-----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, Bsmxsdg3aKji6MiMnz1uOw8NR5yjMyuPPsCogk1rZdLKuKAuHv0l3uzXplMIb1bM KSJdZQ7lweyWPPnwD/vm4g== 0000894671-09-000005.txt : 20090316 0000894671-09-000005.hdr.sgml : 20090316 20090316152948 ACCESSION NUMBER: 0000894671-09-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090316 DATE AS OF CHANGE: 20090316 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: 09684110 BUSINESS ADDRESS: STREET 1: 420 THIRD AVE CITY: GALLIPOLIS STATE: OH ZIP: 45631 BUSINESS PHONE: 7404462631 MAIL ADDRESS: STREET 1: 420 THIRD AVENUE STREET 2: PO BOX 240 CITY: GALLIPOLIS STATE: OH ZIP: 45631 10-K 1 sec10k12312008.txt SEC FORM 10-K AT 12312008 Ohio Valley Banc Corp. 420 Third Avenue Gallipolis, Ohio 45631 March 16, 2009 VIA EDGAR TRANSMISSION ====================== U.S. Securities and Exchange Commission 100 F Street, NE Washington, D.C. 20549 Re: Ohio Valley Banc Corp. Commission File No. 0-20914 CIK No. 0000894671 Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2008 Ladies and Gentlemen: Ohio Valley Banc Corp. (the "Company") is today filing one complete copy of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the "Form 10-K"), including financial statements and exhibits. The consolidated financial statements included in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2008, which are incorporated by reference in the Form 10-K, reflect no changes in any accounting principle or practice or in the method of applying such principle or practice from the preceding year. If you have any questions with respect to the enclosed Form 10-K, please do not hesitate to contact Jeffrey E. Smith at (740) 446-2631. Very truly yours, OHIO VALLEY BANC CORP. By: /s/ Jeffrey E. Smith ----------------------------------- Jeffrey E. Smith, President and CEO 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, 2008 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______ Commission File Number: 0-20914 OHIO VALLEY BANC CORP. ------------------------------------------------------ (Exact name of negistrant as specified in its charter) Ohio 31-1359191 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 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: Title of each class Name of each exchange on which registered Common Shares, Without Par Value The NASDAQ Stock Market LLC -------------------------------- (The NASDAQ Global Market) -------------------------- Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES |_| NO |X| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES |_| NO |X| 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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Smaller reporting company|_| (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Act). YES |_| NO |X| Based on the closing sales price of $25.00 per share on June 30, 2008, the aggregate market value of the issuer's shares held by non-affiliates on such date was $95,921,525. For this purpose, shares held by non-affiliates are all outstanding shares except those held by the directors and executive officers of the issuer and those held by The Ohio Valley Bank Company as trustee with respect to which the Bank has sole or shared voting or dispositive power. The number of common shares of the registrant outstanding as of March 13, 2009 was 3,983,009. Documents Incorporated By Reference: (1) Portions of the 2008 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 May 13, 2009 are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14. 2 PART I ITEM 1 - BUSINESS Organizational History and Subsidiaries Ohio Valley Banc Corp. ("Ohio Valley") is an Ohio corporation registered as a financial holding company pursuant to the Bank Holding Company Act of 1956, as amended ("BHC Act"). Ohio Valley was incorporated under the laws of the State of Ohio on January 8, 1992 and began conducting business on October 23, 1992. 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 Global Market under the symbol "OVBC". Ohio Valley has one banking subsidiary, The Ohio Valley Bank Company (the "Bank"). Ohio Valley also owns two nonbank subsidiaries, Loan Central, Inc. ("Loan Central") and Ohio Valley Financial Services Agency, LLC ("Ohio Valley Financial Services"), which engage in lending and insurance agency services, and two wholly-owned subsidiary trusts formed solely to issue trust preferred securities. Ohio Valley also owns a minority interest in an insurance company. Ohio Valley and its subsidiaries are collectively referred to as the "Company." 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 through a link to The NASDAQ Stock Market's website from Ohio Valley's website as soon as reasonably practicable after Ohio Valley electronically files such materials with, or furnishes them to, the Securities and Exchange Commission ("SEC"). Business of Ohio Valley As a financial holding company registered under the BHC Act, Ohio Valley's primary business is community banking. As of December 31, 2008, Ohio Valley's consolidated assets approximated to $781,108,000, and total shareholders' equity approximated to $63,056,000. Ohio Valley is also permitted to engage in certain non-banking activities under the provisions of the Gramm-Leach-Bliley Act ("GLB Act"), such as securities underwriting and dealing activities, insurance agency and underwriting activities and merchant banking/equity investment activities. The Company presently engages in insurance agency activities through Ohio Valley Financial Services and insurance underwriting activities through a minority interest in ProAlliance Corp. Management will consider opportunities to engage in additional nonbanking activities as they arise. Business of Bank Subsidiary A substantial portion of Ohio Valley's revenue is derived from cash dividends paid by the Bank. The Bank presently has fifteen offices located in Ohio and West Virginia, all of which offer automatic teller machines (ATMs). Seven of these offices also offer drive-up services. The Bank accounted for substantially all of Ohio Valley's consolidated assets at December 31, 2008. 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 3 central and southeastern Ohio as well as western West Virginia. The banking services offered by the Bank include the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; and the making of construction and real estate loans. The Bank also offers individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. As part of its lending function, the Bank offers credit card services. 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 began offering trust services in 1981. The trust department acts as trustee under wills, trusts and profit sharing plans, as executor and administrator of estates, and as guardian for estates of minors and incompetents. In addition, the trust department performs a variety of investment and security services where the Bank acts as an agent on behalf of the client. Trust services are available to all customers of the Bank. During 2007, the Bank began offering a platform to its customers for opening deposit accounts online, the fourth in the nation to offer this specific service. Bank customers may now conveniently establish new deposit accounts at their own home. In addition, the Bank offers an automated telephone banking system, OVB Line, which allows customers to access their personal account or business account information, make loan payments or fund transfers and obtain current rate information, all from a touch-tone telephone. The Bank also offers Internet banking to its customers, which allows customers to perform various transactions using a computer from any location as long as they have access to the Internet and a secure browser. Specifically, customers can check personal account balances, receive information about transactions within their accounts, make transfers between accounts, stop payment on a check, and reorder checks. Customers may also pay bills online and can make payments to virtually any business or individual. Furthermore, the Bank offers other financial management online services such as cash management and news updates related to repossession auctions, current rates and general bank news. Business of Loan Central Loan Central is engaged in consumer finance, offering smaller balance personal and mortgage loans to individuals with higher credit risk history. Loan Central's line of business also includes seasonal tax refund loan services. Loan Central presently has six offices all located within southeastern Ohio. Business of Financial Services Subsidiaries Ohio Valley Financial Services sells life insurance as agent. Ohio Valley Financial Services has been approved under the guidelines of the State of Ohio Department of Insurance. Ohio Valley also holds a non-majority equity interest in ProAlliance Corp., an insurance company. ProAlliance Corp. is engaged primarily in specialty property and casualty insurance coverage and has been 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 Trust I and Ohio Valley Statutory Trust III. Together, these Trusts have issued an aggregate $13,500,000 in trust preferred securities. Ohio Valley has issued a like amount of subordinated debentures to the Trusts in exchange for 4 the proceeds of the issuance of the trust preferred securities. Ohio Valley used the proceeds to provide additional capital to the Bank to support growth. Further detail on Ohio Valley Statutory Trusts I and III is located in Ohio Valley's 2008 Annual Report to Shareholders under "Note I - Subordinated Debentures and Trust Preferred Securities," in the notes to the Company's consolidated financial statements for the fiscal year ended December 31, 2008. Financial Information Financial information regarding the Company as of December 31, 2008 and 2007 and results of operations for the past three fiscal years is contained in the Company's consolidated financial statements for the fiscal year ended December 31, 2008. Lending Activities The Company's loan portfolio decreased $6,712,000 to finish at $630,391,000 in 2008. The loan portfolio is comprised of commercial (commercial real estate and commercial and industrial), residential real estate and consumer loans, including credit card and home equity loans. Residential real estate loans increased $2,210,000, or 0.9%, while commercial and consumer loans decreased $8,230,000, or 3.3% and $921,000, or 0.7%, respectively, as compared to 2007. Consolidated interest and fee revenue from loans accounted for 81.86%, 84.19%, and 83.28% of total consolidated revenues in 2008, 2007 and 2006, respectively. The Company 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. Residential Real Estate Loans The Company's residential real estate loans consist primarily of one- to four-family residential mortgages and carry many of the same customer and industry risks as the commercial loan portfolio. Real estate loans to consumers are secured primarily by a first lien deed of trust with evidence of title in favor of the Bank. The Company also requires proof of hazard insurance, required at the time of closing, with the Bank or Loan Central named as the mortgagee and as loss payee. The Company generally requires the amount of a residential real estate loan be no more than 80% 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 80%. These loans generally range from one-year adjustable to thirty-year fixed-rate mortgages. The Company's market area for real estate lending is primarily located in southeastern Ohio and portions of western West Virginia. The Bank continues to sell a 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, which have fixed rates with fifteen to thirty year terms, have assisted in meeting the consumer preference for long-term fixed-rate loans as well as minimized the Bank's exposure to interest rate risk. Commercial Loans The Company's commercial loan portfolio consists of loans to corporate borrowers primarily in small to mid-sized industrial and commercial companies that include service, retail and wholesale merchants. Collateral securing these loans includes equipment, inventory, stock, commercial real estate and rental property. Commercial loans are considered to have a higher level of risk compared to other types of loans (i.e., single-family residential mortgages, installment loans and credit card loans), although care is taken to minimize these risks. Numerous risk factors impact this portfolio, such as the economy, new technology, labor rates, cash flow, financial structure and asset quality. The payment experience on commercial loans is dependent on adequate cash flows from the business to service both interest and 5 principal due. Thus, commercial loans may be more sensitive to adverse conditions in the economy generally or adverse conditions in a specific industry. The Company diversifies risk within this portfolio by closely monitoring industry concentrations and portfolios to ensure that it does not exceed established lending guidelines. Underwriting standards require a comprehensive credit analysis and independent evaluation of virtually all larger balance commercial loans by the Bank's loan committee prior to approval. New commercial loan originations greater than $750,000 are reviewed and approved by the Executive Committee of the Bank's Board of Directors. Consumer Loans Consumer loans are secured by automobiles, mobile homes, recreational vehicles and other personal property. Personal loans and unsecured credit card receivables are also included as consumer loans. The Company makes 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. The Company monitors the risk associated with these types of loans by monitoring factors such as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. A qualified compliance officer is responsible for monitoring the performance of his or her respective consumer portfolio and updating loan personnel. The Company makes credit life insurance and health and accident insurance available to all qualified borrowers thus reducing their risk of loss when their income is terminated or interrupted. The Company reviews its respective consumer loan portfolios monthly to charge off loans which do not meet applicable 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. Also included in the category of consumer loans are home equity loans. Home equity lines of credit are generally made as second mortgages and charged a variable interest rate. Home equity lines are written with ten-year terms but are reviewed annually. Underwriting Standards The Company's underwriting guidelines and standards are updated periodically and are presented to the Board of Directors of the holding company for approval. The purpose of the standards and guidelines is to grant loans on a sound and collectible basis; to invest available funds in a safe, profitable manner; to serve the legitimate credit needs of the Company's primary market areas; and to ensure that all loan applicants receive fair and equal treatment in the lending process. It is the intent of the underwriting guidelines and standards to: minimize losses by carefully investigating the credit history of each applicant, verify the source of repayment and the ability of the applicant to repay, collateralize those loans in which collateral is deemed to be required, exercise care in the documentation of the application, review, approval, and origination process, and administer a comprehensive loan collection program. The above guidelines are adhered to and subject to the experience, background and personal judgment of the loan officer assigned to the loan application. A loan officer may grant, with justification, a loan with variances from the underwriting guidelines and standards. However, a loan officer may not exceed his or her respective lending authority without obtaining the prior, proper approval from a superior. 6 Investment Activities The Company's investment policy stresses the management of the investment securities portfolio, which includes both securities held-to-maturity and securities available-for-sale, to maximize the return over the long-term in a manner that is consistent with good banking practices and relative safety of principal. The Company's investment portfolio is comprised of a significant amount of mortgage-backed securities and U.S. government agency and sponsored entity securities. Revenues from interest and dividends on securities accounted for 6.87%, 6.70%, and 6.29% of total consolidated revenues in 2008, 2007 and 2006, respectively. The Company currently does not engage in trading account activity. Funding Activities Sources of funds for loan and investment activities include "core deposits." Core deposits include demand deposits, savings and NOW accounts, and certificates of deposit less than $100,000. The Company will also utilize certificates of deposit from wholesale markets, when necessary, to support growth in assets. Borrowings have also been a significant source of funding. These include advances from the Federal Home Loan Bank, Federal Reserve Bank Notes and securities sold under agreements to repurchase. Repurchase agreements are financing arrangements with various customers that have overnight maturity terms. Further funding has come from two trust preferred securities, Ohio Valley Statutory Trust I and Ohio Valley Statutory Trust III, totaling $13,500,000. Ohio Valley used the proceeds to provide additional capital to the Bank to support growth. Competition Competition among providers of financial products and services continues to increase, with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. As of December 31, 2008, there were 110 bank holding companies operating in the State of Ohio registered with the Federal Reserve, down from 120 bank holding companies at December 31, 2007. These holding companies control various banks throughout Ohio, which compete for business to expand market areas as well as acquire additional banks. 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 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, Lawrence, 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 and insurance companies. 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. Additionally, Ohio Valley Financial Services sells life insurance, which further strengthens the blend of services available to Ohio Valley's consumer base. The Company's business is not seasonal, nor is it dependent upon a single or small group of customers. 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 branches currently 7 service the market areas of Gallia, Meigs and Lawrence Counties of Ohio as well as Cabell County of West Virginia. Historically, larger regional institutions, with substantially greater resources, have been generating a growing market presence. Yet, in recent years, the financial industry continues to consolidate, which affects competition by eliminating some regional and local institutions, while strengthening the acquiring companies. Many financial institutions are experiencing significant challenges as a result of the economic crisis, resulting in bank failures and significant intervention from the U.S. Government. Overall, the Company believes it is able to compete effectively in both current and newer markets. There can be no assurance, however, that our ability to market products and services successfully or to obtain adequate yield on our loans will not be impacted by the nature of the competition that now exists or may later develop. 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; 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; 8 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: o 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); o 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 o 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 to the affiliate, the purchase of assets from the affiliate, issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate, 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. Regulation of Ohio 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. 9 Holding Company Activities Ohio Valley became a financial holding company during 2000, permitting it to engage in activities beyond those permitted for traditional bank holding companies. 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 SEC and state insurance regulators. Loan Central is supervised and regulated by the State of Ohio Department of Financial Institutions, Division of Consumer Finance. Ohio Valley's insurance business investments, Ohio Valley Financial Services and ProAlliance Corp., are both supervised and regulated by the State of Ohio Department of Insurance. The insurance laws and regulations applicable to insurance agencies, including Ohio Valley Financial Services, require education and licensing of individual agents and agencies, require reports and impose business conduct rules. 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 hybrid capital instruments, mandatory convertible debt securities, subordinated debt, 10 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. 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 an independent federal agency which insures deposits, up to prescribed statutory limits, of federally-insured banks and savings associations and safeguards the safety and soundness of the financial institution industry. The deposits of the Bank are insured up to statutorily prescribed limits by the FDIC. Insurance premiums for insured institutions are determined based upon the member's capital level and supervisory rating provided to the FDIC by the bank's primary federal regulatory and other information the FDIC determines to be relevant to the risk posed to the deposit insurance fund. The assessment rate determined by considering such factors is then applied to the amount of the bank's 11 deposits to determine the bank's insurance premium. An increase in the assessment rate could have a material adverse effect on the earnings of the bank. Insurance of deposits may be terminated by the FDIC upon a finding that the insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the bank's regulatory agency. Notice would be given to all depositors before the deposit insurance was terminated. On December 16, 2008, the FDIC adopted a final rule increasing risk-based assessment rates uniformly by 7 basis points, on an annual basis, for the first quarter of 2009. On February 27, 2009, the FDIC announced adoption of an interim final rule imposing a one-time special assessment of 20 basis points and a final rule adjusting the risk-based calculation used to determine the premiums to be paid by each insured institution. Management of the Company expects that the special assessment and the changes to the premium calculation will increase the Company's FDIC insurance expense for 2009 substantially over 2008. Additional special assessments and premium increases are possible, which could have a material adverse effect on the Company's net income. 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. Patriot Act The Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorist Act of 2001 (the "Patriot Act") gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity. The Company has established policies and procedures to comply with the requirements of the Patriot Act. Employees As of December 31, 2008, Ohio Valley and its subsidiaries had approximately 264 full-time equivalent employees and officers. Management considers its relationship with its employees and officers to be good. 12 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. 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 2008 Annual Report to Shareholders, which are 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 ended December 31, 2008, 2007 and 2006 are 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 Financial Condition and Results of Operations" located in Ohio Valley's 2008 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, 2008 and 2007 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 Financial Condition and Results of Operations" located in Ohio Valley's 2008 Annual Report to Shareholders. 13 II. INVESTMENT PORTFOLIO A. Types of Securities - Total securities on the balance sheet were comprised of the following classifications at December 31: (dollars in thousands) 2008 2007 2006 ---- ---- ---- Securities Available-for-Sale U.S. Government sponsored entity securities................ $31,866 $ 39,447 $ 25,183 Mortgage-backed securities......... 43,474 38,616 45,084 --------- --------- --------- Total securities available-for-sale $75,340 $ 78,063 $ 70,267 ========= ========= ========= Securities Held-to-Maturity Obligations of states of the U.S. and political subdivisions....... $ 16,946 $ 15,933 $ 13,293 Mortgage-backed securities......... 40 48 57 --------- --------- --------- Total securities held-to-maturity $ 16,986 $ 15,981 $ 13,350 ========= ========= ========= 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 Financial Condition and Results of Operations" located in Ohio Valley's 2008 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 were comprised of the following classifications at December 31: (dollars in thousands) 2008 2007 2006 2005 2004 ---- ---- ---- ---- ---- Residential real estate $252,693 $250,483 $238,549 $235,008 $227,234 Commercial 243,383 251,613 240,748 236,536 226,058 Consumer 126,911 127,832 139,961 145,815 146,965 All other 7,404 7,175 5,906 173 317 -------- -------- -------- -------- -------- $630,391 $637,103 $625,164 $617,532 $600,574 ======== ======== ======== ======== ======== 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 VI - Maturity and Repricing Data of Loans", within "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in Ohio Valley's 2008 Annual Report to Shareholders. 