EX-13 8 sec10k123111_ex13.htm ANNUAL REPORT TO SHAREHOLDERS 123111
OHIO VALLEY BANC CORP.
ANNUAL REPORT 2011

MESSAGE FROM MANAGEMENT
Dear Shareholders and Friends of our Valued Communities,
Enclosed between these covers you will find the summation of your company’s operations for the year 2011.
We would be remiss if we didn’t first recognize the retirement of one of our directors, Robert E. Daniel, who retired from the Board of Directors in May. Mr. Daniel served your board as a representative from one of our area’s largest employers, the healthcare industry. We are pleased that he will continue to serve in an advisory capacity as a Director Emeritus.
We commend the adamant support of our shareholders and customers which led to a successful 2011. OVBC ended the year with net income totaling $5,835,000, a 14.5 percent increase from net income of $5,096,000 for the previous year. Also, earnings per share were $1.46 for 2011 versus $1.28 for 2010, an increase of 14.1 percent.
Capital was the focus for much of 2011 as regulators increased their emphasis on capital standards. With enhanced earnings, the balance of capital increased to even stronger levels in 2011.
Your employees strived to increase Asset Quality by increasing recoveries, working with borrowers who put forth good faith efforts to pay, and by proactively matching appropriate new loans to responsible borrowers. And it worked. Our ratio of nonperforming loans to total loans at December 31, 2011 lowered to .52%, compared to .78% at December 31, 2010.
At Loan Central, this group of dedicated professionals continued to meet the needs of a growing public with problem credit histories. A seventh office was opened just after the end of the year in the Zane Plaza in Chillicothe, Ohio. We are pleased to welcome Chillicothe manager, Greg Kauffman, to the OVBC family. In 2011, Loan Central contributed an outstanding 19.5% of the total earnings per share to the OVBC bottom line.
These successes highlighted a Year of Celebration in which we celebrated important milestones for many of our offices from the 50th Anniversary of the current Main Office location to the 15th Anniversary of our first in-store bank location. We look forward to celebrating the 140th Anniversary of The Ohio Valley Bank Company with you in 2012.
As always, we thank you for your loyalty and support and humbly submit the following pages for your review.
Sincerely,
/s/Jeffrey E. Smith /s/Thomas E. Wiseman
Jeffrey E. Smith Thomas E. Wiseman
Chairman and CEO President and COO
Ohio Valley Banc Corp. Ohio Valley Banc Corp.

Being a Community Bank is More Than Words on a Page…
In October, OVB Financial Literacy Leader Hope Roush brought OVB’s Adventures in Credit to elementary schools in our region. Students learned how to use credit wisely, during an interactive superhero-themed program. At left Roush is pictured at Vinton Elementary.
OVB Officer and Waverly Office Manager, Rick Swain, took a few moments away from the Office’s 20th Anniversary Celebration to thank radio listeners for their support over the years.
Over the last few years, OVB has supported major building projects at school districts across our region; including this double donation presentation made to Gallipolis City Schools and Gallia County Local Schools in 2011.
Manager and Bank Officer Joe Wyant doesn’t back away from a challenge, not even when it’s washing windshields at the 20th Anniversary Celebration of the OVB Office in Jackson. Fortunately, his reward came in September when he had the honor of opening the Little Miss Apple Festival Exhibit with 2010 Little Miss McKinley Morris and OVB GenNEXT Advisory Board member Taryn Strawser.
It’s in the Hearts, Minds, and Actions of Our People
In September, the OVB Jackson Pike Office celebrated its 35th year in business. The event was highlighted by the surprise visit of Larry Marr, the branch’s first customer. He is pictured, on the left, with current Jackson Pike Branch Operations Manager Jenny Nicinsky and Chairman and CEO Jeff Smith, who happened to be the first manager of the Jackson Pike branch.
At OVB, we are proud to “invest” in youth through our region’s outstanding county fairs. These events exhibit the best of what our communities have to offer. Left, OVB Vice President Chris Preston looks on as Account Service Representative Adam Canterbury presents $1,000 to the exhibitor of the Top Steer Born & Raised in Cabell County at the first fair of the season in July.
Right, we stood among an excited crowd to watch one OVB 4-H Scholar crown another as Kalee Edmonds passed the Mason Co. Fair Queen title to Jordan Cullen during the pageant also sponsored by Ohio Valley Bank.
Right, in October, bankers at the OVB Holzer Banking Center, located conveniently inside Holzer Medical Center of Gallipolis, dressed up the office in pink to show support for the hospital’s Susan G. Komen Foundation fundraising efforts.

A TRADITION OF QUALITY PERFORMANCE
Total Return Performance
Year ended December 31, 2011
This is a comparison of five-year cumulative total returns among Ohio Valley Banc Corp.’s common shares, the S & P 500 Index, and the SNL $500 Million-$1 Billion Bank Asset-Size Index. The SNL Index represents stock performance of 79 of the nation's banks located throughout the United States with total assets between $500 Million and $1 Billion (including Ohio Valley Banc Corp.) Calculations are based on an investment of $100 on December 31, 2006 and assumes reinvestment of dividends.
Period Ending

Index |  |  | 12/31/06 |  | 12/31/07 |  | 12/31/08 |  | 12/31/09 |  | 12/31/10 |  | 12/31/11
Ohio Valley Banc Corp. | 100.00 |  | 102.51 |  | 79.35 |  | 95.72 |  | 88.41 |  | 88.06
SNL $500M-$1B Bank Index | 100.00 |  | 80.13 |  | 51.35 |  | 48.90 |  | 53.38 |  | 46.96
S&P 500 |  |  | 100.00 |  | 105.49 |  | 66.46 |  | 84.05 |  | 96.71 |  | 98.76

Annual Report on 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 shareholder upon written request to: Ohio Valley Banc Corp., Attention: Larry E. Miller, Secretary, P.O. Box 240, Gallipolis, OH 45631. The annual report and proxy statement are also available for viewing or download at www.ovbc.com/go/proxyinfo.
Contact Information
Ohio Valley Banc Corp.
420 Third Avenue, P.O. Box 240, Gallipolis, Ohio 45631
740.446.2631 or 800.468.6682 Web: www.ovbc.com E-mail: investorrelations@ovbc.com

OHIO VALLEY BANK
Gallipolis, Ohio
Main Office - 420 Third Ave.
Mini Bank - 437 Fourth Ave.
Inside Foodland - 236 Second Ave.
Inside Walmart - 2145 Eastern Ave.
Jackson Pike - 3035 State Route 160
Inside Holzer - 100 Jackson Pike
Loan Office - Walmart Plaza, 2145 Eastern Ave.
Jackson, Ohio
740 East Main St.
Pomeroy, Ohio
Inside Sav-a-Lot - 700 W. Main St.
Rio Grande, Ohio
27 North College Ave.
South Point, Ohio
Inside Walmart - 354 Private Drive
Waverly, Ohio
507 West Emmitt Ave.
Huntington, West Virginia
3331 U.S. Route 60 East
Milton, West Virginia
280 East Main St.
Point Pleasant, West Virginia
328 Viand St.
Web Branch
www.ovbc.com or www.ohiovalleybank.com
LOAN CENTRAL
Chillicothe, Ohio
1080 N. Bridge Street, Unit 43
Gallipolis, Ohio
2145 Eastern Avenue
Jackson, Ohio
345 Main Street
Ironton, Ohio
710 Park Avenue
South Point, Ohio
348 County Road 410
Waverly, Ohio
505 West Emmitt Avenue
Wheelersburg, Ohio
326 Center Street
Ohio Valley Bank ATMs can be found at each office and also at these convenient locations.
Red’s Truck Center, Kerr Road, Bidwell, Ohio
Sav-a-Lot, State Rt. 160, Bidwell, Ohio
Gallia Academy, 2855 Centenary Road, Gallipolis, Ohio
Holzer Medical Center Cafeteria, 100 Jackson Pike, Gallipolis, Ohio
Holzer Clinic, 280 Pattonsville Road, Jackson, Ohio
Foodland, 409 N. Front Street, Oak Hill, Ohio
Bob Evans Sausage Shop, State Rt. 588, Rio Grande, Ohio
BP, Rt 35 & 5 Mile Creek, Fraziers Bottom, WV
Sunoco Foodmart, 3175 Route 60 E., Huntington, WV
Pleasant Valley Hospital, 2520 Valley Drive, Point Pleasant, WV
See our Intelli-Deposit ATM inside the Gallipolis Walmart where you can make a deposit without a deposit slip!

Community First and Always
Ohio Valley Bank believes in community. As a responsible business, we feel it is our duty to invest in our community, whether by monetary means or through volunteerism. We are proud to make a positive impact on our hometowns. In supporting our communities, we achieve our mission to excel as an independent community bank.
The community and charitable organizations that follow are some of those that we “invested” in during 2011 through charitable giving.

American Cancer Society Amer. Free Enterprise Leadership American Legion American Red Cross Amish School Auction AMVETS Area Agency on Aging District 7 Ariel Theatre Baptist for Life of Central Ohio Beaver Lions Club Beaver OktoberFest Bend Area C.A.R.E. Bend Area Food Pantry Boy Scouts of America Buckeye Hills Career Center Cabell Co. 4-H Cabell Co. Canine Assn. Cabell Co. Fair Cabell Co. FFA Cabell Co. Fraternal Order of Police Cabell Co. Kids for Christmas Cabell Co. SOGA Cabell Huntington Hospital Children’s Fund Cabell Midland High School Chester Ball Association Chester Shade Historical Society Childrens Center of Ohio Christian Life Academy City of Milton Fireworks Cystic Fibrosis Earl Neff Pediatric Toy Fund Eastern High School (Pike County) Eastern Youth League Elm Grove Youth League Emancipation Celebration FACTS Youth Fishing Day Fellowship of Christian Athletes FOF Community Concert Fort Hayes Broadcasting Program Fort Hill Christian Youth Camp Franklin County Schools Franklin Heights High School Frank Shriver Family Benefit French Art Colony French City Chili Fest French Colony Chorus Friends of Lake Alma French 500 Clinic Gallery at 409 Gallia Co. 4-H Gallia Co. Agricultural Society Gallia County Cattlemen Assn. Gallia Co. Chamber of Commerce Gallia Co. Chautauqua Gallia Co. CVB Gallia Co. Dairy Committee Gallia Co. Early Childhood Gallia Co. Emancipation Day Gallia Co. Farm Bureau Gallia Co. Gospel Sing Gallia Co. Health Dept. Gallia Co. Junior Fair Gallia Co. Local Schools Gallia Co. Relay for Life Gallia Co. River Recreation Festival Gallia Co. Snack Pack Gallia Co. Wrestling Club Gallia Senior Citizens Ctr. Gallipolis Bass Busters Gallipolis City Schools Gallipolis Elks Gallipolis In Bloom Gallipolis Jr Women's Club Gallipolis Lions Club | Gallipolis Rotary Gallipolis Shrine Club Gallipolis Women’s Bowling League Generation Gallia Girl Scouts of America Gold Girl Group Home Gospel Lighthouse Fundraiser Greenfield Fire Dept. Ladies Aux. Grove City Schools Guiding Hands/Gallco Center Holzer Foundation, Camp Beaver Holzer Hospice Holzer Medical Center Holzer Senior Outreach Jackson ALS Walk Jackson Chamber of Commerce Jackson City Schools Jackson Co. 4-H Jackson Co. Apple Festival Jackson Co. Economic Development Jackson Co. Fair Auction Jackson Elks Fundraiser Jackson Extension Jackson Firefighters Assn. Jackson Jaycees Jackson Rotary Jackson Shop-with-a-Cop Jackson Sideliners Jackson SWCD Jackson/Vinton Farm Bureau John Hereford Benefit Jonathan Goddard Endowment Josh Napper Scholarship Fund Junior Achievement Juvenile Diabetes Research JVAC Industries Kiwanis Lawrence Co. Beef Sweepstakes Lawrence Co. Fair Auction Lawrence Co. FOP Foundation Liberty Union High School Lillian Jones Museum Madison Jewell Baker Fundraiser Main Street Point Pleasant Martha Elementary Mason Co. 4-H Mason Co. Board of Education Mason Co. Chamber of Commerce Mason Co. Community Foundation Mason Co. Fair & Queen Pageant Mason Co. FBLA Mason Co. Little League Mason Co. Reading Council Mason Co. Relay for Life Mason Co. Schools Mason Co. Special Olympics Meigs Chamber of Commerce Meigs Co. 4-H Meigs Co. Fair Livestock Auction Meigs Co. Schools Meigs New Field Celebration Meigs Soil & Water Conservation Meigs VFW MGM Big Green Club Middleport Sternwheeler Riverfest Middleport Youth League Milton Little League Milton Middle School Milton Rotary Mothman Festival 5K Race MU Athletic Association Multiple Sclerosis Society Muscular Dystrophy Association | NAACP National Child Safety Council National Super Kids Classic National Wild Turkey Federation Native American Harvest Oak Hill Festival of Flags Oak Hill Local Schools OASIS Benefit Ohio 4-H Foundation Ohio River Live Ohio Valley Christian School Ohio Valley Symphony Ohio Valley Youth Orchestra OH/WV YMCA Youth in Government Old Fort Meigs Ole Car Club OVB 4-H Scholarship Program Pancreatic Research Fund Pike Co. 4-H Pike Co. Chamber of Commerce Pike Co. Fair Livestock Auction Pike Co. Outreach Council Pike Co. Shrine Club Pike Co. Soil & Water Conservation Pike Co. YMCA Point Pleasant River Museum Point Pleasant Sternwheel Regatta Pomeroy-Middleport Lions Club Pomeroy Youth League Rachel Halley Benefit Racine’s Party in Park Festival Rio Grande Memorial Park Riverbend Arts Council River Cities Military Support Group Scott Porter Memorial Fund Special Olympics St. Jude’s Children’s Hospital Susan G. Komen Foundation Syracuse Fire Department Tabernacle of Praise Tour Ohio Band Organ Rally Town of Mason Tu-Endie-Wei FOP United Fund of Jackson County University of Rio Grande Vietnam Veterans Village of Pomeroy Village of Rio Grande Vinton Bean Dinner Vinton Integrity Baseball Washington Elementary Ohio Reads Waverly Foundation Waverly Jingle Bell Parade Waverly Leo Club Waverly Lions Club Waverly Local Schools Waverly Street Festival Wellston City Schools Wellston Ohillco Festival West Virginia Pumpkin Festival Women’s & Children’s Hospital Wilkesville Community Center WV Miners Team WV Soccer

Directors and Officers

OVBC OFFICERS Jeffrey E. Smith, Chairman of the Board and Chief Executive Officer Thomas E. Wiseman, President and Chief Operating Officer E. Richard Mahan, Senior Vice President & Chief Credit Officer Larry E. Miller, II, Senior Vice President & Secretary Katrinka V. Hart, Senior Vice President & Chief Lending Officer Mario P. Liberatore, Vice President Cherie A. Elliott, Vice President Jennifer L. Osborne, Vice President Tom R. Shepherd, Vice President Scott W. Shockey, Vice President & Chief Financial Officer Bryan F. Stepp, Vice President Frank W. Davison, Vice President Bryan W. Martin, Vice President David K. Nadler, Vice President Paula W. Clay, Assistant Secretary Cindy H. Johnston, Assistant Secretary OVBC DIRECTORS Jeffrey E. Smith Chairman & CEO, Ohio Valley Banc Corp. and Ohio Valley Bank Thomas E. Wiseman President & COO, Ohio Valley Banc Corp. and Ohio Valley Bank David W. Thomas, Lead Director Former Chief Examiner, Ohio Division of Financial Institutions bank supervision and regulation Lannes C. Williamson President, L. Williamson Pallets, Inc. sawmill, pallet manufacturing, and wood processing Steven B. Chapman Certified Public Accountant, Chapman & Burris CPAs, LLC Anna P. Barnitz Treasurer & CFO, Bob’s Market & Greenhouses, Inc. wholesale horticultural products and retail landscaping stores Brent A. Saunders Attorney, Halliday, Sheets & Saunders President & CEO, Holzer Consolidated Health Systems healthcare Harold A. Howe Self-employed, Real Estate Investment and Rental Property Roger D. Williams Former President, Bob Evans Restaurants restaurant operator and food products OHIO VALLEY BANK DIRECTORS Jeffrey E. Smith Steven B. Chapman Thomas E. Wiseman Anna P. Barnitz David W. Thomas Brent A. Saunders Lannes C. Williamson Roger D. Williams Harold A. Howe DIRECTORS EMERITUS W. Lowell Call Charles C. Lanham James L. Dailey Barney A. Molnar Robert E. Daniel C. Leon Saunders Art E. Hartley, Sr. Wendell B. Thomas WEST VIRGINIA ADVISORY BOARD Mario P. Liberatore Lannes C. Williamson Anna P. Barnitz Stephen L. Johnson Richard L. Handley E. Allen Bell Gregory K. Hartley John A. Myers Trenton M. Stover | OHIO VALLEY BANK OFFICERS Jeffrey E. Smith, Chairman of the Board & Chief Executive Officer Thomas E. Wiseman, President and Chief Operating Officer E. Richard Mahan, Executive Vice President & Chief Credit Officer Larry E. Miller, II, Executive Vice President & Secretary Katrinka V. Hart, Executive Vice President & Chief Lending Officer SENIOR VICE PRESIDENTS Mario P. Liberatore, West Virginia Bank Group Jennifer L. Osborne, Retail Lending Group Tom R. Shepherd, Chief Deposit Officer Scott W. Shockey, Chief Financial Officer Bryan F. Stepp, Corporate Banking West Virginia Frank W. Davison, Financial Bank Group Bryan W. Martin, Administrative Services/Human Resources David K. Nadler, Chief Risk Officer VICE PRESIDENTS Richard D. Scott, Trust Patrick H. Tackett, Retail Lending Marilyn E. Kearns, Director of Human Resources Fred K. Mavis, Business Development Officer Rick A. Swain, Western Division Branch Manager Bryna S. Butler, Market & E-Strategies Officer Tamela D. LeMaster, Branch Administration/CRM Christopher L. Preston, Branch Administration/Business Development ASSISTANT VICE PRESIDENTS 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, Assistant Manager Residential Real Estate Pamela D. Edwards, Special Assets Paula W. Clay, Assistant Secretary Cindy H. Johnston, Assistant Secretary Kyla R. Carpenter, Director of Marketing Toby M. Mannering, Collection Manager Joe J. Wyant, Region Manager Jackson County Allen W. Elliott, Bank Card Manager Brenda G. Henson, Manager Deposit Services D. Jeremy Perkins, Network Systems Gabriel U. Stewart, Chief Information Security Officer Randall L. Hammond, Security Officer/Loss Prevention Barbara A. Patrick, BSA Officer/Loss Prevention Richard P. Speirs, Facilities/Technical Manager and Director of Administrative Services Aaron S. Rykowski, Senior Compliance Officer E. Kate Cox, Regional Branch Administration ASSISTANT CASHIERS Stephanie L. Stover, Retail Lending Operations Manager Raymond G. Polcyn, Manager of Loan Production Office Linda L. Hart, Assistant Manager Waverly Office Lori A. Edwards, Secondary Market Manager Brandon O. Huff, AS400 Administrator Lois J. Scherer, Assistant Transit Officer Angela S. Kinnaird, Sales and Support Manager for Deposit Services Linda K. Roe, Employee Development Manager Shawn R. Siders, Credit Analyst Anita M. Good, Regional Branch Manager LOAN CENTRAL OFFICERS Katrinka V. Hart, Chairman of the Board Cherie A. Elliott, President Timothy R. Brumfield, Vice President & Secretary Manager, Gallipolis Office T. Joe Wilson, Manager, South Point Office Joseph I. Jones, Manager, Waverly Office John J. Holtzapfel, Manager, Wheelersburg Office Deborah G. Moore, Manager, Jackson Office Gregory G. Kauffman, Manager, Chillicothe Office GenNEXT ADVISORY BOARD Anthony W. Staley Taryn D. Strawser W. Graham Woodyard Heidi J. Wood Bryan L. Minear Mark A. Crawford Rheadon L. Remy Jodie L. McCalla Benjamin M. Sandy

OHIO VALLEY BANC CORP.
Symbol: OVBC
Email: investorrelations@ovbc.com
www.ovbc.com

SELECTED FINANCIAL DATA |
|  | Years Ended December 31 |
|  | 2011 |  |  | 2010 |  |  | 2009 |  |  | 2008 |  |  | 2007 |
(dollars in thousands, except share and per share data) |  |  |  |  |  |  |  |  |  |  |  |  |
SUMMARY OF OPERATIONS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total interest income |  | $ | 44,040 |  |  | $ | 46,514 |  |  | $ | 47,623 |  |  | $ | 51,533 |  |  | $ | 54,947 |
Total interest expense |  |  | 10,169 |  |  |  | 13,547 |  |  |  | 16,932 |  |  |  | 20,828 |  |  |  | 26,420 |
Net interest income |  |  | 33,871 |  |  |  | 32,967 |  |  |  | 30,691 |  |  |  | 30,705 |  |  |  | 28,527 |
Provision for loan losses |  |  | 4,896 |  |  |  | 5,871 |  |  |  | 3,212 |  |  |  | 3,716 |  |  |  | 2,252 |
Total other income |  |  | 7,222 |  |  |  | 6,154 |  |  |  | 7,598 |  |  |  | 6,046 |  |  |  | 5,095 |
Total other expenses |  |  | 28,299 |  |  |  | 26,643 |  |  |  | 26,160 |  |  |  | 23,178 |  |  |  | 22,442 |
Income before income taxes |  |  | 7,898 |  |  |  | 6,607 |  |  |  | 8,917 |  |  |  | 9,857 |  |  |  | 8,928 |
Income taxes |  |  | 2,063 |  |  |  | 1,511 |  |  |  | 2,272 |  |  |  | 2,729 |  |  |  | 2,631 |
Net income |  |  | 5,835 |  |  |  | 5,096 |  |  |  | 6,645 |  |  |  | 7,128 |  |  |  | 6,297 |
PER SHARE DATA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earnings per share |  | $ | 1.46 |  |  | $ | 1.28 |  |  | $ | 1.67 |  |  | $ | 1.77 |  |  | $ | 1.52 |
Cash dividends declared per share |  | $ | 0.84 |  |  | $ | 0.84 |  |  | $ | 0.80 |  |  | $ | 0.76 |  |  | $ | 0.71 |
Book value per share |  | $ | 17.84 |  |  | $ | 17.03 |  |  | $ | 16.70 |  |  | $ | 15.83 |  |  | $ | 15.10 |
Weighted average number of common |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
shares outstanding |  |  | 4,001,435 |  |  |  | 3,984,229 |  |  |  | 3,983,034 |  |  |  | 4,018,367 |  |  |  | 4,131,621 |
AVERAGE BALANCE SUMMARY: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total loans |  | $ | 625,603 |  |  | $ | 653,557 |  |  | $ | 641,878 |  |  | $ | 629,225 |  |  | $ | 628,891 |
Securities (1) |  |  | 185,684 |  |  |  | 148,974 |  |  |  | 134,117 |  |  |  | 101,100 |  |  |  | 91,724 |
Deposits |  |  | 720,936 |  |  |  | 693,845 |  |  |  | 652,453 |  |  |  | 606,126 |  |  |  | 595,610 |
Other borrowed funds (2) |  |  | 37,779 |  |  |  | 50,140 |  |  |  | 62,405 |  |  |  | 74,178 |  |  |  | 74,196 |
Shareholders' equity |  |  | 69,866 |  |  |  | 67,606 |  |  |  | 64,941 |  |  |  | 61,346 |  |  |  | 60,549 |
Total assets |  |  | 858,017 |  |  |  | 848,702 |  |  |  | 818,952 |  |  |  | 782,312 |  |  |  | 769,554 |
PERIOD END BALANCES: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total loans |  | $ | 598,308 |  |  | $ | 641,322 |  |  | $ | 651,356 |  |  | $ | 630,391 |  |  | $ | 637,103 |
Securities (1) |  |  | 157,515 |  |  |  | 165,070 |  |  |  | 113,307 |  |  |  | 99,218 |  |  |  | 100,713 |
Deposits |  |  | 687,886 |  |  |  | 694,781 |  |  |  | 647,644 |  |  |  | 592,361 |  |  |  | 589,026 |
Shareholders' equity |  |  | 71,843 |  |  |  | 68,128 |  |  |  | 66,521 |  |  |  | 63,056 |  |  |  | 61,511 |
Total assets |  |  | 804,177 |  |  |  | 851,514 |  |  |  | 811,988 |  |  |  | 781,108 |  |  |  | 783,418 |
KEY RATIOS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Return on average assets |  |  | 0.68 | % |  |  | 0.60 | % |  |  | 0.81 | % |  |  | 0.91 | % |  |  | 0.82 | %
Return on average equity |  |  | 8.35 | % |  |  | 7.54 | % |  |  | 10.23 | % |  |  | 11.62 | % |  |  | 10.40 | %
Dividend payout ratio |  |  | 57.59 | % |  |  | 65.67 | % |  |  | 47.95 | % |  |  | 42.94 | % |  |  | 46.66 | %
Average equity to average assets |  |  | 8.14 | % |  |  | 7.97 | % |  |  | 7.93 | % |  |  | 7.84 | % |  |  | 7.87 | %
(1) Securities include interest-bearing deposits with banks and FHLB stock. |  |  |  |  |  |  |  |  |  |  |  |  |
(2) Other borrowed funds include subordinated debentures |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

