12, 13 and 14. Exhibit Index begins on page 24. PART I ITEM 1 - BUSINESS Holding Company --------------- Ohio Valley Banc Corp ("Ohio Valley") is a financial holding company that was incorporated under the laws of the State of Ohio on January 8, 1992. Ohio Valley is registered under the Bank Holding Company Act of 1956, as amended ("BHC Act"). The principal executive offices of Ohio Valley are located at 420 Third Avenue, Gallipolis, Ohio 45631. Ohio Valley's common shares are listed on The NASDAQ National Market under the symbol "OVBC". Ohio Valley's business is incident to its 100% ownership of the outstanding equity of The Ohio Valley Bank Company (the "Bank"), Loan Central, Inc. ("Loan Central") and Ohio Valley Financial Services Agency, LLC ("Ohio Valley Financial Services"). Ohio Valley and its subsidiaries are collectively referred to as the "Company." Bank Subsidiary --------------- A substantial portion of Ohio Valley's revenue is derived from cash dividends paid by the Bank. The Bank was organized on September 24, 1872, under the laws governing private banking in Ohio. The Bank was incorporated in accordance with the general corporation laws governing savings and loan associations of the State of Ohio on January 8, 1901. The Articles of Incorporation of the Bank were amended on January 25, 1935, for the purpose of authorizing the Bank to transact a commercial savings bank and safe deposit business and again on January 26, 1950, for the purpose of adding special plan banking. The Bank was approved for trust powers in 1980 with trust services first being offered in 1981. The Bank is primarily engaged in commercial and retail banking. The Bank is a full-service financial institution offering a blend of commercial, consumer and agricultural banking services within central and southeastern Ohio as well as western West Virginia. Loans of all types and checking, savings and time deposits are offered, along with such services as safe deposit boxes, issuance of travelers' checks and administration of trusts. The Bank's deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). In addition to originating loans, the Bank invests in U.S. government and agency obligations, interest-bearing deposits in other financial institutions and other investments permitted by applicable law. The Bank presently has sixteen offices, all of which offer automatic teller machines ("ATM's"). Seven of these offices also offer drive-up services. The Bank accounted for substantially all of Ohio Valley's consolidated assets at December 31, 2004. Non-bank Subsidiary ------------------- Loan Central was incorporated on February 1, 1996 under the laws of the State of Ohio governing finance companies. Loan Central is engaged in consumer finance, offering smaller balance personal and mortgage loans to individuals with higher credit risk history. Loan Central presently has five offices within southeastern Ohio. 2 Financial Services Subsidiaries ------------------------------- Ohio Valley Financial Services was formed on January 10, 2000 and is engaged in selling life insurance. [To who? More about business?] Ohio Valley Financial Services was approved under the guidelines of the State of Ohio Department of Insurance. Ohio Valley also holds a non-majority equity interest in three insurance businesses. The first, BSG Title Services, LLC, was formed on February 28, 2001. The second, OVB Title Services, LLC, was formed on October 1, 2004. Both insurance agencies are engaged primarily in title services related to real estate, commercial and consumer loan customers. The third business is ProAlliance Corp., an insurance company formed on March 18,2004. ProAlliance Corp., previouly a subsidiary of ProFinance Corp., was the result of a dividend to the owners of ProCentury Corp., formerly known as ProFinance Corp., prior to an initial public offering of ProCentury Corp. on April 26, 2004.ProAlliance Corp. is engaged primarily in specialty property and casualty insurance coverage. All investments were approved under the guidelines of the State of Ohio Department of Insurance. Variable Interest Entities -------------------------- Ohio Valley owns two special purpose entities - Ohio Valley Statutory Trusts I and II. Prior to 2003, Ohio Valley classified the trusts as wholly owned subsidiaries and consolidated Ohio Valley's ownership of the trust preferred securities in Ohio Valley's financial statements as liabilities. Under accounting guidance outlined by Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, adopted in 2003, the trusts are no longer consolidated. As a result, Ohio Valley does not report the trust preferred securities issued by the trust as liabilities, and instead reports as liabilities the subordinated debentures issued by Ohio Valley and held by the trusts. Further detail on this accounting guidance and the deconsolidation of Ohio Valley Statutory Trusts I and II is located in Ohio Valley's 2004 Annual Report to Shareholders under "Note A - Summary of Significant Accounting Policies" and "Note I - Subordinated Debentures and Trust Preferred Securities." All such information is incorporated herein by reference. Reference is hereby made to Item 1(E), "Statistical Disclosure" and Item 8 of this Form 10-K for financial information pertaining to Ohio Valley's business through its subsidiaries as required by Item 101 of Regulation S-K. Competition ----------- The financial services industry is highly competitive. The market area for the Bank is concentrated primarily in the Gallia, Jackson, Pike and Franklin Counties of Ohio as well as the Mason, Kanawha and Cabell Counties of West Virginia. Some additional business originates from the surrounding Ohio counties of Meigs, Vinton, Scioto and Ross. Competition for deposits and loans comes primarily from local banks and savings associations, although some competition is also experienced from local credit unions, insurance companies and mutual funds. In addition, larger regional institutions, with substantially greater resources, are generating a growing market presence. Loan Central's market presence further strengthens Ohio Valley's ability to compete in the Gallia, Jackson and Pike Counties by serving a consumer base which may not meet the Bank's credit standards. Loan Central also operates in the Ohio counties of Lawrence and Scioto, which are outside the Bank's primary market area. 3 Additionally, Ohio Valley Financial Services sells life insurance which further strengthens the blend of services available to Ohio Valley's consumer base. The principal factors of competition for Ohio Valley's banking business are the rates of interest charged for loans, the rates of interest paid for deposits, the fees charged for services and the availability and quality of services. The business of Ohio Valley and its subsidiaries is not seasonal, nor is it dependent upon a single or small group of customers. The Bank deals with a wide cross-section of individuals, businesses and corporations which are located primarily in southeastern Ohio and western West Virginia. Few loans are made to borrowers outside this area. Lending decisions are made in accordance with written loan policies designed to maintain loan quality. The Bank originates commercial loans, residential real estate loans, home equity lines of credit, installment loans and credit card loans. The Bank believes that there is no significant concentration of loans to borrowers engaged in the same or similar industries and does not have any loans to foreign entities. Commercial lending entails significant risks in its exposure to higher average dollars per loan as compared with other types of lending (i.e., single-family residential mortgage lending, installment lending and credit card loans). The payment experience on commercial loans is typically dependent on adequate cash flows to service both interest and principal due. Thus, commercial loans may be more sensitive to adverse conditions in the economy generally or adverse conditions in a specific industry. The Bank and Loan Central make installment credit available to customers in their primary market area of southeastern Ohio and portions of western West Virginia. Credit approval for consumer loans requires demonstration of sufficient income to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is the policy of the Bank and Loan Central to adhere strictly to all laws and regulations governing consumer lending. A qualified compliance officer is responsible for monitoring the performance of his or her respective consumer portfolio and updating loan personnel. The Bank and Loan Central make credit life insurance and health and accident insurance available to all qualified borrowers thus reducing their risk of loss when a borrower's income is terminated or interrupted. The Bank and Loan Central review their respective consumer loan portfolios monthly to charge off loans which do not meet that subsidiary's standards. Credit card accounts are administered in accordance with the same standards as those applied to other consumer loans. Consumer loans generally involve more risk as to collectibility than mortgage loans because of the type and nature of collateral and, in certain instances, the absence of collateral. As a result, consumer lending collections are dependent upon the borrower's continued financial stability and are adversely affected by job loss, divorce or personal bankruptcy and by adverse economic conditions. The market area for real estate lending by the Bank is also located in southeastern Ohio and portions of western West Virginia. The Bank generally requires the amount of a residential real estate loan be no more than 89% of the purchase price or the appraisal value of the real estate securing the loan, unless private mortgage insurance is obtained by the borrower for the percentage exceeding 89%. These loans generally range from one year adjustable to thirty year fixed rate mortgages. In the third quarter of 2002, the Bank began selling a large portion of its new fixed-rate real estate loan originations to the Federal Home Loan Mortgage Corporation ("Freddie Mac") to enhance customer service and loan pricing. Secondary market sales of these real estate loans, 4 which have fixed rates with fifteen to thirty year terms, assisted in minimizing the Bank's exposure to interest rate risk as rates began to rise in 2004. Real estate loans are secured by first mortgages with evidence of title in favor of the Bank in the form of an attorney's opinion of title or a title insurance policy. The Bank also requires proof of hazard insurance with the Bank named as the mortgagee and as loss payee. Home equity lines of credit are generally made as second mortgages by the Bank. The home equity lines of credit are written with ten year terms but are reviewed annually. A variable interest rate is generally charged on the home equity lines of credit. Consolidated revenues from loans accounted for 77.35%, 81.07% and 82.29% of total consolidated revenues in 2004, 2003 and 2002, respectively. Revenues from interest and dividends on securities accounted for 7.13%, 7.23% and 7.16% of total consolidated revenues in 2004, 2003 and 2002, respectively. To continue the expansion of the Bank's market presence and further enhance customer service, the Bank began a phase of SuperBank branch openings in December 1996. From 1996 to 2001, the Bank opened eight SuperBank facilities within supermarkets and Wal-Mart stores. These new branches service the market areas of Gallia, Jackson, Meigs and Lawrence counties of Ohio as well as the growing Kanawha and Cabell counties of West Virginia. Furthermore, with the advent of the Gramm-Leach-Bliley Act, Ohio Valley has expanded its business beyond banking services. In October 2000, Ohio Valley participated in the purchase of ProCentury Corp., a property and casualty insurance underwriter and reinsurance company. Ohio Valley's interest in ProCentury Corp. was sold in 2004 through an initial public offering that yielded an after-tax gain of $1,625. ProAlliance Corp. was formed as a result of a dividend paid to the owners of ProCentury Corp. prior to this initial public offering in 2004.Furthermore, Ohio Valley formed Ohio Valley Financial Services and two title insurance agencie, BSG Title Services, LLC and OVB Title Services, LLC. The financial services industry is likely to become more competitive as further technological advances enable more companies to provide financial services on a more efficient and convenient basis. Supervision and Regulation -------------------------- The following is a summary of certain statutes and regulations affecting Ohio Valley as well as the Bank and Loan Central. The summary is qualified in its entirety by reference to such statutes and regulations. Regulation of Bank Holding Company Ohio Valley is subject to the requirements of the BHC Act and to the reporting requirements of, and examination and regulation by, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to: o assess civil money penalties; 5 o issue cease and desist or removal orders; and o require that a bank holding company divest subsidiaries (including its banking subsidiaries). In general, the Federal Reserve Board may initiate enforcement action for violations of laws and regulations and unsafe or unsound practices. Under Federal Reserve Board policy, a bank holding company is expected to serve as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks. Under this policy, the Federal Reserve Board may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank. The BHC Act requires the prior approval of the Federal Reserve Board in any case where a bank holding company proposes to: o acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it; o acquire all or substantially all of the assets of another bank or bank holding company; or o merge or consolidate with any other bank holding company. Transactions with Affiliates, Directors, Executive Officers and Shareholders Section 23A and 23B of the Federal Reserve Act and Regulation W restrict transactions by banks and their subsidiaries with their affiliates. An affiliate of a bank is any company or entity which controls, is controlled by or is under common control with the bank. Generally, Sections 23A and 23B and Regulation W: (1) limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of that bank's capital stock and surplus (i.e., tangible capital), (2) limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with all affiliates to 20% of that bank's capital stock and surplus, and (3) require that all such transactions be on terms substantially the same, or at least as favorable to the bank subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. A bank's authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board. Among other things, these loans must be made on terms substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank's capital position, and specified approval procedures must be followed in making loans which exceed specified amounts. 6 Regulation of State Chartered Banks As an Ohio state-chartered bank that is not a member of the Federal Reserve Bank, the Bank is supervised and regulated by the Ohio Division of Financial Institutions and the FDIC. The Bank's deposits are insured up to applicable limits by the FDIC and the Bank is subject to the applicable provisions of the Federal Deposit Insurance Act and the regulations of the FDIC. Various requirements and restrictions under the laws of the United States and the State of Ohio and the State of West Virginia affect the operations of the Bank, including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, and limitations on branching. Holding Company Activities In November of 1999, the Gramm-Leach-Bliley Act ("GLB Act") was enacted, amending the BHC Act and modernizing the laws governing the financial services industry. The GLB Act authorized the creation of financial holding companies, a new type of bank holding company with powers exceeding those of traditional bank holding companies. Ohio Valley became a financial holding company during 2000. In order to become a financial holding company, a bank holding company and all of its depository institutions must be well capitalized and well managed under federal banking regulations, and the depository institutions must have received a Community Investment Act rating of at least satisfactory. Financial holding companies may engage in a wide variety of financial activities, including any activity that the Federal Reserve and the Treasury Department consider financial in nature or incidental to financial activities, and any activity that the Federal Reserve Board determines complementary to a financial activity and which does not pose a substantial safety and soundness risk. These activities include securities underwriting and dealing activities, insurance and underwriting activities and merchant banking/equity investment activities. Because it has authority to engage in a broad array of financial activities, a financial holding company may have several affiliates that are functionally regulated by financial regulators other than the Federal Reserve Board, such as the Securities and Exchange Commission (the "SEC") and state insurance regulators. The GLB Act directs the Federal Reserve Board to rely to the maximum extent possible on examinations and reports prepared by functional regulators. The Federal Reserve Board is also prohibited from applying any capital standard directly to any functionally regulated subsidiary that is already in compliance with the capital requirements of its functional regulator. Loan Central is supervised and regulated by the State of Ohio Department of Financial Institutions, Division of Consumer Finance. Ohio Valley's insurance company investments, ProAlliance Corp., Ohio Valley Financial Services, BSG Title Services, LLC and OVB Title Services, LLC are all supervised and regulated by the State of Ohio Department of Insurance. The insurance laws and regulations applicable to insurance agencies require education and licensing of individual agents and agencies, require reports and impose business conduct rules. 7 The GLB Act provides that if a subsidiary bank of a financial holding company fails to be both well capitalized and well managed, the financial holding company must enter into a written agreement with the Federal Reserve Board within 45 days to comply with all applicable capital and management requirements. Until the Federal Reserve Board determines that the bank is again well capitalized and well managed, the Federal Reserve Board may impose additional limitations or conditions on the conduct or activities of the financial holding company or any affiliate that the Federal Reserve Board finds to be appropriate or consistent with federal banking laws. If the financial holding company does not correct the capital or management deficiencies within 180 days, the financial holding company may be required to divest ownership or control of all banks, including state-chartered non-member banks and other well-capitalized institutions owned by the financial holding company. If an insured bank subsidiary fails to maintain a satisfactory rating under the Community Reinvestment Act, the financial holding company may not engage in activities permitted only to financial holding companies until such time as the bank receives a satisfactory rating. Capital Requirements The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines include both a definition of capital and a framework for calculating weighted risk assets by assigning assets and off-balance sheet items to broad risk categories. The minimum ratio of capital to risk weighted assets (including certain off-balance sheet items, such as standby letters of credit) to be considered adequately capitalized is 8%. At least 4.0 percentage points is to be comprised of common shareholders' equity (including retained earnings but excluding treasury stock), noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets ("Tier 1 Capital"). The remainder ("Tier 2 Capital") may consist of certain amounts of mandatory convertible debt securities, subordinated debt, preferred stock not qualifying as Tier 1 Capital and a limited amount of allowance for loan and lease losses. The Federal Reserve Board also imposes a minimum leverage ratio (Tier 1 Capital to total assets) of 3% for bank holding companies that meet certain specified conditions, including no operational, financial or supervisory deficiencies, and including having the highest regulatory rating. The minimum leverage ratio is 100-200 basis points higher for other bank holding companies and state member banks based on their particular circumstances and risk profiles and those experiencing or anticipating significant growth. State non-member banks, such as the Bank, are subject to similar capital requirements adopted by the FDIC. Ohio Valley and the Bank currently satisfy all applicable capital requirements. Failure to meet applicable capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal and state regulatory authorities, including the termination of deposit insurance by the FDIC. Federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient banks. Under these regulations, institutions which become undercapitalized become subject to mandatory regulatory scrutiny and limitations, which increase as capital continues to decrease. Such institutions are also required to file capital plans with their primary federal regulator, and their holding companies must guarantee the capital shortfall up to 5% of the assets of the capital deficient institution at the time it becomes undercapitalized. 