14 C. 1. Risk Elements - Gross interest income that would have been recorded on loans that were classified as nonaccrual or troubled debt restructurings is estimated to be $554,000 for the fiscal year ending December 31, 2008. The amount recorded on such loans was $490,000. Additional information required by this item is incorporated herein by reference to the information appearing under the caption "Table V - Summary of Nonperforming and Past Due Loans," within "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in Ohio Valley's 2008 Annual Report to Shareholders. 2. Potential Problem Loans - At December 31, 2008, there were approximately $1,404,000 of loans, which are not included in "Table V - Summary of Nonperforming and Past Due Loans" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in Ohio Valley's 2008 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, 2008, 2007 or 2006. 4. Loan Concentrations - As of December 31, 2008, there were no concentrations of loans greater than 10% of total loans which are not otherwise disclosed 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-Summary of Significant Accounting Policies" of the notes to the Company's consolidated financial statements for the fiscal year ended December 31, 2008, located in Ohio Valley's 2008 Annual Report to Shareholders which note is 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, 2008, there were no other interest-bearing assets that would be required to be disclosed under Item III.C. if such assets were loans. 15 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) 2008 2007 2006 2005 2004 ---- ---- ---- ---- ---- Balance, beginning of year $6,737 $9,412 $7,133 $7,177 $7,593 Loans charged off: Residential real estate 225 422 432 349 823 Commercial 1,164 4,002 3,079 1,295 1,661 Consumer 2,140 1,617 2,120 2,263 2,267 -------- -------- -------- -------- ------- Total loans charged off 3,529 6,041 5,631 3,907 4,751 Recoveries of loans: Residential real estate 61 166 204 336 583 Commercial 95 248 946 912 556 Consumer 719 700 1,097 818 843 -------- ------- -------- -------- ------- Total recoveries of loans 875 1,114 2,247 2,066 1,982 Net loan charge-offs (2,654) (4,927) (3,384) (1,841) (2,769) Provision charged to operations 3,716 2,252 5,663 1,797 2,353 -------- ------- -------- -------- ------- Balance, end of year $7,799 $6,737 $9,412 $7,133 $7,177 ======== ======= ======== ======== ======= Ratio of net charge-offs to average loans outstanding 1.24% .78% .54% .31% .47% ======== ======= ======== ======== ======= Ratio of allowance for loan losses to non-performing assets 78.25% 171.77% 61.54% 154.36% 142.46% ======== ======= ======== ======== ======= Discussion of factors that influenced management in determining the amount of additions charged to provision expense is incorporated herein by reference to the information appearing under the caption "Allowance for Loan Losses and Provision Expense" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in Ohio Valley's 2008 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 IV - Allocation of the Allowance for Loan Losses," within "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in Ohio Valley's 2008 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 Financial Condition and Results of Operations" located in Ohio Valley's 2008 Annual Report to Shareholders. 16 C.&E. Foreign Deposits - There were no foreign deposits outstanding at December 31, 2008, 2007, or 2006. D. Schedule of Maturities - The following table provides a summary of total time deposits by remaining maturities for the fiscal year ended December 31, 2008: 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 ................. $ 35,701 $ 12,372 $ 28,873 $ 32,753 Other time deposits of $100,000 or greater ................. 3,151 1,595 4,310 5,737 -------- -------- -------- -------- Total time deposits of $100,000 or greater ................. $ 38,852 $ 13,967 $ 33,183 $ 38,490 ======== ======== ======== ======== 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 Financial Condition and Results of Operations" located in Ohio Valley's 2008 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) 2008 2007 2006 ---- ---- ---- Balance outstanding at period-end .......... $ 24,070 $ 40,390 $ 22,556 -------- -------- -------- Weighted average interest rate at period-end .70% 2.91% 4.20% -------- -------- -------- Average amount outstanding during year ..... $ 28,040 $ 27,433 $ 22,692 -------- -------- -------- Approximate weighted average interest rate during the year ......................... 1.50% 3.83% 3.94% -------- -------- -------- Maximum amount outstanding as of any month-end ............................... $ 35,309 $ 40,390 $ 28,312 -------- -------- -------- ITEM 1A - RISK FACTORS Cautionary Statement Regarding 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, 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 Private Securities Litigation Reform Act. Examples of forward-looking statements include: (i) projections of income or expense, earnings 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 our management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying 17 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. The Private Securities Litigation Reform Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. We desire to take advantage of the "safe harbor" provisions of that Act. 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 those factors identified below. There is also the risk that Ohio Valley's management or Board of Directors incorrectly analyzes these risks and forces, or that the strategies Ohio Valley develops to address them are unsuccessful. Forward-looking statements speak only as of the date on which they are made, and, except as may be required by law, 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 in their entirety by the following cautionary statements. Difficult conditions in the financial markets may adversely affect our business and results of operations. Our financial performance depends on the quality of loans in our portfolio. That quality may be adversely affected by several factors, including underwriting procedures, collateral quality or geographic or industry conditions, as well as the recent deterioration in the financial markets. Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies and defaults, lack of consumer confidence, increased market volatility and widespread reduction of business activity. In addition, our credit risk may be increased when our collateral cannot be sold or is sold at prices not sufficient to recover the full amount of the loan balance. Deterioration in our ability to collect our loans receivable may adversely affect our profitability and financial condition. Federal and state governments could adopt laws responsive to the current credit conditions that would adversely affect our ability to collect on loans. Federal or state governments might adopt legislation or regulations reducing the amount that our customers are required to pay under existing loan contracts or limit our ability to foreclose on collateral. In addition, legislation has been proposed to give judges the ability to adjust the principal and interest payments on mortgages. FDIC insurance premiums may increase materially. The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at a certain level. Current economic conditions have increased bank failures and expectations for further failures, in which case the FDIC insures payments of deposits up to insured limits from the Deposit Insurance Fund. In 18 December 2008, the FDIC issued a rule that increased premiums paid by insured institutions. In February 2009, the FDIC announced adoption of an interim final rule imposing a one-time special assessment of 20 basis points and a final rule adjusting the risk-based calculation used to determine the premiums to be paid by each insured institution. Increases in deposit insurance premiums could adversely affect our net income. In addition, the FDIC has adopted the Temporary Liquidity Guarantee Program, pursuant to which it provides unlimited insurance on deposits in noninterest-bearing transaction accounts not otherwise covered by the existing deposit insurance limit of $250,000. After the initial 30 days of coverage for all insured institutions choosing to participate, any institution wishing to participate will pay a 10 basis point surcharge on the insured deposits. The Company has chosen to participate. Such participation will increase our expenses and decrease net income. Concern of customers over deposit insurance may cause a decrease in deposits at the Bank. With recent increased concerns about bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits from the Bank in an effort to ensure that the amount they have on deposit at the Bank is fully insured. Decreases in deposits may adversely affect our funding costs and net income. Changes in interest rates could have a material adverse effect on our financial condition and results of operations. Our earnings depend substantially on our interest rate spread, which is the difference between (i) the rates we earn on loans, securities and other earning assets and (ii) the interest rates we pay on deposits and other borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. While we have taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that such measures will be effective in avoiding undue interest rate risk. As market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits, which will result in a decrease of our net interest income and could have a material adverse effect on our financial condition and results of operations. Changes in economic and political conditions could adversely affect our earnings, as our borrowers' ability to repay loans and the value of the collateral securing our loans decline. Our success depends, to a certain extent, upon economic and political conditions, local and national, as well as governmental monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, money supply and other factors beyond our control may adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings. Because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. In addition, substantially all of our loans are to individuals and businesses in Ohio and West Virginia. Consequently, any decline in the economy of this market area could have a material adverse effect on our financial condition and results of operations. 19 Recent developments in the residential mortgage and related markets and the economy may adversely affect our business Recently, the residential mortgage market in the United States has been negatively impacted by several economic developments. Those developments include increasing interest rates and payments on adjustable-rate mortgages, decreasing housing values and increased credit standards for borrowers. As a result, delinquencies, foreclosures and losses with respect to residential construction and mortgage loans have increased and may continue to increase. Additionally, the lower housing prices and appraisal values may result in additional delinquencies and loan losses. While the residential real estate loans held in our portfolio are typically originated using conservative underwriting standards and do not include sub-prime loans, we do originate and hold fixed- and adjustable-rate loans and residential construction loans. If the residential loan market continues to deteriorate, especially in Ohio and our local markets, our financial condition and results of operation could be adversely affected. We operate in an extremely competitive market, and our business will suffer if we are unable to compete effectively. In our market area, we encounter significant competition from other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. Many of our competitors have substantially greater resources and lending limits than we do and may offer services that we do not or cannot provide. Our ability to maintain our history of strong financial performance and return on investment to shareholders will depend in part on our continued ability to compete successfully in our market area and on our ability to expand our scope of available financial services as needed to meet the needs and demands of our customers. Unfavorable local economic conditions could significantly affect our profitability. We currently have offices in Ohio and West Virginia. Consistent with our community banking philosophy, a majority of customers are located in and do business in that region, and we lend a substantial portion of our capital and resources to commercial and consumer borrowers in our local banking markets. Therefore, our local and regional economy has a direct impact on our ability to generate deposits to support loan growth, the demand for loans, the ability of borrowers to repay loans, the value of collateral securing our loans (particularly loans secured by real estate), and our ability to collect, liquidate and restructure problem loans. If the economies of our banking markets are adversely affected by a general economic downturn or by other specific events or trends, the resulting impact could have a direct adverse effect on our operating results. We are less able than larger financial institutions to spread risks of unfavorable local economic conditions across a large number of diversified economies. Our small to medium-sized business target market may have fewer financial resources to weather a downturn in the economy. We target our business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger companies. If general economic conditions negatively impact our Ohio and West Virginia markets or the other geographic markets in which we operate, our results of operations and financial condition may be negatively affected. 20 If our actual loan losses exceed our allowance for loan losses, our net income will decrease. Our loan customers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which could have a material adverse effect on our operating results. In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for loan defaults and non-performance, which when combined, we refer to as the allowance for loan losses. Our allowance for loan losses may not be adequate to cover actual credit losses, and future provisions for credit losses could have a material adverse effect on our operating results. Our allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. We cannot assure you that we will not further increase the allowance for loan losses or that regulators will not require us to increase this allowance. Either of these occurrences could have a material adverse effect on our financial condition and results of operations. We depend upon the accuracy and completeness of information about customers and counterparties, which might be misleading. In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information provided to us by customers and counterparties, including financial statements and other financial information. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a business, we may assume that the customer's audited financial statements conform with generally accepted accounting principles and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We may also rely on the audit report covering those financial statements. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with generally accepted accounting principles or that are materially misleading. Our earnings are significantly affected by the fiscal and monetary policies of the U.S. Government and its agencies, sometimes adversely. The policies of the Federal Reserve Board impact us significantly. The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are difficult to predict. Federal Reserve Board policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve Board could reduce the demand for a borrower's products and services. This could adversely affect the borrower's earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations. 21 Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the businesses in which we are engaged. The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds, and not to benefit our shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Additionally, actions by regulatory agencies or significant litigation against us could cause us to devote significant time and resources to defending our business and may lead to penalties that materially affect us and our shareholders. Proposals to change the laws governing financial institutions are frequently raised in Congress and before bank regulatory authorities. It is impossible to predict the ultimate form any proposed legislation might take or how it might affect us. Future changes in the laws or regulations or their interpretation or enforcement could be materially adverse to our business and our shareholders. If we foreclose on collateral property and own the underlying real estate, we may be subject to the increased costs associated with the ownership of real property, resulting in reduced revenues. We may have to foreclose on collateral property to protect our investment and may thereafter own and operate such property, in which case we will be exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to: (i) general or local economic conditions; (ii) neighborhood values; (iii) interest rates; (iv) real estate tax rates; (v) operating expenses of the mortgaged properties; (vi) supply of and demand for rental units or properties; (vii) ability to obtain and maintain adequate occupancy of the properties; (viii) zoning laws; (ix) governmental rules, regulations and fiscal policies; and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating a real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment, or we may be required to dispose of the real property at a loss. The foregoing expenditures and costs could adversely affect our ability to generate revenues, resulting in reduced levels of profitability. Environmental liability associated with commercial lending could have a material adverse effect on our business, financial condition and results of operations. In the course of our business, we may acquire, through foreclosure, commercial properties securing loans that are in default. There is a risk that hazardous substances could be discovered on those properties. In this event, we could be required to remove the substances from and remediate the properties at our cost and expense. The cost of removal and environmental remediation could be substantial. We may not have adequate remedies against the owners of the properties or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have a material adverse effect on our financial condition and results of operation. 22 Our business strategy includes growth plans. Our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. We intend to continue pursuing a profitable growth strategy. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. We cannot assure you that we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implement our business strategy. Also, if we grow more slowly than anticipated, our operating results could be materially adversely affected. Our ability to grow successfully will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or growth will be successfully managed. Our ability to pay cash dividends is limited, and we may be unable to pay cash dividends in the future even if we would like to do so. We are dependent primarily upon the earnings of our operating subsidiaries for funds to pay dividends on our common stock. The payment of dividends by us is also subject to certain regulatory restrictions. As a result, any payment of dividends in the future will be dependent, in large part, on our ability to satisfy these regulatory restrictions and our subsidiaries' earnings, capital requirements, financial condition and other factors. Although our financial earnings and financial condition have allowed us to declare and pay periodic cash dividends to our shareholders, there can be no assurance that our dividend policy or size of dividend distribution will continue in the future. Our failure to pay dividends on our common shares could have a material adverse effect on the market price of our common shares. The loss of key members of our senior management team could adversely affect our business. We believe that our success depends largely on the efforts and abilities of our senior management. Their experience and industry contacts significantly benefit us. In addition, our success depends in part upon senior management's ability to implement our business strategy. The competition for qualified personnel in the financial services industry is intense, and the loss of services of any of our senior executive officers or an inability to continue to attract, retain and motivate key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional qualified personnel. Loss of key employees may disrupt relationships with certain customers. Our business is primarily relationship-driven in that many of our key employees have extensive customer relationships. Loss of a key employee with such customer relationships may lead to the loss of business if the customers were to follow that employee to a competitor. While we believe our relationships with our key producers is good, we cannot guarantee that all of our key personnel will remain with our organization. Loss of such key personnel, should they enter into an employment relationship with one of our competitors, could result in the loss of some of our customers. 23 Consumers may decide not to use banks to complete their financial transactions. Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, consumers can now pay bills and transfer funds directly without banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. Management's accounting policies and methods are the basis of how we report our financial condition and results of operations, and these policies may require management to make estimates about matters that are inherently uncertain. Management's accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect management's judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in reporting materially different amounts than would have been reported under a different alternative. Management has identified several accounting policies as being "critical" to the presentation of our financial condition and results of operations because they require management to make particularly subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. Because of the inherent uncertainty of estimates about these matters, no assurance can be given that the application of alternative policies or methods might not result in our reporting materially different amounts. A limited trading market exists for our common shares, which could lead to price volatility. Your ability to sell or purchase our common shares depends upon the existence of an active trading market for our common shares. Although our common shares are quoted on The NASDAQ Global Market, the volume of trades on any given day has been limited historically. As a result, you may be unable to sell or purchase our common shares at the volume, price and time that you desire. Additionally, a fair valuation of the purchase or sales price of our common shares also depends upon an active trading market, and thus the price you receive for a thinly-traded stock such as our common shares, may not reflect its true value. The limited trading market for our common shares may cause fluctuations in the market value of our common shares to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, could severely harm our business. As part of our business, we collect, process and retain sensitive and confidential client and customer information on behalf of our subsidiaries and other third parties. Despite the security measures we have in place, our facilities and systems, and those of our third party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. 24 Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by us or by our vendors, could severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business. Our organizational documents may have the effect of discouraging a third party from acquiring us by means of a tender offer, proxy contest or otherwise. Our articles of incorporation contain provisions that make it more difficult for a third party to gain control or acquire us without the consent of our board of directors. These provisions also could discourage proxy contests and may make it more difficult for dissident shareholders to elect representatives as directors and take other corporate actions. These provisions of our governing documents may have the effect of delaying, deferring or preventing a transaction or a change in control that might be in the best interests of our shareholders. ITEM 1B - UNRESOLVED STAFF COMMENTS Ohio Valley did not receive any written comments from the staff of the Securities and Exchange Commission regarding its periodic or current reports under the Securities Exchange Act of 1934 within 180 days before the fiscal year ended December 31, 2008. 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.) and Waverly (Pike Co.) in Ohio and Milton (Cabell Co.) in West Virginia. The Bank leases eight additional financial service centers located in Gallipolis (Gallia Co.), Pomeroy (Meigs Co.), Columbus (Franklin Co.) and South Point (Lawrence Co.) in Ohio and Point Pleasant (Mason Co.), Huntington (Cabell Co.), and Milton (Cabell Co.) in West Virginia. The Bank also owns and operates twenty-five ATMs, including twelve off-site ATMs. Furthermore, the Bank owns a facility and leases two facilities 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 six offices located in Gallipolis (Gallia Co.), Jackson (Jackson Co.), Waverly (Pike Co.), South Point and Ironton (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" of the notes to the 25 Company's consoldiated financial statements for the fiscal year ended December 31, 2008, located in Ohio Valley's 2008 Annual Report to Shareholders. 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 2008 to a vote of security holders, by solicitation of proxies or otherwise. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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" and "Performance Graph" located in Ohio Valley's 2008 Annual Report to Shareholders and "Note P - Regulatory Matters" of the notes to the Company's consolidated financial statements for the fiscal year ended December 31, 2008 located in Ohio Valley's 2008 Annual Report to Shareholders. Ohio Valley did not sell any of its equity securities without registration during its 2008 fiscal year. The following table provides information on Ohio Valley's purchases of its common shares during the three fiscal months ended December 31, 2008:
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 Publicly Announced Under Publicly Announced Period Purchased Per Share Plans or Programs(1) Plans or Programs -------------------------- ------------- -------------- ---------------------- -------------------------- October 1 through October 31, 2008 ............. --- --- --- 97,147 November 1 through November 30, 2008 ............ --- --- --- 97,147 December 1 through December 31, 2008 ............ --- --- --- 97,147 ------------- ------------- ------------- ------------- TOTAL --- --- --- 97,147 ============= ============= ============= =============
(1) On January 15, 2008, Ohio Valley's Board of Directors announced its plan to repurchase up to 175,000 of its common shares between February 16, 2008 and February 15, 2009. 26 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 in Ohio Valley's 2008 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 with respect to Ohio Valley's interest rate risk is incorporated herein by reference to the information presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in Ohio Valley's 2008 Annual Report to Shareholders. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to interest rate risk, exchange rate risk, equity price risk and commodity price risk. Ohio Valley does not maintain a trading account for any class of financial instruments, and is not currently subject to foreign currency exchange rate risk, equity price risk or commodity price risk. Ohio Valley's market risk is composed primarily of interest rate 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" found within "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in Ohio Valley's 2008 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 Ohio Valley's 2008 Annual Report to Shareholders. The supplementary data "Consolidated Quarterly Financial Information (unaudited)" and the "Report of Independent Registered Public Accounting Firm on Financial Statements" located in Ohio Valley's 2008 Annual Report to Shareholders is also incorporated herein by reference. Consolidated Statements of Condition as of December 31, 2008 and 2007 Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2008, 2007 and 2006 Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 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 None. 27 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 President 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. Based on that evaluation, Ohio Valley's President and Chief Executive Officer and Vice President 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. Management's Report on Internal Control Over Financial Reporting "Management's Report on Internal Control Over Financial Reporting" located in Ohio Valley's 2008 Annual Report to Shareholders is incorporated into this Item 9A by reference. Report of Registered Public Accounting Firm The "Report of Independent Registered Public Accounting Firm" located in Ohio Valley's 2008 Annual Report to Shareholders is incorporated into this Item 9A by reference. Changes In Internal Control Over Financial Reporting 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, 2008, that have materially affected, or are reasonably likely to materially affect, Ohio Valley's internal control over financial reporting. ITEM 9B - OTHER INFORMATION None. 28 PART III ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required under this Item 10 by Items 401, 405, 406 and 407 (c)(3), (d)(4) and (d)(5) 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 May 13, 2009 (the "2009 Proxy Statement"), under the captions "Election of Directors", "Section 16(a) Beneficial Ownership Reporting Compliance" and "Compensation of Executive Officers and Directors" of the 2009 Proxy Statement. 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: Larry E. Miller, 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 captions "Compensation of Executive Officers and Directors" and "Compensation Committee Interlocks and Insider Participation" of the 2009 Proxy Statement. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 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" of the 2009 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, AND DIRECTOR INDEPENDENCE The information required under this Item 13 by Item 404 and Item 407(a) of SEC Regulation S-K is incorporated herein by reference to the information presented under the captions "Certain Relationships and Related Transactions" and "Proxy Item 1: Election of Directors" of the 2009 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" of the 2009 Proxy Statement. 29 PART IV ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES A. (1) Financial Statements The following consolidated financial statements of Ohio Valley appear in the 2008 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, 2008 and 2007 Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2008, 2007 and 2006 Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 Notes to the Consolidated Financial Statements Report of Independent Registered Public Accounting Firm on Financial Statements (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 32 of this Form 10-K. 30 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 13 , 2009 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 13, 2009 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 (principal executive Jeffrey E. Smith officer) /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/David W. Thomas Director - ----------------------------- David W. Thomas /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 /s/Robert E. Daniel Director - ----------------------------- Robert E. Daniel /s/Roger D. Williams Director - ----------------------------- Roger D. Williams 31 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 (reflects amendments through April 7, 1999) [for SEC reporting compliance only - not filed with the Ohio Secretary of State]: Incorporated herein by reference to Exhibit Exhibit 3(a) to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2007 (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 The Ohio Valley Bank Company Executive Group Life Split Dollar Plan agreement, dated April 29, 2003, 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, 2006 (SEC File No. 0-20914). 10.2 Schedule A to Exhibit 10.1 identifying other identical Executive Group Life Split Dollar agreements between The Ohio Valley Bank Company and certain 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, 2006 (SEC File No. 0-20914). 10.3 The Ohio Valley Bank Company Director Retirement agreement, dated December 28, 2007,between Jeffrey E. Smith 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, 2007 (SEC File No. 0-20914). 10.4 Schedule A to Exhibit 10.3 identifying other identical Director Retirement agreements between The Ohio Valley Bank Company and directors of Ohio Valley Banc Corp.: Filed herewith. 32 Exhibit Number Exhibit Description 10.5 The Ohio Valley Bank Company Salary Continuation agreement, dated January 12, 2004, 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, 2007 (SEC File No. 0-20914). 10.6(a) The Ohio Valley Bank Company Director Deferred Fee agreement, dated December 28, 2007,between Anna P. Barnitz and The Ohio Valley Bank Company: Incorporated herein by reference to Exhibit 10.6 (a) to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2007 (SEC File No. 0-20914). 10.6(b) The Ohio Valley Bank Company Executive Deferred Compensation agreement, dated December 28, 2007, between Jeffrey E. Smith and The Ohio Valley Bank Company: Incorporated herein by reference to Exhibit 10.6(b) to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2007 (SEC File No. 0-20914). 10.7(a) Schedule A to Exhibit 10.6(a) identifying other identical Director Deferred Fee agreements between The Ohio Valley Bank Company and directors of Ohio Valley Banc Corp.: Filed herewith. 10.7(b) Schedule A to Exhibit 10.6(b) identifying other identical Executive Deferred Compensation agreements between The Ohio Valley Bank Company and executive officers of Ohio Valley Banc Corp.: Incorporated herein by reference to Exhibit 10.7 (b) to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2007 (SEC File No. 0-20914). 10.8 Summary of Compensation for Directors and Named Executive Officers of Ohio Valley Banc Corp.: Filed herewith. 10.9 Summary of 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, 2008: Filed herewith. (Not deemed filed except for portions thereof specifically incorporated by reference into this Annual Report on Form 10-K.) 20 Proxy Statement for 2009 Annual Meeting of Shareholders: Incorporated herein by reference to the registrant's definitive proxy statement for the 2009 Annual Meeting of Shareholders to be filed. 33 Exhibit Number Exhibit Description 21 Subsidiaries of Ohio Valley: 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. EX-4 2 exhibit4.txt 12312008 EXHIBIT 4 OHIO VALLEY BANC CORP. 420 Third Avenue, PO Box 240 Gallipolis, OH 45631 (740) 446-2631 March 16, 2009 Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 RE: Ohio Valley Banc Corp. - Form 10-K for the fiscal year ended December 31, 2008 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, 2008 (the "Form 10-K"), as executed on March 16, 2009. 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_4.txt SCHEDULE A TO EX 10.3 DIRECTOR RETIREMENT EXHIBIT 10.4 SCHEDULE A TO EXHIBIT 10.3 The following individuals entered into Director Retirement Agreements with The Ohio Valley Bank Company identified below which are identical to the Director Retirement Agreement, dated December 28, 2007, between Jeffrey E. Smith 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, 2007 (SEC File No. 0-20914). Date of Name Director Retirement Agreement - ---- ----------------------------- Anna P. Barnitz December 28, 2007 Steven B. Chapman December 28, 2007 Robert E. Daniel December 28, 2007 Robert H. Eastman December 28, 2007 Harold A. Howe December 28, 2007 David W. Thomas June 17, 2008 Brent A. Saunders October 16, 2007 Roger D. Williams October 16, 2007 Lannes C. Williamson December 28, 2007 Thomas E. Wiseman December 28, 2007 EX-10 4 exhibit10_7a.txt SCHEDULE A TO EX 106A DIRECTOR DEFERRED EXHIBIT 10.7(a) SCHEDULE A TO EXHIBIT 10.6(a) The following individuals entered into Director Deferred Fee Agreements with The Ohio Valley Bank Company identified below which are identical to the Director Deferred Fee Agreement, dated December 28, 2007, between Anna P. Barnitz and The Ohio Valley Bank Company incorporated herein by reference to Exhibit 10.6(a) to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2007 (SEC File No. 0-20914). Date of Name Director Deferred Fee Agreements - ---- -------------------------------- Steven B. Chapman December 28, 2007 Robert E. Daniel December 28, 2007 Robert H. Eastman December 28, 2007 Harold A. Howe December 28, 2007 Brent A. Saunders October 16, 2007 David W. Thomas June 17, 2008 Roger D. Williams December 28, 2007 Lannes C. Williamson December 28, 2007 Thomas E. Wiseman December 28, 2007 EX-10 5 exhibit10_8.txt SUMMARYOFCOMPENSATIONFORDIRECTORS12312008 EXHIBIT 10.8 SUMMARY OF COMPENSATION FOR DIRECTORS AND NAMED EXECUTIVE OFFICERS OF OHIO VALLEY BANC CORP. Directors - --------- 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 $14,700 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 maintains a life insurance policy for all directors with a death benefit of two times annual director fees as part of the Bank's group term life insurance program. The Bank also maintains a Director Retirement Plan for all directors of the Bank and a Deferred Compensation Plan for all directors and executive officers of the Bank. These documents are filed as Exhibit 10.1, Exhibit 10.3, Exhibit 10.6(a) and Exhibit 10.6(b), respectively, to Ohio Valley's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (SEC File No. 0-20914). Named Executive Officers - ------------------------ The following sets forth the current salaries of the executive officers of Ohio Valley named in the Summary Compensation Table in Ohio Valley's proxy statement (the "Named Executive Officers"): Name Current Salary - ----------------- -------------- Jeffrey E. Smith $177,834 Scott W. Shockey 98,505 Katrinka V. Hart 121,321 E. Richard Mahan 121,268 Larry E. Miller, II 121,321 Certain Named Executive Officers are entitled to participate in several benefit arrangements, including the Ohio Valley Banc Corp. Bonus Program, the Ohio Valley Bank Company Executive Group Life Split Dollar Plan, the Executive Deferred Compensation Plan, and a supplemental executive retirement plan (currently only for Mr. Smith), as set forth in exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6(a), 10.6(b), 10.7(a), 10.7(b), 10.8 and 10.9 to Ohio Valley's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, SEC File No. 0-20914. In addition, Named Executive Officers are entitled to participate in various benefit plans available to all employees, including a Profit Sharing Retirement Plan, a 401(k) plan, an employee stock ownership plan, group term life insurance, health insurance, disability insurance and a flexible compensation/cafeteria plan, all as described in Ohio Valley's proxy statement for its 2009 annual meeting of shareholders. EX-10 6 exhibit10_9.txt SUMMARY OF BONUS PROGRAM 12312008 EXHIBIT 10.9 SUMMARY OF BONUS PROGRAM OF OHIO VALLEY BANC CORP. The following is a description of the 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 component of the Company's compensation program are to: (a) motivate executive officers and other employees and reward such persons for the accomplishment of both annual and long range goals of the Company and its subsidiaries, (b) reinforce a strong performance orientation with differentiation and variability in individual awards based on contribution to long-range business results and (c) provide a fully competitive compensation package which will attract, reward, and retain individuals of the highest quality. All employees of the Company's subsidiaries holding positions with a pay grade of 8 or above are eligible to participate in the Bonus Program, including all subsidiaries' executive officers. Bonuses payable to participants in the Bonus Program are based on (a) the performance of the Company and its subsidiaries as measured against specific 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, the Compensation Committee sets specific performance targets for the Company and its subsidiaries based on a combination of some or all of a number of performance criteria set forth in the Company's strategic plan. The Compensation Committee may establish two sets of targets, one set of which is higher and less likely to be achieved, referred to as the "annual bonus targets". A second set, referred to as the "long range bonus targets" is more likely to be achieved. The targets are based on one or more of the following performance criteria: net income, net income per share, return on assets, return on equity, asset quality (as measured by the ratio of non-performing loans to total loans and non-performing assets to total assets), and efficiency ratio. It is the objective of the Compensation Committee to establish goals that are "reaching" but "reachable". The Committee may not consider the goals to be of equal weight, but, in the aggregate, it considers them to be fundamental metrics which are important to the long-term performance of the Company and which, at the same time, do not expose the Company, nor incent the employees to undertake, excessive risks which would threaten the Company's long-term value. At the end of the fiscal year, the aggregate amount available for the payment of a bonus, if any at all, is determined by the Company's Board of Directors upon recommendation of its Compensation Committee based on an evaluation of the accomplishment of the performance targets. A bonus may be paid at the end of the year without targets having been established or achieved. No officer or employee has any right to the payment of a bonus until the Board of Directors has exercised its discretion to award one and the amount to be paid to each person has been determined and announced. 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", reflecting the individual employee's job grade, the market place range of compensation for that job grade, and individual job performance using the Evaluation Criteria referenced above. Employees are evaluated by their supervisors, except for the executive officers, who are evaluated by the Compensation Committee of the Company's Board of Directors. The Company's Board of Directors approves the bonuses payable to the executive officers under the Bonus Program based upon the recommendation of the Compensation Committee. Bonuses are normally paid in December in cash in a single lump sum, subject to payroll taxes and tax withholdings. EX-13 7 annualreport2008.txt ANNUAL REPORT 12312008 Message from Management Dear Fellow Shareholder, The objective of the report that follows is to share in particular detail "what" your company did in the calendar year 2008. The objective of this letter is to share "how" your company did it. In summary, "what" your company did, among other things, was earn $7,128,000, an increase of 13.2%, or $1.77 per share, an increase of 16.4%. What I am particularly pleased to share with you is "how" the more than 275 employees of your company did it: safely, soundly, and securely. On the date I write this letter, I read these headlines: Economy in Worst Fall Since '82*, Citi, U.S. Reach Accord on a Third Bailout*, and FDIC Sets Fee Increases to Refill Its Coffers.* I suspect the one word used more often in 2008 than any other is "unprecedented": unprecedented losses, unprecedented scandals, unprecedented turmoil. There are approximately 8,300 commercial banks in the United States. Most, like yours, don't do business in New York, Los Angeles, San Francisco, or Atlanta. They, as we, would rather do their business on Main Street than Wall Street. Nevertheless, some of the banks from Wall Street have been making unprecedented loans in our community in recent years and experiencing more than their share of foreclosures right here in our community. In 2008, there were 86 real estate foreclosures in Gallia County, Ohio. Seven financial institutions accounted for 46 - over half - of those foreclosures, and six of those seven financial institutions do not even have an office in Gallia County! Only nine of the remaining 40 foreclosures can be attributed to four financial institutions with local offices. Unfortunately, our entire community suffers from foreclosures as our property values drop. The increasing foreclosure rate and loan quality problems of some banks nationwide are affecting, among other things, FDIC insurance. The FDIC is celebrating its 75th year of deposit insurance coverage. On January 1, 1934, the FDIC insured depositors up to $2,500; on January 1, 2009, 75 years later, the FDIC was insuring depositors up to $250,000. During that time, not one depositor has lost a dime of insured deposits. I mention that for two reasons: first, as a depositor, your insured deposits are safe; as a shareholder, your company will be paying higher FDIC premiums in 2009. As you know with our own auto insurance, those of us who don't drive drunk pay for those who do. In the banking industry, I'm sorry to say, there have been a few "drunk drivers". At Ohio Valley Bank, your company's primary subsidiary, we're going to be paying more to insure your deposits. While we'll gladly pay higher premiums on behalf of tens of thousands of depositors, as one of our Executive Vice Presidents recently said, "We'll also be looking for our 'safe driver discount'". It's not the community banking organizations that have created the mortgage mess that has led to a credit crisis; however, we'll all be paying to clean it up. Lastly, may I leave you with some thoughts on share performance. While your management team is not satisfied with our share performance in 2008, we believe your company has been recognized for its performance when compared to not only peer banks, but also other public non-financial companies. Please view Ohio Valley Banc Corp's "Total Return Performance" on the following page. This report gives an objective comparison of your companies' five-year cumulative total return to an independent index of peer banks as well as the S&P 500. I invite your attention once again to the cover of this Annual Report. At Ohio Valley Banc Corp, we understand that we become successful only through the interdependent support of our customers, shareholders, and employees. Our safety, security, and soundness is a result of the talent, dedication, and service that make up the assets behind the vault door. Sincerely, Jeffrey E. Smith President and CEO Ohio Valley Banc Corp. *Wall Street Journal-February 28, 2009 PERFORMANCE TOTAL RETURN PERFORMANCE Year ended December 31, 2008 This is a comparison of five-year cumulative total returns among Ohio Valley Banc Corp.'s common shares, the S & P 500 Index, and SNL $500 Million-$1 Billion Bank Asset-Size Index. The SNL Index represents stock performance of 94 of the nation's banks located throughout the United States with total assets between $500 Million and $1 Billion (including Ohio Valley Banc Corp.) Calculations are based on an investment of $100 on December 31, 2003 and assumes reinvestment of dividends. Period Ending ---------------------------------------------------------- 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 -------- -------- -------- -------- -------- -------- OVBC $100.00 $126.58 $124.66 $128.24 $131.47 $101.76 SNL $500M-$1B $100.00 $113.32 $118.18 $134.41 $107.71 $ 69.02 S&P 500 $100.00 $110.88 $116.33 $134.70 $142.10 $ 89.53 10-K Information A copy of Ohio Valley Banc Corp.'s annual report on Form 10-K, as filed with the Securities and Exchange Commission, will be forwarded without charge to any shareholder upon written request to: Ohio Valley Banc Corp., Attention: Larry E. Miller, Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and proxy statement are also available on the company's Web site, www.ovbc.com. Contact Information Ohio Valley Banc Corp. 420 Third Avenue, P.O. Box 240, Gallipolis, Ohio 45631 740.446.2631 or 800.468.6682 Web: www.ovbc.com E-mail: investorrelations@ovbc.com BUSINESS PROFILE Ohio Valley Banc Corp. commenced operations on October 23, 1992, as a one-bank holding company with The Ohio Valley Bank Company being the wholly-owned subsidiary. The Company's headquarters are located at 420 Third Avenue in Gallipolis, Ohio. The Ohio Valley Bank Company was organized on September 24, 1872. The Bank is insured under the Federal Deposit Insurance Act and is chartered under the banking laws of the State of Ohio. In April 1996, the Banc Corp. opened a consumer finance company operating under the name of Loan Central, Inc. Ohio Valley Financial Services, an agency specializing in life insurance, was formed as a subsidiary of the Corp. in June 2000. The Corp. also has minority holdings in ProAlliance. OVBC OFFICERS Jeffrey E. Smith, President and CEO E. Richard Mahan, Senior Vice President & Chief Credit Officer Larry E. Miller, II, Senior Vice President & Secretary Katrinka V. Hart, Senior Vice President & Risk Management Mario P. Liberatore, Vice President Cherie A. Barr, Vice President Sandra L. Edwards, Vice President David L. Shaffer, Vice President Jennifer L. Osborne, Vice President Tom R. Shepherd, Vice President Scott W. Shockey, Vice President & Chief Financial Officer Bryan F. Stepp, Vice President Paula W. Clay, Assistant Secretary Cindy H. Johnston, Assistant Secretary OVBC DIRECTORS Jeffrey E. Smith President & CEO, Ohio Valley Banc Corp. Thomas E. Wiseman President, The Wiseman Agency, Inc, insurance and financial services Robert H. Eastman President, Ohio Valley Supermarkets, Inc. retail grocery stores Lannes C. Williamson President, L. Williamson Pallets, Inc. sawmill, pallet manufacturing, and wood processing Steven B. Chapman Certified Public Accountant, Chapman & Burris CPAs, LLC Anna P. Barnitz Treasurer & CFO, Bob's Market & Greenhouses, Inc. wholesale horticultural products and retail landscaping stores Brent A. Saunders Attorney, Halliday, Sheets & Saunders Harold A. Howe President, Ohio Valley Financial Services Agency, LLC Robert E. Daniel Administrator, Holzer Clinic multispecialty physician group practice Roger D. Williams President, Bob Evans Restaurants restaurant operator and food products David W. Thomas Former Chief Examiner, Ohio Division of Financial Institutions bank supervision and regulation DIRECTORS EMERITUS W. Lowell Call Barney A. Molnar James L. Dailey C. Leon Saunders Art E. Hartley, Sr. Wendell B. Thomas Charles C. Lanham The year 2008 proved to be full of challenges for not just Ohio Valley Banc Corp., but for financial institutions across the country. OVBC chose to concentrate on efficiency and opportunities. Ohio Valley Banc Corp. introduced the first new service of the year. NetInvestor debuted to excited shareholders in January 2008. The online service allows shareholders to securely access their OVBC stock information 24/7. The service also makes it easier to make mailing address changes, print 1099-Div forms, receive statements, and verify proxy votes. Ohio Valley Bank launched CellTeller mobile banking in July. Using CellTeller, bank customers can access their accounts, make transfers, and pay bills from their cell phone or