1

CONSOLIDATED STATEMENTS OF CONDITION |
|  | As of December 31 |
|  | 2011 |  |  | 2010 |
(dollars in thousands, except share and per share data) |  |  |  |  |  |
Assets |  |  |  |  |  |
Cash and noninterest-bearing deposits with banks |  | $ | 8,914 |  |  | $ | 8,979 |
Interest-bearing deposits with banks |  |  | 42,716 |  |  |  | 50,772 |
Total cash and cash equivalents |  |  | 51,630 |  |  |  | 59,751 |
Securities available for sale |  |  | 85,670 |  |  |  | 85,839 |
Securities held to maturity |  |  |  |  |  |  |  |
(estimated fair value: 2011 - $22,847; 2010 - $21,198) |  |  | 22,848 |  |  |  | 22,178 |
Federal Home Loan Bank stock |  |  | 6,281 |  |  |  | 6,281 |
Total loans |  |  | 598,308 |  |  |  | 641,322 |
Less: Allowance for loan losses |  |  | (7,344 | ) |  |  | (9,386 | )
Net loans |  |  | 590,964 |  |  |  | 631,936 |
Premises and equipment, net |  |  | 9,216 |  |  |  | 9,738 |
Other real estate owned |  |  | 4,256 |  |  |  | 4,403 |
Accrued income receivable |  |  | 2,872 |  |  |  | 2,704 |
Goodwill |  |  | 1,267 |  |  |  | 1,267 |
Bank owned life insurance and annuity assets |  |  | 23,097 |  |  |  | 19,761 |
Prepaid FDIC insurance |  |  | 1,609 |  |  |  | 2,576 |
Other assets |  |  | 4,467 |  |  |  | 5,080 |
Total assets |  | $ | 804,177 |  |  | $ | 851,514 |
Liabilities |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  | $ | 138,143 |  |  | $ | 91,949 |
Interest-bearing deposits |  |  | 549,743 |  |  |  | 602,832 |
Total deposits |  |  | 687,886 |  |  |  | 694,781 |
Securities sold under agreements to repurchase |  |  | - |  |  |  | 38,107 |
Other borrowed funds |  |  | 20,296 |  |  |  | 27,743 |
Subordinated debentures |  |  | 13,500 |  |  |  | 13,500 |
Accrued liabilities |  |  | 10,652 |  |  |  | 9,255 |
Total liabilities |  |  | 732,334 |  |  |  | 783,386 |
Commitments and Contingent Liabilities (See Note J) |  |  | - |  |  |  | - |
Shareholders' Equity |  |  |  |  |  |  |  |
Common stock ($1.00 stated value per share, |  |  |  |  |  |  |  |
10,000,000 shares authorized; 2011 - 4,686,295 shares issued; |  |  |  |  |
2010 - 4,659,795 shares issued) |  |  | 4,686 |  |  |  | 4,660 |
Additional paid-in capital |  |  | 33,473 |  |  |  | 33,003 |
Retained earnings |  |  | 48,435 |  |  |  | 45,960 |
Accumulated other comprehensive income |  |  | 961 |  |  |  | 217 |
Treasury stock, at cost (659,739 shares) |  |  | (15,712 | ) |  |  | (15,712 | )
Total shareholders' equity |  |  | 71,843 |  |  |  | 68,128 |
Total liabilities and shareholders' equity |  | $ | 804,177 |  |  | $ | 851,514 |
See accompanying notes to consolidated financial statements |

2

CONSOLIDATED STATEMENTS OF INCOME |
For the years ended December 31 |  | 2011 |  |  | 2010 |  |  | 2009 |
(dollars in thousands, except per share data) |  |  |  |  |  |  |  |  |
Interest and dividend income: |  |  |  |  |  |  |  |  |
Loans, including fees |  | $ | 41,263 |  |  | $ | 43,462 |  |  | $ | 44,076 |
Securities |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 1,776 |  |  |  | 2,187 |  |  |  | 2,748 |
Tax exempt |  |  | 571 |  |  |  | 497 |  |  |  | 451 |
Dividends |  |  | 267 |  |  |  | 275 |  |  |  | 290 |
Other interest |  |  | 163 |  |  |  | 93 |  |  |  | 58 |
|  |  | 44,040 |  |  |  | 46,514 |  |  |  | 47,623 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 8,436 |  |  |  | 11,053 |  |  |  | 13,683 |
Securities sold under agreements to repurchase |  |  | 17 |  |  |  | 57 |  |  |  | 75 |
Other borrowed funds |  |  | 627 |  |  |  | 1,348 |  |  |  | 2,085 |
Subordinated debentures |  |  | 1,089 |  |  |  | 1,089 |  |  |  | 1,089 |
|  |  | 10,169 |  |  |  | 13,547 |  |  |  | 16,932 |
Net interest income |  |  | 33,871 |  |  |  | 32,967 |  |  |  | 30,691 |
Provision for loan losses |  |  | 4,896 |  |  |  | 5,871 |  |  |  | 3,212 |
Net interest income after provision for loan losses |  |  | 28,975 |  |  |  | 27,096 |  |  |  | 27,479 |
Noninterest income: |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 2,218 |  |  |  | 2,202 |  |  |  | 2,816 |
Trust fees |  |  | 215 |  |  |  | 233 |  |  |  | 227 |
Income from bank owned life insurance and annuity assets |  |  | 725 |  |  |  | 741 |  |  |  | 1,311 |
Mortgage banking income |  |  | 386 |  |  |  | 362 |  |  |  | 758 |
Electronic refund check / deposit fees |  |  | 2,559 |  |  |  | 780 |  |  |  | 528 |
Debit / credit card interchange income |  |  | 1,387 |  |  |  | 998 |  |  |  | 807 |
Gain (loss) on sale of other real estate owned |  |  | (1,224 | ) |  |  | (177 | ) |  |  | 38 |
Other |  |  | 956 |  |  |  | 1,015 |  |  |  | 1,113 |
|  |  | 7,222 |  |  |  | 6,154 |  |  |  | 7,598 |
Noninterest expense: |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 16,650 |  |  |  | 15,647 |  |  |  | 14,824 |
Occupancy |  |  | 1,585 |  |  |  | 1,609 |  |  |  | 1,599 |
Furniture and equipment |  |  | 1,143 |  |  |  | 1,214 |  |  |  | 1,204 |
Corporation franchise tax |  |  | 744 |  |  |  | 745 |  |  |  | 713 |
FDIC insurance |  |  | 1,029 |  |  |  | 1,061 |  |  |  | 1,625 |
Data processing |  |  | 891 |  |  |  | 685 |  |  |  | 670 |
Foreclosed assets, net |  |  | 650 |  |  |  | 67 |  |  |  | 150 |
Other |  |  | 5,607 |  |  |  | 5,615 |  |  |  | 5,375 |
|  |  | 28,299 |  |  |  | 26,643 |  |  |  | 26,160 |
Income before income taxes |  |  | 7,898 |  |  |  | 6,607 |  |  |  | 8,917 |
Provision for income taxes |  |  | 2,063 |  |  |  | 1,511 |  |  |  | 2,272 |
NET INCOME |  | $ | 5,835 |  |  | $ | 5,096 |  |  | $ | 6,645 |
Other Comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |
Change in unrealized gains/losses on securities, net of tax |  |  | 744 |  |  |  | (457 | ) |  |  | (16 | )
Comprehensive income |  | $ | 6,579 |  |  | $ | 4,639 |  |  | $ | 6,629 |
Earnings per share |  | $ | 1.46 |  |  | $ | 1.28 |  |  | $ | 1.67 |
See accompanying notes to consolidated financial statements |

3

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
For the years ended December 31, 2011, 2010 and 2009 |  |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands, except share and per share data) |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  | Other |  |  |  |  |  | Total |
|  | Common |  |  | Additional |  |  | Retained |  |  | Comprehensive |  |  | Treasury |  |  | Shareholders' |
|  | Stock |  |  | Paid-In Capital |  |  | Earnings |  |  | Income |  |  | Stock |  |  | Equity |
Balances at January 1, 2009 |  | $ | 4,643 |  |  | $ | 32,683 |  |  | $ | 40,752 |  |  | $ | 690 |  |  | $ | (15,712 | ) |  | $ | 63,056 |
Comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  |  | - |  |  |  | - |  |  |  | 6,645 |  |  |  | - |  |  |  | - |  |  |  | 6,645 |
Change in unrealized gain on |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
available for sale securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (24 | ) |  |  | - |  |  |  | (24 | )
Income tax effect |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8 |  |  |  | - |  |  |  | 8 |
Total comprehensive income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 6,629 |
Common stock issued to ESOP, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1,000 shares |  |  | 1 |  |  |  | 21 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 22 |
Cash dividends, $.80 per share |  |  | - |  |  |  | - |  |  |  | (3,186 | ) |  |  | - |  |  |  | - |  |  |  | (3,186 | )
Balances at December 31, 2009 |  |  | 4,644 |  |  |  | 32,704 |  |  |  | 44,211 |  |  |  | 674 |  |  |  | (15,712 | ) |  |  | 66,521 |
Comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  |  | - |  |  |  | - |  |  |  | 5,096 |  |  |  | - |  |  |  | - |  |  |  | 5,096 |
Change in unrealized gain on |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
available for sale securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (693 | ) |  |  | - |  |  |  | (693 | )
Income tax effect |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 236 |  |  |  | - |  |  |  | 236 |
Total comprehensive income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,639 |
Common stock issued to ESOP, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
16,047 shares |  |  | 16 |  |  |  | 299 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 315 |
Cash dividends, $.84 per share |  |  | - |  |  |  | - |  |  |  | (3,347 | ) |  |  | - |  |  |  | - |  |  |  | (3,347 | )
Balances at December 31, 2010 |  |  | 4,660 |  |  |  | 33,003 |  |  |  | 45,960 |  |  |  | 217 |  |  |  | (15,712 | ) |  |  | 68,128 |
Comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  |  | - |  |  |  | - |  |  |  | 5,835 |  |  |  | - |  |  |  | - |  |  |  | 5,835 |
Change in unrealized gain on |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
available for sale securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,127 |  |  |  | - |  |  |  | 1,127 |
Income tax effect |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (383 | ) |  |  | - |  |  |  | (383 | )
Total comprehensive income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 6,579 |
Common stock issued to ESOP, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
26,500 shares |  |  | 26 |  |  |  | 470 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 496 |
Cash dividends, $.84 per share |  |  | - |  |  |  | - |  |  |  | (3,360 | ) |  |  | - |  |  |  | - |  |  |  | (3,360 | )
Balances at December 31, 2011 |  | $ | 4,686 |  |  | $ | 33,473 |  |  | $ | 48,435 |  |  | $ | 961 |  |  | $ | (15,712 | ) |  | $ | 71,843 |
See accompanying notes to consolidated financial statements |

4

CONSOLIDATED STATEMENTS OF CASH FLOWS |
For the years ended December 31 |  | 2011 |  |  | 2010 |  |  | 2009 |
(dollars in thousands, except per share data) |  |  |  |  |  |  |  |  |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |
Net income |  | $ | 5,835 |  |  | $ | 5,096 |  |  | $ | 6,645 |
Adjustments to reconcile net income to net cash provided |  |  |  |  |  |  |  |  |  |  |  |
by operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Depreciation |  |  | 971 |  |  |  | 1,067 |  |  |  | 1,071 |
Net amortization of securities |  |  | 1,059 |  |  |  | 666 |  |  |  | 280 |
Proceeds from sale of loans in secondary market |  |  | 13,637 |  |  |  | 16,825 |  |  |  | 57,815 |
Loans disbursed for sale in secondary market |  |  | (13,251 | ) |  |  | (16,463 | ) |  |  | (57,057 | )
Amortization of mortgage servicing rights |  |  | 121 |  |  |  | 122 |  |  |  | 129 |
(Recovery) impairment of mortgage servicing rights |  |  | (33 | ) |  |  | 30 |  |  |  | 91 |
Gain on sale of loans |  |  | (474 | ) |  |  | (514 | ) |  |  | (978 | )
Deferred tax (benefit) expense |  |  | 340 |  |  |  | (462 | ) |  |  | (2 | )
Provision for loan losses |  |  | 4,896 |  |  |  | 5,871 |  |  |  | 3,212 |
Common stock issued to ESOP |  |  | 496 |  |  |  | 315 |  |  |  | 22 |
Earnings on bank owned life insurance and annuity assets |  |  | (725 | ) |  |  | (741 | ) |  |  | (1,311 | )
(Gain) loss on sale of other real estate owned |  |  | 1,224 |  |  |  | 177 |  |  |  | (38 | )
Change in accrued income receivable |  |  | (168 | ) |  |  | 192 |  |  |  | 276 |
Change in accrued liabilities |  |  | 1,397 |  |  |  | (718 | ) |  |  | (1,374 | )
Change in other assets |  |  | 857 |  |  |  | 866 |  |  |  | (3,853 | )
Net cash provided by operating activities |  |  | 16,182 |  |  |  | 12,329 |  |  |  | 4,928 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Proceeds from maturities of securities available for sale |  |  | 43,193 |  |  |  | 65,698 |  |  |  | 41,099 |
Purchases of securities available for sale |  |  | (43,007 | ) |  |  | (69,014 | ) |  |  | (49,922 | )
Proceeds from maturities of securities held to maturity |  |  | 1,449 |  |  |  | 3,523 |  |  |  | 1,858 |
Purchases of securities held to maturity |  |  | (2,068 | ) |  |  | (9,126 | ) |  |  | (1,470 | )
Net change in loans |  |  | 34,243 |  |  |  | 4,829 |  |  |  | (25,527 | )
Proceeds from sale of other real estate owned |  |  | 756 |  |  |  | 1,511 |  |  |  | 1,050 |
Purchases of premises and equipment |  |  | (449 | ) |  |  | (673 | ) |  |  | (971 | )
Proceeds from bank owned life insurance |  |  | - |  |  |  | - |  |  |  | 1,034 |
Purchases of bank owned life insurance and annuity assets |  |  | (2,611 | ) |  |  | (286 | ) |  |  | (304 | )
Net cash provided by (used in) investing activities |  |  | 31,506 |  |  |  | (3,538 | ) |  |  | (33,153 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Change in deposits |  |  | (6,895 | ) |  |  | 47,137 |  |  |  | 55,283 |
Cash dividends |  |  | (3,360 | ) |  |  | (3,347 | ) |  |  | (3,186 | )
Change in securities sold under agreements to repurchase |  |  | (38,107 | ) |  |  | 6,466 |  |  |  | 7,571 |
Proceeds from Federal Home Loan Bank borrowings |  |  | 703 |  |  |  | 11,475 |  |  |  | 6,050 |
Repayment of Federal Home Loan Bank borrowings |  |  | (7,562 | ) |  |  | (26,278 | ) |  |  | (16,005 | )
Change in other short-term borrowings |  |  | (588 | ) |  |  | (163 | ) |  |  | (24,110 | )
Net cash provided by (used in) financing activities |  |  | (55,809 | ) |  |  | 35,290 |  |  |  | 25,603 |
Cash and cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents |  |  | (8,121 | ) |  |  | 44,081 |  |  |  | (2,622 | )
Cash and cash equivalents at beginning of year |  |  | 59,751 |  |  |  | 15,670 |  |  |  | 18,292 |
Cash and cash equivalents at end of year |  | $ | 51,630 |  |  | $ | 59,751 |  |  | $ | 15,670 |
Supplemental disclosure: |  |  |  |  |  |  |  |  |  |  |  |
Cash paid for interest |  | $ | 10,875 |  |  | $ | 15,022 |  |  | $ | 17,791 |
Cash paid for income taxes |  |  | 445 |  |  |  | 2,016 |  |  |  | 2,730 |
Non-cash transfers from loans to other real estate owned |  |  | 1,833 |  |  |  | 522 |  |  |  | 1,749 |
Other real estate owned sales financed by the Bank |  |  | 344 |  |  |  | 159 |  |  |  | 723 |
See accompanying notes to consolidated financial statements |

5

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6

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in thousands, except share and per share data
Note A - Summary of Significant Accounting Policies
Description of Business: Ohio Valley Banc Corp. ("Ohio Valley") is a financial holding company registered under the Bank Holding Company Act of 1956. Ohio Valley has one banking subsidiary, The Ohio Valley Bank Company (the "Bank"), as well as a subsidiary that engages in consumer lending to individuals with higher credit risk history, Loan Central, Inc., and a subsidiary insurance agency that facilitates the receipts of insurance commissions, Ohio Valley Financial Services Agency, LLC. Ohio Valley and its subsidiaries are collectively referred to as the “Company”.
The Company provides a full range of commercial and retail banking services from 21 offices located in central and southeastern Ohio and western West Virginia. It accepts deposits in checking, savings, time and money market accounts and makes personal, commercial, floor plan, student, construction and real estate loans. Substantially all loans are secured by specific items of collateral, including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from business operations. The Company also offers safe deposit boxes, wire transfers and other standard banking products and services. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. In addition to accepting deposits and making loans, the Bank invests in U. S. Government and agency obligations, interest-bearing deposits in other financial institutions and investments permitted by applicable law.
The Bank's trust department provides a wide variety of fiduciary services for trusts, estates and benefit plans and also provides investment and security services as an agent for its customers.
Principles of Consolidation: The consolidated financial statements include the accounts of Ohio Valley and its wholly-owned subsidiaries, the Bank, Loan Central, Inc., a consumer finance company, and Ohio Valley Financial Services Agency, LLC, an insurance agency. All material intercompany accounts and transactions have been eliminated.
Industry Segment Information: Internal financial information is primarily reported and aggregated in two lines of business, banking and consumer finance.
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, mortgage servicing rights, deferred tax assets, the fair value of certain securities, the fair value of financial instruments and the determination and carrying value of impaired loans and other real estate owned.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, interest and 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 securities that could be sold for liquidity, investment management or similar reasons even if there is not a present intention of such a sale. Available for sale securities are reported at fair value, with unrealized gains or losses included in other comprehensive income, net of tax.
Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses are recognized upon the sale of specific identified securities on the completed trade date.
Other-Than-Temporary-Impairments of Securities: In determining an other-than-temporary-impairment (“OTTI”), management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its
7

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
anticipated recovery. The assessment of whether an OTTI decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
When an OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
Federal Home Loan Bank (”FHLB”) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the Bank's level of borrowings from the FHLB and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff 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 using the level yield method without anticipating prepayments.
The amount of the Company's recorded investment is not materially different than the amount of unpaid principal balance for loans at December 31, 2011.
Interest income is discontinued and the loan moved to non-accrual status when full loan repayment is in doubt, typically when the loan is impaired or payments are past due 90 days or over unless the loan is well-secured or in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days or over and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. 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. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans generally consist of loans with balances of $200 or more on nonaccrual status or nonperforming in nature. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings and classified as impaired.
8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower's prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non‑impaired loans and impaired loans that are not individually reviewed for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: Commercial Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer.
Commercial and industrial loans consist of borrowings for commercial purposes to individuals, corporations, partnerships, sole proprietorships, and other business enterprises. Commercial and industrial loans are generally secured by business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or operations. The Company's risk exposure is related to deterioration in the value of collateral securing the loan should foreclosure become necessary. Generally, business assets used or produced in operations do not maintain their value upon foreclosure which may require the Company to write-down the value significantly to sell.
Commercial real estate consists of nonfarm, nonresidential loans secured by owner-occupied and nonowner-occupied commercial real estate as well as commercial construction loans. An owner-occupied loan relates to a borrower purchased building or space for which the repayment of principal is dependent upon cash flows from the ongoing business operations conducted by the party, or an affiliate of the party, who owns the property. Owner-occupied loans that are dependent on cash flows from operations can be adversely affected by current market conditions for their product or service. A nonowner-occupied loan is a property loan for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property. Nonowner-occupied loans that are dependent upon rental income are primarily impacted by local economic conditions which dictate occupancy rates and the amount of rent charged. Commercial construction loans consist of borrowings to purchase and develop raw land into 1-4 family residential properties. Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements. Repayment of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value which may be absorbed by the Company.
Residential real estate loans consist of loans to individuals for the purchase of 1-4 family primary residences with repayment primarily through wage or other income sources of the individual borrower. The Company's loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.
9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other loans to individuals for household, family, and other personal expenditures, both secured and unsecured. These loans typically have maturities of 5 years or less with repayment dependent on individual wages and income. The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary. In recent fiscal years covering 2009, 2010, and 2011, one of the most significant portions of the Company's net loan charge-offs have been from consumer loans. Never the less, the Company has allocated the highest percentage of its allowance for loan losses as a percentage of loans to the other identified loan portfolio segments due to the larger dollar balances associated with such portfolios.
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 as of December 31:

% of Total Loans

|  | 2011 |  | 2010
Residential real estate loans |  | 37.85% |  | 36.94%
Commercial real estate loans |  | 36.68% |  | 35.34%
Consumer loans |  | 17.92% |  | 19.10%
Commercial and industrial loans |  | 7.55% |  | 8.62%
|  | 100.00% |  | 100.00%

