-----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, U8l60BO0nkPyr0vlt5m4P+8AV6p69cZJPi8FnhM1Jacpg4WMAWaZQFsUeZcyywmB esu1JthpJKXyao53G8B6zQ== 0001169232-07-001468.txt : 20070316 0001169232-07-001468.hdr.sgml : 20070316 20070316172422 ACCESSION NUMBER: 0001169232-07-001468 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070316 DATE AS OF CHANGE: 20070316 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: 07701265 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 sec10k12312006.txt 12312006 Ohio Valley Banc Corp. 420 Third Avenue Gallipolis, Ohio 45631 March 16, 2007 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, 2006 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, 2006 (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, 2006, 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, 2006 [ ] 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, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| 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 $25.15 per share on June 30, 2006, the aggregate market value of the issuer's shares held by non-affiliates on such date was $101,359,027. 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 15, 2007 was 4,170,720 common shares. Documents Incorporated By Reference: (1) Portions of the 2006 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 9, 2007 are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14. 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. 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 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, 2006, Ohio Valley's consolidated assets approximated to $764,361,000 and total shareholders' equity approximated to $60,282,000. 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 unerwriting 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, 2006. The Bank is primarily engaged in commercial and retail banking. The Bank is a full-service financial institution offering a blend of commercial, consumer and agricultural banking services within central and southeastern Ohio as well as western West Virginia. 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 3 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. 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 five 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 II. 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 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 II is located in Ohio Valley's 2006 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, 2006. 4 Financial Information Financial information regarding the Company as of December 31, 2006 and 2005 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, 2006. Lending Activities The Company's loan portfolio increased $7,632,000 to finish at $625,164,000 in 2006. 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. Commercial loans increased $4,212,000 or 1.8% and residential real estate loans increased $3,541,000 or 1.5%, while consumer loans decreased $5,854,000 or 4.0% as compared to 2005. Consolidated interest and fee revenue from loans accounted for 83.28%, 82.61%, and 77.35% of total consolidated revenues in 2006, 2005 and 2004, 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. 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 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 $300,000 are reviewed and approved by the Executive Committee of the Bank's Board of Directors. 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 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 89% of the purchase price or the appraisal value of the real estate securing the loan, unless private mortgage insurance is obtained by the borrower for the percentage exceeding 89%. These loans generally range from one-year adjustable to thirty-year fixed-rate mortgages. 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 5 rates with fifteen to thirty year terms, assisted in minimizing the Bank's exposure to interest rate risk as rates began to rise in 2004. 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. 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 6 amount of mortgage-backed securities and U.S. government agency securities. Revenues from interest and dividends on securities accounted for 6.71%, 6.69% and 7.13% of total consolidated revenues in 2006, 2005 and 2004, 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 trut preferred securities, Ohio Valley Statutory Trust I and Ohio Valley Statutory Trust II, totaling $13,500,000. Ohio Valley used the proceeds to provide additional capital to the bank to support growth. Competition The financial services industry is highly competitive. As of December 31, 2006, there were 122 bank holding companies operating in the State of Ohio registered with the Federal Reserve. 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, insurance companies and mutual funds. In addition, larger regional institutions, with substantially greater resources, are generating a growing market presence. Loan Central's market presence further strengthens Ohio Valley's ability to compete in the Gallia, Jackson and Pike Counties by serving a consumer base which may not meet the Bank's credit standards. Loan Central also operates in the Ohio counties of Lawrence and Scioto, which are outside the Bank's primary market area. 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 service the market areas of Gallia, Meigs and Lawrence counties of Ohio as well as the growing Kanawha and Cabell counties of West Virginia. 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. 7 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; 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); 8 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. Holding Company Activities In November of 1999, the GLB Act was enacted, amending the BHC Act and modernizing the laws governing the financial services industry. The GLB Act authorized the creation of financial holding companies, a new type of bank holding company with powers exceeding those of traditional bank holding companies. Ohio Valley became a financial holding company during 2000. In order to become a financial holding company, a bank holding company and all of its depository institutions must be well capitalized and well managed under federal banking regulations, and the depository institutions must have received a Community Investment Act rating of at least satisfactory. Financial holding companies may engage in a wide variety of financial activities, including any activity that the Federal Reserve and the Treasury Department consider financial in nature or incidental to financial activities, and any activity that the Federal Reserve Board determines complementary to a financial activity and which does not pose a substantial safety and soundness risk. These activities include securities underwriting and dealing activities, insurance and underwriting activities and merchant banking/equity investment activities. Because it has authority to engage in a broad array of financial 9 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. The GLB Act directs the Federal Reserve Board to rely to the maximum extent possible on examinations and reports prepared by functional regulators. The Federal Reserve Board is also prohibited from applying any capital standard directly to any functionally regulated subsidiary that is already in compliance with the capital requirements of its functional regulator. Loan Central is supervised and regulated by the State of Ohio Department of Financial Institutions, Division of Consumer Finance. Ohio Valley's insurance 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, 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 10 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-issued 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 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. In February 2006, two pieces of legislation commonly referred to as the Deposit Insurance Reform Acts were enacted. Under that legislation, the Bank Insurance Fund and the Savings Association Insurance Fund were merged into a new Deposit Insurance Fund ("DIF"). The Deposit Insurance Reform Acts provide for several additional changes to the deposit insurance system, including the following: 11 o increasing the deposit insurance limit for retirement accounts from $100,000 to $250,000; o adjusting the deposit insurance limits (currently $100,000 for most accounts) every five years based on an inflation index, with the first adjustment to be effective on January 1, 2011; o providing pass-through deposit insurance for the deposits of employee benefit plans (but prohibiting undercapitalized depository institutions from accepting employee benefit plan deposits); o allocating an aggregate of $4.7 billion of one-time credits to offset the premiums of depository institutions based on their assessment based at the end of 1996; o establishing rules for awarding cash dividends to depository institutions, based on their relative contributions to the DIF and its predecessor funds, when the DIF reserve ratio reaches certain levels; and o revising the rules and procedures for risk-based premium assessments. 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 In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorist Act of 2001 (the "Patriot Act") was signed into law in October 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. Sarbanes-Oxley Act of 2002 On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate 12 disclosures made pursuant to the securities laws. The proposed changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently. The Sarbanes-Oxley Act addresses, among other matters: audit committees; corporate responsibility for financial reports; a requirement that chief executive and chief financial officers forfeit certain bonuses if their companies issue an accounting restatement as a result of misconduct; a prohibition on insider trading during pension fund black-out periods; disclosure of off-balance sheet transactions; conditions for the use of financial information not in accordance with generally accepted accouting principles; a prohibition on personal loans to directors and executive officers (excluding loans by insured depository institutions that are subject to the insider lending restrictions of the Federal Reserve Act); expedited filing requirements for stock transaction reports by officers and directors; the formation of the Public Company Accounting Oversight Board; auditor independence; and various increased criminal penalties for violations of securities laws. As mandated by the Sarbanes-Oxley Act, the SEC has adopted rules and regulations governing, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. The NASDAQ Global Market has also adopted corporate governance rules. Ohio Valley's Board of Directors has taken a series of actions to strengthen and improve Ohio Valley's corporate governance practices in light of the rules of the SEC and The NASDAQ Global Market. Employees As of December 31, 2006, Ohio Valley and its subsidiaries had approximately 254 full-time equivalent employees and officers. Management considers its relationship with its employees and officers to be good. Other Information Management anticipates no material effect upon the capital expenditures, earnings and competitive position of the Company by reason of any laws regulating or protecting the environment. Ohio Valley believes that the nature of the operations of its subsidiaries has little, if any, environmental impact. Ohio Valley, therefore, anticipates no material capital expenditures for environmental control facilities in its current fiscal year or for the foreseeable future. The Bank and Loan Central may be required to make capital expenditures related to properties which they may acquire through foreclosure proceedings in the future. However, the amount of such capital expenditures, if any, is not currently determinable. Neither Ohio Valley nor its subsidiaries have any material patents, trademarks, licenses, franchises or concessions. No material amounts have been spent on research activities, and no employees are engaged full-time in research activities. 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. 13 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 2006 Annual Report to Shareholders, which are incorporated herein by reference. I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL A. & B. The average balance sheet information and the related analysis of net interest earnings for the years ending December 31, 2006, 2005 and 2004 is incorporated herein by reference to the information appearing under the caption "Table I - Consolidated Average Balance Sheet & Analysis of Net Interest Income," within "Management's Discussion and Analysis of Operations" located in Ohio Valley's 2006 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, 2006 and 2005 is incorporated herein by reference to the information appearing under the caption "Table II - Rate Volume Analysis of Changes in Interest Income & Expense," within "Management's Discussion and Analysis of Operations" located in Ohio Valley's 2006 Annual Report to Shareholders. II. INVESTMENT PORTFOLIO A. Types of Securities - Total securities on the balance sheet wee comprised of the following classifications at December 31: (dollars in thousands) 2006 2005 2004 ---- ---- ---- Securities Available-for-Sale U.S. Government agency securities.. $ 25,183 $ 18,167 $ 20,087 Mortgage-backed securities......... 45,084 48,161 48,647 --------- --------- --------- Total securities available-for-sale $ 70,267 $ 66,328 $ 68,734 ========= ========= ========= Securities Held-to-Maturity Obligations of states of the U.S. and political subdivisions....... $ 13,293 $ 12,019 $ 11,910 Mortgage-backed securities......... 57 69 84 --------- --------- --------- Total securities held-to-maturity $ 13,350 $ 12,088 $ 11,994 ========= ========= ========= B. Information required by this item is incorporated herein by reference to the information appearing under the caption "Table III - Securities," within "Management's Discussion and Analysis of Operations" located in Ohio Valley's 2006 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. 14 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) 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- Commercial $240,748 $236,536 $226,058 $220,724 $205,508 Residential real estate 238,549 235,008 227,234 217,636 224,212 Consumer 139,961 145,815 146,965 134,720 128,662 All other 5,906 173 317 624 1,179 -------- -------- -------- -------- -------- $625,164 $617,532 $600,574 $573,704 $559,561 ======== ======== ======== ======== ======== 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 Operations" located in Ohio Valley's 2006 Annual Report to Shareholders. 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 $403,000 for the fiscal year ending December 31, 2006. The amount recorded on such loans was $939,000. 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 Operations" located in Ohio Valley's 2006 Annual Report to Shareholders. 2. Potential Problem Loans - At December 31, 2006, there were approximately $4,962,000 of loans, which are not included in "Table V - Summary of Nonperforming and Past Due Loans" within "Management's Discussion and Analysis of Operations" located in Ohio Valley's 2006 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, 2006, 2005 or 2004. 4. Loan Concentrations - As of December 31, 2006, 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, 2006, located in Ohio Valley's 2006 Annual Report to Shareholders which note is incorporated herein by reference. 15 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, 2006, there were no other interest-bearing assets that would be required to be disclosed under Item III.C. if such assets were loans. 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) 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- Balance, beginning of year $7,133 $7,177 $7,593 $7,069 $6,251 Loans charged-off: Residential real estate 432 349 823 1,110 636 Commercial 3,079 1,295 1,661 2,267 2,272 Consumer 2,120 2,263 2,267 2,661 2,656 -------- -------- -------- -------- ------- Total loans charged-off 5,631 3,907 4,751 6,038 5,564 Recoveries of loans: Residential real estate 204 336 583 279 119 Commercial 946 912 556 1,057 158 Consumer 1,097 818 843 887 635 -------- ------- -------- -------- ------- Total recoveries of loans 2,247 2,066 1,982 2,223 912 Net loan charge-offs (3,384) (1,841) (2,769) (3,815) (4,652) Provision charged to operations 5,663 1,797 2,353 4,339 5,470 -------- ------- -------- -------- ------- Balance, end of year $9,412 $7,133 $7,177 $7,593 $7,069 ======== ======= ======== ======== ======= Ratio of net charge-offs to average loans outstanding .54% .31% .47% .68% .86% ======== ======= ======== ======== ======= Ratio of allowance for loan losses to non-performing assets 61.54% 154.36% 142.46% 140.66% 83.16% ======== ======= ======== ======== ======= Discussion on factors which influenced management in determining the amount of additions charged to provision expense is incorporated herein by reference to the information appearing under the caption "Allowance for Loan Loss and Provision Expense" within "Management's Discussion and Analysis of Operations" located in Ohio Valley's 2006 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 Operations" located in Ohio Valley's 2006 Annual Report to Shareholders. V. DEPOSITS A. Deposit Summary - Information required by this item is incorporated herein by reference to the information appearing under the caption "Table I - Consolidated Average Balance Sheet & Analysis of Net Interest Income," within "Management's Discussion and Analysis of Operations" located in Ohio Valley's 2006 Annual Report to Shareholders. 16 C.&E. Foreign Deposits - There were no foreign deposits outstanding at December 31, 2006, 2005, or 2004. D. Schedule of Maturities - The following table provides a summary of total time deposits by remaining maturities for the fiscal year ended December 31, 2006: 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 ................. $ 40,563 $ 18,602 $ 31,562 $ 42,095 Other time deposits of $100,000 or greater ................. 1,597 1,258 2,525 3,673 -------- -------- -------- -------- Total time deposits of $100,000 or greater ................. $ 42,160 $ 19,860 $ 34,087 $ 45,768 ======== ======== ======== ======== VI. RETURN ON EQUITY AND ASSETS Information required by this section is incorporated herein by reference to the information appearing under the caption "Table X - Key Ratios" within "Management's Discussion and Analysis of Operations" located in Ohio Valley's 2006 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) 2006 2005 2004 ---- ---- ---- Balance outstanding at period-end .......... $ 22,556 $ 29,070 $ 39,753 -------- -------- -------- Weighted average interest rate at period-end 4.20% 3.32% 1.77% -------- -------- -------- Average amount outstanding during year ..... $ 22,692 $ 24,694 $ 24,743 -------- -------- -------- Approximate weighted average interest rate during the year ......................... 3.94% 2.60% 1.12% -------- -------- -------- Maximum amount outstanding as of any month-end ............................... $ 28,312 $ 29,070 $ 39,753 -------- -------- -------- 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 17 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 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. 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 18 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. 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. Our profitability depends significantly on the condition of the local and regional economies where we operate. 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. 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 19 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. 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. 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. 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, 20 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. 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. 21 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. 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, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. 22 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. The price of our common shares may be volatile, which may result in losses for shareholders. Several factors could cause the price of our common shares to fluctuate substantially in the future. These factors include: o announcements of developments related to our business; o fluctuations in our results of operations; o sales of substantial amounts of our securities into the marketplace; o general conditions in our markets or the worldwide economy; o a shortfall in revenues or earnings compared to securities analysts' expectations; o changes in analysts' recommendations or projections; and o our announcement of new acquisitions or other projects. The market price of our common shares may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market price declines or market volatility in the future could adversely affect the price of our common shares, and the current market price may not be indicative of future market prices. 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, 23 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. We may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on our financial condition and results of operation. We and our subsidiaries may be involved from time to time in a variety of litigation arising out of our business. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operation. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all. 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. 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. Terrorism, acts of war or international conflicts could have a material adverse effect on our financial condition and results of operations. Acts or threats of war or terrorism, international conflicts, including ongoing military operations in Iraq and Afghanistan, and the actions taken by the United States and other governments in response to such events could negatively impact general business and economic conditions in the United States. If terrorist activity, acts of war or other international hostilities cause an overall economic decline, our financial condition and operating results could be materially adversely affected. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to 24 national security and other actual or potential conflicts or acts of war, including conflict in the Middle East, have created many economic and political uncertainties that could seriously harm our business and results of operations in ways that cannot presently be predicted. 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, 2006. 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.), Milton (Cabell Co.) and Cross Lanes (Kanawha Co.) in West Virginia. The Bank also owns and operates twenty-four ATMs, including ten off-site ATMs. Furthermore, the Bank owns a facility and leases a facility in Gallipolis (Gallia Co.), Ohio which are used for additional office space. The Bank also owns two facilities in Gallipolis (Gallia Co.), Ohio and Point Pleasant (Mason Co.), West Virginia which are leased to third parties. Loan Central conducts its consumer finance operations through five offices located in Gallipolis (Gallia Co.), Jackson (Jackson Co.), Waverly (Pike Co.), South Point (Lawrence Co.) and Wheelersburg (Scioto Co.), all in Ohio. All of these facilities are leased by Loan Central, except for the Wheelersburg (Scioto Co.) facility. Loan Central leases a portion of its Wheelersburg (Scioto Co.) facility to a third party. Ohio Valley Financial Services also conducts business within Loan Central's Jackson (Jackson Co.) facility. Management considers all of these properties to be satisfactory for the Company's current operations. The Bank, Loan Central and Ohio Valley Financial Services' leased facilities are all subject to commercially standard leasing arrangements. Information concerning the value of the Company's owned and leased real property and a summary of future lease payments is contained in "Note E - Premises and Equipment" of the notes to the Company's consoldiated financial statements for the fiscal year ended December 31, 2006, located in Ohio Valley's 2006 Annual Report to Shareholders. 25 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 2006 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" located in Ohio Valley's 2006 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, 2006 located in Ohio Valley's 2006 Annual Report to Shareholders. Ohio Valley did not sell any of its securities without registration during its 2006 fiscal year. The following table provides information on Ohio Valley's purchases of its common shares during the three fiscal months ended December 31, 2006:
Maximum Number Total Number of Shares of Shares That May Total Number of Average Purchased as Part of Yet Be Purchased Common Shares Price Paid per Publicly Announced Under Publicly Announced Period Purchased Common Share Plans or Programs(1) Plans or Programs -------------------------- ------------- -------------- ---------------------- -------------------------- October 1 through October 31, 2006 ............. 5,391 $25.15 5,391 154,159 November 1 through November 30, 2006 ............ 11,475 $25.24 11,475 142,684 December 1 through December 31, 2006 ............ 5,766 $25.15 5,766 136,918 ------------- ------------- ------------- ------------- TOTAL 22,632 $25.20 22,632 136,918 ============= ============= ============= =============
(1) On July 21, 2006, Ohio Valley's Board of Directors announced its plan to repurchase up to 175,000 of its common shares between August 16, 2006 and February 16, 2007 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 2006 Annual Report to Shareholders. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required under this Item 7 by Item 303 of SEC Regulation S-K is incorporated herein by reference to the information presented under the caption "Management's Discussion and Analysis of Operations" located in Ohio Valley's 2006 Annual Report to Shareholders. 26 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required under this Item 7A by Item 305 of SEC Regulation S-K is incorporated herein by reference to the information presented under the captions "Interest Rate Sensitivity and Liquidity" and "Interest Rate Sensitivity -- Table VIII" found within "Management's Discussion and Analysis of Operations" located in Ohio Valley's 2006 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 2006 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 2006 Annual Report to Shareholders is also incorporated herein by reference. Consolidated Statements of Condition as of December 31, 2006 and 2005 Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 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. 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 27 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 2006 Annual Report to Shareholders is incorporated into this Item 9A by reference. Attestation Report of Registered Public Accounting Firm The "Report of Independent Registered PublicAccounting Firm-Internal Controls" located in Ohio Valley's 2006 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, 2006, that have materially affected, or are reasonably likely to materially affect, Ohio Valley's internal control over financial reporting. ITEM 9B - OTHER INFORMATION None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 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 9, 2007 (the "2007 Proxy Statement"), under the captions "Proxy Item 1: Election of Directors", "Section 16(a) Beneficial Ownership Reporting Compliance" and "Compensation of Executive Officers and Directors" of the 2007 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: E. Richard Mahan, Secretary, P.O. Box 240, Gallipolis, Ohio 45631. 28 ITEM 11 - EXECUTIVE COMPENSATION The information required under this Item 11 by Item 402 of SEC Regulation S-K is incorporated herein by reference to the information presented under the caption "Compensation of Executive Officers and Directors" of the 2007 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 2007 Proxy Statement. Ohio Valley does not maintain any equity compensation plans requiring disclosure pursuant to Item 201(d) of SEC Regulation S-K. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this Item 13 by Item 404 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 2007 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 2007 Proxy Statement. PART IV ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES A. (1) Financial Statements The following consolidated financial statements of Ohio Valley appear in the 2006 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, 2006 and 2005 Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 Notes to the Consolidated Financial Statements Report of Independent Registered Public Accounting Firm on Financial Statements 29 (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 16 , 2007 By /s/Jeffrey E. Smith -------- ------------------------- Jeffrey E. Smith President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 16, 2007 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/W. Lowell Call Director - ----------------------------- W. Lowell Call /s/Robert H. Eastman Director - ----------------------------- Robert H. Eastman /s/Brent A. Saunders Director - ----------------------------- Brent A. Saunders /s/Steven B. Chapman Director - ----------------------------- Steven B. Chapman /s/Thomas E. Wiseman Director - ----------------------------- Thomas E. Wiseman /s/Harold A. Howe Director - ----------------------------- Harold A. Howe /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: Incorporated herein by reference to Exhibit 3(a) to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 1997 (SEC File No. 0-20914). 3(b) Code of Regulations of Ohio Valley: Incorporated herein by reference to Exhibit 3(b) to Ohio Valley's current report on Form 8-K (SEC File No. 0-20914) filed November 6, 1992. 4 Agreement to furnish instruments and agreements defining rights of holders of long-term debt: Filed herewith. 10.1 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: Filed herewith. 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.: Filed herewith. 10.3 The Ohio Valley Bank Company Director Retirement agreement, dated March 16, 2004, between Brent A. Saunders and The Ohio Valley Bank Company: Filed herewith. 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. 