other mobile device. A focus on efficiency led to the closing of one office and the opening of another in August of 2008. The Ohio Valley Bank office located inside the Cross Lanes (W.Va.) Walmart was closed. This closing was part of management's strategic decision to reassign resources to the company's core market areas including nearby Cabell County, where the bank has established both a traditional branch office and an in-store Walmart branch. That same month, a new Loan Production Office opened its doors in the Walmart Plaza in Gallipolis (Ohio) and the Ohio Valley Bank office inside the Gallipolis Walmart was remodeled. The new loan production office improved resources for the heavy traffic received at the Ohio Valley Bank inside the Gallipolis Walmart. At a time when other banks were starting to restrict their lending, Ohio Valley Bank made this bold commitment to show the community that it has money to lend. In fact, later in August, Ohio Valley Bank expanded its online lending services to include credit cards. Ohio Valley Banc Corp.'s leadership was recognized nationally in December 2008, when the American Bankers Association selected President and CEO Jeffrey E. Smith as one of only 100 bankers to serve on the national America's Community Bankers Council. "This is an opportunity to let our voice be heard on national issues that also affect us locally. This is an historic opportunity for us," Smith commented. Earlier in 2008, Smith received the Bud and Donna McGhee Award, the highest honor bestowed by the Gallia County Chamber of Commerce. Ohio Valley Banc Corp. stock is traded on The NASDAQ Stock Market under the symbol OVBC. Loan Production Office Ribbon-Cutting As is tradition for every new OVB office opened, the ribbon for the ceremony is made up of actual currency which is then donated to a deserving charity. The American Cancer Society Relay for Life of Gallia County was the receiving charity for this office opening. Remodeled OVB at Gallipolis Walmart The newly remodeled Ohio Valley Bank located inside the Gallipolis Walmart offers improved privacy, more teller windows, and a sleek new design. Increased e-Services 2008 brought the advent of NetInvestor, CellTeller, and online credit cards. An unique partnership with the Columbus Zoo & Aquarium increased usage of eDelivery paperless bank statements. OHIO VALLEY BANK OHIO VALLEY BANK DIRECTORS Jeffrey E. Smith Anna P. Barnitz Thomas E. Wiseman Brent A. Saunders Robert H. Eastman Robert E. Daniel Lannes C. Williamson Roger D. Williams Harold A. Howe David W. Thomas Steven B. Chapman OHIO VALLEY BANK OFFICERS Jeffrey E. Smith President & Chief Executive Officer E. Richard Mahan Executive Vice President & Chief Credit Officer Larry E. Miller, II Executive Vice President & Secretary Katrinka V. Hart Executive Vice President & Risk Management SENIOR VICE PRESIDENTS Mario P. Liberatore West Virginia Bank Group Sandra L. Edwards Financial Bank Group David L. Shaffer Commercial Bank Group Jennifer L. Osborne Retail Lending Group Tom R. Shepherd Chief Deposit Officer Scott W. Shockey Chief Financial Officer Bryan F. Stepp Commercial Lending VICE PRESIDENTS Patricia L. Davis Research & Technical Applications Richard D. Scott Trust Bryan W. Martin Facilities & Technical Services Patrick H. Tackett Western Division Branch Administrator Molly K. Tarbett Loss Prevention Manager Marilyn E. Kearns Director of Human Resources David K. Nadler Financial Analyst & Strategic Plan Coordinator Fred K. Mavis Business Development Officer ASSISTANT VICE PRESIDENTS Philip E. Miller Region Manager Franklin County Rick A. Swain Region Manager Pike County Judith K. Hall Regional Branch Administrator Gallia/Meigs Melissa P. Mason Trust Officer Diana L. Parks Internal Auditor Christopher S. Petro Comptroller Linda L. Plymale Transit Officer Kimberly R. Williams Systems Officer Deborah A. Carhart Shareholder Relations Gregory A. Phillips Indirect Lending Manager Pamela D. Edwards Commercial Loan Operations Paula W. Clay Assistant Secretary Cindy H. Johnston Assistant Secretary Christopher L. Preston Regional Branch Administrator I-64 Angela G. King Regional Branch Administrator Gallia/Meigs Frank W. Davison Chief Information Officer Bryna S. Butler Director e-Services and Corporate Communications Kyla R. Carpenter Director of Marketing William T. Johnson Enterprise Risk Analyst Toby M. Mannering Collection Manager Joe J. Wyant Region Manager Jackson County Allen W. Elliott Bank Card Manager ASSISTANT CASHIERS Brenda G. Henson Manager Customer Service Richard P. Speirs Maintenance Technical Supervisor Stephanie L. Stover Retail Lending Operations Manager Raymond G. Polcyn Retail Lending Manager Gallia-Meigs SuperBanks Tyrone J. Thomas Assistant Manager Franklin County Region Tamela D. LeMaster Regional Branch Manager I-64 Linda L. Hart Assistant Manager Waverly Office Miquel D. McCleese Assistant Manager Columbus Office Randall L. Hammond Security Officer OHIO VALLEY BANK 16 locations Gallipolis, Ohio Main Office - 420 Third Ave. Mini Bank - 437 Fourth Ave. Inside Foodland - 236 Second Ave. Inside Walmart - 2145 Eastern Ave. 3035 State Route 160 Inside Holzer - 100 Jackson Pike Loan Office - Walmart Plaza, 2145 Eastern Ave. Columbus, Ohio 3700 South High St. Jackson, Ohio 740 East Main St. Pomeroy, Ohio Inside Sav-a-Lot - 700 W. Main St. Rio Grande, Ohio 27 North College Ave. South Point, Ohio Inside Walmart - 354 Private Drive Waverly, Ohio 507 West Emmitt Ave. Huntington, West Virginia 3331 U.S. Route 60 East Milton, West Virginia 280 East Main St. Point Pleasant, West Virginia 328 Viand St. Web Branch www.ovbc.com www.ohiovalleybank.com WEST VIRGINIA ADVISORY BOARD Mario P. Liberatore Lannes C. Williamson Anna P. Barnitz John C. Musgrave Richard L. Handley Stephen L. Johnson Gregory K. Hartley E. Allen Bell Trenton M. Stover John A. Myers LOAN CENTRAL LOAN CENTRAL OFFICERS Katrinka V. Hart Chairman of the Board Cherie A. Barr President Timothy R. Brumfield Secretary & Manager, Gallipolis Office T. Joe Wilson Manager, South Point Office Deborah G. Moore Manager, Jackson Office Joseph I. Jones Manager, Waverly Office John J. Holtzapfel Manager, Wheelersburg Office Loan Central booked a record number of tax refund loans in 2008 and completed preparations to expand its offering in 2009 to include three tax refund loan and preparation options. Other seasonal programs, such as Back to School loans and Christmas cash, have proven successful for the finance company. A total of 4,670 loans were originated by Loan Central in 2008. Their friendly, fast service and convenient hours set them apart from the competition. LOAN CENRAL 6 locations Gallipolis, Ohio 2145 Eastern Avenue Jackson, Ohio 345 Main Street Ironton, Ohio 710 Park Avenue South Point, Ohio 348 County Road 410 Waverly, Ohio 505 West Emmitt Avenue Wheelersburg, Ohio 326 Center Street Loan Central Tax Refund Loan Growth Period Ending -------------------------------------- 2005 2006 2007 2008 -------- -------- -------- -------- Number of Tax Refund Loans Originated 868 1,368 1,495 2,027 SELECTED FINANCIAL DATA Years Ended December 31 2008 2007 2006 2005 2004 (dollars in thousands, except ------ ------ ------ ------ ------ share and per share data) SUMMARY OF OPERATIONS: Total interest income $ 51,533 $ 54,947 $ 52,421 $ 46,071 $ 43,490 Total interest expense 20,828 26,420 23,931 18,137 16,146 Net interest income 30,705 28,527 28,490 27,934 27,344 Provision for loan losses 3,716 2,252 5,662 1,797 2,353 Total other income 6,211 5,236 5,830 5,522 7,992 Total other expenses 23,343 22,583 21,199 21,359 20,926 Income before income taxes 9,857 8,928 7,459 10,300 12,057 Income taxes 2,729 2,631 2,061 3,283 3,676 Net income 7,128 6,297 5,398 7,017 8,381 PER SHARE DATA(1): Earnings per share $ 1.77 $ 1.52 $ 1.27 $ 1.64 $ 1.93 Cash dividends declared per share $ .76 $ .71 $ .67 $ .63 $ .75 Book value per share $15.83 $15.10 $14.38 $13.90 $13.19 Weighted average number of common shares outstanding 4,018,367 4,131,621 4,230,551 4,278,562 4,338,598 AVERAGE BALANCE SUMMARY: Total loans $ 629,225 $ 628,891 $ 626,418 $ 599,345 $ 590,006 Securities (2) 101,100 91,724 86,179 84,089 86,598 Deposits 606,126 595,610 585,301 542,730 537,162 Other borrowed funds (3) 74,178 74,196 81,975 92,520 96,361 Shareholders' equity 61,346 60,549 59,970 57,620 55,788 Total assets 782,312 769,554 760,932 726,489 722,281 PERIOD END BALANCES: Total loans $ 630,391 $ 637,103 $ 625,164 $ 617,532 $ 600,574 Securities (2) 99,218 100,713 90,161 84,623 86,674 Deposits 592,361 589,026 593,786 562,866 535,153 Shareholders' equity 63,056 61,511 60,282 59,271 56,579 Total assets 781,108 783,418 764,361 749,719 729,120 KEY RATIOS: Return on average assets .91% .82% .71% .97% 1.16% Return on average equity 11.62% 10.40% 9.00% 12.18% 15.02% Dividend payout ratio 42.94% 46.66% 52.56% 38.55% 38.89% Average equity to average assets 7.84% 7.87% 7.88% 7.93% 7.72% (1) Restated for stock splits as appropriate. (2) Securities include interest-bearing balances with banks and FHLB stock. (3) Other borrowed funds include subordinated debentures. 1 CONSOLIDATED STATEMENTS OF CONDITION As of December 31 2008 2007 ---- ---- (dollars in thousands, except share and per share data) ASSETS Cash and noninterest-bearing deposits with banks $ 16,650 $ 15,584 Federal funds sold 1,031 1,310 --------- --------- Total cash and cash equivalents 17,681 16,894 Interest-bearing deposits in other financial institutions 611 633 Securities available-for-sale 75,340 78,063 Securities held-to-maturity (estimated fair value: 2008 - $17,241, 2007 - $15,764) 16,986 15,981 Federal Home Loan Bank stock 6,281 6,036 Total loans 630,391 637,103 Less: Allowance for loan losses (7,799) (6,737) --------- --------- Net loans 622,592 630,366 Premises and equipment, net 10,232 9,871 Accrued income receivable 3,172 3,254 Goodwill 1,267 1,267 Bank owned life insurance 18,153 16,339 Other assets 8,793 4,714 --------- --------- Total assets $ 781,108 $ 783,418 ========= ========= LIABILITIES Noninterest-bearing deposits $ 85,506 $ 78,589 Interest-bearing deposits 506,855 510,437 --------- --------- Total deposits 592,361 589,026 Securities sold under agreements to repurchase 24,070 40,390 Other borrowed funds 76,774 67,002 Subordinated debentures 13,500 13,500 Accrued liabilities 11,347 11,989 --------- --------- Total liabilities 718,052 721,907 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES (See Note K) SHAREHOLDERS' EQUITY Common stock ($1.00 par value per share, 10,000,000 shares authorized; 2008 - 4,642,748 shares issued; 2007 - 4,641,747 shares issued) 4,643 4,642 Additional paid-in capital 32,683 32,664 Retained earnings 40,752 37,763 Accumulated other comprehensive gain (loss) 690 (115) Treasury stock, at cost (2008 - 659,739 shares; 2007 - 567,403 shares) (15,712) (13,443) --------- --------- Total shareholders' equity 63,056 61,511 --------- --------- Total liabilities and shareholders' equity $ 781,108 $ 783,418 ========= ========= See accompanying notes to consolidated financial statements 2 CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31 2008 2007 2006 ------------------------------- ---- ---- ---- (dollars in thousands, except per share data) Interest and dividend income: Loans, including fees $ 47,272 $ 50,671 $ 48,514 Securities: Taxable 3,109 3,079 2,851 Tax exempt 535 555 474 Dividends 323 398 339 Other interest 294 244 243 -------- -------- -------- 51,533 54,947 52,421 Interest expense: Deposits 16,636 21,315 18,594 Securities sold under agreements to repurchase 421 1,051 895 Other borrowed funds 2,682 2,911 3,163 Subordinated debentures 1,089 1,143 1,279 -------- -------- -------- 20,828 26,420 23,931 -------- -------- -------- Net interest income 30,705 28,527 28,490 Provision for loan losses 3,716 2,252 5,662 Net interest income after provision -------- -------- -------- for loan losses 26,989 26,275 22,828 -------- -------- -------- Noninterest income: Service charges on deposit accounts 3,073 2,982 2,987 Trust fees 240 230 221 Income from bank owned life insurance 775 757 907 Gain on sale of loans 127 102 104 Loss on sale of other real estate owned (31) (777) (55) Other 2,027 1,942 1,666 -------- -------- -------- 6,211 5,236 5,830 Noninterest expense: Salaries and employee benefits 14,075 13,045 12,497 Occupancy 1,562 1,467 1,338 Furniture and equipment 1,048 1,086 1,120 Corporation franchise tax 606 671 669 Data processing 773 844 687 Other 5,279 5,470 4,888 -------- -------- -------- 23,343 22,583 21,199 -------- -------- -------- Income before income taxes 9,857 8,928 7,459 Provision for income taxes 2,729 2,631 2,061 -------- -------- -------- NET INCOME $ 7,128 $ 6,297 $ 5,398 ======== ======== ======== Earnings per share $ 1.77 $ 1.52 $ 1.27 ======== ======== ======== See accompanying notes to consolidated financial statements 3 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2008, 2007 and 2006 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, 2006 $ 4,626 $32,282 $31,843 $(1,231) $ (8,249) $59,271 Comprehensive income: Net income --- --- 5,398 --- --- 5,398 Change in unrealized loss on available-for-sale securities --- --- --- 379 --- 379 Income tax effect --- --- --- (129) --- (129) ------- Total comprehensive income --- --- --- --- --- 5,648 Common stock issued through dividend reinvestment, 4 shares --- --- --- --- --- --- Cash dividends, $.67 per share --- --- (2,837) --- --- (2,837) Shares acquired for treasury, 71,487 shares --- --- --- --- (1,800) (1,800) ------- ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 2006 4,626 32,282 34,404 (981) (10,049) 60,282 Comprehensive income: Net income --- --- 6,297 --- --- 6,297 Change in unrealized loss on available-for-sale securities --- --- --- 1,313 --- 1,313 Income tax effect --- --- --- (447) --- (447) ------- Total comprehensive income --- --- --- --- --- 7,163 Common stock issued to ESOP, 9,500 shares 10 238 --- --- --- 248 Common stock issued through dividend reinvestment, 5,907 shares 6 144 --- --- --- 150 Cash dividends, $.71 per share --- --- (2,938) --- --- (2,938) Shares acquired for treasury, 134,551 shares--- --- --- --- (3,394) (3,394) ------- ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 2007 4,642 32,664 37,763 (115) (13,443) 61,511 Comprehensive income: Net income --- --- 7,128 --- --- 7,128 Change in unrealized loss on available-for-sale securities --- --- --- 1,220 --- 1,220 Income tax effect --- --- --- (415) --- (415) ------- Total comprehensive income --- --- --- --- --- 7,933 Common stock issued to ESOP, 1,000 shares 1 19 --- --- --- 20 Common stock issued through dividend reinvestment, 1 share --- --- --- --- --- --- Cash dividends, $.76 per share --- --- (3,061) --- --- (3,061) Shares acquired for treasury, 92,336 shares --- --- --- --- (2,269) (2,269) Cumulative-effect adjustment in adopting EITF No. 06-04 --- --- (1,078) --- --- (1,078) ------- ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 2008 $ 4,643 $32,683 $40,752 $ 690 $(15,712) $63,056 ======= ======= ======= ======= ======== =======
See accompanying notes to consolidated financial statements 4 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2008 2007 2006 ------------------------------- ---- ---- ---- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,128 $ 6,297 $ 5,398 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 939 987 1,021 Net amortization and accretion of securities 101 66 94 Proceeds from sale of loans in secondary market 11,703 4,300 4,038 Loans disbursed for sale in secondary market (11,576) (4,198) (3,933) Gain on sale of loans (127) (102) (104) Deferred tax (benefit) expense (102) 908 (903) Provision for loan losses 3,716 2,252 5,662 Common stock issued to ESOP 20 248 --- Federal Home Loan Bank stock dividend (245) --- (338) Loss on sale of other real estate owned 31 777 55 Change in accrued income receivable 82 (20) (415) Change in accrued liabilities (1,720) 1,298 1,852 Change in other assets (601) (1,528) (290) ------- ------- ------- Net cash provided by operating activities 9,349 11,285 12,137 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 24,643 8,969 12,261 Purchases of securities available-for-sale (20,792) (15,509) (15,907) Proceeds from maturities of securities held-to-maturity 2,046 1,009 354 Purchases of securities held-to-maturity (3,060) (3,649) (1,625) Change in interest-bearing deposits in other banks 22 (125) 2 Net change in loans (991) (19,498) (11,589) Proceeds from sale of other real estate owned 617 4,274 734 Purchases of premises and equipment (1,300) (1,046) (2,534) Proceeds from bank owned life insurance --- 71 174 Purchases of bank owned life insurance (1,204) --- --- ------- ------- ------- Net cash used in investing activities (19) (25,504) (18,130) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in deposits 3,335 (4,760) 30,920 Cash dividends (3,061) (2,938) (2,837) Proceeds from issuance of common stock --- 150 --- Purchases of treasury stock (2,269) (3,394) (1,800) Change in securities sold under agreements to repurchase (16,320) 17,834 (6,514) Proceeds from Federal Home Loan Bank borrowings 13,000 20,000 5,000 Repayment of Federal Home Loan Bank borrowings (16,014) (14,061) (22,146) Change in other short-term borrowings 12,786 (2,483) 4,519 Proceeds from subordinated debentures --- 8,500 --- Repayment of subordinated debentures --- (8,500) --- ------- ------- ------- Net cash provided by (used in) financing activities (8,543) 10,348 7,142 ------- ------- ------- CASH AND CASH EQUIVALENTS: Change in cash and cash equivalents 787 (3,871) 1,149 Cash and cash equivalents at beginning of year 16,894 20,765 19,616 ------- ------- ------- Cash and cash equivalents at end of year $17,681 $16,894 $20,765 ======= ======= ======= SUPPLEMENTAL DISCLOSURE: Cash paid for interest $22,637 $25,854 $22,014 Cash paid for income taxes 2,827 878 3,623 Non-cash transfers from loans to other real estate owned 5,049 2,632 573
See accompanying notes to consolidated financial statements 5 [ THIS PAGE INTENTIONALLY LEFT BLANK ] NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Amounts are in thousands, except share and per share data Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: Ohio Valley Banc Corp. ("Ohio Valley") is a financial holding company registered under the Bank Holding Company Act of 1956. Ohio Valley has one banking subsidiary, The Ohio Valley Bank Company (the "Bank"), as well as a subsidiary that engages in consumer lending to individuals with higher credit risk history and a subsidiary insurance agency which sells life insurance. The Company provides a full range of commercial and retail banking services from 21 offices located in central and southeastern Ohio and western West Virginia. It accepts deposits in checking, savings, time and money market accounts and makes personal, commercial, floor plan, student, construction and real estate loans. Substantially all loans are secured by specific items of collateral, including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from business operations. The Company also offers safe deposit boxes, wire transfers and other standard banking products and services. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. In addition to accepting deposits and making loans, the Bank invests in U. S. Government and agency obligations, interest-bearing deposits in other financial institutions and investments permitted by applicable law. The Bank's trust department provides a wide variety of fiduciary services for trusts, estates and benefit plans and also provides investment and security services as an agent for its customers. Principles of Consolidation: The consolidated financial statements include the accounts of Ohio Valley and its wholly-owned subsidiaries, the Bank, Loan Central, a consumer finance company, and Ohio Valley Financial Services Agency, LLC, an insurance agency. Ohio Valley and its subsidiaries are collectively referred to as the "Company". All material intercompany accounts and transactions have been eliminated. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving the use of management's estimates and assumptions that are more susceptible to change in the near term involve the allowance for loan losses, the fair value of certain securities, the fair value of financial instruments and the determination and carrying value of impaired loans. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, noninterest-bearing deposits with banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The Company reports net cash flows for customer loan transactions, deposit transactions, short-term borrowings and interest-bearing deposits with other financial institutions. Securities: The Company classifies securities into held-to-maturity and available-for-sale categories. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Securities classified as available-for-sale include equity securities and other securities that could be sold for liquidity, investment management or similar reasons even if there is not a present intention of such a sale. Available-for-sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. Other securities, such as Federal Home Loan Bank stock, are carried at cost. Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method. Gains and losses are recognized upon the sale of specific identified securities on the completed transaction basis. Securities are written down to fair value when a decline in fair value is other than temporary. Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on an accrual basis using the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. Payments received on such loans are reported as principal reductions. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Concentrations of Credit Risk: The Company grants residential, consumer and commercial loans to customers located primarily in the southeastern Ohio and western West Virginia areas. The following represents the composition of the Company's loan portfolio at December 31, 2008: % of Total Loans ---------------- Residential real estate loans 40.09% Commercial real estate loans 31.50% Consumer loans 20.13% Commercial and industrial loans 7.11% All other loans 1.17% ---------------- 100.00% ================ Approximately 3.79% 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, 2008, the Bank's primary correspondent balance was $8,659 on deposit at Fifth Third Bank, Cincinnati, Ohio. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation, which is computed using the straight-line or declining balance methods over the estimated useful life of the owned asset and, for leasehold improvement, over the remaining term of the leased facility. The useful lives range from 3 to 8 years for equipment, furniture and fixtures and 7 to 39 years for buildings and improvements. Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of foreclosure is included in other assets. Such real estate is carried at the lower of investment in the loan or estimated fair value of the property less estimated selling costs. Any reduction to fair value at the time of acquisition is accounted for as a loan charge-off. Any subsequent reduction in fair value is recorded as a loss on other assets. Costs incurred to carry other real estate are charged to expense. Other real estate owned totaled $4,693 at December 31, 2008 and $261 at December 31, 2007. 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. 8 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 common shares outstanding during the periods: 4,018,367 for 2008; 4,131,621 for 2007; 4,230,551 for 2006. Ohio Valley 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.The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company adopted Financial Accounting Standards Board ("FASB") Interpretation 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), as of January 1, 2007. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The adoption of FIN 48 had no impact on the Company's financial statements. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale which are also recognized as separate components of equity. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. Bank Owned Life Insurance: The Company has purchased life insurance policies on certain officers. These policies are recorded at their cash surrender value, or the amount that could be currently realized. ESOP: Compensation expense is based on the market price of shares as they are committed to be allocated to participant accounts. Adoption of New Accounting Standards: In September 2006, the FASB issued Statement of Financial Accounting Standards ("FAS") No. 157, "Fair Value Measurements". FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement also establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position ("FSP") 157-2, "Effective Date of FASB Statement No. 157". This FSP delays the effective date of FAS 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material. In October 2008, the FASB issued FSP 157-3, "Determining the Fair Value of a Financial Asset when the Market for That Asset Is Not Active". This FSP clarifies the application of FAS 157 in a market that is not active. The impact of adoption was not material. In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities". The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard was effective for the Company on January 1, 2008. The Company has not elected the fair value option for any financial assets or financial liabilities. 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In September 2006, the FASB Emerging Issues Task Force ("EITF") finalized Issue No. 06-04, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements". This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants' employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue was effective for fiscal years beginning after December 15, 2007. As a result of the adoption of EITF No. 06-04, the Company recognized a cumulative effect adjustment (decrease) to retained earnings of $1,078, which also represented additional liability required to be provided under EITF No. 06-04 on January 1, 2008 related to the agreements. On November 5, 2007, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings ("SAB 109"). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 was effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The impact of adoption was not material. Effect of Newly Issued But Not Yet Effective Accounting Standards: In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations ("FAS 141(R)"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position. In December 2007, the FASB issued FAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51" ("FAS No. 160"), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. FAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited and the Company does not expect the adoption of FAS No. 160 to have a significant impact on its results of operations or financial position. In March 2008, the FASB issued FAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FAS No. 133". FAS No. 161 amends and expands the disclosure requirements of FAS No. 133 for derivative instruments and hedging activities. FAS No. 161 requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position. Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. These financial instruments are recorded when they are funded. See Note K for more specific disclosure related to loan commitments. Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to Ohio Valley or by Ohio Valley to its shareholders. These restrictions pose no practical limit on the ability of the Bank or Ohio Valley to pay dividends at historical levels. See Note P for more specific disclosure related to dividend restrictions. Restrictions on Cash: Cash on hand or on deposit with Fifth Third Bank and the Federal Reserve Bank of $8,066 and $8,312 was required to meet regulatory reserve and clearing requirements at year-end 2008 and 2007. The balances at Fifth Third Bank do not earn interest. 10 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 management monitors the revenue streams of the various products and services, the identifiable segments are not material, and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment. Reclassifications: The consolidated financial statements for 2007 and 2006 have been reclassified to conform with the presentation for 2008. These 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, 2008 ----------------- U.S. Government sponsored entity securities $30,623 $1,243 --- $31,866 Mortgage-backed securities 43,671 82 $ (279) 43,474 ------- ------ -------- ------- Total securities $74,294 $1,325 $ (279) $75,340 ======= ====== ======= ======= December 31, 2007 ----------------- U.S. Government sponsored entity securities $39,002 $ 462 $ (17) $39,447 Mortgage-backed securities 39,235 37 (656) 38,616 ------- ------ -------- ------- Total securities $78,237 $ 499 $ (673) $78,063 ======= ====== ======= ======= Gross Gross Estimated Amortized Unrealized Unrealized Fair Securities Held-to-Maturity Cost Gains Losses Value ---- ----- ------ ----- December 31, 2008 ----------------- Obligations of states and political subdivisions $16,946 $ 327 $ (70) $17,203 Mortgage-backed securities 40 --- (2) 38 ------- ------ ----- ------- Total securities $16,986 $ 327 $ (72) $17,241 ======= ====== ===== ======= December 31, 2007 ----------------- Obligations of states and political subdivisions $15,933 $ 236 $(451) $15,718 Mortgage-backed securities 48 --- (2) 46 ------- ------ ----- ------- Total securities $15,981 $ 236 $(453) $15,764 ======= ====== ===== =======