Approximately 3.98% 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, 2011, the Bank’s primary correspondent balance was $42,402 on deposit at the Federal Reserve Bank, Cleveland, 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, whichever is shorter. The useful lives range from 3 to 8 years for equipment, furniture and fixtures and 7 to 39 years for buildings and improvements.
Foreclosed assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Foreclosed assets totaled $4,256 and $4,403 at December 31, 2011 and 2010.
Goodwill: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected December 31, 2011 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
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.
Mortgage Servicing Rights: A mortgage servicing right (“MSR”) is a contractual agreement where the right to service a mortgage loan is sold by the original lender to another party. When the Company sells mortgage loans to the secondary market, it retains the servicing rights to these loans. The Company’s MSR is recognized separately when acquired through sales of loans and is initially recorded at fair value with the income statement effect recorded in mortgage banking income. Subsequently, the MSR is then amortized in
10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
proportion to and over the period of estimated future servicing income of the underlying loan. The MSR is then evaluated for impairment periodically based upon the fair value of the rights as compared to the carrying amount, with any impairment being recognized through a valuation allowance. Fair value of the MSR is based on market prices for comparable mortgage servicing contracts. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. At December 31, 2011 and 2010, the Company’s MSR asset portfolio was $430 and $434, respectively.
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.
Earnings Per Share: Earnings per share is based on net income divided by the following weighted average number of common shares outstanding during the periods: 4,001,435 for 2011; 3,984,229 for 2010; 3,983,034 for 2009. Ohio Valley had no dilutive securities outstanding for any period presented.
Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
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, net of tax.
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 and Annuity Assets: The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. The Company also purchased an annuity investment in December 2011 that will earn interest.
ESOP: Compensation expense is based on the market price of shares as they are committed to be allocated to participant accounts.
Adoption of New Accounting Standards:
In December 2010, the Financial Accounting Standards Board (“FASB”) amended existing guidance relating to goodwill impairment testing. This guidance requires that if the carrying amount of a reporting unit is zero or negative, a qualitative assessment be performed to determine if it is more likely than not that goodwill is impaired. Step 2 of the impairment test shall be performed if it is determined that it is more likely than not that goodwill is impaired. The amendments in this guidance were effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The effect of adopting this standard did not have a material effect on the Company's operating results or financial condition.
11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
In April 2011, the FASB issued guidance within the ASU 2011-02 A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring (“TDR”). ASU 2011-02 clarifies when a loan modification or restructuring is considered a TDR. This guidance was effective for the first interim or annual period beginning on or after June 15, 2011, and was applied retrospectively to the beginning of the annual period of adoption. The adoption of this guidance created additional TDR disclosures within Note C – Loans and Allowance for Loan Losses, but did not have an impact on the Company's consolidated financial statements.
In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This guidance is effective for the first interim or annual period beginning on or after December 15, 2011. The Company is currently evaluating the impact of this amendment and does not anticipate a significant impact to its consolidated financial statements.
In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statements of changes in shareholders' equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted. The Company is currently evaluating the impact of this amendment and does not anticipate a significant impact to its consolidated financial statements.
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 J 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. See Note N 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 $44,018 and $52,233 was required to meet regulatory reserve and clearing requirements at year-end 2011 and 2010. The balances at Fifth Third Bank 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 M. 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.
Reclassifications: The consolidated financial statements for 2010 and 2009 have been reclassified to conform with the presentation for 2011. These reclassifications had no effect on the net results of operations or shareholders’ equity.
12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities
Securities are summarized as follows:

Securities Available for Sale |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Estimated Fair Value |
December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 5,510 |  |  | $ | 3 |  |  | $ | ---- |  |  | $ | 5,513 |
U.S. Government sponsored entity securities |  |  | 2,501 |  |  |  | 58 |  |  |  | ---- |  |  |  | 2,559 |
Agency mortgage-backed securities, residential |  |  | 76,203 |  |  |  | 1,407 |  |  |  | (12 | ) |  |  | 77,598 |
Total securities |  | $ | 84,214 |  |  | $ | 1,468 |  |  | $ | (12 | ) |  | $ | 85,670 |
December 31, 2010 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 17,081 |  |  | $ | 6 |  |  | $ | (8 | ) |  | $ | 17,079 |
U.S. Government sponsored entity securities |  |  | 7,513 |  |  |  | 230 |  |  |  | (12 | ) |  |  | 7,731 |
Agency mortgage-backed securities, residential |  |  | 60,916 |  |  |  | 383 |  |  |  | (270 | ) |  |  | 61,029 |
Total securities |  | $ | 85,510 |  |  | $ | 619 |  |  | $ | (290 | ) |  | $ | 85,839 |

Securities Held to Maturity |  | Amortized Cost |  |  | Gross Unrecognized Gains |  |  | Gross Unrecognized Losses |  |  | Estimated Fair Value |
December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 22,825 |  |  | $ | 558 |  |  | $ | (559 | ) |  | $ | 22,824 |
Agency mortgage-backed securities, residential |  |  | 23 |  |  |  | ---- |  |  |  | ---- |  |  |  | 23 |
Total securities |  | $ | 22,848 |  |  | $ | 558 |  |  | $ | (559 | ) |  | $ | 22,847 |
December 31, 2010 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 22,149 |  |  | $ | 130 |  |  | $ | (1,109 | ) |  | $ | 21,170 |
Agency mortgage-backed securities, residential |  |  | 29 |  |  |  | ---- |  |  |  | (1 | ) |  |  | 28 |
Total securities |  | $ | 22,178 |  |  | $ | 130 |  |  | $ | (1,110 | ) |  | $ | 21,198 |

At year-end 2011 and 2010, 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 $46,683 at December 31, 2011 and $90,216 at December 31, 2010 were pledged to secure public deposits and repurchase agreements and for other purposes as required or permitted by law.
The amortized cost and estimated fair value of debt securities at December 31, 2011, 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. Securities not due at a single maturity are shown separately.

|  | Available for Sale |  |  | Held to Maturity |
Debt Securities: |  | Amortized Cost |  |  | Estimated Fair Value |  |  | Amortized Cost |  |  | Estimated Fair Value |
Due in one year or less |  | $ | 8,011 |  |  | $ | 8,072 |  |  | $ | 648 |  |  | $ | 661 |
Due in one to five years |  |  | ---- |  |  |  | ---- |  |  |  | 3,901 |  |  |  | 3,801 |
Due in five to ten years |  |  | ---- |  |  |  | ---- |  |  |  | 10,289 |  |  |  | 10,496 |
Due after ten years |  |  | ---- |  |  |  | ---- |  |  |  | 7,987 |  |  |  | 7,866 |
Agency mortgage-backed securities, residential |  |  | 76,203 |  |  |  | 77,598 |  |  |  | 23 |  |  |  | 23 |
Total debt securities |  | $ | 84,214 |  |  | $ | 85,670 |  |  | $ | 22,848 |  |  | $ | 22,847 |

There were no sales of debt securities during 2011, 2010 and 2009.
13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities (continued)
Securities with unrealized losses not recognized in income are as follows:

| Less Than 12 Months |  |  | 12 Months or More |  |  | Total |
December 31, 2011 |  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |
Securities Available for Sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agency mortgage-backed |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
securities, residential |  | $ | 7,621 |  |  | $ | (12 | ) |  | $ | ---- |  |  | $ | ---- |  |  | $ | 7,621 |  |  | $ | (12 | )
Total available for sale |  | $ | 7,621 |  |  | $ | (12 | ) |  | $ | ---- |  |  | $ | ---- |  |  | $ | 7,621 |  |  | $ | (12 | )

| Less Than 12 Months |  |  | 12 Months or More |  |  | Total |
|  | Fair Value |  |  | Unrecognized Loss |  |  | Fair Value |  |  | Unrecognized Loss |  |  | Fair Value |  |  | Unrecognized Loss |
Securities Held to Maturity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
political subdivisions |  | $ | 664 |  |  | $ | (21 | ) |  | $ | 3,557 |  |  | $ | (538 | ) |  | $ | 4,221 |  |  | $ | (559 | )
Total held to maturity |  | $ | 664 |  |  | $ | (21 | ) |  | $ | 3,557 |  |  | $ | (538 | ) |  | $ | 4,221 |  |  | $ | (559 | )

| Less Than 12 Months |  |  | 12 Months or More |  |  | Total |
December 31, 2010 |  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |
Securities Available for Sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 9,041 |  |  | $ | (8 | ) |  | $ | ---- |  |  | $ | ---- |  |  | $ | 9,041 |  |  | $ | (8 | )
U.S. Government sponsored |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
entity securities |  |  | 1,990 |  |  |  | (12 | ) |  |  | ---- |  |  |  | ---- |  |  |  | 1,990 |  |  |  | (12 | )
Agency mortgage-backed |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
securities, residential |  |  | 27,953 |  |  |  | (270 | ) |  |  | ---- |  |  |  | ---- |  |  |  | 27,953 |  |  |  | (270 | )
Total available for sale |  | $ | 38,984 |  |  | $ | (290 | ) |  | $ | ---- |  |  | $ | ---- |  |  | $ | 38,984 |  |  | $ | (290 | )

| Less Than 12 Months |  |  | 12 Months or More |  |  | Total |
|  | Fair Value |  |  | Unrecognized Loss |  |  | Fair Value |  |  | Unrecognized Loss |  |  | Fair Value |  |  | Unrecognized Loss |
Securities Held to Maturity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
political subdivisions |  | $ | 7,510 |  |  | $ | (690 | ) |  | $ | 970 |  |  | $ | (419 | ) |  | $ | 8,480 |  |  | $ | (1,109 | )
Agency mortgage-backed |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
securities, residential |  |  | ---- |  |  |  | ---- |  |  |  | 21 |  |  |  | (1 | ) |  |  | 21 |  |  |  | (1 | )
Total held to maturity |  | $ | 7,510 |  |  | $ | (690 | ) |  | $ | 991 |  |  | $ | (420 | ) |  | $ | 8,501 |  |  | $ | (1,110 | )

Unrealized losses on the Company's debt securities have not been recognized into income because the issuers' securities are of high credit quality and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery. Management does not believe any individual unrealized loss at December 31, 2011 and 2010 represents an other-than-temporary impairment.
14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses

Loans are comprised of the following at December 31: |  |  |  |  |  |
|  | 2011 |  |  | 2010 |
Residential real estate |  | $ | 226,489 |  |  | $ | 236,878 |
Commercial real estate: |  |  |  |  |  |  |  |
Owner-occupied |  |  | 142,566 |  |  |  | 149,042 |
Nonowner-occupied |  |  | 55,419 |  |  |  | 55,989 |
Construction |  |  | 21,471 |  |  |  | 21,591 |
Commercial and industrial |  |  | 45,200 |  |  |  | 55,306 |
Consumer: |  |  |  |  |  |  |  |
Automobile |  |  | 45,702 |  |  |  | 58,271 |
Home equity |  |  | 20,507 |  |  |  | 20,527 |
Other |  |  | 40,954 |  |  |  | 43,718 |
|  |  | 598,308 |  |  |  | 641,322 |
Less: Allowance for loan losses |  |  | 7,344 |  |  |  | 9,386 |
Loans, net |  | $ | 590,964 |  |  | $ | 631,936 |

The Bank originated refund anticipation loans that contributed fee income of $561 in 2011, $655 in 2010 and $397 in 2009. As recommended by the FDIC, the Bank ceased offering refund anticipation loans effective April 19, 2011.

Activity in the allowance for loan losses was as follows: |  | 2011 |  |  | 2010 |  |  | 2009 |
Balance, beginning of year |  | $ | 9,386 |  |  | $ | 8,198 |  |  | $ | 7,799 |
Loans charged off: |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 1,649 |  |  |  | 971 |  |  |  | 1,172 |
Commercial real estate |  |  | 2,298 |  |  |  | 2,766 |  |  |  | 59 |
Commercial and industrial |  |  | 4,725 |  |  |  | 191 |  |  |  | 568 |
Consumer |  |  | 1,750 |  |  |  | 1,951 |  |  |  | 2,532 |
Total loans charged off |  |  | 10,422 |  |  |  | 5,879 |  |  |  | 4,331 |
Recoveries of loans: |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 198 |  |  |  | 40 |  |  |  | 41 |
Commercial real estate |  |  | 1,394 |  |  |  | 70 |  |  |  | 58 |
Commercial and industrial |  |  | 1,127 |  |  |  | 25 |  |  |  | 672 |
Consumer |  |  | 765 |  |  |  | 1,061 |  |  |  | 747 |
Total recoveries of loans |  |  | 3,484 |  |  |  | 1,196 |  |  |  | 1,518 |
Net loan charge-offs |  |  | ( 6,938 | ) |  |  | (4,683 | ) |  |  | (2,813 | )
Provision charged to operations |  |  | 4,896 |  |  |  | 5,871 |  |  |  | 3,212 |
Balance, end of year |  | $ | 7,344 |  |  | $ | 9,386 |  |  | $ | 8,198 |

As a result of management’s evaluation of the trends in the real estate market, the status of long-term, collateral dependent impaired loans and the current regulatory environment, management decided to take partial charge-offs more quickly on collateral dependent impaired loans during the second quarter of 2011.
15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2011:

|  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial & Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 993 |  |  | $ | 3,141 |  |  | $ | 3,795 |  |  | $ | 1,457 |  |  | $ | 9,386 |
Provision for loan losses |  |  | 2,188 |  |  |  | 1,386 |  |  |  | 439 |  |  |  | 883 |  |  |  | 4,896 |
Loans charged off |  |  | (1,649 | ) |  |  | (2,298 | ) |  |  | (4,725 | ) |  |  | (1,750 | ) |  |  | (10,422 | )
Recoveries |  |  | 198 |  |  |  | 1,394 |  |  |  | 1,127 |  |  |  | 765 |  |  |  | 3,484 |
Total ending allowance balance |  | $ | 1,730 |  |  | $ | 3,623 |  |  | $ | 636 |  |  | $ | 1,355 |  |  | $ | 7,344 |

The following table presents the balance in the allowance for loan losses and the recorded investment of loans by portfolio segment and based on impairment method as of December 31, 2011 and 2010:

December 31, 2011 |  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial & Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | ---- |  |  | $ | 655 |  |  | $ | ---- |  |  | $ | ---- |  |  | $ | 655 |
Collectively evaluated for impairment |  |  | 1,730 |  |  |  | 2,968 |  |  |  | 636 |  |  |  | 1,355 |  |  |  | 6,689 |
Total ending allowance balance |  | $ | 1,730 |  |  | $ | 3,623 |  |  | $ | 636 |  |  | $ | 1,355 |  |  | $ | 7,344 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 1,085 |  |  | $ | 10,153 |  |  | $ | 334 |  |  | $ | ---- |  |  | $ | 11,572 |
Loans collectively evaluated for impairment |  |  | 225,404 |  |  |  | 209,303 |  |  |  | 44,866 |  |  |  | 107,163 |  |  |  | 586,736 |
Total ending loans balance |  | $ | 226,489 |  |  | $ | 219,456 |  |  | $ | 45,200 |  |  | $ | 107,163 |  |  | $ | 598,308 |

December 31, 2010 |  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial and Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 125 |  |  | $ | 1,698 |  |  | $ | 3,407 |  |  | $ | ---- |  |  | $ | 5,230 |
Collectively evaluated for impairment |  |  | 868 |  |  |  | 1,443 |  |  |  | 388 |  |  |  | 1,457 |  |  |  | 4,156 |
Total ending allowance balance |  | $ | 993 |  |  | $ | 3,141 |  |  | $ | 3,795 |  |  | $ | 1,457 |  |  | $ | 9,386 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 1,784 |  |  | $ | 13,460 |  |  | $ | 7,862 |  |  | $ | ---- |  |  | $ | 23,106 |
Loans collectively evaluated for impairment |  |  | 235,094 |  |  |  | 213,162 |  |  |  | 47,444 |  |  |  | 122,516 |  |  |  | 618,216 |
Total ending loans balance |  | $ | 236,878 |  |  | $ | 226,622 |  |  | $ | 55,306 |  |  | $ | 122,516 |  |  | $ | 641,322 |

16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)

Information regarding impaired loans is as follows: |  | 2011 |  |  | 2010 |  |  |  |
Year-end loans with no allocated allowance for loan losses |  | $ | 8,081 |  |  | $ | 7,884 |  |  |  |
Year-end loans with allocated allowance for loan losses |  |  | 3,491 |  |  |  | 15,222 |  |  |  |
Total impaired loans |  | $ | 11,572 |  |  | $ | 23,106 |  |  |  |
Amount of the allowance for loan losses allocated |  | $ | 655 |  |  | $ | 5,230 |  |  |  |
|  |  | 2011 |  |  |  | 2010 |  |  |  | 2009 |
Average of individually impaired loans during year |  | $ | 11,163 |  |  | $ | 24,589 |  |  | $ | 27,927 |
Interest income recognized during impairment |  | $ | 647 |  |  | $ | 1,158 |  |  | $ | 1,793 |
Cash-basis interest income recognized |  | $ | 608 |  |  | $ | 1,083 |  |  | $ | 1,690 |

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2011:

December 31, 2011 |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance for Loan Losses Allocated |  |  | Average Impaired Loans |  |  | Interest Income Recognized |  |  | Cash Basis Interest Recognized |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  | $ | 1,136 |  |  | $ | 1,085 |  |  | $ | ---- |  |  | $ | 748 |  |  | $ | 36 |  |  | $ | 31 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 5,713 |  |  |  | 5,470 |  |  |  | ---- |  |  |  | 5,510 |  |  |  | 325 |  |  |  | 317 |
Nonowner-occupied |  |  | 1,192 |  |  |  | 1,192 |  |  |  | ---- |  |  |  | 1,247 |  |  |  | 56 |  |  |  | 49 |
Construction |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Commercial and industrial |  |  | 614 |  |  |  | 334 |  |  |  | ---- |  |  |  | 483 |  |  |  | 40 |  |  |  | 40 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Home equity |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Other |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 420 |  |  |  | 420 |  |  |  | 130 |  |  |  | 84 |  |  |  | 27 |  |  |  | 22 |
Nonowner-occupied |  |  | 2,396 |  |  |  | 2,396 |  |  |  | 437 |  |  |  | 2,414 |  |  |  | 128 |  |  |  | 118 |
Construction |  |  | 675 |  |  |  | 675 |  |  |  | 88 |  |  |  | 677 |  |  |  | 35 |  |  |  | 31 |
Commercial and industrial |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Home equity |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Other |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Total |  | $ | 12,146 |  |  | $ | 11,572 |  |  | $ | 655 |  |  | $ | 11,163 |  |  | $ | 647 |  |  | $ | 608 |

The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees. The difference in the unpaid principal balance and recorded investment of the Company’s loans was not materially different at year-end 2011.
17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2010:

|  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance for Loan Losses Allocated |
With no related allowance recorded: |  |  |  |  |  |  |  |  |
Residential real estate |  | $ | 1,284 |  |  | $ | 1,244 |  |  | $ | ---- |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 4,719 |  |  |  | 4,234 |  |  |  | ---- |
Nonowner-occupied |  |  | 2,987 |  |  |  | 992 |  |  |  | ---- |
Construction |  |  | 743 |  |  |  | 743 |  |  |  | ---- |
Commercial and industrial |  |  | 671 |  |  |  | 671 |  |  |  | ---- |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Home equity |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Other |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 540 |  |  |  | 540 |  |  |  | 125 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 4,731 |  |  |  | 4,731 |  |  |  | 1,125 |
Nonowner-occupied |  |  | 2,760 |  |  |  | 2,760 |  |  |  | 573 |
Construction |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Commercial and industrial |  |  | 7,191 |  |  |  | 7,191 |  |  |  | 3,407 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Home equity |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Other |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Total |  | $ | 25,626 |  |  | $ | 23,106 |  |  | $ | 5,230 |

Nonaccrual loans and loans past due 90 days or more and still accruing were as follows:

|  | December 31, 2011 |  |  | December 31, 2010 |
Loans past due 90 days or more and still accruing |  | $ | 459 |  |  | $ | 1,714 |
Nonaccrual loans |  | $ | 2,678 |  |  | $ | 3,295 |

Nonaccrual loans and loans past due 90 days or more and still accruing include both smaller balance homogenous loans that are collectively evaluated for impairment and individually
classified as impaired loans.
18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
The following table presents the recorded investment of nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of December 31, 2011 and 2010:

December 31, 2011 |  | Loans Past Due 90 Days And Still Accruing |  |  | Nonaccrual |
Residential real estate |  | $ | 439 |  |  | $ | 2,450 |
Commercial real estate: |  |  |  |  |  |  |  |
Owner-occupied |  |  | ---- |  |  |  | 125 |
Nonowner-occupied |  |  | ---- |  |  |  | 86 |
Consumer: |  |  |  |  |  |  |  |
Automobile |  |  | 13 |  |  |  | 12 |
Home equity |  |  | ---- |  |  |  | 5 |
Other |  |  | 7 |  |  |  | ---- |
Total |  | $ | 459 |  |  | $ | 2,678 |

December 31, 2010 |  | Loans Past Due 90 Days And Still Accruing |  |  | Nonaccrual |
Residential real estate |  | $ | 1,487 |  |  | $ | 2,200 |
Commercial real estate: |  |  |  |  |  |  |  |
Owner-occupied |  |  | ---- |  |  |  | 428 |
Nonowner-occupied |  |  | ---- |  |  |  | 432 |
Consumer: |  |  |  |  |  |  |  |
Automobile |  |  | 114 |  |  |  | 100 |
Home equity |  |  | 43 |  |  |  | 104 |
Other |  |  | 70 |  |  |  | 31 |
Total |  | $ | 1,714 |  |  | $ | 3,295 |

19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
The following table presents the aging of the recorded investment of past due loans by class of loans as of December 31, 2011 and 2010:

December 31, 2011 |  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | 90 Days Or More Past Due |  |  | Total Past Due |  |  | Loans Not Past Due |  |  | Total |
Residential real estate |  | $ | 3,662 |  |  | $ | 1,144 |  |  | $ | 2,889 |  |  | $ | 7,695 |  |  | $ | 218,794 |  |  | $ | 226,489 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 182 |  |  |  | ---- |  |  |  | 125 |  |  |  | 307 |  |  |  | 142,259 |  |  |  | 142,566 |
Nonowner-occupied |  |  | 69 |  |  |  | 232 |  |  |  | 86 |  |  |  | 387 |  |  |  | 55,032 |  |  |  | 55,419 |
Construction |  |  | 204 |  |  |  | ---- |  |  |  | ---- |  |  |  | 204 |  |  |  | 21,267 |  |  |  | 21,471 |
Commercial and industrial |  |  | 171 |  |  |  | 14 |  |  |  | ---- |  |  |  | 185 |  |  |  | 45,015 |  |  |  | 45,200 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | 864 |  |  |  | 110 |  |  |  | 13 |  |  |  | 987 |  |  |  | 44,715 |  |  |  | 45,702 |
Home equity |  |  | 75 |  |  |  | 76 |  |  |  | 5 |  |  |  | 156 |  |  |  | 20,351 |  |  |  | 20,507 |
Other |  |  | 506 |  |  |  | 162 |  |  |  | 7 |  |  |  | 675 |  |  |  | 40,279 |  |  |  | 40,954 |
Total |  | $ | 5,733 |  |  | $ | 1,738 |  |  | $ | 3,125 |  |  | $ | 10,596 |  |  | $ | 587,712 |  |  | $ | 598,308 |