10.5 The Ohio Valley Bank Company Salary Continuation agreement, dated January 12, 2004, between Jeffrey E. Smith and The Ohio Valley Bank Company: Filed herewith. 10.7(a) The Ohio Valley Bank Company Director Deferred Fee agreement, dated January 13, 2004, between Brent A. Saunders and The Ohio Valley Bank Company: Filed herewith. 10.7(b) The Ohio Valley Bank Company Executive Deferred Compensation agreement, dated April 17, 2003, between Jeffrey E. Smith and The Ohio Valley Bank Company: Filed herewith. 32 10.8(a) Schedule A to Exhibit 10.7(a) identifying other identical Director Deferred Fee agreements between The Ohio Valley Bank Company and directors of Ohio Valley Banc Corp.: Filed herewith. 10.8(b) Schedule A to Exhibit 10.7(b) identifying other identical Executive Deferred Compensation agreements between The Ohio Valley Bank Company and executive officers of Ohio Valley Banc Corp.: Filed herewith. 10.9 Summary of Compensation for Directors of Ohio Valley Banc Corp.: Filed herewith. 10.10 Summary of Long Range Bonus Program of Ohio Valley Banc Corp.: Incorporated herein by reference to Exhibit 10.10 to Ohio Valley's Annual Report on Form 10-K for fiscal year ending December 31, 2004 (SEC File No. 0-20914). 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, 2006: Filed herewith. (Not deemed filed except for portions thereof specifically incorporated by reference into this Annual Report on Form 10-K.) 21 Subsidiaries of Ohio Valley: Filed herewith 23 Consent of Independent Accountant - Crowe Chizek and Company LLC: Filed herewith. 31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer): Filed herewith. 31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer): Filed herewith. 32 Section 1350 Certifications (Principal Executive Officer and Principal Accounting Officer): Filed herewith. 99.1 Proxy Statement for 2007 Annual Meeting of Shareholders: Incorporated herein by reference to the registrant's definitive proxy statement for the 2007 Annual Meeting of Shareholders to be filed. 33 EX-4 2 exhibit4.txt 12312006 EXHIBIT 4 OHIO VALLEY BANC CORP. 420 Third Avenue, PO Box 240 Gallipolis, OH 45631 (740) 446-2631 March 16, 2007 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, 2006 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, 2006 (the "Form 10-K"), as executed on March 16, 2007. 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 exhibit10-1.txt EXECGROUPLIFESPLITDOLLARPLAN EXHIBIT 10.1 THE OHIO VALLEY BANK COMPANY EXECUTIVE GROUP LIFE SPLIT DOLLAR PLAN THIS AGREEMENT is made and entered into this 29th day of April, 2003, by and between THE OHIO VALLEY BANK COMPANY, an Ohio corporation located in Gallipolis, Ohio (the "Company"), and JEFFREY E. SMITH (the "Executive"). This Agreement shall append the Split Dollar Endorsements entered into on even date herewith or as subsequently amended, by and between the aforementioned parties. BACKGROUND On November 1, 1996, the Company and the Executive entered into The Ohio Valley Bank Company Executive Group Life Split Dollar Plan, and on March 24, 2000, the Company and the Executive entered into the First Amendment to The Ohio Valley Bank Company Executive Group Life Split Dollar Plan. The Company and the Executive now wish to amend and restate said Agreement document for the purpose of (1) adding an additional policy to the Agreement, and (2) updating the terms and conditions contained in the Agreement. This new Agreement shall rescind and replace the existing Agreement. INTRODUCTION To encourage the Executive to remain an employee of the Company, the Company is willing to divide the death proceeds of two life insurance policies on the Executive's life. The Company will pay life insurance premiums from its general assets. AGREEMENT The Company and the Executive agree as follows: Article 1 General Definitions The following terms shall have the meanings specified: 1.1 "Insured" means the Executive. 1.2 "Insurer" means each life insurance carrier that has a Split Dollar Policy Endorsement attached to this Agreement. 1.3 "Normal Retirement Age" means the Executive's 65th birthday. 1.4 "Policy" means the specific life insurance policy issued by the Insurer. 1.5 "Termination of Employment" means the Executive ceasing to be employed by the Company for any reason whatsoever, other than by reason of an approved leave of absence. Article 2 Policy Ownership/Interests 2.1 Company Ownership. The Company is the sole owner of the Policies and shall have the right to exercise all incidents of ownership. The Company shall be the direct beneficiary of the remaining death proceeds after the Executive's interest has been paid under Section 2.2. 2.2 Executive's Interest. The death proceeds of each Policy shall be payable to the beneficiary designated by the Executive to the extent of the lesser of: (i) two times the Executive's highest Total Annual Compensation as determined during either the current calendar year in which the Executive's death occurs or any calendar year prior to the Executive's death; or (ii) the face amount of each life insurance Policy on the life of the Executive specified in the Split Dollar Endorsements attached to this Agreement. "Total Annual Compensation" is defined as the aggregate of: (1) the Executive's base salary for the current calendar year; (2) any Christmas gift, Executive bonus and director fees and bonus (if applicable) from the previous calendar year; and (3) any amounts described in (1) and (2) herein that have been deferred under a qualified or non-qualified deferral plan. The Executive shall also have the right to elect and change settlement options that may be permitted. 2.3 Option to Purchase. The Company shall not sell, surrender or transfer ownership of the Policies while this Agreement is in effect without first giving the Executive or the Executive's transferee the option to purchase the Policies for a period of 60 days from written notice of such intention. The purchase price shall be an amount equal to the cash surrender value of the Policies. This provision shall not impair the right of the Company to terminate this Agreement. Article 3 Premiums 3.1 Premium Payment. The Company shall pay any premiums due on the Policies. 3.2 Economic Benefit. The Company shall determine the economic benefit attributable to the Executive based on the amount of the current term rate for the Executive's age multiplied by the aggregate death benefit payable to the Executive's beneficiary. The "current term rate" is the minimum amount required to be imputed under Revenue Rulings 64-328 and 66-110, or any subsequent applicable authority. 3.3 Imputed Income. The Company shall impute the economic benefit to the Executive on an annual basis. Article 4 Assignment The Executive may assign without consideration all of the Executive's interests in the Policies and in this Agreement to any person, entity or trust. In the event the Executive transfers all of the Executive's interest in the Policies, then all of the Executive's interest in the Policies and in the Agreement shall be vested in the Executive's transferee, who shall be substituted as a party hereunder and the Executive shall have no further interest in the Policies or in this Agreement. Article 5 Insurer The Insurer shall be bound only by the terms of each Policy. Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all entities or persons. The Insurer shall not be bound by or be deemed to have notice of the provisions of this Agreement. Article 6 Claims Procedure 6.1 Claims Procedure. Any person or entity who has not received benefits under this Agreement that he or she believes should be paid (the "claimant") shall make a claim for such benefits as follows: 6.1.1 Initiation - Written Claim. The claimant initiates a claim by submitting to the Company a written claim for the benefits. 6.1.2 Timing of Company Response. The Company shall respond to such claimant within 90 days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 6.1.3 Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial, (b) A reference to the specific provisions of the Agreement on which the denial is based, (c) A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed, (d) An explanation of the Agreement's review procedures and the time limits applicable to such procedures, and (e) A statement of the claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review. 6.2 Review Procedure. If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows: 6.2.1 Initiation - Written Request. To initiate the review, the claimant, within 60 days after receiving the Company's notice of denial, must file with the Company a written request for review. 6.2.2 Additional Submissions - Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits. 6.2.3 Considerations on Review. In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 6.2.4 Timing of Company Response. The Company shall respond in writing to such claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 6.2.5 Notice of Decision. The Company shall notify the claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial, (b) A reference to the specific provisions of the Agreement on which the denial is based, (c) A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits, and (d) A statement of the claimant's right to bring a civil action under ERISA Section 502(a). Article 7 Amendments and Termination The Company or the Executive may terminate this Agreement at any time by giving written notice to the other party. Article 8 Miscellaneous 8.1 Binding Effect. This Agreement shall bind the Executive and the Company and their beneficiaries, survivors, executors, administrators and transferees, and any Policy beneficiary. 8.2 No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 8.3 Applicable Law. The Agreement and all rights hereunder shall be governed by and construed according to the laws of the State of Ohio, except to the extent preempted by the laws of the United States of America. 8.4 Reorganization. The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company. 8.5 Notice. Any notice, consent or demand required or permitted to be given under the provisions of this Split Dollar Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the same to such other party personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his or her last known address as shown on the records of the Company. The date of such mailing shall be deemed the date of such mailed notice, consent or demand. 8.6 Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. 8.7 Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to: (a) Interpreting the provisions of this Agreement; (b) Establishing and revising the method of accounting for this Agreement; (c) Maintaining a record of benefit payments; and (d) Establishing rules and prescribing any forms necessary or desirable to administer this Agreement. 8.8 Named Fiduciary. The Company shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. EXECUTIVE: COMPANY: THE OHIO VALLEY BANK COMPANY /s/ Jeffrey E. Smith By: /s/ James L. Dailey - -------------------- ----------------------------- Jeffrey E. Smith Title: Chairman of the Board ----------------------------- EX-10 4 exhibit10-2.txt SCHED A EXECGROUPLIFESPLITDOLLARPLAN EXHIBIT 10.2 SCHEDULE A TO EXHIBIT 10.1 The following individuals entered into Executive Group Life Split Dollar Plans with The Ohio Valley Bank Company identified below which are identical to the Executive Group Life Split Dollar Plan, dated April 29, 2003, between Jeffrey E. Smith and The Ohio Valley Bank Company filed herewith. Date of Name Executive Group Life Split Dollar Plan Katrinka V. Hart March 21, 2000 E. Richard Mahan March 23, 2000 Larry E. Miller II March 22, 2000 EX-10 5 exhibit103.txt DIRECTOR RETIREMENT EXHIBIT 10.3 THE OHIO VALLEY BANK COMPANY DIRECTOR RETIREMENT AGREEMENT THIS DIRECTOR RETIREMENT AGREEMENT (the "Agreement") is adopted this 16th day of March, 2004, by and between THE OHIO VALLEY BANK COMPANY, a state-chartered commercial bank located in Gallipolis, Ohio (the "Bank") and BRENT A. SAUNDERS (the "Director"). The purpose of this Agreement is to encourage the Director to remain a member of the Bank's Board of Directors. This Agreement shall be unfunded for tax purposes. Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Accrual Balance" means the liability that should be accrued by the Bank, under Generally Accepted Accounting Principles ("GAAP"), for the Bank's obligation to the Director under this Agreement, by applying Accounting Principles Board Opinion Number 12 ("APB 12") as amended by Statement of Financial Accounting Standards Number 106 ("FAS 106") and the Discount Rate. Any one of a variety of amortization methods may be used to determine the Accrual Balance. However, once chosen, the method must be consistently applied. The Accrual Balance shall be reported annually by the Bank to the Director. 1.2 "Beneficiary" means each designated person, or the estate of the deceased Director, entitled to benefits, if any, upon the death of the Director determined pursuant to Article 4. 1.3 "Beneficiary Designation Form" means the form established from time to time by the Plan Administrator that the Director completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries. 1.4 "Board" means the Board of Directors of the Bank as from time to time constituted. 1.5 "Code" means the Internal Revenue Code of 1986, as amended. 1.6 "Compensation" means the total fees payable to the Director during a Plan Year. 1.7 "Disability" means Director (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Bank. Medical determination of Disability may be made by either the Social Security Administration or by the provider of an accident or health plan covering employees of the Bank. Upon the request of the Plan Administrator, the Director must submit proof to the Plan Administrator of Social Security Administration's or the provider's determination. 1.8 "Discount Rate" means the rate used by the Plan Administrator for determining the Accrual Balance. The initial Discount Rate is six percent (6%). However, the Plan Administrator, in its discretion, may adjust the Discount Rate to maintain the rate within reasonable standards according to GAAP and/or applicable bank regulatory guidance. 1.9 "Early Termination" means Separation from Service before Normal Retirement Age for reasons other than death, Disability or Termination for Cause. 1.10 "Effective Date" means November 1, 2001. 1.11 "Normal Retirement Age" means the Annual Meeting of Shareholders following the calendar year in which the Director attains the age of seventy (70). 1.12 "Normal Retirement Date" means the later of the Normal Retirement Age or Separation from Service. 1.13 "Plan Administrator" means the plan administrator described in Article 6. 1.14 "Plan Year" means each twelve-month period commencing on January 1 and ending on December 31 of each year. The initial Plan Year shall commence on the Effective Date of this Plan and end on the following December 31. 1.15 "Separation from Service" means the termination of the Director's service with the Bank for reasons other than death or Disability. Whether a Separation form Service takes place is determined based on the facts and circumstances surrounding the termination of the Director's service and whether the Bank and the Director intended for the Director to provide significant services for the Bank following such termination. A termination of service will not be considered a Separation from Service if: (a) the Director continues to provide services as a director of the Bank at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three full calendar years of service (or, if in the service of the Bank less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of service (or, if less, such lesser period), or (b) the Director continues to provide services to the Bank in a capacity other than as a director of the Bank at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three full calendar years of service (or if in the service of the Bank less than three years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three full calendar years of service (or if less, such lesser period). 1.16 "Termination for Cause" has that meaning set forth in Section 5.2. 1.17 "Years of Service" means the total number of twelve-month periods during which the Director has served on the Bank's Board of Directors. Article 2 Distributions During Lifetime 2.1 Normal Retirement Benefit. Upon the Director reaching Normal Retirement Age while in the active service of the Bank, the Bank shall distribute to the Director the benefit described in this Section 2.1 in lieu of any other benefit under this Article. 2.1.1 Amount of Benefit. The annual benefit under this Section 2.1 is the greater of: (i) fifty percent (50%) of the Director's three (3) prior years average total annual or monthly Compensation; or (ii) fifty percent (50%) of any consecutive three (3) prior years average total annual or monthly Compensation. 2.1.2 Distribution of Benefit. For Directors with ten (10) Years of Service or less, the Bank shall pay the annual benefit to the Director in twelve (12) equal monthly installments payable on the first day of each month commencing with the month following the Director's Normal Retirement Date. The annual benefit shall be paid to the Director for ten (10) years. For Directors with more than ten (10) Years of Service, the Bank shall pay the annual benefit to the Director in twelve (12) equal monthly installments payable on the first day of each month commencing with the month following the Director's Normal Retirement Date. The annual benefit shall be paid to the Director for twenty (20) years. 2.2 Disability Benefit. If the Director's Disability results in Separation from Service prior to Normal Retirement Age, the Bank shall distribute to the Director the benefit described in this Section 2.2 in lieu of any other benefit under this Article. 2.2.1 Amount of Benefit. The benefit under this Section 2.2 is the greater of: (i) fifty percent (50%) of the Director's three (3) prior years average total annual or monthly Compensation; or (ii) fifty percent (50%) of any consecutive three (3) years average total annual or monthly Compensation. 2.2.2 Distribution of Benefit. For Directors with ten (10) Years of Service or less, the Bank shall pay the annual benefit to the Director in twelve (12) equal monthly installments payable on the first day of each month commencing with the month following the Director's Normal Retirement Date. The annual benefit shall be paid to the Director for ten (10) years. For Directors with more than ten (10) Years of Service, the Bank shall pay the annual benefit to the Director in twelve (12) equal monthly installments payable on the first day of each month commencing with the month following the Director's Normal Retirement Date. The annual benefit shall be paid to the Director for twenty (20) years. 2.3 Restriction on Timing of Distribution. Notwithstanding any provision of this Agreement to the contrary, if the Director is considered a "specified employee" under Section 409A of the Code and regulations thereunder, benefit distributions that qualify as a "separation from service" under Section 409A of the Code and regulations thereunder may not commence earlier than six (6) months after the date of such separation from service. Article 3 Distribution at Death 3.1 Death During Active Service. If the Director dies while in the active service of the Bank, the Bank shall distribute to the Beneficiary the benefit described in this Section 3.1. This benefit shall be distributed in lieu of the benefits under Article 2. 3.1.1 Amount of Benefit. The benefit under this Section 3.1 is the greater of: (i) fifty percent (50%) of the Director's three (3) prior years average total annual or monthly Compensation; or (ii) fifty percent (50%) of any consecutive three (3) prior years average total annual or monthly Compensation. 3.1.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Beneficiary in twelve (12) equal monthly installments payable on the first day of each month commencing with the month following the Director's death and following receipt by the Bank of the Director's death certificate. The annual benefit shall be paid to the Director's beneficiary for five (5) years. 3.2 Death During Distribution of a Benefit. If the Director dies after any benefit distributions have commenced under this Agreement but before receiving all such distributions, the Bank shall distribute to the Beneficiary the benefit described in this Section 3.2. This benefit shall be distributed in lieu of any other benefits under this Article. 3.2.1 Amount of Benefit. The annual benefit under this Section 3.2 is the greater of: (i) fifty percent (50%) of the Director's three (3) prior years average total annual or monthly Compensation; or (ii) fifty percent (50%) of any consecutive three (3) prior years average total annual or monthly compensation. 3.2.2 Distribution of Benefit. The Bank shall pay the Beneficiary at the same time and in the same amounts they would have paid to the Director had the Director survived. The number of payments shall be the lesser of: (i) the remaining benefit payments due to the Director; or (ii) five (5) years of benefits, paid monthly. 3.3 Death After Separation from Service But Before Benefit Distributions Commence. If the Director is entitled to benefit distributions under this Agreement, but dies prior to the commencement of said benefit distributions, the Bank shall distribute to the Beneficiary the same benefits that the Director was entitled to prior to death except that the benefit distributions shall commence within thirty (30) days following receipt by the Bank of the Director's death certificate. Article 4 Beneficiaries 4.1 Beneficiary. The Director shall have the right, at any time, to designate a Beneficiary (ies) to receive any benefit distributions under this Agreement upon the death of the Director. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other plan of the Bank in which the Director participates. 4.2 Beneficiary Designation: Change. The Director shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent. The Director's beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Director or if the Director names a spouse as Beneficiary and the marriage is subsequently dissolved. The Director shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator's rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Director and accepted by the Plan Administrator prior to the Director's death. 4.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent. 4.4 No Beneficiary Designation. If the Director dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Director, then the Director's spouse shall be the designated Beneficiary. If the Director has no surviving spouse, the benefits shall be made to the personal representative of the Director's estate. 4.5 Facility of Distribution. If the Plan Administrator determines in its discretion that a benefit is to be distributed to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person's property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Director and the Director's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such distribution amount. Article 5 General Limitations 5.1 Excess Parachute Payment. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement to the extent the benefit would create an excise tax under the excess parachute rules of Section 280G of the Code. 5.2 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not distribute any benefit under this Agreement if Director's service is terminated by the Board for: (a) Gross negligence or gross neglect of duties to the Bank; or (b) Conviction of a felony or of a gross misdemeanor involving moral turpitude in connection with the Director's service with the Bank; or (c) Fraud, disloyalty, dishonesty or willful violation of any law or significant Bank policy committed in connection with the Director's service and resulting in a material adverse effect on the Bank. 5.3 Suicide or Misstatement. No benefits shall be distributed if the Director commits suicide within three (3) years after the Effective Date of this Agreement, or if an insurance company which issued a life insurance policy covering the Director and owned by the Bank denies coverage (i) for material misstatements of fact made by the Director on an application for such life insurance, or (ii) for any other reason. 5.4 Removal. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not distribute any benefit under this Agreement if the Director is subject to a final removal or prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance Act. Article 6 Administration of Agreement 6.1 Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint. The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Agreement and (ii) decide or resolve any and all questions including interpretations of this Agreement, as may arise in connection with the Agreement. 6.2 Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Bank. 6.3 Binding Effect of Decisions. The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. 6.4 Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members. 6.5 Bank Information. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the retirement, Disability, death, or Separation from Service of the Director, and such other pertinent information as the Plan Administrator may reasonably require. 6.6 Annual Statement. The Plan Administrator shall provide to the Director, within one hundred twenty (120) days after the end of each Plan Year, a statement setting forth the benefits to be distributed under this Agreement. Article 7 Claims and Review Procedures 7.1 Claims Procedure. A Director or Beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be distributed shall make a claim for such benefits as follows: 7.1.1 Initiation - Written Claim. The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits. 7.1.2 Timing of Plan Administrator Response. The Plan Administrator shall respond to such claimant within 90 days after receiving the claim. If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision. 7.1.3 Notice of Decision. If the Plan Administrator denies part or all of the claim, the Plan Administrator shall notify the claimant in writing of such denial. The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial; (b) A reference to the specific provisions of the Agreement on which the denial is based; (c) A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed; (d) An explanation of the Agreement's review procedures and the time limits applicable to such procedures; and (e) A statement of the claimant's right to bring a civil action following an adverse benefit determination on review. 7.2 Review Procedure. If the Plan Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial, as follows: 7.2.1 Initiation - Written Request. To initiate the review, the claimant, within 60 days after receiving the Plan Administrator's notice of denial, must file with the Plan Administrator a written request for review. 7.2.2 Additional Submissions - Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claimant's claim for benefits. 7.2.3 Considerations on Review. In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 7.2.4 Timing of Plan Administrator Response. The Plan Administrator shall respond in writing to such claimant within 60 days after receiving the request for review. If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision. 7.2.5 Notice of Decision. The Plan Administrator shall notify the claimant in writing of its decision on review. The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial; (b) A reference to the specific provisions of the Agreement on which the denial is based; (c) A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claimant's claim for benefits; and (d) A statement of the claimant's right to bring a civil action. Article 8 Amendments and Termination 8.1 Amendment. This Agreement may be amended only by a written agreement signed by the Bank and the Director. Provided, however, that the Bank may amend this Agreement to conform with written directives to the Bank from its banking regulators. 8.2 Plan Termination Generally. The Bank may unilaterally terminate this Agreement at any time. Except as provided in Section 8.3, the termination of this Agreement shall not cause a distribution of benefit payments under this Agreement. Rather, upon such termination benefit distributions will be made at the earliest distribution event permitted under Article 2 or Article 3. 8.3 Plan Terminations Under Section 409A. Notwithstanding anything to the contrary in Section 8.2, the Bank may make distributions in the following circumstances, in accordance with Section 409A of the Code or the regulations thereunder: (a) Within thirty (30) days before, or twelve (12) months after a Change in Control (b) Upon the Bank's dissolution or with the approval of a bankruptcy court; or (c) Upon the Bank's termination of this and all Similar Plans, provided that all distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and the Bank does not adopt any new Similar Plans for a minimum of five (5) years following the date of such termination. Article 9 Miscellaneous 9.1 Binding Effect. This Agreement shall bind the Director and the Bank, and their beneficiaries, survivors, executors, successors, administrators and transferees. 9.2 No Guarantee of Service. This Agreement is not a contract for services. It does not give the Director the right to remain in the service of the Bank, nor does it interfere with the shareholder's right to discharge the Director. It also does not require the Director to remain in the service of the Bank nor interfere with the Director's right to terminate services at any time. 9.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 9.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld, under Section 409A of the Code and regulations thereunder, from the benefits provided under this Agreement. The Director acknowledges that the Bank's sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies). 9.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Ohio, except to the extent preempted by the laws of the United States of America. 9.6 Unfunded Arrangement. The Director and Beneficiary are general unsecured creditors of the Bank for the distribution of benefits under this Agreement. The benefits represent the mere promise by the Bank to distribute such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Director's life or other informal funding asset is a general asset of the Bank to which the Director and Beneficiary have no preferred or secured claim. 