At year-end 2008 and 2007, 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 $73,539 at December 31, 2008 and $78,843 at December 31, 2007 were pledged to secure public deposits, repurchase agreements and for other purposes as required or permitted by law. 11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE B - SECURITIES (continued) The amortized cost and estimated fair value of debt securities at December 31, 2008, 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 $ 7,499 $ 7,682 $ 1,085 $ 1,087 Due in one to five years 20,622 21,551 3,992 4,140 Due in five to ten years 2,502 2,633 2,865 2,999 Due after ten years --- --- 9,004 8,977 Mortgage-backed securities 43,671 43,474 40 38 ------- ------- ------- ------- Total debt securities $74,294 $75,340 $16,986 $17,241 ======= ======= ======= ======= There were no sales of debt or equity securities during 2008, 2007 and 2006. Securities with unrealized losses not recognized in income are as follows:
Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- December 31, 2008 Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ----- ----- ----- ----- ----- ----- Description of Securities ------------------------- U.S. Government sponsored entity securities --- --- --- --- --- --- Mortgage-backed securities $12,759 $ (178) $18,951 $ (103) $31,710 $ (281) Obligations of states and political subdivisions --- --- 2,879 (70) 2,879 (70) ------- ------ ------- ------- ------- ------- $12,759 $ (178) $21,830 $ (173) $34,589 $ (351) ======= ====== ======= ======= ======= ======= Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- December 31, 2007 Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ----- ----- ----- ----- ----- ----- Description of Securities ------------------------- U.S. Government sponsored entity securities $ 1,983 $ (17) --- --- $ 1,983 $ (17) Mortgage-backed securities 663 (4) $32,938 $ (654) 33,601 (658) Obligations of states and political subdivisions --- --- 5,443 (451) 5,443 (451) ------- ------ ------- ------- ------- ------- $ 2,646 $ (21) $38,381 $(1,105) $41,027 $(1,126) ======= ====== ======= ======= ======= =======
Unrealized losses on the Company's debt securities have not been recognized into income because the issuers' securities are of high credit quality, management has the intent and ability to hold them for the foreseeable future, and the decline in fair value is largely due to increases in market interest rates. The fair value is expected to recover as the bonds approach their maturity date or reset date. Management does not believe any individual unrealized loss at December 31, 2008 represents an other-than-temporary impairment. 12 NOTE C - LOANS Loans are comprised of the following at December 31: 2008 2007 ---- ---- Residential Real estate $252,693 $250,483 Commercial real estate 198,559 196,523 Commercial and industrial 44,824 55,090 Consumer 126,911 127,832 All other 7,404 7,175 -------- -------- Total Loans $630,391 $637,103 ======== ======== NOTE D - ALLOWANCE FOR LOAN LOSSES Following is an analysis of changes in the allowance for loan losses for the years ended December 31: 2008 2007 2006 ---- ---- ---- Balance, beginning of year $6,737 $9,412 $7,133 Loans charged off: Commercial (1) 1,164 4,002 3,079 Residential real estate 225 422 432 Consumer 2,140 1,617 2,120 ------ ------ ------ Total loans charged off 3,529 6,041 5,631 Recoveries of loans: Commercial (1) 95 248 946 Residential real estate 61 166 204 Consumer 719 700 1,097 ------ ------ ------ Total recoveries of loans 875 1,114 2,247 Net loan charge-offs (2,654) (4,927) (3,384) Provision charged to operations 3,716 2,252 5,663 ------ ------ ------ Balance, end of year $7,799 $6,737 $9,412 ====== ====== ====== Information regarding impaired loans is as follows: 2008 2007 ---- ---- Balance of impaired loans $ 8,099 $ 6,871 Less portion for which no specific allowance is allocated 5,513 2,568 ------- ------- Portion of impaired loan balance for which an allowance for credit losses is allocated $ 2,586 $ 4,303 ======= ======= Portion of allowance for loan losses allocated to the impaired loan balance $ 1,404 $ 1,312 ======= ======= Average investment in impaired loans for the year $ 9,027 $ 6,918 ======= ======= Past due - 90 days or more and still accruing $ 1,878 $ 927 ======= ======= Nonaccrual $ 3,396 $ 2,734 ======= ======= Interest recognized on impaired loans was $490, $401 and $939 for years ending 2008, 2007 and 2006, respectively. Accrual basis income was not materially different from cash basis income for the periods presented. (1) Includes commercial and industrial and commercial real estate loans 13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE E - PREMISES AND EQUIPMENT Following is a summary of premises and equipment at December 31: 2008 2007 ---- ---- Land $ 1,570 $ 1,565 Buildings 10,220 9,953 Leasehold improvements 2,822 2,771 Furniture and equipment 12,489 11,511 ------- ------- 27,101 25,800 Less accumulated depreciation 16,869 15,929 ------- ------- Total premises and equipment $10,232 $ 9,871 ======= ======= The following is a summary of the future minimum lease payments for facilities leased by the Company. Lease payments were $448 in 2008 and $405 in 2007. 2009 $ 453 2010 351 2011 316 2012 277 2013 225 Thereafter 133 ------ $1,755 ====== NOTE F - DEPOSITS Following is a summary of interest-bearing deposits at December 31: 2008 2007 ---- ---- NOW accounts $ 80,855 $ 65,618 Savings and Money Market 118,289 103,712 Time: IRA accounts 46,574 44,050 Certificates of Deposit: In denominations under $100,000 151,438 170,565 In denominations of $100,000 or more 109,699 126,492 -------- -------- Total time deposits 307,711 341,107 -------- -------- Total interest-bearing deposits $506,855 $510,437 ======== ======== Following is a summary of total time deposits by remaining maturity at December 31: 2008 ------ Within one year $219,240 From one to two years 49,403 From two to three years 32,956 From three to four years 2,648 From four to five years 2,435 Thereafter 1,029 -------- Total $307,711 ======== Brokered deposits, included in time deposits, were $17,906 and $21,820 at December 31, 2008 and 2007, respectively. 14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are financing arrangements that have overnight maturity terms. At maturity, the securities underlying the agreements are returned to the Company. Information concerning securities sold under agreements to repurchase is summarized as follows at December 31: 2008 2007 ---- ---- Balance outstanding at period-end $24,070 $40,390 ------- ------- Weighted average interest rate at period-end .70% 2.91% ------- ------- Average amount outstanding during the year $28,040 $27,433 ------- ------- Approximate weighted average interest rate during the year 1.50% 3.83% ------- ------- Maximum amount outstanding as of any month-end $35,309 $40,390 ------- ------- Securities underlying these agreements at year-end were as follows: Carrying value of securities $51,690 $49,290 ------- ------- Fair Value $52,083 $48,829 ------- ------- The Company sold securities under agreements to repurchase with overnight maturity terms totaling $2,514 at December 31, 2008 and $12,379 at December 31, 2007 with one large commercial account. NOTE H - OTHER BORROWED FUNDS Other borrowed funds at December 31, 2008 and 2007 are comprised of advances from the Federal Home Loan Bank("FHLB") of Cincinnati, promissory notes and Federal Reserve Bank ("FRB") Notes. FHLB borrowings Promissory Notes FRB Notes Totals --------------- ---------------- --------- ------- 2008 $68,715 $ 5,479 $ 2,580 $ 76,774 2007 $55,779 $ 5,723 $ 5,500 $ 67,002 Pursuant to collateral agreements with the FHLB, advances are secured by $226,127 in qualifying mortgage loans and $6,280 in FHLB stock at December 31, 2008. Fixed rate FHLB advances of $48,165 mature through 2033 and have interest rates ranging from 2.13% to 6.62%. In addition, variable rate FHLB borrowings of $20,550 matured in 2009 and carried an interest rate of .54%. At December 31, 2008, the Company had a cash management line of credit enabling it to borrow up to $60,000 from the FHLB. All cash management advances have an original maturity of 90 days. The line of credit must be renewed on an annual basis. There was $39,450 available on this line of credit at December 31, 2008. Based on the Company's current FHLB stock ownership, total assets and pledgeable residential first mortgage loans, the Company had the ability to obtain borrowings from the FHLB up to a maximum of $167,501 at December 31, 2008. Promissory notes, issued primarily by Ohio Valley, have fixed rates of 2.40% to 5.00% and are due at various dates through a final maturity date of November 12, 2010. A total of $3,521 represented promissory notes payable by Ohio Valley to related parties. See Note L for further discussion of related party transactions. FRB notes consist of the collection of tax payments from Bank customers under the Treasury Tax and Loan program. These funds have a variable interest rate and are callable on demand by the U.S. Treasury. The interest rate for the Company's FRB notes was zero percent at December 31, 2008 and 4.00% at December 31, 2007. Various investment securities from the Bank used to collateralize FRB notes totaled $5,880 at December 31, 2008 and $5,945 at December 31, 2007. Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $45,850 at December 31, 2008 and $34,950 at December 31, 2007. 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE H - OTHER BORROWED FUNDS (continued) Scheduled principal payments over the next five years: FHLB Borrowings Promissory Notes FRB Notes Totals --------------- ---------------- --------- ------ Year Ended 2009 $36,556 $4,479 $2,580 $43,615 Year Ended 2010 26,005 1,000 --- 27,005 Year Ended 2011 6,006 --- --- 6,006 Year Ended 2012 6 --- --- 6 Year Ended 2013 6 --- --- 6 Thereafter 136 --- --- 136 ------- ------ ------ ------- $68,715 $5,479 $2,580 $76,774 ======= ====== ====== ======= NOTE I - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES On September 7, 2000, a trust formed by Ohio Valley issued $5,000 of 10.6% fixed rate trust preferred securities as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering, which debentures represent the sole asset of the trust. The Company may redeem all or a portion of these subordinated debentures beginning September 7, 2010 at a premium of 105.30% with the call price declining .53% per year until reaching a call price of par at year twenty through maturity. The subordinated debentures must be redeemed no later than September 7, 2030. Debt issuance costs of $166 were incurred and capitalized and will amortize as a yield adjustment through expected maturity. On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of adjustable-rate trust preferred securities as part of a pooled offering of such securities. The rate on these trust preferred securities will be fixed at 6.58% for five years, and then convert to a floating-rate term on March 15, 2012, based on a rate equal to the 3-month LIBOR plus 1.68%. There were no debt issuance costs incurred with these trust preferred securities. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering. The subordinated debentures must be redeemed no later than June 15, 2037. On March 26, 2007, the proceeds from these new trust preferred securities were used to pay off $8,500 in higher cost trust preferred security debt that was issued on March 26, 2002. This repayment of $8,500 in trust preferred securities was the result of an early call feature that allowed the Company to redeem the entire amount of these subordinated debentures at par value. These higher cost subordinated debentures, which were floating based on a rate equal to the 3-month LIBOR plus 3.60%, not to exceed 11.00%, were redeemed at a floating rate of 8.97%. The replacement of this higher cost debt was a strategy by management to lower interest expense and improve the net interest margin. Under the provisions of the related indenture agreements, the interest payable on the trust preferred securities is deferrable for up to five years and any such deferral is not considered a default. During any period of deferral, the Company would be precluded from declaring or paying dividends to shareholders or repurchasing any of the Company's common stock. Under FASB Interpretation No. 46, as revised, the trusts are not consolidated with the Company. Accordingly, the Company does not report the securities issued by the trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by the trust. Since the Company's equity interest in the trusts cannot be received until the subordinated debentures are repaid, these amounts have been netted. 16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE J - INCOME TAXES The provision for income taxes consists of the following components: 2008 2007 2006 ---- ---- ---- Current tax expense $2,831 $1,723 $2,964 Deferred tax (benefit)expense (102) 908 (903) ------ ------ ------ Total income taxes $2,729 $2,631 $2,061 ====== ====== ====== The source of gross deferred tax assets and gross deferred tax liabilities at December 31: 2008 2007 ---- ---- Items giving rise to deferred tax assets: Allowance for loan losses $2,712 $2,343 Deferred compensation 1,362 1,278 Unrealized loss on securities available-for-sale --- 59 Deferred loan fees/costs 294 293 Depreciation 21 150 Other 189 252 Items giving rise to deferred tax liabilities: Investment accretion (2) (3) FHLB stock dividends (1,081) (995) Unrealized gain on securities available-for-sale (356) --- Prepaid expenses (168) (130) Intangibles (232) (196) Other (66) (65) ------ ------ Net deferred tax asset $2,673 $2,986 ====== ====== 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: 2008 2007 2006 ---- ---- ---- Statutory tax $3,351 $3,036 $2,536 Effect of nontaxable interest (282) (282) (211) Nondeductible interest expense 34 47 33 Income from bank owned insurance (192) (210) (264) Effect of state income tax 1 114 119 Tax credits (193) (78) (68) Other items 10 4 (84) ------ ------ ------ Total income taxes $2,729 $2,631 $2,061 ====== ====== ====== The adoption of FIN 48 at January 1, 2007 had no impact on the Company's financial statements. At December 31, 2007 and December 31, 2008, the Company had no unrecognized tax benefits recorded. The Company does not expect the amount of unrecognized tax benefits to significantly change within the next twelve months. The Company is subject to U.S. federal income tax as well as West Virginia state income tax. The Company is no longer subject to federal examination for years prior to 2005. The Company's 2003-2005 West Virginia state income tax returns were examined by taxing authority and no additional liability was assessed. The tax years 2005-2007 remain open to federal examination, and the 2006-2007 tax years remain open to state examination. 17 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. Following is a summary of such commitments at December 31: 2008 2007 ----- ----- Fixed rate $ 577 $ 2,127 Variable rate 63,839 65,391 Standby letters of credit 13,524 14,607 The interest rate on fixed rate commitments ranged from 6.00% to 8.99% at December 31, 2008. 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 incomeproducing commercial properties. There are various contingent liabilities that are not reflected in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations. The Bank is required to maintain average reserve balances with the Federal Reserve Bank or cash in the vault. The amount of those reserve balances was $7,999 and $7,066 for the years ended December 31, 2008 and 2007, respectively. NOTE L - RELATED PARTY TRANSACTIONS Certain directors, executive officers and companies in which they are affiliated were loan customers during 2008. A summary of activity on these borrower relationships with aggregate debt greater than $120 is as follows: Total loans at January 1, 2008 $11,809 New loans 1,284 Repayments (4,508) Other changes (174) ------- Total loans at December 31, 2008 $ 8,411 ======= Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period, such as changes in persons included. In addition, certain directors, executive officers and companies with which they are affiliated were recipients of interest-bearing promissory notes issued by Ohio Valley in the amount of $3,521 at December 31, 2008 and $3,768 at December 31, 2007. 18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE M - EMPLOYEE BENEFITS The Bank has a profit-sharing plan for the benefit of its employees and their beneficiaries. Contributions to the plan are determined by the Board of Directors of Ohio Valley. Contributions charged to expense were $187, $172 and $171, for 2008, 2007 and 2006. Ohio Valley maintains an Employee Stock Ownership Plan (ESOP) covering substantially all employees of the Company. Ohio Valley makes discretionary contributions to the ESOP which are allocated to ESOP participants based on relative compensation. The total number of shares held by the ESOP, all of which have been allocated to participant accounts, were 227,177 and 225,148 at December 31, 2008 and 2007. In addition, the Bank made contributions to its ESOP Trust as follows: Years ended December 31 2008 2007 2006 ---- ---- ---- Number of shares issued 1,000 1,000 8,500 ====== ====== ====== Value of stock contributed $ 20 $ 26 $ 222 Cash contributed 340 318 121 ----- ----- ----- Total charged to expense $ 360 $ 344 $ 343 ===== ===== ===== Life insurance contracts with a cash surrender value of $18,153 at December 31, 2008 have been purchased by the Company, the owner of the policies. The purpose of these contracts was to replace a current group life insurance program for executive officers, implement a deferred compensation plan for directors and executive officers, implement a director retirement plan and implement a supplemental retirement plan for certain officers. Under the deferred compensation plan, Ohio Valley pays each participant the amount of fees deferred plus interest over the participant's desired term, upon termination of service. Under the director retirement plan, participants are eligible to receive ongoing compensation payments upon retirement subject to length of service. The supplemental retirement plan provides payments to select executive officers upon retirement based upon a compensation formula determined by Ohio Valley's Board of Directors. The present value of payments expected to be provided are accrued during the service period of the covered individuals and amounted to $3,914 and $3,669 at December 31, 2008 and 2007. Expenses related to the plans for each of the last three years amounted to $328, $294, and $262. NOTE N - OTHER COMPREHENSIVE INCOME Other comprehensive income components and related taxes for the years ended December 31, are as follow: 2008 2007 2006 ---- ---- ---- Net unrealized holding gains on available-for-sale securities $ 1,220 $ 1,313 $ 379 Tax effect (415) (447) (129) ------- ------- ------- Other comprehensive income (loss) $ 805 $ 866 $ 250 ======= ======= ======= 19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS As discussed in Note A, FAS 157 was implemented by the Company effective January 1, 2008. FAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant, unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. The following is a description of the Company's valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis: Securities Available-For-Sale: Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements using pricing models that vary based on asset class and include available trade, bid and other market information. Fair value of securities available-for-sale may also be determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities. Impaired Loans: Some impaired loans are reported at the fair value of the underlying collateral adjusted for selling costs. Collateral values are estimated using Level 3 inputs based on third party appraisals. Assets and Liabilities Measured on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at December 31, 2008, Using ------------------------------------------------------------ Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3) ------------------- ----------------- -------------- Assets: Securities Available-For-Sale ---- $ 75,340 ----
Assets and Liabilities Measured on a Nonrecurring Basis Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:
Fair Value Measurements at December 31, 2008, Using ------------------------------------------------------------ Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3) ------------------- ----------------- -------------- Assets: Impaired Loans ---- ---- $1,182
The portion of the impaired loan balance for which a specific allowance for credit losses was allocated totaled $2,586. The valuation allowance for these loans was $1,404, resulting in additional provision for loan loss expense of $775 at December 31, 2008. 20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) 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: Securities classified as available-for-sale are reported at fair value. For these securities, the Company obtains fair value measurements using pricing models that vary based on asset class and include available trade, bid and other market information. Fair value of securities available-for-sale may also be determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities. Federal Home Loan Bank stock: It is not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. Loans: The fair value of fixed rate loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair market value of loan commitments and standby letters of credits was not material at December 31, 2008 or 2007. The fair value for variable rate loans is estimated to be equal to carrying value. This fair value represents an entry price in accordance with FAS No. 107. While FAS No. 157 amended FAS No. 107 in several respects, this approach to fair value remains an acceptable approach under Generally Accepted Accounting Principles. 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: 2008 2007 ---- ---- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- Financial assets: Cash and cash equivalents $ 17,681 $ 17,681 $ 16,894 $ 16,894 Interest-bearing deposits in other banks 611 611 633 633 Securities 92,326 92,581 94,044 93,827 Federal Home Loan Bank stock 6,281 N/A 6,036 N/A Loans 622,592 637,422 630,366 639,273 Accrued interest receivable 3,172 3,172 3,254 3,254 Financial liabilities: Deposits (592,361) (591,742) (589,026) (588,045) Securities sold under agreements to repurchase (24,070) (24,070) (40,390) (40,390) Other borrowed funds (76,774) (78,777) (67,002) (68,124) Subordinated debentures (13,500) (13,718) (13,500) (14,121) Accrued interest payable (4,933) (4,933) (6,742) (6,742) 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. 21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE P - REGULATORY MATTERS The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. At year-end, consolidated actual capital levels and minimum required levels for the Company and the Bank were:
Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 2008 Total capital (to risk weighted assets) Consolidated $82,205 13.5% $48,783 8.0% $60,979 N/A Bank 76,642 12.7 48,155 8.0 60,194 10.0% Tier 1 capital (to risk weighted assets) Consolidated 74,581 12.2 24,391 4.0 36,587 N/A Bank 69,158 11.5 24,078 4.0 36,116 6.0 Tier 1 capital (to average assets) Consolidated 74,581 9.7 30,788 4.0 38,485 N/A Bank 69,158 9.1 30,355 4.0 37,944 5.0 2007 Total capital (to risk weighted assets) Consolidated $80,578 13.1% $49,037 8.0% $61,296 N/A Bank 75,119 12.4 48,364 8.0 60,455 10.0% Tier 1 capital (to risk weighted assets) Consolidated 73,841 12.0 24,518 4.0 36,777 N/A Bank 68,682 11.4 24,182 4.0 36,273 6.0 Tier 1 capital (to average assets) Consolidated 73,841 9.5 31,081 4.0 38,851 N/A Bank 68,682 9.0 30,656 4.0 38,320 5.0
At year-end 2008 and 2007, the most recent regulatory notifications categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. No conditions or events have occurred since that notification that management believes have changed the status of the Company or the Bank as well capitalized. Dividends paid by the subsidiaries are the primary source of funds available to Ohio Valley for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the subsidiaries to Ohio Valley is subject to restrictions by regulatory authorities. These restrictions generally limit dividends to the current and prior two years retained earnings. At January 1, 2009, approximately $2,861 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. 22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Below is condensed financial information of Ohio Valley. In this information, Ohio Valley's investment in its subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries since acquisition. This information should be read in conjunction with the consolidated financial statements of the Company. CONDENSED STATEMENTS OF CONDITION Years ended December 31: 2008 2007 Assets ---- ---- Cash and cash equivalents $ 1,169 $ 1,055 Investment in subsidiaries 75,440 73,926 Notes receivable - subsidiaries 5,461 5,658 Other assets 295 428 ------- ------- Total assets $82,365 $81,067 ======= ======= Liabilities Notes payable $ 5,479 $ 5,723 Subordinated debentures 13,500 13,500 Other liabilities 330 333 ------- ------- Total liabilities 19,309 19,556 ------- ------- Shareholders' Equity Total shareholders' equity 63,056 61,511 ------- ------- Total liabilities and shareholders' equity $82,365 $81,067 ======= ======= CONDENSED STATEMENTS OF INCOME Years ended December 31: 2008 2007 2006 ---- ---- ---- Income: Interest on notes $ 259 $ 311 $ 261 Other operating income 33 35 68 Dividends from subsidiaries 6,250 5,000 5,000 Expenses: Interest on notes 261 314 264 Interest on subordinated debentures 1,089 1,143 1,279 Operating expenses 309 227 279 ------ ------ ------ Income before income taxes and equity in undistributed earnings of subsidiaries 4,883 3,662 3,507 Income tax benefit 458 450 590 Equity in undistributed earnings of subsidiaries 1,787 2,185 1,301 ------ ------ ------ Net Income $7,128 $6,297 $5,398 ====== ====== ====== 23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued) CONDENSED STATEMENT OF CASH FLOWS Years ended December 31: 2008 2007 2006 ---- ---- ---- Cash flows from operating activities: Net income $7,128 $6,297 $5,398 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (1,787) (2,185) (1,301) Change in other assets 133 (39) 4 Change in other liabilities (3) (73) (13) ------ ------ ------ Net cash provided by operating activities 5,471 4,000 4,088 ------ ------ ------ Cash flows from investing activities: Change in other short-term investments 197 (320) (420) ------ ------ ------ Net cash provided by (used in) investing activities 197 (320) (420) ------ ------ ------ Cash flows from financing activities: Change in other short-term borrowings (244) 329 280 Proceeds from subordinated debentures --- 8,500 --- Repayment of subordinated debentures --- (8,500) --- Cash dividends paid (3,061) (2,938) (2,837) Proceeds from issuance of common shares 20 398 --- Purchases of treasury shares (2,269) (3,394) (1,800) ------ ------ ------ Net cash used in financing activities (5,554) (5,605) (4,357) ------ ------ ------ Cash and cash equivalents: Change in cash and cash equivalents 114 (1,925) (689) Cash and cash equivalents at beginning of year 1,055 2,980 3,669 ------ ------ ------ Cash and cash equivalents at end of year $1,169 $1,055 $2,980 ====== ====== ====== 24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE R - CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited) Quarters Ended Mar. 31 Jun. 30 Sept. 30 Dec. 31 2008 ------- ------- -------- ------- Total interest income $13,734 $12,853 $12,657 $12,289 Total interest expense 6,059 5,298 4,933 4,538 Net interest income 7,675 7,555 7,724 7,751 Provision for loan losses 701 916 693 1,406 Net Income 1,965 1,731 1,885 1,547 Earnings per share $ .48 $ .43 $ .47 $ .39 2007 Total interest income $13,502 $13,720 $13,784 $13,941 Total interest expense 6,431 6,554 6,779 6,656 Net interest income 7,071 7,166 7,005 7,285 Provision for loan losses 386 616 332 918 Net Income 1,775 1,686 1,833 1,003 Earnings per share $ .42 $ .41 $ .45 $ .24 2006 Total interest income $12,640 $13,034 $13,407 $13,340 Total interest expense 5,287 5,810 6,299 6,535 Net interest income 7,353 7,224 7,108 6,805 Provision for loan losses (1) 666 791 474 3,731 Net Income 1,739 1,826 1,817 16 Earnings per share $ .41 $ .43 $ .43 $ --- (1) During the fourth quarter of 2006, the Bank increased the allowance for loan losses to account for increases in its nonaccrual loan balances and historical loan loss factors resulting in a provision expense charge of $3,731. 25 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Ohio Valley Banc Corp. We have audited the accompanying consolidated statements of condition of Ohio Valley Banc Corp. (the "Company") as of December 31, 2008 and 2007, 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, 2008. We also have audited the Company's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, 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, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Ohio Valley Banc Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. /s/CROWE HORWATH LLP Crowe Horwath LLP Columbus, Ohio March 12, 2009 26 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Board of Directors and Shareholders Ohio Valley Banc Corp. The management of Ohio Valley Banc Corp. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. The system of internal control over financial reporting as it relates to the consolidated financial statements is evaluated for effectiveness by management. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed Ohio Valley Banc Corp's system of internal control over financial reporting as of December 31, 2008, in relation to criteria for effective internal control over financial reporting as described in "Internal Control Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2008, its system of internal control over financial reporting is effective and meets the criteria of the "Internal Control Integrated Framework". Crowe Horwath LLP, independent registered public accounting firm, has issued an audit report dated March 12, 2009 on the Company's internal control over financial reporting. That report is contained in Ohio Valley's Annual Report to Shareholders under the heading "Report of Independent Registered Public Accounting Firm". Ohio Valley Banc Corp /s/JEFFREY E. SMITH Jeffrey E. Smith President, CEO /s/SCOTT W. SHOCKEY Scott W. Shockey Vice President, CFO 27 SUMMARY OF COMMON STOCK DATA OHIO VALLEY BANC CORP. Years ended December 31, 2008 and 2007 INFORMATION AS TO STOCK PRICES AND DIVIDENDS: On February 9, 1996, Ohio Valley's common shares began to be quoted on The NASDAQ Stock Market under the symbol "OVBC". The following table summarizes the high and low sales prices for Ohio Valley's common shares on the NASDAQ Global Market for each quarterly period since January 1, 2007. 2008 High Low - ---- ------ ------ First Quarter $26.65 $25.00 Second Quarter 26.25 25.00 Third Quarter 25.50 20.00 Fourth Quarter 21.80 17.65 2007 High Low - ---- ------ ------ First Quarter $26.50 $24.86 Second Quarter 25.70 24.15 Third Quarter 25.73 25.00 Fourth Quarter 25.95 24.60 Shown below is a table which reflects the dividends declared per share on Ohio Valley's common shares. As of March 13, 2009, the number of holders of record of common shares was 2,124, a decrease from 2,136 shareholders at March 13, 2008. Dividends per share 2008 2007 - ------------------- ---- ---- First Quarter $.19 $.17 Second Quarter .19 .18 Third Quarter .19 .18 Fourth Quarter .19 .18 Dividends paid by the subsidiaries are the primary source of funds available to Ohio Valley for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the subsidiaries to Ohio Valley is subject to restrictions by regulatory authorities. These restrictions generally limit dividends to the current and prior two years retained earnings. 28 PERFORMANCE GRAPH OHIO VALLEY BANC CORP. Year ended December 31, 2008 The following graph sets forth a comparison of five-year cumulative total returns among the Company's common shares (indicated "Ohio Valley Banc Corp." on the Performance Graph), the S & P 500 Index (indicated "S & P 500" on the Performance Graph), and SNL Securities SNL $500 Million-$1 Billion Bank Asset-Size Index (indicated "SNL" on the Performance Graph) for the fiscal years indicated. Information reflected on the graph assumes an investment of $100 on December 31, 2003 in each of the common shares of the Company, the S & P 500 Index, and the SNL Index. Cumulative total return assumes reinvestment of dividends. The SNL Index represents stock performance of ninety-four (94) of the nation's banks located throughout the United States with total assets between $500 Million and $1 Billion as selected by SNL Securities of Charlottesville, Virginia. The Company is included as one of the 94 banks in the SNL Index. TOTAL RETURN PERFORMANCE OVBC, SNL $500M-$1B Bank Index and S&P 500 2003-2008 Period Ending ---------------------------------------------------------- 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 -------- -------- -------- -------- -------- -------- OVBC $100.00 $126.58 $124.66 $128.24 $131.47 $101.76 SNL $500M-$1B $100.00 $113.32 $118.18 $134.41 $107.71 $ 69.02 S&P 500 $100.00 $110.88 $116.33 $134.70 $142.10 $ 89.53 29 [ THIS PAGE INTENTIONALLY LEFT BLANK ] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDIION AND RESULTS OF OPERATIONS The purpose of this discussion is to provide an analysis of the Company's financial condition and results of operations which is not otherwise apparent from the audited consolidated financial statements included in this report. The accompanying consolidated financial information has been prepared by management in conformity with U.S. generally accepted accounting principles ("US GAAP") and is consistent with that reported in the consolidated statements. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following tables and related discussion. All dollars are reported in thousands, except share and per share data. RESULTS OF OPERATIONS: SUMMARY Ohio Valley Banc Corp. generated net income of $7,128 for 2008, an increase of 13.2% from 2007. Net income was also up 16.7% in 2007. Earnings per share were $1.77 for 2008, an increase of 16.4% from 2007. Earnings per share were up 19.7% in 2007. The increase in net income and earnings per share for 2008 was primarily due to a 6.0% net interest income expansion as a result of the lower short-term interest rate environment initiated by the Federal Reserve Bank. Growth in income also came from noninterest income improvement of 18.6% over 2007 due to lower losses on the sale of other real estate owned ("OREO"). The increase in net income and earnings per share for 2007 was largely related to a $3,410 decrease in provision for loan loss expense as a result of lower nonperforming loans and charge-offs from year-end 2006. The lower provision expense for 2007 can be attributed mostly to the specific allocations made to the allowance for loan losses in the fourth quarter of 2006 that resulted in $3,731 in provision expense, which contributed to the decrease in 2006's net income and earnings per share. Total assets during 2008 decreased $2,310, or 0.3%, resulting in total assets at year-end of $781,108. The Company's return on assets (ROA) was .91% for 2008 compared to .82% in 2007 and .71% in 2006. Return on equity (ROE) was 11.62% for 2008 compared to 10.40% in 2007 and 9.00% in 2006. The increasing trend in both ROA and ROE for 2008 and 2007 were the result of improved earnings performance due to net interest and noninterest income activities in 2008 and a significant decrease in provision expense during 2007. NET INTEREST INCOME The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense incurred on interest-bearing liabilities. The Company earns interest and dividend income from loans, investment securities and short-term investments while incurring interest expense on interest-bearing deposits, securities sold under agreements to repurchase ("repurchase agreements") and short- and long-term borrowings. Net interest income is affected by changes in both the average volume and mix of the balance sheet and the level of interest rates for financial instruments. Changes in net interest income are measured by net interest margin and net interest spread. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Both of these are reported on a fully tax-equivalent ("FTE") 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, 2008. Tables I and II have been prepared to summarize the significant changes outlined in this analysis. Net interest income on an FTE basis increased $2,177 in 2008, an increase of 7.5% compared to the $28,891 earned in 2007. The increase was primarily attributable to an expanding net interest margin caused by lower funding costs combined with a higher level of interest-earning assets, mostly from growth in securities and interest-bearing balances with banks. Net interest income on an FTE basis increased $121 in 2007, an increase of 0.4% compared to the $28,770 earned in 2006. The small increase was primarily attributable to a higher level of interest-earning assets, mostly from growth in securities and loans, partially offset by a lower net interest margin caused by a higher average balance of loans on nonaccrual status and an increased pressure in funding costs due to the lagging effect of short-term rate increases experienced during the first half of 2006. For 2008, average earning assets grew $10,834, or 1.5%, as compared to growth of $8,253, or 1.2%, in 2007. Driving this continued growth in earning assets for 2008 was average interest-bearing balances with banks, increasing to $5,710 at year-end 2008, up from $549 at year-end 2007. The increase was due to the Company's excess liquidity position resulting from lower loan demand and excess deposit liabilities. Average interest-bearing balances with banks represented 0.8% of earning assets at year-end 2008 as compared to 0.1% at year-end 2007. Earning asset growth was also experienced from average securities balances, which expanded $4,215, or 4.6%, for 2008 and represented 13.0% of earning assets at year-end 2008. This compares to average securities growth of $5,575, or 6.5%, for 2007 representing 12.6% of earning assets at year-end 2007. The growth in average securities was largely comprised of U.S. government sponsored entity securities. Average loans, the Company's highest portion of earning assets, remained relatively stable during 2008 and 2007, increasing $334, or 0.1%, and $2,473, or 0.4%, respectively. Average loans for 2008 represented 85.5% of earning assets as compared to 86.7% for 2007. The MANAGEMENT'S DISCUSSION AND ANALYSIS growth in average loans was largely comprised of commercial loan participations as well as residential real estate mortgages. Further contributing to net interest income was additional fee income from increased originations of the Company's refund anticipation loans ("RAL"). Participating with a third party tax software provider has given the Company the opportunity to make RAL loans during the tax refund loan season, typically from January through March. RAL loans are short-term cash advances against a customer's anticipated income tax refund. During 2008, the Company had recognized $265 in RAL fees as compared to $94 during 2007. Management continues to focus on generating loan growth as this portion of earning assets provides the greatest return to the Company. Although loans make up the largest 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, strict underwriting standards 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 0.6% between 2007 and 2008 and increased 0.7% between 2006 and 2007. Interest-bearing liabilities in 2008 were comprised largely of time deposits and NOW accounts, which together represented 64.1% of total interest-bearing liabilities, down from 67.9% in 2007 and 70.2% in 2006. Other borrowed money represented 9.7% of total interest-bearing liabilities in 2008, down from 9.8% in 2007 and 11.1% in 2006. The reason for this composition decrease was from growth in the Company's savings and money market accounts, primarily its Market Watch product, which together represented a higher composition of total interest-bearing liabilities at 19.5% in 2008 as compared to 15.7% in 2007 and 12.7% in 2006. Introduced in 2005, the Market Watch product offers customers tiered rates that are competitive with other offerings in the Company's market areas. The increased demand for the Market Watch product was largely the result of promotional pricing during the second quarter of 2008. The consumer preference for this product generated a significant amount of funding dollars which have helped to support earning asset growth and maturity runoffs of time deposits. This continued shift in composition during 2008 with higher savings and money market balances and lower time deposits served as a cost effective contribution to the net interest margin. The average cost of savings and money market accounts was 1.70%, 2.78% and 2.42% during the years ending 2008, 2007 and 2006, respectively. This is compared to the much higher average cost of time deposits of 4.17%, 4.88% and 4.24% during the years ending 2008, 2007 and 2006, respectively. The net interest margin increased 24 basis points to 4.23% in 2008 from 3.99% in 2007. This increase is compared to a 3 basis points decrease in the net interest margin in 2007. During 2008, there was a decrease of 11 basis points in interest free funds (i.e. demand deposits, shareholders' equity) from .63% in 2007 to .52% in 2008. However, this impact from interest free funds was completely offset by an increase in the net interest rate spread on interest sensitive assets and liabilities of 35 basis points, with lower asset yields of ..58% being completely offset by lower funding costs of .93%. Lower asset yields caused interest income on an FTE basis to decrease $3,415, or 6.2%, from 2007. Lower asset yields were largely the result of loan yields decreasing 55 basis points from 2007 to 2008. The drop in loan yield can be attributed to the decreases in short-term interest rates initiated by the Federal Reserve since September of 2007. Since that time, the Federal Reserve has decreased short-term interest rates ten times for a total of 500 basis points. The Company's commercial, participation and real estate loan portfolios have been most sensitive to these decreases in short-term interest rates since 2007. Furthermore, long-term interest rates continue to decrease from a year ago causing increased opportunities for mortgage refinancings. As a result, the Company continues to experience a customer demand shift from its one-year adjustable-rate mortgages, with average balances down $18,178 in 2008, to its thirty-year fixed-rate real estate mortgages, with average balances up $21,781 in 2008. The volume of refinancings during 2008 continues to stabilize as compared to 2007 and 2006. Conversely in 2007, the Company experienced an increase in loan yields which contributed most to a $2,610, or 5.0%, increase in interest income on an FTE basis from 2006 to 2007. Loan yield expansion was attributed to the rise in short-term rates between June 2004 and June 2006 as set by the Federal Reserve. During this time, short-term market interest rates were increased by 425 basis points causing a positive impact to loan yields within the Company's commercial, participation and real estate loan portfolios. Long-term interest rates during this time continued to remain relatively stable which contributed to a loan shift from one-year adjustable-rate mortgages, which yielded 7.10% during 2007, to thirty-year fixed-rate real estate mortgages, which yielded 7.21% in 2007. In relation to lower earning asset yields for 2008, the Company's interest-bearing liability costs decreased .93% causing interest expense to drop $5,592, or 21.2%, from 2007 to 2008. As previously mentioned, the Federal Reserve has reduced rates a full 500 basis points since September 2007 that has caused a downward shift in short-term interest rates, while longer-term rates have not decreased to the same extent. In a changing interest rate environment, rates on loans reprice more rapidly than interest rates paid on deposits. However, the Bank had positioned its balance sheet so that there were more interest-bearing liabilities subject to repricing than interest rates on loans. As a result, interest paid on liabilities decreased more than interest earned on assets. The short-term rate decreases impacted the repricings of various Bank deposit products, including public fund NOW accounts, Gold Club and Market Watch accounts. Contributing most to the decrease in funding costs were interest rates on time deposit balances (CD's), which continued to reprice at lower rates during 2008 (as a lagging effect to the Federal Reserve action to drop short-term interest rates). The year-to-date weighted average cost of the MANAGEMENT'S DISCUSSION AND ANALYSIS Company's time deposits decreased 71 basis points from 4.88% at year-end 2007 to 4.17% at year-end 2008. Conversely in 2007, the Company saw its interest-bearing liability costs increase .38% from 2006 as a result of the Federal Reserve's actions to increase short-term interest rates between June 2004 and June 2006, as previously mentioned. While this action was effective in allowing asset yields to grow, interest rate pressures were felt by an increase in the Company's total interest expense, which increased $2,489, or 10.4%, from 2006, as a result of higher funding costs, competitive factors to retain deposits, and larger average earning asset balances which required additional funding. Increases in funding costs during 2007 came mostly from the Bank's time deposit accounts, which were most responsive to the lagging effect from previous market rate increases. The year-to-date weighted average cost of the Bank's time deposits grew 64 basis points from 4.24% at year-end 2006 to 4.88% at year-end 2007. The change in interest expense was further impacted by the Company's growth in average money market accounts largely due to its Market Watch product with tiered market rates. As a result, the year-to-date weighted average cost of the Bank's savings and money market deposits grew 36 basis points from 2.42% at year-end 2006 to 2.78% at year-end 2007. It is difficult to speculate on future changes in net interest margin and the frequency and size of changes in market interest rates. The past year has seen the banking industry under significant stress due to declining real estate values and asset impairments. The Federal Reserve's actions of decreasing short-term interest rates were necessary to take steps in repairing the recessionary problems and promote economic stability. However, there can be no assurance of additional future rate cuts in 2009 as changes in market interest rates are dependent upon a variety of factors that are beyond the Company's control. The Company anticipates the lagging effect of time deposit repricings will continue during 2009, but at a much smaller pace, and should continue to lower funding costs and improve net interest margin. For additional discussion on the Company's rate sensitive assets and liabilities, please see "Interest Rate Sensitivity and Liquidity" and "Table VIII" within this Management's Discussion and Analysis. NONINTEREST INCOME Total noninterest income increased $975, or 18.6%, in 2008 as compared to 2007. Contributing most to the increase in noninterest income was the decrease in the loss on sale of OREO. During the fourth quarter of 2007, the Company's largest non-performing asset was liquidated, creating a pretax loss of $686. The sale of this OREO property was directly attributable to management's strategy of being more aggressive in improving the Company's nonperforming levels. As a result, the loss on sale of OREO decreased $746, or 96.0%, from year-end 2007. Also contributing to noninterest revenue growth were activities from other noninterest income sources, which include improvements in the Company's tax refund processing fees and debit card interchange fees. As mentioned previously, the Company began