December 31, 2010 |  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | 90 Days Or More Past Due |  |  | Total Past Due |  |  | Loans Not Past Due |  |  | Total |
Residential real estate |  | $ | 4,731 |  |  | $ | 1,951 |  |  | $ | 3,448 |  |  | $ | 10,130 |  |  | $ | 226,748 |  |  | $ | 236,878 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 1,564 |  |  |  | 17 |  |  |  | 428 |  |  |  | 2,009 |  |  |  | 147,033 |  |  |  | 149,042 |
Nonowner-occupied |  |  | 87 |  |  |  | ---- |  |  |  | 432 |  |  |  | 519 |  |  |  | 55,470 |  |  |  | 55,989 |
Construction |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | 21,591 |  |  |  | 21,591 |
Commercial and industrial |  |  | 15 |  |  |  | ---- |  |  |  | ---- |  |  |  | 15 |  |  |  | 55,291 |  |  |  | 55,306 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | 1,010 |  |  |  | 342 |  |  |  | 213 |  |  |  | 1,565 |  |  |  | 56,706 |  |  |  | 58,271 |
Home equity |  |  | 78 |  |  |  | 50 |  |  |  | 147 |  |  |  | 275 |  |  |  | 20,252 |  |  |  | 20,527 |
Other |  |  | 793 |  |  |  | 238 |  |  |  | 101 |  |  |  | 1,132 |  |  |  | 42,586 |  |  |  | 43,718 |
Total |  | $ | 8,278 |  |  | $ | 2,598 |  |  | $ | 4,769 |  |  | $ | 15,645 |  |  | $ | 625,677 |  |  | $ | 641,322 |

Troubled Debt Restructurings:
A troubled debt restructuring (“TDR”) is where the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. All TDR's are considered to be impaired. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or short-term interest-only payment terms.
The Company has allocated reserves for a portion of its TDR’s to reflect the fair values of the underlying collateral or the present value of the concessionary terms granted to the customer.
20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
The following table presents the types of TDR loan modifications by class of loans as of December 31, 2011 and December 31, 2010:

|  | TDR’s Performing to Modified Terms |  |  | TDR’s Not Performed to Modified Terms |  |  | Total TDR’s |
December 31, 2011 |  |  |  |  |  |  |  |  |
Residential real estate |  |  |  |  |  |  |  |  |
Interest only payments |  | $ | ---- |  |  | $ | 283 |  |  | $ | 283 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 3,619 |  |  |  | ---- |  |  |  | 3,619 |
Rate reduction |  |  | 869 |  |  |  | ---- |  |  |  | 869 |
Maturity extension at lower stated rate than market rate |  |  | 219 |  |  |  | ---- |  |  |  | 219 |
Nonowner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 3,357 |  |  |  | ---- |  |  |  | 3,357 |
Construction |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 674 |  |  |  | ---- |  |  |  | 674 |
Commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 334 |  |  |  | ---- |  |  |  | 334 |
Total TDR’s |  | $ | 9,072 |  |  | $ | 283 |  |  | $ | 9,355 |

|  | TDR’s Performing to Modified Terms |  |  | TDR’s Not Performed to Modified Terms |  |  | Total TDR’s |
December 31, 2010 |  |  |  |  |  |  |  |  |
Residential real estate |  |  |  |  |  |  |  |  |
Interest only payments |  | $ | 456 |  |  | $ | ---- |  |  | $ | 456 |
Rate reduction |  |  | 584 |  |  |  | ---- |  |  |  | 584 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 3,886 |  |  |  | ---- |  |  |  | 3,886 |
Rate reduction |  |  | 887 |  |  |  | ---- |  |  |  | 887 |
Nonowner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 2,983 |  |  |  | ---- |  |  |  | 2,983 |
Construction |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 679 |  |  |  | ---- |  |  |  | 679 |
Commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 671 |  |  |  | ---- |  |  |  | 671 |
Rate reduction |  |  | 6,668 |  |  |  | ---- |  |  |  | 6,668 |
Total TDR’s |  | $ | 16,814 |  |  | $ | ---- |  |  | $ | 16,814 |

21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
At December 31, 2011, the balance in TDR loans decreased $7,459, or 44.4%, from year-end 2010. This was largely impacted by partial charge-offs and subsequent payoffs recorded on one impaired commercial and industrial loan relationship totaling $6,668 during the first and fourth quarters of 2011. At December 31, 2011 and December 31, 2010, 97% and 100% of the Company’s TDR’s were performing according to their modified terms. The Company allocated $655 and $3,791 in reserves to customers whose loan terms have been modified in TDR’s as of December 31, 2011 and December 31, 2010, respectively. At December 31, 2011, the Company had $81 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDR’s as compared to none at December 31, 2010.
At The following table presents the post-modification balances of TDR loan modifications by class of loans that occurred during year ended December 31, 2011:

|  | TDR’s Performing to Modified Terms |  |  | TDR’s Not Performing to Modified Terms |  |  | Total TDR’s |
December 31, 2011 |  |  |  |  |  |  |  |  |
Residential real estate |  | $ | ---- |  |  | $ | ---- |  |  | $ | ---- |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Rate reduction |  |  | 1,515 |  |  |  | ---- |  |  |  | 1,515 |
Maturity extension at lower stated rate than market rate |  |  | 226 |  |  |  | ---- |  |  |  | 226 |
Nonowner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 400 |  |  |  | ---- |  |  |  | 400 |
Maturity extension at lower stated rate than market rate |  |  | 1,927 |  |  |  | ---- |  |  |  | 1,927 |
Construction |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Commercial and industrial |  |  | ---- |  |  |  | ---- |  |  |  | ---- |
Total TDR’s |  | $ | 4,068 |  |  | $ | ---- |  |  | $ | 4,068 |

All of the Company’s TDR’s that occurred during the year ended December 31, 2011 were performing in accordance with their modified terms and did not experience any payment defaults within twelve months following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. TDR loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The TDR’s described above increased the allowance for losses by $544 and resulted in charge-offs of $414 during the year ended December 31, 2011. As of December 31, 2011, the Company had allocated $130 of reserves to customers whose loan terms have been modified during the year ended December 31, 2011.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. These risk categories are represented by a loan grading scale from 1 through 10. The Company analyzes loans individually with a higher credit risk rating and groups these loans into categories called “criticized” and "classified" assets. The Company considers its criticized assets to be loans that are graded 8 and its classified assets to be loans that are graded 9 through 10. The Company's risk categories are reviewed at least annually on loans that have aggregate borrowing amounts that meet or exceed $500.
22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
The Company uses the following definitions for its criticized loan risk ratings:

Special Mention (Loan Grade 8). Loans classified as special mention indicate considerable risk due to deterioration of repayment (in the earliest stages) due to potential weak primary repayment source, or payment delinquency. These loans will be under constant supervision, are not classified and do not expose the institution to sufficient risks to warrant classification. These deficiencies should be correctable within the normal course of business, although significant changes in company structure or policy may be necessary to correct the deficiencies. These loans are considered bankable assets with no apparent loss of principal or interest envisioned. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. Credits that are defined as a troubled debt restructuring should be graded no higher than special mention until they have been reported as performing over one year after restructuring.

The Company uses the following definitions for its classified loan risk ratings:

Substandard (Loan Grade 9). Loans classified as substandard represent very high risk, serious delinquency, nonaccrual, or unacceptable credit. Repayment through the primary source of repayment is in jeopardy due to the existence of one or more well defined weaknesses and the collateral pledged may inadequately protect collection of the loans. Loss of principal is not likely if weaknesses are corrected, although financial statements normally reveal significant weakness. Loans are still considered collectible, although loss of principal is more likely than with special mention loan grade 8 loans. Collateral liquidation is considered likely to satisfy debt.

Doubtful (Loan Grade 10). Loans classified as doubtful display a high probability of loss, although the amount of actual loss at the time of classification is undetermined. This should be a temporary category until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification. These loans exhibit all substandard characteristics with the addition that weaknesses make collection or liquidation in full highly questionable and improbable. This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain important and reasonable specific pending factors which may strengthen the credit can be more accurately determined. These factors may include proposed acquisitions, liquidation procedures, capital injection, receipt of additional collateral, mergers, or refinancing plans. A doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded substandard.

Criticized and classified loans will mostly consist of commercial and industrial and commercial real estate loans. The Company considers its loans that do not meet the criteria for a criticized and classified asset rating as pass rated loans, which will include loans graded from 1 (Prime) to 7 (Watch). All commercial loans are categorized into a risk category either at the time of origination or reevaluation date. As of December 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of commercial loans by class of loans is as follows:

December 31, 2011 |  | Pass |  |  | Criticized |  |  | Classified |  |  | Total |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 113,118 |  |  | $ | 15,664 |  |  | $ | 13,784 |  |  | $ | 142,566 |
Nonowner-occupied |  |  | 31,697 |  |  |  | 12,815 |  |  |  | 10,907 |  |  |  | 55,419 |
Construction |  |  | 19,519 |  |  |  | ---- |  |  |  | 1,952 |  |  |  | 21,471 |
Commercial and industrial |  |  | 36,633 |  |  |  | 3,250 |  |  |  | 5,317 |  |  |  | 45,200 |
Total |  | $ | 200,967 |  |  | $ | 31,729 |  |  | $ | 31,960 |  |  | $ | 264,656 |

23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)

December 31, 2010 |  | Pass |  |  | Criticized |  |  | Classified |  |  | Total |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 122,726 |  |  | $ | 15,764 |  |  | $ | 10,552 |  |  | $ | 149,042 |
Nonowner-occupied |  |  | 48,569 |  |  |  | 1,550 |  |  |  | 5,870 |  |  |  | 55,989 |
Construction |  |  | 15,487 |  |  |  | 63 |  |  |  | 6,041 |  |  |  | 21,591 |
Commercial and industrial |  |  | 39,725 |  |  |  | 3,943 |  |  |  | 11,638 |  |  |  | 55,306 |
Total |  | $ | 226,507 |  |  | $ | 21,320 |  |  | $ | 34,101 |  |  | $ | 281,928 |

The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau), but the scores are not updated. The Company focuses mostly on the performance and repayment ability of the borrower as an indicator of credit risk and does not consider a borrower's credit score to be a significant influence in the determination of a loan's credit risk grading.
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment of residential and consumer loans by class of loans based on payment activity as of December 31, 2011 and December 31, 2010:

December 31, 2011 |  | Consumer |  |  |  |  |  |  |
|  | Automobile |  |  | Home Equity |  |  | Other |  |  | Residential Real Estate |  |  | Total |
Performing |  | $ | 45,677 |  |  | $ | 20,502 |  |  | $ | 40,947 |  |  | $ | 223,600 |  |  | $ | 330,726 |
Nonperforming |  |  | 25 |  |  |  | 5 |  |  |  | 7 |  |  |  | 2,889 |  |  |  | 2,926 |
Total |  | $ | 45,702 |  |  | $ | 20,507 |  |  | $ | 40,954 |  |  | $ | 226,489 |  |  | $ | 333,652 |

December 31, 2010 |  | Consumer |  |  |  |  |  |  |
|  | Automobile |  |  | Home Equity |  |  | Other |  |  | Residential Real Estate |  |  | Total |
Performing |  | $ | 58,057 |  |  | $ | 20,380 |  |  | $ | 43,617 |  |  | $ | 233,191 |  |  | $ | 355,245 |
Nonperforming |  |  | 214 |  |  |  | 147 |  |  |  | 101 |  |  |  | 3,687 |  |  |  | 4,149 |
Total |  | $ | 58,271 |  |  | $ | 20,527 |  |  | $ | 43,718 |  |  | $ | 236,878 |  |  | $ | 359,394 |

The Company, through its subsidiaries, grants residential, consumer, and commercial loans to customers located primarily in the southeastern area of Ohio as well as the western counties of West Virginia. Approximately 3.98% of total loans were unsecured at December 31, 2011, up from 3.93% at December 31, 2010.
24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note D - Premises and Equipment
Following is a summary of premises and equipment at December 31:

|  | 2011 |  |  | 2010 |
Land |  | $ | 1,890 |  |  | $ | 1,890 |
Buildings |  |  | 10,334 |  |  |  | 10,270 |
Leasehold improvements |  |  | 2,855 |  |  |  | 2,897 |
Furniture and equipment |  |  | 13,961 |  |  |  | 13,674 |
|  |  | 29,040 |  |  |  | 28,731 |
Less accumulated depreciation |  |  | 19,824 |  |  |  | 18,993 |
Total premises and equipment |  | $ | 9,216 |  |  | $ | 9,738 |

The following is a summary of the future minimum lease payments for facilities leased by the Company. Lease expense was $492 in 2011, $490 in 2010 and $462 in 2009.

2012 |  | $ | 501 |
2013 |  |  | 433 |
2014 |  |  | 311 |
2015 |  |  | 174 |
2016 |  |  | 147 |
Thereafter |  |  | 55 |
|  | $ | 1,621 |

Note E - Deposits
Following is a summary of interest-bearing deposits at December 31:

|  | 2011 |  |  | 2010 |
NOW accounts |  | $ | 101,907 |  |  | $ | 101,833 |
Savings and Money Market |  |  | 200,072 |  |  |  | 191,916 |
Time: |  |  |  |  |  |  |  |
In denominations under $100,000 |  |  | 126,705 |  |  |  | 156,694 |
In denominations of $100,000 or more |  |  | 121,059 |  |  |  | 152,389 |
Total time deposits |  |  | 247,764 |  |  |  | 309,083 |
Total interest-bearing deposits |  | $ | 549,743 |  |  | $ | 602,832 |

Following is a summary of total time deposits by remaining maturity at December 31, 2011:

2012 |  | $ | 141,710 |
2013 |  |  | 68,183 |
2014 |  |  | 25,710 |
2015 |  |  | 6,401 |
2016 |  |  | 4,833 |
Thereafter |  |  | 927 |
Total |  | $ | 247,764 |

Brokered deposits, included in time deposits, were $31,271 and $36,272 at December 31, 2011 and 2010, respectively.
25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note F - 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. Newly enacted banking regulations during the third quarter of 2011 permitted the Company to begin paying interest on its business checking accounts and contributed to the decrease in securities sold under agreements to repurchase balances. Information concerning securities sold under agreements to repurchase is summarized as follows at December 31:

Balance outstanding at period-end |  | $ | ---- |  |  | $ | 38,107 |
Weighted average interest rate at period-end |  |  | .00 | % |  |  | .15 | %
Average amount outstanding during year |  | $ | 19,196 |  |  | $ | 26,991 |
Approximate weighted average interest rate |  |  |  |  |  |  |  |
during the year |  |  | .09 | % |  |  | .21 | %
Maximum amount outstanding as of any month-end |  | $ | 36,680 |  |  | $ | 38,107 |
Securities underlying these agreements at year-end were as follows: |  |  |  |  |  |  |  |
Carrying value of securities |  | $ | ---- |  |  | $ | 49,436 |
Fair value |  | $ | ---- |  |  | $ | 49,552 |

Note G - Other Borrowed Funds
Other borrowed funds at December 31, 2011 and December 31, 2010 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 |
2011 |  | $ | 16,548 |  |  | $ | 3,748 |  |  | $ | ---- |  |  | $ | 20,296 |
2010 |  | $ | 23,406 |  |  | $ | 3,835 |  |  | $ | 502 |  |  | $ | 27,743 |

Pursuant to collateral agreements with the FHLB, advances are secured by $243,791 in qualifying mortgage loans, $98,629 in commercial loans and $6,281 in FHLB stock at December 31, 2011. Fixed-rate FHLB advances of $16,548 mature through 2033 and have interest rates ranging from 1.79% to 3.42% and a year-to-date weighted average cost of 2.50%. There were no variable-rate FHLB borrowings at December 31, 2011.
At December 31, 2011, the Company had a cash management line of credit enabling it to borrow up to $95,000 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 $95,000 available on this line of credit at December 31, 2011.
Based on the Company's current FHLB stock ownership, total assets and pledgeable loans, the Company had the ability to obtain borrowings from the FHLB up to a maximum of $180,586 at December 31, 2011. Of this maximum borrowing capacity of $180,586, the Company had $137,038 available to use as additional borrowings, of which $95,000 could be used for short-term, cash management advances, as mentioned above.
Promissory notes, issued primarily by Ohio Valley, have fixed rates of 1.52% to 5.00% and are due at various dates through a final maturity date of December 8, 2014. At December 31, 2011, there were no promissory notes payable by Ohio Valley to related parties. See Note K for further discussion of related party transactions.
FRB notes consist of the collection of tax payments from Bank customers under the Treasury Tax and Loan program. These funds have a variable interest rate and are callable on demand by the U.S. Treasury. The interest rate for the Company's FRB notes was zero percent at December 31, 2011 and December 31, 2010. Various investment securities from the Bank used to collateralize FRB notes totaled $725 at December 31, 2011 and $1,270 at December 31, 2010.
Letters of credit issued on the Bank's behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $27,000 at December 31, 2011 and $33,450 at December 31, 2010.
26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note G - Other Borrowed Funds (continued)
Scheduled principal payments over the next five years:

|  |  | FHLB Borrowings |  |  | Promissory Notes |  |  | FRB Notes |  |  | Totals |
| 2012 |  |  | $ | 1,507 |  |  | $ | 2,437 |  |  | $ | ---- |  |  | $ | 3,944 |
| 2013 |  |  |  | 3,814 |  |  |  | 166 |  |  |  | ---- |  |  |  | 3,980 |
| 2014 |  |  |  | 3,704 |  |  |  | 1,145 |  |  |  | ---- |  |  |  | 4,849 |
| 2015 |  |  |  | 1,108 |  |  |  | ---- |  |  |  | ---- |  |  |  | 1,108 |
| 2016 |  |  |  | 1,026 |  |  |  | ---- |  |  |  | ---- |  |  |  | 1,026 |
Thereafter |  |  |  | 5,389 |  |  |  | ---- |  |  |  | ---- |  |  |  | 5,389 |
|  |  |  | $ | 16,548 |  |  | $ | 3,748 |  |  | $ | ---- |  |  | $ | 20,296 |

Note H - Subordinated Debentures and Trust Preferred Securities
On September 7, 2000, a trust formed by Ohio Valley issued $5,000 of 10.6% fixed-rate trust preferred securities as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering, which debentures represent the sole asset of the trust. Beginning September 7, 2010, the Company’s subordinated debentures were callable upon demand at a premium of 105.30% with the call price declining .53% per year until reaching a call price of par at year twenty through maturity. The subordinated debentures must be redeemed no later than September 7, 2030. Debt issuance costs of $166 were incurred and capitalized and will amortize as a yield adjustment through expected maturity.
On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of adjustable-rate trust preferred securities as part of a pooled offering of such securities. The rate on these trust preferred securities will be fixed at 6.58% for five years, and then convert to a floating-rate term on March 15, 2012, based on a rate equal to the 3-month LIBOR plus 1.68%. There were no debt issuance costs incurred with these trust preferred securities. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering. The subordinated debentures must be redeemed no later than June 15, 2037.
On March 26, 2007, the proceeds from these new trust preferred securities were used to pay off $8,500 in higher cost trust preferred security debt that was issued on March 26, 2002. This repayment of $8,500 in trust preferred securities was the result of an early call feature that allowed the Company to redeem the entire amount of these subordinated debentures at par value. These higher cost subordinated debentures, which were floating based on a rate equal to the 3-month LIBOR plus 3.60%, not to exceed 11.00%, were redeemed at a floating rate of 8.97%. The replacement of this higher cost debt was a strategy by management to lower interest expense and improve the net interest margin.
Under the provisions of the related indenture agreements, the interest payable on the trust preferred securities is deferrable for up to five years and any such deferral is not considered a default. During any period of deferral, the Company would be precluded from declaring or paying dividends to shareholders or repurchasing any of the Company's common stock. Under generally accepted accounting principles, the trusts are not consolidated with the Company. Accordingly, the Company does not report the securities issued by the trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by the trust. Since the Company's equity interest in the trusts cannot be received until the subordinated debentures are repaid, these amounts have been netted.
27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note I - Income Taxes

The provision for income taxes consists of the following components: |  |  |  |  |  |  |
|  | 2011 |  |  | 2010 |  |  | 2009 |
Current tax expense |  | $ | 1,723 |  |  | $ | 1,973 |  |  | $ | 2,274 |
Deferred tax (benefit) expense |  |  | 340 |  |  |  | (462 | ) |  |  | (2 | )
Total income taxes |  | $ | 2,063 |  |  | $ | 1,511 |  |  | $ | 2,272 |
The source of deferred tax assets and deferred tax liabilities at December 31: |  |  |  |  |
Items giving rise to deferred tax assets: |  |  | 2011 |  |  |  | 2010 |  |  |  |  |
Allowance for loan losses |  | $ | 2,551 |  |  | $ | 3,262 |  |  |  |  |
Deferred compensation |  |  | 1,558 |  |  |  | 1,499 |  |  |  |  |
Deferred loan fees/costs |  |  | 376 |  |  |  | 384 |  |  |  |  |
Other real estate owned |  |  | 440 |  |  |  | - |  |  |  |  |
Other |  |  | 179 |  |  |  | 179 |  |  |  |  |
Items giving rise to deferred tax liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Mortgage servicing rights |  |  | (149 | ) |  |  | (151 | ) |  |  |  |
FHLB stock dividends |  |  | (1,081 | ) |  |  | (1,081 | ) |  |  |  |
Unrealized gain on securities available for sale |  |  | (495 | ) |  |  | (112 | ) |  |  |  |
Depreciation |  |  | (250 | ) |  |  | (128 | ) |  |  |  |
Prepaid expenses |  |  | (140 | ) |  |  | (166 | ) |  |  |  |
Intangibles |  |  | (330 | ) |  |  | (304 | ) |  |  |  |
Other |  |  | (1 | ) |  |  | (1 | ) |  |  |  |
Net deferred tax asset |  | $ | 2,658 |  |  | $ | 3,381 |  |  |  |  |
The Company determined that it was not required to establish a valuation allowance for deferred tax assets since management believes that the deferred tax assets are likely to be realized through a carry back to taxable income in prior years or the future reversals of existing taxable temporary differences. |
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: |
|  |  | 2011 |  |  |  | 2010 |  |  |  | 2009 |
Statutory tax |  | $ | 2,685 |  |  | $ | 2,246 |  |  | $ | 3,032 |
Effect of nontaxable interest |  |  | (299 | ) |  |  | (279 | ) |  |  | (264 | )
Nondeductible interest expense |  |  | 16 |  |  |  | 20 |  |  |  | 24 |
Income from bank owned insurance, net |  |  | (169 | ) |  |  | (236 | ) |  |  | (196 | )
Effect of nontaxable life insurance death proceeds |  |  |  | - |  |  |  | - |  |  | (189 | )
Effect of state income tax |  |  | 56 |  |  |  | 46 |  |  |  | 74 |
Tax credits |  |  | (245 | ) |  |  | (224 | ) |  |  | (212 | )
Other items |  |  | 19 |  |  |  | (62 | ) |  |  | 3 |
Total income taxes |  | $ | 2,063 |  |  | $ | 1,511 |  |  | $ | 2,272 |
At December 31, 2011 and December 31, 2010, the Company had no unrecognized tax benefits. The Company does not expect the amount of unrecognized tax benefits to significantly change within the next twelve months. The Company did not recognize any interest and/or penalties related to income tax matters for the periods presented. |
The Company is subject to U.S. federal income tax as well as West Virginia state income tax. The Company is no longer subject to federal or state examination for years prior to 2008. The tax years 2008-2010 remain open to federal and state examinations. |

28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note J - 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:

|  | 2011 |  |  | 2010 |
Fixed rate |  | $ | 1,456 |  |  | $ | 941 |
Variable rate |  |  | 54,860 |  |  |  | 47,843 |
Standby letters of credit |  |  | 5,486 |  |  |  | 5,163 |