8 Limits on Dividends The ability of a bank holding company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends that may be declared by its subsidiary banks and other subsidiaries. However, the Federal Reserve Board expects Ohio Valley to serve as a source of strength to the Bank, which may require it to retain capital for further investments in the Bank, rather than for dividends for shareholders of Ohio Valley. The Bank may not pay dividends to Ohio Valley if, after paying such dividends, it would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. The Bank must have the approval of its regulatory authorities if a dividend in any year would cause the total dividends for that year to exceed the sum of its current year's net profits and retained net profits for the preceding two years, less required transfers to surplus. Payment of dividends by the Bank may be restricted at any time at the discretion of its regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice or if necessary to maintain adequate capital for the Bank. These provisions could have the effect of limiting Ohio Valley's ability to pay dividends on its outstanding common shares. Deposit Insurance Assessments The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). The Bank is a member of the BIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both BIF and SAIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. The assessment currently ranges from 1.44 to 28.44 cents per $100 of domestic deposits. The Bank is currently paying an assessment rate of 1.44 cents per $100 of domestic deposits. Monetary Policy and Economic Conditions The business of commercial banks is affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities, including the Federal Reserve Board. The Federal Reserve Board regulates the money and credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These policies and regulations significantly influence the amount of bank loans and deposits and the interest rates charged and paid thereon, and thus have an effect on earnings. Sarbanes-Oxley Act of 2002 On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to 9 protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. The proposed changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently. The Sarbanes-Oxley Act addresses, among other matters: audit committees; corporate responsibility for financial reports; a requirement that chief executive and chief financial officers forfeit certain bonuses and profits if their companies issue an accounting restatement as a result of misconduct; a prohibition on insider trading during pension fund black-out periods; disclosure of off-balance sheet transactions; conditions for the use of financial information not in accordance with generally accepted accouting principles; a prohibition on personal loans to directors and executive officers (excluding loans by insured depository institutions that are subject to the insider lending restrictions of the Federal Reserve Act); expedited filing requirements for stock transaction reports by officers and directors; the formation of the Public Accounting Oversight Board; auditor independence; and various increased criminal penalties for violations of securities laws. As mandated by the Sarbanes-Oxley Act, the SEC has adopted rules and regulations governing, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. The NASDAQ Stock Market has also adopted corporate governance rules. Ohio Valley's Board of Directors has taken a series of actions to strengthen and improve Ohio Valley's corporate governance practices in light of the rules of the SEC and The NASDAQ Stock Market. Employees --------- As of December 31, 2004, Ohio Valley and its subsidiaries employed 270 full-time equivalent employees. Management considers its relationship with its employees to be good. Other Information ----------------- Management anticipates no material effect upon the capital expenditures, earnings and competitive position of the Company by reason of any laws regulating or protecting the environment. Ohio Valley believes that the nature of the operations of its subsidiaries has little, if any, environmental impact. Ohio Valley, therefore, anticipates no material capital expenditures for environmental control facilities in its current fiscal year or for the foreseeable future. The Bank and Loan Central may be required to make capital expenditures related to properties which they may acquire through foreclosure proceedings in the future. However, the amount of such capital expenditures, if any, is not currently determinable. Neither Ohio Valley nor its subsidiaries have any material patents, trademarks, licenses, franchises or concessions. No material amounts have been spent on research activities and no employees are engaged full-time in research activities. 10 Available Information --------------------- Interested readers can access Ohio Valley's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through Ohio Valley's Internet website at www.ovbc.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate the information contained on Ohio Valley's website into this Annual Report on Form 10-K). These reports can be accessed free of charge from Ohio Valley's website as soon as reasonably practicable after Ohio Valley electronically files such materials with, or furnishes them to, the SEC. Financial Information About Foreign and Domestic Operations and Export Sales ---------------------------------------------------------------------------- Ohio Valley's subsidiaries do not have any offices located in a foreign country and they have no foreign assets, liabilities, or related income and expense. Statistical Disclosure ---------------------- The following section contains certain financial disclosures relating to Ohio Valley as required under the SEC's Industry Guide 3, "Statistical Disclosure by Bank Holding Companies", or a specific reference as to the location of the required disclosures in Ohio Valley's 2004 Annual Report to Shareholders which are hereby incorporated herein by reference. I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL A. & B.The average balance sheet information and the related analysis of net interest earnings for the years ending December 31, 2004, 2003 and 2002 is incorporated herein by reference to the information appearing under the caption "Table I - Consolidated Average Balance Sheet & Analysis of Net Interest Income", within "Management's Discussion and Analysis of Operations" located on page 30 of Ohio Valley's 2004 Annual Report to Shareholders. C. Tables setting forth the effect of volume and rate changes on interest income and expense for the years ended December 31, 2004, 2003 and 2002 is incorporated herein by reference to the information appearing under the caption "Table II - Rate Volume Analysis of Changes in Interest Income & Expense", within "Management's Discussion and Analysis of Operations" located on page 32 of Ohio Valley's 2004 Annual Report to Shareholders. For purposes of these Tables, changes in interest due to volume and rate were determined as follows: Volume Variance - Change in volume multiplied by the previous year's rate. Rate Variance - Change in rate multiplied by the previous year's volume. Rate / Volume Variance - Change in volume multiplied by the change in rate. Changes not due solely to either a change in volume or a change in rate have been allocated proportionally to both changes due to volume and rate. 11 II. INVESTMENT PORTFOLIO A. Types of Securities - Total securities on the balance sheet are comprised of the following classifications at December 31: (dollars in thousands) 2004 2003 2002 ---- ---- ---- Securities Available-for-Sale U.S. Government agency securities.. $ 20,087 $ 37,785 $ 66,838 Mortgage-backed securities......... 48,647 33,364 3,425 FHLB stock......................... 5,421 5,203 5,001 --------- --------- --------- Total securities available-for-sale $ 74,155 $ 76,352 $ 75,264 ========= ========= ========= Securities Held-to-Maturity Obligations of states of the U.S. and political subdivisions....... $ 11,910 $ 12,724 $ 13,821 Mortgage-backed securities......... 84 111 169 --------- --------- --------- Total securities held-to-maturity $ 11,994 $ 12,835 $ 13,990 ========= ========= ========= B. Information required by this item is incorporated herein by reference to the information appearing under the caption "Table III - Securities", within "Management's Discussion and Analysis of Operations" located on page 33 of Ohio Valley's 2004 Annual Report to Shareholders. C. Excluding obligations of the U.S. Government and its agencies, no concentration of securities exists of any issuer that is greater than 10% of shareholders' equity of Ohio Valley. III. LOAN PORTFOLIO A. Types of Loans - Total loans on the balance sheet are comprised of the following classifications at December 31: (dollars in thousands) 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Real estate loans $227,234 $217,636 $224,212 $226,212 $209,724 Commercial loans 226,058 220,724 205,508 173,154 139,826 Consumer loans 146,965 134,720 128,662 108,437 98,013 All other loans 317 624 1,179 857 740 -------- -------- -------- -------- -------- $600,574 $573,704 $559,561 $508,660 $448,303 ======== ======== ======== ======== ======== B. Maturities and Sensitivities of Loans to Changes in Interest Rates - Information required by this item is incorporated herein by reference to the information appearing under the caption "Table VII - Maturity and Repricing Data of Loans", within "Management's Discussion and Analysis of Operations" located on page 35 of Ohio Valley's 2004 Annual Report to Shareholders. C. 1. Risk Elements - Gross interest income that would have been recorded on loans that were troubled debt restructurings, nonaccrual or past due 90 days is estimated to be $121,000 for the fiscal year ending December 31, 2004. Additional information required by this item is incorporated herein by reference to the information appearing under the caption "Table VI - Summary of Nonperforming and Past Due Loans", within "Management's Discussion and Analysis of Operations" located on page 35 of Ohio Valley's 2004 Annual Report to Shareholders. 12 2. Potential Problem Loans - At December 31, 2004, there are approximately $1,986,000 of loans, which are not included in "Table VI - Summary of Nonperforming and Past Due Loans" within "Management's Discussion and Analysis of Operations" located on page 35 of Ohio Valley's 2004 Annual Report to Shareholders, for which management has some doubt as to the borrower's ability to comply with the present repayment terms. These loans and their loss exposure have been considered in management's analysis of the adequacy of the allowance for loan losses. 3. Foreign Outstandings - There were no foreign outstandings at December 31, 2004, 2003 or 2002. 4. Loan Concentrations - As of December 31, 2004, there were no concentrations of loans greater than 10% of total loans which are not otherwisedisclosed as a category of loans pursuant to Item III.A. above. Also refer to the Consolidated Financial Statements regarding concentrations of credit risk found within Note A of the Notes to the Consolidated Financial Statements of Ohio Valley's 2004 Annual Report to Shareholders incorporated herein by reference. 5. No amount of loans that have been classified by regulatory examiners as loss, substandard, doubtful, or special mention have been excluded from the amounts disclosed as impaired, nonaccrual, past due 90 days or more, restructured, or potential problem loans. D. Other Interest-Bearing Assets - As of December 31, 2004, there were no other interest-bearing assets that would be required to be disclosed under Item III.C. if such assets were loans. 13 IV. SUMMARY OF LOAN LOSS EXPERIENCE A. The following schedule presents an analysis of the allowance for loan losses for the fiscal years ended December 31: (dollars in thousands) 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Balance, beginning of year $7,593 $7,069 $6,251 $5,385 $5,055 Loans charged-off: Real estate 823 1,110 636 659 92 Commercial 1,661 2,267 2,272 620 61 Consumer 2,267 2,661 2,656 1,903 1,642 -------- -------- -------- -------- ------- Total loans charged-off 4,751 6,038 5,564 3,182 1,795 Recoveries of loans: Real estate 583 279 119 69 4 Commercial 556 1,057 158 17 --- Consumer 843 887 635 459 231 -------- ------- -------- -------- ------- Total recoveries of loans 1,982 2,223 912 545 235 Net loan charge-offs (2,769) (3,815) (4,652) (2,637) (1,560) Provision charged to operations 2,353 4,339 5,470 3,503 1,890 -------- ------- -------- -------- ------- Balance, end of year $7,177 $7,593 $7,069 $6,251 $5,385 ======== ======= ======== ======== ======= Ratio of Net Charge-offs to Average Loans outstanding .47% .68% .86% .56% .36% ======== ======= ======== ======== ======= Ratio of Allowance for Loan Losses to Non-Performing Assets 142.46% 140.66% 83.16% 94.73% 80.70% ======== ======= ======== ======== ======= Discussion on factors which influenced management in determining the amount of additions charged to provision expense is incorporated herein by reference to the information appearing under the caption "Loans" within "Management's Discussion and Analysis of Operations" located on page 33 of Ohio Valley's 2004 Annual Report to Shareholders. B. Allocation of the Allowance for Loan Losses - Information required by this item is incorporated herein by reference to the information appearing under the caption "Table V - Allocation of the Allowance for Loan Losses", within "Management's Discussion and Analysis of Operations" located on page 35 of Ohio Valley's 2004 Annual Report to Shareholders. V. DEPOSITS A. Deposit Summary - Information required by this item is incorporated herein by reference to the information appearing under the caption "Table I - Consolidated Average Balance Sheet & Analysis of Net Interest Income", within "Management's Discussion and Analysis of Operations" located on page 30 of Ohio Valley's 2004 Annual Report to Shareholders. 14 C.&E. Foreign Deposits - There were no foreign deposits outstanding at December 31, 2004, 2003, or 2002. D. Schedule of Maturities - The following table provides a summary of total time deposits by remaining maturities for the fiscal year ended December 31, 2004: Over Over 3 months 3 through 6 through Over (dollars in thousands) or less 6 months 12 months 12 months ------- -------- --------- --------- Certificates of deposit of $100,000 or greater ................. $ 14,929 $ 8,074 $ 31,677 $ 46,005 Other time deposits of $100,000 or greater ................. 1,249 765 2,075 2,975 -------- ------- -------- -------- Total time deposits of $100,000 or greater ................. $ 16,178 $ 8,839 $ 33,752 $ 48,980 ======== ======= ======== ======== VI. RETURN ON EQUITY AND ASSETS Information required by this section is incorporated herein by reference to the information appearing under the caption "Table X - Key Ratios" within "Management's Discussion and Analysis of Operations" located on page 40 of Ohio Valley's 2004 Annual Report to Shareholders. VII. SHORT-TERM BORROWINGS The following schedule is a summary of securities sold under agreements to repurchase at December 31: (dollars in thousands) 2004 2003 2002 ---- ---- ---- Balance outstanding at period-end .......... $ 39,753 $ 24,018 $ 33,052 -------- -------- -------- Weighted average interest rate at period-end 1.77% .80% 1.08% -------- -------- -------- Average amount outstanding during year ..... $ 24,743 $ 23,396 $ 23,090 -------- -------- -------- Approximate weighted average interest rate during the year ......................... 1.12% .87% 1.56% -------- -------- -------- Maximum amount outstanding as of any month-end ............................... $ 39,753 $ 35,213 $ 33,052 -------- -------- -------- Forward-Looking Information Certain statements contained in this Annual Report on Form 10-K which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act), including, without limitation, the statements specifically identified as forward-looking statements within this document. In addition, certain statements in future filings by Ohio Valley with the SEC, in press releases, and in oral and written statements made by or with the approval of Ohio Valley which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Ohio Valley or its management or its board 15 of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "targeted" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying those statements. Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events, including: (i) changes in political, economic or other factors such as inflation rates, recessionary or expansive trends, and taxes; (ii) competitive pressures; (iii) fluctuations in interest rates; (iv) the level of defaults and prepayment on loans made by the Company; (v) unanticipated litigation, claims, or assessments; (vi) fluctuations in the cost of obtaining funds to make loans; and (vii) regulatory changes. There is also the risk that we incorrectly analyze these risks and forces, or that the strategies we develop to address them are unsuccessful. Forward-looking statements speak only as of the date on which they are made and Ohio Valley undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect unanticipated events. All subsequent written and oral forward-looking statements attributable to Ohio Valley or any person acting on our behalf are qualified by the cautionary statements in this selection. ITEM 2 - PROPERTIES Ohio Valley does not own or lease any real or personal property. The principal executive offices of Ohio Valley and the Bank are located at 420 Third Avenue, Gallipolis, Ohio. The Bank owns six financial service centers located in Gallipolis (Gallia Co.), Jackson (Jackson Co.), Waverly (Pike Co.) and Columbus (Franklin Co.), all in Ohio. The Bank leases nine additional financial service centers located in Gallipolis (Gallia Co.), Jackson (Jackson Co.), Pomeroy (Meigs Co.), and South Point (Lawrence Co.) in Ohio and Point Pleasant (Mason Co.), Huntington (Cabell Co.), Milton (Cabell Co.) and Cross Lanes (Kanawha Co.) in West Virginia. The Bank also owns and operates twenty five ATMs, including ten off-site ATMs. Furthermore, the Bank owns a facility and leases a facility in Gallipolis (Gallia Co.), Ohio which are used for additional office space. The Bank also owns two facilities in Gallipolis (Gallia Co.), Ohio and Point Pleasant (Mason Co.), West Virginia which are leased to third parties. Loan Central conducts its consumer finance operations through five offices located in Gallipolis (Gallia Co.), Jackson (Jackson Co.), Waverly (Pike Co.), South Point (Lawrence Co.) and Wheelersburg (Scioto Co.), all in Ohio. All of these facilities are leased by Loan Central, except for the Wheelersburg (Scioto Co.) facility. Loan Central leases a portion of its Wheelersburg (Scioto Co.) facility to a third party. Ohio Valley Financial Services also conducts business within Loan Central's Jackson (Jackson Co.) facility. Management considers all of these properties to be satisfactory for the Company's current operations. The Bank, Loan Central and Ohio Valley Financial Services' leased facilities are all subject to commercially standard leasing arrangements. Information concerning the value of the Company's owned and leased real property and a summary of future lease payments is contained in "Note E - Premises and Equipment" to the Company's consoldiated financial statements for the fiscal year ended December 31, 2004, located on page 17 of Ohio Valley's 2004 Annual Report to Shareholders. 16 ITEM 3 - LEGAL PROCEEDINGS There are no material pending legal proceedings against Ohio Valley or any of its subsidiaries, other than ordinary, routine litigation incidental to their respective businesses. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There was no matter submitted during the fourth quarter of 2004 to a vote of security holders, by solicitation of proxies or otherwise. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, the following table lists the names and ages of the executive officers of Ohio Valley as of March 16, 2005, the positions presently held by those individuals with Ohio Valley and its principal subsidiaries and their individual business experience during the past five years. Current Position and Name and Age Business Experience During Past 5 Years - ------------------ --------------------------------------- Jeffrey E. Smith, 55 President and Chief Executive Officer of Ohio Valley and the Bank Sue Ann Bostic, 63 Vice President of Ohio Valley beginning 1996; Senior Vice President, Administrative Group of the Bank since 1996. Cherie A. Barr, 38 Vice President of Ohio Valley beginning 1998; President of Loan Central since 2000, President and Secretary of Loan Central from 1999 to 2000. Katrinka V. Hart, 46 Senior Vice President since 2003 and Vice President from 1995 to 2003 of Ohio Valley; Executive Vice President and Risk Management Officer since 2003, Senior Vice President, Retail Bank Group from 1995 to 2003 of the Bank. Mario P. Liberatore, 59 Vice President of Ohio Valley beginning 1997, Senior Vice President, West Virginia Bank Group of the Bank beginning 1997. E. Richard Mahan, 59 Senior Vice President and Secretary of Ohio Valley beginning 2000, Executive Vice President and Secretary of the Bank beginning 2000; Senior Vice President of Ohio Valley from 1999 to 2000, Executive Vice President of the Bank from 1999 to 2000. Larry E. Miller, II, 40 Senior Vice President and Treasurer of Ohio Valley beginning 2000, Executive Vice President and Treasurer of the Bank beginning 2000; Senior Vice President of Ohio Valley from 1999 to 2000, Executive Vice President of the Bank from 1999 to 2000. David L. Shaffer, 46 Vice President of Ohio Valley beginning 2000, Senior Vice President, Commercial Bank Group of the Bank beginning 2000; Vice President, Commercial Lending of the Bank from 1999 to 2000. 17 Current Position and Name and Age Business Experience During Past 5 Years - ------------------ --------------------------------------- Sandra L. Edwards, 57 Vice President of Ohio Valley beginning 2000; Senior Vice President, Financial Bank Group of the Bank beginning 2000,Vice President, Management Information Systems of the Bank from 1999 to 2000. Scott W. Shockey, 35 Vice President and Chief Financial Officer since December 2004 and Assistant Treasurer from 2001 to December 2003 of Ohio Valley; Senior Vice President since December 2004, Chief Financial Officer since 2001, Vice President from 2001 to December 2003, and Assistant Vice President and Comptroller from 1999 to 2001 of the Bank. Jennifer L. Osborne, 52 Vice President of Ohio Valley since 2004; Senior Vice President, Retail Lending Group since 2004 and Vice President, Retail Lending Group from 1999 to 2003 of the Bank. Tom R. Shepherd, 38 Vice President of Ohio Valley since 2004; Senior Vice President, Retail Deposit Group since 2004, Vice President, Director of Marketing, Product Management and Retail Development from 2001 to 2003, and Vice President, Marketing from 1998 to 2000 of the Bank. Cindy H. Johnston, 44 Assistant Secretary of Ohio Valley since 1995; Assistant Vice President since 2004 and Assistant Secretary since 1995 of the Bank. Paula W. Salisbury, 46 Assistant Secretary of Ohio Valley since 1995; Assistant Vice President since 2004 and Assistant Secretary since 1995 of the Bank. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required under this Item 5 by Items 201(a) through (c) of SEC Regulation S-K is incorporated herein by reference to the information presented under the captions "Summary of Common Stock Data" located on page 28 of Ohio Valley's 2004 Annual Report to Shareholders and "Note P -- Regulatory Matters" to the Company's Consolidated Financial Statements for the fiscal year ended December 31, 2004 located on page 23 of Ohio Valley's 2004 Annual Report to Shareholders. The closing price of Ohio Valley's common shares on the NASDAQ National Market on March 15, 2005 was $33.21. 18 In response to the information required under this Item 5 by Item 701 of SEC Regulation S-K, Ohio Valley did not sell any of its securities without registration during its 2004 fiscal year. Pursuant to Item 703 of SEC Regulation S-K, the following table provides information on Ohio Valley's purchases of its common shares during the three fiscal months ended December 31, 2004:
Maximum Number Total Number of Shares of Shares That May Total Number of Average Purchased as Part of Yet Be Purchased Common Shares Price Paid per Publicly Announced Under Publicly Announced Period Purchased Common Share Plans or Programs Plans or Programs -------------------------- ------------- -------------- ---------------------- -------------------------- October 1 through October 31, 2004 ............. - - - - - - - - - 107,091 November 1 through November 30, 2004 ............ - - - - - - - - - 107,091 December 1 through December 31, 2004 ............ 31,260 $32.50 31,260 75,831 ------------- ------------- ------------- ------------- TOTAL 31,260 $32.50 31,260 75,831 ============= ============= ============= =============
ITEM 6 - SELECTED FINANCIAL DATA The information required under this Item 6 by Item 301 of SEC Regulation S-K is incorporated herein by reference to the information presented under the caption "Selected Financial Data" located on page 5 of Ohio Valley's 2004 Annual Report to Shareholders. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required under this Item 7 by Item 303 of SEC Regulation S-K is incorporated herein by reference to the information presented under the caption "Management's Discussion and Analysis of Operations" located on pages 29-40 of Ohio Valley's 2004 Annual Report to Shareholders. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required under this Item 7A by Item 305 of SEC Regulation S-K is incorporated herein by reference to the information presented under the captions "Interest Rate Sensitivity and Liquidity" and "Interest Rate Sensitivity -- Table VIII" and found within "Management's Discussion and Analysis of Operations" located on pages 37 and 38, respectively, of Ohio Valley's 2004 Annual Report to Shareholders. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Ohio Valley's consolidated financial statements and related notes are listed below and incorporated herein by reference to pages 6-26 of Ohio Valley's 2004 Annual Report to Shareholders. The supplementary "Consolidated Quarterly 19 Financial Information (unaudited)" and the "Report of Independent Registered Public Accounting Firm on Financial Statements" located on pages 26 and 27, respectively, of Ohio Valley's 2004 Annual Report to Shareholders are also incorporated herein by reference. Consolidated Statements of Condition as of December 31, 2004 and 2003 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 Notes to the Consolidated Financial Statements Report of Independent Registered Public Accounting Firm on Financial Statements ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Ohio Valley has not changed accountants during the fiscal years ended December 31, 2004 and December 31, 2003. Furthermore, during the fiscal years ended December 31, 2004 and December 31, 2003, there were no disagreements between Crowe Chizek and Company LLC ("Crowe Chizek") on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Crowe Chizek's satisfaction, would have caused Crowe Chizek to make reference to the subject matter of the disagreement in connection with its reports on Ohio Valley's consolidated financial statements for such periods. ITEM 9A - CONTROLS AND PROCEDURES Disclosure Controls and Procedures - ---------------------------------- With the participation of the President and Chief Executive Officer (the principal executive officer) and the Vice Presient and Chief Financial Officer (the principal financial officer) of Ohio Valley, Ohio Valley's management has evaluated the effectiveness of Ohio Valley's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Annual Report on Form 10-K. 20 Based on that evaluation, Ohio Valley's President and Chief Executive Officer and Vice Presient and Chief Financial Officer have concluded that: o information required to be disclosed by Ohio Valley in this Annual Report on Form 10-K would be accumulated and communicated to Ohio Valley's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; o information required to be disclosed by Ohio Valley in this Annual Report on Form 10-K would be recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and o Ohio Valley's disclosure controls and procedures are effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that material information relating to Ohio Valley and its consolidated subsidiaries is made known to them, particularly during the period for which the periodic reports of Ohio Valley, including this Annual Report on Form 10-K, are being prepared. Internal Control Over Financial Reporting - ----------------------------------------- Pursuant to the SEC's Exemptive Order in Release No. 34-50754 (November 30, 2004), management's annual report on internal control over financial reporting required by Item 308(a) of SEC Regulation S-K and the related attestation report of the registered public accounting firm required by Item 308(b) of SEC Regulation S-K are not included herein. Ohio Valley will file this information with the SEC by an amendment to this Form 10-K no later than May 2, 2005. There were no changes in Ohio Valley's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Ohio Valley's fiscal quarter ended December 31, 2004, that have materially affected, or are reasonably likely to materially affect, Ohio Valley's internal control over financial reporting. ITEM 9B - OTHER INFORMATION The following information is disclosed pursuant to Item 5.02 - Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers of Form 8-K: Election of Director - -------------------- The Board of Directors of Ohio Valley elected Harold A. Howe as a director of Ohio Valley on January 18, 2005. Mr. Howe, age 54, has served as the President of Ohio Valley Financial Services since 2000 and as a member of the Board of Directors of the Bank since 1998. Mr. Howe is self-employed in the real estate investment and rental business. Mr. Howe was elected to finish the unexpired term of James L. Dailey who retired from the Board of Directors of Ohio Valley effective January 18, 2005. Mr. Dailey continues to serve as the Chairman of the Board of Directors of the Bank. The Board of Directors of Ohio Valley has nominated Mr. Howe to stand for re-election to the Board of Directors of Ohio Valley at Ohio Valley's Annual Meeting of Shareholders on April 13, 2005. 21 On March 2, 2005, Ohio Valley issued a press release announcing Mr. Howe's election to its Board of Directors. A copy of the press release is included as Exhibit 99 to this Form 10-K and incorporated herein by reference. Appointment of Principal Officer - -------------------------------- On December 14, 2004, Scott W. Shockey was elected as Vice President and Chief Financial Officer of Ohio Valley and as Senior Vice President of the Bank. Mr. Shockey, age 35, has also served as Chief Financial Officer of the Bank since 2001. Mr. Shockey served as Assistant Treasurer of Ohio Valley from 2001 to December 14, 2004; as Vice President of the Bank from 2001 to December 14, 2004; and as Assistant Vice President and Comptroller of the Bank from 1999 to 2001. The Bank has had and expects to have in the future banking transactions in the ordinary course of the Bank's business with Mr. Shockey, and members of his immediate family. All loans and commitments to loan included in such transactions were made on substantially the same terms, including interest rates and collateral on loans and repayment terms, as those prevailing at the time for comparable transactions with other persons and, in the opinion of management, each such loan and commitment to loan did not involve more than a normal risk of uncollectibility or present other unfavorable features. All of such loans comply with Regulation O of the federal banking regulations. The aggregate amount of loans to Mr. Shockey and affiliates and other associates of Mr. Shockey was $32,512 at December 31, 2004. As of the date hereof, all of such loans were performing loans. The following information is disclosed pursuant to Item 1.01 - Entry into a Material Definitive Agreement of Form 8-K: Compensation of Directors - ------------------------- All of the directors of Ohio Valley also serve as directors of the Bank. The directors of Ohio Valley are paid by the Bank for their services rendered as directors of the Bank. The form and amount of compensation paid to Ohio Valley's directors is reviewed periodically by the Compensation and Mangement Succession Committee of Ohio Valley's Board of Directors as well as the full Board. On December 14, 2004, upon the recommendation of the Compensation and Management Succession Committee, Ohio Valley's Board of Directors increased the amount of the annual retainer to be paid to each of Ohio Valley's directors by $650. Accordingly, in December 2004, each director of Ohio Valley received an annual retainer of $15,350 for services to be rendered in fiscal 2005. No other changes were made to the directors' compensation package. A summary of the compensation paid to Ohio Valley's directors is filed as Exhibit 10.9 to this Form 10-K and incorporated herein by reference. 22 Long Range Bonus Program Awards - ------------------------------- Ohio Valley maintains a bonus program (the "Long Range Bonus Program") for the executive officers and certain other officers of Ohio Valley and the Bank. Bonuses under the Long Range Bonus Program are calculated based on each participant's annual performance evaluation and the Bank's achievement of certain performance criteria. A summary of the Long Range Bonus Program is filed as Exhibit 10.10 to this Form 10-K and incorporated herein by reference. In December 2004, the Board of Directors of Ohio Valley, upon the recommendation of the Compensation and Management Succession Committee, approved the following bonuses for the executive officers of Ohio Valley under the Long Range Bonus Program in respect of fiscal 2004 performance: Jeffrey E. Smith $71,553 E. Richard Mahan $51,554 Larry E. Miller $46,266 Katrinka V. Hart $46,266 Sue Ann Bostic $44,937 Annual Results Bonus - -------------------- Ohio Valley maintains an Annual Results Bonus Program. The objectives of the Annual Results Bonus Program are (a) to motivate Ohio Valley's executive officers and other employees and to reward them for the accomplishment of the short-term goals of Ohio Valley and its subsidiaries; (b) to reinforce a strong performance orientation with differentiation and variability in individual awards based on contribution to annual results; and (c) to provide a competitive compensation package that will attract, reward and retain employees of the highest quality. All employees of Ohio Valley and its subsidiaries holding positions with a pay grade of 8 or above are eligible to participate in the Annual Results Bonus Program, including all of Ohio Valley's executive officers. Bonuses payable to participants in the Annual Results Bonus Program are based on the performance of Ohio Valley and its sibsidiaries against specific performance targets designated by Ohio Valley's Board of Directors upon the recommendation of its Compensation and Management Succession Committee. In January 2004, the Board of Directors designated specific performance targets for Ohio Valley and its subsidiaries related to earnings growth, return on assets, return on equity and asset quality for fiscal 2004 (the "2004 Performance Targets"). In December 2004, Ohio Valley's Board of Directors, upon the recommendation of the Compensation and Management Succession Committee, (1) determined that the 2004 Performance Targets were achieved (due in part to the sale of Ohio Valley's interest in ProCentury), (2) set the aggregate amount available for bonuses under the Annual Results Bonus Program and (3) allocated the aggregate amount available for bonuses among the various pay grades. All employees in the same pay grade received the same bonus (except for Mr. Smith as explained below). Accordingly, Ohio Valley's Board of Directors, upon the recommendation of the Compensation and Management Succession Committee, approved bonuses for the 23 following executive officers of Ohio Valley under the Annual Results Bonus Program in respect of fiscal 2004 performance: E. Richard Mahan $2,000 Larry E. Miller $2,000 Katrinka V. Hart $2,000 Sue Ann Bostic $1,750 Based upon his pay grade, Jeffrey E. Smith, the President and Chief Executive Officer of Ohio Valley, should have received a bonus of approximately $2,000. However, the Compensation and Management Succession Committee exercised its discretion and recommended to the Board of Directors that Mr. Smith receive a $12,000 bonus under the Annual Results Bonus Program. Ohio Valley's Board of Directors accepted the recommendation of the Compensation and Management Succession Committee and awarded the $12,000 bonus to Mr. Smith. All bonuses under the Annual Results Bonus Program were paid in December 2004 in cash in a single lump sum after deduction of payroll taxes and tax withholdings. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required under this Item 10 by Items 401 and 405 of SEC Regulation S-K is incorporated herein by reference to the information presented in Ohio Valley's definitive proxy statement relating to the annual meeting of shareholders of Ohio Valley to be held on April 13, 2005 (the "2005 Proxy Statement"), under the captions "Proxy Item 1: Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" located on pages 7 through 15 and page 6, respectively, of the 2005 Proxy Statement. In addition, certain information concerning executive officers of Ohio Valley is set forth in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant." In accordance with the requirements of Item 406 of SEC Regulation S-K, the Board of Directors of Ohio Valley has adopted a Code of Ethics covering the directors, officers and employees of Ohio Valley and its affiliates, including, without limitation, the principal executive officer, the principal financial officer and the principal accounting officer of Ohio Valley. Interested persons may obtain copies of the Code of Ethics without charge by writing to Ohio Valley Banc Corp, Attention: E. Richard Mahan, Secretary, P.O. Box 240, Gallipolis, Ohio 45631. ITEM 11 - EXECUTIVE COMPENSATION The information required under this Item 11 by Item 402 of SEC Regulation S-K is incorporated herein by reference to the information presented under the caption "Compensation of Executive Officers and Directors" located on pages 16 through 23 of the 2005 Proxy Statement. 24 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this Item 12 by Item 403 of SEC Regulation S-K is incorporated herein by reference to the information presented under the caption "Ownership of Certain Beneficial Owners and Management" located on pages 3 through 6 of the 2005 Proxy Statement. Ohio Valley does not maintain any equity compensation plans requiring disclosure pursuant to Item 201(d) of SEC Regulation S-K. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this Item 13 by Item 404 of SEC Regulation S-K is incorporated herein by reference to the information presented under the caption "Certain Relationships and Related Transactions" located on page 23 of the 2005 Proxy Statement. ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required under this Item 14 by Item 9(e) of Schedule 14A is incorporated herein by reference to the information presented under the captions "Pre-Approval of Services Performed by Independent Registered Public Accounting Firm" and "Services Rendered by the Independent Registered Public Accounting Firm" located on pages 25 through 29 of the 2005 Proxy Statement. PART IV ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES A. (1) Financial Statements The following consolidated financial statements of Ohio Valley appear in the 2004 Annual Report to Shareholders, Exhibit 13, and are specifically incorporated herein by reference under Item 8 of this Form 10-K: Consolidated Statements of Condition as of December 31, 2004 and 2003 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 Notes to the Consolidated Financial Statements Report of Independent Registered Public Accounting Firm on Financial Statements 25 (2) Financial Statement Schedules Financial statement schedules are omitted as they are not required or are not applicable, or the required information is included in the financial statements. (3) Exhibits Reference is made to the Exhibit Index beginning on page 28 of this Form 10-K. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Ohio Valley has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OHIO VALLEY BANC CORP. Date: March 16 , 2005 By /s/Jeffrey E. Smith -------- ------------------------- Jeffrey E. Smith President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 16 , 2005 by the following persons on behalf of Ohio Valley and in the capacities indicated. Name Capacity ---- -------- /s/Jeffrey E. Smith President, Chief Executive Officer - ----------------------------- and Director Jeffrey E. Smith /s/Scott W. Shockey Vice President and Chief Financial - ----------------------------- Officer (principal financial officer Scott W. Shockey and principal accounting officer) /s/Lannes C. Williamson Director - ----------------------------- Lannes C. Williamson /s/Anna P. Barnitz Director - ----------------------------- Anna P. Barnitz /s/W. Lowell Call Director - ----------------------------- W. Lowell Call /s/Robert H. Eastman Director - ----------------------------- Robert H. Eastman /s/Brent A. Saunders Director - ----------------------------- Brent A. Saunders /s/Steven B. Chapman Director - ----------------------------- Steven B. Chapman /s/Thomas E. Wiseman Director - ----------------------------- Thomas E. Wiseman /s/Harold A. Howe Director - ----------------------------- Harold A. Howe 27 EXHIBIT INDEX The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table: Exhibit Number Exhibit Description 3(a) Amended Articles of Incorporation of Ohio Valley. Incorporated herein by reference to Exhibit 3(a) to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 1997 (SEC File No. 0-20914). 3(b) Code of Regulations of Ohio Valley. Incorporated herein by reference to Exhibit 3(b) to Ohio Valley's current report on Form 8-K (SEC File No. 0-20914) filed November 6, 1992. 4 Agreement to furnish instruments and agreements defining rights of holders of long-term debt. Filed herewith. 10.1 Split Dollar Agreement, dated November 11, 1996, between Jeffrey E. Smith and The Ohio Valley Bank Company. Incorporated herein by reference to Exhibit 10.1 to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2002 (SEC File No. 0-20914). 10.2 Schedule A to Exhibit 10.1 identifying other identical Split Dollar Agreements between The Ohio Valley Bank Company and executive officers of Ohio Valley Banc Corp. Incorporated herein by reference to Exhibit 10.2 to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2002 (SEC File No. 0-20914). 10.3 Director Retirement Plan, dated October 10, 2002, between Brent A. Saunders and The Ohio Valley Bank Company. Incorporated herein by reference to Exhibit 10.3 to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2002 (SEC File No. 0-20914). 10.4 Schedule A to Exhibit 10.3 identifying other identical director retirement plans between The Ohio Valley Bank Company and executive officers who are directors of Ohio Valley Banc Corp. Incorporated herein by reference to Exhibit 10.4 to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2002 (SEC File No. 0-20914). 10.5 Salary Continuation Plan, dated January 2, 1997, between Jeffrey E. Smith and The Ohio Valley Bank Company. Incorporated herein by reference to Exhibit 10.5 to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2002 (SEC File No. 0-20914). 28 10.6 Schedule A to Exhibit 10.5 identifying other identical salary continuation plans between The Ohio Valley Bank Company and executive officers of Ohio Valley Banc Corp. Incorporated herein by reference to Exhibit 10.6 to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2002 (SEC File No. 0-20914). 10.7 Deferred Compensation Plan, dated November 11, 2002, between Barney A. Molnar and The Ohio Valley Bank Company. Incorporated herein by reference to Exhibit 10.7 to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2002 (SEC File No. 0-20914). 10.8 Schedule A to Exhibit 10.7 identifying other identical deferred compensation plans between The Ohio Valley Bank Company and executive officers or directors of Ohio Valley Banc Corp. Incorporated herein by reference to Exhibit 10.8 to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2002 (SEC File No. 0-20914). 10.9 Summary of Compensation for Directors of Ohio Valley Banc Corp. Filed herewith. 10.10 Summary of Long Range Bonus Program of Ohio Valley Banc Corp. Filed herewith. 11 Statement regarding computation of per share earnings (included in Note A of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.) 13 Ohio Valley's Annual Report to Shareholders for the fiscal year ended December 31, 2004 filed herewith. (Not deemed filed except for portions thereof specifically incorporated by reference into this Annual Report on Form 10-K.) 21 Subsidiaries of Ohio Valley. Filed herewith. 29 23 Consent of Independent Accountant - Crowe Chizek and Company LLC. Filed herewith. 31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer). Filed herewith. 31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer). Filed herewith. 32 Section 1350 Certifications (Principal Executive Officer and Principal Accounting Officer). Filed herewith. 99 Press Release issed by Ohio Valley on March 2, 2005. Filed herewith. 