its participation in a new tax refund loan service in 2006 where it serves as a facilitator for the clearing of tax refunds for a tax software provider. The Company is one of a limited number of financial institutions throughout the U.S. that facilitates tax refunds through its relationship with this tax software provider. As a result of tax refund processing fee activity being mostly seasonal, the majority of income was recorded during the first half of 2008, with only minimal income recorded thereafter. For 2008, the Company's tax refund processing fees increased by $163, or 148.5%, over 2007. Further enhancing growth in other noninterest income was debit card interchange income, increasing $106, or 19.4%, during 2008 as compared to 2007. The volume of transactions utilizing the Company's Jeanie(R) Plus debit card continue to increase from a year ago. The Company's customers used their Jeanie(R) Plus debit cards to complete 1,319,191 transactions during 2008, up 13.1% from the 1,166,337 transactions during 2007, derived mostly from gasoline and restaurant purchases. Also increasing noninterest income was the Bank's service charge fees on deposit accounts, which increased $91, or 3.1%, from year-end 2007. A higher volume of overdraft balances contributed to an increase in non-sufficient fund fees during 2008. To help manage consumer demand for longer-termed, fixed-rate real estate mortgages, the Company has taken additional opportunities to sell some real estate loans to the secondary market. During the year ended December 31, 2008, the Company sold 109 loans totaling $11,704 to the secondary market as compared to 41 loans totaling $4,299 during the year ended December 31, 2007. This volume increase in loan sales contributed to the growth in income on sale of loans, which was up $25, or 24.5%, during 2008 as compared to 2007. Income earned on the Company's bank owned life insurance ("BOLI") contracts was up $18, or 2.4%, during 2008 as compared to 2007. BOLI activity was mostly impacted by additional investments in life insurance contracts purchased during the second and fourth quarters of 2008. The Company's average investment balance in BOLI through December 31, 2008 was $16,934, an increase of $669, or 4.1%, as compared to the same period in 2007. Partially offsetting the growth in other noninterest income were decreases in the Company's rental income from OREO properties. Rental income from OREO properties totaled $213 during 2007 as compared to no rental income recognized during 2008. Rental income recognized in 2007 from OREO properties was primarily from one large commercial facility located in Kanawha County, West Virginia and one hotel facility located in Portsmouth, Ohio. Both properties were eventually sold in December 2007. In 2007, total noninterest income decreased $594, or 10.2%, as compared to 2006. Contributing most to this decrease was the loss on sale of OREO experienced during the fourth quarter of 2007, creating a pretax loss of $686. MANAGEMENT'S DISCUSSION AND ANALYSIS Further decreasing noninterest income was the Company's tax-free BOLI investment proceeds. BOLI income was down $150, or 16.5%, during 2007, driven mostly by tax-free life insurance proceeds of $174 that were recorded in 2006 as compared to $71 in proceeds during 2007. Partially offsetting the 2007 decreases from the loss on sale of OREO and BOLI revenue were increases in rental income from the OREO properties previously mentioned that totaled $213 during 2007 as compared to no income in 2006. The Company's tax processing fees were also up $27, or 71.8%, as compared to the same period in 2006. NONINTEREST EXPENSE Total noninterest expense increased $760, or 3.4%, in 2008 and increased $1,384, or 6.5%, in 2007. The most significant expense in this category is salary and employee benefits, which increased $1,030, or 7.9%, from 2007 to 2008. Contributing most to this increase were increased health insurance benefit expenses, annual cost of living salary increases and higher incentive costs due to higher corporate performance during 2008 as compared to 2007. During 2008, the Company also experienced a higher full-time equivalent employee base, increasing from 256 employees at year-end 2007 to 264 employees at year-end 2008, further increasing salaries and employee benefit expenses during 2008. During 2007, salary and employee benefits increased $548, or 4.4%, from 2006. This increase was in large part due to annual cost of living salary increases as well as increases in employee incentive compensation due to higher corporate performance during 2007 as compared to 2006. During 2007, the Company also experienced a slightly higher full-time equivalent employee base, increasing from 254 employees at year-end 2006 to 256 employees at year-end 2007, further increasing salaries and employee benefit expenses during 2007. In 2008, occupancy and furniture and equipment expenses increased $57, or 2.2%, as compared to 2007. This increase was in large part due to the addition of a new banking facility located within a hospital in Gallia County. The full service banking center was built during 2007 at a cost of approximately $371 and serves as an additional market presence to service the banking needs of the medical staff and patients along the hospital's campus area. The facility was placed in service and depreciation commenced during the fourth quarter of 2007. As a result, occupancy and furniture and equipment expenses for this new facility increased $49 during 2008 as compared to 2007. In 2007, occupancy and furniture and equipment expenses increased $95, or 3.9%, as compared to 2006. The increase was in large part due to the Company's investment in its Jackson, Ohio facility. In late 2006, the Company invested over $2,000 to replace its Jackson, Ohio facility and, during that time, ceased operations in its Jackson superbank facility. The facility was placed in service and depreciation commenced during the fourth quarter of 2006. During 2008, corporation franchise tax decreased $65, or 9.7%, as compared to 2007. This cost savings effect was the result of a tax credit the Company was able to apply for and receive based on the training programs that exist and are utilized within the Company for the benefit of its employees. Corporation franchise tax was relatively stable during 2007 as compared to 2006, increasing $2, or .3%, based on capital levels at the Bank during this period. The Company continues to incur monthly costs from the Bank's use of technology to better serve the convenience of its customers, which includes ATM, debit and credit cards, as well as various online banking products, including net teller and bill pay. During 2008, data processing expenses decreased $71, or 8.4%, as compared to 2007. The decrease was due to the successful re-negotiation of the Bank's monthly data processing costs. The negotiations for lower monthly processing charges were finalized in the third quarter of 2008 and decreased the monthly data processing costs by more than $15 per month beginning with the August 2008 bill. During 2007, data processing expenses increased $157, or 22.9%, as compared to 2006, mostly due to the transactional volume increases in the Company's Jeanie(R) Plus debit cards during 2007. Other noninterest expenses were down $191, or 3.5%, during 2008. Contributing most to this expense savings was a decrease in the Company's foreclosure expenses, which were down $487, or 90.5%, during 2008 as compared to 2007. This decrease was due to the larger than normal volume of foreclosure costs that were incurred during 2007 associated with higher average nonperforming loan balances during that time. Foreclosure costs that were incurred as part of resolving nonperforming credits during 2007 were deemed necessary to improve asset quality and lower portfolio risk. Partially offsetting lower foreclosure expense during 2008 within other noninterest expense was growth in the Company's Federal Deposit Insurance Corporation ("FDIC") insurance expense, which was up $198, or 283.7%, during 2008 as compared to 2007. This increase was in large part due to the Company's share of a one-time assessment credit being fully utilized by June 30, 2008. With the elimination of this credit, the Company entered the third quarter of 2008 with its deposits being assessed at a rate close to 7 basis points. In December 2008, the FDIC issued a rule increasing deposit insurance assessment rates uniformly for all financial institutions for the first quarter of 2009 by an additional 7 basis points on an annual basis. On February 27, 2009, the FDIC announced adoption of an interim final rule imposing a one-time special assessment of 20 basis points and a final rule adjusting the risk-based calculation used to determine the premiums to be paid by each insured institution. The amount of the special assessment may be decreased, but additional special assessments and premium increases are possible, which could have a material adverse effect on the Company's net income. As a result of this special assessment and the changes to the premium calculation, the Company anticipates its FDIC insurance expense to significantly increase in 2009 from its already increasing levels in 2008. All other noninterest expense categories were up $98, or 2.0%, from 2007. MANAGEMENT'S DISCUSSION AND ANALYSIS During 2007, other noninterest expenses were up $582, or 11.9%, in large part due to increases in the various loan and collection expenses associated with higher nonperforming loan balances mentioned above. The Company's efficiency ratio is defined as noninterest expense as a percentage of FTE net interest income plus noninterest income. The emphasis management has placed on managing its balance sheet mix and interest rate sensitivity to help expand the net interest margin as well as developing more innovative ways to generate noninterest revenue has contributed to an improved efficiency ratio, finishing at 62.5% for 2008 as compared to 66.1% for 2007. Conversely, in 2007, the efficiency ratio finished at 66.1%, up from 61.2% in 2006. This less-improved efficiency number is largely the result of higher loan costs that were incurred during 2007 to better the Company's nonperforming loan levels. FINANCIAL CONDITION: CASH AND CASH EQUIVALENTS The Company's cash and cash equivalents consist of cash and balances due from banks and federal funds sold. The amounts of cash and cash equivalents fluctuate on a daily basis due to customer activity and liquidity needs. At December 31, 2008, cash and cash equivalents had increased $787, or 4.7%, to $17,681 as compared to $16,894 at December 31, 2007. The increased liquidity position of the Company at December 31, 2008 was the result of lower loan demand and investment security maturities combined with an increase in total deposits. As liquidity levels vary continuously based on consumer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes that the current balance of cash and cash equivalents remains at a level that will meet cash obligations and provide adequate liquidity. INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS At December 31, 2008, the Company had a total of $611 invested as interest-bearing deposits in other financial institutions, a slight decrease from $633 at December 31, 2007. Historically, the Company has typically invested its excess funds with various correspondent banks in the form of federal funds sold, a common strategy performed by most banks. Beginning in the second quarter of 2008, the Company utilized a new relationship with a deposit placement service provider known as CDARS, or the Certificate of Deposit Account Registry Service, to invest its excess funds. CDARS provides financial institutions with the means to invest its own funds through One-Way Sell transactions for various maturity terms. The rates offered for the terms selected by the Company, between 1.8% and 2.8% at a weighted average maturity of 7 weeks, compared favorably to federal funds rate offerings at that time, which were 2.0% at September 30, 2008, and have since been lowered to .25% at December 31, 2008. At December 31, 2008, the Company's CDARS One-Way Sell investments had matured. The Company views this investment option as a margin-enhancing alternative when investing its excess funds and will continue to utilize this method when the need arises. Furthermore, CDARS balances are 100% secured by FDIC insurance as compared to federal funds sold balances which were considered unsecured as of September 30, 2008. Since then, as part of the FDIC's "Liquidity Guarantee Program" announced on October 14, 2008, federal funds sold balances (or inter-banking funding) will now be 100% guaranteed by the FDIC for participating institutions. The ability of the Company to issue these guaranteed federal funds sold balances will expire on June 30, 2009. 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, other than renewals or replacements of maturing securities. The balance of total securities decreased $1,718, or 1.8%, as compared to 2007, with the ratio of securities to total assets also decreasing to 11.8% at December 31, 2008, compared to 12.0% at December 31, 2007. The Company's investment securities portfolio consists of mortgage-backed securities, U.S. Government sponsored entity ("GSE") securities and obligations of states and political subdivisions ("municipals"). GSE securities decreased $7,581, or 19.2%, as a result of several large maturities during both the first and second quarters of 2008. In addition to attractive yield opportunities and a desire to increase diversification within the Company's securities portfolio, GSE securities have also been used to satisfy pledging requirements for repurchase agreements. At December 31, 2008, the Company's repurchase agreements had decreased 40.4%, reducing the need to secure these balances and impacting the runoff in GSE securities. This decrease was partially offset by increases in both mortgage-backed securities and obligations of states and political subdivisions, which were up $4,850, or 12.5%, and $1,013, or 6.4%, respectively, from year-end 2007. Mortgage-backed securities make up the largest portion of the Company's investment portfolio, totaling $43,514, or 47.1% of total investments at December 31, 2008. The primary advantage of mortgage-backed securities has been the increased cash flows due to the more rapid (monthly) repayment of principal as compared to other types of investment securities, which deliver proceeds upon maturity or call date. Principal repayments from mortgage-backed securities during 2008 totaled $7,985. With the general decrease in interest rates evident since 2007, the reinvestment rates on debt securities continue to show lower returns during 2008. The weighted average FTE yield on debt securities at year-end 2008 was 4.34%, as compared to 4.55% at year-end 2007. Table III provides a summary of the portfolio by category and remaining contractual maturity. Issues classified as equity securities have no stated MANAGEMENT'S DISCUSSION AND ANALYSIS maturity date and are not included in Table III. For 2009, the Company's focus will be to generate interest revenue primarily through loan growth, as loans generate the highest yields of total earning assets. LOANS In 2008, the Company's primary category of earning assets, total loans, decreased $6,712, or 1.1%, to finish at $630,391. Lower loan balances were largely due to total commercial loans decreasing $8,230, or 3.3%, from year-end 2007. The Company's commercial loans include both commercial real estate and commercial and industrial loans. While commercial loan balances are down, management continues to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans. The Company's commercial and industrial loan portfolio, down $10,266, or 18.6%, from year-end 2007, consists of loans to corporate borrowers primarily in small to mid-sized industrial and commercial companies that include service, retail and wholesale merchants. Collateral securing these loans includes equipment, inventory, and stock. Commercial real estate, the Company's largest segment of commercial loans, increased $2,036, or 1.0%. This segment of loans is mostly secured by commercial real estate and rental property. Commercial real estate consists of loan participations with other banks outside the Company's primary market area. Although the Company is not actively marketing participation loans outside its primary market area, it is taking advantage of the relationships it has with certain lenders in those areas where the Company believes it can profitably participate with an acceptable level of risk. The commercial loan portfolio, including participation loans, consists primarily of rental property loans (22.8% of portfolio), medical industry loans (12.0% of portfolio), land development loans (8.9% of portfolio), and hotel and motel loans (8.3% of portfolio). During 2008, the primary market areas for the Company's commercial loan originations, excluding loan participations, were in the areas of Gallia, Jackson and Franklin counties of Ohio, which accounted for 61.9% of total originations. The growing West Virginia markets also accounted for 30.2% of total originations for the same time period. While management believes lending opportunities exist in the Company's markets, future commercial lending activities will depend upon economic and related conditions, such as general demand for loans in the Company's primary markets, interest rates offered by the Company and normal underwriting considerations. Additionally, the potential for larger than normal commercial loan payoffs may limit loan growth during 2009. Also contributing to the loan portfolio decrease were consumer loans, which were down $921, or 0.7%, from year-end 2007. The Company's consumer loans are secured by automobiles, mobile homes, recreational vehicles and other personal property. Personal loans and unsecured credit card receivables are also included as consumer loans. The decrease in consumer volume was mostly attributable to the automobile lending segment, which decreased $2,450, or 4.3%, from year-end 2007. While the automobile lending segment continues to represent the largest portion of the Company's consumer loan portfolio, management's emphasis on profitable loan growth with higher returns has contributed most to the reduction in loan volume within this area. Indirect automobile loans bear additional costs from dealers that partially offset interest revenue and lower the rate of return. Furthermore, economic factors that have weakened the economy and consumer spending have caused a decline in automobile loan volume. As short-term rates have aggressively moved down since September 2007, continued competition with local banks and alternative methods of financing, such as captive finance companies offering loans at below-market interest rates, have continued to challenge automobile loan growth during 2008 and should continue to do so in 2009. Partially offsetting the decreases in auto loans was an increase to the Company's home equity capital line loan balances, which increased $2,162, or 11.1%, from year-end 2007. The remaining consumer loan portfolio balances decreased $633 from year-end 2007. Generating residential real estate loans remains a key focus of the Company's lending efforts. Residential real estate loan balances comprise the largest portion of the Company's loan portfolio and consist primarily of one- to four-family residential mortgages and carry many of the same customer and industry risks as the commercial loan portfolio. During 2008, total residential real estate loan balances increased $2,210, or 0.9%, from year-end 2007 to total $252,693. The increase was largely driven by growth in the Company's five-year adjustable rate (2-step) product, with balances being up $7,374, or 112.9%, from year-end 2007. This product allows the consumer to secure a fixed initial interest rate for the first five years, with the loan adjusting to a variable interest rate for years 6 through 30. Real estate loan growth was also experienced in the Company's longer-termed, fixed-rate real estate loans, which were up $6,287, or 3.4%, from year-end 2007. Terms of these fixed-rate loans include 15-, 20- and 30-year periods. To help further satisfy demand for longer-termed, fixed-rate real estate loans, the Company continues to originate and sell some fixed-rate mortgages to the secondary market, and has sold $11,704 in loans during 2008, which were up $7,405, or 172.2%, over the volume sold during 2007. Partially offsetting the increases in five-year adjustable and long-term, fixed-rate real estate loan balances was a decrease to the Company's one-year adjustable-rate mortgage balances of $9,118, or 21.6%, from year-end 2007. During 2006 and 2007, consumer demand for fixed-rate real estate loans continued to increase due to the continuation of lower, more affordable, mortgage rates. As long-term interest rates remained low during 2008, consumers continued to pay off and refinance their variable rate mortgages, although the volume of refinancings continues to stabilize as compared to 2007 and 2006. This has resulted in lower one-year adjustable-rate mortgage balances at year-end 2008 as compared to year-end 2007. The remaining real estate loan portfolio balances decreased $2,333 primarily from the Company's residential construction loans. MANAGEMENT'S DISCUSSION AND ANALYSIS Additionally, the Company recognized an increase of $229, or 3.2%, in other loans from year-end 2007. Other loans consist primarily of state and municipal loans and overdrafts. This increase was largely due to an increase in state and municipal loan balances of $248. The Company continues to monitor the pace of its loan volume, as it has experienced a 1.1% drop-off within its total loan portfolio during 2008. The well-documented housing market crisis and rising energy costs have impacted consumer spending and have led to lower consumer demand for loans. Furthermore, the Company continues to view the consumer loan segment as a decreasing portfolio, due to higher loan costs, increased competition in automobile loans and a lower return on investment as compared to the other loan portfolios. As a result, the Company anticipates total loan growth to be challenging throughout 2009. The Company remains committed to sound underwriting practices without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the credit quality of the portfolio. ALLOWANCE FOR LOAN LOSSES AND PROVISION EXPENSE Tables IV and V have been provided to enhance the understanding of the loan portfolio and the allowance for loan losses. Management evaluates the adequacy of the allowance for loan losses quarterly based on several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimate of probable losses. Management continually monitors the loan portfolio to identify potential portfolio risks and to detect potential credit deterioration in the early stages, and then establishes reserves based upon its evaluation of these inherent risks. 