The interest rate on fixed-rate commitments ranged from 3.13% to 7.38% at December 31, 2011.
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.
The Company participates as a facilitator of tax refunds pursuant to a clearing agreement with a third-party tax software provider. The clearing agreement is effective through December 31, 2015 and is renewable in 5-year increments. The agreement requires the Bank to process electronic refund checks (“ERC’s”) and electronic refund deposits (“ERD’s”) presented for payment on behalf of taxpayers containing taxpayer refunds. The Bank will, in turn, receive a fee paid by the third-party tax software provider for each transaction that is processed. The agreement is subject to termination if the Bank fails to perform the required clearing services and/or the Bank’s regulators would require the Bank to cease offering the product presented within the agreement.
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.
Note K - Related Party Transactions
Certain directors, executive officers and companies with which they are affiliated were loan customers during 2011. A summary of activity on these borrower relationships with aggregate debt greater than $120 is as follows:

Total loans at January 1, 2011 |  | $ | 5,889 |
New loans |  |  | 131 |
Repayments |  |  | (264 | )
Other changes |  |  | (668 | )
Total loans at December 31, 2011 |  | $ | 5,088 |

Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period, such as changes in persons classified as directors, executive officers and companies’ affiliates.
Deposits from principal officers, directors, and their affiliates at year-end 2011 and 2010 were $15,807 and $9,271.
29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note L - 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 $218, $210 and $196 for 2011, 2010 and 2009. |
Ohio Valley maintains an Employee Stock Ownership Plan (ESOP) covering substantially all employees of the Company. Ohio Valley issues shares to the ESOP, purchased by the ESOP with subsidiary cash contributions, 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 255,381 and 240,703 at December 31, 2011 and 2010. In addition, the subsidiaries made contributions to its ESOP Trust as follows: |
|  | Years ended December 31 |  |  |  |
|  | 2011 |  |  | 2010 |  |  | 2009 |
Number of shares issued |  |  | 26,500 |  |  |  | 16,407 |  |  |  | 1,000 |
Fair value of stock contributed |  | $ | 497 |  |  | $ | 315 |  |  | $ | 22 |
Cash contributed |  |  | 65 |  |  |  | 105 |  |  |  | 371 |
Total expense |  | $ | 562 |  |  | $ | 420 |  |  | $ | 393 |

Life insurance contracts with a cash surrender value of $21,207 and annuity assets of $1,890 at December 31, 2011 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 supplemental retirement plans 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 plans provide payments to select executive officers upon retirement based upon a compensation formula determined by Ohio Valley’s Board of Directors. The present value of payments expected to be provided are accrued during the service period of the covered individuals and amounted to $4,480 and $4,314 at December 31, 2011 and 2010. Expenses related to the plans for each of the last three years amounted to $318, $317 and $321. In association with the split-dollar life insurance plan, the present value of the postretirement benefit totaled $1,580 at December 31, 2011 and $1,351 at December 31, 2010.
30

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note M - Fair Value of Financial Instruments

The measurement of fair value under US GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant, unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:
Securities Available For Sale: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2) .For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Mortgage Servicing Rights: Fair value is based on market prices for comparable mortgage servicing contracts.
31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note M - Fair Value of Financial Instruments (continued)

Assets and Liabilities Measured on a Recurring Basis |  |  |  |
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| Fair Value Measurements at December 31, 2011, Using
| Quoted Prices in |  |  |  |
| Active Markets |  | Significant Other | Significant
| for Identical |  | Observable |  | Unobservable
| Assets |  | Inputs |  | Inputs
| (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |
U.S. Treasury securities | _____ |  | $ | 5,513 |  | _____
U.S. Government sponsored entity securities | _____ |  |  | 2,559 |  | _____
Agency mortgage-backed securities, residential | _____ |  |  | 77,598 |  | _____
| Fair Value Measurements at December 31, 2010, Using
| Quoted Prices in |  |  |  |  |
| Active Markets |  | Significant Other | Significant
| for Identical |  | Observable |  | Unobservable
| Assets |  | Inputs |  | Inputs
| (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |
U.S. Treasury securities | _____ |  | $ | 17,079 |  | _____
U.S. Government sponsored entity securities | _____ |  |  | 7,731 |  | _____
Agency mortgage-backed securities, residential | _____ |  |  | 61,029 |  | _____

There were no transfers between Level 1 and Level 2 during 2011 or 2010.

Assets and Liabilities Measured on a Nonrecurring Basis |  |  |  |  |
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below: |  |  |
| Fair Value Measurements at December 31, 2011, Using |
| Quoted Prices in |  |  |  |  |
| Active Markets |  | Significant Other |  | Significant |
| for Identical |  | Observable |  | Unobservable |
| Assets |  | Inputs |  | Inputs |
| (Level 1) |  | (Level 2) |  | (Level 3) |
Assets: |  |  |  |  |  |
Impaired loans: |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |
Owner occupied | _____ |  | _____ |  | $ | 290 |
Nonowner-occupied | _____ |  | _____ |  |  | 1,959 |
Construction | _____ |  | _____ |  |  | 587 |
Mortgage servicing rights | _____ |  | _____ |  |  | 430 |
Other real estate owned: |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |
Construction | _____ |  | _____ |  |  | 1,814 |
Commercial and industrial | _____ |  | _____ |  |  | 1,134 |

32

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note M - Fair Value of Financial Instruments (continued)

| Fair Value Measurements at December 31, 2010, Using |
| Quoted Prices in |  |  |  |  |
| Active Markets |  | Significant Other |  | Significant |
| for Identical |  | Observable |  | Unobservable |
| Assets |  | Inputs |  | Inputs |
| (Level 1) |  | (Level 2) |  | (Level 3) |
Assets: |  |  |  |  |  |
Impaired loans: |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |
Owner occupied | _____ |  | _____ |  | $ | 3,606 |
Nonowner-occupied | _____ |  | _____ |  |  | 2,187 |
Commercial and industrial | _____ |  | _____ |  |  | 3,785 |
Residential real estate | _____ |  | _____ |  |  | 414 |
Mortgage servicing rights | _____ |  | _____ |  |  | 434 |

Impaired loans had a principal balance of $11,572 at December 31, 2011. The portion of impaired loans with specific allocations of the allowance for loan losses had a carrying amount of $3,491 and was measured for impairment using the present value of estimated future cash flows. This resulted in a valuation allowance of $655 at December 31, 2011, which contributed to an increase of $218 in provision for loan loss expense during the year ended December 31, 2011. This is compared to an increase of $2,930 in provision for loan loss expense during the previous year ended December 31, 2010. At December 31, 2010, impaired loans had a principal balance of $23,106. The portion of impaired loans with specific allocations of the allowance for loan losses had a carrying amount of $15,222. The loans were measured for impairment using fair value of the underlying collateral and the present value of estimated future cash flows. This resulted in a valuation allowance of $5,230 at December 31, 2010.
Mortgage servicing rights, which are carried at lower of cost or fair value, were carried at their fair value of $430, which is made up of the outstanding balance of $573, net of a valuation allowance of $143 at December 31, 2011. This is compared to a fair value of $434, made up of the outstanding balance of $609, net of a valuation allowance of $175 at December 31, 2010.
Other real estate owned that was measured at fair value less costs to sell at December 31, 2011 had a net carrying amount of $2,948, which is made up of the outstanding balance of $4,214, net of a valuation allowance of $1,266 at December 31, 2011, which resulted in a corresponding write-down of $1,266 for the year ended December 31, 2011. At December 31, 2010, there was no other real estate owned measured at fair value less costs to sell, which resulted in no valuation allowance and no corresponding write-downs from the year ended December 31, 2010.
33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note M - Fair Value of Financial Instruments (continued)
Federal Home Loan Bank stock: It is not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.
Loans: The fair value of fixed-rate loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of loan commitments and standby letters of credit was not material at December 31, 2011 or 2010. The fair value for variable-rate loans is estimated to be equal to carrying value. This fair value represents an entry price in accordance with ASC 825. While ASC 820 amended ASC 825 in several respects, this approach to fair value remains an acceptable approach under generally accepted accounting principles.
Deposit Liabilities: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Borrowings: For other borrowed funds and subordinated debentures, rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value. For securities sold under agreements to repurchase, carrying value is a reasonable estimate of fair value.
Accrued Interest Receivable and Payable: For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value.
In addition, other assets and liabilities that are not defined as financial instruments were not included in the disclosures below, such as premises and equipment and life insurance contracts. The fair value of off-balance sheet items is not considered material (or is based on the current fees or cost that would be charged to enter into or terminate such arrangements).
The fair values of financial assets and liabilities carried on the Company’s consolidated balance sheet include those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis. The estimated fair values of the Company’s financial instruments at December 31, are as follows:

|  | 2011 |  |  |  |  |  | 2010 |  |  |  |
|  | Carrying |  |  | Fair |  |  | Carrying |  |  | Fair |
|  | Value |  |  | Value |  |  | Value |  |  | Value |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 51,630 |  |  | $ | 51,630 |  |  | $ | 59,571 |  |  | $ | 59,751 |
Securities available for sale |  |  | 85,670 |  |  |  | 85,670 |  |  |  | 85,839 |  |  |  | 85,839 |
Securities held to maturity |  |  | 22,848 |  |  |  | 22,847 |  |  |  | 22,178 |  |  |  | 21,198 |
Federal Home Loan Bank stock |  |  | 6,281 |  |  |  | N/A |  |  |  | 6,281 |  |  |  | N/A |
Loans |  |  | 590,964 |  |  |  | 599,782 |  |  |  | 631,936 |  |  |  | 637,986 |
Accrued interest receivable |  |  | 2,872 |  |  |  | 2,872 |  |  |  | 2,704 |  |  |  | 2,704 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 687,886 |  |  |  | 690,607 |  |  |  | 694,781 |  |  |  | 698,199 |
Securities sold under agreements to repurchase |  |  | - |  |  |  | - |  |  |  | 38,107 |  |  |  | 38,107 |
Other borrowed funds |  |  | 20,296 |  |  |  | 20,565 |  |  |  | 27,743 |  |  |  | 26,968 |
Subordinated debentures |  |  | 13,500 |  |  |  | 11,085 |  |  |  | 13,500 |  |  |  | 11,507 |
Accrued interest payable |  |  | 1,894 |  |  |  | 1,894 |  |  |  | 2,600 |  |  |  | 2,600 |

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.
34

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note N - Regulatory Matters
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, 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. Failure to meet capital requirements can initiate regulatory action. Management believes that as of December 31, 2011, the Company and the Bank met all capital adequacy requirements to which they were subject.
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 2011 and 2010, the Bank’s capital met the requirements for the Bank to be deemed well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed the Bank's category.
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 |  |  | Actual |  |  | Adequacy Purposes |  |  | Action Regulations |
|  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |
2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 90,288 |  |  |  | 15.6 | % |  | $ | 46,174 |  |  |  | 8.0 | % |  | $ | 57,718 |  |  |  | N/A |
Bank |  |  | 81,991 |  |  |  | 14.4 |  |  |  | 45,544 |  |  |  | 8.0 |  |  |  | 56,930 |  |  |  | 10.0 | %
Tier 1 capital (to risk weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 83,072 |  |  |  | 14.4 |  |  |  | 23,087 |  |  |  | 4.0 |  |  |  | 34,631 |  |  |  | N/A |
Bank |  |  | 74,975 |  |  |  | 13.2 |  |  |  | 22,772 |  |  |  | 4.0 |  |  |  | 34,158 |  |  |  | 6.0 |
Tier 1 capital (to average assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 83,072 |  |  |  | 10.3 |  |  |  | 32,414 |  |  |  | 4.0 |  |  |  | 40,517 |  |  |  | N/A |
Bank |  |  | 74,975 |  |  |  | 9.4 |  |  |  | 31,969 |  |  |  | 4.0 |  |  |  | 39,962 |  |  |  | 5.0 |
2010 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 87,660 |  |  |  | 14.5 | % |  | $ | 48,235 |  |  |  | 8.0 | % |  | $ | 60,294 |  |  |  | N/A |
Bank |  |  | 79,893 |  |  |  | 13.4 |  |  |  | 47,663 |  |  |  | 8.0 |  |  |  | 59,578 |  |  |  | 10.0 | %
Tier 1 capital (to risk weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 80,101 |  |  |  | 13.3 |  |  |  | 24,117 |  |  |  | 4.0 |  |  |  | 36,176 |  |  |  | N/A |
Bank |  |  | 72,426 |  |  |  | 12.2 |  |  |  | 23,831 |  |  |  | 4.0 |  |  |  | 35,747 |  |  |  | 6.0 |
Tier 1 capital (to average assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 80,101 |  |  |  | 9.3 |  |  |  | 34,326 |  |  |  | 4.0 |  |  |  | 42,908 |  |  |  | N/A |
Bank |  |  | 72,426 |  |  |  | 8.5 |  |  |  | 33,902 |  |  |  | 4.0 |  |  |  | 42,377 |  |  |  | 5.0 |

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, 2012 approximately $4,795 of the subsidiaries’ retained earnings were available for dividends under these guidelines. In addition to these restrictions, dividend payments cannot reduce regulatory capital levels below minimum regulatory guidelines. The Board of Governors of the Federal Reserve System also has a policy requiring Ohio Valley to provide notice to the FRB in advance of the payment of a dividend to Ohio Valley's shareholders under certain circumstances, and the FRB may disapprove of such dividend payment if the FRB determines the payment would be an unsafe or unsound practice.
35

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note O - 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 |  | 2011 |  |  | 2010 |  |  |  |
Cash and cash equivalents |  | $ | 1,462 |  |  | $ | 1,687 |  |  |  |
Investment in subsidiaries |  |  | 84,038 |  |  |  | 80,087 |  |  |  |
Notes receivable - subsidiaries |  |  | 3,743 |  |  |  | 3,828 |  |  |  |
Other assets |  |  | 406 |  |  |  | 314 |  |  |  |
Total assets |  | $ | 89,649 |  |  | $ | 85,916 |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Notes payable |  | $ | 3,748 |  |  | $ | 3,835 |  |  |  |
Subordinated debentures |  |  | 13,500 |  |  |  | 13,500 |  |  |  |
Other liabilities |  |  | 558 |  |  |  | 453 |  |  |  |
Total liabilities |  | $ | 17,806 |  |  | $ | 17,788 |  |  |  |
Shareholders’ Equity |  |  |  |  |  |  |  |  |  |  |
Total shareholders’ equity |  |  | 71,843 |  |  |  | 68,128 |  |  |  |
Total liabilities and shareholders’ equity |  | $ | 89,649 |  |  | $ | 85,916 |  |  |  |
CONDENSED STATEMENTS OF INCOME |  |  |  |  |  |  |  |  |  |  |
|  | Years ended December 31: |  |  |  |
Income: |  |  | 2011 |  |  |  | 2010 |  |  |  | 2009 |
Interest on notes |  | $ | 134 |  |  | $ | 158 |  |  | $ | 156 |
Other operating income |  |  | 65 |  |  |  | 68 |  |  |  | 56 |
Dividends from subsidiaries |  |  | 3,500 |  |  |  | 4,500 |  |  |  | 4,000 |
Expenses: |  |  |  |  |  |  |  |  |  |  |  |
Interest on notes |  |  | 134 |  |  |  | 159 |  |  |  | 157 |
Interest on subordinated debentures |  |  | 1,089 |  |  |  | 1,089 |  |  |  | 1,089 |
Operating expenses |  |  | 287 |  |  |  | 538 |  |  |  | 230 |
Income before income taxes |  |  |  |  |  |  |  |  |  |  |  |
and equity in undistributed earnings |  |  |  |  |  |  |  |  |  |  |  |
of subsidiaries |  |  | 2,189 |  |  |  | 2,940 |  |  |  | 2,736 |
Income tax benefit |  |  | 439 |  |  |  | 522 |  |  |  | 423 |
Equity in undistributed earnings |  |  |  |  |  |  |  |  |  |  |  |
of subsidiaries |  |  | 3,207 |  |  |  | 1,634 |  |  |  | 3,486 |
Net Income |  | $ | 5,835 |  |  | $ | 5,096 |  |  | $ | 6,645 |

36

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note O - Parent Company Only Condensed Financial Information (continued)

CONDENSED STATEMENTS OF CASH FLOWS |  |  |  |  |  |  |  |  |
|  | Years ended December 31: |  |  |  |
Cash flows from operating activities: |  | 2011 |  |  | 2010 |  |  | 2009 |
Net Income |  | $ | 5,835 |  |  | $ | 5,096 |  |  | $ | 6,645 |
Adjustments to reconcile net income |  |  |  |  |  |  |  |  |  |  |  |
to net cash provided by operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Equity in undistributed earnings of subsidiaries |  |  | (3,207 | ) |  |  | (1,634 | ) |  |  | (3,486 | )
Common stock issued to ESOP |  |  | 496 |  |  |  | 315 |  |  |  | 22 |
Change in other assets |  |  | (92 | ) |  |  | (12 | ) |  |  | (7 | )
Change in other liabilities |  |  | 105 |  |  |  | 64 |  |  |  | 59 |
Net cash provided by operating activities |  |  | 3,137 |  |  |  | 3,829 |  |  |  | 3,233 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Change in notes receivable |  |  | 85 |  |  |  | 402 |  |  |  | 1,231 |
Net cash provided by investing activities |  |  | 85 |  |  |  | 402 |  |  |  | 1,231 |
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Change in notes payable |  |  | (87 | ) |  |  | (412 | ) |  |  | (1,232 | )
Cash dividends paid |  |  | (3,360 | ) |  |  | (3,347 | ) |  |  | (3,186 | )
Net cash used in financing activities |  |  | (3,447 | ) |  |  | (3,759 | ) |  |  | (4,418 | )
Cash and cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents |  |  | (225 | ) |  |  | 472 |  |  |  | 46 |
Cash and cash equivalents at beginning of year |  |  | 1,687 |  |  |  | 1,215 |  |  |  | 1,169 |
Cash and cash equivalents at end of year |  | $ | 1,462 |  |  | $ | 1,687 |  |  | $ | 1,215 |

37

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note P - Segment Information
The reportable segments are determined by the products and services offered, primarily distinguished between banking and consumer finance. They are also distinguished by the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business which are then aggregated if operating performance, products/services, and customers are similar. Loans, investments, and deposits provide the majority of the net revenues from the banking operation, while loans provide the majority of the net revenues for the consumer finance segment. All Company segments are domestic.
Total revenues from the banking segment, which accounted for the majority of the Company's total revenues, totaled 91.8%, 92.9% and 93.4% of total consolidated revenues for the years ended December 31, 2011, 2010 and 2009, respectively.
The accounting policies used for the Company's reportable segments are the same as those described in Note A - Summary of Significant Accounting Policies. Income taxes are allocated based on income before tax expense.
Segment information for the years ended December 31, is as follows:

|  | Year Ended December 31, 2011 |  |  |  |
|  |  |  |  | Consumer |  |  | Total |
|  | Banking |  |  | Finance |  |  | Company |
Net interest income |  | $ | 30,792 |  |  | $ | 3,079 |  |  | $ | 33,871 |
Provision expense |  | $ | 4,809 |  |  | $ | 87 |  |  | $ | 4,896 |
Noninterest income |  | $ | 6,327 |  |  | $ | 895 |  |  | $ | 7,222 |
Noninterest expense |  | $ | 26,130 |  |  | $ | 2,169 |  |  | $ | 28,299 |
Tax expense |  | $ | 1,483 |  |  | $ | 580 |  |  | $ | 2,063 |
Net income |  | $ | 4,697 |  |  | $ | 1,138 |  |  | $ | 5,835 |
Assets |  | $ | 789,744 |  |  | $ | 14,433 |  |  | $ | 804,177 |
|  | Year Ended December 31, 2010 |  |  |  |
|  |  |  |  |  | Consumer |  |  | Total |
|  | Banking |  |  | Finance |  |  | Company |
Net interest income |  | $ | 30,074 |  |  | $ | 2,893 |  |  | $ | 32,967 |
Provision expense |  | $ | 5,717 |  |  | $ | 154 |  |  | $ | 5,871 |
Noninterest income |  | $ | 5,578 |  |  | $ | 576 |  |  | $ | 6,154 |
Noninterest expense |  | $ | 24,756 |  |  | $ | 1,887 |  |  | $ | 26,643 |
Tax expense |  | $ | 1,029 |  |  | $ | 482 |  |  | $ | 1,511 |
Net income |  | $ | 4,149 |  |  | $ | 947 |  |  | $ | 5,096 |
Assets |  | $ | 837,359 |  |  | $ | 14,155 |  |  | $ | 851,514 |
|  | Year Ended December 31, 2009 |  |  |  |
|  |  |  |  |  | Consumer |  |  | Total |
|  | Banking |  |  | Finance |  |  | Company |
Net interest income |  | $ | 27,817 |  |  | $ | 2,874 |  |  | $ | 30,691 |
Provision expense |  | $ | 3,049 |  |  | $ | 163 |  |  | $ | 3,212 |
Noninterest income |  | $ | 7,132 |  |  | $ | 466 |  |  | $ | 7,598 |
Noninterest expense |  | $ | 24,247 |  |  | $ | 1,913 |  |  | $ | 26,160 |
Tax expense |  | $ | 1,843 |  |  | $ | 429 |  |  | $ | 2,272 |
Net income |  | $ | 5,810 |  |  | $ | 835 |  |  | $ | 6,645 |
Assets |  | $ | 797,276 |  |  | $ | 14,712 |  |  | $ | 811,988 |

38

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note Q - Consolidated Quarterly Financial Information (unaudited)
Quarters Ended

2011 |  | Mar. 31 |  |  | Jun. 30 |  |  | Sept. 30 |  |  | Dec. 31 |
Total interest income |  | $ | 12,025 |  |  | $ | 10,817 |  |  | $ | 10,693 |  |  | $ | 10,505 |
Total interest expense |  |  | 2,822 |  |  |  | 2,663 |  |  |  | 2,509 |  |  |  | 2,175 |
Net interest income |  |  | 9,203 |  |  |  | 8,154 |  |  |  | 8,184 |  |  |  | 8,330 |
Provision for loan losses(1) |  |  | 2,944 |  |  |  | 759 |  |  |  | 1,152 |  |  |  | 41 |
Noninterest income |  |  | 3,659 |  |  |  | 1,687 |  |  |  | 1,058 |  |  |  | 818 |
Noninterest expense |  |  | 7,098 |  |  |  | 6,981 |  |  |  | 7,001 |  |  |  | 7,219 |
Net income |  |  | 2,033 |  |  |  | 1,555 |  |  |  | 886 |  |  |  | 1,361 |
Earnings per share |  | $ | 0.51 |  |  | $ | 0.39 |  |  | $ | 0.22 |  |  | $ | 0.34 |
2010 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total interest income |  | $ | 12,228 |  |  | $ | 11,599 |  |  | $ | 11,438 |  |  | $ | 11,249 |
Total interest expense |  |  | 3,619 |  |  |  | 3,421 |  |  |  | 3,328 |  |  |  | 3,179 |
Net interest income |  |  | 8,609 |  |  |  | 8,178 |  |  |  | 8,110 |  |  |  | 8,070 |
Provision for loan losses(2) |  |  | 921 |  |  |  | 721 |  |  |  | 2,225 |  |  |  | 2,004 |
Noninterest income |  |  | 1,865 |  |  |  | 1,524 |  |  |  | 1,382 |  |  |  | 1,383 |
Noninterest expense |  |  | 6,881 |  |  |  | 6,976 |  |  |  | 6,863 |  |  |  | 5,923 |
Net income |  |  | 1,906 |  |  |  | 1,471 |  |  |  | 421 |  |  |  | 1,298 |
Earnings per share |  | $ | 0.48 |  |  | $ | 0.37 |  |  | $ | 0.10 |  |  | $ | 0.33 |
2009 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total interest income |  | $ | 12,611 |  |  | $ | 11,710 |  |  | $ | 11,733 |  |  | $ | 11,569 |
Total interest expense |  |  | 4,331 |  |  |  | 4,407 |  |  |  | 4,285 |  |  |  | 3,909 |
Net interest income |  |  | 8,280 |  |  |  | 7,303 |  |  |  | 7,448 |  |  |  | 7,660 |
Provision for loan losses |  |  | 848 |  |  |  | 296 |  |  |  | 957 |  |  |  | 1,111 |
Noninterest income |  |  | 2,021 |  |  |  | 1,818 |  |  |  | 2,137 |  |  |  | 1,622 |
Noninterest expense |  |  | 6,556 |  |  |  | 6,915 |  |  |  | 6,528 |  |  |  | 6,161 |
Net income |  |  | 2,051 |  |  |  | 1,396 |  |  |  | 1,700 |  |  |  | 1,498 |
Earnings per share |  | $ | 0.51 |  |  | $ | 0.35 |  |  | $ | 0.43 |  |  | $ | 0.38 |

(1) During the first quarter of 2011, the Company began taking partial charge-offs more quickly on collateral dependent impaired loans as a result of management's evaluation of the trends in the real estate market, the status of long-term, collateral dependent impaired loans and the current regulatory environment. The increases in partial charge-offs contributed to a higher historical loan loss factor, which required additional general allocations within the allowance for loan losses.
(2) During the third and fourth quarters of 2010, the Bank experienced an increase in its provision expense as a result of continued credit quality issues with three commercial relationships that resulted in additional impairment charges and partial charge-offs.
39

R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM
To the Board of Directors and Shareholders
Ohio Valley Banc Corp.
We have audited the accompanying consolidated statements of condition of Ohio Valley Banc Corp. (the “Company”) as of December 31, 2011 and 2010, 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, 2011. We also have audited the Company's internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ohio Valley Banc Corp. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Ohio Valley Banc Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

|  | /s/ Crowe Horwath LLP
|  | Crowe Horwath LLP

Louisville, KY
March 15, 2012
40

MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Board of Directors and Shareholders
Ohio Valley Banc Corp.
The management of Ohio Valley Banc Corp. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
The system of internal control over financial reporting as it relates to the consolidated financial statements is evaluated for effectiveness by management. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed Ohio Valley Banc Corp.’s system of internal control over financial reporting as of December 31, 2011, 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, 2011, its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control Integrated Framework”.
Crowe Horwath LLP, independent registered public accounting firm, has issued an audit report dated March 15, 2012 on the Company's internal control over financial reporting. That report is contained in Ohio Valley's Annual Report to Shareholders under the heading "Report of Independent Registered Public Accounting Firm”.
Ohio Valley Banc Corp.