9.7 Reorganization. The Bank shall not merge or consolidate into or with another bank, or reorganize, or sell substantially all of its assets to another bank, firm, or person unless such succeeding or continuing bank, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term "Bank" as used in this Agreement shall be deemed to refer to the successor or survivor bank. 9.8 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Director as to the subject matter hereof. No rights are granted to the Director by virtue of this Agreement other than those specifically set forth herein. 9.9 Interpretation. Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural. 9.10 Alternative Action. In the event it shall become impossible for the Bank or the Plan Administrator to perform any act required by this Agreement, the Bank or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Bank. 9.11 Headings. Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions. 9.12 Validity. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein. 9.13 Notice. Any notice or filing required or permitted to be given to the Bank or Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: The Ohio Valley Bank Company ------------------------------- 420 Third Avenue ------------------------------- P O Box 240 ------------------------------- Gallipolis, OH 45631-0240 ------------------------------- Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to the Director under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Director. 9.14 Recovery of Estate Taxes. If the Director's gross estate for federal estate tax purposes includes any amount determined by reference to and on account of this Agreement, and if the Beneficiary is other than the Director's estate, then the Director's estate shall be entitled to recover from the Beneficiary receiving such benefit under the terms of this Agreement an amount by which the total estate tax due by the Director's estate exceeds the total estate tax which would have been payable if the value of such benefit had not been included in the Director's gross estate. If there is more than one person receiving such benefit, the right of recovery shall be against each such person. IN WITNESS WHEREOF, the Director and a duly authorized representative of the Bank have signed this Agreement. DIRECTOR: BANK: THE OHIO VALLEY BANK COMPANY /s/ Brent A. Saunders By: /s/ Jeffrey E. Smith - --------------------- ------------------------- Brent A. Saunders Title: President and CEO ------------------------- EX-10 6 exhibit10-4.txt SCHED A 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 March 16, 2004, between Brent A. Saunders and The Ohio Valley Bank Company filed herewith. Date of Name Director Retirement Agreement - ---- ----------------------------- Anna P. Barnitz March 16, 2004 W. Lowell Call January 16, 2004 Steven B. Chapman January 20, 2004 Robert E. Daniel January 23, 2006 Robert H. Eastman January 20, 2004 Harold A. Howe January 12, 2004 Jeffrey E. Smith January 12, 2004 Roger D. Williams January 23, 2006 Lannes C. Williamson January 14, 2004 Thomas E. Wiseman January 13, 2004 EX-10 7 exhibit10-5.txt SALARYCONTINUATIONAGREEMENT EXHIBIT 10.5 THE OHIO VALLEY BANK COMPANY SALARY CONTINUATION AGREEMENT THIS AGREEMENT is adopted this 12th day of January, 2004, by and between THE OHIO VALLEY BANK COMPANY, located in Gallipolis, Ohio (the "Company"), and JEFFREY E. SMITH (the "Executive"). BACKGROUND On January 2, 1997, the Company and the Executive entered into The Ohio Valley Bank Company Salary Continuation Agreement. The Company and the Executive now wish to amend and restate said Agreement for the purpose of 1) increasing the Executive's Normal Retirement Benefit amount, and 2) updating the terms and provisions contained therein. This new Agreement shall rescind and replace the existing Agreement. INTRODUCTION To encourage the Executive to remain an employee of the Company, the Company is willing to provide salary continuation benefits to the Executive. The Company will pay the benefits from its general assets. AGREEMENT The Company and the Executive agree as follows: Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Code" means the Internal Revenue Code of 1986, as amended. 1.2 "Disability" means the Executive's suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Company of the carrier's or Social Security Administration's determination upon the request of the Company. 1.3 "Early Retirement Date" means the Executive attaining age 60 or completing 20 Years of Service. 1.4 "Effective Date" means January 2, 1997. 1.5 "Involuntary Early Termination" means that the Executive, prior to Normal Retirement Age, has been notified in writing that employment with the Company is terminated for reasons other than an approved leave of absence, Termination for Cause or Disability. 1.6 "Normal Retirement Age" means the Executive's 65th birthday. 1.7 "Normal Retirement Date" means the later of the Normal Retirement Age or Termination of Employment. 1.8 "Plan Year" means a twelve-month period commencing on January 1 and ending on December 31 of each year. The initial Plan Year shall commence on the effective date of this Agreement. 1.9 "Termination for Cause" See Article 5. 1.10 "Termination of Employment" means that the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company. 1.11 "Years of Service" means the total number of twelve-month periods during which the Executive is employed on a full-time basis by the Company, including any approved leaves of absence. Article 2 Lifetime Benefits 2.1 Normal Retirement Benefit. Upon Termination of Employment on or after the Normal Retirement Age for reasons other than death, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Agreement. 2.1.1 Amount of Benefit. The annual benefit under this Section 2.1 is $117,100 (One Hundred Seventeen Thousand One Hundred Dollars). 2.1.2 Payment of Benefit. The Company shall pay the annual benefit to the Executive in 12 equal monthly installments commencing with the month following the Executive's Normal Retirement Date. The annual benefit shall be paid to the Executive for a period of 20 years. 2.2 Early Retirement Benefit. If the Executive terminates employment after the Early Retirement Date but before the Normal Retirement Date and for reasons other than death, Disability or Involuntary Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Agreement. 2.2.1 Amount of Benefit. The benefit under this Section 2.2 is the dollar amount equal to the liability then accrued on the books of the Company, which shall be reported to the Executive on an annual basis by the Company. This benefit is determined by calculating a 20-year fixed annuity from the accrued liability, crediting interest on the unpaid balance at an annual rate of 7.5 percent, compounded monthly. 2.2.2 Payment of Benefit. The Company shall pay the annual benefit to the Executive in 12 equal monthly installments commencing with the month following the Normal Retirement Age. The annual benefit shall be paid to the Executive for a period of 20 years. 2.3 Disability Benefit. If the Executive terminates employment due to Disability prior to the Normal Retirement Date, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Agreement. 2.3.1 Amount of Benefit. The benefit under this Section 2.3 is the dollar amount equal to the liability then accrued on the books of the Company, which shall be reported to the Executive on an annual basis by the Company. This benefit is determined by calculating a 20-year fixed annuity from the accrued liability, crediting interest on the unpaid balance at an annual rate of 7.5 percent, compounded monthly. 2.3.2 Payment of Benefit. The Company shall pay the annual benefit to the Executive in 12 equal monthly installments commencing with the month following the Termination of Employment. The annual benefit shall be paid to the Executive for a period of 20 years. 2.4 Involuntary Early Termination. Upon Involuntary Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement. 2.4.1 Amount of Benefit. The benefit under this Section 2.4 is the Involuntary Early Termination Annual Benefit set forth in Schedule A for the Plan Year ending immediately prior to the date in which Termination of Employment occurs (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1). This benefit is determined by vesting the Executive in 100 percent of the Accrual Balance. Any increase in the annual benefit under Section 2.1.1 would require the recalculation of the Involuntary Early Termination benefit on Schedule A. This benefit is determined by calculating a 20-year fixed annuity from the Accrual Balance, crediting interest on the unpaid balance at an annual rate of 7.5 percent, compounded monthly. 2.4.2 Payment of Benefit. The Company shall pay the annual benefit to the Executive in 12 equal monthly installments commencing with the month following the Termination of Employment. The annual benefit shall be paid to the Executive for a period of 20 years. Article 3 Death Benefits 3.1 Death During Active Service. If the Executive dies while in the active service of the Company, the Company shall pay to the Executive's beneficiary the benefit described in this Section 3.1. This benefit shall be paid in lieu of the benefits under Article 2. 3.1.1 Amount of Benefit. The annual benefit under this Section 3.1 is the Normal Retirement Benefit amount described in Section 2.1.1. 3.1.2 Payment of Benefit. The Company shall pay the annual benefit to the Executive's beneficiary in 12 equal monthly installments commencing with the month following the Executive's death. The annual benefit shall be paid to the Executive's beneficiary for a period of 20 years. 3.2 Death During Payment of a Lifetime Benefit. If the Executive dies after any Lifetime Benefit payments have commenced under this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived. 3.3 Death After Termination of Employment But Before Payment of a Lifetime Benefit Commences. If the Executive is entitled to a Lifetime Benefit under this Agreement, but dies prior to the commencement of said benefit payments, the Company shall pay the same benefit payments to the Executive's beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive's death. Article 4 Beneficiaries 4.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Company. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and received by the Company during the Executive's lifetime. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate. 4.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Company may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit. Article 5 General Limitations 5.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company terminates the Executive's employment for: (a) Gross negligence or gross neglect of duties; (b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or (c) Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive's employment and resulting in an adverse effect on the Company. 5.2 Confidentiality. The Executive shall not disclose any trade secrets or confidential information of any kind, type or description. In the event the Executive does disclose said information, such disclosure shall constitute a breach of this Agreement and compensation shall cease immediately 5.3 Non-Compete. The Executive agrees, during the term of this Agreement, he will not accept employment with any bank, financial or lending organization which is in competition directly or indirectly with the Company. In the event the Executive does accept such employment, this agreement shall immediately terminate. 5.4 Suicide or Misstatement. The Company shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Company shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on an employment application or resume provided to the Company, or on any application for any benefits provided by the Company to the Executive. Article 6 Claims and Review Procedures 6.1 Claims Procedure. An Executive or beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows: 6.1.1 Initiation - Written Claim. The claimant initiates a claim by submitting to the Company a written claim for the benefits. 6.1.2 Timing of Company Response. The Company shall respond to such claimant within 90 days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 6.1.3 Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial; (b) A reference to the specific provisions of the Agreement on which the denial is based; (c) A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed; (d) An explanation of the Agreement's review procedures and the time limits applicable to such procedures; and (e) A statement of the claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review. 6.2 Review Procedure. If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows: 6.2.1 Initiation - Written Request. To initiate the review, the claimant, within 60 days after receiving the Company's notice of denial, must file with the Company a written request for review. 6.2.2 Additional Submissions - Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits. 6.2.3 Considerations on Review. In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 6.2.4 Timing of Company Response. The Company shall respond in writing to such claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 6.2.5 Notice of Decision. The Company shall notify the claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial; (b) A reference to the specific provisions of the Agreement on which the denial is based; (c) A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits; and (d) A statement of the claimant's right to bring a civil action under ERISA Section 502(a). Article 7 Amendments and Termination The Company may amend or terminate this Agreement at any time prior to the Executive's Termination of Employment by written notice to the Executive. In no event shall this Agreement be terminated without the Executive immediately becoming 100 percent vested in the Accrual Balance at the time of termination. Article 8 Miscellaneous 8.1 Binding Effect. This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees. 8.2 No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 8.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 8.4 Reorganization. The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement. Upon the occurrence of such event, the term "Company" as used in this Agreement shall be deemed to refer to the successor or survivor company. 8.5 Tax Withholding. The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement. 8.6 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Ohio, except to the extent preempted by the laws of the United States of America. 8.7 Unfunded Arrangement. The Executive and beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Company to which the Executive and beneficiary have no preferred or secured claim. 8.8 Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. 8.9 Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to: (a) Establishing and revising the method of accounting for the Agreement; (b) Maintaining a record of benefit payments; (c) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement; and (d) Interpreting the provisions of the Agreement. 8.10 Named Fiduciary. The Company shall be the named fiduciary and plan administrator under this Agreement. It may delegate to others certain aspects of the management and operational responsibilities including the employment of advisors and the delegation of ministerial duties to qualified individuals. IN WITNESS WHEREOF, the Executive and the Company have signed this Agreement. EXECUTIVE: COMPANY: THE OHIO VALLEY BANK COMPANY /s/ Jeffrey E. Smith By: /s/ James L. Dailey - -------------------- ------------------------ Jeffrey E. Smith Title: Chairman of the Board EX-10 8 exhibit10-7a.txt DIRECTORDEFERRED EXHIBIT 10.7(a) THE OHIO VALLEY BANK COMPANY DIRECTOR DEFERRED FEE AGREEMENT THIS DIRECTOR DEFERRED FEE AGREEMENT is made this 13th day of January, 2004, by THE OHIO VALLEY BANK COMPANY (the "Bank"), a state-chartered commercial bank located in Gallipolis, Ohio and BRENT A. SAUNDERS (the "Director"). The purpose of this Agreement is to encourage the Director to remain a member of the Bank's Board of Directors. Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Anniversary Date" means December 31 of each year. 1.2 "Beneficiary" means each designated person, or the estate of a deceased Director, entitled to benefits, if any, upon the death of the Director determined pursuant to Article 6. 1.3 "Board" means the Board of Directors of the Bank as from time to time constituted. 1.4 "Beneficiary Designation Form" means the form established from time to time by the Plan Administrator that the Director completes, signs and returns to the Plan Administrator to designate one or more beneficiaries. 1.5 "Code" means the Internal Revenue Code of 1986, as amended. 1.6 "Crediting Rate" means 6%, initially. However, the Plan Administrator, in its discretion, may adjust the Crediting Rate to maintain the rate within reasonable standards according to GAAP and/or applicable bank regulatory guidance. 1.7 "Deferral Account" means the Bank's accounting of the Director's accumulated Deferrals plus accrued interest. 1.8 "Deferral Election Form" means the form established from time to time by the Plan Administrator that the Director completes, signs and returns to the Plan Administrator to designate the amount of Deferrals. 1.9 "Deferrals" means the amount of the Director's Fees which the Director elects to defer according to this Agreement. 1.10 "Disability" means the Director (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering directors of the Bank. Medical determination of Disability may be made by either the Social Security Administration or by the provider of an accident or health plan covering directors of the Bank. The Director must submit proof to the Plan Administrator of Social Security Administration's or the provider's determination upon the request of the Plan Administrator. 1.11 "Distribution Election Form" means the form established from time to time by the Plan Administrator that the Director completes, signs and returns to the Plan Administrator to designate the time and form payment. 1.12 "Early Termination" means Separation from Service before Normal Retirement Age for reasons other than death, Disability or Termination for Cause. 1.13 "Effective Date" means dateMonth12Day11Year2001December 11, 2001. 1.14 "Fees" means the total fees payable to the Director during a Plan Year. 1.15 "Normal Retirement Age" means the Annual Meeting of Shareholders following the calendar year in which the Director attains the age of seventy (70). 1.16 "Normal Retirement Date" means the later of the Normal Retirement Age or Separation from Service. 1.17 "Plan Administrator" means the plan administrator described in Article 8. 1.18 "Plan Year" means a twelve-month period commencing on January 1 and ending on December 31 of each year. The initial Plan Year shall commence on the Effective Date of this Agreement and end on the following December 31. 1.19 "Secretary" means the Secretary of the United States Department of the Treasury. 1.20 "Separation from Service" means the termination of the Director's service with the Bank for reasons other than death or Disability. Whether a Separation form Service takes place is determined based on the facts and circumstances surrounding the termination of the Director's service and whether the Bank and the Director intended for the Director to provide significant services for the Bank following such termination. A termination of service will not be considered a Separation from Service if: (a) the Director continues to provide services as a director of the Bank at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three full calendar years of service (or, if in the service of the Bank less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of service (or, if less, such lesser period), or (b) the Director continues to provide services to the Bank in a capacity other than as a director of the Bank at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three full calendar years of service (or if in the service of the Bank less than three years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three full calendar years of service (or if less, such lesser period). 1.21 "Termination for Cause" has that meaning set forth in Section 7.1. 1.22 "Unforeseeable Emergency" means a severe financial hardship to the Director resulting from an illness or accident of the Director, the Director's spouse, or a dependent (as defined in Section 152(a) of the Code) of the Director, loss of the Director's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Director. Article 2 Deferral Election 2.1 Generally. Unless otherwise provided for by the Secretary, the Director may file annually Deferral Election Form(s) with the Plan Administrator no later than the end of the Plan Year preceding the Plan Year in which services leading to such Fees will be performed (e.g., by December 31, 20xx for Fees to be deferred in 20xx+1). The Deferral Deferral Election Form(s) shall set forth the amount of Fees to be deferred and shall be effective to defer only Fees earned for services performed after the date the Election Form(s) are received by the Plan Administrator. 2.2 Initial Election. To defer Fees for services performed in the first Plan Year, and after being notified by the Plan Administrator of eligibility for participation in the Agreement, the Director may make an initial deferral election under this Agreement by delivering to the Plan Administrator a signed Deferral Election Form within thirty (30) days after the Effective Date of this Agreement. The Deferral Election Form shall set forth the amount of Fees to be deferred and shall be effective to defer only Fees earned for services performed after the date the Deferral Election Form is received by the Plan Administrator. 2.3 Change in Form or Timing of Distributions. For distribution of benefits under Article 4, the Director may elect to delay the timing or change the form of distributions by submitting the appropriate Distribution Election Form(s) to the Plan Administrator. Any such elections: (a) may not accelerate the time or schedule of any distribution, except as allowed by the Secretary; (b) must, for benefits payable under Section 4.1, be made at least twelve (12) months prior to the first scheduled distribution; (c) must, for benefits payable under Sections 4.1, 4.2 and 4.4, delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made; and (d) must take effect not less than twelve (12) months after the election is made. Article 3 Deferral Account 3.1 Establishing and Crediting. The Bank shall establish a Deferral Account on its books for the Director and shall credit to the Deferral Account the following amounts: 3.1.1 Deferrals. The Fees deferred by the Director as of the time the Fees would have otherwise been paid to the Director. 3.1.2 Interest. (a) On the last day of each month and immediately prior to the distribution of any benefits, but only until commencement of benefit distributions under this Agreement, interest shall be credited on the Deferral Account at an annual rate equal to the Crediting Rate, compounded annually. (b) On the last day of each month during any applicable installment period, interest shall be credited on the unpaid Deferral Account balance at an annual rate equal to the Crediting Rate, compounded annually. The Board in its sole discretion, may change the rate in this Section 3.1.2(b) only prior to commencement of installment distributions. 3.2 Statement of Accounts. The Plan Administrator shall provide to the Director, within one hundred twenty (120) days after the end of each Plan Year, a statement setting forth the Deferral Account balance. 3.3 Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement. The Deferral Account is not a trust fund of any kind. The Director is a general unsecured creditor of the Bank for the distribution of benefits. The benefits represent the mere Bank promise to pay such benefits. The Director's rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Director's creditors. Article 4 Distributions During Lifetime 4.1 Normal Retirement Benefit. Upon the Director reaching Normal Retirement Age, the Bank shall pay to the Director the benefit described in this Section 4.1 in lieu of any other benefit under this Article. 4.1.1 Amount of Benefit. The benefit under this Section 4.1 is the Deferral Account balance at the Director's Normal Retirement Age. 4.1.2 Distribution of Benefit. The Bank shall pay the benefit to the Director as elected by the Director on the Distribution Election Form(s) commencing within thirty (30) days following Normal Retirement Age. 4.2 Early Termination Benefit. Upon the Director's Early Termination, the Bank shall pay to the Director the benefit described in this Section 4.2 in lieu of any other benefit under this Article. 4.2.1 Amount of Benefit. The benefit under this Section 4.2 is the Deferral Account balance at the Director's Separation from Service. 4.2.2 Distribution of Benefit. The Bank shall pay the benefit to the Director as elected by the Director on the Distribution Election Form(s) commencing within thirty (30) days following Separation from Service. 4.3 Disability Benefit. If the Director's Disability results in the Director's Separation from Service prior to Normal Retirement Age, the Bank shall pay to the Director the benefit described in this Section 4.3 in lieu of any other benefit under this Article. 4.3.1 Amount of Benefit. The benefit under this Section 4.3 is the Deferral Account balance at the Director's Separation from Service. 4.3.2 Distribution of Benefit. The Bank shall pay the benefit to the Director as elected by the Director on the Distribution Election Form(s) commencing within thirty (30) days following Separation from Service due to Disability 4.4 Hardship Distribution. If the Director experiences an Unforeseeable Emergency, the Director may petition the Board to receive a payout from the Agreement. The Board in its sole discretion may grant such petition. If granted, the Director shall receive, within sixty (60) days, a payout from the Agreement (i) only to the extent deemed necessary by the Board to satisfy the Director's Unforeseeable Emergency, plus an amount necessary to pay taxes reasonably anticipated as a result of the distribution; and (ii) after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Director's assets (to the extent the liquidation would not itself cause severe financial hardship). 4.5 Restriction on Timing of Distribution. Notwithstanding any provision of this Agreement to the contrary, if the Director is considered a "specified employee" under Section 409A of the Code and regulations thereunder, benefit distributions that qualify as a "separation from service" under Section 409A of the Code and regulations thereunder may not commence earlier than six (6) months after the date of such separation from service. Article 5 Distributions at Death 5.1 Death During Active Service. If the Director dies while in active service of the Bank, the Bank shall pay to the Beneficiary the benefit described in this Section 5.1 in lieu of any other benefit under this Agreement. 5.1.1 Amount of Benefit. The benefit under Section 5.1 is the greater of: a) the Deferral Account balance on the Director's death; or b) the projected Deferral Account balance had the Director continued to defer at the current rate until Normal Retirement Age. 5.1.2 Payment of Benefit. The Bank shall pay the benefit to the Beneficiary in the matter elected on the Distribution Election Form(s). 5.2 Death During Distribution of a Benefit. If the Director dies after any benefit distributions have commenced under this Agreement but before receiving all such distributions, the Bank shall pay to the Beneficiary the remaining benefits at the same time and in the same amounts as they would have been paid to the Director had the Director survived. 5.3 Death After Separation from Service But Before Benefit Distributions Commence. If the Director is entitled to benefit distributions under this Agreement, but dies prior to the commencement of said benefit distributions, the Bank shall pay to the Beneficiary the same benefits that the Director was entitled to prior to death except that the benefit distributions shall commence within thirty (30) days following the Director's death. Article 6 Beneficiaries 6.1 Beneficiary. The Director shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under the Agreement to a Beneficiary upon the death of the Director. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other plan of the Bank in which the Director participates. 6.2 Beneficiary Designation; Change. The Director shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent. The Director's beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Director or if the Director names a spouse as Beneficiary and the marriage is subsequently dissolved. The Director shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator's rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Director and accepted by the Plan Administrator prior to the Director's death. 6.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent. 6.4 No Beneficiary Designation. If the Director dies without a valid Beneficiary designation, or if all designated Beneficiaries predecease the Director, then the Director's spouse shall be the designated Beneficiary. If the Director has no surviving spouse, the benefits shall be made to the personal representative of the Director's estate. 6.5 Facility of Distribution. If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person's property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Director and the Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such distribution amount. Article 7 General Limitations 7.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement that is in excess of the Director's Deferrals (i.e., Deferral Account minus interest credited thereon) if Director's service is terminated by the Board for: (a) Gross negligence or gross neglect of duties to the Bank; or (b) Conviction of a felony or of a gross misdemeanor involving moral turpitude in connection with the Director's service to the Bank; or (c) Fraud, disloyalty, dishonesty or willful violation of any law or significant Bank policy committed in connection with the Director's service and resulting in an adverse effect on the Bank; or (d) Issuance of a final removal or prohibition order issued by a state or federal banking agency with jurisdiction over the Bank. 7.2 No Withdrawal Election. Except as expressly provided herein, the Director may not elect, at any time, to withdraw any portion of the Deferral Account balance. 