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