30 EX-4 2 exhibit4.txt INSTRUMENTSDEFININGRIGHTSOFSECURITYHOLDERS EXHIBIT 4 OHIO VALLEY BANC CORP. 420 Third Avenue, PO Box 240 Gallipolis, OH 45631 (740) 446-2631 March 16, 2005 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Ohio Valley Banc Corp. - Form 10-K for the fiscal year ended December 31, 2004 Gentlemen: Ohio Valley Banc Corp., an Ohio corporation ("Ohio Valley"), is today filing an Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the "Form 10-K"), as executed on March 16, 2005. Pursuant to the instructions relating to the Exhibits in Item 601(b)(4)(iii) of Regulation S-K, Ohio Valley hereby agrees to furnish the Commission, upon request, copies of instruments and agreements, defining the rights of holders of its long-term debt and of the long-term debt of its consolidated subsidiaries, which are not being filed as exhibits to the Form 10-K. Such long-term debt does not exceed 10% of the total assets of Ohio Valley Banc Corp. and its subsidiaries on a consolidated basis. Very truly yours, /s/ Jeffrey E. Smith - -------------------------------- Jeffrey E. Smith President and CEO Ohio Valley Banc Corp. EX-10 3 exhibit10-9.txt SUMMARYOFCOMPENSATIONFORDIRECTORS EXHIBIT 10.9 SUMMARY OF COMPENSATION FOR DIRECTORS OF OHIO VALLEY BANC CORP. All of the directors of Ohio Valley Banc Corp. ("Ohio Valley") also serve as directors of its subsidiary, The Ohio Valley Bank Company (the "Bank"). The directors of Ohio Valley are paid by the Bank for their services rendered as directors of the Bank, not Ohio Valley. Each director of the Bank who is not an employee of Ohio Valley or any of its subsidiaries (a "Non-Employee Director") receives $550 per month for his or her services. Each director of the Bank who is an employee of Ohio Valley or any of its subsidiaries (an "Employee Director") receives $350 per month for his or her services. In addition, each director of the Bank receives an annual retainer of $15,350 paid in December of each year for services to be rendered during the following year. Each Non-Employee Director who is a member of the Executive Committee of the Bank receives fees of $40,695 annually. This figure was pro-rated for time served for new members. Employee Directors receive no additional compensation for serving on the Executive Committee. The Bank also maintains split-dollar life insurance policies, a Director Retirement Plan and a Deferred Compensation Plan for all directors of the Bank. These documents are filed as Exhibit 10.1, Exhibit 10.3 and Exhibit 10.7, respectively, to Ohio Valley's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (SEC File No. 0-20914). EX-10 4 exhibit10-10.txt LONGRANGEBONUSPROGRAM EXHIBIT 10.10 SUMMARY OF LONG RANGE BONUS PROGRAM OF OHIO VALLEY BANC CORP. The following is a description of the Long Range Bonus Program (the "Bonus Program") of Ohio Valley Banc Corp. ("Ohio Valley") provided pursuant to Item 601(b)(10)(iii) of Regulation S-K promulgated by the Securities and Exchange Commission, which requires a written description of a compensatory plan when no formal document contains the compensation information. The objectives of the Bonus Program are (a) to motivate Ohio Valley's executive officers and other employees and to reward them for the accomplishment of the long range goals of Ohio Valley and its subsidiaries (b) to reinforce a strong performance orientation with differentiation and variability in individual awards based on contribution to long range business results; and (c) to provide a competitive compensation package that will attract, reward and retain employees of the highest quality. All employees of Ohio Valley and its subsidiaries holding positions with a pay grade of 8 or above are eligible to participate in the Bonus Program, including all of Ohio Valley's executive officers. Bonuses payable to participants in the Bonus Program are based on (a) the performance of Ohio Valley and its subsidiaries against specific performance targets (the "Performance Targets"); (b) each employee's individual performance; and (c) the marketplace range of compensation for employees holding comparable positions. At the beginning of each fiscal year, Ohio Valley's Board of Directors sets the specific Performance Targets for Ohio Valley and its subsidiaries for that year based on the following performance criteria set forth in Ohio Valley's strategic plan: net income and net income per share, return on assets and return on equity, net interest margin, efficiency ratio, capital ratios, asset quality, and asset ratios. At the end of the fiscal year, the aggregate amount available for the payment of bonuses under the Bonus Program is determined by Ohio Valley's Board of Directors upon recommendation of its Compensation and Management Succession Committee based on an evaluation of the accomplishment of the Performance Targets. Once the aggregate amount of the bonus pool is determined, individual bonus awards are determined through a formula that applies each employee's performance evaluation score to a "bonus grid" that accounts for the employee's job grade and the marketplace range of compensation for that job grade. Each employee's performance, including the performance of the executive officers, is evaluated based on the following performance criteria: job knowledge-information; priority setting; delgation of duties; decisiveness; creativity; written and oral communication skills; initiative and adaptability; teamwork and open-mindedness; work efficiency and follow-through and goal setting. Employees are evaluated by their supervisors, except for the executive officers who are evaluated by the Compensation and Management Succession Committee of Ohio Valley's Board of Directors. Ohio Valley's Board of Directors approves the bonuses payable to the executive officers under the Bonus Program based upon the recommendation of the Compensation and Management Succession Committee. Bonuses are normally paid in December in cash in a single lump sum, subject to payroll taxes and tax witholdings. EX-13 5 ovb2004annualreport.txt ANNUALREPORT 12312004 "ONE NAME" "ONE GOAL" MESSAGE FROM MANAGEMENT by CEO/President Jeff Smith & Chairman Jim Dailey Dear Shareholders, 2004 was an unprecedented year for Ohio Valley Banc Corp. Your company achieved records in: total earnings, total earnings per share, core earnings, and core earnings per share. In addition, your company finished the year with consolidated total assets at a record $729 million. 2004 was a year that saw every member of the Ohio Valley Banc Corp. team contributing to your company's success. The Directors, Officers, Employees, and You, our Shareholders each did their part in delivering these results. Your Board saw their 2000 decision to invest in ProCentury Corp (formerly ProFinance Holdings) return a $2.4 million pre-tax gain. Your Officers and Employees worked diligently in our core businesses of lending and collecting to continue to improve asset quality in a difficult economy. Your retail bankers opened accounts, gathered deposits, and issued certificates faced with the challenges of complying with a multitude of regulations ranging from the U. S. Patriot Act to the Office of Foreign Asset Control (OFAC). Your auditing staff saw the continued burden of Sarbanes- Oxley as Section 404 was implemented. While each task was handled as it was presented, many were not without cost, both in dollars and time. While the efforts were challenging, the results were gratifying and our Owners shared in the success with a 5th Dividend in December of $.19 per share and set their own record as they reinvested more than $1.4 million in our Dividend Reinvestment and Stock Purchase Plan (DRIP). That brings us to the theme of this year's Annual Report: "One Name. . .One Goal". Because of you and your predecessors, Ohio Valley Bank with its far reaching family of companies, employees, and shareholders has stood the test of time. Our goal continues to be to serve the families of our communities. Thank you for your loyal support in our efforts. We sincerely hope you find the enclosed report a "snapshot" of the results your company achieved in 2004 and you will find the opportunity to join us in Gallipolis on April 13, 2005 for your Annual Meeting. Sincerely, Jeffrey E. Smith President and CEO James L. Dailey Chairman of the Board Thank you Jim, This report on the progress of Ohio Valley Banc Corp. would not be complete without recognizing the contributions of Jim Dailey. As we consider his upcoming retirement effective April 13, 2005, I want to take this opportunity to applaud this "Dentist turned Banker" for his unique vision and leadership as a Director; President; CEO; and, most recently, Chairman in making Ohio Valley Banc Corp. what it is today. His "fingerprints" are all over this institution and, like his predecessors, he has moved the bar even higher for those who follow. Our challenge is to continue what you have begun. Jeff SELECTED FINANCIAL DATA Years Ended December 31 SUMMARY OF OPERATIONS: 2004 2003 2002 2001 2000 (dollars in thousands, except per share data) Total interest income $ 43,490 $ 45,160 $ 47,771 $ 47,585 $ 45,195 Total interest expense 16,146 17,645 20,810 24,235 24,065 Net interest income 27,344 27,515 26,961 23,350 21,130 Provision for loan losses 2,353 4,339 5,470 3,503 1,890 Total other income 7,992 5,982 5,634 5,129 3,858 Total other expenses 20,926 19,817 19,175 18,171 16,978 Income before income taxes 12,057 9,341 7,950 6,805 6,120 Income taxes 3,676 2,869 2,275 1,910 1,720 Net income 8,381 6,472 5,675 4,895 4,400 PER SHARE DATA: Net income per share $ 2.42 $ 1.86 $ 1.64 $ 1.41 $ 1.25 Cash dividends per share $ .94 $ .71 $ .67 $ .79 $ .59 Book value per share $16.49 $15.55 $14.55 $13.42 $12.76 Weighted average number of common shares outstanding 3,470,878 3,480,230 3,458,300 3,461,856 3,516,205 AVERAGE BALANCE SUMMARY: Total loans $ 590,006 $ 559,854 $ 538,148 $ 473,998 $ 432,165 Securities (1) 86,598 86,609 76,020 70,857 74,733 Deposits 537,162 509,676 489,513 441,255 428,874 Other borrowed funds (2) 96,361 100,590 98,938 74,525 47,311 Shareholders' equity 55,788 52,074 47,875 45,329 42,773 Total assets 722,281 693,197 667,561 590,193 544,306 PERIOD END BALANCES: Total loans $ 600,574 $ 573,704 $ 559,561 $ 508,660 $ 448,303 Securities (1) 86,674 90,046 90,759 76,796 76,402 Deposits 535,153 507,509 497,404 455,861 432,371 Shareholders' equity 56,579 54,408 50,375 46,300 44,492 Total assets 729,120 707,327 696,356 634,999 561,658 KEY RATIOS: Return on average assets 1.16% .93% .85% .83% .81% Return on average equity 15.02% 12.43% 11.85% 10.80% 10.29% Dividend payout ratio 38.89% 38.14% 40.79% 55.84% 47.14% Average equity to average assets 7.72% 7.51% 7.17% 7.68% 7.86% (1) Securities include interest-bearing balances with banks. (2) Other borrowed funds include subordinated debentures. 5 CONSOLIDATED STATEMENTS OF CONDITION As of December 31 2004 2003 ---- ---- (dollars in thousands, except share and per share data) ASSETS Cash and cash equivalents $ 16,279 $ 17,753 Interest-bearing deposits in other banks 525 859 Securities available-for-sale 74,155 76,352 Securities held-to-maturity (estimated fair value: 2004 - $12,534, 2003 - $13,547) 11,994 12,835 Total loans 600,574 573,704 Less: Allowance for loan losses (7,177) (7,593) --------- --------- Net loans 593,397 566,111 Premises and equipment, net 8,860 9,142 Accrued income receivable 2,643 2,700 Goodwill 1,267 1,267 Bank owned life insurance 13,988 13,222 Other assets 6,012 7,086 --------- --------- Total assets $ 729,120 $ 707,327 ========= ========= LIABILITIES Noninterest-bearing deposits $ 69,936 $ 62,235 Interest-bearing deposits 465,217 445,274 --------- --------- Total deposits 535,153 507,509 Securities sold under agreements to repurchase 39,753 24,018 Other borrowed funds 76,550 101,562 Subordinated debentures 13,500 13,500 Accrued liabilities 7,585 6,330 --------- --------- Total liabilities 672,541 652,919 --------- --------- SHAREHOLDERS' EQUITY Common stock ($1.00 stated value, 10,000,000 shares authorized; 2004 - 3,689,828 shares issued, 2003 - 3,658,212 shares issued) 3,690 3,658 Additional paid-in-capital 31,931 30,962 Retained earnings 28,465 23,343 Accumulated other comprehensive income (219) 624 Treasury stock, at cost (2004 - 258,970 shares, 2003 - 159,611 shares) (7,288) (4,179) --------- --------- Total shareholders' equity 56,579 54,408 --------- --------- Total liabilities and shareholders' equity $ 729,120 $ 707,327 ========= ========= See accompanying notes to consolidated financial statements 6 CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31 2004 2003 2002 ------------------------------- ---- ---- ---- (dollars in thousands, except per share data) Interest and dividend income: Loans, including fees $ 39,821 $ 41,462 $ 43,947 Securities: Taxable 2,837 2,739 2,612 Tax exempt 552 685 735 Dividends 218 203 225 Other Interest 62 71 252 -------- -------- -------- 43,490 45,160 47,771 Interest expense: Deposits 11,326 12,322 15,129 Securities sold under agreements to repurchase 278 204 361 Other borrowed funds 3,574 4,175 4,427 Subordinated debentures 968 944 893 -------- -------- -------- 16,146 17,645 20,810 -------- -------- -------- Net interest income 27,344 27,515 26,961 Provision for loan losses 2,353 4,339 5,470 Net interest income after provision -------- -------- -------- for loan losses 24,991 23,176 21,491 -------- -------- -------- Noninterest income: Service charges on deposit accounts 3,318 3,160 3,118 Trust fees 203 215 215 Income from bank owned insurance 606 657 684 Gain on sale of loans 63 444 76 Gain on sale of ProCentury Corp. 2,463 Other 1,339 1,506 1,541 -------- -------- -------- 7,992 5,982 5,634 Noninterest expense: Salaries and employee benefits 12,592 11,571 10,641 Occupancy 1,285 1,308 1,274 Furniture and equipment 1,208 1,031 1,083 Corporation franchise tax 616 591 395 Data processing 504 554 484 Other 4,721 4,762 5,298 -------- -------- -------- 20,926 19,817 19,175 -------- -------- -------- Income before income taxes 12,057 9,341 7,950 Provision for income taxes 3,676 2,869 2,275 -------- -------- -------- NET INCOME $ 8,381 $ 6,472 $ 5,675 ======== ======== ======== Earnings per share $ 2.42 $ 1.86 $ 1.64 ======== ======== ======== See accompanying notes to consolidated financial statements 7 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2004, 2003 and 2002 Accumulated Additional Other Total Common Paid-In Retained Comprehensive Treasury Shareholders' (dollars in thousands, except share and Stock Capital Earnings Income(Loss) Stock Equity per share data) ------- ------- ------- ----------- -------- ------- BALANCES AT JANUARY 1, 2002 $ 3,579 $29,207 $15,979 $ 1,043 $ (3,508) $46,300 Comprehensive income: Net income 5,675 5,675 Net change in unrealized gain on available-for-sale securities 600 600 Income tax effect (204) (204) ------- Total comprehensive income 6,071 Common Stock issued to ESOP, 12,800 shares 13 272 285 Common Stock issued through dividend reinvestment, 28,285 shares 28 613 641 Cash dividends, $.67 per share (2,315) (2,315) Shares acquired for treasury, 27,125 shares (607) (607) ------- ------- ------- ------- -------- ------- BALANCES AT DECEMBER 31, 2002 3,620 30,092 19,339 1,439 (4,115) 50,375 Comprehensive income: Net income 6,472 6,472 Net change in unrealized gain on available-for-sale securities (1,235) (1,235) Income tax effect 420 420 ------- Total comprehensive income 5,657 Common Stock issued to ESOP, 7,400 shares 7 191 198 Common Stock issued through dividend reinvestment, 30,477 shares 31 679 710 Cash dividends, $.71 per share (2,468) (2,468) Shares acquired for treasury, 2,496 shares (64) (64) ------- ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 2003 3,658 30,962 23,343 624 (4,179) 54,408 Comprehensive income: Net income 8,381 8,381 Net change in unrealized gain on available-for-sale securities (1,277) (1,277) Income tax effect 434 434 ------- Total comprehensive income 7,538 Common Stock issued to ESOP, 4,600 shares 5 146 151 Common Stock issued through dividend reinvestment, 27,016 shares 27 823 850 Cash dividends, $.94 per share (3,259) (3,259) Shares acquired for treasury, 99,359 shares (3,109) (3,109) ------- ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 2004 $ 3,690 $31,931 $28,465 $ (219) $(7,288) $56,579 ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements 8 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2004 2003 2002 ------------------------------- ---- ---- ---- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,381 $ 6,472 $ 5,675 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,237 1,086 1,165 Net amortization and accretion of securities 201 243 123 Proceeds from sale of loans in secondary market 1,598 20,952 5,913 Loans disbursed for sale in secondary market (1,535) (20,508) (5,837) Gain on sale of loans (63) (444) (76) Deferred tax benefit 63 (364) (392) Provision for loan losses 2,353 4,339 5,470 Common stock issued to ESOP 151 198 285 FHLB stock dividend (218) (203) (225) Gain on sale of ProCentury Corp. (2,463) Change in accrued income receivable 57 444 276 Change in accrued liabilities 1,255 (260) (1,118) Change in other assets (456) 1,268 (691) ------- ------- ------- Net cash provided by operating activities 10,561 13,223 10,568 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 30,715 41,953 30,491 Purchases of securities available-for-sale (29,755) (44,271) (43,469) Proceeds from maturities of securities held-to-maturity 1,874 2,965 2,005 Purchases of securities held-to-maturity (1,056) (1,855) (2,046) Change in interest-bearing deposits in other banks 334 646 (241) Net change in loans (29,775) (19,602) (55,183) Proceeds from sale of other real estate owned (388) (2,152) (370) Proceeds from sale of ProCentury Corp. 4,394 Purchases of premises and equipment (955) (1,981) (710) Purchases of insurance contracts (272) ------- ------- ------- Net cash used in investing activities (24,884) (24,297) (69,523) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in deposits 27,644 10,105 41,543 Cash dividends (3,259) (2,468) (2,315) Proceeds from issuance of common stock 850 710 641 Purchases of treasury stock (3,109) (64) (607) Change in securities sold under agreements to repurchase 15,735 (9,034) 3,778 Proceeds from subordinated debentures 8,500 Proceeds from FHLB borrowings 11,000 7,503 16,065 Repayment of FHLB borrowings (20,633) (15,439) (13,040) Change in other short-term borrowings (15,379) 14,063 1,553 ------- ------- ------- Net cash provided by financing activities 12,849 5,376 56,118 ------- ------- ------- CASH AND CASH EQUIVALENTS: Change in cash and cash equivalents (1,474) (5,698) (2,837) Cash and cash equivalents at beginning of year 17,753 23,451 26,288 ------- ------- ------- Cash and cash equivalents at end of year $16,279 $17,753 $23,451 ======= ======= ======= SUPPLEMENTAL DISCLOSURE: Cash paid for interest $16,246 $18,562 $21,659 Cash paid for income taxes 3,472 2,960 2,675 Non-cash transfers from loans to other real estate owned 524 3,796 521
See accompanying notes to consolidated financial statements 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Amounts are in thousands, except share and per share data Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of the Ohio Valley Banc Corp. (the Company) and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the Bank), Loan Central, a consumer finance company and Ohio Valley Financial Services Agency, LLC, an insurance agency. As further discussed in Note I, trusts that had previously been consolidated with the Company are now reported separately. All material intercompany accounts and transactions have been eliminated. Nature of Operations: The Company provides financial services through 21 offices located in central and southeastern Ohio as well as western West Virginia. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Other financial instruments include deposit accounts in other financial institutions and federal funds sold. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving the use of management's estimates and assumptions that are more susceptible to change in the near term involve the allowance for loan losses, the fair value of certain securities, the fair value of financial instruments and the determination and carrying value of impaired loans. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, noninterest-bearing deposits with banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The Company reports net cash flows for customer loan transactions, deposit transactions, short-term borrowings and interest-bearing deposits with other financial institutions. Securities: The Company classifies securities into held-to-maturity and available-for-sale categories. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Securities classified as available-for-sale include equity securities and other securities that management intends to sell or that could be sold for liquidity, investment management or similar reasons even if there is not a present intention of such a sale. Available-for-sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. Other securities such as Federal Home Loan Bank stock are carried at cost. Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method. Gains and losses are recognized upon the sale of specific identified securities on the completed transaction basis. Securities are written down to fair value when a decline in fair value is not temporary. Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on an accrual basis using the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. Payments received on such loans are reported as principal reductions. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. 11 Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Concentrations of Credit Risk: The Company, through its subsidiaries, grants residential, consumer and commercial loans to customers located primarily in the southeastern Ohio and western West Virginia areas. The following represents the composition of the loan portfolio at December 31, 2004: % of Total Loans ---------------- Real Estate loans 37.84% Commercial and industrial loans 37.64% Consumer loans 24.47% All other loans .05% ---------------- 100.00% ================ Approximately 3.36% of total loans are unsecured. The Bank, in the normal course of its operations, conducts business with correspondent financial institutions. Balances in correspondent accounts, investments in federal funds, certificates of deposit and other short-term securities are closely monitored to ensure that prudent levels of credit and liquidity risks are maintained. At December 31, 2004, the Bank's primary correspondent balance was $9,088 on deposit at Fifth Third Bank, Cincinnati, Ohio. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line or declining balance methods with useful lives ranging from 7 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line or declining balance methods with useful lives ranging from 3 to 8 years. Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of foreclosure is included in other assets. Such real estate is carried at the lower of investment in the loan or estimated fair value of the property less estimated selling costs. Any reduction to fair value at the time of acquisition is accounted for as a loan charge-off. Any subsequent reduction in fair value is recorded as a loss on other assets. Costs incurred to carry other real estate are charged to expense. Other real estate owned totaled $2,018 at December 31, 2004 and $2,084 at December 31, 2003. Goodwill: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Per Share Amounts: Earnings per share is based on net income divided by the following weighted average number of shares outstanding during the periods: 3,470,878 for 2004, 3,480,230 for 2003 and 3,458,300 for 2002. The Company had no dilutive securities outstanding for any period presented. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale which are also recognized as separate components of equity. 12 Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. Bank Owned Life Insurance: The Company has purchased life insurance policies on certain officers. These policies are recorded at their cash surrender value, or the amount that could be currently realized. ESOP: Compensation expense is based on the market price of shares as they are committed to be allocated to participant accounts. New Accounting Pronouncements: In March 2004, the Financial Accounting Standards Board ("FASB") ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1"). The basic model developed to evaluate whether an investment within scope of EITF 03-1 is other-thantemporarily impaired involves a three-step process including determining whether an investment is impaired (fair value less amortized cost), evaluating whether the impairment is other-than-temporary and, if other-than-temporary, requiring recognition of an impairment equal to the difference between the investment's cost and fair value. In September 2004, the FASB issued Staff Position ("FSP") No. 03-1-1 which delayed the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1. The delay of the effective date for paragraphs 10-20 will be superseded concurrent with the final issuance of proposed FSP EITF Issue 03-1-a, "Implication Guidance for the Application of Paragraph 16 of EITF 03-1, 'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.'" The amount of other-than-temporary impairment to be recognized, if any, will be dependent on market conditions, management's intent and ability to hold investments until a forecasted recovery, and the finalization of this proposed guidance by the FASB. Also in March 2004, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments" ("SAB 105"). This bulletin was issued to inform registrants of the SEC's view that the fair value of the recorded loan commitments, that are required to follow derivative accounting under FASB 133, Accounting for Derivative Instruments and Hedging Activities, should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of this Staff Accounting Bulletin in the second quarter of 2004 did not have a material impact on the Company. In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued AICPA Statement of Position No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"), to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt securities purchased or acquired in purchase business combinations and do not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for loan and lease losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004. The Company does not anticipate that this guidance will have a material impact on the financial condition, results of operations, or cash flows. Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. See Note K for more specific disclosure related to loan commitments. Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders. These restrictions pose no practical limit on the ability of the bank or holding company to pay dividends at historical levels. See Note P for more specific disclosure related to dividend restrictions. Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $277 and $7,411 was required to meet regulatory reserve and clearing requirements at year end 2004 and 2003. These balances do not earn interest. 13 Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note O. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Industry Segment Information: While the chief decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment. Reclassifications: The consolidated financial statements for 2003 and 2002 have been reclassified to conform with the presentation for 2004. Such reclassifications had no effect on the net results of operations. NOTE B - SECURITIES Securities are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Securities Available-for-Sale Cost Gains Losses Value ---- ----- ------ ----- December 31, 2004 ----------------- U.S. Government agency securities $19,992 $ 153 $ (58) $20,087 Mortgage-backed securities 49,073 96 (522) 48,647 FHLB stock 5,421 5,421 ------- ------ ----- ------- Total securities $74,486 $ 249 $(580) $74,155 ======= ====== ===== ======= December 31, 2003 ----------------- U.S. Government agency securities $36,789 $1,047 $ (51) $37,785 Mortgage-backed securities 33,415 140 (191) 33,364 FHLB stock 5,203 5,203 ------- ------ ----- ------- Total securities $75,407 $1,187 $(242) $76,352 ======= ====== ===== ======= Gross Gross Estimated Amortized Unrealized Unrealized Fair Securities Held-to-Maturity Cost Gains Losses Value ---- ----- ------ ----- December 31, 2004 ----------------- Obligations of states and political subdivisions $11,910 $ 567 $ (24) $12,453 Mortgage-backed securities 84 (3) 81 ------- ------ ----- ------- Total securities $11,994 $ 567 $ (27) $12,534 ======= ====== ===== ======= December 31, 2003 --------------------------- Obligations of states and political subdivisions $12,724 $ 741 $ (25) $13,440 Mortgage-backed securities 111 (4) 107 ------- ------ ----- ------- Total securities $12,835 $ 741 $ (29) $13,547 ======= ====== ===== =======
14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE B - SECURITIES (continued) At year-end 2004 and 2003, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity. Securities with a carrying value of approximately $71,823 at December 31,2004 and $71,804 at December 31, 2003 were pledged to secure public deposits, repurchase agreements and for other purposes as required or permitted by law. The amortized cost and estimated fair value of debt securities at December 31, 2004, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities. Available-for-Sale Held-to-Maturity ---------------------- ----------------------- Estimated Estimated Amortized Fair Amortized Fair Debt Securities: Cost Value Cost Value ------- ------- ------- ------- Due in one year or less $10,491 $10,618 $ 927 $ 939 Due in one to five years 9,501 9,469 2,728 2,818 Due in five to ten years 5,313 5,665 Due after ten years 2,942 3,031 Mortgage-backed securities 49,073 48,647 84 81 ------- ------- ------- ------- Total debt securities $69,065 $68,734 $11,994 $12,534 ======= ======= ======= ======= There were no sales of debt and equity securities during 2004, 2003 and 2002. Securities with unrealized losses not recognized in income are as follows:
Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- December 31, 2004 Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ----- ----- ----- ----- ----- ----- Description of Securities ------------------------- U.S. Government agency securities ........ $ 1,941 $ (58) $ 1,941 $ (58) Mortgage-backed securities ............... $22,987 $ (241) 16,683 (284) 39,670 (525) Obligations of states and political subdivisions ................. 129 (1) 1,095 (23) 1,224 (24) ------- ------ ------- ------- ------- ------- $23,116 $ (242) $19,719 $ (365) $42,835 $ (607) ======= ====== ======= ======= ======= ======= Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- December 31, 2003 Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ----- ----- ----- ----- ----- ----- Description of Securities ------------------------- U.S. Government agency securities ........ $ 1,949 $ (51) $ 1,949 $ (51) Mortgage-backed securities ............... 20,152 (185) $ 1,650 $ (10) 21,802 (195) Obligations of states and political subdivisions ................. 1,023 (18) 75 (7) 1,098 (25) ------- ------ ------- ------- ------- ------- $23,124 $ (254) $ 1,725 $ (17) $24,849 $ (271) ======= ====== ======= ======= ======= =======
Unrealized losses on the Company's securities have not been recognized into income because the issuers'securities are of high credit quality, management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to increases in market interest rates. The fair value is expected to recover as the bonds approach their maturity date or reset date. Management does not believe any individual unrealized losses at December 31, 2004 represents an other-than-temporary impairment. NOTE C - LOANS Loans are comprised of the following at December 31: 2004 2003 ---- ---- Real estate loans $227,234 $217,636 Commercial and industrial loans 226,058 220,724 Consumer loans 146,965 134,720 All other loans 317 624 -------- -------- Total Loans $600,574 $573,704 ======== ======== 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE D - ALLOWANCE FOR LOAN LOSSES Following is an analysis of changes in the allowance for loan losses for the years ended December 31: 2004 2003 2002 ---- ---- ---- Balance, beginning of year $7,593 $7,069 $6,251 Loans charged-off: Real estate 823 1,110 636 Commercial 1,661 2,267 2,272 Consumer 2,267 2,661 2,656 ------ ------ ------ Total loans charged-off 4,751 6,038 5,564 Recoveries of loans: Real estate 583 279 119 Commercial 556 1,057 158 Consumer 843 887 635 ------ ------ ------ Total recoveries of loans 1,982 2,223 912 Net loan charge-offs (2,769) (3,815) (4,652) Provision charged to operations 2,353 4,339 5,470 ------ ------ ------ Balance, end of year $7,177 $7,593 $7,069 ====== ====== ====== Information regarding impaired loans is as follows: 2004 2003 ---- ---- Balance of impaired loans $5,573 $1,988 ====== ====== Less portion for which no specific allowance is alloctade $ 619 $ 801 ====== ====== Portion of impaired loan balance for which an allowance for credit losses is allocated $4,954 $1,187 ====== ====== Portion of allowance for loan losses allocated to the impaired loan balance $1,986 $ 475 ====== ====== Average investment in impaired loans for the year $5,711 $2,082 ====== ====== Past due - 90 days or more and still accruing $1,402 $ 659 ====== ====== Nonaccrual $1,618 $2,655 ====== ====== Interest on impaired loans was not material for years ending 2004, 2003 or 2002. 16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE E - PREMISES AND EQUIPMENT Following is a summary of premises and equipment at December 31: 2004 2003 ---- ---- Land $ 1,428 $ 1,428 Buildings 7,897 7,648 Leasehold improvements 2,453 2,173 Furniture and equipment 9,945 9,519 ------- ------- 21,723 20,768 Less accumulated depreciation 12,863 11,626 ------- ------- Total Premises and Equipment $ 8,860 $ 9,142 ======= ======= The following is a summary of the future minimum lease payments for facilities leased by the Company. Lease payments were $334 in 2004 and $350 in 2003. 2005 $ 342 2006 317 2007 264 2008 188 2009 91 Thereafter 10 ------ $1,212 ====== NOTE F - DEPOSITS Following is a summary of interest-bearing deposits at December 31: 2004 2003 ---- ---- NOW accounts $110,901 $113,423 Savings and Money Market 46,031 46,603 Time: IRA accounts 37,272 38,427 Certificates of Deposit: In denominations under $100,000 170,328 162,570 In denominations of $100,000 or more 100,685 84,251 -------- -------- Total time deposits 308,285 285,248 -------- -------- Total interest-bearing deposits $465,217 $445,274 ======== ======== Following is a summary of total time deposits by remaining maturity at December 31: 2004 ------ Within one year $162,051 From one to two years 99,675 From two to three years 19,265 From three to four years 16,463 From four to five years 8,836 Thereafter 1,995 -------- Total $308,285 ======== Brokered deposits, included in time deposits, were $32,965 and $17,147 at December 31, 2004 and 2003, respectively. 17 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are financing arrangements that have overnight maturity terms. At maturity, the securities underlying the agreements are returned to the Company. Information concerning securities sold under agreements to repurchase is summarized as follows at December 31: 2004 2003 ------- ------- Balance outstanding at period-end $39,753 $24,018 ------- ------- Weighted average interest rate at period-end 1.77% .80% ------- ------- Average amount outstanding during the year $24,743 $23,396 ------- ------- Approximate weighted average interest rate during the year 1.12% .87% ------- ------- Maximum amount outstanding as of any month-end $39,753 $35,213 ------- ------- Securities underlying these agreements at year-end were as follows: Carrying value of securities $48,283 $45,292 ------- ------- Fair Value $47,928 $45,658 ------- ------- The Company had securities sold under agreements to repurchase with overnight maturity terms totaling $20,046 at December 31, 2004 and $7,512 at December 31, 2003 with two large commercial accounts. NOTE H - OTHER BORROWED FUNDS Other borrowed funds at December 31, 2004 and 2003 are comprised of advances from the Federal Home Loan Bank (FHLB) of Concinnati, promissory notes and Federal Reserve Bank (FRB) Notes. FHLB Borrowings Promissory Notes FRB Notes Totals --------------- ---------------- --------- ------- 2004 $67,222 $ 5,355 $ 3,973 $ 76,550 2003 $90,729 $ 7,031 $ 3,802 $101,562 Pursuant to collateral agreements with the FHLB, advances are secured by $206,569 in qualifying mortgage loans and $5,421 in FHLB stock at December 31, 2004. Fixed rate FHLB advances of $67,022 mature through 2010 and have interest rates ranging from 2.54% to 6.62%. In addition, one variable rate FHLB borrowing of $200 matures in 2005 and has an interest rate of 2.38%. At December 31, 2004, the Company had a cash management line of credit enabling it to borrow up to $30,000 from the FHLB. All cash management advances have an original maturity of 90 days. The line of credit must be renewed on an annual basis. There was $29,800 available on this line of credit at December 31, 2004. Based on the Company's current FHLB stock ownership, total assets and pledgeable residential first mortgage loans, the Company had the ability to obtain borrowings up to a maximum of $153,000 at December 31, 2004. Promissory notes, issued primarily by the Company, have fixed rates of 3.00% to 4.25% and are due at various dates through a final maturity date of November 30, 2005. A total of $3,249 represented promissory notes from related parties. See Note L for further discussion of related party transactions. FRB notes consist of the collection of tax payments from Bank customers under the Treasury Tax and Loan program. These funds have a variable interest rate and are callable on demand by the U.S. Treasury. At December 31, 2004, the interest rate for the Company's FRB notes was 1.87%. Various investment securities from the Bank used to collateralize FRB notes totaled $6,060 at December 31, 2004. Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $29,500 at December 31, 2004 and $27,000 at December 31, 2003. Scheduled principal payments over the next five years: FHLB borrowings Promissory notes FRB Notes Total --------------- ---------------- --------- ----- 2005 $17,880 $5,248 $3,973 $ 27,101 2006 22,107 107 22,214 2007 8,061 8,061 2008 9,010 9,010 2009 3,007 3,007 Thereafter 7,157 7,157 ------- ------ ------ -------- $67,222 $5,355 $3,973 $ 76,550 ======= ====== ====== ======== 18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE I - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES On March 26, 2002, a trust formed by the Company issued $8,500 of 5.6% floating rate trust preferred securities as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering, which debentures represent the sole asset of the trust. The Company may redeem all or a portion of these subordinated debentures at par value beginning March 26, 2007. The subordinated debentures must be redeemed no later than March 26, 2032. The Company used the net proceeds from the sale of these securities to provide additional capital to the Bank to support growth. Debt issuance costs of $256 were incurred and capitalized and will amortize as a yield adjustment through expected maturity. At December 31, 2004, the current variable rate was 6.1%. On September 7, 2000, a trust formed by the Company issued $5,000 of 10.6% fixed rate trust preferred securities as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering, which debentures represent the sole asset of the trust. The Company may redeem all or a portion of these subordinated debentures beginning September 7, 2010 at a premium of 105.30% with the call price declining .53% per year until reaching a call price of par at year twenty through maturity. The subordinated debentures must be redeemed no later than September 7, 2030. Debt issuance costs of $166 were incurred and capitalized and will amortize as a yield adjustment through expected maturity. Prior to 2003, the trusts were consolidated in the Company's financial statements, with the trust preferred securities issued by the trust reported in liabilities and the subordinated debentures eliminated in consolidation. Under new accounting guidance, FASB Interpretation No. 46, as revised in December 2003, the trusts are no longer consolidated with the Company. Accordingly, the Company does not report the securities issued by the trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by the trust, as these are no longer eliminated in consolidation. Since the Company's equity interest in the trusts cannot be received until the subordinated debentures are repaid, these amounts have been netted. The effect of no longer consolidating the trust changes certain balance sheet classifications but does not change the Company's equity or net income. NOTE J - INCOME TAXES The provision for federal income taxes consists of the following components: 2004 2003 2002 ---- ---- ---- Current tax expense $3,613 $3,233 $2,667 Deferred tax (benefit) 63 (364) (392) ------ ------ ------ Total income taxes $3,676 $2,869 $2,275 ====== ====== ====== The source of gross deferred tax assets and gross deferred tax liabilities at December 31: 2004 2003 ---- ---- Items giving rise to deferred tax assets: Allowance for loan losses $2,503 $2,648 Deferred compensation 1,021 852 Unrealized loss on securities available-for-sale 113 Deferred loan fees/costs 138 77 Other 151 49 Items giving rise to deferred tax liabilities: Investment accretion (52) (60) Depreciation (94) (57) FHLB stock dividends (783) (707) Unrealized gain on securities available-for-sale (321) Prepaid expenses (105) Intangibles (88) (52) Other (51) (47) ------ ------ Net deferred tax asset $2,753 $2,382 ====== ====== 19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE J - INCOME TAXES (continued) The difference between the financial statement tax provision and amounts computed by applying the statutory federal income tax rate of 34% to income before taxes is as follows: 2004 2003 2002 ---- ---- ---- Statutory tax $4,099 $3,176 $2,703 Effect of nontaxable interest and dividends (189) (236) (254) Nondeductible interest expense 18 23 30 Income from bank owned insurance (166) (187) (198) Effect of state income tax 56 97 Other items (142) (4) (6) ------ ------ ------ Total income taxes $3,676 $2,869 $2,275 ====== ====== ====== NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. Following is a summary of such commitments at December 31: 2004 2003 ----- ----- Fixed rate $ 730 $ 731 Variable rate 50,447 49,926 Standby letters of credit 10,490 7,839 The interest rate on fixed rate commitments ranged from 4.875% to 7.25% at December 31, 2004. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer 's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. There are various contingent liabilities that are not reflected in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations. The bank subsidiary of the Company is required to maintain average reserve balances with the Federal Reserve Bank or as cash in the vault. The amount of those reserve balances for the year ended December 31, 2004, was approximately $7,516. 20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE L - RELATED PARTY TRANSACTIONS Certain directors, executive officers and companies in which they are affiliated were loan customers during 2004. A summary of activity on these borrower relationships with aggregate debt greater than $60 is as follows: Total loans at January 1, 2004 $ 5,409 New loans 3,142 Repayments (2,120) Other changes 288 ------- Total loans at December 31, 2004 $ 6,719 ======= Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period. In addition, certain directors, executive officers and companies in which they are affiliated were recipients of promissory notes issued by the Company in the amount of $3,249. NOTE M - EMPLOYEE BENEFITS The Bank has a profit-sharing plan for the benefit of its employees and their beneficiaries. Contributions to the plan are determined by the Board of Directors. Contributions charged to expense were $164, $152 and $149 for 2004, 2003 and 2002. The Company maintains an Employee Stock Ownership Plan (ESOP) covering substantially all of its employees. The Company makes discretionary contributions to the plan which are allocated to plan participants based on relative compensation. The total number of shares held by the Plan, all of which have been allocated to participant accounts were 162,592 and 163,723 at December 31, 2004 and 2003. In addition, the Bank made contributions to its ESOP Trust as follows: Years ended December 31 2004 2003 2002 ---- ---- ---- Number of shares issued 4,600 7,400 12,800 ====== ====== ====== Value of stock contributed $ 151 $ 198 $ 285 Cash contributed 176 105 158 ----- ----- ----- Total charged to expense $ 327 $ 303 $ 443 ===== ===== ===== Life insurance contracts with a cash surrender value of $13,988 have been purchased by the Company, the owner of the policies. The purpose of these contracts was to replace a current group life insurance program for executive officers, implement a deferred compensation plan for directors and executive officers, implement a director retirement plan and implement a supplemental retirement plan for certain officers. Under the deferred compensation plan, the Company pays each participant the amount of fees deferred plus interest over the participant's desired term, upon termination of service. Under the director retirement plan, participants are eligible to receive ongoing compensation payments upon retirement subject to length of service. The supplemental retirement plan provides payments to select executive officers upon retirement based upon a compensation formula determined by the Board of Directors. The present value of payments expected to be provided are accrued during the service period of the covered individuals. Expenses related to the plans for each of the last three years amounted to $436, $312 and $267. NOTE N - OTHER COMPREHENSIVE INCOME Other comprehensive income components and related taxes for the years ended December 31, are as follow: 2004 2003 2002 Net unrealized holding gains(losses) ---- ---- ---- on available-for-sale securities $(1,277) $(1,229) $ 600 Tax effect 434 414 (204) ------- ------- ------- Other comprehensive income(loss) $ (843) $ (815) $ 396 ======= ======= ======= 21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE O - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents: For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Interest-bearing Deposits in Other Banks: For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities: For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. The fair value for FHLB stock is estimated at carrying value. Loans: The fair value of fixed rate loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair market value of loan commitments and standby letters of credits is not material at December 31, 2004 or 2003. The fair value for variable rate loans is estimated to be equal to carrying value. Deposit Liabilities: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowings: For other borrowed funds and subordinated debentures, rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value. For securities sold under agreements to repurchase, carrying value is a reasonable estimate of fair value. Accrued Interest Receivable and Payable: For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value. In addition, other assets and liabilities that are not defined as financial instruments were not included in the disclosures below, such as premises and equipment and life insurance contracts. The estimated fair values of the Company's financial instruments at December 31, are as follows: 2004 2003 ---- ---- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- Financial assets: Cash and cash equivalents $ 16,279 $ 16,279 $ 17,753 $ 17,753 Interest-bearing deposits in other banks 525 525 859 859 Securities 86,149 86,689 89,187 89,899 Loans 593,397 597,373 566,111 574,942 Accrued interest receivable 2,643 2,643 2,700 2,700 Financial liabilities: Deposits (535,153) (533,708) (507,509) (509,945) Securities sold under agreements to repurchase (39,753) (39,753) (24,018) (24,018) Other borrowed funds (76,550) (77,698) (101,562) (104,914) Subordinated debentures (13,500) (14,179) (13,500) (13,742) Accrued interest payable (3,310) (3,310) (3,410) (3,410) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE P - REGULATORY MATTERS The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion and plans for capital restoration are required. At year-end, consolidated actual capital levels and minimum required levels for the Company and Bank were:
Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 2004 Total capital (to risk weighted assets) Consolidated $76,175 13.3% $45,804 8.0% $57,255 10.0% The Ohio Valley Bank Company 71,589 12.7 45,254 8.0 56,568 10.0 Tier 1 capital (to risk weighted assets) Consolidated 69,018 12.1 22,902 4.0 34,353 6.0 The Ohio Valley Bank Company 64,712 11.4 22,627 4.0 33,941 6.0 Tier 1 capital (to average assets) Consolidated 69,018 9.4 29,239 4.0 36,549 5.0 The Ohio Valley Bank Company 64,712 9.0 28,887 4.0 36,109 5.0 2003 Total capital (to risk weighted assets) Consolidated $72,864 13.3% $43,841 8.0% $54,802 10.0% The Ohio Valley Bank Company 65,324 12.1 43,071 8.0 53,838 10.0 Tier 1 capital (to risk weighted assets) Consolidated 66,003 12.0 21,921 4.0 32,881 6.0 The Ohio Valley Bank Company 58,587 10.9 21,535 4.0 32,303 6.0 Tier 1 capital (to average assets) Consolidated 66,003 9.5 27,728 4.0 34,660 5.0 The Ohio Valley Bank Company 58,587 8.5 27,533 4.0 34,416 5.0
At year-end 2004 and 2003, the most recent regulatory notifications categorized the Company and Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. Dividends paid by the subsidiaries are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the subsidiaries to the Company is subject to restrictions by regulatory authorities. These restrictions generally limit dividends to the current and prior two years retained earnings. At December 31, 2004, approximately $12,180 of the subsidiaries' retained earnings were available for dividends under these guidelines. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below minimum regulatory guidelines. These restrictions do not presently limit the Company from paying dividends at its historical level. 23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Below is condensed financial information of Ohio Valley Banc Corp. In this information, the parent's investment in subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries since acquisition. This information should be read in conjunction with the consolidated financial statements. CONDENSED STATEMENTS OF CONDITION at December 31: Assets 2004 2003 ---- ---- Cash and cash equivalents $ 2,010 $ 3,430 Interest-bearing balances with subsidiaries --- 4 Investment in subsidiaries 68,383 62,806 Notes receivable - subsidiaries 5,218 6,943 Other assets 247 2,083 ------- ------- Total assets $75,858 $75,266 ======= ======= Liabilities Notes Payable $ 5,355 $ 7,031 Subordinated debentures 13,500 13,500 Other liabilities 424 327 ------- ------- Total liabilities $19,279 $20,858 ------- ------- Shareholders' Equity Total shareholders' equity 56,579 54,408 ------- ------- Total liabilities and shareholders' equity $75,858 $75,266 ======= ======= CONDENSED STATEMENTS OF INCOME Years ended December 31: 2004 2003 2002 ---- ---- ---- Income: Interest on loans $ --- $ 1 2 Interest on notes 213 223 203 Other operating income 75 47 42 Dividends from bank subsidiary 1,000 3,904 4,428 Gain on sale of ProCentury Corp. 2,463 --- --- Expenses: Interest on notes 217 225 219 Interest on subordinated debentures 968 944 921 Operating expenses 209 242 208 ------ ------ ------ Income before income taxes and equity in undistributed earnings of subsidiaries 2,357 2,764 3,327 Income tax benefit (expense) (439) 378 365 Equity in undistributed earnings of subsidiaries 6,463 3,330 1,983 ------ ------ ------ Net Income $8,381 $6,472 $5,675 ====== ====== ====== 24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued) CONDENSED STATEMENT OF CASH FLOWS Years ended December 31: 2004 2003 2002 ---- ---- ---- Cash flows from operating activities: Net income $8,381 $6,472 $5,675 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries(6,463) (3,330) (1,983) Gain on sale of ProCentury Corp. (2,463) --- --- Change in other assets (58) 20 49 Change in other liabilities 107 (15) (185) ------ ------ ------ Net cash provided by (used in) operating activities (496) 3,147 3,556 ------ ------ ------ Cash flows from investing activities: Capital contributions to subsidiaries --- --- (8,000) Change in other long-term investments --- --- (263) Proceeds from sale of ProCentury Corp. 4,394 --- --- Change in other short-term investments 1,725 (1,645) (2,258) Change in subsidiary line of credit --- 34 16 ------ ------ ------ Net cash provided by (used in) investing activities 6,119 (1,611) (10,505) ------ ------ ------ Cash flows from financing activities: Proceeds from issuance of long-term debt --- --- 8,762 Change in other short-term borrowings (1,676) 1,687 1,557 Cash dividends paid (3,259) (2,468) (2,315) Proceeds from issuance of common stock 1,001 908 926 Purchases of treasury stock (3,109) (64) (607) ------ ------ ------ Net cash provided by (used in) financing activities (7,043) 63 8,323 ------ ------ ------ Cash and cash equivalents: Change in cash and cash equivalents (1,420) 1,599 1,374 Cash and cash equivalents at beginning of year 3,430 1,831 457 ------ ------ ------ Cash and cash equivalents at end of year $2,010 $3,430 $1,831 ====== ====== ====== 25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE R - GAIN ON SALE OF PROCENTURY On April 26, 2004, the Company sold 450,000 common shares of ProCentury Corp. ("ProCentury"), a Columbus-based property and casualty insurer, which represented 9% of ProCentury's outstanding common stock. The transaction was completed as part of ProCentury's initial public offering. The sale of stock, which represented 100% of the Company's ownership in ProCentury, resulted in a pre-tax gain of $2,463 and an after-tax gain of $1,625 ($.47 cents per share). The Company's investment in ProCentury was made in October of 2000 to allow for more diversification of operations by becoming part of a property and casualty insurance underwriter as made permissible by the Gramm-Leach-Bliley Act of 1999. The Company decided to liquidate its investment to utilize the cash proceeds to enhance the Company's core business of banking through branch renovations and expansion. NOTE S - CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited) Quarters Ended 2004 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Total interest income $10,891 $10,722 $10,912 $10,965 Total interest expense 3,968 3,975 4,020 4,183 Net interest income 6,923 6,747 6,892 6,782 Provision for loan losses 768 373 471 741 Net Income (1) 1,566 3,252 1,670 1,893 Net income per share $ .45 $ .94 $ .48 $ .55 2003 Total interest income $11,611 $11,493 $11,179 $10,877 Total interest expense 4,695 4,511 4,267 4,172 Net interest income 6,916 6,982 6,912 6,705 Provision for loan losses 1,385 1,246 996 712 Net Income 1,460 1,572 1,590 1,850 Net income per share $ .42 $ .45 $ .46 $ .53 2002 Total interest income $11,609 $11,887 $12,119 $12,156 Total interest expense 5,236 5,191 5,280 5,103 Net interest income 6,373 6,696 6,839 7,053 Provision for loan losses 1,142 813 1,541 1,974 Net Income 1,252 1,353 1,409 1,661 Net income per share $ .36 $ .39 $ .41 $ .48 (1) During the second quarter of 2004, the Company sold its interest of ProCentury resulting in an after-tax gain of $1,625 ($.47 cents per share). 26 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS Board of Directors and Shareholders Ohio Valley Banc Corp. Gallipolis, Ohio We have audited the accompanying consolidated statements of condition of Ohio Valley Banc Corp., as of December 31, 2004 and 2003 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ohio Valley Banc Corp. as of December 31, 2004 and 2003 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. /s/CROWE CHIZEK AND COMPANY LLC Crowe Chizek and Company LLC Columbus, Ohio February 11, 2005 27 SUMMARY OF COMMON STOCK DATA OHIO VALLEY BANC CORP. Years ended December 31, 2004 and 2003 INFORMATION AS TO STOCK PRICES AND DIVIDENDS: The market for the common stock of the Company is not highly active and trading has historically been limited. On February 9, 1996, the Company's common stock was established on NASDAQ securities market under the symbol "OVBC". Prior to this date a limited market was created beginning in the first quarter of 1992 through The Ohio Company. The following table shows bid and ask quotations for the Company's common stock during 2004 and 2003. The range of market price is compiled from data provided by the broker based on limited trading. The quotations are inter-dealer prices, without retail markup, markdown, or commission, and may not represent actual transactions. 2004 Low Bid High Bid Low Ask High Ask - ---- ------- -------- ------- -------- First Quarter $28.00 $30.54 $28.50 $31.34 Second Quarter 30.01 35.68 30.25 37.00 Third Quarter 30.50 33.00 31.32 33.39 Fourth Quarter 31.25 32.50 31.27 33.50 2003 Low Bid High Bid Low Ask High Ask - ---- ------- -------- ------- -------- First Quarter $20.51 $23.19 $20.61 $23.48 Second Quarter 22.00 23.43 22.45 23.90 Third Quarter 23.00 24.22 23.48 24.74 Fourth Quarter 24.50 27.05 24.75 27.34 Dividends per share 2004 2003 - ------------------- ---- ---- First Quarter $.18 $.17 Second Quarter .19 .18 Third Quarter .19 .18 Fourth Quarter Normal Dividend .19 .18 Special Dividend .19 Shown above is a table which reflects the dividends paid per share on the Company's common stock. This disclosure is based on the weighted average number of shares for each year and does not indicate the amount paid on the actual shares outstanding at the end of each quarter. As of December 31, 2004, the number of holders of common stock was 2,026 an increase from 1,995 shareholders at December 31, 2003. On November 16, 2004, the company's Board of Directors declared a special extra cash dividend of $.19 per share on the outstanding shares of Ohio Valley Banc Corp. stock payable on December 15, 2004 to shareholders of record December 1, 2004. The special dividend was approved so that OVBC shareholders could share in the successful return on their Company's investment in ProCentury Corp. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS The purpose of this discussion is to provide an analysis of the Company's financial condition and results of operations which is not otherwise apparent from the audited consolidated financial statements included in this report. The accompanying consolidated financial information has been prepared by management in conformity with accounting principles generally accepted in the United States of America (US GAAP) and is consistent with that reported in the consolidated statements. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following tables and related discussion. All dollars are reported in thousands, except share and per share data. RESULTS OF OPERATIONS: SUMMARY Ohio Valley Banc Corp. generated net income of $8,381 for 2004, an increase of 29.5% from 2003. Net income was up 14.0% in 2003. Net income per share of $2.42 for 2004 represented continued growth from $1.86 in 2003 and $1.64 in 2002. The gain in net income and earnings per share for 2004 was primarily due to the Company's sale of its minority interest in an insurance investment in ProCentury Corp [Nasdaq: PROS]. This second quarter sale resulted in an after-tax gain of $1,625 or $.47 per share. Asset growth for 2004 was $21,793 or 3.1% resulting in total assets at year-end of $729,120. The Company's return on assets (ROA) increased to 1.16% for 2004 compared to .93% in 2003 and .85% in 2002. Return on equity (ROE) was 15.02% for 2004 compared to 12.43% in 2003 and 11.85% in 2002. The average of the bid and ask price for the Company's stock was $32.88 at December 31, 2004 compared to $26.74 at year-end 2003 and $20.61 at year-end 2002. NET INTEREST INCOME The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets (i.e., loans and investments) and interest expense incurred on interest-bearing liabilities (i.e., deposits and borrowings). Net interest income is affected by changes in both the average volume and mix of the balance sheet and the level of interest rates for financial instruments. Changes in net interest income are measured by net interest margin and net interest spread. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Both of these are reported on a tax equivalent basis. Net interest margin is greater than net interest spread due to the interest earned on interest-earning assets funded from noninterest bearing funding sources, primarily demand deposits and shareholders' equity. Following is a discussion of changes in interest-earning assets, interest-bearing liabilities and the associated impact on interest income and interest expense for the three years ending December 31, 2004. Tables I and II have been prepared to summarize the significant changes outlined in this analysis. Net interest income on a fully tax equivalent basis (FTE) decreased $228 in 2004, a decrease of 0.8% compared to the $27,831 earned in 2003. The decrease was primarily attributable to a decrease in the net interest margin which completely offset the benefits of higher earning assets. Net interest income (FTE) increased $547 in 2003, an increase of 2.0% compared to the $27,284 earned in 2002. The growth in net interest income for 2003 was attributable to a higher level of interest-earning assets partially offset by a decrease in the net interest margin. For 2004, average earning assets grew by 4.4% as compared to growth of 3.7% in 2003. Driving this continued growth in earning assets was the growth in average loan balances. Average total loans expanded $30,152 or 5.4% for 2004 and represented 86.6% of earning assets. This compares to average loan growth of $21,706 or 4.0% with loans representing 85.8% of earning assets for 2003. Average securities represent the next highest portion of earning assets with 12.6% of earning assets for 2004 and 13.1% in 2003. Management continues to focus on generating loan growth as this portion of earning assets provides the greatest return to the Company. Although loans comprise a larger percentage of earning assets, management is comfortable with the current level of loans based on collateral values, the balance of the allowance for loan losses and the Company's well-capitalized status. Management maintains securities at a dollar level adequate enough to provide ample liquidity and cover pledging requirements. Average interest-bearing liabilities increased 3.5% between 2003 and 2004 and increased 3.3% between 2002 and 2003. The composition of interest-bearing liabilities consists mostly of time deposits at 52.3% and NOW accounts at 19.0% in 2004, which are up from their 51.8% and 18.5% composition in 2002, respectively. This change in interest-bearing liabilities came mostly in the area of other borrowed money, which represented 16.3% of interest-bearing liabilities in 2004 as compared to 17.9% in 2002. This shift in composition from 2002 to 2004 has proven to be a cost effective source of funding with the average cost of both time deposits and NOW accounts currently at 2.61% compared to the average cost of other borrowed money at 4.71%. Average time deposits were mostly influenced by growth in brokered CD deposits and average NOW accounts were mostly influenced by growth in public fund deposits. The net interest margin decreased .22% to 4.05% in 2004 from 4.27% in 2003. This is compared to a .07% decrease in the net interest margin in 2003. Contributing to the decrease in net interest margin in 2004 was the decrease in the net interest rate spread of .20% with lower asset yields of .55% being partially offset by lower funding costs of .35%. Contributing to the decrease in yield on earning assets was a decrease in the return on average loans of .66% from 2003. Total interest expense declined 8.5% due to the costs of time deposits decreasing .50%, the cost of borrowings decreasing .38% and the cost of NOW accounts decreasing .10%, all impacted by the sustained low rate environment in 2004. The impact of interest free funds on the net interest margin decreased from .38% in 2003 to .36% in 2004. The .02% decrease in the contribution of interest free funding sources combined with .20% decrease in the net interest spread yielded the .22% decrease in the net interest margin. The 2003 decrease in net interest margin of .07% was due to a .07% decrease in the contribution of interest free funding sources combined with no change in the net interest spread with lower asset yields of .68% being offset by lower funding costs of .68%. In 2005, the Company will continue to target loan growth in the core market areas of southeastern Ohio as well as the growing West Virginia markets to enhance net interest income. The Company has structured its balance sheet to limit its exposure to interest rate risk during the record low rate environment of 2003 and most of 2004. The emphasis has been to grow short-term variable rate assets and similar term liabilities to maintain a relatively "match funded" interest rate position. As a result, as short-term rates began to rise in the third quarter of 2004, the net interest margin began to stabilize. With the interest rate risk position now more balanced coupled with short-term rates on the rise in 2005, management feels the net interest margin should continue to level off and the negative impacts to net interest income minimal. NONINTEREST INCOME AND EXPENSE Total noninterest income increased $2,010 in 2004, a 33.6% gain over 2003. Total noninterest income increased 6.2% in 2003. Contributing most to the growth in noninterest income was the sale of the Company's interest in ProCentury Corp., a Columbus-based property and casualty insurer, on April 26, 2004. The sale of stock ownership in ProCentury Corp., which was part of an initial public offering, resulted in gross income of $2,463 recognized. For additional information on the ProCentury Corp. transaction, please refer to Note R of the Company's consolidated financial statements under the caption "Gain on Sale of ProCentury". Growth in noninterest income was also driven by the Company's service charge revenue on deposit accounts, which was up $158 or 5.0% in 2004, and $42 or 1.3% in 2003. This growth in service charge income primarily came from overdraft fees relative to the consistent average growth in the Company's transaction account balances (i.e. demand deposits). The Company's average demand deposit balances were up $4,719 or 7.7% in 2004 and up $3,755 or 6.5% in 2003. Partially offsetting the gain in noninterest income was a decrease in the Company's net gain on sale of loans by $381 or 85.8%. The Company was in a heavy period of mortgage refinancing in 2003 during a historical low-rate environment. This refinancing volume declined in 2004 and has resulted in the Company having sold 18 loans to the secondary market in 2004 as compared to 196 loans in 2003. Income earned on life insurance contracts from the Company's supplemental retirement program was down $51 or 7.8% in 2004 and down $27 or 3.9% in 2003, due to a lower earnings credit rate tied to each of the policies. For 2004, other noninterest income decreased $167 or 11.1% as compared to 2003 largely due to the elimination of a quarterly fee associated with joint marketing services between the Company and ProCentury Corp. The second quarter liquidation of ProCentury Corp. effectively terminated these quarterly services for 2004 which resulted in a decrease of $174. This decrease was partially offset by increases in other noninterest income areas such as loan insurance income, loan service fees and debit/credit card income. Additionally, other noninterest income in 2003 decreased $35 or 2.3% as compared to 2002 due to decreases in loan insurance income caused by state mandated premium reductions partially offset by increases in loan service fees and debit/credit card income. Total noninterest expense increased $1,109 or 5.6% in 2004 and $642 or 3.4% in 2003. The most significant expense in this category is salary and employee benefits which increased $1,021 