/s/ Jeffrey E. Smith |  |
Jeffrey E. Smith |  |
Chairman, CEO |  |
/s/ Scott W. Shockey |  |
Scott W. Shockey |  |
Vice President, CFO |  |
March 15, 2012 |  |

41

SUMMARY OF COMMON STOCK DATA
OHIO VALLEY BANC CORP.
Years ended December 31, 2011 and 2010

INFORMATION AS TO STOCK PRICES AND DIVIDENDS: Ohio Valley’s common shares are traded on The NASDAQ Stock Market under the symbol “OVBC”. The following table summarizes the high and low sales prices for Ohio Valley’s common shares on the NASDAQ Global Market for each quarterly period since January 1, 2010.
2011 |  | High |  |  | Low |
First Quarter |  | $ | 23.26 |  |  | $ | 19.21 |
Second Quarter |  |  | 23.10 |  |  |  | 16.50 |
Third Quarter |  |  | 18.70 |  |  |  | 16.01 |
Fourth Quarter |  |  | 19.09 |  |  |  | 17.00 |
2010 |  | High |  |  | Low |
First Quarter |  | $ | 25.00 |  |  | $ | 18.75 |
Second Quarter |  |  | 22.49 |  |  |  | 16.38 |
Third Quarter |  |  | 21.79 |  |  |  | 16.40 |
Fourth Quarter |  |  | 20.87 |  |  |  | 18.23 |
Shown below is a table which reflects the dividends declared per share on Ohio Valley’s common shares. As of March 9, 2012, the number of holders of record of common shares was 2,141.
Dividends per share |  |  | 2011 |  |  |  | 2010 |
First Quarter |  | $ | 0.21 |  |  | $ | 0.21 |
Second Quarter |  | $ | 0.21 |  |  | $ | 0.21 |
Third Quarter |  | $ | 0.21 |  |  | $ | 0.21 |
Fourth Quarter |  | $ | 0.21 |  |  | $ | 0.21 |
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 amount of retained earnings for the current and prior two years.
In addition, policy of the Board of Governors of the Federal Reserve System requires Ohio Valley to provide notice to the FRB in advance of the payment of a dividend to Ohio Valley's shareholders under certain circumstances, and the FRB may disapprove of such dividend payment if the FRB determines the payment would be an unsafe or unsound practice.
Dividend restrictions are also listed within the provisions of Ohio Valley's trust preferred security arrangements. Under the provisions of these agreements, the interest payable on the trust preferred securities is deferrable for up to five years and any such deferral would not be considered a default. During any period of deferral, Ohio Valley would be precluded from declaring or paying dividends to its shareholders or repurchasing any of its common stock.

42

PERFORMANCE GRAPH
OHIO VALLEY BANC CORP.
Year ended December 31, 2011
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, 2006 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 70 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 70 banks in the SNL Index.
Period ending

Index |  |  | 12/31/06 |  | 12/31/07 |  | 12/31/08 |  | 12/31/09 |  | 12/31/10 |  | 12/31/11
Ohio Valley Banc Corp. | 100.00 |  | 102.51 |  | 79.35 |  | 95.72 |  | 88.41 |  | 88.06
SNL $500M-$1B Bank Index | 100.00 |  | 80.13 |  | 51.35 |  | 48.90 |  | 53.38 |  | 46.96
S&P 500 |  |  | 100.00 |  | 105.49 |  | 66.46 |  | 84.05 |  | 96.71 |  | 98.76