7.3 Suicide or Misstatement. The Bank shall not pay any benefit under this Agreement if the Director commits suicide within three (3) years after the date of this Agreement. In addition, the Bank shall not pay any benefit under this Agreement if the Director has made any material misstatement of fact on a resume provided to the Bank, or on any application for any benefits provided by the Bank to the Director. 7.4.1 Excess Parachute Payment. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement to the extent the benefit would create an excise tax under the excess parachute rules of Section 280G of the Code. Article 8 Administration Of Agreement 8.1 Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint. The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Agreement and (ii) decide or resolve any and all questions including interpretations of this Agreement, as may arise in connection with the Agreement. 8.2 Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Bank. 8.3 Binding Effect of Decisions. The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. 8.4 Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members. 8.5 Bank Information. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the Fees of its Directors, the date and circumstances of the retirement, Disability, death or Separation from Service of its Directors, and such other pertinent information as the Plan Administrator may reasonably require. Article 9 Claims and Review Procedures 9.1 Claims Procedure. The Director or Beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows: 9.1.1 Initiation - Written Claim. The claimant initiates a claim by submitting to the Bank a written claim for the benefits. 9.1.2 Timing of Bank Response. The Bank shall respond to such claimant within 90 days after receiving the claim. If the Bank determines that special circumstances require additional time for processing the claim, the Bank can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Bank expects to render its decision. 9.1.3 Notice of Decision. If the Bank denies part or all of the claim, the Bank shall notify the claimant in writing of such denial. The Bank shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial, (b) A reference to the specific provisions of the Agreement on which the denial is based, (c) A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed, and (d) An explanation of the Agreement's review procedures and the time limits applicable to such procedures. 9.2 Review Procedure. If the Bank denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows: 9.2.1 Initiation - Written Request. To initiate the review, the claimant, within 60 days after receiving the Bank's notice of denial, must file with the Bank a written request for review. 9.2.2 Additional Submissions - Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Bank shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claimant's claim for benefits. 9.2.3 Considerations on Review. In considering the review, the Bank shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 9.2.4 Timing of Bank Response. The Bank shall respond in writing to such claimant within 60 days after receiving the request for review. If the Bank determines that special circumstances require additional time for processing the claim, the Bank can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Bank expects to render its decision. 9.2.5 Notice of Decision. The Bank shall notify the claimant in writing of its decision on review. The Bank shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial, (b) A reference to the specific provisions of the Agreement on which the denial is based, and (c) A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claimant's claim for benefits. Article 10 Amendments and Termination 10.1 Amendment. This Agreement may be amended only by a written agreement signed by the Bank and the Director. Provided, however, that the Bank may amend this Agreement to conform with written directives to the Bank from its banking regulators. 10.2 Plan Termination Generally. The Bank may unilaterally terminate this Agreement at any time. Except as provided in Section 10.3, the termination of this Agreement shall not cause a distribution of benefit payments under this Agreement. Rather, upon such termination benefit distributions will be made at the earliest distribution event permitted under Article 4 or Article 5. 10.3 Plan Terminations Under Section 409A. Notwithstanding anything to the contrary in Section 10.2, the Bank may make distributions in the following circumstances, in accordance with Section 409A of the Code or the regulations thereunder: (a) Within thirty (30) days before, or twelve (12) months after a Change in Control (b) Upon the Bank's dissolution or with the approval of a bankruptcy court; or (c) Upon the Bank's termination of this and all Similar Plans, provided that all distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and the Bank does not adopt any new Similar Plans for a minimum of five (5) years following the date of such termination. Article 11 Miscellaneous 11.1 Binding Effect. This Agreement shall bind the Director and the Bank and their beneficiaries, survivors, executors, administrators and transferees. 11.2 No Guarantee of Service. This Agreement is not a contract for services. It does not give the Director the right to remain a director of the Bank, nor does it interfere with the Bank's right to discharge the Director. It also does not require the Director to remain a director nor interfere with the Director's right to separate from service at any time. 11.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 11.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld, under Section 409A of the Code and regulations thereunder, from the benefits provided under this Agreement. Director acknowledges that the Bank's sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies). 11.5 Applicable Law. The Agreement, and all rights hereunder shall be governed by the laws of placeStateOhio, except to the extent preempted by the laws of the placecountry-regionUnited States of America. 11.6 Unfunded Arrangement. The Director and the Beneficiary are general unsecured creditors of the Bank for the distribution of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Director's life or other informal funding asset is a general asset of the Bank to which the Director and the Beneficiary have no preferred or secured claim. 11.7 Reorganization. The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another bank, firm, or person unless such succeeding or continuing bank, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term "Bank" as used in this Agreement shall be deemed to refer to the successor or survivor bank. 11.8 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Director as to the subject matter hereof. No rights are granted to the Director by virtue of (i) this Agreement other than those specifically set forth herein. 11.9 Interpretation. Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural. 11.10 Alternative Action. In the event it shall become impossible for the Bank or the Plan Administrator to perform any act required by this Agreement, the Bank or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Bank. 11.11 Headings. Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions. 11.12 Validity. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein. 11.13 Notice. Any notice or filing required or permitted to be given to the Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: The Ohio Valley Bank Company ------------------------------- 420 Third Avenue ------------------------------- P O Box 240 ------------------------------- Gallipolis, OH 45631-0240 ------------------------------- Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. Any notice or filing required or permitted to be given to the Director under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Director. 11.14 Compliance with Section 409A. This Agreement shall at tall times be administered and the provisions of this Agreement shall be interpreted consistent with the requirements of Section 409A of the Code and any and all regulations thereunder, including such regulations as may be promulgated after the Effective Date of this Agreement. IN WITNESS WHEREOF, the Director and the Bank have signed this Agreement as of January 13, 2004. Director: Bank: THE OHIO VALLEY BANK COMPANY /s/ Brent A. Saunders By: /s/ Jeffrey E Smith - --------------------- ------------------------- Brent A. Saunders Title: President and CEO ------------------------- EX-10 9 exhibit107b.txt EXECDEFERREDCOMP EXHIBIT 10.7(b) THE OHIO VALLEY BANK COMPANY EXECUTIVE DEFERRED COMPENSATION AGREEMENT THIS EXECUTIVE DEFERRED COMPENSATION AGREEMENT is made this 17th day of April, 2003, by THE OHIO VALLEY BANK COMPANY (the "Company"), a state-chartered commercial bank located in Gallipolis, Ohio, and JEFFREY E. SMITH (the "Executive"). The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensation employees who contribute materially to the continued growth, development and future business success of the Company. This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act ("ERISA"). Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Base Salary" shall mean the annual cash compensation relating to services performed during any calendar year, excluding distributions from nonqualified deferred compensation plans, bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, and other fees, and automobile and other allowances paid to an Executive for employment services rendered (whether or not such allowances are included in the Executive's gross income). Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Executive pursuant to all qualified or non-qualified plans of the Company and shall be calculated to include amounts not otherwise included in the Executive's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by the Company; provided, however, that all such amounts will be included in compensation only to the extent that had there been no such plan, the amount would have been payable in cash to the Executive. 1.2 "Beneficiary" means each designated person, or the estate of a deceased Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to Article 6. 1.3 "Beneficiary Designation Form" means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more beneficiaries. 1.4 "Board" means the Board of Directors of the Company as from time to time constituted. 1.5 "Bonus" means the cash bonus, if any, awarded to each Executive for services performed during the Plan Year and that does not qualify as Performance-Based Compensation. 1.6 "Code" means the Internal Revenue Code of 1986, as amended. 1.7 "Compensation" means the total Base Salary, Bonus, and Performance-Based Compensation that would be paid to an Executive during a Plan Year, absent deferrals, less FICA taxes associated with such Base Salary, Bonus, and Performance-Based Compensation. 1.8 "Deferral Account" means the Company's accounting of the Executive's accumulated Deferrals, plus accrued interest. 1.9 "Deferrals" means the amount of the Executive's Compensations which the Executive elects to defer according to this Agreement. 1.10 "Disability" means the Executive (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering executives of the Company. Medical determination of Disability may be made by either the Social Security Administration or by the provider of an accident or health plan covering executives of the Company. The Executive must submit proof to the Plan Administrator of Social Security Administration's or the provider's determination upon the request of the Plan Administrator. 1.11 "Early Retirement" means Separation from Service before Normal Retirement Age for reasons other than death, Disability, or Termination for Cause. 1.12 "Effective Date" means January 1, 2003. 1.13 "Election Form(s)" means the form(s) established from time to time by the Plan Administrator that the Executive completes, signs and returns to the Plan Administrator to make elections under the Agreement. 1.14 "Normal Retirement Age" means the Executive attaining age sixty-five (65). 1.15 "Normal Retirement Date" means the later of Normal Retirement Age or Separation from Service. 1.16 "Performance-Based Compensation" means the cash bonus, if any, awarded to the Executive that qualifies as "performance-based compensation" under Section 409A of the Code and the regulations thereunder. 1.17 "Plan Administrator" means the plan administrator described in Article 8. 1.18 "Plan Year" means a twelve-month period commencing on January 1 and ending on December 31 of each year. The initial Plan Year shall commence on the Effective Date of this Agreement and end on the following December 31. 1.19 "Secretary" means the Secretary of the United States Department of the Treasury. 1.20 "Separation from Service" means the termination of the Executive's employment with the Company for reasons other than death or Disability. Whether a Separation from Service takes place is determined based on the facts and circumstances surrounding the termination of the Executive's employment and whether the Company and the Executive intended for the Executive to provide significant services for the Company following such termination. A termination of employment will not be considered a Separation from Service if: (a) the Executive continues to provide services as an employee of the Company at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or, if employed less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of employment (or, if less, such lesser period), or (b) the Executive continues to provide services to the Company in a capacity other than as an employee of the Company at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or if employed less than three years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three full calendar years of employment (or if less, such lesser period). 1.21 "Termination for Cause" has that meaning set forth in Section 7.1. 1.22 "Unforeseeable Emergency" means a severe financial hardship to the Executive resulting from an illness or accident of the Executive, the Executive's spouse, or a dependent (as defined in Section 152(a) of the Code) of the Executive, loss of the Executive's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Executive. Article 2 Deferral Election 2.1 Elections Generally. Unless otherwise provided for by the Secretary, the Participant may file annually Base Salary, Bonus, and Performance-Based Compensation Election Form(s) with the Plan Administrator no later than: (a) For Base Salary and Bonus, the end of the Plan Year preceding the Plan Year in which services leading to such Base Salary and Bonus will be performed; and (b) For Performance-Based Compensation, no later than six months before the end of the service period during which the Performance-Based Compensation is measured. The Election Form(s) shall set forth the amount of Base Salary, Bonus, and Performance-based Compensation to be deferred and shall--for Base Salary and Bonus only--be effective to defer only such compensation earned for services performed after the date the Election Form(s) are received by the Plan Administrator. Subsequent Election Form(s), subject to Section 2.3(b), shall only be effective for the Plan Year following the Plan Year in which they are received and approved by the Plan Administrator. 2.2 Initial Election. After being notified by the Plan Administrator of eligibility for participation in the Agreement, a Participant may make an initial deferral election under this Agreement by delivering to the Plan Administrator a signed Election Form(s) and Beneficiary Designation Form within thirty (30) days. The Election Form(s) shall set forth the amount of Base Salary, Bonus, and Performance-Based Compensation and shall be effective to defer, subject to Section 2.1(b), only Base Salary, Bonus, and Performance-based Compensation earned for services performed after the date the Election Form(s) are received by the Plan Administrator. 2.3. Change in Form or Timing of Distributions. For distribution of benefits under Article 4, Participant may elect to delay the timing or change the form of distributions by submitting the appropriate Election Form(s) to the Plan Administrator. Any such elections: (a) may not accelerate the time or schedule of any distribution, except as allowed by the Secretary; (b) must, for benefits payable under Section 4.1, be made at least twelve (12) months prior to the first scheduled distribution; (c) must, for benefits payable under Sections 4.1 and 4.2, delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made; and (d) must take effect not less than twelve (12) months after the election is made. Article 3 Deferral Account 3.1 Establishing and Crediting. The Company shall establish a Deferral Account on its books for the Executive and shall credit to the Deferral Account the following amounts: 3.1.1 Deferrals. The Compensations deferred by the Executive as of the time the Compensations would have otherwise been paid to the Executive. 3.1.2 Interest. On the last day of each month and immediately prior to the distribution of any benefits, but only until commencement of benefit distributions under this Agreement, interest shall be credited on the Deferral Account at an annual rate determined by the Board in its sole and absolute discretion, compounded annually. 3.2 Statement of Accounts. The Plan Administrator shall provide to the Executive, within one hundred twenty (120) days after the end of each Plan Year, a statement setting forth the Deferral Account balance. 3.3 Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement. The Deferral Account is not a trust fund of any kind. The Executive is a general unsecured creditor of the Company for the distribution of benefits. The benefits represent the mere Company promise to pay such benefits. The Executive's rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive's creditors. Article 4 Distributions During Lifetime 4.1 Normal Retirement Benefit. Upon the Normal Retirement Date, the Company shall pay to the Executive the benefit described in this Section 4.1 in lieu of any other benefit under this Article. 4.1.1 Amount of Benefit. The benefit under this Section 4.1 is the Deferral Account balance at the Executive's Normal Retirement Age. 4.1.2 Distribution of Benefit. The Company shall pay the benefit to the Executive as elected by the Executive on the Election Form(s) commencing within thirty (30) days following Normal Retirement Age. 4.2 Early Retirement Benefit. Upon the Executive's Early Retirement, the Company shall pay to the Executive the benefit described in this Section 4.2 in lieu of any other benefit under this Article. 4.2.1 Amount of Benefit. The benefit under this Section 4.2 is the Deferral Account balance at the Executive's Separation from Service. 4.2.2 Distribution of Benefit. The Company shall pay the benefit to the Executive as elected by the Executive on the Election Form(s) commencing within thirty (30) days following Separation from Service. 4.3 Disability Benefit. If the Executive's Disability results in the Executive's Separation from Service prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 4.3 in lieu of any other benefit under this Article. 4.3.1 Amount of Benefit. The benefit under this Section 4.3 is the Deferral Account balance at the Executive's Separation from Service. 4.3.2 Distribution of Benefit. The Company shall pay the benefit to the Executive as elected by the Executive on the Election Form(s) commencing within thirty (30) days following Separation from Service due to Disability 4.4 Hardship Distribution. If the Executive experiences an Unforeseeable Emergency, the Executive may petition the Board to receive a payout from the Agreement. The Board in its sole discretion may grant such petition. If granted, the Executive shall receive, within sixty (60) days, a payout from the Agreement (i) only to the extent deemed necessary by the Board to satisfy the Executive's Unforeseeable Emergency, plus an amount necessary to pay taxes reasonably anticipated as a result of the distribution; and (ii) after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Executive's assets (to the extent the liquidation would not itself cause severe financial hardship). 4.5 Restriction on Timing of Distribution. Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a "specified employee" under Section 409A of the Code and regulations thereunder, benefit distributions that qualify as a "separation from service" under Section 409A of the Code and regulations thereunder may not commence earlier than six (6) months after the date of such separation from service. Article 5 Distributions at Death 5.1 Death During Active Service. If the Executive dies while in the active service of the Company, the Company shall distribute to the Beneficiary the benefit described in this Section 5.1. This benefit shall be distributed in lieu of the benefits under Article 4. 5.1.1 Amount of Benefit. The benefit under this Section 5.1 is the greater of: (a) Deferral Account balance at the Executive's Separation from Service; or (b) the Deferral Account Balance projected to be accrued at Normal Retirement Age. 5.1.2 Distribution of Benefit. The Company shall pay the benefit to the Beneficiary as elected by the Executive on the Election Form(s) commencing within sixty (60) days following receipt by the Company of the Executive's death certificate. 5.2 Death During Distribution of a Benefit. If the Executive dies after any benefit distributions have commenced under this Agreement but before receiving all such distributions, the Company shall pay to the Beneficiary the remaining benefits at the same time and in the same amounts as they would have been paid to the Executive had the Executive survived. 5.3 Death After Separation from Service But Before Benefit Distributions Commence. If the Executive is entitled to benefit distributions under this Agreement, but dies prior to the commencement of said benefit distributions, the Company shall pay to the Beneficiary the same benefits that the Executive was entitled to prior to death except that the benefit distributions shall commence within thirty (30) days following the Executive's death. Article 6 Beneficiaries 6.1 Beneficiary. Each Executive shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under the Agreement to a Beneficiary upon the death of the Executive. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other plan of the Company in which the Executive participates. 6.2 Beneficiary Designation; Change. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent. The Executive's beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator's rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive's death. 6.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent. 6.4 No Beneficiary Designation. If the Executive dies without a valid Beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive's spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be made to the personal representative of the Executive's estate. 6.5 Facility of Distribution. If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person's property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Executive and the Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such distribution amount. Article 7 General Limitations 7.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement that is in excess of the Executive's Deferrals (i.e., Deferral Account minus interest credited thereon) if Executive's service is terminated by the Board for: (a) Gross negligence or gross neglect of duties to the Company; or (b) Conviction of a felony or of a gross misdemeanor involving moral turpitude in connection with the Executive's service to the Company; or (c) Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive's service and resulting in an adverse effect on the Company; or (d) Issuance of a final removal or prohibition order issued by a state or federal banking agency with jurisdiction over the Company. 7.2 No Withdrawal Election. Except as expressly provided herein, the Executive may not elect, at any time, to withdraw any portion of the Deferral Account balance. Article 8 Administration Of Agreement 8.1 Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint. The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Agreement and (ii) decide or resolve any and all questions including interpretations of this Agreement, as may arise in connection with the Agreement. 8.2 Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company. 8.3 Binding Effect of Decisions. The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. 8.4 Indemnity of Plan Administrator. The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members. 8.5 Company Information. To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the Compensations of its Executives, the date and circumstances of the retirement, Disability, death or Separation from Service of its Executives, and such other pertinent information as the Plan Administrator may reasonably require. Article 9 Claims and Review Procedures 9.1 Claims Procedure. The Executive or Beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows: 9.1.1 Initiation - Written Claim. The claimant initiates a claim by submitting to the Company a written claim for the benefits. 9.1.2 Timing of Company Response. The Company shall respond to such claimant within 90 days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 9.1.3 Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial, (b) A reference to the specific provisions of the Agreement on which the denial is based, (c) A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed, (d) An explanation of the Agreement's review procedures and the time limits applicable to such procedures, and (e) A statement of the claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review. 9.2 Review Procedure. If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows: 9.2.1 Initiation - Written Request. To initiate the review, the claimant, within 60 days after receiving the Company's notice of denial, must file with the Company a written request for review. 9.2.2 Additional Submissions - Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits. 9.2.3 Considerations on Review. In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 9.2.4 Timing of Company Response. The Company shall respond in writing to such claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 9.2.5 Notice of Decision. The Company shall notify the claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial, (b) A reference to the specific provisions of the Agreement on which the denial is based, (c) A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits, and (d) A statement of the claimant's right to bring a civil action under ERISA Section 502(a). Article 10 Amendments and Termination 10.1 Amendment. This Agreement may be amended only by a written agreement signed by the Company and the Executive. Provided, however, that the Company may amend this Agreement to conform with written directives to the Company from its banking regulators. 10.2 Termination. This Agreement may be terminated only by a written agreement signed by the Company and the Executive. Upon such termination, the Deferral Account balance shall be paid to the Executives in a lump sum within thirty (30) days following the earlier of: (a) Separation from Service; (b) Death; (c) Such time as permitted by the Secretary under regulations issued pursuant to Section 409A of the Code. Article 11 Miscellaneous 11.1 Binding Effect. This Agreement shall bind the Executive and the Company and their beneficiaries, survivors, executors, administrators and transferees. 11.2 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an executive of the Company, nor does it interfere with the Company's right to discharge the Executive. It also does not require the Executive to remain an executive nor interfere with the Executive's right to separate from service at any time. 11.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 11.4 Tax Withholding. The Company shall withhold any taxes that are required to be withheld, under Section 409A of the Code and regulations thereunder, from the benefits provided under this Agreement. The Executive acknowledges that the Company's sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies). 11.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Ohio, except to the extent preempted by the laws of the United States of America. 11.6 Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Company for the distribution of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life or other informal funding asset is a general asset of the Company to which the Executive and the Beneficiary have no preferred or secured claim. 11.7 Reorganization. The Company shall not merge or consolidate into or with another company or bank, or reorganize, or sell substantially all of its assets to another bank, firm, or person unless such succeeding or continuing bank, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement. Upon the occurrence of such event, the term "Company" as used in this Agreement shall be deemed to refer to the successor or survivor bank. 11.8 Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of (i) this Agreement other than those specifically set forth herein. 