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 that is reflective of probable and inherent loss. The allowance required is primarily a function of the relative quality of the loans in the loan portfolio, the mix of loans in the portfolio and the rate of growth of outstanding loans. During 2008, the Company increased its provision for loan loss expense by $1,464 as compared to 2007, which increased the allowance for loan losses by $1,062, or 15.8%, to $7,799. The increase in the allowance for loan losses was in large part due to an increase in the level of nonperforming loans, which consist of nonaccruing loans and accruing loans past due 90 days or more. Nonperforming loans increased from $3,661 at year-end 2007 to $5,274 at year-end 2008 that required specific allocations to be made on behalf of the portfolio risks and credit deterioration of these nonperforming credits. During the first quarter of 2008, the Company experienced problems with one of its commercial borrowers that was unable to meet the debt requirements of its loans. During this time, the Company stopped recognizing interest income on the loans, reversed all interest that had been accrued and unpaid and classified the loans as nonperforming. At March 31, 2008, the ratio of nonperforming loans to total loans grew to 1.40% as a result of this classification. During the second quarter, continued analysis of these loans was performed, which included the reviews of updated appraisals that reflected a decline in market values due to deteriorating market conditions. This analysis, along with continued loan deterioration of this large commercial borrower, prompted management to charge down the loan by $750, including estimated costs to sell, to the estimated fair value of the collateral. Subsequently, the Company acquired these properties through foreclosure and transferred the loans to OREO. This shifted approximately $4,214 from nonperforming loans to nonperforming assets, which contributed to the increase in its nonperforming assets from $3,922 at year-end 2007 to $9,968 at year-end 2008. As a result, the Company's ratio of nonperforming loans to total loans decreased to .84% at December 31, 2008, while the ratio of nonperforming assets, which includes OREO properties, to total assets increased from .50% at year-end 2007 to 1.28% at year-end 2008. During 2008, net charge-offs totaled $2,654, which were down $2,273 from 2007, in large part due to commercial charge-offs of specific allocations that were reflected in the allowance for loan losses from 2007. As a result of higher nonperforming loan balances, the ratio of allowance for loan losses to total loans increased to 1.24% at December 31, 2008 as compared to 1.06% at December 31, 2007. Management believes that the allowance for loan losses at December 31, 2008 was adequate and reflected probable incurred losses in the loan portfolio. There can be no assurance, however, that adjustments to the allowance for loan losses will not be required in the future. Changes in the circumstances of particular borrowers, as well as adverse developments in the economy are factors that could change and make adjustments to the allowance for loan losses necessary. The actions that took place in the first and second quarters of 2008 were deemed prudent and necessary by management to maintain the allowance at its adequate level. Asset quality will continue to remain a key focus, as management continues to stress not just loan growth, but quality in loan underwriting as well. DEPOSITS Interest-earning assets are funded generally by both interest-bearing and noninterest-bearing core deposits. Deposits are influenced by changes in interest rates, economic conditions and competition from other banks. The accompanying table VII shows the composition of total deposits as of December 31, 2008. Total deposits increased $3,335, or 0.6%, to finish at $592,361 at year-end 2008, resulting mostly from an increase in the Company's interest-bearing demand deposits and money market deposit balances. Interest-bearing NOW account balances increased $15,237, or 23.2%, during 2008 as compared to year-end 2007. This growth was largely driven by a $16,386 increase in public fund balances related to the local city and county school construction projects currently in process within Gallia County, Ohio. MANAGEMENT'S DISCUSSION AND ANALYSIS Further deposit growth came from the Company's money market deposit balances, which were up $13,349, or 18.5%, during 2008 as compared to year-end 2007. This increase was from the Company's Market Watch money market account product, which generated $13,485 in new deposit balances from year-end 2007, mostly during the second quarter of 2008. Introduced in August 2005, the Market Watch product is a limited transaction investment account with tiered rates that competes with current market rate offerings and serves as an alternative to certificates of deposit for some customers. In the second quarter of 2008, the Company began marketing a special six-month introductory rate offer of 3.50% APY that would be for new Market Watch accounts. This special offer was well received by the Bank's customers and contributed to most of the year-to-date increase in 2008. As a result of this introductory rate offer, Market Watch deposit balances increased $20,670 during the second quarter of 2008. The Company's interest-free funding source, noninterest bearing demand deposits, also increased $6,917, or 8.8%, from year-end 2007, largely due to growth in business checking account balances. Time deposits, particularly CD's, remain the most significant source of funding for the Company's earning assets, making up 51.9% of total deposits. During 2008, time deposits decreased $33,396, or 9.8%, from year-end 2007, partly because of the declining pace of the Company's loan portfolio. With loan balances down 1.1% from year-end 2007, there has not been an aggressive need to deploy CD's as a funding source. Furthermore, an increased demand for the Market Watch product generated a deposit composition shift during 2008 from CD balances to higher savings and money market balances. This deposit shift also served as a cost effective contribution to the net interest margin. The average cost of savings and money market accounts was 1.70% and 2.78% during the years ending 2008 and 2007, respectively. This is compared to the much higher average cost of time deposits of 4.17% and 4.88% during the years ending 2008 and 2007, respectively. The Company will continue to experience increased competition for deposits in its market areas, which should challenge net growth in its deposit balances. The Company will continue to evaluate its deposit portfolio mix to properly utilize both retail and wholesale funds to support earning assets and minimize interest costs. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Repurchase agreements, which are financing arrangements that have overnight maturity terms, were down $16,320, or 40.4%, from year-end 2007. This decrease was mostly due to seasonal fluctuations of two commercial accounts during 2008. FUNDS BORROWED The Company also accesses other funding sources, including short-term and long-term borrowings, to fund asset growth and satisfy short-term liquidity needs. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB) advances and promissory notes. During 2008, other borrowed funds were up $9,772, or 14.6%, from year-end 2007, primarily to support various deposit maturities. While retail deposits continue to be the primary source of funding for growth in earning assets, management will continue to utilize various wholesale borrowings to help manage interest rate sensitivity and liquidity. OFF-BALANCE SHEET ARRANGEMENTS The disclosures required for off-balance sheet arrangements are discussed in Note I and Note K. SUBORDINATED DEBENTURES On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of adjustable-rate trust preferred securities as part of a pooled offering of such securities. The Company used the proceeds from these trust preferred securities to pay off $8,500 in higher cost trust preferred security debt on March 26, 2007. The replacement of the higher cost trust preferred security debt was a strategy by management to lower interest rate pressures that were impacting interest expense and help improve the Company's net interest margin. The early extinguishment and replacement of this higher cost debt improved earnings by nearly $54 pre-tax ($35 after taxes) during 2008 as compared to 2007. For additional discussion on the terms and conditions of this new trust preferred security issuance, please refer to Note I "Subordinated Debentures and Trust Preferred Securities". CAPITAL RESOURCES The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors and shareholders. All of the capital ratios exceeded the regulatory minimum guidelines as identified in Note P "Regulatory Matters". Shareholders' equity totaled $63,056 at December 31, 2008, compared to $61,511 at December 31, 2007, which represents growth of 2.5%. Contributing most to this increase was year-to-date net income of $7,128 partially offset by cash dividends paid of $3,061, or $.76 per share, year-to-date, and increased share repurchases. The Company had treasury stock totaling $15,712 at December 31, 2008, an increase of $2,269 as compared to the total at year-end 2007. The Company may repurchase additional common shares from time to time as authorized by its stock repurchase program. Most recently, the Board of Directors extended the stock repurchase program from February 16, 2009 to February 15, 2010, and authorized Ohio Valley to repurchase up to 175,000 of its common shares through open market and privately negotiated purchases. Furthermore, the Company benefits from a dividend reinvestment and stock purchase plan that is administered by an independent agent of the Company. 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 MANAGEMENT'S DISCUSSION AND ANALYSIS commissions. During 2008, shareholders invested more than $1,167 through the dividend reinvestment and stock purchase plan. These proceeds resulted in the acquisition of 49,539 existing shares through open market purchases. At December 31, 2008, approximately 81% of the shareholders were enrolled in the dividend reinvestment plan. INTEREST RATE SENSITIVITY AND LIQUIDITY The Company's goal for interest rate sensitivity management is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the Company's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability, but excessive levels of IRR can threaten the Company's earnings and capital. The Company evaluates IRR through the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The modeling process starts with a base case simulation, which assumes a flat interest rate scenario. The base case scenario is compared to rising and falling interest rate scenarios assuming a parallel shift in all interest rates. Comparisons of net interest income and net income fluctuations from the flat rate scenario illustrate the risks associated with the projected balance sheet structure. The Company's Asset/Liability Committee monitors and manages IRR within Board approved policy limits. The current IRR policy limits anticipated changes in net interest income to an instantaneous increase or decrease in market interest rates over a 12 month horizon to +/- 5% for a 100 basis point rate shock, +/- 7.5% for a 200 basis point rate shock and +/- 10% for a 300 basis point rate shock. Based on the level of interest rates at December 31, 2008, management did not test interest rates down 200 or 300 basis points. The estimated percentage change in net interest income due to a change in interest rates was within the policy guidelines established by the Board. At December 31, 2008, the Company's analysis of net interest income reflects a liability sensitive position. Based on current assumptions, an instantaneous decrease in interest rates would positively impact net interest income primarily due to the duration of earning assets exceeding the duration of interest-bearing liabilities. Conversely, an increase in interest rates would negatively impact net interest income. As compared to December 31, 2007, the Company's interest rate risk profile has become less exposed to rising interest rates primarily due to the extension of maturity terms offered on new time deposits. Since September 2007, the Federal Reserve has reduced short-term interest rates 500 basis points and the Company's net interest margin has responded positively to the decline in market rates. Liquidity management focuses 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 $75,340 in securities as available for sale at December 31, 2008. 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, 2008, the Bank could borrow an additional $52,937 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. MANAGEMENT'S DISCUSSION AND ANALYSIS Allowance for loan losses: To arrive at the total dollars necessary to maintain an allowance level sufficient to absorb probable losses incurred at a specific financial statement date, management has developed procedures to establish and then evaluate the allowance once determined. The allowance consists of the following components: specific allocation, general allocation and other estimated general allocation. To arrive at the amount required for the specific allocation component, the Company evaluates loans for which a loss may be incurred either in part or in whole. To achieve this task, the Company has created a quarterly report ("Watchlist") which lists the loans from each loan portfolio that management deems to be potential credit risks. The loans placed on this report are: loans past due 60 or more days, nonaccrual loans and loans management has determined to be potential problem loans. These loans are reviewed and analyzed for potential loss by the Large Loan Review Committee, which consists of the President of the Company and members of senior management with lending authority. The function of the Committee is to review and analyze large borrowers for credit risk, scrutinize the Watchlist and evaluate the adequacy of the allowance for loan losses and other credit related issues. The Committee has established a grading system to evaluate the credit risk of each commercial borrower on a scale of 1 (least risk) to 10 (greatest risk). After the Committee evaluates each relationship listed in the report, a specific loss allocation may be assessed. The specific allocation is currently made up of amounts allocated to the commercial and real estate loan portfolios. Included in the specific allocation analysis are impaired loans, which consist of loans with balances of $200 or more on nonaccrual status or non-performing in nature. These loans are also individually analyzed and a specific allocation may be assessed based on expected credit loss. Collateral dependent loans will be evaluated to determine a fair value of the collateral securing the loan. Any changes in the impaired allocation will be reflected in the total specific allocation. The second component (general allowance) is based upon total loan portfolio balances minus loan balances already reviewed (specific allocation). The Large Loan Review Committee evaluates credit analysis reports that provide management with a "snapshot" of information on borrowers with larger-balance loans (aggregate balances of $1,000 or greater), including loan grades, collateral values, and other factors. A list is prepared and updated quarterly that allows management to monitor this group of borrowers. Therefore, only small balance commercial loans and homogeneous loans (consumer and real estate loans) are not specifically reviewed to determine minor delinquencies, current collateral values and present credit risk. The Company utilizes actual historic loss experience as a factor to calculate the probable losses for this component of the allowance for loan losses. This risk factor reflects a 3 year performance evaluation of credit losses per loan portfolio. The risk factor is achieved by taking the average net charge-off per loan portfolio for the last 36 consecutive months and dividing it by the average loan balance for each loan portfolio over the same time period. The Company believes that by using the 36 month average loss risk factor, the estimated allowance will more accurately reflect current probable losses. The final component used to evaluate the adequacy of the allowance includes five additional areas that management believes can have an impact on collecting all principal due. These areas are: 1) delinquency trends, 2) current local economic conditions, 3) non-performing loan trends, 4) recovery vs. charge-off, and 5) personnel changes. Each of these areas is given a percentage factor, from a low of 10% to a high of 30%, determined by the degree of impact it may have on the allowance. To calculate the impact of other economic conditions on the allowance, the total general allowance is multiplied by this factor. These dollars are then added to the other two components to provide for economic conditions in the Company's assessment area. The Company's assessment area takes in a total of ten counties in Ohio and West Virginia. Each assessment area has its individual economic conditions; however, the Company has chosen to average the risk factors for compiling the economic risk factor. The adequacy of the allowance may be determined by certain specific and nonspecific allocations; however, the total allocation is available for any credit losses that may impact the loan portfolios. CONCENTRATIONS OF CREDIT RISK The Company maintains a diversified credit portfolio, with residential 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 MANAGEMENT'S DISCUSSION AND ANALYSIS in interest rates; the level of defaults and prepayment on loans made by the Company; unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in management's discussion and analysis is available in the Company's filings with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, including the disclosure under the heading "Item 1A. Risk Factors" of Part 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. 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 ------------------------------------------------------------------------------------ 2008 2007 2006 (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 $ 5,710 $ 137 2.39% $ 549 $ 23 4.22% $ 579 $ 23 4.06% with banks Federal funds sold 5,552 157 2.83 4,428 221 5.00 4,193 220 5.24 Securities: Taxable 82,606 3,432 4.15 76,748 3,477 4.53 73,160 3,189 4.36 Tax exempt 12,784 768 6.01 14,427 797 5.52 12,440 688 5.53 Loans 629,225 47,402 7.53 628,891 50,793 8.08 626,418 48,581 7.76 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- earning assets 735,877 51,896 7.05% 725,043 55,311 7.63% 716,790 52,701 7.35% Noninterest-earning assets: Cash and due from banks 15,029 14,137 15,306 Other nonearning assets 38,217 38,094 36,655 Allowance for loan losses (6,811) (7,720) (7,819) -------- -------- -------- Total noninterest- earning assets 46,435 44,511 44,142 -------- -------- -------- Total assets $782,312 $769,554 $760,932 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $ 88,110 $ 1,599 1.81% $ 78,636 $ 1,924 2.45% $ 93,137 $ 2,343 2.52% Savings and Money Market 121,392 2,061 1.70 97,240 2,705 2.78 78,241 1,895 2.42 Time deposits 311,188 12,976 4.17 341,686 16,686 4.88 338,593 14,356 4.24 Repurchase agreements 28,040 421 1.50 27,433 1,051 3.83 22,692 895 3.94 Other borrowed money 60,678 2,682 4.42 60,603 2,911 4.80 68,475 3,163 4.62 Subordinated debentures 13,500 1,089 8.07 13,593 1,143 8.41 13,500 1,279 9.48 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- bearing liabilities 622,908 20,828 3.34% 619,191 26,420 4.27% 614,638 23,931 3.89% Noninterest-bearing liabilities: Demand deposit accounts 85,436 78,048 75,330 Other liabilities 12,622 11,766 10,994 -------- -------- -------- Total noninterest- bearing liabilities 98,058 89,814 86,324 Shareholders' equity 61,346 60,549 59,970 -------- -------- -------- Total liabilities and shareholders' equity $782,312 $769,554 $760,932 ======== ======== ======== Net interest earnings $31,068 $28,891 $28,770 ======= ======= ======= Net interest earnings as a percent of interest-earning assets 4.23% 3.99% 4.02% ----- ----- ----- Net interest rate spread 3.71% 3.36% 3.46% ----- ----- ----- Average interest-bearing liabilities to average earning assets 84.65% 85.40% 85.75% ===== ===== =====
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 2008 2007 ----------------------------- ---------------------------- (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 $ 128 $ (14) $ 114 $ (1) $ 1 -- Federal funds sold 47 (111) (64) 12 (11) $ 1 Securities: Taxable 255 (300) (45) 160 128 288 Tax exempt (96) 67 (29) 110 (1) 109 Loans 27 (3,418) (3,391) 192 2,020 2,212 ------- ------- ------- ------- ------- ------- Total interest income 361 (3,776) (3,415) 473 2,137 2,610 INTEREST EXPENSE - ---------------- NOW accounts 213 (538) (325) (356) (63) (419) Savings and Money Market 570 (1,214) (644) 503 307 810 Time deposits (1,407) (2,303) (3,710) 132 2,198 2,330 Repurchase agreements 23 (653) (630) 182 (26) 156 Other borrowed money 3 (232) (229) (425) 173 (252) Subordinated debentures (8) (46) (54) --- (136) (136) ------- ------- ------- ------- ------- ------- Total interest expense (606) (4,986) (5,592) 36 2,453 2,489 ------- ------- ------- ------- ------- ------- Net interest earnings $ 967 $ 1,210 $ 2,177 $ 437 $ (316) $ 121 ======= ======= ======= ======= ======= =======
The change in interest due to volume and rate is determined as follows: Volume Variance - change in volume multiplied by the previous year's rate; Yield/Rate Variance - change in rate multiplied by the previous year's volume; Total Variance - change in volume multiplied by the change in rate. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Fully taxable equivalent yield assumes a 34% tax rate, net of related nondeductible interest expense. SECURITIES
Table III MATURING --------------------------------------------------------------------------- As of December 31, 2008 Within After One but After Five but (dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years -------- ----------------- ---------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- U.S. Government sponsored entity securities $ 7,682 4.14% $21,551 4.26% $ 2,633 4.95% --- --- Obligations of states and political subdivisions 1,085 6.02% 3,992 7.04% 2,865 6.96% $9,004 3.21% Mortgage-backed securities 1,235 3.35% 42,279 3.88% --- --- --- --- ------- ---- ------- ---- ------- ---- ------ ---- Total debt securiities $10,002 4.25% $67,822 4.19% $ 5,498 6.00% $9,004 3.21% ======= ==== ======= ==== ======= ==== ====== ====
Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions using a 34% rate. Weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Mortgage-backed securities, which have prepayment provisions, are assigned to a maturity based on estimated average lives. Securities are shown at their carrying values which include the market value adustments for available-for-sale securities. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES Table IV Years Ended December 31 (dollars in thousands) 2008 2007 2006 2005 2004 - ---------------------- ---- ---- ---- ---- ---- Commercial loans (1) $5,898 $5,273 $7,806 $4,704 $4,657 Percentage of loans to total loans 39.78% 40.63% 39.45% 38.33% 37.69% Residential real estate loans 806 327 310 623 642 Percentage of loans to total loans 40.09% 39.31% 38.16% 38.06% 37.84% Consumer loans 1,095 1,137 1,296 1,806 1,878 Percentage of loans to total loans 20.13% 20.06% 22.39% 23.61% 24.47% ------- ------- ------- ------- ------- Allowance for Loan Losses $7,799 $6,737 9,412 $7,133 $7,177 ======= ======= ======= ======= ======= 100.00% 100.00% 100.00% 100.00% 100.00% ======= ======= ======= ======= ======= Ratio of net charge-offs to average loans 1.24% .78% .54% .31% .47% ======= ======= ======= ======= ======= The above allocation is based on estimates and subjective judgments and is not necessarily indicative of the specific amounts or loan categories in which losses may ultimately occur. (1) Includes commercal and industrial and commercial real estate loans. SUMMARY OF NONPERFORMING AND PAST DUE LOANS Table V (dollars in thousands) 2008 2007 2006 2005 2004 - ---------------------- ---- ---- ---- ---- ---- Impaired loans $ 8,099 $ 6,871 $17,402 $7,983 $5,573 Past due-90 days or more and still accruing 1,878 927 1,375 1,317 1,402 Nonaccrual 3,396 2,734 12,017 1,240 1,618 Accruing loans past due 90 days or more to total loans .30% .14% .22% .21% .23% Nonaccrual loans as a % of total loans .54% .43% 1.92% .20% .27% Impaired loans as a % of total loans 1.28% 1.08% 2.78% 1.29% .93% Allowance for loans losses as a % of total loans 1.24% 1.06% 1.51% 1.16% 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 2008, the Company recognized $490 of interest income on impaired loans. Individual loans not included above that management feels have loss potential total approximately $1,404. The Company has no assets which are considered to be troubled debt restructurings that are not already included in the table above. Management formally considers placing a loan on nonaccrual status when collection of principal or interest has become doubtful. Furthermore, a loan should not be returned to the accrual status unless either all delinquent principal or interest has been brought current or the loan becomes well secured and is in the process of collection. MATURITY AND REPRICING DATA OF LOANS
Table VI As of December 31, 2008 Maturing/Repricing (dollars in thousands) Within After One but One Year Within Five Years After Five Years Total -------- ----------------- ---------------- ----- Residential real estate loans $ 45,456 $ 20,488 $186,749 $252,693 Commercial loans (1) 134,965 77,312 38,510 250,787 Consumer loans 29,785 65,648 31,478 126,911 -------- -------- -------- -------- Total loans $210,206 $163,448 $256,737 $630,391 ======== ======== ======== ========
Loans maturing or repricing after one year with: Variable interest rates $ 76,096 Fixed interest rates 344,089 -------- Total $420,185 ======== (1) Includes commercial and industrial and commercial real estate loans. DEPOSITS Table VII as of December 31 (dollars in thousands) 2008 2007 2006 ---- ---- ---- Interest-bearing deposits: NOW accounts $ 80,855 $ 65,618 $ 78,484 Money Market 85,625 72,276 58,941 Savings accounts 32,664 31,436 32,719 IRA accounts 46,574 44,050 38,731 Certificates of Deposit 261,137 297,057 306,951 -------- -------- -------- 506,855 510,437 515,826 Noninterest-bearing deposits: Demand deposits 85,506 78,589 77,960 -------- -------- -------- Total deposits $592,361 $589,026 $593,786 ======== ======== ======== The following table presents the Company's estimated net interest income sensitivity: INTEREST RATE SENSITIVITY Table VIII Change in December 31, 2008 December 31, 2007 Interest Rates % Change in % Change in Basis Points Net Interest Income Net Interest Income - --------------- ------------------- ------------------- +300 (5.47%) (8.23%) +200 (4.12%) (5.09%) +100 (2.30%) (2.47%) -100 2.54% 2.48% -200 ---- 5.01% -300 ---- 7.86% CONTRACTUAL OBLIGATIONS
Table IX The following table presents, as of December 31, 2008, 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 $284,650 --- --- --- $284,650 Consumer and brokered time deposits F 219,240 $ 82,359 $ 5,083 $ 1,029 307,711 Repurchase agreements G 24,070 --- --- --- 24,070 Other borrowed funds H 43,615 33,011 12 136 76,774 Subordinated debentures I --- --- --- 13,500 13,500
KEY RATIOS Table X 2008 2007 2006 2005 2004 ---- ---- ---- ---- ---- Return on average assets .91% .82% .71% .97% 1.16% Return on average equity 11.62% 10.40% 9.00% 12.18% 15.02% Dividend payout ratio 42.94% 46.66% 52.56% 38.55% 38.89% Average equity to average assets 7.84% 7.87% 7.88% 7.93% 7.72% EX-21 8 exhibit21.txt SUBSIDIARIES OF REGISTRNT 12312008 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 Connecticut 100% Ohio Valley Statutory Trust III Delaware 100% EX-31 9 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial staements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 13, 2009 By /s/ Jeffrey E. Smith ----------------------------------- Jeffrey E. Smith, President and CEO EX-31 10 exhibit31_2.txt PRINCIPAL FINANCIAL OFFICER 12312008 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial staements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 13, 2009 By /s/ Scott W. Shockey ----------------------------------- Scott W. Shockey Vice President and Chief Financial Officer EX-32 11 exhibit32.txt SECT 1350 CERTIFICATION 12312008 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, 2008 (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 13, 2009 Dated: March 13, 2009 * 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. -----END PRIVACY-ENHANCED MESSAGE-----