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide an analysis of the financial condition and results of operations of Ohio Valley Banc Corp. (“Ohio Valley” or the “Company”) that 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 generated net income of $5,835 for 2011, an increase of 14.5% from 2010. Earnings per share were $1.46 for 2011, an increase of 14.1% from 2010. The increase in net income and earnings per share for 2011 was primarily due to higher noninterest income combined with improvements in higher net interest income and lower provision for loan loss expense. Noninterest income grew $1,068, or 17.4%, during 2011, largely from the Company’s tax processing fees. The Company generates fee income by facilitating tax refund payments in the form of electronic refund check/deposit (“ERC/ERD”) transactions. ERC/ERD transactions involve the issuing of a tax refund to the taxpayer after the Bank has received the refund from the federal/state government. In 2011, ERC/ERD fees increased $1,779 over the previous year due to the significant growth in transaction volume of processing tax refund payments during the first half of 2011. This activity was mostly seasonal and had little impact on Company earnings during the third and fourth quarters of 2011.
Further contributing to the Company’s successful year in net income was lower provision for loan loss expense, which decreased $975, or 16.6%, during 2011 as compared to the previous year. The decrease was in large part due to significant recoveries of commercial loans experienced in 2011 as well as larger impairment charges recorded in 2010. Net charge-offs during 2011 were up $2,255, or 48.2%, over 2010, but the majority of these charge-offs had already been specifically allocated for within the allowance for loan losses. As a result, no provision expense was required to be taken against the majority of these additional charge-offs. Conversely, recoveries of loans did have an immediate impact on lowering provision expense. Total recoveries during 2011 were $3,484, which increased $2,288, or 191.3%, from 2010, in large part due to successful collection efforts of commercial loan balances that had been previously charged off. Provision expense also benefited from impairment charges recorded during 2010 that had an opposite effect in 2011. During the fourth quarter of 2010, the Company identified asset impairment of $1,406 related to one commercial loan relationship with two loans classified as troubled debt restructurings (“TDR’s”). This impairment charge required specific reserves within the allowance for loan losses, which required a corresponding increase in provision for loan loss expense in 2010 that had the effect of lowering provision expense during 2011.
Further contributing to higher earnings in 2011 was an improved net interest income, which increased $904, or 2.7%, over 2010. The sustained low-rate environment continues to have an impact in lowering funding costs, as well as causing management to emphasize growing lower-costing, core deposit relationship balances. As a result, interest expense decreased $3,378 during 2011, as compared to 2010. This cost savings completely offset the decrease in interest income of $2,474 during 2011, as compared to 2010.
Partially offsetting the benefits from higher ERC/ERD fees, lower provision expense and higher net interest income were increases in other real estate owned (“OREO”) losses, as well as increases in salaries and employee benefit and foreclosed asset expenses. OREO losses finished at $1,224 at year-end 2011, up from $177 in losses at year-end 2010. Higher OREO losses were impacted most by impairment charges taken on two commercial real estate foreclosed properties classified as OREO. These losses were the result of re-evaluations of the carrying values in 2011 for both OREO properties, which identified $1,266 in total asset impairment. The impairment charges were recorded as write-downs to the carrying values of both properties and limited the growth in noninterest income during 2011. Salaries and employee benefit expense increased $1,003, or 6.4%, during 2011, as compared to 2010, in large part due to annual merit increases, higher health insurance premiums and a larger number of employees. The Company’s foreclosed asset costs also grew to $650 during 2011, an increase of $583 from the previous year. The increase was mostly related to the foreclosure expenses of two commercial real estate properties, which included taxes and other general costs to maintain both properties.
During 2010, Ohio Valley generated net income of $5,096, a decrease of 23.3% from 2009. Earnings per share were $1.28 for 2010, a decrease of 23.4% from 2009. The decrease in net income and earnings per share for 2010 was primarily due to a higher provision for loan loss expense, representing a $2,659, or 82.8%, increase over 2009. Provision expense increased over 2009 in large part due to increases in both net charge-offs and specific allocations on impaired loans. Net charge-offs were impacted by partial charge-offs of $2,480 recorded on two commercial loans, while specific allocations were impacted by an impairment charge of $1,406 related to two commercial TDR’s. Further contributing to lower earnings in 2010 were decreases in other noninterest income sources, including service charges on deposit accounts (down $614, or 21.8%), income from bank owned life insurance (down $570, or 43.5%) and mortgage banking income (down $396, or 52.2%). Service charge income was mostly impacted by a lower volume of overdrafts being assessed as well as the adoption of new regulatory guidance that limits daily and annual overdraft fees. The declining effects from bank owned life insurance (“BOLI”) and mortgage banking income during 2010 were the results of timing differences of events that occurred during 2009 that had a limited effect in 2010. These events included life insurance proceeds of $556 that were received in 2009 and a significant period of mortgage refinancing during the first half of 2009.
Partially offsetting these negative effects of higher provision expense and lower noninterest income was improvement in the Company’s net interest income, which increased $2,276, or 7.4%, over 2009. Net interest income for the Company grew in large part due to an increase in the Company’s average earning assets and net interest margin improvement. Average earning asset growth was mostly affected by commercial loans while the net interest margin improvement was mostly affected by a shift from short-term, lower yielding assets being re-invested into higher yielding, longer-term assets combined with a continued decline in the Company’s interest expense in both deposits and borrowings due to the sustained low interest rate environment.
NET INTEREST INCOME
The most significant portion of the Company's revenue, net interest income, results from properly managing the spread between interest income on earning assets and interest expense incurred on interest-bearing liabilities. The Company earns interest and dividend income from loans, investment securities and short-term investments while incurring interest expense on interest-bearing deposits, securities sold under agreements to repurchase (“repurchase agreements”) and short- and long-term borrowings. Net interest income is affected by changes in both the average volume and mix of assets and liabilities and the level of interest rates for financial instruments. Changes in net interest income are measured by net interest margin and net interest spread. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Both of these are reported on a fully tax-equivalent (“FTE”) basis. Net interest margin is greater than net interest spread due to the interest earned on interest-earning assets funded from noninterest-bearing funding sources, primarily demand deposits and shareholders' equity. Following is a discussion of changes in interest-earning assets, interest-bearing liabilities and the associated impact on interest income and interest expense for the three years ended December 31, 2011. Tables I and II have been prepared to summarize the significant changes outlined in this analysis.
Net interest income on an FTE basis increased $940 in 2011, or 2.8%, compared to the $33,360 earned in 2010, while the Company’s FTE net interest margin increased 7 basis points from 4.16% in 2010 to 4.23% in 2011. The improvements in both net interest income and net interest margin were mainly due to lower rates paid on interest-bearing deposits, a change in deposit mix to lower-cost core deposits and an increase in the Company’s average earning assets. The Federal Reserve continues to hold the prime interest rate at 3.25%, and the target federal funds rate remains at a range from 0.0% to 0.25%. The sustained low short-term rates have continued to impact the repricings of various Bank deposit products, including public fund NOW, Gold Club and Market Watch accounts. Interest rates on certificate of deposit (“CD”) balances have also repriced to lower rates (as a lagging effect to the Federal Reserve’s action to maintain short-term interest rates at their low levels) which continues to lower funding costs. Management continues to emphasize lower-cost core deposit relationship balances which contributed to higher average NOW, savings and money market balances in 2011 (increasing $36,898) while experiencing a lower level of higher-cost time deposit and other borrowed money balances (decreasing $57,817). Average earning assets grew 1.1% during 2011 compared to 2010, largely from higher average balances being carried at the Federal Reserve and growth in average securities.
Net interest income on an FTE basis increased $2,314 in 2010, or 7.5%, compared to the $31,046 earned in 2009, while the FTE net interest margin increased 16 basis points from 4.00% in 2009 to 4.16% in 2010. As in 2011, the improvements in 2010 were primarily attributable to lower rates paid on deposits, a shift in deposit composition to lower-cost core deposits and average earning asset growth. The Company continued to benefit from a sustained low interest rate environment in 2010 that permitted its interest expense to decline, with deposits and borrowings readjusting to current market rates. The Company also benefited from a deposit composition shift from higher-costing time deposits and other borrowed money (decreasing 4.2% from 2009) to lower-costing NOW, savings and money market deposit accounts (increasing 15.8%). During 2010, the Company also benefited from the deployment of short-term assets into higher-yielding longer-term assets, such as loans. The Company’s average earning assets increased 3.4% in 2010, particularly within the higher-yielding loans portfolio.
For 2011, average earning assets grew $8,756, or 1.1%, as compared to growth of $26,518, or 3.4%, in 2010. Driving this continued growth in earning assets for 2011 was average interest-bearing balances with banks, increasing to $67,947 at year-end 2011, up from $43,450 at year-end 2010 and $27,077 at year-end 2009. The increasing trend of larger interest-bearing balances with banks is primarily due to seasonal excess funds resulting from the clearing of tax refund checks and deposits. These ERC/ERD deposits occurred primarily during the first half of 2011 and 2010 and are the result of the Company’s relationship with a third-party tax software provider. The Company acts as the facilitator for these ERC/ERD transactions and earns a fee for each cleared item. For the short time the Company holds such refunds, constituting noninterest-bearing deposits, the Company increases its deposits with the Federal Reserve. This has caused the interest-bearing balances with banks to represent a large percentage of earning assets during the time the Company holds the refunds, although such balances decrease at year-end. For the year-end December 31, 2011, average interest-bearing balances with banks totaled 8.4% of earning assets, as compared to 5.4% for 2010 and 3.5% for 2009. As loan growth was challenged during 2011, the Company re-invested a portion of its short-term Federal Reserve balances into longer-term investment securities. As a result, the Company’s average investment securities, both taxable and tax exempt, increased during 2011, with its percentage of earning assets averaging 14.5% for the year, compared to 13.2% in 2010. The Company’s average investment securities did not change significantly during 2010, with its percentage of earning assets averaging 13.2%, compared to 13.8% for 2009. Average loans continue to be the Company’s highest portion of earning assets. During 2011, average loans decreased $27,954, or 4.3%, compared to 2010. Average loans during 2010 were limited to an $11,679, or 1.8%, increase from 2009. The Company’s market area for lending continues to be limited due to economic pressures that have negatively impacted consumer spending and have decreased loan demand. The Company’s installment and real estate portfolios have been affected the most during 2011 and 2010 by these negative factors. As a result, average loans as a percentage of earning assets have decreased to 77.1% for 2011, as compared to 81.4% for 2010 and 82.7% for 2009, as most of the average earning asset growth in 2011 and 2010 has came from short-term balances with banks and investment securities.
Management continues to focus on generating loan growth as this portion of earning assets provides the greatest return to the Company. Although loans make up the largest percentage of earning assets, management is comfortable with the current level of loans based on collateral values, the balance of the allowance for loan losses, strict underwriting standards and the Company's well-capitalized status. Management maintains securities at a dollar level adequate enough to provide ample liquidity and cover pledging requirements.
Average interest-bearing liabilities decreased 4.3% between 2010 and 2011 due to decreasing time deposits, and increased 3.0% between 2009 and 2010 due to increasing savings and money market accounts. The fluctuations of interest-bearing deposits since 2009 are in large part due to the Company’s preference of core deposit relationship balances over higher-costing time deposits and other borrowing liabilities, which have changed the funding composition mix during this time. Interest-bearing liabilities continue to be comprised largely of time deposits, which represented 44.0% of total interest-bearing liabilities in 2011. This composition mix, however, has decreased the most since 2009, which represented 48.9% and 51.0% of total interest-bearing liabilities in 2010 and 2009, respectively. As interest rates on time deposits continued to readjust to current market rates in 2011, competitive pricing pressures grew and contributed to a significant maturity runoff of CD’s during 2011. In addition, other borrowings lowered to 3.8% of total interest-bearing liabilities in 2011, as compared to 5.5% in 2010 and 7.5% in 2009. Conversely, the Company’s core deposit segment of interest-bearing liabilities, which include NOW and savings and money market accounts, together represented 47.1% of total interest-bearing liabilities in 2011, as compared to 39.5% in 2010 and 35.2% in 2009. The primary reason for this composition increase has particularly been in the Company's Market Watch product. The Market Watch product is a limited transaction investment account with tiered rates that competes with current market rate offerings and serves as an alternative to certificates of deposit for some customers. With an added emphasis on further building and maintaining core deposit relationships, the Company has marketed several attractive incentive offerings in the past several years to draw customers to this particular product. The consumer preference for this product has generated a significant amount of funding dollars which have helped to support earning asset growth, maturity runoff of time deposits and payoffs on other borrowed funds. This composition shift from 2009 to 2011 with higher NOW, savings and money market balances and lower time deposits and other borrowed money has served as a cost effective contribution to the net interest margin. The average cost of the “growing” NOW, savings and money market account core segment was 0.90%, 1.14% and 1.30% during the years ended 2011, 2010 and 2009, respectively. The higher average costs of time deposits and other borrowed money segment were 2.08%, 2.58% and 3.37% during the years ended 2011, 2010 and 2009, respectively.
The net interest margin increased to 4.23% in 2011 from 4.16% in 2010 and 4.00% in 2009. The 7 basis point and 16 basis point improvement from 2011 and 2010 was largely the result of lower average costs on interest-bearing liabilities completely offsetting the lower yields on earning assets, which improved the Company’s net interest rate spread. During 2011, the net interest rate spread increased 7 basis points to 3.89%, resulting from the decrease in average cost of interest-bearing liabilities of 44 basis points from 2.03% to 1.59%, completely offsetting the decrease in average yield on interest-earning assets of 37 basis points from 5.85% to 5.48%. During 2010, the net interest rate spread increased 25 basis points to 3.82%, resulting from the decrease in average cost of interest-bearing liabilities of 58 basis points from 2.61% to 2.03% completely offsetting the decrease in average yield on interest-earning assets of 33 basis points from 6.18% to 5.85%. Partially offsetting the net interest rate spread increase in 2010 was a 9 basis point decrease in contributions of interest-free funds (i.e., demand deposits, shareholders' equity), which lowered from 0.43% in 2009 to 0.34% in 2010.
Lower asset yields caused interest income on an FTE basis to decrease $2,438, or 5.2%, during 2011, and $1,071, or 2.2%, during 2010. This decline reflects higher liquidity levels and lower loan demand. During 2010 and 2011, average loan balances experienced limited to declining growth while excess funds increased as a result of interest-bearing core deposit growth and an increased volume of short-term tax refund deposits. The Company continues to invest the majority of its excess funds into its interest-bearing Federal Reserve Bank clearing account, yielding just 0.25%. While these increases in Federal Reserve Bank balances contributed most to the Company’s average earning asset growth during 2011 and 2010, these balances also contributed most to the decrease in earning asset yields, with the majority of the Company’s earning asset growth yielding just 0.25%. The intention for these short-term Federal Reserve Bank balances that were not related to tax refund clearing items or other seasonal deposits was to re-invest them into future loan growth or longer-term securities with higher interest rate yields to improve the net interest margin. Further contributing to lower asset yields were yields on loans decreasing 5 basis points from 2010 to 2011 and 22 basis points from 2009 to 2010. This decrease reflects the extended low interest rate environment the Federal Reserve has been maintaining since it began reducing short-term rates in 2008. The Company's commercial, participation and real estate loan portfolios have been most sensitive to these decreases in short-term interest rates since that time, particularly the prime interest rate, which remained at 3.25% at year-end 2011.
Further contributing to lower interest income during 2011 and 2010 were decreases in mortgage loan volume as a result of management’s strategy to sell most of its long-term, fixed-rate real estate loans to the secondary market, while retaining the servicing rights to these loans. As previously discussed, the Federal Reserve continues to maintain interest rates at their low levels, which has had an impact on long-term interest rates that affect mortgage loan pricing. The lower rates have contributed to a consumer demand for mortgage loan refinancing to help lower their monthly costs. The interest rate risks associated with satisfying this demand for long-term fixed-rate mortgages prompted management to sell the majority of these real estate loans to the secondary market, while retaining the servicing rights. This action continues to generate loan sale and servicing fee revenue within noninterest income, but has resulted in an $889, or 5.7%, decrease in real estate interest and fee income during 2011, as compared to 2010. In addition, 2010 real estate interest and fee income decreased $999, or 6.0%, from 2009.
Included in consumer loan interest income were fees associated with the Company’s refund anticipation loan (“RAL”) tax loan originations. The Company’s participation with a third-party tax software provider has given the Bank the opportunity to make RALs during the tax refund loan season, typically from January through March. RALs are short-term cash advances against a customer's anticipated income tax refund. During 2011, the Company recognized $561 in RAL fees, compared to $655 during 2010, a decrease of $94, or 14.4%. The Company had an increase of $258, or 65.1%, in RAL fees during 2010 compared to 2009.
The Bank also has a separate agreement with the tax software provider for the Company’s ERC/ERD clearing services. Through the ERC/ERD agreement, the Company serves as a facilitator for the clearing of tax refunds. In recent years, the RAL business has been subject to scrutiny by various governmental and consumer groups who have questioned the fairness and legality of RAL fees and the underwriting risks associated with originating RALs. The ERC/ERD service does not subject the Bank to the risks related to the RALs and has not been subject to the same scrutiny.
On February 3, 2011, the Bank received a recommendation from the FDIC to discontinue offering RAL loans through third parties following the completion of the 2011 tax filing season. The FDIC expressed concerns regarding the underwriting of RALs based on the 2010 decision by the Internal Revenue Service (the "IRS") to cease providing debt indicator information. In response to the FDIC's expressions of concern, on February 8, 2011, the Bank determined to discontinue offering RALs through unrelated third-party vendors after April 19, 2011. Thus, the Bank’s termination of this product will negatively affect the Company’s results of operations in 2012. The FDIC's concern and recommendation does not affect the Bank's offering of other tax refund products, such as ERC’s and ERD’s. The Bank will, therefore, continue offering ERC’s and ERD’s. Furthermore, the FDIC’s recommendation does not affect the offerings of RALs by Loan Central.
In relation to lower earning asset yields for 2011 and 2010, the Company’s interest-bearing liability costs also decreased 44 basis points during 2011 and 58 basis points during 2010. The lower costs have caused interest expense to drop $3,378, or 24.9%, from 2010 to 2011 and $3,385, or 20.0%, from 2009 to 2010 as a result of lower rates paid on interest-bearing liabilities. Since the beginning of 2008, the Federal Reserve Board has reduced the prime and federal funds interest rates by 400 basis points. Since December 2008, the prime interest rate has been at 3.25% and the target federal funds rate has been in a range of 0.0% to 0.25%. The sustained low short-term rates have continued to impact the repricings of various Bank deposit products, including public fund NOW, Gold Club and Market Watch accounts. However, contributing most to the decrease in funding costs were interest rates on time deposit balances, which continued to reprice at lower rates during 2011 and 2010 (as a continued lagging effect to the Federal Reserve action to drop short-term interest rates). The year-to-date weighted average costs of the Company’s time deposits have decreased from 3.24% at year-end 2009 to 2.46% at year-end 2010 and 2.03% at year-end 2011.
Further contributing to lower time deposit expenses has been the Company’s continued emphasis on growing core deposits during 2011 and 2010. This emphasis has created a deposit composition shift from higher-costing time deposit balances to lower-costing core deposits in NOW, savings and money market balances. As a result of decreases in the average market interest rates mentioned above and the deposit composition shift to lower-costing deposit balances, the Company’s total weighted average funding costs have decreased to 1.59% at year-end 2011 as compared to 2.03% at year-end 2010 and 2.61% at year-end 2009.
The Company has experienced margin improvement during 2011 and 2010 due to a higher deposit mix of lower-costing NOW and money market balances while also benefiting from a sustained low interest rate environment. However, the pace of improvement lowered in 2011, as the net interest margin increased 7 basis points as compared to a 16 basis point improvement in 2010. The lower pace of improvement was largely due to higher average balances being carried at the Federal Reserve yielding just 0.25% during 2011. This, combined with declining average loan balances, has placed increased pressure on net interest margin growth during 2011.
The Company will continue to focus on re-deploying these Federal Reserve balances into higher yielding instruments as opportunities arise. Net interest margin will benefit if these deposits with the Federal Reserve Bank can be re-invested in loans and other longer-term, higher yielding investments. It is difficult to speculate on future changes in net interest margin and the frequency and size of changes in market interest rates. The past several years has seen the banking industry under continued stress due to declining real estate values and asset impairments. Earlier in 2012, the Federal Reserve announced it would maintain the current state of low interest rates through 2014 or longer to help boost the economy as its recovery has been short of expectations. However, further decreases in interest rates by the Federal Reserve are estimated to have a negative effect on the Company’s net interest income, as most of its deposit balances are perceived to be at or near their interest rate floors. The Company will also continue to face pressure on its net interest income and margin improvement unless loan balances begin to expand and become a larger component of overall earning assets. 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.
PROVISION EXPENSE
Credit risk is inherent in the business of originating loans. The Company sets aside an allowance for loan losses through charges to income, which are reflected in the consolidated statement of income as the provision for loan losses. This provision charge is recorded to achieve an allowance for loan losses that is adequate to absorb losses in the Company’s loan portfolio. Management performs, on a quarterly basis, a detailed analysis of the allowance for loan losses that encompasses loan portfolio composition, loan quality, loan loss experience and other relevant economic factors.
The Company’s earnings benefited from lower provision expense during 2011, decreasing $975, or 16.6%, as compared to 2010. Conversely, during 2010, provision expense increased significantly by $2,659, or 82.8%, as compared to 2009. The impact to provision expense during both 2011 and 2010 is largely related to the changes in specific allocations, net charge-offs and general allocations of the allowance for loan losses. During 2010, the Company’s increase in provision expense was largely the result of partial charge-offs taken on one commercial loan classified as impaired. Partial charge-offs of $1,995 were recorded on one commercial real estate loan due to a continued deterioration in collateral values. At the time of charge-off, the Company had specific allocations of $1,825 within the allowance for loan losses, for which approximately $820 had been recognized prior to 2010. As a result, the $1,995 in partial charge-offs led to $990 in additional provision expense charges during 2010. This action had an opposite effect in 2011, contributing to the Company’s lower provision expense.
Also contributing to higher provision expense in 2010 were specific allocations recorded on two commercial loans classified as impaired. In 2010, the Company identified additional asset impairment of $1,406 related to two commercial and industrial loans from one relationship classified as a TDR. The Company continues to monitor and make loan modifications to certain troubled loans that will ease payment performance pressures off of the borrower. GAAP guidance requires an impairment analysis to be performed on loans classified as TDR’s. This analysis is measured by comparing the present value of expected future cash flows discounted at the loan’s effective interest rate to the cash flows based on the original contractual terms of the loan. The difference between the two measurements results in an impairment charge. The additional impairment charges on the two commercial and industrial loans previously mentioned required a specific allocation of the allowance for loan losses and a corresponding increase to provision for loan losses expense. Partially offsetting this provision expense benefit in 2011 was a continued deterioration in collateral values on the two TDR commercial loans previously mentioned. During the first quarter of 2011, a current analysis of both loans’ collateral values revealed a $933 impairment that required a corresponding increase to provision expense during 2011.
Beginning in 2011, the Company began to take partial charge-offs more quickly on collateral dependent impaired loans. As management further evaluated the trends in the real estate market, as well as the status of long-term, collateral dependent impaired loans, the decision to charge off these specific allocations was made. This led to increased charge-offs during 2011 of $4,543 and also significantly reduced the specific reserve allocations within the allowance for loan losses from $5,230 at December 31, 2010 to $655 at December 31, 2011. While most of this increase in charge-offs in 2011 did not require a corresponding provision expense entry due to the use of specific reserves that were already recorded prior to 2011, these charge-offs did have an immediate impact on the Company’s general allocations related to its historical loan loss factor. The general allocation, among other things, evaluates the average historical loan losses over the past 36 months. As a result, the general allocation for commercial and residential real estate loans increased to $5,334 at December 31, 2011 from $2,699 at December 31, 2010, requiring an increase in provision expense. These charge-off amounts will impact the amount of the Company’s loan loss allowance for three years. The general allocation also evaluates other factors, such as economic risk, as well as changes in classified and criticized assets.
During 2011, the Company was successful in recovering amounts on previously charged-off loans. During 2011, total loan recoveries were $3,484, an increase of 2,288, or 191.3%, over 2010. The majority of loan recoveries were from commercial real estate and commercial and industrial loan balances that had been previously charged off. The increase in loan recoveries lowered provision expense during 2011.
In large part due to the increase in net charge-offs during 2011, the allowance for loan losses finished at 1.23% of total loans at December 31, 2011, as compared to 1.46% at December 31, 2010. Management believes that the allowance for loan losses was adequate at December 31, 2011 to absorb probable losses in the portfolio. Furthermore, the increase in net charge-offs has increased the Company’s general allocations within the allowance for loan losses, with general allocations to total loans increasing from 0.65% at December 31, 2010 to 1.12% at December 31, 2011. Future provisions to the allowance for loan losses will continue to be based on management’s quarterly in-depth evaluation that is discussed in further detail under the caption “Critical Accounting Policies - Allowance for Loan Losses” within this Management’s Discussion and Analysis.
NONINTEREST INCOME
Total noninterest income increased $1,068, or 17.4%, in 2011 as compared to 2010. Contributing most to the 2011 growth in noninterest income were increases in seasonal tax refund processing fees and debit/credit card interchange income, partially offset by higher OREO losses.
The successful growth in noninterest revenue was largely due to increased ERC/ERD fees. During 2011, the Company’s ERC/ERD fees increased by $1,779, or 228.1%, as compared to the same period in 2010. The increase was due to a volume increase in the number of ERC/ERD transactions that were processed during the first and second quarters of 2011. For the 2011 tax season, the tax software provider was able to expand the number of tax preparers utilizing its software, which contributed to the volume increase. Because ERC/ERD fee activity is mostly seasonal, the majority of income was recorded during the first half of 2011, with only minimal income recorded thereafter.
The Company also experienced noninterest income growth from its debit and credit interchange income, which increased $389, or 39.0%, during the year ended 2011 as compared to 2010. The volume of transactions utilizing the Company’s credit card and Jeanie® Plus debit card continued to increase from a year ago. Beginning in the second half of 2010, the Company began offering incentive-based credit cards that would permit its users to redeem accumulated points for merchandise, as well as cash incentives paid, particularly to business users based on transaction criteria. In addition, similar incentives were introduced to the Company’s Jeanie® Plus debit cards during the first quarter of 2011 to promote customer spending. While incenting debit/credit card customers has increased customer use of electronic payments, which has contributed to higher interchange revenue, the strategy also fits well with the Company’s emphasis on growing and enhancing its customer relationships.
Partially offsetting the noninterest revenue improvements in 2011 from ERC/ERD and debit/credit card interchange fees were higher net losses on the sales of OREO. During the year ended 2011, sales of OREO resulted in a net loss of $1,224, which was up from the $177 in net OREO losses experienced during the year ended 2010. The increase in net losses during 2011 was largely attributed to impairment charges taken on two commercial real estate foreclosed properties. These losses were the result of recent re-evaluations of the carrying values for both properties. Based on weakened market conditions, management applied a discount to the appraised value of the properties and increased the estimated liquidation expenses associated with both properties. The results were a $480 impairment charge recorded in September 2011 and a $786 impairment charge recorded in December 2011. Collectively, these charges taken on both commercial real estate properties contributed most to the higher year-to-date OREO losses in 2011 as compared to 2010.
The remaining noninterest income categories were down $53, or 1.2%, during the year ended 2011, as compared to 2010. These changes were due mostly to lower trust fee income, lower earnings from tax-free BOLI investments and lower loan insurance income due to the decline in loan demand, which has limited insurance sale opportunities.
In 2010, total noninterest income decreased $1,444, or 19.0%, as compared to 2009. This decrease in noninterest income was mostly led by a $614, or 21.8%, decrease in the Company’s service charges on deposit accounts from 2009, particularly overdraft fees. The volume of overdraft balances decreased in 2010 as customers continued to present fewer checks against non-sufficient funds. New regulatory guidance adopted in July 2010 placed daily and annual limits on the amount of overdraft fees a customer can be assessed, which also contributed to the decline in overdraft volume. Decreases in noninterest income during 2010 also came from lower earnings from tax-free BOLI investments, which decreased $570, or 43.5%, during 2010. BOLI investments are maintained by the Company to fund various benefit plans, including deferred compensation plans, director retirement plans and supplemental retirement plans. Largely contributing to lower BOLI earnings in 2010 was the collection of $556 in life insurance proceeds during the third quarter of 2009, whereas no life insurance proceeds were received during 2010. Further decreasing noninterest revenue during 2010 was lower mortgage banking income, which decreased $396, or 52.2%, affected by a reduction in the volume of real estate loans sold to the secondary market. Historic low interest rates on long-term fixed-rate mortgage loans contributed to an increased consumer demand to refinance their existing mortgages in 2009. To help manage this consumer demand for longer-termed, fixed-rate real estate mortgages, the Company sold most real estate loans it originated during that period. This decision to sell long-term fixed-rate mortgages at lower rates was also effective in minimizing the interest rate risk exposure to rising rates. The Company also experienced higher net losses on the sales of OREO during 2010, which lowered noninterest income by $215, or 565.8%. The increase in net losses was largely due to the sale of one property during the second quarter of 2010 that resulted in a net loss of $148. Partially offsetting these noninterest income decreases in 2010 was growth in the Company’s ERC/ERD fees of $252, or 47.7%, affected mostly by a larger volume of transactions that were processed.
NONINTEREST EXPENSE
Management continues to work diligently to minimize the growth in noninterest expense. For 2011, total noninterest expense increased $1,656, or 6.2%. Contributing most to the growth in net overhead expense were higher salaries and employee benefits, as well as increases in foreclosure and data processing costs.
The Company’s largest noninterest expense item, salaries and employee benefits, increased $1,003, or 6.4%, during 2011 as compared to 2010. The increase was largely due to annual merit increases, higher health insurance premiums and an increase in the number of employees. During 2011, the Company experienced a higher full-time equivalent employee base, increasing from 279 employees at year-end 2010 to 285 employees at year-end 2011, increasing salaries and employee benefit expenses during 2011. During 2010, salary and employee benefits increased $823, or 5.6%, from 2009. The increase was largely due to annual merit increases, increased health insurance benefit costs and an increase in the number of employees. The Company’s full-time equivalent employees increased from 270 employees at year-end 2009 to 279 employees at year-end 2010.
Also contributing to additional noninterest expense during 2011 were foreclosed asset costs which totaled $650 during the year ended 2011, as compared to $67 during the year ended 2010. This $583 increase in foreclosed asset costs in 2011 was related mostly to two commercial real estate properties. Foreclosure expenses include the costs in maintaining the properties, which consist of taxes and general maintenance. During 2010, foreclosed asset expense decreased $83, or 55.3%, as compared to 2009.
The Company also realized increases to its data processing expenses, which increased $206, or 30.1%, during 2011. The Company continues to take great strides in utilizing the growing technology offered to financial institutions to enhance its loan and deposit products to better serve its customers. Data processing costs include processing services for the Company’s debit and credit cards as well as online and mobile banking technology. During 2010, data processing expense increased $15, or 2.2%, as compared to 2009.
Various noninterest expense categories decreased from a year ago to partially offset the salary and employee benefit, data processing and foreclosed asset expenses. Occupancy and furniture/equipment costs decreased $95, or 3.4%, during 2011. This decrease was largely due to lower depreciation expense on purchased equipment from prior years based on a declining balance method that accelerates depreciation costs in the early stages of the assets’ useful life. With no significant equipment purchases during 2011, the acceleration effect of depreciation has decreased. During 2010, occupancy and furniture/equipment expense increased $20, or 0.7%, as compared to 2009.
Also partially offsetting the overhead expense increase during 2011 was a $32, or 3.0%, decrease in FDIC premium expense as compared to 2010. During the fourth quarter of 2009, the FDIC approved an alternative to future special assessments, which was to have all banks prepay twelve quarters worth of FDIC assessments. On December 30, 2009, the Company prepaid its assessment in the amount of $3,567. The prepayment, which included assumptions about future deposit and assessment rate growth, was based on third quarter 2009 deposits. The prepaid amount is being amortized over the entire prepayment period. The monthly expense associated with this prepaid FDIC insurance increased during the first and second quarters of 2011 in relation to growing deposit and assessment assumptions. Beginning April 1, 2011, the assessment base for deposit insurance premiums changed from total domestic deposits to average total assets minus average tangible equity, and the assessment rate schedules changed. The new assessment method has afforded the Company lower net premium assessments during the third and fourth quarters of 2011. While the Company has benefited from having its FDIC insurance expense amortized over twelve quarters, continued declines in the Deposit Insurance Fund could result in the FDIC imposing additional assessments in the future, which could adversely affect the Company's capital levels and earnings. During 2010, FDIC premium expense decreased $564, or 34.7%, as compared to 2009. This change in lower deposit insurance expense was due to increases in fee assessment rates in 2009 combined with a special assessment of $373 that was applied to all FDIC insured institutions during 2009.