11.9 Notice. Any notice or filing required or permitted to be given to the Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: The Ohio Valley Bank Company --------------------------------- 420 Third Avenue --------------------------------- P O Box 240 --------------------------------- Gallipolis, OH 45631-0240 --------------------------------- Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive. IN WITNESS WHEREOF, the Executive and the Company have signed this Agreement as of April 17, 2003. EXECUTIVE: COMPANY: THE OHIO VALLEY BANK COMPANY /s/ Jeffrey E. Smith By: /s/ James L. Dailey - -------------------- ---------------------------- Jeffrey E. Smith Title: Chairman of the Board EX-10 10 exhibit10-8a.txt SCHED A DIRECTORDEFERRED EXHIBIT 10.8(a) SCHEDULE A TO EXHIBIT 10.7(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 January 13, 2004, between Brent A. Saunders and The Ohio Valley Bank Company filed herewith. Date of Name Director Deferred Fee Agreements - ---- -------------------------------- Anna P. Barnitz January 20, 2004 W. Lowell Call January 13, 2004 Steven B. Chapman January 20, 2004 Robert E. Daniel June 20, 2006 Robert H. Eastman January 20, 2004 Harold A. Howe March 16, 2004 Roger D. Williams June 20, 2006 Lannes C. Williamson June 15, 2004 Thomas E. Wiseman January 13, 2004 EX-10 11 exhibit108b.txt SCHED A EXECDEFERREDCOMP EXHIBIT 10.8(b) SCHEDULE A TO EXHIBIT 10.7(b) The following individuals entered into Executive Deferred Compensation Agreements with The Ohio Valley Bank Company identified below which are identical to the Executive Deferred Compensation Agreement, dated April 17, 2003, between Jeffrey E. Smith and The Ohio Valley Bank Company filed herewith. Date of Name Executive Deferred Compensation Agreements - ---- ------------------------------------------ Katrinka V. Hart January 9, 2004 E. Richard Mahan January 9, 2004 Scott W. Shockey December 1, 2005 EX-10 12 exhibit10-9.txt SUMMARYOFCOMPENSATIONFORDIRECTORS12312006 EXHIBIT 10.9 SUMMARY OF COMPENSATION FOR DIRECTORS OF OHIO VALLEY BANC CORP. All of the directors of Ohio Valley Banc Corp. ("Ohio Valley") also serve as directors of its subsidiary, The Ohio Valley Bank Company (the "Bank"). The directors of Ohio Valley are paid by the Bank for their services rendered as directors of the Bank, not Ohio Valley. Each director of the Bank who is not an employee of Ohio Valley or any of its subsidiaries (a "Non-Employee Director") receives $550 per month for his or her services. Each director of the Bank who is an employee of Ohio Valley or any of its subsidiaries (an "Employee Director") receives $350 per month for his or her services. In addition, each director of the Bank receives an annual retainer of $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 $36,000 annually. This figure was pro-rated for time served for new members. Employee Directors receive no additional compensation for serving on the Executive Committee. The Bank also maintains 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 10.7(a) and Exhibit 10.7(b), respectively, to Ohio Valley's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (SEC File No. 0-20914). EX-13 13 annualreport2006.txt ANNUAL REPORT 12312006 Message from Management Dear Fellow Shareholders and Friends, March 15, 2007 In my nearly thirty-five years as an Ohio Valley banker, 2006 was one of only three years in which our company reported a decrease in annual earnings. It is no pleasure to report to you that our company's net earnings for 2006 decreased 23.1% and earnings per share were down 22.6%. Nor does it please me to report that our company increased its provision for loan loss expense by $3.8 million due to higher non-performing loans and charge-offs and that our ratio of net chargeoffs to average loans increased from .31% to .54%. However, what does please me is that last year, in one of the more challenging banking environments, in one of the more challenging economies, and one of the most challenging locations, the Midwest, the more than 250 people who work for our company: o Earned nearly $5.4 million, o Increased the dividend to our shareholders more than 5% per share, o Increased our total assets to more than three quarters of a billion dollars, o Increased noninterest income by $308 thousand, o Opened a beautiful new office in Jackson, Ohio, and o Decreased non interest expense by $160 thousand, improving our efficiency ratio to 61.2%. The annual report that follows this message gives complete details on the financial results of our company for 2006 and selected previous years. A good friend of OVB once told me, "Experience is good, even though some of it's bad!" Another friend of OVB said, "Rough seas make for good sailors and strong ships." I think your sailors are better and your ship is stronger from the experience of 2006. The ship is stronger for two reasons: at December 31, 2006, the total capital of our company was more than $60 Million and more than 80% of our shareholders were enrolled in the dividend reinvestment and stock purchase plan. We thank you for your continued support of OVBC and submit this report for your review. By the way, if you'd like to know who those friends were who shared the two comments with me, come to this year's annual meeting May 9th and I'll tell you. Sincerely, Jeffrey E. Smith President and Chief Executive Officer SELECTED FINANCIAL DATA Years Ended December 31 SUMMARY OF OPERATIONS: 2006 2005 2004 2003 2002 (dollars in thousands, except per share data) Total interest income $ 52,421 $ 46,071 $ 43,490 $ 45,160 $ 47,771 Total interest expense 23,931 18,137 16,146 17,645 20,810 Net interest income 28,490 27,934 27,344 27,515 26,961 Provision for loan losses 5,662 1,797 2,353 4,339 5,470 Total other income 5,830 5,522 7,992 5,982 5,634 Total other expenses 21,199 21,359 20,926 19,817 19,175 Income before income taxes 7,459 10,300 12,057 9,341 7,950 Income taxes 2,061 3,283 3,676 2,869 2,275 Net income 5,398 7,017 8,381 6,472 5,675 PER SHARE DATA(1): Net income per share $ 1.27 $ 1.64 $ 1.93 $ 1.49 $ 1.31 Cash dividends per share $ .67 $ .63 $ .75 $ .57 $ .54 Book value per share $14.38 $13.90 $13.19 $12.44 $11.64 Weighted average number of common shares outstanding 4,230,551 4,278,562 4,338,598 4,350,288 4,322,875 AVERAGE BALANCE SUMMARY: Total loans $ 626,418 $ 599,345 $ 590,006 $ 559,854 $ 538,148 Securities (2) 86,179 84,089 86,598 86,609 76,020 Deposits 585,301 542,730 537,162 509,676 489,513 Other borrowed funds (3) 81,975 92,520 96,361 100,590 98,938 Shareholders' equity 59,970 57,620 55,788 52,074 47,875 Total assets 760,932 726,489 722,281 693,197 667,561 PERIOD END BALANCES: Total loans $ 625,164 $ 617,532 $ 600,574 $ 573,704 $ 559,561 Securities (2) 90,161 84,623 86,674 90,046 90,759 Deposits 593,786 562,866 535,153 507,509 497,404 Shareholders' equity 60,282 59,271 56,579 54,408 50,375 Total assets 764,361 749,719 729,120 707,327 696,356 KEY RATIOS: Return on average assets .71% .97% 1.16% .93% .85% Return on average equity 9.00% 12.18% 15.02% 12.43% 11.85% Dividend payout ratio 52.56% 38.55% 38.89% 38.14% 40.79% Average equity to average assets 7.88% 7.93% 7.72% 7.51% 7.17% (1) Restated for stock splits as appropriate. (2) Securities include interest-bearing balances with banks. (3) Other borrowed funds include subordinated debentures. 3 CONSOLIDATED STATEMENTS OF CONDITION As of December 31 2006 2005 ---- ---- (dollars in thousands, except share and per share data) ASSETS Cash and noninterest-bearing deposits with banks $ 18,965 $ 18,516 Federal funds sold 1,800 1,100 --------- --------- Total cash and cash equivalents 20,765 19,616 Interest-bearing deposits in other financial institutions 508 510 Securities available-for-sale 70,267 66,328 Securities held-to-maturity (estimated fair value: 2006 - $13,586, 2005 - $12,373) 13,350 12,088 Federal Home Loan Bank stock 6,036 5,697 Total loans 625,164 617,532 Less: Allowance for loan losses (9,412) (7,133) --------- --------- Net loans 615,752 610,399 Premises and equipment, net 9,812 8,299 Accrued income receivable 3,234 2,819 Goodwill 1,267 1,267 Bank owned life insurance 16,054 15,962 Other assets 7,316 6,734 --------- --------- Total assets $ 764,361 $ 749,719 ========= ========= LIABILITIES Noninterest-bearing deposits $ 77,960 $ 82,561 Interest-bearing deposits 515,826 480,305 --------- --------- Total deposits 593,786 562,866 Securities sold under agreements to repurchase 22,556 29,070 Other borrowed funds 63,546 76,173 Subordinated debentures 13,500 13,500 Accrued liabilities 10,691 8,839 --------- --------- Total liabilities 704,079 690,448 --------- --------- SHAREHOLDERS' EQUITY Common stock ($1.00 par value per share, 10,000,000 shares authorized; 2006 - 4,626,340 shares issued, 2005 - 4,626,336 shares issued) 4,626 4,626 Additional paid-in-capital 32,282 32,282 Retained earnings 34,404 31,843 Accumulated other comprehensive loss (981) (1,231) Treasury stock, at cost (2006 - 432,852 shares, 2005 - 361,365 shares) (10,049) (8,249) --------- --------- Total shareholders' equity 60,282 59,271 --------- --------- Total liabilities and shareholders' equity $ 764,361 $ 749,719 ========= ========= See accompanying notes to consolidated financial statements 4 CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31 2006 2005 2004 ------------------------------- ---- ---- ---- (dollars in thousands, except per share data) Interest and dividend income: Loans, including fees $ 48,514 $ 42,621 $ 39,821 Securities: Taxable 2,851 2,644 2,837 Tax exempt 474 475 552 Dividends 339 277 218 Other Interest 243 54 62 -------- -------- -------- 52,421 46,071 43,490 Interest expense: Deposits 18,594 12,973 11,326 Securities sold under agreements to repurchase 895 641 278 Other borrowed funds 3,163 3,398 3,574 Subordinated debentures 1,279 1,125 968 -------- -------- -------- 23,931 18,137 16,146 -------- -------- -------- Net interest income 28,490 27,934 27,344 Provision for loan losses 5,662 1,797 2,353 Net interest income after provision -------- -------- -------- for loan losses 22,828 26,137 24,991 -------- -------- -------- Noninterest income: Service charges on deposit accounts 2,987 3,096 3,318 Trust fees 221 211 203 Income from bank owned life insurance 907 589 606 Gain on sale of loans 104 120 63 Gain on sale of ProCentury Corp. --- --- 2,463 Other 1,611 1,506 1,339 -------- -------- -------- 5,830 5,522 7,992 Noninterest expense: Salaries and employee benefits 12,497 12,837 12,592 Occupancy 1,338 1,309 1,285 Furniture and equipment 1,120 1,206 1,208 Corporation franchise tax 669 673 616 Data processing 687 633 504 Other 4,888 4,701 4,721 -------- -------- -------- 21,199 21,359 20,926 -------- -------- -------- Income before income taxes 7,459 10,300 12,057 Provision for income taxes 2,061 3,283 3,676 -------- -------- -------- NET INCOME $ 5,398 $ 7,017 $ 8,381 ======== ======== ======== Earnings per share $ 1.27 $ 1.64 $ 1.93 ======== ======== ======== See accompanying notes to consolidated financial statements 5 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2006, 2005 and 2004 Accumulated Additional Other Total Common Paid-In Retained Comprehensive Treasury Shareholders' (dollars in thousands, except share and Stock Capital Earnings Income(Loss) Stock Equity per share data) ------- ------- ------- ----------- -------- ------- BALANCES AT JANUARY 1, 2004 $ 3,658 $30,962 $23,343 $ 624 $ (4,179) $54,408 Comprehensive income: Net income --- --- 8,381 --- --- 8,381 Change in unrealized gain on available-for-sale securities --- --- --- (1,277) --- (1,277) Income tax effect --- --- --- 434 --- 434 ------- Total comprehensive income --- --- --- --- --- 7,538 Common Stock issued to ESOP, 4,600 shares 5 146 --- --- --- 151 Common Stock issued through dividend reinvestment, 27,016 shares 27 823 --- --- --- 850 Cash dividends, $.75 per share --- --- (3,259) --- --- (3,259) Shares acquired for treasury, 99,359 shares --- --- --- --- (3,109) (3,109) ------- ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 2004 3,690 31,931 28,465 (219) (7,288) 56,579 Comprehensive income: Net income --- --- 7,017 --- --- 7,017 Change in unrealized loss on available-for-sale securities --- --- --- (1,534) --- (1,534) Income tax effect --- --- --- 522 --- 522 ------- Total comprehensive income --- --- --- --- --- 6,005 Shares from stock split, 25%: Common stock, 922,030 shares (including treasury stock of 64,742 shares) 922 --- (922) --- --- --- Cash paid in lieu of fractional shares in stock split --- --- (12) --- --- (12) Common Stock issued to ESOP, 9,500 shares 9 231 --- --- --- 240 Common Stock issued through dividend reinvestment, 4,978 shares 5 120 --- --- --- 125 Cash dividends, $.63 per share --- --- (2,705) --- --- (2,705) Shares acquired for treasury, 37,653 shares --- --- --- --- (961) (961) ------- ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 2005 $ 4,626 $32,282 $31,843 $(1,231) $(8,249) $59,271 Comprehensive income: Net income --- --- 5,398 --- --- 5,398 Change in unrealized loss on available-for-sale securities --- --- --- 379 --- 379 Income tax effect --- --- --- (129) --- (129) ------- Total comprehensive income --- --- --- --- --- 5,648 Common Stock issued through dividend reinvestment, 4 shares --- --- --- --- --- --- Cash dividends, $.67 per share --- --- (2,837) --- --- (2,837) Shares acquired for treasury, 71,487 shares --- --- --- --- (1,800) (1,800) ------- ------- ------- ------- ------- ------- BALANCES AT DECEMBER 31, 2006 $ 4,626 $32,282 $34,404 $ (981) $(10,049) $60,282 ======= ======= ======= ======= ======== =======
See accompanying notes to consolidated financial statements 6 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2006 2005 2004 ------------------------------- ---- ---- ---- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,398 $ 7,017 $ 8,381 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,021 1,147 1,237 Net amortization and accretion of securities 94 123 201 Proceeds from sale of loans in secondary market 4,038 4,918 1,598 Loans disbursed for sale in secondary market (3,933) (4,798) (1,535) Gain on sale of loans (104) (120) (63) Deferred tax (benefit) expense (903) (293) 63 Provision for loan losses 5,662 1,797 2,353 Common stock issued to ESOP --- 240 151 Federal Home Loan Bank stock dividend (338) (276) (218) Gain on sale of ProCentury Corp. --- --- (2,463) Loss on sale of other real estate owned 55 12 --- Change in accrued income receivable (415) (176) 57 Change in accrued liabilities 1,852 1,254 1,255 Change in other assets (290) (314) (844) ------- ------- ------- Net cash provided by operating activities 12,137 10,531 10,173 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 12,261 20,714 30,715 Purchases of securities available-for-sale (15,907) (19,952) (29,755) Proceeds from maturities of securities held-to-maturity 354 1,159 1,874 Purchases of securities held-to-maturity (1,625) (1,265) (1,056) Change in interest-bearing deposits in other banks 2 15 334 Net change in loans (11,589) (18,969) (30,163) Proceeds from sale of other real estate owned 734 100 388 Proceeds from sale of ProCentury Corp. --- --- 4,394 Proceeds from sale of premises and equipment --- 87 --- Purchases of premises and equipment (2,534) (673) (955) Proceeds from bank owned life insurance 174 125 850 Purchases of bank owned life insurance --- (1,510) (272) ------- ------- ------- Net cash used in investing activities (18,130) (20,294) (24,496) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in deposits 30,920 27,713 27,644 Cash dividends (2,837) (2,705) (3,259) Cash paid in lieu of fractional shares in stock split --- (12) --- Proceeds from issuance of common stock --- 125 850 Purchases of treasury stock (1,800) (961) (3,109) Change in securities sold under agreements to repurchase (6,514) (10,683) 15,735 Proceeds from Federal Home Loan Bank borrowings 5,000 13,521 11,000 Repayment of Federal Home Loan Bank borrowings (22,146) (18,157) (20,633) Change in other short-term borrowings 4,519 4,259 (15,379) ------- ------- ------- Net cash provided by financing activities 7,142 13,100 12,849 ------- ------- ------- CASH AND CASH EQUIVALENTS: Change in cash and cash equivalents 1,149 3,337 (1,474) Cash and cash equivalents at beginning of year 19,616 16,279 17,753 ------- ------- ------- Cash and cash equivalents at end of year $20,765 $19,616 $16,279 ======= ======= ======= SUPPLEMENTAL DISCLOSURE: Cash paid for interest $22,014 $17,188 $16,246 Cash paid for income taxes 3,623 3,502 3,472 Non-cash transfers from loans to other real estate owned 573 170 524 Non-cash transfers from retained earnings to common stock for stock split --- 922 ---
See accompanying notes to consolidated financial statements 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Amounts are in thousands, except share and per share data Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of the Ohio Valley Banc Corp. ("Ohio Valley") and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the "Bank"), Loan Central, a consumer finance company, and Ohio Valley Financial Services Agency, LLC, an insurance agency. Ohio Valley and its subsidiaries are collectively referred to as the "Company". All material intercompany accounts and transactions have been eliminated. Nature of Operations: The Company provides financial services through 20 offices located in central and southeastern Ohio as well as western West Virginia. The Company's primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral, including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from business operations. Other financial instruments include deposit accounts in other financial institutions and federal funds sold. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving the use of management's estimates and assumptions that are more susceptible to change in the near term involve the allowance for loan losses, the fair value of certain securities, the fair value of financial instruments and the determination and carrying value of impaired loans. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, noninterest-bearing deposits with banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The Company reports net cash flows for customer loan transactions, deposit transactions, short-term borrowings and interest-bearing deposits with other financial institutions. Securities: The Company classifies securities into held-to-maturity and available-for-sale categories. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Securities classified as available-for-sale include equity securities and other securities that management intends to sell or that could be sold for liquidity, investment management or similar reasons even if there is not a present intention of such a sale. Available-for-sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. Other securities, such as Federal Home Loan Bank stock, are carried at cost. Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method. Gains and losses are recognized upon the sale of specific identified securities on the completed transaction basis. Securities are written down to fair value when a decline in fair value is other than temporary. Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on an accrual basis using the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. Payments received on such loans are reported as principal reductions. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are 8 Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Concentrations of Credit Risk: The Company grants residential, consumer and commercial loans to customers located primarily in the southeastern Ohio and western West Virginia areas. The following represents the composition of the Company's loan portfolio at December 31, 2006: % of Total Loans ---------------- Commercial real estate loans 30.93% Commercial and industrial loans 7.58% Residential real estate loans 38.16% Consumer loans 22.39% All other loans .94% ---------------- 100.00% ================ Approximately 3.51% of total loans are unsecured. The Bank, in the normal course of its operations, conducts business with correspondent financial institutions. Balances in correspondent accounts, investments in federal funds, certificates of deposit and other short-term securities are closely monitored to ensure that prudent levels of credit and liquidity risks are maintained. At December 31, 2006, the Bank's primary correspondent balance was $10,071 on deposit at Fifth Third Bank, Cincinnati, Ohio. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation, which is computed using the straight-line or declining balance methods over the estimated useful life of the owned asset and, for leasehold improvement, over the remaining term of the leased facility. The useful lives range from 3 to 8 years for equipment, furniture and fixtures and 7 to 39 years for buildings and improvements. Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of foreclosure is included in other assets. Such real estate is carried at the lower of investment in the loan or estimated fair value of the property less estimated selling costs. Any reduction to fair value at the time of acquisition is accounted for as a loan charge-off. Any subsequent reduction in fair value is recorded as a loss on other assets. Costs incurred to carry other real estate are charged to expense. Other real estate owned totaled $1,903 at December 31, 2006 and $2,064 at December 31, 2005. Goodwill: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Stock Split: On April 13, 2005, Ohio Valley's Board of Directors declared a five-for-four stock split, effected in the form of a stock dividend, on Ohio Valley's common shares. Each shareholder of record on April 25, 2005, received an additional common share for every four common shares then held. The common shares were issued on May 10, 2005. The stock split was recorded by transferring from retained earnings an amount equal to the stated value of the shares issued. The Company retained the current par value of $1.00 per share for all common shares. Earnings and cash dividends per share amounts have been retroactively adjusted to reflect the effect of the stock split. Per Share Amounts: Earnings per share is based on net income divided by the following weighted average number of common shares outstanding during the periods: 4,230,551 for 2006; 4,278,562 for 2005; 4,338,598 for 2004. Ohio Valley had no dilutive securities outstanding for any period presented. The weighted average number of shares outstanding have been retroactively adjusted to reflect the effect of the stock split. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. 9 Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale which are also recognized as separate components of equity. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. Bank Owned Life Insurance: The Company has purchased life insurance policies on certain officers. These policies are recorded at their cash surrender value, or the amount that could be currently realized. ESOP: Compensation expense is based on the market price of shares as they are committed to be allocated to participant accounts. New Accounting Pronouncements: In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has determined that the adoption of FIN 48 will not have a material effect on its financial condition, results of operations and cash flows. Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. These financial instruments are recorded when they are funded. See Note K for more specific disclosure related to loan commitments. Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to Ohio Valley or by Ohio Valley to its shareholders. These restrictions pose no practical limit on the ability of the Bank or Ohio Valley to pay dividends at historical levels. See Note P for more specific disclosure related to dividend restrictions. Restrictions on Cash: Cash on hand or on deposit with Fifth Third Bank and the Federal Reserve Bank of $11,281 and $10,804 was required to meet regulatory reserve and clearing requirements at year end 2006 and 2005. These balances do not earn interest. Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note O. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Industry Segment Information: While management monitors the revenue streams of the various products and services, the identifiable segments are not material, and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment. Reclassifications: The consolidated financial statements for 2005 and 2004 have been reclassified to conform with the presentation for 2006. These reclassifications had no effect on the net results of operations. 10 NOTE B - SECURITIES Securities are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Securities Available-for-Sale Cost Gains Losses Value ---- ----- ------ ----- December 31, 2006 ----------------- U.S. Government agency securities $25,495 $ 3 $ (315) $25,183 Mortgage-backed securities 46,260 13 (1,189) 45,084 ------- ------ -------- ------- Total securities $71,755 $ 16 $(1,504) $70,267 ======= ====== ======= ======= December 31, 2005 ----------------- U.S. Government agency securities $18,487 --- $ (320) $18,167 Mortgage-backed securities 49,706 $ 10 (1,555) 48,161 ------- ------ -------- ------- Total securities $68,193 $ 10 $(1,875) $66,328 ======= ====== ======= ======= Gross Gross Estimated Amortized Unrealized Unrealized Fair Securities Held-to-Maturity Cost Gains Losses Value ---- ----- ------ ----- December 31, 2006 ----------------- Obligations of states and political subdivisions $13,293 $ 279 $ (41) $13,531 Mortgage-backed securities 57 --- (2) 55 ------- ------ ----- ------- Total securities $13,350 $ 279 $ (43) $13,586 ======= ====== ===== ======= December 31, 2005 ----------------- Obligations of states and political subdivisions $12,019 $ 341 $ (53) $12,307 Mortgage-backed securities 69 --- (3) 66 ------- ------ ----- ------- Total securities $12,088 $ 341 $ (56) $12,373 ======= ====== ===== =======
At year-end 2006 and 2005, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity. Securities with a carrying value of approximately $71,544 at December 31, 2006 and $69,614 at December 31, 2005 were pledged to secure public deposits, repurchase agreements and for other purposes as required or permitted by law. 11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE B - SECURITIES (continued) The amortized cost and estimated fair value of debt securities at December 31, 2006, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities. Available-for-Sale Held-to-Maturity ---------------------- ----------------------- Estimated Estimated Amortized Fair Amortized Fair Debt Securities: Cost Value Cost Value ------- ------- ------- ------- Due in one year or less --- --- $ 626 $ 630 Due in one to five years $25,495 $25,183 5,664 5,727 Due in five to ten years --- --- 2,136 2,237 Due after ten years --- --- 4,867 4,937 Mortgage-backed securities 46,260 45,084 57 55 ------- ------- ------- ------- Total debt securities $71,755 $70,267 $13,350 $13,586 ======= ======= ======= ======= There were no sales of debt or equity securities during 2006, 2005 and 2004. Securities with unrealized losses not recognized in income are as follows:
Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- December 31, 2006 Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ----- ----- ----- ----- ----- ----- Description of Securities ------------------------- U.S. Government agency securities ........ $ 8,966 $ (32) $15,214 $ (283) $24,180 $ (315) Mortgage-backed securities ............... --- --- 41,027 (1,191) 41,027 (1,191) Obligations of states and political subdivisions ................. --- --- 1,883 (41) 1,883 (41) ------- ------ ------- ------- ------- ------- $ 8,966 $ (32) $58,124 $(1,515) $67,090 $(1,547) ======= ====== ======= ======= ======= ======= Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- December 31, 2005 Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ----- ----- ----- ----- ----- ----- Description of Securities ------------------------- U.S. Government agency securities ........ $13,271 $ (228) $ 1,908 $ (92) $15,179 $ (320) Mortgage-backed securities ............... 16,944 (352) 30,878 (1,206) 47,822 (1,558) Obligations of states and political subdivisions ................. 976 (14) 1,153 (39) 2,129 (53) ------- ------ ------- ------- ------- ------- $31,191 $ (594) $33,939 $(1,337) $65,130 $(1,931) ======= ====== ======= ======= ======= =======