or 8.8% from 2003 to 2004. Contributing most to this increase were annual merit increases, rising benefit costs and increases to incentive compensation plans in relation to the successful growth in earnings experienced in 2004. Further contributing to the salary increase was the Company's full-time equivalent employee base increasing from 262 employees at year-end 2003 to 270 employees at year-end 2004. Salaries and employee benefits expense also increased $930 or 8.7% from 2002 to 2003. Occupancy and furniture and equipment expenses were up $154 or 6.6% in 2004 driven by depreciation on the Company's various investments in facility upgrades (Milton, West Virginia office), operating system upgrades (AS400), as well as newer "up-to-date" personal computer systems to help improve employee and network efficiency. In 2003, occupancy and furniture and equipment expenses were relatively stable, decreasing $18 or .8%. Corporation franchise tax increased $25 or 4.2% in 2004 due to capital growth at the Bank level. Corporation franchise tax increased $196 or 49.6% in 2003 largely due to the reversal of a tax assessment in 2002 that was originally charged to expense in 2001 related to the exclusion of intercompany indebtedness for taxable net worth. Data processing expenses decreased $50 or 9.0% in 2004 largely due to the negotiation of lower data processing fees on the Company's debit and credit cards. Data processing expenses increased $70 or 14.5% in 2003 largely due to the Company's debit/credit card and ATM activities. Other noninterest expenses were down slightly by $41 or .9% in 2004 and down $536 or 10.1% in 2003. The larger variance in 2003 was largely driven by a one time charge off of fraudulent checks in 2002, with the impact net of recoveries being $384 at the end of 2003. The Company's efficiency ratio for 2004 remained steady at 58.7% as compared to 58.5% in 2003, where the Company's noninterest expense had slightly outpaced the growth in revenue sources (net interest income and noninterest income). The efficiency ratio for 2003 was also up slightly finishing at 58.5% as compared to 58.1% in 2002. FINANCIAL CONDITION: SECURITIES Management's goal in structuring the portfolio is to maintain a prudent level of liquidity while providing an acceptable rate of return without sacrificing asset quality. Maturing securities have historically provided sufficient liquidity such that management has not sold a debt security in several years. The balance of total securities decreased $3,038 or 3.4% as compared to 2003 with the ratio of securities to total assets also decreasing to 11.8% at December 31, 2004 compared to 12.6% at December 31, 2003. The Company's demand for securities has shifted from investing in U.S. Government agency securities which are down $17,698 or 46.8% to mortgage-backed securities which are up $15,256 or 45.6% over 2003. The increase in mortgage-backed securities is anticipated to improve the Company's investment portfolio with a higher rate of return and a more rapid repayment of principal as compared to U.S. Government agency securities. Due to the sustained low rate environment and its respective market conditions, the yield on reinvestment opportunities for securities has continued to decline in 2004. The weighted average FTE yield on debt securities at year-end 2004 was 4.53% as compared to 4.66% at year-end 2003. Table III provides a summary of the portfolio by category and remaining contractual maturity. Issues classified as equity securities have no stated maturity date and are not included in Table III. LOANS In 2004, total loans increased $26,870 or 4.7% to reach $600,574. The largest contributor was consumer loans which experienced growth of $12,245 or 9.1%. Consumer loan growth came primarily from originations in the areas of automobiles (both direct and indirect), recreational vehicles and mobile homes which were collectively up $8,570 or 9.7% from year-end 2003. Indirect automobile lending, which represents the largest portion of the consumer loan portfolio, increased $3,280 or 6.9% to reach $51,070 at December 31, 2004, and is subject to the same underwriting as the Company's regular loans. The Company's West Virginia markets of Cabell and Kanawha counties contributed most to the auto indirect lending growth, which increased $3,444 from year-end 2003. In addition, home equity capital line balances were up $1,498 or 8.4% over 2003. The Company believes the growth in the consumer loan portfolio is attributable to the low interest rate environment which allowed for more aggressive loan pricing. In 2004, real estate loans increased $9,598 or 4.4%. During 2003, the Company's real estate loan portfolio was impacted by a heavy period of mortgage refinancing triggered by a record low rate interest environment. This prompted the Company's risk-management strategy of selling a significant portion of its 30 year fixed rate real estate loan originations to the secondary market while growing its 1 year adjustable rate products and retaining them in the portfolio. Since the heavy period of mortgage refinancing has declined, the Company has increased its fixed rate loan originations. For 2004, real estate loan growth was comprised mostly of the Company's 15 and 20 year fixed rate originations which were up $7,734 or 13.7% from year-end 2003 and its 1 year adjustable rate products which were up $5,169 or 6.9% from year-end 2003. Partially offsetting this growth in real estate loans was a decrease in the Company's 30 year fixed rate originations which were down $4,126 or 7.5% from year-end 2003. Real estate loans represent the largest portion of the total loan portfolio at 38% as of December 31, 2004. Loan increases in 2004 also came from commercial loans which experienced growth of $5,334 or 2.4%. The commercial loan area originated over $133,000 in loans for 2004. Approximately 74% of these loans were originated in Gallia, Jackson, Pike and Franklin counties in Ohio and 10% were originated from the West Virginia markets. The Company's commercial loan growth was positively impacted by the sustained low interest rate environment experienced during 2004 contributing to a higher volume of business opportunities. Continued growth in commercial loans for 2005 will be dependent upon economic conditions as well as a general demand for loans in the Company's market areas. Tables V, VI, and VII have been provided to enhance the understanding of the loan portfolio and the allowance for potential loan losses. Management evaluates the adequacy of the allowance for loan losses quarterly based on several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimate of probable losses. Actual losses on loans are reflected as reductions in the reserve and are referred to as charge-offs. The amount of the provision for loan losses charged to operating expenses is the amount necessary, in management's opinion, to maintain the allowance for loan losses at an adequate level. The allowance required is primarily a function of the relative quality of the loans in the loan portfolio, the mix of loans in the portfolio and the rate of growth of outstanding loans. The ratio of net charge-offs to average total loans for the year ending 2004 was .47% down from .68% for the year ending 2003, due mostly to the $1,046 or 27.4% decrease in net charge-offs within the real estate and consumer loan portfolios. This decrease in net charge-offs is related to the Company's improved nonperforming loan status as well as the strong emphasis management continues to place on asset quality within the Company's loan portfolio. Nonperforming loans, which include nonaccrual loans and accruing loans past due 90 days or more, are returned to performing status when the loan is brought current and has performed in accordance with contractual terms. Nonperforming loans were approximately $3,020 at December 31, 2004 compared to $3,314 at the end of 2003. As a result, the Company's nonperforming loans as a percentage of total loans improved to .50% at year-end 2004 as compared to .58% at year-end 2003. Nonperforming assets to total assets also decreased to .69% at December 31, 2004 as compared to .76% at year-end 2003. Nonperforming assets still included a single line representing .25% of total assets at December 31, 2004. For 2004, provision expense was down $1,986 or 45.8% compared to the provision expense for 2003. This decrease in provision expense was largely associated with the decrease in net charge-offs as a percent of average total loans as well as a decline in both nonperforming loans and expected losses. At December 31, 2004, the allowance for loan losses totaled $7,177, or 1.20% of total loans, down $416 from December 31, 2003 when the allowance was 1.32% of total loans. Management decreased the allowance as a percent of total loans in 2004 due to the decline in nonperforming loans caused by improvements in asset quality as well as lower portfolio risk. Based on this quarterly evaluation, management feels the allowance is adequate to absorb probable incurred losses in the portfolio based on collateral values as well as a high relative volume of real estate mortgages. DEPOSITS Interest-earning assets are funded primarily by core deposits. The accompanying table IV shows the composition of total deposits as of December 31, 2004. Total deposits grew $27,644 or 5.4% to reach $535,153 by year-end 2004. Leading the growth in deposits were time deposits which increased $23,037 or 8.1% over 2003. This growth was primarily driven by increases in the Company's brokered CD issuances of $15,703 or 91.4% during the fiscal year of 2004. Management continues to utilize these deposit sources from local and national markets to not only supplement deposit growth, but also fund growth in earning assets and reduce other borrowed funds. Additionally, the Company's interest-free funding source, noninterest bearing demand deposits, increased $7,701 or 12.4% during 2004 mostly from business checking account balances. Partially offsetting total deposit growth was a decrease in the Company's interest-bearing demand deposits which were down $2,522 or 2.2% as compared to 2003. Driving this variance were decreases in the Company's Gold Club and public fund NOW products that totaled $4,381, partially offset by a $2,706 increase in the Company's Shareholder Gold product, which offers a NOW account and many banking benefits to Company shareholders. Furthermore, savings and money market deposits decreased $572 or 1.2% as compared to 2003. FUNDS BORROWED During 2004, the Company's total borrowings, consisting of securities sold under agreements to repurchase ("repurchase agreements") and other borrowed funds, decreased to $116,303 at December 31, 2004 compared to $125,580 at December 31, 2003. The Company's other borrowed funds decreased $25,012 or 24.6% from year-end 2003. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB) advances and promissory notes. FHLB advances are subject to collateral agreements and are secured by qualifying first mortgage loans and FHLB stock. With the growth in deposits outpacing asset growth, management was able to reduce short-term borrowings from the FHLB by $13,875 and long-term fixed rate borrowings from the FHLB by $9,632 from year-end 2003. Based on the sustained low interest rate environment in 2004, management preferred funding asset growth with term deposits rather than variable rate borrowings. Management will continue to evaluate borrowings from the FHLB as an alternative funding source in 2005. Promissory notes are primarily associated with funding loans at Loan Central and were issued with various terms through a final maturity date of 2006. The decrease in total borrowings was partially offset by a $15,735 or 65.5% increase in repurchase agreements largely due to seasonal account balance increases with two large commercial accounts. OFF-BALANCE SHEET ARRANGEMENTS The disclosures required for off-balance sheet arrangements are discussed in Note I and Note K. CAPITAL RESOURCES The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors and shareholders. Shareholders' equity totaled $56,579 at December 31, 2004, compared to $54,408 at December 31, 2003, which represents growth of 4.0%. All of the capital ratios exceeded the regulatory minimum guidelines as identified in Note P "Regulatory Matters". Cash dividends paid of $3,259 for 2004 represents a 32.1% increase over the cash dividends paid during 2003. The key factor for the increase in cash dividends paid is due to the special "ProCentury" dividend paid in the fourth quarter of $.19 per share which increased the number of dividend distributions to five as compared to four distributions in 2003. Management deemed the special dividend appropriate to allow shareholders to participate in the successful return on their Company's investment in ProCentury Corp. which was liquidated in the second quarter of 2004 and contributed an after-tax gain of $1,625 or $.47 cents per share. Additionally, the increase in cash dividends for 2004 was due in part to an increase in the dividend rate paid per share. The Company maintains a dividend reinvestment and stock purchase plan. The plan allows shareholders to purchase additional shares of company stock. A benefit of the plan is to permit the shareholders to reinvest cash dividends as well as make supplemental purchases without the usual payment of brokerage commissions. During 2004, shareholders invested more than $1,400 through the dividend reinvestment and stock purchase plan. These proceeds resulted in the issuance of 27,016 new shares and the acquisition of 19,120 existing shares through open market purchases for a total of 46,136 shares. At December 31, 2004, approximately 79% of the shareholders were enrolled in the dividend reinvestment plan. Members' reinvestment of dividends and supplemental purchases in 2004 represented 45% of year-to-date dividends paid. In addition, as part of the Company's stock repurchase program in 2004, management purchased 99,359 shares in the open market. The current stock repurchase program limits the number of shares to be repurchased to 175,000 shares. At December 31, 2004, the Company could repurchase an additional 75,831 shares under the existing share repurchase program which will expire on February 15, 2005. INTEREST RATE SENSITIVITY AND LIQUIDITY The Company's goal for interest rate sensitivity management is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the Company's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability, but excessive levels of IRR can threaten the Company's earnings and capital. The Company evaluates IRR through the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The modeling process starts with a base case simulation, which assumes a flat interest rate scenario. The base case scenario is compared to rising and falling interest rate scenarios assuming a parallel shift in all interest rates. Comparisons of net interest income and net income fluctuations from the flat rate scenario illustrate the risks associated with the projected balance sheet structure. The Company's Asset/Liability Committee monitors and manages IRR within Board approved policy limits. The current IRR policy limits anticipated changes in net interest income over a 12 month horizon to plus or minus 10% of the base net interest income assuming a parallel rate shock of up 100, 200 and 300 basis points and down 100 basis points. Based on the current interest rate environment, management did not test interest rates down 200 and 300 basis points. The IRR analysis shows the Company's balance sheet is mostly liability sensitive at December 31, 2004. During rising interest rates, the change in net interest income decreases and during declining interest rates, the change in net interest income increases. The estimated change in net interest income reflects minimal IRR exposure and is well within the policy guidelines established by the Board. During 2003, management aggressively targeted variable rate loans coupled with longer term funding sources to reduce IRR. During 2004, management emphasized variable rate and short-term duration assets funded by comparable term liabilities to maintain a relatively balanced IRR position. Liquidity management should focus on matching the cash inflows and outflows within the Company's natural market for loans and deposits. This goal is accomplished by maintaining sufficient asset liquidity along with stable core deposits. The primary sources of liquidity are interest-bearing balances with banks, federal funds sold and the maturity and repayment of investments and loans as well as cash flows provided from operations. The Company has classified $74,155 in securities as available for sale at December 31, 2004. In addition, the Federal Home Loan Bank in Cincinnati offers advances to the Bank which further enhances the Bank's ability to meet liquidity demands. At December 31, 2004, the Bank could borrow an additional $51,000 from the Federal Home Loan Bank. The Bank also has the ability to purchase federal funds from several of its correspondent banks. See the consolidated statement of cash flows for further cash flow information. Management does not rely on any single source of liquidity and monitors the level of liquidity based on many factors affecting the Company's financial condition. INFLATION Consolidated financial data included herein has been prepared in accordance with US GAAP. Presently, US GAAP requires the Company to measure financial position and operating results in terms of historical dollars with the exception of securities available for sale, which are carried at fair value. Changes in the relative value of money due to inflation or deflation are generally not considered. In management's opinion, changes in interest rates affect the financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as monetary and fiscal policies. A financial institution's ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today's volatile economic environment. The Company seeks to insulate itself from interest rate volatility by ensuring that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. CRITICAL ACCOUNTING POLICIES The most significant accounting policies followed by the Company are presented in Note A to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the adequacy of the allowance for loan losses to be a critical accounting policy. Allowance for Loan Losses: To arrive at the total dollars necessary to maintain an allowance level sufficient to absorb probable losses incurred at a specific financial statement date, management has developed procedures to establish and then evaluate the allowance once determined. The allowance consists of the following components: specific allocation, general allocation and other estimated general allocation. To arrive at the amount required for the specific allocation component, the Company evaluates loans for which a loss may be incurred either in part or whole. To achieve this task, the Company has created a quarterly report ("Watchlist") which lists the loans from each loan portfolio that management deems to be potential credit risks. The criteria to be placed on this report are: past due 60 or more days, nonaccrual and loans management has determined to be potential problem loans. These loans are reviewed and analyzed for potential loss by the Large Loan Review Committee which consists of the President and members of senior management with lending authority. The function of the Committee is to review and analyze large borrowers for credit risk, scrutinize the Watchlist and evaluate the adequacy of the allowance for loan losses and other credit related issues. The Committee has established a grading system to evaluate the credit risk of each commercial borrower on a scale of 1 (least risk) to 10 (greatest risk). After the Committee evaluates each relationship listed in the report, a specific loss allocation may be assessed. The specific allocation is currently made up of amounts allocated to the commercial loan portfolio. Included in the specific allocation are impaired loans, which consist of loans with balances of $200 or more on nonaccrual status or non-performing in nature. These loans are also individually analyzed and a specific allocation may be assessed based on expected credit loss. Collateral dependent loans will be evaluated to determine a fair value of the collateral securing the loan. Non-performing loan balances continue to decline from the previous year (down 10%). Any changes in the impaired allocation will be reflected in the total specific allocation. The second component (general allowance) consists of the total loan portfolio balances minus loan balances already reviewed (specific allocation). A quarterly large loan report is prepared to provide management with a "snapshot" of information on larger-balance loans (of $550 or greater), including loan grades, collateral values, etc. This tool allows management to monitor this group of borrowers. Therefore only small balance commercial loans and homogeneous loans (consumer and real estate loans) have not been specifically reviewed to determine minor delinquencies, current collateral values and present credit risk. The Company utilizes actual historic loss experience as a factor to calculate the probable losses for this component of the allowance for loan losses. This risk factor reflects an actual 1 year or 3 year performance evaluation of credit losses per loan portfolio, whichever is greater. The risk factor is achieved by taking the average charge off per loan portfolio for the last 12 or 36 consecutive months, whichever is greater, and dividing it by the average loan balance for each loan portfolio over the same time period. The Company believes that by using the greatest of the 12 or 36 month average loss risk factor, the estimated allowance will more accurately reflect current probable losses. The final component used to evaluate the adequacy of the allowance includes five additional areas that management believes can have an impact on collecting all principal due. These areas are: 1) delinquency trends, 2) current local economic conditions, 3) non-performing loan trends, 4) recovery vs. charge off, and 5) personnel changes. Each of these areas is given a percentage factor, from a low of 10% to a high of 30%, determined by the importance of the impact it may have on the allowance. After evaluating each area, an overall factor of 13% was determined for this reporting period. To calculate the impact of other economic conditions on the allowance, the total general allowance is multiplied by this factor. These dollars are then added to the other two components to provide for economic conditions in the Company's assessment area. The Company's assessment area takes in a total of ten counties in Ohio and West Virginia. Each assessment area has its individual economic conditions; however, the Company has chosen to average the risk factors for compiling the economic risk factor. The adequacy of the allowance may be determined by certain specific and nonspecific allocations; however, the total allocation is available for any credit losses that may impact the loan portfolios. CONCENTRATIONS OF CREDIT RISK The Company maintains a diversified credit portfolio, with real estate loans currently comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in central and southeastern Ohio as well as western West Virginia. Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group. To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations. FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements' within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as "believes," "anticipates," "expects," and similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control that could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to: changes in political, economic or other factors such as inflation rates, recessionary or expansive trends, and taxes; competitive pressures; fluctuations in interest rates; the level of defaults and prepayment on loans made by the Company; unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements, whether as a result of new information, unanticipated future events or otherwise. CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME
Table I December 31 ------------------------------------------------------------------------------------ 2004 2003 2002 (dollars in thousands) -------------------------- -------------------------- -------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- ASSETS - ------ Interest-earning assets: Interest-bearing balances $ 879 $ 7 .79% $ 1,360 $ 8 .61% $ 1,607 15 .91% with banks Federal funds sold 4,708 55 1.17 5,842 63 1.07 14,643 237 1.62 Securities: Taxable 73,046 3,055 4.18 71,361 2,942 4.12 59,831 2,837 4.74 Tax exempt 12,673 809 6.38 13,888 996 7.17 14,582 1,051 7.21 Loans 590,006 39,823 6.75 559,854 41,467 7.41 538,148 43,954 8.17 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- earning assets 681,312 43,749 6.42% 652,305 45,476 6.97% 628,811 48,094 7.65% Noninterest-earning assets: Cash and due from banks 15,809 15,797 15,871 Other nonearning assets 32,779 32,515 29,594 Allowance for loan losses (7,619) (7,420) (6,715) -------- -------- -------- Total noninterest- earning assets 40,969 40,892 38,750 -------- -------- -------- Total assets $722,281 $693,197 $667,561 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $112,546 1,783 1.58% $110,648 1,858 1.68% $102,393 2,203 2.15% Savings and Money Market 48,574 318 .65 48,050 386 .80 42,264 522 1.23 Time deposits 309,744 9,225 2.98 289,399 10,078 3.48 287,032 12,404 4.32 Repurchase agreements 24,743 278 1.12 23,396 204 .87 23,090 361 1.56 Other borrowed money 96,361 4,542 4.71 100,590 5,119 5.09 98,938 5,320 5.38 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- bearing liabilities 591,968 16,146 2.73% 572,083 17,645 3.08% 553,717 20,810 3.76% Noninterest-bearing liabilities: Demand deposit accounts 66,298 61,579 57,824 Other liabilities 8,227 7,461 8,145 -------- -------- -------- Total noninterest- bearing liabilities 74,525 69,040 65,969 Shareholders' equity 55,788 52,074 47,875 -------- -------- -------- Total liabilities and shareholders' equity $722,281 $693,197 $667,561 ======== ======== ======== Net interest earnings $27,603 $27,831 $27,284 ======= ======= ======= Net interest earnings as a percent of interest-earning assets 4.05% 4.27% 4.34% ----- ----- ----- Net interest rate spread 3.69% 3.89% 3.89% ----- ----- ----- Average interest-bearing liabilities to average earning assets 86.89% 87.70% 88.06% ===== ===== =====
Fully taxable equivalent yields are calculated assuming a 34% tax rate, net of nondeductible interest expense. Average balances are computed on an average daily basis. The average balance for available-for-sale securities includes the market value adjustment. However, the calculated yield is based on the securities' amortized cost. Average loan balances include nonaccruing loans. Loan income includes cash received on nonaccruing loans. RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE
Table II 2004 2003 ----------------------------- ---------------------------- (dollars in thousands) Increase (Decrease) Increase (Decrease) From Previous Year Due to From Previous Year Due to ----------------------------- ---------------------------- Volume Yield/Rate Total Volume Yield/Rate Total ------ ---------- ----- ------ ---------- ----- INTEREST INCOME - --------------- Interest-bearing balances with banks $ (3) $ 2 $ (1) $ (3) $ (4) $ (7) Federal funds sold (13) 5 (8) (111) (63) (174) Securities: Taxable 70 43 113 504 (399) 105 Tax exempt (83) (104) (187) (49) (6) (55) Loans 2,159 (3,803) (1,644) 1,723 (4,210) (2,487) ------- ------- ------- ------- ------- ------- Total interest income 2,130 (3,857) (1,727) 2,064 (4,682) (2,618) INTEREST EXPENSE - ---------------- NOW accounts 32 (107) (75) 167 (512) (345) Savings and Money Market 4 (72) (68) 64 (200) (136) Time deposits 675 (1,528) (853) 101 (2,427) (2,326) Repurchase agreements 12 62 74 5 (162) (157) Other borrowed money (209) (368) (577) 88 (289) (201) ------- ------- ------- ------- ------- ------- Total interest expense 514 (2,013) (1,499) 425 (3,590) (3,165) ------- ------- ------- ------- ------- ------- Net interest earnings $ 1,616 $(1,844) $ (228) $ 1,639 $(1,092) $ 547 ======= ======= ======= ======= ======= =======
The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Fully taxable equivalent yield assumes a 34% tax rate, net of related nondeductible interest expense. SECURITIES
Table III MATURING --------------------------------------------------------------------------- As of December 31, 2004 Within After One but After Five but (dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years -------- ----------------- ---------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- Obligations of U.S. Government agency securities $10,618 6.11% $ 9,469 3.75% --- --- --- --- Obligations of states and political subdivisions 927 6.88% 2,728 6.03% $ 5,313 7.11% $2,942 5.03% Mortgage-backed securities --- --- 44,815 3.72% 3,916 4.06% --- --- ------- ---- ------- ---- ------- ---- ------ ---- Total debt securiities $11,545 6.18% $57,012 3.84% $ 9,229 5.82% $2,942 5.03% ======= ==== ======= ==== ======= ==== ====== ====
Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions using a 34% rate. Weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Mortgage-backed securities, which have prepayment provisions, are assigned to a maturity based on estimated average lives. Securities are shown at their carrying values which include the market value adustments for available-for-sale securities. DEPOSITS Table IV as of December 31 (dollars in thousands) 2004 2003 2002 ---- ---- ---- Interest-bearing deposits: NOW accounts $110,901 $113,423 $105,130 Money Market 9,023 8,917 10,255 Savings accounts 37,008 37,686 33,704 IRA accounts 37,272 38,427 38,295 Certificates of Deposit 271,013 246,821 251,023 -------- -------- -------- 465,217 445,274 438,407 Noninterest-bearing deposits: Demand deposits 69,936 62,235 58,997 -------- -------- -------- Total deposits $535,153 $507,509 $497,404 ======== ======== ======== ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES Table V Years Ended December 31 (dollars in thousands) 2004 2003 2002 2001 2000 - ---------------------- ---- ---- ---- ---- ---- Commercial loans $4,657 $4,844 $3,358 $2,467 $2,200 Percentage of loans to total loans 37.69% 38.58% 36.94% 34.21% 31.36% Real estate loans 642 833 1,318 1,177 867 Percentage of loans to total loans 37.84% 37.94% 40.07% 44.47% 46.78% Consumer loans 1,878 1,916 2,393 2,607 2,318 Percentage of loans to total loans 24.47% 23.48% 22.99% 21.32% 21.86% ------- ------- ------- ------- ------- Allowance for Loan Losses $7,177 $7,593 $7,069 $6,251 $5,385 ======= ======= ======= ======= ======= 100.00% 100.00% 100.00% 100.00% 100.00% ======= ======= ======= ======= ======= Ratio of net charge-offs to average loans .47% .68% .86% .56% .36% ======= ======= ======= ======= ======= The above allocation is based on estimates and subjective judgments and is not necessarily indicative of the specific amounts or loan categories in which losses may ultimately occur. SUMMARY OF NONPERFORMING AND PAST DUE LOANS Table VI (dollars in thousands) 2004 2003 2002 2001 2000 - ---------------------- ---- ---- ---- ---- ---- Impaired loans $5,573 $1,988 $4,780 $2,621 $1,233 Past due-90 days or more and still accruing 1,402 659 1,491 3,013 3,691 Nonaccrual 1,618 2,655 6,569 3,297 2,948 Accruing loans past due 90 days or more to total loans .23% .12% .27% .59% .82% Nonaccrual loans as a % of total loans .27% .46% 1.17% .65% .66% Impaired loans as a % of total loans .93% .35% .85% .52% .28% Allowance for loans losses as a % of total loans 1.20% 1.32% 1.26% 1.23% 1.20% Management believes that the impaired loan disclosures are comparable to the nonperforming loan disclosures except that the impaired loan disclosures do not include single family residential or consumer loans which are analyzed in the aggregate for loan impairment purposes. During 2004, the Company recognized $284 of interest income on impaired loans. Individual loans not included above that management feels have loss potential total approximately $1,986. The Company has no assets which are considered to be troubled debt restructings that are not already included in the table above. Management formally considers placing a loan on nonaccrual status when collection of principal or interest has become doubtful. Furthermore, a loan should not be returned to the accrual status unless either all delinquent principal or interest has been brought current or the loan becomes well secured and is in the process of collection. MATURITY AND REPRICING DATA OF LOANS
Table VII As of December 31, 2004 Maturing/Repricing (dollars in thousands) Within After One but One Year Within Five Years After Five Years Total -------- ----------------- ---------------- ----- Commercial loans and other $155,087 $ 48,742 $ 22,546 $226,375 Real estate loans 95,862 16,026 115,346 227,234 Consumer loans 26,831 87,615 32,519 146,965 -------- -------- -------- -------- Total loans $277,780 $152,383 $170,411 $600,574 ======== ======== ======== ========
Loans maturing or repricing after one year with: Variable interest rates $ 47,461 Fixed interest rates 275,333 -------- Total $322,794 ======== The following table presents the Company's estimated net interest income sensitivity: INTEREST RATE SENSITIVITY Table VIII Change in 12/31/04 12/31/03 Interest Rates % Change in % Change in in Basis Points Net Interest Income Net Interest Income - --------------- ------------------- ------------------- +300 (1.07%) +.09% +200 (.42%) (.14%) +100 (.11%) (.56%) -100 +.35% +2.04% CONTRACTUAL OBLIGATIONS
Table IX The following table presents, as of December 31, 2004, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. Payments Due In (dollars in thousands) Note One Year One to Three to Over Reference or Less Three Years Five Years Five Years Total --------- -------- ----------- ---------- ---------- ---------- Deposits without a stated maturity F $226,868 --- --- --- $226,868 Consumer and brokered time deposits F 162,051 $118,940 $ 25,299 $ 1,995 308,285 Repurchase agreements G 39,753 --- --- --- 39,753 Other borrowed funds H 27,101 30,275 12,017 7,157 76,550 Trust preferred obligations I --- --- --- 13,500 13,500
KEY RATIOS Table X 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Return on average assets 1.16% .93% .85% .83% .81% Return on average equity 15.02% 12.43% 11.85% 10.80% 10.29% Dividend payout ratio 38.89% 38.14% 40.79% 55.84% 47.14% Average equity to average assets 7.72% 7.51% 7.17% 7.68% 7.86% DIRECTOR & OFFICER LISTING OVBC Directors - -------------- James L. Dailey Jeffrey E. Smith Robert H. Eastman W. Lowell Call Thomas E. Wiseman Lannes C. Williamson Steven B. Chapman Anna P Barnitz Brent A. Saunders OVBC Officers - ------------- Jeffrey E. Smith James L. Dailey E. Richard Mahan Larry E. Miller, II Katrinka V. Hart Sue Ann Bostic Mario P. Liberatore Cherie A. Barr Sandra L. Edwards David L. Shaffer Jennifer L. Osborne Tom R. Shepherd Scott W. Shockey Cindy H. Johnston Paula W. Clay Ohio Valley Bank Directors - -------------------------- James L. Dailey Jeffrey E. Smith Robert H. Eastman W. Lowell Call Thomas E. Wiseman Lannes C. Williamson Harold A. Howe Steven B. Chapman Wendell B. Thomas Anna P. Barnitz Barney A. Molnar Brent A. Saunders Directors Emeritus - ------------------ Keith R. Brandeberry Merrill L. Evans Art E. Hartley, Sr. Charles C. Lanham C. Leon Saunders Warren F. Sheets West Virginia Advisory Board - ---------------------------- Lannes C. Williamson Anna P. Barnitz Mario P. Liberatore Charles C. Lanham Richard L. Handley Gregory K. Hartley Trenton M. Stover R. Raymond Yauger John C. Musgrave Stephen L. Johnson Barney A. Molnar E. Allen Bell Ohio Valley Bank Officers - ------------------------- Jeffrey E. Smith President & Chief Executive Officer James L. Dailey Chairman of the Board E. Richard Mahan Executive Vice President & Secretary Larry E. Miller, II Executive Vice President & Treasurer Katrinka V. Hart Executive Vice President & Risk Management Officer Sue Ann Bostic Senior Vice President, Administrative Services Group Mario P. Liberatore Senior Vice President, West Virginia Bank Group Sandra L. Edwards Senior Vice President, Financial Bank Group David L. Shaffer Senior Vice President, Commercial Bank Group Jennifer L. Osborne Senior Vice President, Retail Lending Group Tom R. Shepherd Senior Vice President, Retail Deposit Group Scott W. Shockey Senior Vice President and Chief Financial Officer Patricia L. Davis Vice President, Research & Technical Applications Richard D. Scott Vice President, Trust Bryan W. Martin Vice President, Facilities & Technical Services Patrick H. Tackett Vice President, Western Division Branch Administrator Molly K. Tarbett Vice President, Loss Prevention Manager Robert T. Hennesy Assistant VP, Indirect Lending Manager Philip E. Miller Assistant VP, Region Manager Franklin County Rick A. Swain Assistant VP, Region Manager Pike County Judy K. Hall Assistant VP, Training and Educational Development Melissa P. Mason Assistant VP, Trust Officer Diana L. Parks Assistant VP, Internal Auditor Christopher S. Petro Assistant VP and Comptroller Linda L. Plymale Assistant VP, Transit Officer Kimberly R. Williams Assistant VP, Systems Officer Bryan F. Stepp Assistant VP, Business Development Deborah A. Carhart Assistant VP, Shareholder Relations Gregory A. Phillips Assistant VP, I-64 Retail Lending Manager Pamela D. Edwards Assistant VP, Commercial Loan Operations Marilyn Kearns Assistant VP, Director of Human Resources Paula W. Clay Assistant VP, Assistant Secretary Cindy H. Johnston Assistant VP, Assistant Secretary Christopher L. Preston Assistant VP, Regional Branch Administration I-64 Angela G. King Assistant VP, Regional Branch Administrator Gallia/Meigs Brenda G. Henson Assistant Cashier, Manager Customer Service Kyla R. Carpenter Assistant Cashier and Marketing Officer Richard P. Speirs Assistant Cashier, Maintenance Technical Supervisor Stephanie L. Stover Assistant Cashier, Retail Lending Operations Manager Bryna S. Butler Assistant Cashier for Corporate Communications Raymond G. Polcyn Assistant Cashier,Retail Lending Manager for Gallia-Meigs SuperBanks Toby M. Mannering Assistant Cashier, Collections Manager Tyrone J. Thomas Assistant Cashier, Assistant Manager Franklin County Region Frank W. Davison Assistant Cashier, AS/400 Administrator Allen W. Elliott Assistant Cashier, Assistant Manager Indirect Lending Tamela D. LeMaster Assistant Cashier, Regional Branch Manager I-64 Loan Central Officers - --------------------- Jeffrey E. Smith Chairman of the Board Cherie A. Barr President Timothy R. Brumfield Secretary & Manager, Gallipolis Office Joseph I. Jones Manager, Waverly Office T. Joe Wilson Manager, South Point Office John J. Holtzapfel Manager, Wheelersburg Office Deborah G. Moore Manager, Jackson Office INVESTOR INFORMATION - -------------------- VITAL STATISTICS > Record earnings for 12 consecutive years > Earnings per share for 2004 represented an increase of 30.1% over last year (including sale of ProCentury stock). > Approximately $729 million in assets BUSINESS PROFILE Ohio Valley Banc Corp. commenced operations on October 23, 1992, as a one-bank holding company with The Ohio Valley Bank Company being the wholly-owned subsidiary. The Company's headquarters are located at 420 Third Avenue in Gallipolis, Ohio. The Ohio Valley Bank Company was organized on September 24, 1872. The Bank is insured under the Federal Deposit Insurance Act and is chartered under the banking laws of the State of Ohio. The company currently operates sixteen offices in Ohio and West Virginia. In April 1996, the Banc Corp. opened a consumer finance company operating under the name of Loan Central, Inc. with five offices in Ohio. Ohio Valley Financial Services, an agency specializing in life insurance, was formed as a subsidiary of the Corp. in June 2000. The Company also has minority holdings in ProAlliance OVB Title Services. FORM 10-K A copy of the company's annual report on Form 10-K, as filed with the Securities and Exchange Commission, will be forwarded without charge to any stockholder upon written request to: Ohio Valley Banc Corp., Attention: E. Richard Mahan, Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and proxy statement are also available on the company's Web site, www.ovbc.com. STOCK LISTING Ohio Valley Banc Corp. stock is traded on The Nasdaq Stock Market under the symbol OVBC. HEADQUARTERS Ohio Valley Banc Corp. 420 Third Avenue P.O. Box 240 Gallipolis, Ohio 45631 740.446.2631 or 800.468.6682 Web: www.ovbc.com E-mail: investorrelations@ovbc.com FINANCIAL HIGHLIGHTS {bar graph} 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- NET INCOME ($000) ***$ 8,381 $ 6,472 $ 5,675 $ 4,895 $ 4,400 TOTAL ASSETS ($000) $729,120 $707,327 $696,356 $634,999 $561,658 INCOME PER SHARE ***$ 2.42 $ 1.86 $ 1.64 $ 1.41 $ 1.25 DIVIDENDS PER SHARE **$ .94 $ .71 $ .67 *$ .79 $ .59 * Reflects extra "Freedom Dividend" ** Reflects "ProCentury Dividend" *** Reflects ProCentury sale EX-21 6 exhibit21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT STATE OF PERCENTAGE NAME INCORPORATION OF OWNERSHIP - --------------------------- ---------------- ---------------- The Ohio Valley Bank Company Ohio 100% Loan Central, Inc. Ohio 100% Ohio Valley Financial Services Agency, LLC Ohio 100% Ohio Valley Statutory Trust I Ohio 100% Ohio Valley Statutory Trust II Ohio 100% BSG Title Services, LLC Ohio 50% OVB Title Services, LLC Ohio 49% ProAlliance Corp. Ohio 9% EX-23 7 exhibit23.txt CONSENT OF PUBLIC ACCOUNTING FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 of Ohio Valley Banc Corp. filed with the United States Securities and Exchange Commission (SEC No. 033-62010), of our report dated February 11, 2005 on the consolidated financial statements of Ohio Valley Banc Corp. included in this Annual Report on Form 10-K for the year ended December 31, 2004. /s/ Crowe Chizek and Company LLC -------------------------------- Crowe Chizek and Company LLC Columbus, Ohio March 16, 2005 EX-31 8 exhibit31-1.txt PRINCIPAL EXECUTIVE OFFICER Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification I, Jeffrey E. Smith, certify that: 1. I have reviewed this Annual Report on Form 10-K of Ohio Valley Banc Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16 , 2005 By /s/ Jeffrey E. Smith -------- ----------------------------------- Jeffrey E. Smith, President and CEO EX-31 9 exhibit31-2.txt PRINCIPAL FINANCIAL OFFICER Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification I, Scott W. Shockey, certify that: 1. I have reviewed this Annual Report on Form 10-K of Ohio Valley Banc Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16 , 2005 By /s/ Scott W. Shockey -------- ----------------------------------- Scott W. Shockey, Vice President and Chief Financial Officer EX-32 10 exhibit32.txt 1350 CERTIFICATION 12312004 Exhibit 32 SECTION 1350 CERTIFICATION In connection with the Annual Report of Ohio Valley Banc Corp. (the "Corporation") on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Jeffrey E. Smith, President and Chief Executive Officer of the Corporation, and Scott W. Shockey, Vice President and Chief Financial Officer of the Corporation, each certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge: (1) The Report fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. * /s/ Jeffrey E. Smith * /s/ Scott W. Shockey - ---------------------- ------------------------- Jeffrey E. Smith, Scott W. Shockey President and Chief Executive Officer Vice President and Chief Financial Officer Dated: March 16, 2005 Dated: March 16, 2005 * This certification is being furnished as required by Rule 13a - 14(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing. EX-99 11 exhibit99.txt 8-KFILING ITEM5.02 HOWE Exhibit 99 PRESS RELEASE For immediate release Contact: Bryna Butler, 446-2631, ext. 253, E-mail: bsbutler@ovbc.com Howe Joins OVBC Board GALLIPOLIS, Ohio -- Harold A. Howe has been elected to the Ohio Valley Banc Corp. [Nasdaq: OVBC] Board of Directors. Howe joined the Ohio Valley Banc Corp. family in 1998 with the company's purchase of Jackson Savings Bank of Jackson, Ohio. He is now the president of Ohio Valley Financial Services, a life insurance agency subsidiary of OVBC. In addition, he serves on the Ohio Valley Bank Board of Directors. Howe will be finishing the unexpired term of Jim Dailey on the Board. Dailey retired from the Corp. Board in January 2005, but is still Chairman of the Board of Ohio Valley Bank, the largest subsidiary of Ohio Valley Banc Corp. A native of Jackson, Howe is a graduate of Jackson High School, Urbana University, and Xavier University Graduate School. He is President of the Jackson Community Improvement Corporation, Director of the Jackson YMCA, and serves on the Jackson Metropolitan Housing Board. He is also a member of Rotary (past president), Jaycees, Elks, and Moose. He and wife, Kay, reside in Jackson. Ohio Valley Banc Corp. stock is traded on the Nasdaq Stock Market under the symbol OVBC. The company owns three subsidiaries: Ohio Valley Bank, with 16 offices throughout Ohio and West Virginia; Loan Central, with five offices in Ohio; and Ohio Valley Financial Services, a life insurance agency based in Jackson, Ohio. -----END PRIVACY-ENHANCED MESSAGE-----