Unrealized losses on the Company's debt securities have not been recognized into income because the issuers' securities are of high credit quality, management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to increases in market interest rates. The fair value is expected to recover as the bonds approach their maturity date or reset date. Management does not believe any individual unrealized loss at December 31, 2006 represents an other-than-temporary impairment. NOTE C - LOANS Loans are comprised of the following at December 31: 2006 2005 ---- ---- Commercial real estate $193,359 $182,031 Commercial and industrial 47,389 54,505 Residential Real estate 238,549 235,008 Consumer 139,961 145,815 All other 5,906 173 -------- -------- Total Loans $625,164 $617,532 ======== ======== 12 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE D - ALLOWANCE FOR LOAN LOSSES Following is an analysis of changes in the allowance for loan losses for the years ended December 31: 2006 2005 2004 ---- ---- ---- Balance, beginning of year $7,133 $7,177 $7,593 Loans charged-off: Commercial (1) 3,079 1,295 1,661 Residential real estate 432 349 823 Consumer 2,120 2,263 2,267 ------ ------ ------ Total loans charged-off 5,631 3,907 4,751 Recoveries of loans: Commercial (1) 946 912 556 Residential real estate 204 336 583 Consumer 1,097 818 843 ------ ------ ------ Total recoveries of loans 2,247 2,066 1,982 Net loan charge-offs (3,384) (1,841) (2,769) Provision charged to operations 5,663 1,797 2,353 ------ ------ ------ Balance, end of year $9,412 $7,133 $7,177 ====== ====== ====== Information regarding impaired loans is as follows: 2006 2005 ---- ---- Balance of impaired loans $17,402 $7,983 Less portion for which no specific allowance is allocated 2,959 2,828 ------ ------ Portion of impaired loan balance for which an allowance for credit losses is allocated $14,443 $5,155 ====== ====== Portion of allowance for loan losses allocated to the impaired loan balance $4,962 $2,603 ====== ====== Average investment in impaired loans for the year $18,774 $8,315 ====== ====== Past due - 90 days or more and still accruing $1,375 $1,317 ====== ====== Nonaccrual $12,017 $1,240 ====== ====== Interest recognized on impaired loans was $939, $495 and $284 for years ending 2006, 2005 and 2004, respectively. Accrual basis income was not materially different from cash basis income for the periods presented. (1) Includes commercial and industrial and commercial real estate loans 13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE E - PREMISES AND EQUIPMENT Following is a summary of premises and equipment at December 31: 2006 2005 ---- ---- Land $ 1,364 $ 1,341 Buildings 9,908 8,045 Leasehold improvements 2,452 2,493 Furniture and equipment 11,043 10,427 ------- ------- 24,767 22,306 Less accumulated depreciation 14,955 14,007 ------- ------- Total Premises and Equipment $ 9,812 $ 8,299 ======= ======= The following is a summary of the future minimum lease payments for facilities leased by the Company. Lease payments were $386 in 2006 and $385 in 2005. 2007 $ 355 2008 291 2009 180 2010 60 2011 43 Thereafter 30 ------ $ 959 ====== NOTE F - DEPOSITS Following is a summary of interest-bearing deposits at December 31: 2006 2005 ---- ---- NOW accounts $ 78,484 $ 95,498 Savings and Money Market 91,660 57,473 Time: IRA accounts 38,731 36,779 Certificates of Deposit: In denominations under $100,000 174,129 165,276 In denominations of $100,000 or more 132,822 125,279 -------- -------- Total time deposits 345,682 327,334 -------- -------- Total interest-bearing deposits $515,826 $480,305 ======== ======== Following is a summary of total time deposits by remaining maturity at December 31: 2006 ------ Within one year $226,220 From one to two years 97,288 From two to three years 15,495 From three to four years 3,697 From four to five years 903 Thereafter 2,079 -------- Total $345,682 ======== Brokered deposits, included in time deposits, were $26,935 and $38,083 at December 31, 2006 and 2005, respectively. 14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are financing arrangements that have overnight maturity terms. At maturity, the securities underlying the agreements are returned to the Company. Information concerning securities sold under agreements to repurchase is summarized as follows at December 31: 2006 2005 ------- ------- Balance outstanding at period-end $22,556 $29,070 ------- ------- Weighted average interest rate at period-end 4.20% 3.32% ------- ------- Average amount outstanding during the year $22,692 $24,694 ------- ------- Approximate weighted average interest rate during the year 3.94% 2.60% ------- ------- Maximum amount outstanding as of any month-end $28,312 $29,070 ------- ------- Securities underlying these agreements at year-end were as follows: Carrying value of securities $40,258 $44,763 ------- ------- Fair Value $39,163 $43,344 ------- ------- The Company sold securities under agreements to repurchase with overnight maturity terms totaling $5,723 at December 31, 2006 and $10,958 at December 31, 2005 with one large commercial account. NOTE H - OTHER BORROWED FUNDS Other borrowed funds at December 31, 2006 and 2005 are comprised of advances from the Federal Home Loan Bank("FHLB") of Cincinnati, promissory notes and Federal Reserve Bank ("FRB") Notes. FHLB borrowings Promissory Notes FRB Notes Totals --------------- ---------------- --------- ------- 2006 $55,690 $ 5,393 $ 2,463 $ 63,546 2005 $66,385 $ 5,113 $ 4,675 $ 76,173 Pursuant to collateral agreements with the FHLB, advances are secured by $218,928 in qualifying mortgage loans and $6,036 in FHLB stock at December 31, 2006. Fixed rate FHLB advances of $45,239 mature through 2010 and have interest rates ranging from 3.16% to 6.62%. In addition, variable rate FHLB borrowings of $10,450 matured in 2006 and carried an interest rate of 5.34%. At December 31, 2006, the Company had a cash management line of credit enabling it to borrow up to $60,000 from the FHLB. All cash management advances have an original maturity of 90 days. The line of credit must be renewed on an annual basis. There was $49,550 available on this line of credit at December 31, 2006. Based on the Company's current FHLB stock ownership, total assets and pledgeable residential first mortgage loans, the Company had the ability to obtain borrowings from the FHLB up to a maximum of $162,082 at December 31, 2006. Promissory notes, issued primarily by Ohio Valley, have fixed rates of 4.75% to 6.25% and are due at various dates through a final maturity date of September 30, 2008. A total of $3,268 represented promissory notes payable by Ohio Valley to related parties. See Note L for further discussion of related party transactions. FRB notes consist of the collection of tax payments from Bank customers under the Treasury Tax and Loan program. These funds have a variable interest rate and are callable on demand by the U.S. Treasury. At December 31, 2006, the interest rate for the Company's FRB notes was 5.04%. Various investment securities from the Bank used to collateralize FRB notes totaled $6,070 at December 31, 2006. Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $41,950 at December 31, 2006 and $27,950 at December 31, 2005. Scheduled principal payments over the next five years: FHLB borrowings Promissory notes FRB Notes Totals --------------- ---------------- --------- ------ 2007 $22,516 $3,993 $2,463 $ 28,972 2008 18,010 1,400 --- 19,410 2009 8,005 --- --- 8,005 2010 7,006 --- --- 7,006 2011 6 --- --- 6 Thereafter 147 --- --- 147 ------- ------ ------ -------- $55,690 $5,393 $2,463 $ 63,546 ======= ====== ====== ======== 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE I - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES On March 26, 2002, a trust formed by Ohio Valley issued $8,500 of floating rate trust preferred securities as part of a pooled offering of such securities. Floating rate is based on a rate equal to the 3-month LIBOR plus 3.60%, not to exceed 11.00%. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering, which debentures represent the sole asset of the trust. The Company may redeem all or a portion of these subordinated debentures at par value beginning March 26, 2007. The subordinated debentures must be redeemed no later than March 26, 2032. The Company used the net proceeds from the sale of these securities to provide additional capital to the Bank to support growth. Debt issuance costs of $256 were incurred and capitalized and will amortize as a yield adjustment through expected maturity. At December 31, 2006, the current variable rate was 9.0%. On September 7, 2000, a trust formed by Ohio Valley issued $5,000 of 10.6% fixed rate trust preferred securities as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering, which debentures represent the sole asset of the trust. The Company may redeem all or a portion of these subordinated debentures beginning September 7, 2010 at a premium of 105.30% with the call price declining .53% per year until reaching a call price of par at year twenty through maturity. The subordinated debentures must be redeemed no later than September 7, 2030. Debt issuance costs of $166 were incurred and capitalized and will amortize as a yield adjustment through expected maturity. NOTE J - INCOME TAXES The provision for income taxes consists of the following components: 2006 2005 2004 ---- ---- ---- Current tax expense $2,964 $3,576 $3,613 Deferred tax (benefit)expense (903) (293) 63 ------ ------ ------ Total income taxes $2,061 $3,283 $3,676 ====== ====== ====== The source of gross deferred tax assets and gross deferred tax liabilities at December 31: 2006 2005 ---- ---- Items giving rise to deferred tax assets: Allowance for loan losses $3,275 $2,488 Deferred compensation 1,206 1,135 Unrealized loss on securities available-for-sale 506 635 Deferred loan fees/costs 280 244 Depreciation 86 --- Other 330 251 Items giving rise to deferred tax liabilities: Investment accretion (2) (1) Depreciation --- (7) FHLB stock dividends (995) (880) Prepaid expenses (120) (117) Intangibles (160) (124) Other (65) (57) ------ ------ Net deferred tax asset $4,341 $3,567 ====== ====== The difference between the financial statement tax provision and amounts computed by applying the statutory federal income tax rate of 34% to income before taxes is as follows: 2006 2005 2004 ---- ---- ---- Statutory tax $2,536 $3,502 $4,099 Effect of nontaxable interest $211 (161) (189) Nondeductible interest expense 33 19 18 Income from bank owned insurance (264) (158) (166) Effect of state income tax 119 111 56 Other items (152) (30) (142) ------ ------ ------ Total income taxes $2,061 $3,283 $3,676 ====== ====== ====== 16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. Following is a summary of such commitments at December 31: 2006 2005 ----- ----- Fixed rate $ 1,491 $ 1,487 Variable rate 57,009 53,852 Standby letters of credit 15,002 11,255 The interest rate on fixed rate commitments ranged from 6.63% to 9.00% at December 31, 2006. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. There are various contingent liabilities that are not reflected in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations. The Bank is required to maintain average reserve balances with the Federal Reserve Bank or cash in the vault. The amount of those reserve balances was $7,039 and $7,107 for the years ended December 31, 2006 and 2005, respectively. NOTE L - RELATED PARTY TRANSACTIONS Certain directors, executive officers and companies in which they are affiliated were loan customers during 2006. A summary of activity on these borrower relationships with aggregate debt greater than $120 is as follows: Total loans at January 1, 2006 $13,758 New loans 502 Repayments (1,265) Other changes (225) ------- Total loans at December 31, 2006 $12,770 ======= Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period, such as changes in persons included. In addition, certain directors, executive officers and companies with which they are affiliated were recipients of interest-bearing promissory notes issued by the Company in the amount of $3,268. 17 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE M - EMPLOYEE BENEFITS The Bank has a profit-sharing plan for the benefit of its employees and their beneficiaries. Contributions to the plan are determined by the Board of Directors of Ohio Valley. Contributions charged to expense were $171, $172, and $164, for 2006, 2005 and 2004. Ohio Valley maintains an Employee Stock Ownership Plan (ESOP) covering substantially all employees of the Company. Ohio Valley makes discretionary contributions to the ESOP which are allocated to ESOP participants based on relative compensation. The total number of shares held by the ESOP, all of which have been allocated to participant accounts, were 227,710 and 218,489 at December 31, 2006 and 2005. In addition, the Bank made contributions to its ESOP Trust as follows: Years ended December 31 2006 2005 2004 ---- ---- ---- Number of shares issued 8,500 9,500 5,750 ====== ====== ====== Value of stock contributed $ 222 $ 240 $ 151 Cash contributed 121 102 176 ----- ----- ----- Total charged to expense $ 343 $ 342 $ 327 ===== ===== ===== Life insurance contracts with a cash surrender value of $16,054 have been purchased by the Company, the owner of the policies. The purpose of these contracts was to replace a current group life insurance program for executive officers, implement a deferred compensation plan for directors and executive officers, implement a director retirement plan and implement a supplemental retirement plan for certain officers. Under the deferred compensation plan, Ohio Valley pays each participant the amount of fees deferred plus interest over the participant's desired term, upon termination of service. Under the director retirement plan, participants are eligible to receive ongoing compensation payments upon retirement subject to length of service. The supplemental retirement plan provides payments to select executive officers upon retirement based upon a compensation formula determined by Ohio Valley's Board of Directors. The present value of payments expected to be provided are accrued during the service period of the covered individuals. Expenses related to the plans for each of the last three years amounted to $262, $340, and $436. NOTE N - OTHER COMPREHENSIVE INCOME Other comprehensive income components and related taxes for the years ended December 31, are as follow: 2006 2005 2004 ---- ---- ---- Net unrealized holding gains (losses) on available-for-sale securities $ 379 $(1,534) $(1,277) Tax effect (129) 522 434 ------- ------- ------- Other comprehensive income (loss) $ 250 $(1,012) $ (843) ======= ======= ======= 18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE O - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents: For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Interest-bearing Deposits in Other Banks: For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities: For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. The fair value for FHLB stock is estimated at carrying value. Loans: The fair value of fixed rate loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair market value of loan commitments and standby letters of credits was not material at December 31, 2006 or 2005. The fair value for variable rate loans is estimated to be equal to carrying value. Deposit Liabilities: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowings: For other borrowed funds and subordinated debentures, rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value. For securities sold under agreements to repurchase, carrying value is a reasonable estimate of fair value. Accrued Interest Receivable and Payable: For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value. In addition, other assets and liabilities that are not defined as financial instruments were not included in the disclosures below, such as premises and equipment and life insurance contracts. The estimated fair values of the Company's financial instruments at December 31, are as follows: 2006 2005 ---- ---- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- Financial assets: Cash and cash equivalents $ 20,765 $ 20,765 $ 19,616 $ 19,616 Interest-bearing deposits in other banks 508 508 510 510 Securities 89,653 89,889 84,113 84,398 Loans 615,752 621,362 610,399 607,183 Accrued interest receivable 3,234 3,234 2,819 2,819 Financial liabilities: Deposits (593,786) (591,809) (562,866) (559,933) Securities sold under agreements to repurchase (22,556) (22,556) (29,070) (29,070) Other borrowed funds (63,546) (63,302) (76,173) (76,042) Subordinated debentures (13,500) (14,070) (13,500) (14,164) Accrued interest payable (6,176) (6,176) (4,259) (4,259) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE P - REGULATORY MATTERS The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. At year-end, consolidated actual capital levels and minimum required levels for the Company and the Bank were:
Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 2006 Total capital (to risk weighted assets) Consolidated $81,057 13.4% $48,358 8.0% $60,447 10.0% Bank 76,275 12.8 47,743 8.0 59,679 10.0 Tier 1 capital (to risk weighted assets) Consolidated 73,478 12.2 24,179 4.0 36,268 6.0 Bank 67,163 11.3 23,871 4.0 35,807 6.0 Tier 1 capital (to average assets) Consolidated 73,478 9.6 30,695 4.0 38,369 5.0 Bank 67,163 8.9 30,318 4.0 37,897 5.0 2005 Total capital (to risk weighted assets) Consolidated $79,853 13.5% $47,352 8.0% $59,190 10.0% Bank 73,255 12.5 46,802 8.0 58,503 10.0 Tier 1 capital (to risk weighted assets) Consolidated 72,720 12.3 23,676 4.0 35,514 6.0 Bank 66,422 11.4 23,401 4.0 35,102 6.0 Tier 1 capital (to average assets) Consolidated 72,720 9.9 29,511 4.0 36,888 5.0 Bank 66,422 9.1 29,163 4.0 36,454 5.0
At year-end 2006 and 2005, the most recent regulatory notifications categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. No conditions or events have occurred since that notification that management believes have changed the status of the Company or the Bank as well capitalized. Dividends paid by the subsidiaries are the primary source of funds available to Ohio Valley for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the subsidiaries to Ohio Valley is subject to restrictions by regulatory authorities. These restrictions generally limit dividends to the current and prior two years retained earnings. At January 1, 2007, approximately $2,456 of the subsidiaries' retained earnings were available for dividends under these guidelines. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below minimum regulatory guidelines. These restrictions do not presently limit Ohio Valley from paying dividends at its historical level. 20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Below is condensed financial information of Ohio Valley. In this information, Ohio Valley's investment in its subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries since acquisition. This information should be read in conjunction with the consolidated financial statements of the Company. CONDENSED STATEMENTS OF CONDITION Years ended December 31: Assets 2006 2005 ---- ---- Cash and cash equivalents $ 2,980 $ 3,669 Investment in subsidiaries 70,875 69,324 Notes receivable - subsidiaries 5,338 4,918 Other assets 389 301 ------- ------- Total assets $79,582 $78,212 ======= ======= Liabilities Notes Payable $ 5,394 $ 5,113 Subordinated debentures 13,500 13,500 Other liabilities 406 328 ------- ------- Total liabilities 19,300 18,941 ------- ------- Shareholders' Equity Total shareholders' equity 60,282 59,271 ------- ------- Total liabilities and shareholders' equity $79,582 $78,212 ======= ======= CONDENSED STATEMENTS OF INCOME Years ended December 31: 2006 2005 2004 ---- ---- ---- Income: Interest on notes $ 261 $ 243 $ 213 Other operating income 68 88 52 Dividends from Bank 5,000 5,700 1,000 Gain on sale of ProCentury Corp. --- --- 2,463 Expenses: Interest on notes 264 250 217 Interest on subordinated debentures 1,279 1,125 968 Operating expenses 279 268 209 ------ ------ ------ Income before income taxes and equity in undistributed earnings of subsidiaries 3,507 4,388 2,334 Income tax benefit (expense) 590 441 (439) Equity in undistributed earnings of subsidiaries 1,301 2,188 6,486 ------ ------ ------ Net Income $5,398 $7,017 $8,381 ====== ====== ====== 21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE Q - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued) CONDENSED STATEMENT OF CASH FLOWS Years ended December 31: 2006 2005 2004 ---- ---- ---- Cash flows from operating activities: Net income $5,398 $7,017 $8,381 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (1,301) (2,188) (6,463) Gain on sale of ProCentury Corp. --- --- (2,463) Change in other assets 4 181 (58) Change in other liabilities (13) (96) 107 ------ ------ ------ Net cash provided by (used in) operating activities 4,088 4,914 (496) ------ ------ ------ Cash flows from investing activities: Proceeds from sale of ProCentury Corp. --- --- 4,394 Change in other short-term investments (420) 300 1,725 ------ ------ ------ Net cash provided by (used in) investing activities (420) 300 6,119 ------ ------ ------ Cash flows from financing activities: Change in other short-term borrowings 280 (242) (1,676) Cash dividends paid (2,837) (2,705) (3,259) Cash paid in lieu of fractional shares in stock split --- (12) --- Proceeds from issuance of common shares --- 365 1,001 Purchases of treasury shares (1,800) (961) (3,109) ------ ------ ------ Net cash provided by (used in) financing activities (4,357) (3,555) (7,043) ------ ------ ------ Cash and cash equivalents: Change in cash and cash equivalents (689) 1,659 (1,420) Cash and cash equivalents at beginning of year 3,669 2,010 3,430 ------ ------ ------ Cash and cash equivalents at end of year $2,980 $3,669 $2,010 ====== ====== ====== 22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE R - GAIN ON SALE OF PROCENTURY On April 26, 2004, Ohio Valley sold 450,000 common shares of ProCentury Corp. ("ProCentury"), a Columbus-based property and casualty insurer, which represented 9% of ProCentury's outstanding common stock. The transaction was completed as part of ProCentury's initial public offering. The sale of stock, which represented 100% of Ohio Valley's ownership in ProCentury, resulted in a pre-tax gain of $2,463 and an after-tax gain of $1,625 ($.37 cents per share). Ohio Valley's investment in ProCentury was made in October of 2000 to allow for more diversification of operations by becoming part of a property and casualty insurance underwriter as made permissible by the Gramm-Leach-Bliley Act of 1999. Ohio Valley decided to liquidate its investment to utilize the cash proceeds to enhance the Company's core business of banking through branch renovations and expansion. NOTE S - CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited) Quarters Ended 2006 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Total interest income $12,640 $13,034 $13,407 $13,340 Total interest expense 5,287 5,810 6,299 6,535 Net interest income 7,353 7,224 7,108 6,805 Provision for loan losses (1) 666 791 474 3,731 Net Income 1,739 1,826 1,817 16 Net income per share $ .41 $ .43 $ .43 $ --- 2005 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Total interest income $10,952 $11,115 $11,773 $12,231 Total interest expense 4,115 4,321 4,678 5,023 Net interest income 6,837 6,794 7,095 7,208 Provision for loan losses 317 330 501 649 Net Income 1,570 1,732 1,736 1,979 Net income per share $ .37 $ .40 $ .41 $ .46 2004 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Total interest income $10,891 $10,722 $10,912 $10,965 Total interest expense 3,968 3,975 4,020 4,183 Net interest income 6,923 6,747 6,892 6,782 Provision for loan losses 768 373 471 741 Net Income (2) 1,566 3,252 1,670 1,893 Net income per share $ .36 $ .75 $ .38 $ .44 (1) During the fourth quarter of 2006, the Bank increased the allowance for loan losses to account for increases in its nonaccrual loan balances and historical loan loss factors resulting in a provision expense charge of $3,731. (2) During the second quarter of 2004, Ohio Valley sold its interest of ProCentury resulting in an after-tax gain of $1,625 ($.37 cents per share). 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS Board of Directors and Shareholders Ohio Valley Banc Corp. We have audited the accompanying consolidated statements of condition of Ohio Valley Banc Corp. as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ohio Valley Banc Corp. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ohio Valley Banc Corp.'s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2007 expressed an unqualified opinion thereon. /s/CROWE CHIZEK AND COMPANY LLC Crowe Chizek and Company LLC Columbus, Ohio March 13, 2007 24 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - INTERNAL CONTROLS Board of Directors and Shareholders Ohio Valley Banc Corp. We have audited management's assessment, included in the accompanying Management's Report on Internal Controls Over Financial Reporting, that Ohio Valley Banc Corp. maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO). Ohio Valley Banc Corp's. management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Ohio Valley Banc Corp. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO). Also in our opinion, Ohio Valley Banc Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition of Ohio Valley Banc Corp. as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2006 and our report dated March 13, 2007 expressed an unqualified opinion on those consolidated financial statements. /s/CROWE CHIZEK AND COMPANY LLC Crowe Chizek and Company LLC Columbus, Ohio March 13, 2007 25 MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING Board of Directors and Shareholders Ohio Valley Banc Corp. The management of Ohio Valley Banc Corp (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. The system of internal control over financial reporting as it relates to the consolidated financial statements is evaluated for effectiveness by management. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed Ohio Valley Banc Corp's system of internal control over financial reporting as of December 31, 2006, in relation to criteria for effective internal control over financial reporting as described in "Internal Control Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2006, its system of internal control over financial reporting is effective and meets the criteria of the "Internal Control Integrated Framework". Crowe Chizek and Company LLC, independent registered public accounting firm, has issued an attestation report dated March 13, 2007 on management's assessment of the Company's internal control over financial reporting. That report is contained in Ohio Valley's Annual Report to Shareholders under the heading "Report of Independent Registered Public Accounting Firm - Internal Controls". Ohio Valley Banc Corp /s/JEFFREY E. SMITH Jeffrey E. Smith President, CEO /s/SCOTT W. SHOCKEY Scott W. Shockey Vice President, CFO 26 SUMMARY OF COMMON STOCK DATA OHIO VALLEY BANC CORP. Years ended December 31, 2006 and 2005 INFORMATION AS TO STOCK PRICES AND DIVIDENDS: On February 9, 1996, Ohio Valley's common shares began to be quoted on NASDAQ stock market under the symbol "OVBC". The following table summarizes the high and low sales prices for Ohio Valley's common shares on the NASDAQ Global Market for each quarterly period since January 1, 2005. The range of market price is compiled from data provided by the broker based on limited trading. The quotations are inter-dealer prices, without retail markup, markdown, or commission, and may not represent actual transactions 2006 High Low - ---- ------ ------ First Quarter $25.50 $25.00 Second Quarter 25.45 25.15 Third Quarter 26.00 25.15 Fourth Quarter 25.77 25.15 2005 High Low - ---- ------ ------ First Quarter $28.00 $26.00 Second Quarter 29.53 25.55 Third Quarter 26.18 24.99 Fourth Quarter 25.30 24.84 Shown below is a table which reflects the dividends paid per share on Ohio Valley's common shares. As of December 31, 2006, the number of holders of common shares was 2,120, an increase from 2,096 shareholders at December 31, 2005. Dividends per share 2006 2005 - ------------------- ---- ---- First Quarter $.16 $.15 Second Quarter .17 .16 Third Quarter .17 .16 Fourth Quarter .17 .16 27 PERFORMANCE GRAPH OHIO VALLEY BANC CORP Year ended December 31, 2006 The following graph sets forth a comparison of five year cumulative total returns among the Company's common shares (indicated "Ohio Valley Banc Corp." on the Performance Graph), the S & P 500 Index (indicated "S & P 500" on the Performance Graph), and SNL Securities SNL $500 Million-$1 Billion Bank Asset-Size Index (indicated "SNL" on the Performance Graph) for the fiscal years indicated. Information reflected on the graph assumes an investment of $100 on December 31, 2001 in each of the common shares of the Company, the S & P 500 Index, and the SNL Index. Cumulative total return assumes reinvestment of dividends. The SNL Index represents stock performance of one hundred eleven (111) of the nation's banks located throughout the United States with total assets between $500 Million and $1 Billion as selected by SNL Securities of Charlottesville, Virginia. The Company is included as one of the 111 banks in the SNL Index. TOTAL RETURN PERFORMANCE OVBC, SNL $500M-$1B Bank Index and S&P 500 2001-2006 Period Ending ---------------------------------------------------------- 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 -------- -------- -------- -------- -------- -------- OVBC $100 $ 87.73 $117.23 $148.39 $146.14 $150.34 SNL $500M-$1B $100 $127.67 $184.09 $208.62 $217.57 $247.44 S&P 500 $100 $ 77.90 $100.25 $111.15 $116.61 $135.03 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS The purpose of this discussion is to provide an analysis of the Company's financial condition and results of operations which is not otherwise apparent from the audited consolidated financial statements included in this report. The accompanying consolidated financial information has been prepared by management in conformity with U.S. generally accepted accounting principles ("US GAAP") and is consistent with that reported in the consolidated statements. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following tables and related discussion. All dollars are reported in thousands, except share and per share data. RESULTS OF OPERATIONS: SUMMARY Ohio Valley Banc Corp. generated net income of $5,398 for 2006, a decrease of 23.1% from 2005. Net income was down 16.3% in 2005. Net income per share was $1.27 for 2006, a decrease of 22.6% from 2005. Net income per share was down 15.0% in 2005. The decrease in net income and earnings per share for 2006 was primarily due to a $3,865 increase in provision for loan loss expense as a result of higher nonperforming loans and charge offs from year-end 2005. The decrease in net income and earnings per share for 2005 was primarily due to the Company's sale of its minority interest in an insurance investment in ProCentury Corp. in the second quarter of 2004. This second quarter sale resulted in an after-tax gain of $1,625, or $.37 per share, that was included in the earnings of 2004. Asset growth for 2006 was $14,642, or 2.0%, resulting in total assets at year-end of $764,361. The Company's return on assets (ROA) was .71% for 2006 compared to .97% in 2005 and 1.16% in 2004. Return on equity (ROE) was 9.00% for 2006 compared to 12.18% in 2005 and 15.02% in 2004. The decreases in both ROA and ROE for 2006 and 2005 are the result of lower earnings for each year caused by provision expense increases in 2006 and revenue from sale of ProCentury in 2004. NET INTEREST INCOME The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense incurred on interest-bearing liabilities. The Company earns interest and dividend income from loans, investment securities and short-term investments while incurring interest expense on interest-bearing deposits, repurchase agreements and short and long-term borrowings. Net interest income is affected by changes in both the average volume and mix of the balance sheet and the level of interest rates for financial instruments. Changes in net interest income are measured by net interest margin and net interest spread. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Both of these are reported on a tax equivalent basis. Net interest margin is greater than net interest spread due to the interest earned on interest-earning assets funded from noninterest bearing funding sources, primarily demand deposits and shareholders' equity. Following is a discussion of changes in interest-earning assets, interest-bearing liabilities and the associated impact on interest income and interest expense for the three years ending December 31, 2006. Tables I and II have been prepared to summarize the significant changes outlined in this analysis. Net interest income on a fully tax equivalent basis (FTE) increased $620 in 2006, an increase of 2.2% compared to the $28,150 earned in 2005. The increase was primarily attributable to a higher level of interest-earning assets (primarily from growth in loans) partially offset by a lower net interest margin (primarily from continued short-term rate increases during first half of 2006 causing average costs on interest bearing funding sources to grow at a faster pace than average yields on interest earning assets). Net interest income (FTE) increased $547 in 2005, an increase of 2.0% compared to the $27,603 earned in 2004. The increase in net interest income for 2005 was attributable to a higher level of interest-earning assets (primarily from growth in loans) and a higher net interest margin (primarily from continued short-term rate increases as well as growth in non-interest bearing funding sources). For 2006, average earning assets grew $32,100, or 4.7%, as compared to growth of $3,378, or .5% in 2005. Driving this continued growth in earning assets was a strong increase in average loan balances. Average total loans expanded $27,073, or 4.5%, for 2006 and finished with a total percentage of loans to earning assets of 87.4%. This compares to average loan growth of $9,339, or 1.6%, with loans representing 87.5% of earning assets for 2005. The growth in average loans was largely comprised of commercial loan participations as well as real estate mortgages. Average securities represent the next highest portion of earning assets, finishing at 11.9% of earning assets for 2006 and 12.2% for 2005. Management continues to focus on generating loan growth as this portion of earning assets provides the greatest return to the Company. Although loans comprise a larger percentage of earning assets, management is comfortable with the current level of loans based on collateral values, the balance of the allowance for loan losses and the Company's well-capitalized status. Management maintains securities at a dollar level adequate enough to provide ample liquidity and cover pledging requirements. 29 Average interest-bearing liabilities increased 4.3% between 2005 and 2006 and decreased .4% between 2004 and 2005. Interest-bearing liabilities in 2006 were comprised mostly of time deposits and NOW accounts, which together represented 70.2% of total interest-bearing liabilities, down from 71.6% in 2005 and 71.3% in 2004. Other borrowed money represents the next highest portion of interest-bearing liabilities, finishing at 13.3% of interest-bearing liabilities for 2006, down from 15.7% in 2005 and 16.3% in 2004. The reason for this composition decrease in 2006 was from growth in the Company's savings and money market accounts, primarily its Market Watch product, which together represented a higher composition of total interest-bearing liabilities at 12.7% in 2006 as compared to 8.5% in 2005 and 8.2% in 2004. Introduced in 2005, the Market Watch product offered customers tiered rates that are competitive with other offerings in the Company's market areas. The increased demand for the Market Watch product generated a significant amount of funding dollars which helped to support loan growth and also repayment of other borrowed money. This shift in composition in 2006 with higher savings and money market balances and lower borrowings served as a cost effective contribution to the net interest margin and also helped to partially offset the steady growth in average costs associated with time deposits. The average cost of savings and money market accounts in 2006 was 2.42%, as compared to the much higher average cost of other borrowed money at 5.42%. The average cost of time deposits grew from 3.28% in 2005 to 4.24% in 2006. The net interest margin decreased .09% to 4.02% in 2006 from 4.11% in 2005. This is compared to a .06% increase in the net interest margin in 2005. During 2006, there was an increase of .13% in interest free funds (i.e. demand deposits, shareholders' equity) from .43% in 2005 to .56% in 2006. However, this impact from interest free funds was completely offset by a decrease in the net interest rate spread on interest sensitive assets and liabilities of .22%, with higher asset yields of .59% being completely offset by higher funding costs of ..81%. Contributing to the increase in yield on earning assets was an increase in the return on average loans of .65% from 2005. The significant change in loan yields can be attributed to the rising rate environment that has generated consistent increases in short-term interest rates that have been evident since June 2004. Between June 2004 and June 2006, the Federal Reserve's Open Market Committee increased the target federal funds rate 425 basis points, causing a similar increase in short-term market interest rates. The Company's commercial and participation loan portfolios were most sensitive to the increase in short-term interest rates, with weighted average loan yields increasing 82 basis points from 6.98% in 2005 to 7.80% in 2006. Market driven longer-term interest rates have risen very little during this same period, causing the Company's real estate loan portfolio yields to increase at a slower pace than commercial and participation loans. While the Federal Reserve's actions to increase interest rates over the past few years has been effective in allowing asset yields to grow, interest rate pressures have been felt by an increase in the Company's nonaccrual loan balances, which are up $10,777 from 2005 to finish at $12,017 in 2006. This has resulted in less interest income being recognized and a negative impact to the net interest margin. Further contributing to this net interest margin compression was total interest expense, which increased 31.9% from 2005 due to higher repricing rates and larger average earning asset balances that required additional funding. The increase came mostly from costs incurred on the Company's time deposits and savings and money market accounts, which increased ..96% and 1.42%, respectively, from 2005. Time deposits have been more responsive to the rising rate environment experienced during 2005 and 2006. Savings and money market accounts were impacted mostly by a consumer demand for the Market Watch product. In summary, the .13% increase in the contribution of interest free funding sources that was completely offset by the .22% decrease in the net interest rate spread yielded the .09% decrease in the net interest margin for 2006. The 2005 increase in net interest margin of .06% was from a .07% increase in interest free funds partially offset by a .01% decrease in the net interest spread, with higher asset yields of .34% being offset by higher funding costs of .35%. While the frequency and size of changes in market interest rates are difficult to predict, management believes that the Federal Reserve has reached its "target" zone of economic stability and anticipates no future interest rate increases for 2007. There can be no assurance, however, to this effect as changes in market interest rates are dependent upon a variety of factors that are beyond the Company's control. The anticipated combinations of modest earning asset growth and a compressing net interest margin should continue to challenge net interest income growth in 2007. For additional discussion on the Company's rate sensitive assets and liabilities, please see "Interest Rate Sensitivity and Liquidity" and "Table VIII" within this Management's Discussion and Analysis. NONINTEREST INCOME AND EXPENSE Total noninterest income increased $308, or 5.6%, in 2006 as compared to 2005. Contributing most to the increase in noninterest income was earnings from the Company's bank owned life insurance ("BOLI") contracts, which increased $318, or 54.0%, in 2006 as compared to 2005. BOLI activity was impacted by additional investments in life insurance contracts purchased during 2005, higher earnings rate on such contracts and life insurance proceeds received in 2006. The Company's average investment balance in BOLI for 2006 was $16,052, an increase of $1,551, or 10.7%, as compared to 2005. Other noninterest income was also up $105, or 7.0%, in 2006 as compared to 2005. Debit card interchange fees were the key drivers of other noninterest income, increasing $67, or 16.2% in 2006 as compared to 2005. The volume of transactions utilizing the Company's Jeanie(R) Plus debit card continue to increase over a year ago. The Company's 30 customers used their Jeanie(R) Plus debit cards to complete 1,008,792 transactions during 2006, up 20.1% from the 839,766 transactions during 2005, derived mostly from gasoline and restaurant purchases. Other noninterest income growth also came from insurance commissions on credit insurance. Partially offsetting the year-to-date increases from BOLI and other noninterest revenue was a decrease in the Company's service charge on deposit accounts, lowering $109, or 3.5%, in 2006 as compared to 2005, due to the growth in the number of Easy Checking accounts featuring no service charge or minimum balance requirements. The Easy Checking account, a transaction account with electronic features, increases the Company's core deposits, increases interchange fees and decreases processing costs. In 2005, total noninterest income decreased $2,470, or 30.9%, compared to 2004 in large part to the sale of ProCentury Corp., a Columbus-based property and casualty insurer, on April 26, 2004. The sale of stock ownership in ProCentury Corp. resulted in gross income of $2,463 recognized in the 2004 fiscal period. For additional information on the ProCentury Corp. transaction, please refer to Note R of the Company's consolidated financial statements under the caption "Gain on Sale of ProCentury". Total noninterest expense decreased $160, or .7%, in 2006 and increased $433, or 2.1%, in 2005. The most significant expense in this category is salary and employee benefits, which decreased $340, or 2.6%, from 2005 to 2006. Contributing most to this decrease was a reduction in employee incentive compensation due to lower corporate performance during the fiscal period of 2006 as compared to 2005. During 2006, the Company also experienced a lower full-time equivalent employee base, decreasing from 265 employees at year-end 2005 to 254 employees at year-end 2006, further reducing salaries and employee benefit expenses during 2006. During 2005, salaries and employee benefits expense increased $245, or 1.9%, from 2004 due to annual merit increases and rising benefit costs. During 2005, the Company experienced a lower full-time equivalent employee base, decreasing from 270 employees at year-end 2004 to 265 employees at year-end 2005, partially offsetting increases in salaries and employee benefits. In 2006, occupancy and furniture and equipment expenses decreased $57, or 2.3%, as compared to 2005. This decrease was in large part due to the maturities of depreciation terms on several asset acquisitions from previous years as well as the decreasing nature of current depreciable assets that have incurred lower depreciation expense during 2006. In late 2006, the Company invested over $2,000 to replace its Jackson, Ohio facility and ceased operations in its Jackson superbank facility. The depreciation expenses on this new facility will have more of an impact in 2007 than 2006. In 2005, occupancy and furniture and equipment expenses were relatively stable, increasing just $22, or ..9%, as there were no new material facility upgrades. Corporation franchise tax was relatively stable during 2006, decreasing $4, or .6%, and increasing $57, or 9.3%, in 2005 based on capital levels at the Bank for both periods. During 2006, data processing expenses increased $54, or 8.5%, primarily from the transactional volume increase in the Company's Jeanie(R) Plus debit cards. During 2005, data processing expenses increased $129, or 25.6%, due to volume increases and the negotiation of lower data processing fees on debit and credit cards in the prior 2004 fiscal period. Other noninterest expenses were up $183, or 3.4%, during 2006 in large part due to increases in various loan and collection expenses associated with higher nonperforming loan balances. During 2005, the Company's other noninterest expenses decreased $20, or .4%, from lower legal and check clearing costs. The Company's efficiency ratio, which is noninterest expense as a percentage of fully tax-equivalent net interest income plus noninterest income, for 2006 improved to 61.2%, decreasing 2.29% from 2005, as a result of successful noninterest revenue growth and lower overhead costs. Conversely, in 2005, the efficiency ratio was up 4.75% to finish at 63.5%, largely due to the gain on sale of ProCentury Corp. that was included in 2004's noninterest earnings. Excluding ProCentury Corp., the Company's efficiency ratio in 2005 was up just .4% with the Company's noninterest expense slightly outpacing the growth in revenue sources (net interest income and noninterest income). FINANCIAL CONDITION: CASH AND CASH EQUIVALENTS The Company's cash and cash equivalents consist of cash and balances due from banks and federal funds sold. The amounts of cash and cash equivalents fluctuate on a daily basis due to 31 customer activity and liquidity needs. At December 31, 2006, cash and cash equivalents had increased $1,149, or 5.9%, to $20,765 as compared to $19,616 at December 31, 2005. This increase was primarily attributable to the Company's improved liquidity position from time deposit growth. Management believes that the current balance of cash and cash equivalents remains at a level that will meet cash obligations and provide adequate liquidity. SECURITIES Management's goal in structuring the portfolio is to maintain a prudent level of liquidity while providing an acceptable rate of return without sacrificing asset quality. Maturing securities have historically provided sufficient liquidity such that management has not sold a debt security in several years. The balance of total securities increased $5,201, or 6.6%, as compared to 2005 with the ratio of securities to total assets also increasing to 10.9% at December 31, 2006, compared to 10.5% at December 31, 2005. This trend of higher security investments was driven by increases in U.S. government agency securities of $7,016, or 38.6%, and municipal bonds of $1,274, or 10.6%, as compared to year-end 2005. The growth in U.S. government agencies and municipal bonds was the result of attractive yield opportunities and a desire to increase diversification within the Company's securities portfolio. This growth was partially offset by a decrease in mortgage-backed securities of $3,089, or 6.4%, from year-end 2005. The Company continues to benefit from the advantages of mortgage-backed securities, which make up the largest portion of the Company's investment portfolio, totaling $45,141, or 54.0% of total investments at December 31, 2006. The primary advantage of mortgage-backed securities has been the increased cash flows due to the more rapid (monthly) repayment of principal as compared to other types of investment securities, which deliver proceeds upon maturity or call date. Principal repayments from mortgage-backed securities totaled $7,272 from January 1, 2006 to December 31, 2006. With the general increase in interest rates evident during 2006, the reinvestment rates on debt securities also responded, producing higher returns in 2006 as compared to 2005. The weighted average FTE yield on debt securities at year-end 2006 was 4.44% as compared to 4.28% at year-end 2005. Table III provides a summary of the portfolio by category and remaining contractual maturity. Issues classified as equity securities have no stated maturity date and are not included in Table III. While the Company's focus is to generate interest revenue primarily through loan growth, management will continue to invest excess funds in securities when opportunities arise. 32 LOANS In 2006, the Company's primary category of earning assets, total loans, increased $7,632, or 1.2%, to reach $625,164. Most of this increase occurred in 2006's first quarter period where loans were up from year-end 2005 by $8,841, or 1.4%. Total loan growth was mostly influenced by commercial loans increasing $4,212, or 1.8%, from year-end 2005. Commercial loans include both commercial real estate and commercial and industrial loans. This overall growth is consistent with the Company's continued emphasis on commercial lending, which generally yields a higher return on investment as compared to other types of loans. Commercial loan growth during 2006 was primarily driven by loan participations with other banks outside the Company's primary market area, which increased $9,038, or 47.8%. Although the Company is not actively marketing participation loans outside its primary market area, it is taking advantage of the relationships it has with certain lenders in those areas where the Company believes it can profitably participate with an acceptable level of risk. This growth in participation loans was partially offset by a decrease in the remaining commercial loan balances of $4,826, or 2.2%, in large part due to significant payoffs from three commercial real estate accounts. The commercial loan portfolio consists primarily of rental property loans (15.7% of portfolio), medical industry loans (13.1% of portfolio), hotel and motel loans (9.6% of portfolio), and land development loans (9.1% of portfolio). The primary market areas for the Company's commercial loans, excluding loan participations, are in the areas of Gallia, Jackson, Pike and Franklin counties in Ohio, which accounted for 66.0% of total originations during 2006, and the growing West Virginia markets, which accounted for 22.2% of total originations for the same time period. While management believes lending opportunities exist in the Company's markets, future commercial lending activities will depend upon economic and related conditions, such as general demand for loans in the Company's primary markets, interest rates offered by the Company and normal underwriting considerations. Additionally, the potential for larger than normal commercial loan payoffs may continue to limit loan growth during 2007. While commercial loans, both commercial real estate and commercial and industrial, comprise the largest portion of the Company's loan portfolio, generating residential real estate loans remains a key focus of the Company's lending efforts. In 2006, residential real estate loans increased $3,541, or 1.5%, to reach $238,549. Throughout the past fiscal year, consumer demand for real estate loans has steadily increased due to the continuation of lower mortgage rates that have not responded as much to the documented rise in short-term interest rates. The Company's fixed-rate real estate loans have become increasingly more popular than the adjustable-rate mortgage product. A flattened yield curve influenced by these many short-term rate increases has led to a specific demand for long-term, fixed-rate real estate loans, which still remain affordable for the Company's mortgage consumers. Management continues to feel comfortable with the Company's minimal interest rate risk exposure and, as a result, the Company kept a large portion of its fixed-rate real estate originations in its portfolio during 2006. This led to an increase in fixed-rate real estate loan balances of $18,216, or 16.4%, from year-end 2005. To help further satisfy this increasing demand in fixed-rate real estate loans, the Company continues to originate and sell some fixed-rate mortgages to the secondary market, but has sold just $4,038 in loans during 2006, which is below the volume of originations sold during 2005. Partially offsetting real estate loan growth was a decrease in the Company's one-year adjustable-rate mortgage balances of $14,277, or 17.4%, as a result of the slowed volume of refinancing that had been more aggressive during the 2004 and 2005 periods. The remaining real estate loan portfolio balances decreased, primarily from the Company's other variable-rate real estate loan products. The Company's consumer loans fell $5,854, or 4.0%, from year-end 2005 to finish at $139,961. This drop in consumer loans was mostly attributable to the automobile lending segment, which decreased $6,811, or 9.8%, from year-end 2005. While the automobile lending segment continues to represent the largest portion of the Company's consumer loan portfolio, management's emphasis on profitable loan growth with higher returns has contributed most to the reduction in loan volume within this area. Indirect automobile loans bear additional costs from dealers that partially offset interest revenue and lower the rate of return. Furthermore, economic factors and the continued rising rate environment during 2005 and most of 2006 have caused a decline in automobile loan volume. As rates have aggressively moved up, continued competition with local banks and alternative methods of financing, such as captive finance companies offering loans at below-market interest rates, have continued to challenge automobile loan growth during 2006. Partially offsetting the decrease in auto loans was an increase in the Company's capital line balances, primarily home equity loans, which increased $507, or 2.5%, from year-end 2005. The Company recognized an increase of $5,733 in other loans from year-end 2005. Other loans consist primarily of state and municipal loans and overdrafts. This increase was largely due 33 to an increase in state and municipal loans of $5,691. The Company was pleased with its total loan growth results during 2006. Loan balances were largely driven by unseasonable commercial loan increases during the first quarter of 2006. Since that quarter, general demand for commercial loans has been flat, variable-rate real estate mortgages continue to shift to longer term fixed-rate real estate products and consumer volume has been declining. As a result, the Company expects total loan volume to continue at a moderate pace throughout the fiscal period of 2007. For 2007, the Company will continue to engage in sound underwriting practices within its loan portfolio without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the credit quality of the portfolio. ALLOWANCE FOR LOAN LOSS AND PROVISION EXPENSE Tables IV, V, and VI have been provided to enhance the understanding of the loan portfolio and the allowance for potential loan losses. Management evaluates the adequacy of the allowance for loan losses quarterly based on several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimate of probable losses. Actual losses on loans are reflected as reductions in the reserve and are referred to as charge-offs. The amount of the provision for loan losses charged to operating expenses is the amount necessary, in management's opinion, to maintain the allowance for loan losses at an adequate level. The allowance required is primarily a function of the relative quality of the loans in the loan portfolio, the mix of loans in the portfolio and the rate of growth of outstanding loans. During 2006, the Company increased its provision for loan loss expense by $3,865 as compared to 2005, which elevated its allowance for loan losses by $2,279, or 32.0%, to finish at $9,412. This increase was primarily due to increases in nonaccrual loan balances and loan charge-offs since year-end 2005. During the fourth quarter of 2006, a loan relationship totaling $6,700, or 1.07% of total loans, was determined by management to be impaired due to certain events and subsequently placed on nonaccrual status. The loans are primarily secured by commercial real estate and based on management's assessment of the relationship, a specific allocation for loan losses was made totaling $2,000, which required a corresponding increase in the provision for loan losses. Additionally, management charged off $2,300 on existing nonperforming loans during the fourth quarter of 2006. While the allowance for loan losses already reflected the probable losses on these previously identified nonperforming loans, the charge-offs increased the Company's historical loss experience for commercial loans, resulting in an increase in the allowance for loan losses for general allocations to reflect increased risk in the portfolio. Due to both the increase in specific allocations of the allowance for loan losses and increased loss history which called for an increase in the general allocations, management provided $3,731 to the allowance for loan losses during the fourth quarter of 2006. As a result of these fourth quarter events, the Company's ratio of net charge-offs to average total loans for the year ending 2006 finished at .54%, up from .31% for the year ending 2005, due mostly to the $1,750 increase in net charge-offs within the commercial loan portfolio. The Company's nonperforming loans, which consist of nonaccruing loans and accruing loans past due 90 days or more, were approximately $13,392 at December 31, 2006, compared to $2,557 at the end of 2005. The increase was primarily in nonaccrual loan balances. As a result, the Company's nonperforming loans as a percentage of total loans increased to 2.14% at year-end 2006 as compared to .41% at year-end 2005. Nonperforming assets, which includes real estate acquired through foreclosure and referred to as other real estate owned ("OREO"), to total assets also increased to 2.00% at December 31, 2006, compared to .62% at year-end 2005. Nonperforming loans and nonperforming assets included three commercial relationships representing 1.63% of total loans and 1.33% of total assets at December 31, 2006. As a result of higher nonperforming loan balances, the ratio of allowance for loan losses to total loans increased to 1.51% at December 31, 2006 as compared to 1.16% at December 31, 2005. Management believes that the allowance for loan losses is adequate and reflects probable incurred losses in the loan portfolio. The actions that took place in the fourth quarter of 2006 were deemed prudent and necessary by management and efforts to work diligently in resolving and/or liquidating these problem credits within the nonperforming loan portfolio will continue into 2007. Asset quality remains a key focus, as management continues to stress not just loan growth, but quality in loan underwriting as well. 34 DEPOSITS Interest-earning assets are funded primarily by both interest and noninterest bearing core deposits. Deposits are influenced by changes in interest rates, economic conditions and competition from other banks. The accompanying table VII shows the composition of total deposits as of December 31, 2006. Total deposits grew $30,920, or 5.5%, to reach $593,786 by year-end 2006, resulting from the Company's efforts to attract deposits to fund loan growth as well as the rise in interest rates. The increase in deposits came primarily from growth in money market and time deposit balances. Money market deposit balances were up $36,595 to finish at $58,941 at year-end 2006 as compared to $22,346 at year-end 2005. This increase was from the Company's new Market Watch money market account product, which generated $38,473 in new deposit balances from year-end 2005. Introduced in August 2005, the Market Watch product is a limited transaction investment account with tiered rates that compete with current market rate offerings and serve as an alternative to certificates of deposit for some customers. The continued success of the Company's new Market Watch product was responsible for a deposit balance shift from its interest-bearing demand deposits, causing a decrease in NOW accounts of $17,014, or 17.8%. This was primarily from decreases in the Company's Gold Club and Shareholder Gold NOW products that totaled $14,960, or 29.8%, collectively. Also supplementing deposit growth were time deposits, which increased $18,348, or 5.6%, over 2005. Time deposits, particularly certificates of deposit ("CD's"), continue to be the most significant source of funding for the Company's earning assets making up 58.2% of total deposits at December 31, 2006. The Company's retail CD balances increased $36,665, or 13.5%, from year-end 2005 while wholesale funding deposits (i.e., brokered and network CD issuances) decreased $18,317, or 32.8%, from year-end 2005. As interest rates have risen during the first half of 2006, wholesale funding rates from brokered and network CD deposits have increased at a faster pace than funding rates on retail CD deposits, making retail CD deposits more affordable and cost effective to utilize as a loan funding source. The weighted average cost for these wholesale CD issuances in 2006 was 4.38%, while the weighted average cost for retail CD issuances was 4.25%, a cost benefit of 13 basis points. The net increase in CD balances as a result of the shift of emphasis back to retail funding was used to fund loan originations and lower other borrowed funds during 2006. Deposit growth was partially offset by a $4,601, or 5.6%, decrease in the Company's noninterest-bearing demand deposits from year-end 2005, primarily from seasonal decreases in business checking balances. The Company will continue to experience increased competition for deposits in its market areas, which should challenge its net growth in retail CD balances. The Company will continue to target growth in these retail funds during 2007, reflecting the Company's efforts to reduce its reliance on higher cost funding. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Repurchase agreements, which are financing arrangements that have overnight maturity terms, were down $6,514, or 22.4%, from year-end 2005. This decline was mostly due to typical seasonal fluctuations of one commercial account. FUNDS BORROWED The Company also accesses other funding sources, including short-term and long-term borrowings, to fund asset growth and satisfy short-term liquidity needs. During 2006, the Company's other borrowed funds decreased $12,627, or 16.6%, from year-end 2005. This was primarily due to the continued emphasis on retail deposits as the primary source of funding for growth in earning assets. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB) advances and promissory notes. FHLB advances are subject to collateral agreements and are secured by qualifying first mortgage loans and FHLB stock. Promissory notes are primarily associated with funding loans at Loan Central and were issued with various terms through a final maturity date of 2008. Management utilized the aggressive growth in retail proceeds to fund loans and repay FHLB borrowings during 2006. Management will continue to evaluate borrowings from the FHLB as an alternative funding source to help manage interest rate sensitivity and liquidity in 2007. OFF-BALANCE SHEET ARRANGEMENTS The disclosures required for off-balance sheet arrangements are discussed in Note I and Note K. CAPITAL RESOURCES The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors and shareholders. All of the capital ratios exceeded the regulatory minimum guidelines as identified in Note P "Regulatory Matters". Shareholders' equity totaled $60,282 at December 31, 2006, compared to $59,271 at December 31, 2005, which represents growth of 1.7%. Contributing most to this increase was year-to-date net income of $5,398. Partially offsetting the growth in capital were cash dividends paid of $2,837, or $.67 per share, year-to-date, and a $1,800 increase in the amount of treasury stock repurchases. Cash dividends paid for 2006 represents a 4.9% increase as compared to 2005. The Company anticipates repurchasing additional common shares from time to time as authorized by its stock 35 repurchase program. The Company's Board of Directors has approved annual extensions to the plan. Most recently, the Board of Directors extended the stock repurchase program from February 16, 2007 to February 15, 2008, and authorized Ohio Valley to repurchase up to 175,000 of its common shares through open market and privately negotiated purchases. Furthermore, the Company maintains a dividend reinvestment and stock purchase plan. The plan allows shareholders to purchase additional shares of company stock. A benefit of the plan is to permit the shareholders to reinvest cash dividends as well as make supplemental purchases without the usual payment of brokerage commissions. During 2006, shareholders invested more than $1,336 through the dividend reinvestment and stock purchase plan. These proceeds resulted in the issuance of 4 new shares and the acquisition of 52,679 existing shares through open market purchases for a total of 52,683 shares. At December 31, 2006, approximately 81% of the shareholders were enrolled in the dividend reinvestment plan. Members' reinvestment of dividends and supplemental purchases in 2006 represented 47.1% of year-to-date dividends paid. INTEREST RATE SENSITIVITY AND LIQUIDITY The Company's goal for interest rate sensitivity management is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations. Interest rate risk ("IRR") is the exposure of the Company's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability, but excessive levels of IRR can threaten the Company's earnings and capital. The Company evaluates IRR through the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The modeling process starts with a base case simulation, which assumes a flat interest rate scenario. The base case scenario is compared to rising and falling interest rate scenarios assuming a parallel shift in all interest rates. Comparisons of net interest income and net income fluctuations from the flat rate scenario illustrate the risks associated with the projected balance sheet structure. The Company's Asset Liability Committee monitors and manages IRR within Board approved policy limits. The current IRR policy limits anticipated changes in net interest income over a 12 month horizon to plus or minus 10% of the base net interest income assuming a parallel rate shock of up 100, 200 and 300 basis points and down 100, 200 and 300 basis points. The estimated change in net interest income reflects minimal interest rate risk exposure and is well within the policy guidelines established by the Board. At December 31, 2006, the Company's analysis of net interest income reflects a modest liability sensitive position. Based on current assumptions, an instantaneous increase in interest rates would negatively impact net interest income primarily due to variable rate loans reaching their annual interest rate cap or potentially their lifetime interest rate cap. Furthermore, in a rising rate environment the prepayment amounts on loans and mortgage-backed securities slow down producing less cash flow to reinvest at higher interest rates. During an instantaneous decrease in interest rates, the opposite occurs producing a nominal increase in net interest income. As compared to December 31, 2005, the Company's interest rate risk profile has become more liability sensitive in anticipation of interest rates peaking and potentially decreasing in 2007. Liquidity management should focus on matching the cash inflows and outflows within the Company's natural market for loans and deposits. This goal is accomplished by maintaining sufficient asset liquidity along with stable core deposits. The primary sources of liquidity are interest-bearing balances with banks, federal funds sold and the maturity and repayment of investments and loans as well as cash flows provided from operations. The Company has classified $66,328 in securities as available for sale at December 31, 2006. In addition, the Federal Home Loan Bank in Cincinnati offers advances to the Bank which further enhances the Bank's ability to meet liquidity demands. At December 31, 2006, the Bank could borrow an additional $65,000 from the Federal Home Loan Bank. The Bank also has the ability to purchase federal funds from several of its correspondent banks. See the consolidated statement of cash flows for further cash flow information. Management does not rely on any single source of liquidity and monitors the level of liquidity based on many factors affecting the Company's financial condition. INFLATION Consolidated financial data included herein has been prepared in accordance with US GAAP. Presently, US GAAP requires the Company to measure financial position and operating results in terms of historical dollars with the exception of securities available for sale, which are carried at fair value. Changes in the relative value of money due to inflation or deflation are generally not considered. In management's opinion, changes in interest rates affect the financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as monetary and fiscal policies. A financial institution's ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today's volatile economic environment. The Company seeks to insulate itself from interest rate volatility by ensuring that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. 36 CRITICAL ACCOUNTING POLICIES The most significant accounting policies followed by the Company are presented in Note A to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the adequacy of the allowance for loan losses to be a critical accounting policy. Allowance for loan losses: To arrive at the total dollars necessary to maintain an allowance level sufficient to absorb probable losses incurred at a specific financial statement date, management has developed procedures to establish and then evaluate the allowance once determined. The allowance consists of the following components: specific allocation, general allocation and other estimated general allocation. To arrive at the amount required for the specific allocation component, the Company evaluates loans for which a loss may be incurred either in part or whole. To achieve this task, the Company has created a quarterly report ("Watchlist") which lists the loans from each loan portfolio that management deems to be potential credit risks. The criteria to be placed on this report are: past due 60 or more days, nonaccrual and loans management has determined to be potential problem loans. These loans are reviewed and analyzed for potential loss by the Large Loan Review Committee, which consists of the President of the Company and members of senior management with lending authority. The function of the Committee is to review and analyze large borrowers for credit risk, scrutinize the Watchlist and evaluate the adequacy of the allowance for loan losses and other credit related issues. The Committee has established a grading system to evaluate the credit risk of each commercial borrower on a scale of 1 (least risk) to 10 (greatest risk). After the Committee evaluates each relationship listed in the report, a specific loss allocation may be assessed. The specific allocation is currently made up of amounts allocated to the commercial and real estate loan portfolios. Included in the specific allocation analysis are impaired loans, which consist of loans with balances of $200 or more on nonaccrual status or non-performing in nature. These loans are also individually analyzed and a specific allocation may be assessed based on expected credit loss. Collateral dependent loans will be evaluated to determine a fair value of the collateral securing the loan. Any changes in the impaired allocation will be reflected in the total specific allocation. The second component (general allowance) is based upon total loan portfolio balances minus loan balances already reviewed (specific allocation). The Large Loan Review Committee evaluates credit analysis reports that provide management with a "snapshot" of information on borrowers with larger-balance loans (aggregate balances of $1,000 or greater), including loan grades, collateral values, and other factors. A list is prepared and updated quarterly that allows management to monitor this group of borrowers. Therefore, only small balance commercial loans and homogeneous loans (consumer and real estate loans) are not specifically reviewed to determine minor delinquencies, current collateral values and present credit risk. The Company utilizes actual historic loss experience as a factor to calculate the probable losses for this component of the allowance for loan losses. This risk factor reflects an actual one-year or three-year performance evaluation of credit losses per loan portfolio, whichever is greater. The risk factor is achieved by taking the average net charge-off per loan portfolio for the last 12 or 36 consecutive months, whichever is greater, and dividing it by the average loan balance for each loan portfolio over the same time period. The Company believes that by using the greater of the 12 or 36 month average loss risk factor, the estimated 37 allowance will more accurately reflect current probable losses. The final component used to evaluate the adequacy of the allowance includes five additional areas that management believes can have an impact on collecting all principal due. These areas are: 1) delinquency trends, 2) current local economic conditions, 3) non-performing loan trends, 4) recovery vs. charge-off, and 5) personnel changes. Each of these areas is given a percentage factor, from a low of 10% to a high of 30%, determined by the degree of impact it may have on the allowance. To calculate the impact of other economic conditions on the allowance, the total general allowance is multiplied by this factor. These dollars are then added to the other two components to provide for economic conditions in the Company's assessment area. The Company's assessment area takes in a total of ten counties in Ohio and West Virginia. Each assessment area has its individual economic conditions; however, the Company has chosen to average the risk factors for compiling the economic risk factor. The adequacy of the allowance may be determined by certain specific and nonspecific allocations; however, the total allocation is available for any credit losses that may impact the loan portfolios. CONCENTRATIONS OF CREDIT RISK The Company maintains a diversified credit portfolio, with commercial loans, both commercial real estate and commercial and industrial, currently comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in central and southeastern Ohio as well as western West Virginia. Management believes this risk to be general in nature, as there are no material concentrations of loans to any industry or consumer group. To the extent possible, the Company diversifies its loan portfolio to limit credit risk by avoiding industry concentrations. FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as "believes," "anticipates," "expects," and similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control, that could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to: changes in political, economic or other factors such as inflation rates, recessionary or expansive trends, and taxes; competitive pressures; fluctuations in interest rates; the level of defaults and prepayment on loans made by the Company; unanticipated litigation, claims, or assessments; fluctuations in the cost of obtaining funds to make loans; and regulatory changes. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in management's discussion and analysis is available in the Company's filings with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, including the disclosure under the heading "Item 1A. Risk Factors" of Part 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements, whether as a result of new information, unanticipated future events or otherwise. 38 CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME
Table I December 31 ------------------------------------------------------------------------------------ 2006 2005 2004 (dollars in thousands) -------------------------- -------------------------- -------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- ASSETS - ------ Interest-earning assets: Interest-bearing balances $ 579 $ 23 4.06% $ 636 $ 15 2.33% $ 879 $ 7 .79% with banks Federal funds sold 4,193 220 5.24 1,256 39 3.14 4,708 55 1.17 Securities: Taxable 73,160 3,189 4.36 71,602 2,921 4.08 73,046 3,055 4.18 Tax exempt 12,440 688 5.53 11,851 691 5.83 12,673 809 6.38 Loans 626,418 48,581 7.76 599,345 42,621 7.11 590,006 39,823 6.75 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- earning assets 716,790 52,701 7.35% 684,690 46,287 6.76% 681,312 43,749 6.42% Noninterest-earning assets: Cash and due from banks 15,306 15,420 15,809 Other nonearning assets 36,655 33,687 32,779 Allowance for loan losses (7,819) (7,308) (7,619) -------- -------- -------- Total noninterest- earning assets 44,142 41,799 40,969 -------- -------- -------- Total assets $760,932 $726,489 $722,281 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $ 93,137 2,343 2.52% $110,626 2,252 2.04% $112,546 1,783 1.58% Savings and Money Market 78,241 1,895 2.42 50,363 503 1.00 48,574 318 .65 Time deposits 338,593 14,356 4.24 311,268 10,218 3.28 309,744 9,225 2.98 Repurchase agreements 22,692 895 3.94 24,694 641 2.60 24,743 278 1.12 Other borrowed money 81,975 4,442 5.42 92,520 4,523 4.89 96,361 4,542 4.71 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest- bearing liabilities 614,638 23,931 3.89% 589,471 18,137 3.08% 591,968 16,146 2.73% Noninterest-bearing liabilities: Demand deposit accounts 75,330 70,473 66,298 Other liabilities 10,994 8,925 8,227 -------- -------- -------- Total noninterest- bearing liabilities 86,324 79,398 74,525 Shareholders' equity 59,970 57,620 55,788 -------- -------- -------- Total liabilities and shareholders' equity $760,932 $726,489 $722,281 ======== ======== ======== Net interest earnings $28,770 $28,150 $27,603 ======= ======= ======= Net interest earnings as a percent of interest-earning assets 4.02% 4.11% 4.05% ----- ----- ----- Net interest rate spread 3.46% 3.68% 3.69% ----- ----- ----- Average interest-bearing liabilities to average earning assets 85.75% 86.09% 86.89% ===== ===== =====
Fully taxable equivalent yields are calculated assuming a 34% tax rate, net of nondeductible interest expense. Average balances are computed on an average daily basis. The average balance for available-for-sale securities includes the market value adjustment. However, the calculated yield is based on the securities' amortized cost. Average loan balances include nonaccruing loans. Loan income includes cash received on nonaccruing loans. RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE
Table II 2006 2005 ----------------------------- ---------------------------- (dollars in thousands) Increase (Decrease) Increase (Decrease) From Previous Year Due to From Previous Year Due to ----------------------------- ------------------------------ Volume Yield/Rate Total Volume Yield/Rate Total ------ ---------- ----- ------ ---------- ----- INTEREST INCOME - --------------- Interest-bearing balances with banks $ (2) $ 10 $ 8 $ (2) $ 10 $ 8 Federal funds sold 141 40 181 (61) 45 (16) Securities: Taxable 65 204 269 (59) (75) (134) Tax exempt 34 (37) (3) (51) (67) (118) Loans 1,983 3,976 5,959 638 2,160 2,798 ------- ------- ------- ------- ------- ------- Total interest income 2,221 4,193 6,414 465 2,073 2,538 INTEREST EXPENSE - ---------------- NOW accounts (390) 481 91 (31) 500 469 Savings and Money Market 390 1,002 1,392 12 173 185 Time deposits 958 3,180 4,138 46 947 993 Repurchase agreements (56) 310 254 (1) 364 363 Other borrowed money (544) 463 (81) (184) 165 (19) ------- ------- ------- ------- ------- ------- Total interest expense 358 5,436 5,794 (158) 2,149 1,991 ------- ------- ------- ------- ------- ------- Net interest earnings $ 1,863 $(1,243) $ 620 $ 623 $ (76) $ 547 ======= ======= ======= ======= ======= =======
The change in interest due to volume and rate is determined as follows: Volume Variance - change in volume multiplied by the previous year's rate; Yield/Rate Variance - change in rate multiplied by the previous year's volume; Total Variance - change in volume multiplied by the change in rate. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Fully taxable equivalent yield assumes a 34% tax rate, net of related nondeductible interest expense. SECURITIES
Table III MATURING --------------------------------------------------------------------------- As of December 31, 2006 Within After One but After Five but (dollars in thousands) One Year Within Five Years Within Ten Years After Ten Years -------- ----------------- ---------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- Obligations of U.S. Government agency securities --- --- $25,183 4.49% --- --- --- --- Obligations of states and political subdivisions $ 626 6.60% 5,664 6.57% $ 2,136 7.49% $4,867 4.23% Mortgage-backed securities 3,918 3.63% 39,268 4.04% 1,955 5.42% --- --- ------- ---- ------- ---- ------- ---- ------ ---- Total debt securiities $ 4,544 4.04% $70,115 4.41% $ 4,091 6.50% $4,867 4.23% ======= ==== ======= ==== ======= ==== ====== ====
Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions using a 34% rate. Weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Mortgage-backed securities, which have prepayment provisions, are assigned to a maturity based on estimated average lives. Securities are shown at their carrying values which include the market value adustments for available-for-sale securities. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES Table IV Years Ended December 31 (dollars in thousands) 2006 2005 2004 2003 2002 - ---------------------- ---- ---- ---- ---- ---- Commercial loans (1) $7,806 $4,704 $4,657 $4,844 $3,358 Percentage of loans to total loans 39.45% 38.33% 37.69% 38.58% 36.94% Residential real estate loans 310 623 642 833 1,318 Percentage of loans to total loans 38.16% 38.06% 37.84% 37.94% 40.07% Consumer loans 1,296 1,806 1,878 1,916 2,393 Percentage of loans to total loans 22.39% 23.61% 24.47% 23.48% 22.99% ------- ------- ------- ------- ------- Allowance for Loan Losses $9,412 $7,133 $7,177 $7,593 $7,069 ======= ======= ======= ======= ======= 100.00% 100.00% 100.00% 100.00% 100.00% ======= ======= ======= ======= ======= Ratio of net charge-offs to average loans .54% .31% .47% .68% .86% ======= ======= ======= ======= ======= The above allocation is based on estimates and subjective judgments and is not necessarily indicative of the specific amounts or loan categories in which losses may ultimately occur. (1) Includes commercal and industrial and commercial real estate loans. SUMMARY OF NONPERFORMING AND PAST DUE LOANS Table V (dollars in thousands) 2006 2005 2004 2003 2002 - ---------------------- ---- ---- ---- ---- ---- Impaired loans $17,402 $7,983 $5,573 $1,988 $4,780 Past due-90 days or more and still accruing 1,375 1,317 1,402 659 1,491 Nonaccrual 12,017 1,240 1,618 2,655 6,569 Accruing loans past due 90 days or more to total loans .22% .21% .23% .12% .27% Nonaccrual loans as a % of total loans 1.92% .20% .27% .46% 1.17% Impaired loans as a % of total loans 2.78% 1.29% .93% .35% .85% Allowance for loans losses as a % of total loans 1.51% 1.16% 1.20% 1.32% 1.26% Management believes that the impaired loan disclosures are comparable to the nonperforming loan disclosures except that the impaired loan disclosures do not include single family residential or consumer loans which are analyzed in the aggregate for loan impairment purposes. During 2006, the Company recognized $939 of interest income on impaired loans. Individual loans not included above that management feels have loss potential total approximately $4,962. The Company has no assets which are considered to be troubled debt restructings that are not already included in the table above. Management formally considers placing a loan on nonaccrual status when collection of principal or interest has become doubtful. Furthermore, a loan should not be returned to the accrual status unless either all delinquent principal or interest has been brought current or the loan becomes well secured and is in the process of collection. MATURITY AND REPRICING DATA OF LOANS
Table VI As of December 31, 2006 Maturing/Repricing (dollars in thousands) Within After One but One Year Within Five Years After Five Years Total -------- ----------------- ---------------- ----- Commercial loans (1) $149,764 $ 48,158 $ 48,732 $246,654 Residential real estate loans 77,617 12,852 148,080 238,549 Consumer loans 27,184 77,555 35,222 139,961 -------- -------- -------- -------- Total loans $254,565 $138,565 $232,034 $625,164 ======== ======== ======== ========
Loans maturing or repricing after one year with: Variable interest rates $ 47,408 Fixed interest rates 323,191 -------- Total $370,599 ======== (1) Includes commercial and industrial and commercial real estate loans. DEPOSITS Table VII as of December 31 (dollars in thousands) 2006 2005 2004 ---- ---- ---- Interest-bearing deposits: NOW accounts $ 78,484 $ 95,498 $110,901 Money Market 58,941 22,347 9,023 Savings accounts 32,719 35,126 37,008 IRA accounts 38,731 36,779 37,272 Certificates of Deposit 306,951 290,555 271,013 -------- -------- -------- 515,826 480,305 465,217 Noninterest-bearing deposits: Demand deposits 77,960 82,561 69,936 -------- -------- -------- Total deposits $593,786 $562,866 $535,153 ======== ======== ======== The following table presents the Company's estimated net interest income sensitivity: INTEREST RATE SENSITIVITY Table VIII Change in December 31, 2006 December 31, 2005 Interest Rates % Change in % Change in Basis Points Net Interest Income Net Interest Income - --------------- ------------------- ------------------- +300 (5.95%) (3.35%) +200 (3.26%) (.86%) +100 (1.37%) (.09%) -100 1.10% (.25%) -200 1.74% (.45%) -300 2.65% .23% CONTRACTUAL OBLIGATIONS
Table IX The following table presents, as of December 31, 2006, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. Payments Due In (dollars in thousands) Note One Year One to Three to Over Reference or Less Three Years Five Years Five Years Total --------- -------- ----------- ---------- ---------- ---------- Deposits without a stated maturity F $248,104 --- --- --- $248,104 Consumer and brokered time deposits F 226,220 $112,783 $ 4,600 $ 2,078 345,681 Repurchase agreements G 22,556 --- --- --- 22,556 Other borrowed funds H 28,972 27,415 7,012 147 63,546 Subordinated debentures I --- --- --- 13,500 13,500
KEY RATIOS Table X 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- Return on average assets .71% .97% 1.16% .93% .85% Return on average equity 9.00% 12.18% 15.02% 12.43% 11.85% Dividend payout ratio 52.56% 38.55% 38.89% 38.14% 40.79% Average equity to average assets 7.88% 7.93% 7.72% 7.51% 7.17% DIRECTOR & OFFICER LISTING OVBC Directors - -------------- Jeffrey E. Smith President and CEO, Ohio Valley Banc Corp. Thomas E. Wiseman President, The Wiseman Agency, Inc. W. Lowell Call Retired Executive, Bob Evans Farms, Inc. Robert H. Eastman President, Ohio Valley Supermarkets, Inc. Lannes C. Williamson President, L. Williamson Pallets, Inc. Steven B. Chapman CPA, Chapman & Burris CPA's, LLC Anna P Barnitz Treasurer & CFO, Bob's Market & Greenhouses, Inc. Brent A. Saunders Attorney, Halliday, Sheets & Saunders Harold A. Howe President, Ohio Valley Financial Services Robert E. Daniel Administrator, Holzer Clinic Roger D. Williams President, Bob Evans Restaurants OVBC Officers - ------------- Jeffrey E. Smith E. Richard Mahan Larry E. Miller, II Katrinka V. Hart Sue Ann Bostic Mario P. Liberatore Cherie A. Barr Sandra L. Edwards David L. Shaffer Jennifer L. Osborne Tom R. Shepherd Scott W. Shockey Paula W. Clay Cindy H. Johnston Ohio Valley Bank Directors - -------------------------- Jeffrey E. Smith Robert H. Eastman W. Lowell Call Thomas E. Wiseman Lannes C. Williamson Harold A. Howe Steven B. Chapman Anna P. Barnitz Brent A. Saunders Robert E. Daniel Roger D. Williams Directors Emeritus - ------------------ James L. Dailey Merrill L. Evans Art E. Hartley, Sr. Charles C. Lanham C. Leon Saunders Wendell B. Thomas Barney A. Molnar West Virginia Advisory Board - ---------------------------- Mario P. Liberatore Anna P. Barnitz Richard L. Handley Gregory K Harley Charles C. Lanham Trenton M. Stover Lannes C. Williamson R. Raymond Yauger John C. Musgrave Stephen L. Johnson E. Allen Bell John A. Myers Ohio Valley Bank Officers - ------------------------- Jeffrey E. Smith President & Chief Executive Officer E. Richard Mahan Executive Vice President & Secretary Larry E. Miller, II Executive Vice President & Treasurer Katrinka V. Hart Executive Vice President & Risk Management Senior Vice Presidents Sue Ann Bostic Administrative Services Group Mario P. Liberatore West Virginia Bank Group Sandra L. Edwards Financial Bank Group David L. Shaffer Commercial Bank Group Jennifer L. Osborne Retail Lending Group Tom R. Shepherd Retail Deposit Group Scott W. Shockey Chief Financial Officer Vice Presidents Patricia L. Davis Research & Technical Applications Richard D. Scott Trust Bryan W. Martin Facilities & Technical Services Patrick H. Tackett Western Division Branch Administrator Molly K. Tarbett Loss Prevention Manager Marilyn E. Kearns Director of Human Resources Assistant Vice Presidents Philip E. Miller Region Manager Franklin County Rick A. Swain Region Manager Pike County Judith K. Hall Training and Educational Development Melissa P. Mason Trust Officer Diana L. Parks Internal Auditor Christopher S. Petro Comptroller Linda L. Plymale Transit Officer Kimberly R. Williams Systems Officer Deborah A. Carhart Shareholder Relations Gregory A. Phillips Indirect Lending Manager Pamela D. Edwards Commercial Loan Operations Paula W. Clay Assistant Secretary Cindy H. Johnston Assistant Secretary Chris L. Preston Regional Branch Administration I-64 Angela G. King Regional Branch Administrator Gallia/Meigs Frank W. Davison Chief Information Officer David K. Nadler Credit and Financial Analyst Assistant Cashiers Brenda G. Henson Manager Customer Service Kyla R. Carpenter Marketing Officer Richard P. Speirs Maintenance Technical Supervisor Stephanie L. Stover Retail Lending Operations Manager Bryna S. Butler Corporate Communications Raymond G. Polcyn Retail Lending Manager for Gallia-Meigs SuperBanks Toby M. Mannering Collections Manager Tyrone J. Thomas Assistant Manager Franklin County Region Allen W. Elliott Assistant Manager Indirect Lending Tamela D. LeMaster Regional Branch Manager I-64 Michael D. Hart Security Officer William T. Johnson Internal Control Coordinator Joe J. Wyant Region Manager Jackson County Linda L. Hart Assistant Manager Waverly Office Miquel D. McCleese Assistant Manager Columbus Office Loan Central Officers - --------------------- Jeffrey E. Smith Chairman of the Board Cherie A. Barr President Timothy R. Brumfield Secretary & Manager, Gallipolis Office Joseph I. Jones Manager, Waverly Office T. Joe Wilson Manager, South Point Office John J. Holtzapfel Manager, Wheelersburg Office Deborah G. Moore Manager, Jackson Office INVESTOR INFORMATION - -------------------- BUSINESS PROFILE Ohio Valley Banc Corp. commenced operations on October 23, 1992, as a one-bank holding company with The Ohio Valley Bank Company being the wholly-owned subsidiary. The Company's headquarters are located at 420 Third Avenue in Gallipolis, Ohio. The Ohio Valley Bank Company was organized on September 24, 1872. The Bank is insured under the Federal Deposit Insurance Act and is chartered under the banking laws of the State of Ohio. The company currently operates sixteen offices in Ohio and West Virginia. In April 1996, the Banc Corp. opened a consumer finance company operating under the name of Loan Central, Inc. with five offices in Ohio. Ohio Valley Financial Services, an agency specializing in life insurance, was formed as a subsidiary of the Corp. in June 2000. The Company also has minority holdings in ProAlliance. The Company currently has over $750 million in assets. FORM 10-K A copy of the company's annual report on Form 10-K, as filed with the Securities and Exchange Commission, will be forwarded without charge to any stockholder upon written request to: Ohio Valley Banc Corp., Attention: E. Richard Mahan, Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and proxy statement are also available on the company's Web site, www.ovbc.com. STOCK LISTING Ohio Valley Banc Corp. stock is traded on The Nasdaq Stock Market under the symbol OVBC. HEADQUARTERS Ohio Valley Banc Corp. 420 Third Avenue P.O. Box 240 Gallipolis, Ohio 45631 740.446.2631 or 800.468.6682 Web: www.ovbc.com E-mail: investorrelations@ovbc.com MAKING HEADLINES IN 2006 Daniel & Williams Elected to OVBC Board Loan Central Celebrates 10 Years OVB's Davison Promoted to Asst. VP OVB Plunges into Syracuse Community Pool Project Commercial Loans Exceed $250 Million Shepherd & Thomas Graduate Bank Leadership Institute OVB's Nadler Promoted to Asst. VP; Hart Promoted to Asst. Cashier OVB Receives Southeast Financial Literacy Achievement Award from Ohio School Boards Association and Ohio Bankers League OVB Announces New e-Delivery Service OVB Jackson Ribbon-Cutting Benefits Local Charities OVB's McCleese Promoted to Asst. Cashier Tom Wiseman Appointed Lead Director EX-21 14 exhibit21.txt 12312006 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT STATE OF PERCENTAGE NAME INCORPORATION OF OWNERSHIP ---- ---------------- ------------ The Ohio Valley Bank Company Ohio 100% Loan Central, Inc. Ohio 100% Ohio Valley Financial Services Agency, LLC Ohio 100% Ohio Valley Statutory Trust I Ohio 100% Ohio Valley Statutory Trust II Ohio 100% ProAlliance Corp. Ohio 9% EX-23 15 exhibit23.txt REGISTEREDPUBLICACCOUNTINGFIRM12312006 EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 of Ohio Valley Banc Corp. filed with the United States Securities and Exchange Commission (SEC No. 033-62010) of our reports dated March 13, 2007 with respect to the consolidated financial statements of Ohio Valley Banc Corp., and management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, each such report included in Ohio Valley Banc Corp.'s 2006 Annual Report to Shareholders and incorporated by reference into this Annual Report on Form 10-K for the year ended December 31, 2006. /s/ Crowe Chizek and Company LLC -------------------------------- Crowe Chizek and Company LLC Columbus, Ohio March 13, 2007 EX-31 16 exhibit31-1.txt PRINCIPAL EXECUTIVE OFFICER 12312006 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 16, 2007 By /s/ Jeffrey E. Smith ----------------------------------- Jeffrey E. Smith, President and CEO EX-31 17 exhibit31-2.txt PRINCIPAL FINANCIAL OFFICER 12312006 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 16, 2007 By /s/ Scott W. Shockey ----------------------------------- Scott W. Shockey Vice President and Chief Financial Officer EX-32 18 exhibit32.txt 12312006 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, 2006 (the "Report"), the undersigned Jeffrey E. Smith, President and Chief Executive Officer of the Corporation, and Scott W. Shockey, Vice President and Chief Financial Officer of the Corporation, each certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. * /s/ Jeffrey E. Smith * /s/ Scott W. Shockey - ------------------------------------- ------------------------ Jeffrey E. Smith Scott W. Shockey President and Chief Executive Officer Vice President and Chief Financial Officer Dated: March 16, 2007 Dated: March 16, 2007 * 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-----