In 2011, the Company’s other noninterest expense decreased $8, or 0.1%, largely from changes in donations, legal, accounting and consulting fees. In 2010, other noninterest expense increased $157, or 2.8%, from 2009. The increase was mostly impacted by legal, accounting and consulting fees, which were collectively up $274, or 60.1%, during 2010 as compared to 2009. This growth was primarily due to various capital planning costs incurred by Ohio Valley, the parent company, during the first half of 2010. Also impacting other noninterest expense were increases in donations of $214, or 202.0%, over 2009 largely due to local school contributions within Gallia County, Ohio. These increasing factors were partially offset by decreases in the Company’s stationary, supplies and postage expenses, which were collectively down $260, or 12.2%, from 2009, which demonstrated management’s cost savings focus on maintaining limited growth in overhead expense to help offset the negative effects of higher provision expense and lower noninterest revenue.
The Company’s efficiency ratio is defined as noninterest expense as a percentage of fully tax-equivalent net interest income plus noninterest income. Management continues to place emphasis on managing its balance sheet mix and interest rate sensitivity to help expand the net interest margin as well as developing more innovative ways to generate noninterest revenue. A strong net interest income due to lower funding costs combined with higher noninterest income from ERC/ERD fees has had a positive effect on efficiency during 2011. However, the Company also experienced non-recurring OREO impairment charges of $1,266 which limited the growth in noninterest revenue during 2011. Furthermore, the Company experienced increased foreclosure costs of $583, primarily during the fourth quarter of 2011, on two commercial real estate properties which contributed to higher overhead expense. As a result, overhead expense for 2011 has outpaced revenue levels, which has caused the year-to-date efficiency ratio to worsen from the prior period. The efficiency ratio during 2011 increased to 68.2% from the 67.4% experienced during 2010.
FINANCIAL CONDITION:
CASH AND CASH EQUIVALENTS
The Company’s cash and cash equivalents consist of cash, interest- and non-interest bearing balances due from banks and federal funds sold. The amounts of cash and cash equivalents fluctuate on a daily basis due to customer activity and liquidity needs. At December 31, 2011, cash and cash equivalents had decreased $8,121, or 13.6%, to $51,630 as compared to $59,751 at December 31, 2010. The decrease in cash and cash equivalents was largely affected by the Company’s decrease in interest-bearing Federal Reserve Bank clearing account balances. While loan demand remains challenged, the Company continues to utilize its interest-bearing Federal Reserve Bank clearing account to manage its excess funds during periods of significant liquidity. Heading into 2011, the Company saw its deposit liabilities, both interest- and noninterest-bearing, increase $22,259, or 3.3%, during the second half of 2010, which contributed to excess fund levels. In addition, during the first quarter of 2011, the Company experienced higher levels of excess funds due to increased tax refund deposits from its RAL and ERC/ERD tax business. Liquidity levels normalized during the second and third quarters of 2011 as these short-term tax refund deposits were fully disbursed from the Federal Reserve Bank clearing account. During this time, the Company also utilized its Federal Reserve Bank clearing account to manage both investment security purchases and maturities, as well as to fund continued maturities of retail and wholesale CD’s. The interest rate paid on both the required and excess reserve balances of the Company’s Federal Reserve Bank clearing account is based on the targeted federal funds rate established by the Federal Open Market Committee. As of the filing date of this report, the interest rate calculated by the Federal Reserve continues to be 0.25%. This interest rate is similar to what the Company would have received from its investments in federal funds sold, currently in a range of less than 0.25%. Furthermore, Federal Reserve Bank balances are 100% secured.
As liquidity levels vary continuously based on consumer activities, amounts of cash and cash equivalents can vary widely at any given point in time. The Company’s focus will be to continue to re-invest these liquid funds back into longer-term, higher yielding assets, such as loans and investment securities during 2012 when the opportunities arise. Further information regarding the Company’s liquidity can be found under the caption “Liquidity” in this Management’s Discussion and Analysis.
SECURITIES
Management's goal in structuring the portfolio is to maintain a prudent level of liquidity while providing an acceptable rate of return without sacrificing asset quality. Maturing securities have historically provided sufficient liquidity such that management has not sold a debt security in several years, other than renewals or replacements of maturing securities.
During 2011, the balance of total securities did not change significantly on a net basis, increasing just $501, or 0.5%, as compared to 2010, with the ratio of securities to total assets also increasing to 13.5% at December 31, 2011, compared to 12.7% at December 31, 2010. The Company’s investment securities portfolio consists of U.S. Treasury securities, U.S. Government sponsored entity (“GSE”) securities, U.S. Government agency mortgage-backed securities and obligations of states and political subdivisions. During the first half of 2011, the Company experienced a significant increase in excess funds resulting from core deposit liability growth during the second half of 2010 and tax refund deposits during the first quarter of 2011. With loan demand remaining challenged, the Company invested a portion of its excess funds into long-term Agency mortgage-backed securities, which have increased $16,563, or 27.1%, from year-end 2010. Typically, the primary advantage of Agency 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. However, with the current low interest rate environment and loan balances on a declining pace, the cash flow that is being collected is being reinvested at lower rates. Principal repayments from Agency mortgage-backed securities totaled $18,920 during 2011.
While security growth has been evident within the Company’s Agency mortgage-backed securities portfolio, it has experienced offsetting decreases in its U.S. Treasury and GSE securities balances, which have decreased $11,566, or 67.7%, and $5,172, or 66.9%, respectively, from year-end 2010. In addition to helping achieve diversification within the Company’s investment securities portfolio, U.S. Treasury and GSE securities have also been used to satisfy pledging requirements for repurchase agreements. During the third quarter of 2011, however, newly enacted legislation permitted business checking accounts to earn interest on their deposits. This legislation has prompted all of the Company’s repurchase agreement accounts to reinvest into either interest-bearing demand accounts subject to normal FDIC insurance coverage or noninterest-bearing demand accounts with unlimited FDIC insurance coverage until the end of 2012. As a result, at December 31, 2011, the Company’s repurchase agreement balance was $0. With the general decrease in interest rates evident since 2008, the reinvestment rates on debt securities continue to show lower returns during 2011. The weighted average FTE yield on debt securities at year-end 2011 was 2.36%, as compared to 2.94% at year-end 2010 and 3.38% at year-end 2009. As a result, the Company’s focus will be to generate interest revenue primarily through loan growth, as loans generate the highest yields of total earning assets. Table III provides a summary of the portfolio by category and remaining contractual maturity. Issues classified as equity securities have no stated maturity date and are not included in Table III.
LOANS
In 2011, the Company's primary category of earning assets and most significant source of interest income, total loans, decreased $43,014, or 6.7%, to finish at $598,308. Lower loan balances were mostly influenced by total consumer loans, which were down $15,353, or 12.5%, from year-end 2010 to total $107,163. The Company’s consumer loans are primarily secured by automobiles, mobile homes, recreational vehicles and other personal property. Personal loans and unsecured credit card receivables are also included as consumer loans. The decrease in consumer loans came mostly from the Company’s automobile lending portfolio, which decreased $12,569, or 21.6%, from year-end 2010. The automobile lending component comprises the largest portion of the Company’s consumer loan portfolio, representing 42.7% of total consumer loans at December 31, 2011. In recent years, growing economic factors have weakened the economy and have limited consumer spending. During this time of economic challenge, the Company continues to maintain a strict loan underwriting process on its consumer auto loan offerings to limit future loss exposure. The Company’s interest rates offered on indirect automobile opportunities have struggled to compete with the more aggressive lending practices of local banks and alternative methods of financing, such as captive finance companies offering loans at below-market interest rates related to this segment. The decreasing trend of auto loan balances should continue during 2012, as the larger institutions and captive finance companies will continue to aggressively compete for a larger share of the market.
The remaining consumer loan products were collectively down $2,784, or 4.3%, which included general decreases in loan balances from recreational vehicles, mobile homes, home equity lines of credit and unsecured loans. Management will continue to place more emphasis on other loan portfolios (i.e. commercial and, to a smaller extent, residential real estate) that will promote increased profitable loan growth and higher returns. Indirect automobile loans bear additional costs from dealers that partially offset interest revenue and lower the rate of return.
Generating residential real estate loans remains a key focus of the Company’s lending efforts. Residential real estate loan balances comprise the largest portion of the Company’s loan portfolio and consist primarily of one- to four-family residential mortgages and carry many of the same customer and industry risks as the commercial loan portfolio. During 2011, total residential real estate loan balances decreased $10,389, or 4.4%, from year-end 2010 to total $226,489. The decrease was mostly from the Company’s 15-, 20- and 30-year fixed-rate loans, which were down $12,345, or 7.0%, from year-end 2010. Long-term interest rates continue to remain at historic low levels. In recent years, the Company has experienced periods of increased refinancing demand for long-term, fixed-rate real estate loans, particularly during the first half of 2009 and the second half of 2010, as a result of the historic low rates. Management has determined that originating 100% of the demand for long-term fixed-rate real estate loans at such low rates would present an unacceptable level of interest rate risk. Therefore, to help manage interest rate risk while also satisfying the demand for long-term, fixed-rate real estate loans, the Company has strategically chosen to originate and sell most of its fixed-rate mortgages to the secondary market. During these heavy periods of increased refinancing in 2009 and 2010, consumers were able to take advantage of low rates and reduce their monthly costs. As a result, during the year ended December 31, 2011, refinancing volume that led to secondary market sales trended down, with 118 loans sold totaling $13,637 as compared to 133 loans sold totaling $16,825 during the year ended December 31, 2010. This trend of secondary market emphasis also contributed to a lower balance of one-year adjustable-rate mortgages, which were down $2,611, or 10.8%, from year-end 2010. The remaining real estate loan portfolio balances increased $4,567 primarily from the Company’s other variable-rate products. The Company believes it has limited its interest rate risk exposure due to its practice of promoting and selling residential mortgage loans to the secondary market. The Company will continue to follow this secondary market strategy until long-term interest rates increase back to a range that falls within an acceptable level of interest rate risk.
Further impacting lower loan balances were decreases in the Company’s commercial loan portfolio, which include both commercial real estate and commercial and industrial loans. At December 31, 2011, commercial and industrial and commercial real estate loans decreased $10,106, or 18.3%, and $7,166, or 3.2%, respectively, from year-end 2010. While commercial loans were down, management continues to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans. During 2011, the Company’s 18.3% decrease in the commercial and industrial loan portfolio was largely due to charge-offs and decreasing loan demand. Commercial and industrial loans consist of loans to corporate borrowers primarily in small to mid-sized industrial and commercial companies that include service, retail and wholesale merchants. Collateral securing these loans includes equipment, inventory, and stock.
Commercial real estate, the Company’s largest segment of commercial loans, also decreased $7,166, or 3.2%, from year-end 2010, largely due to charge-offs and decreasing loan demand. This segment of loans consists of owner-occupied, nonowner-occupied and construction loans. Commercial real estate also includes loan participations with other banks outside the Company’s primary market area. Although the Company is not actively seeking to participate in loans originated outside its primary market area, it has taken 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. Commercial real estate loans were down largely from its owner-occupied portfolio during 2011, which decreased $6,476, or 4.3%, from year-end 2010. Owner-occupied loans consist of nonfarm, nonresidential properties. A commercial owner-occupied loan is a borrower purchased building or space for which the repayment of principal is dependent upon cash flows from the ongoing operations conducted by the party, or an affiliate of the party, who owns the property. Owner-occupied loans of the Company include loans secured by hospitals, churches, and hardware and convenience stores. Nonowner-occupied commercial loans are property loans for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property, such as apartment buildings, condominiums, hotels and motels. These loans are primarily impacted by local economic conditions, which dictate occupancy rates and the amount of rent charged. Commercial construction loans are extended to individuals as well as corporations for the construction of an individual property or multiple properties and are secured by raw land and the subsequent improvements.
The total commercial loan portfolio, including participation loans, consists primarily of rental property loans (26.5% of portfolio), medical industry loans (11.3% of portfolio), hotel and motel loans (6.7% of portfolio) and land development loans (5.2% of portfolio). During 2011, the primary market areas for the Company’s commercial loan originations, excluding loan participations, were in the areas of Gallia, Jackson, Pike and Franklin counties of Ohio, which accounted for 44.5% of total originations. The growing West Virginia markets also accounted for 42.7% 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, the effects of competitive pressure and normal underwriting considerations.
The Company continues to monitor the pace of its loan volume. The well-documented housing market crisis and other disruptions within the economy have negatively impacted consumer spending, which has continued to limit the lending opportunities within the Company's market locations. Declines in the housing market since 2009, with falling home prices and increasing foreclosures and unemployment, have continued to result in significant write-downs of asset values by financial institutions. To combat this ongoing potential for loan loss, the Company will remain consistent in its approach to sound underwriting practices and a focus on asset quality. The Company anticipates its overall loan growth in 2012 to be challenged.
ALLOWANCE FOR LOAN LOSSES
Tables IV and V have been provided to enhance the understanding of the loan portfolio and the allowance for loan losses. Management evaluates the adequacy of the allowance for loan losses quarterly based on several factors, including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimate of probable incurred losses. Management continually monitors the loan portfolio to identify potential portfolio risks and to detect potential credit deterioration in the early stages, and then establishes reserves based upon its evaluation of these inherent risks. Actual losses on loans are reflected as reductions in the reserve and are referred to as charge-offs. The amount of the provision for loan losses charged to operating expenses is the amount necessary, in management's opinion, to maintain the allowance for loan losses at an adequate level that is reflective of probable and inherent loss. The allowance required is primarily a function of the relative quality of the loans in the loan portfolio, the mix of loans in the portfolio and the rate of growth of outstanding loans. Impaired loans, which include loans classified as TDR’s, are considered in the determination of the overall adequacy of the allowance for loan losses.
The continued struggles of our U.S. economy are having a direct impact on the Company’s borrowers, as they continue to experience financial difficulties and liquidity strains. The Company is faced with the ongoing decision of whether to foreclose on these troubled loans and take possession of the collateral or to work with the borrower to modify the original terms of the loan. A successful loan modification not only avoids costly foreclosure proceedings but, more importantly, could result in the full repayment of the loan principal amount. The Company continues to monitor and make loan modifications to certain troubled loans that would ease payment pressures on the borrower. Most generally, the modification “period” of the original terms of the loan is only temporary (i.e. 12 months), after which the loan would resume under the original contractual terms of the loan. GAAP and regulatory guidance identifies certain loan modifications that would be classified as TDR’s, which, in general, is when a bank, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the bank would not otherwise consider. One such qualification would be if the bank modified the original terms of the loan for the remaining original life of the debt. Modifications of the original terms would include temporarily adjusting the contractual interest rate of the loan or converting the payment method from principal and interest amortization payments to interest-only for a temporary period of time.
During 2011, the Company’s allowance for loan losses decreased $2,042 to finish at $7,344, as compared to $9,386 at year-end 2010. This decrease in reserves was largely due to the partial charge-offs during the first half of 2011 of various commercial and residential real estate loans classified as impaired and TDR’s. Beginning in 2011, the Company began to take partial charge-offs more quickly on collateral dependent loans. As management further evaluated the trends in the real estate market, as well as the status of long-term, collateral dependent impaired loans, the decision to charge off these specific allocations was made. As a result, net charge-offs during 2011 grew to $6,938, an increase from $4,683 in net charge-offs recorded during 2010. The majority of net charge-offs were recorded during the first and second quarters of 2011, which totaled $4,278 and $2,332, respectively.
Partially offsetting the growth in net charge-offs and lowering provision expense was an increase in loan recoveries. In 2011, the Company was successful in recovering amounts on previously charged-off loans. During 2011, total loan recoveries were $3,484, an increase of $2,288, or 191.3%, over 2010. The majority of loan recoveries were from commercial real estate and commercial and industrial loan balances that had been previously charged off.
Net charge-offs during the first quarter of 2011 were mostly from two commercial TDR loans with one borrower, for which a $3,839 partial charge-off was recorded due to declining asset values. Of this $3,839 in TDR loan charge-offs, approximately $2,906 had been previously allocated within the allowance for loan losses causing no additional provision expense to be charged. This previous allocation of the allowance for loan losses was the result of GAAP and regulatory guidance, which requires the Company to perform impairment analysis of the asset values on collateral-based TDR loans. This impairment analysis from prior periods resulted in specific allocation increases to the allowance for loan losses and corresponding increases to provision for loan losses expense. Yet, during the first quarter of 2011, a current impairment analysis revealed further deterioration in the collateral values associated with both commercial loans. As a result, it was determined an additional $933 in provision expense was necessary to account for this impairment. During the fourth quarter of 2011, the Company was successful in obtaining payoff from both of these commercial loans which led to the increase in loan recoveries previously mentioned. The Company will continue to perform the required impairment analysis on both commercial loans and make adjustments to the allowance for loan losses as necessary.
Net charge-offs during the second quarter of 2011 were largely recorded on various collateral-based impaired loans during the month of June, using reserves that had previously been allocated for these loans within the allowance for loan losses. This action came after further cash flow analysis by management and additional feedback from regulators. In the near term, management expects to timely charge off specific reserves on collateral dependent loans.
As a result of the previously mentioned TDR loan charge-offs during the first quarter of 2011, as well as other charge-offs taken during the second quarter of 2011 on various collateral dependent impaired loans, the specific reserve allocations on both TDR and impaired loans decreased from $5,230 at December 31, 2010 to just $655 at December 31, 2011. Given that a majority of these loan losses had been previously identified and specifically allocated for in periods prior to 2011, increases in provision expense were not required. However, these TDR and impaired loan charge-offs had an immediate impact on the Company’s general allocations related to the historical loan loss factor. This general allocation evaluates the average historical loan losses over the past 36 months and requires general allocations of the allowance for loan losses to be recorded as average loan losses increase. During 2011, the Company’s annualized ratio of net charge-offs to average loans grew to 1.11% as compared to 0.72% during 2010. This change in ratio had an immediate impact on the overall increase to the Company’s general charge-off allocation, which increased $1,099 from year-end 2010, primarily within the commercial real estate and commercial and industrial loan portfolios. Further affecting increases to the general allocations within the allowance for loan losses were the Company’s economic risk factor, classified and criticized asset allocations, which collectively increased $1,434 from December 31, 2010 to December 31, 2011.
The Company’s impaired loans decreased $11,534 from year-end 2010 in large part due to the commercial and residential real estate loan charge-offs previously mentioned. The portions of impaired loans for which there are specific allocations reflect losses that the Company expects to incur, as they will not likely be able to collect all amounts due according to the contractual terms of the loan. Although impaired loans have been identified as potential problem loans, they may never become delinquent or classified as nonperforming. This was the case with the previously mentioned commercial loans that were partially charged-off during the first quarter of 2011.
The Company was successful in lowering its nonperforming loans to total loans, finishing at 0.52% at December 31, 2011 as compared to 0.78% at December 31, 2010. Nonperforming loans consist of nonaccruing loans and accruing loans past due 90 days or more. Nonperforming loans finished at $3,137 at December 31, 2011, compared to $5,009 at year-end 2010. Lowering nonperforming loans also had an impact on lowering both the specific allocations of the allowance and corresponding provision expenses for the portfolio risks and credit deterioration of these nonperforming credits. The Company’s nonperforming assets (which includes nonperforming loans and OREO) to total assets ratio also lowered, finishing at 0.92% at December 31, 2011 as compared to 1.11% at December 31, 2010. Approximately 39.9% of nonperforming assets is related to two loans with one commercial borrower totaling $2,948 that was transferred into OREO during the second quarter of 2008. After a re-evaluation of the asset values of both properties during 2011, an impairment write-down of $1,266 was recorded and contributed to the decrease in nonperforming assets from year-end 2010. Both nonperforming loans and nonperforming assets at December 31, 2011 continue to be in various stages of resolution for which management believes such loans are adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses.
As a result of the specific reserve allocations used in the partial charge-offs of both TDR and impaired loans during the first half of 2011, the ratio of the allowance for loan losses to total loans decreased to 1.23% at December 31, 2011, compared to 1.46% at December 31, 2010. Because of the increase in net charge-offs, the Company has seen its general allocations within the allowance for loan losses increase, with its general allocations to total loans increasing from 0.65% at December 31, 2010 to 1.12% at December 31, 2011. Management believes that the allowance for loan losses at December 31, 2011 was adequate and reflected probable incurred losses in the loan portfolio. There can be no assurance, however, that adjustments to the allowance for loan losses will not be required in the future. Changes in the circumstances of particular borrowers, as well as adverse developments in the economy are factors that could change and make adjustments to the allowance for loan losses necessary. Asset quality will continue to remain a key focus, as management continues to stress not just loan growth, but quality in loan underwriting as well
DEPOSITS
Deposits are used as part of the Company’s liquidity management strategy to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. Deposits, both interest- and noninterest-bearing, continue to be the most significant source of funds used by the Company to support earning assets. The Company seeks to maintain a proper balance of “core” deposit relationships on hand while also utilizing various wholesale deposit sources, such as brokered and internet CD balances, as an alternative funding source to manage efficiently the net interest margin. 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, 2011. Total deposits decreased $6,895, or 1.0%, to finish at $687,886 at December 31, 2011, resulting mostly from a net decrease in the Company’s time deposit balances due to increased maturity runoff of CD’s. This change in time deposits from year-end 2010 fits within management’s strategy of focusing on more core deposit balances that include interest-bearing demand, savings, money market and noninterest-bearing deposit balances. Core relationship deposits are considered by management as a primary source of the Bank’s liquidity. The Bank focuses on these kinds of deposit relationships with consumers from local markets who can maintain multiple accounts and services at the Bank. The Company views core deposits as the foundation of its long-term funding sources because it believes such core deposits are more stable and less sensitive to changing interest rates and other economic factors. As a result, the Bank’s core customer relationship strategy has resulted in a higher portion of its deposits being held in NOW, savings and money market accounts at December 31, 2011 than at December 31, 2010, while a lesser portion was being held in brokered and retail time deposits at December 31, 2011 than at December 31, 2010. Furthermore, the Company’s core noninterest-bearing demand accounts increased from year-end 2010.
Deposit decreases from year-end 2010 came mostly from the Company’s time deposits. Historically, time deposits, particularly CD’s, had been the most significant source of funding for the Company’s earning assets, making up 44.5% of total deposits at December 31, 2010. However, these funding sources continue to be less emphasized due to lower market rates and the Company’s focus on growing its core deposit balances. As a result, time deposits represented 36.0% of total deposits at December 31, 2011. During 2011, time deposits decreased $61,319, or 19.8%, from year-end 2010. With loan balances down 6.7% from year-end 2010, the Company has not needed to employ aggressive funding measures, such as offering higher rates, to attract customer investments in CD’s. Furthermore, as market rates remain at low levels from 2009 and 2010, the Company has seen the cost of its retail CD balances continue to reprice downward (as a lagging effect to the actions by the Federal Reserve) to reflect current deposit rates. As the Company’s CD rate offerings have fallen considerably from a year ago, the Bank’s CD customers have been more likely to consider re-investing their matured CD balances into other short-term deposit products or with other institutions offering the most attractive rates. This has led to an increased maturity runoff within its “customer relation” retail CD portfolio. Furthermore, with the significant downturn in economic conditions, the Bank’s CD customers in general have experienced reduced funds available to deposit with structured terms, choosing to remain more liquid. As a result, the Company has experienced a decrease within its retail CD balances, which were down $39,767 from year-end 2010. The Company’s preference of core deposit funding sources has created a lesser reliance on brokered and internet CD issuances, which were also down $21,552 from year-end 2010. The Company will continue to evaluate its use of brokered CD’s to manage interest rate risk associated with longer-term, fixed-rate asset loan demand.
While time deposits decreased during 2011, the Company’s remaining deposits, both interest- and noninterest-bearing, collectively increased $54,424, or 14.1%, from year-end 2010. The increase came mostly from a significant portion of the Company’s repurchase agreement funds reinvesting into interest- and noninterest-bearing checking accounts during the second half of 2011. Prior to 2011, banking regulations prohibited the payment of interest on commercial demand deposit accounts. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, which created significant financial reform. One of those changes, which took effect in the third quarter of 2011, now permits banks to pay interest on business checking accounts. The Company evaluated the effects of this change to its business deposit account relationships, particularly within its repurchase agreement borrowings. Repurchase agreements are financing arrangements with business accounts that have overnight maturity terms. These overnight funds are paid a rate of interest and require various securities to be pledged as collateral. During the third quarter of 2011, the Company began offering to its repurchase agreement depositors the opportunity to reinvest their balances into one of two products: 1) a higher-yielding, interest-bearing demand deposit (Commercial NOW) account that would be subject to standard FDIC insurance coverage, or 2) a noninterest-bearing demand deposit (business checking) account that would have unlimited FDIC insurance coverage up to the end of 2012. As a result, the Company saw 100% of its repurchase agreement balances shift into its core deposit segment. At December 31, 2011, the Company’s interest-free funding source, noninterest-bearing demand deposits, had increased $46,194, or 50.2%, from year-end 2010, with the majority coming from its business checking account growth from the reinvestment of repurchase agreement balances. Also at December 31, 2011, the Company’s interest-bearing demand deposit (NOW) accounts increased $74, or 0.1%, from year-end 2010, mostly within commercial NOW accounts that received reinvested dollars from repurchase agreement balances. Not only does this provide the Company’s business account relationships with options to better suit their needs, it also fits in its preference to grow core deposits and to establish more solid customer relationships.
Partially offsetting core deposit growth within the Company’s NOW account deposits in 2011 were decreases in public fund account balances, which were down $7,627, or 13.4%, from year-end 2010. This decrease was largely driven by public fund balances related to local city and county school construction projects within Gallia County, Ohio. While the Company feels confident in the relationships it has with its public fund customers, these balances will continue to experience “larger” fluctuations than other deposit account relationships due to the nature of the account activity. Larger public fund balance fluctuations are, at times, seasonal and can be predicted while most other large fluctuations are outside of management’s control. The Company values these public fund relationships it has secured and will continue to market and service these accounts to maintain its long-term relationship.
Interest-bearing deposit growth also came from money market accounts, which were up $4,115, or 2.8%, from year-end 2010. The increase came largely from the Company’s Market Watch product. The Market Watch product is a limited transaction investment account with tiered rates that competes with current market rate offerings and serves as an alternative to certificates of deposit for some customers. With an added emphasis on further building and maintaining core deposit relationships, the Company has marketed several attractive incentive offerings in the past several years to draw customers to this particular product. Most recently, the Company offered a special six-month introductory rate offer of 2.00% APY during 2010’s third quarter for new Market Watch accounts. This special offer was well received by the Bank’s customers and contributed to elevating money market balances during the second half of 2010. The promotion ended during the first quarter of 2011, and the interest rate adjusted down to a current market rate. A portion of deposits have been retained since the lowering of the rate as Market Watch balances are up $4,017, or 2.8%, from year-end 2010.
Additional interest-bearing core deposit growth also came from the Company’s savings account balances, which increased $4,041, or 9.5%, from year-end 2010, coming primarily from its statement savings product. The increase in savings account balances reflects the customer’s preference to remain liquid while the opportunity for market rates to rise in the near future still exists. As CD market rates continue to adjust downward, the spread between a short-term CD rate and a statement savings rate have become close enough for customers to invest their balances into the more liquid statement savings account.
The Company will continue to experience increased competition for deposits in its market areas, which should challenge its net growth. The Company will continue to emphasize growth in its core deposit relationships during 2012, reflecting the Company’s efforts to reduce its reliance on higher cost funding and improving net interest income.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Repurchase agreements, which are financing arrangements that have overnight maturity terms, decreased from $38,107 at December 31, 2010 to $0 at December 31, 2011. As previously mentioned, the re-distribution of 100% of the Company’s repurchase agreements to other deposit products was due to newly enacted legislation during the third quarter of 2011 which permits banks to now pay interest on its business checking accounts. All of the Company’s repurchase agreement depositors took advantage of two interest-bearing and noninterest-bearing products to reinvest their dollars. Not only does this provide the Company’s business account relationships with options to better suit their needs, it also fits in its preference to grow core deposits and to establish more solid customer relationships.
OTHER BORROWED FUNDS
The Company also accesses other funding sources, including short-term and long-term borrowings, to fund asset growth and satisfy short-term liquidity needs. Other borrowed funds consist primarily of Federal Home Loan Bank (“FHLB”) advances and promissory notes. During 2011, other borrowed funds were down $7,447, or 26.8%, from year-end 2010. While net loan demand was on a declining pace during 2011, management used the retained deposit proceeds from the first quarter’s seasonal tax activity to repay FHLB borrowings. While deposits continue to be the primary source of funding for growth in earning assets, management will continue to utilize various wholesale borrowings to help manage interest rate sensitivity and liquidity.
OFF-BALANCE SHEET ARRANGEMENTS
As discussed in Notes G and J, the Company engages in certain off-balance sheet credit-related activities, including commitments to extend credit and standby letters of credit, which could require the Company to make cash payments in the event that specified future events occur. 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 to guarantee the performance of a customer to a third party. While these commitments are necessary to meet the financing needs of the Company’s customers, many of these commitments are expected to expire without being drawn upon. Therefore, the total amount of commitments does not necessarily represent future cash requirements.
CAPITAL RESOURCES
The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors. As detailed in Note N to the financial statements at December 31, 2011, the Bank’s capital exceeded the requirements to be deemed “well capitalized” under applicable prompt corrective action regulations. Total shareholders' equity at December 31, 2011 of $71,843 was up $3,715, or 5.5%, as compared to the balance of $68,128 at December 31, 2010. Contributing most to this increase was year-to-date net income of $5,835, partially offset by cash dividends paid of $3,360, or $.83 per share. The Company had treasury stock totaling $15,712 at December 31, 2011, unchanged from year-end 2010.
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 static balance sheet and flat interest rates. 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 current balance sheet structure.
The Company’s Asset/Liability Committee monitors and manages IRR within Board approved policy limits. The current IRR policy limits anticipated changes in net interest income to an instantaneous increase or decrease in market interest rates over a 12 month horizon to +/- 5% for a 100 basis point rate shock, +/- 7.5% for a 200 basis point rate shock and +/- 10% for a 300 basis point rate shock. Based on the level of interest rates, management did not test interest rates down 200 or 300 basis points.
The estimated percentage change in net interest income due to a change in interest rates was within the policy guidelines established by the Board. With the historical low interest rate environment, management generally has been focused on limiting the duration of assets, while trying to extend the duration of our funding sources to the extent customer preferences will permit us to do so. The exposure to rising interest rates is primarily related to the level of fixed-rate mortgages, which have contractual terms as long as 30 years. Presently, management attempts to sell most fixed-rate residential mortgages to the secondary market. However, the underwriting criteria for secondary market loans continues to become more restrictive. As a result, we booked a portion of the fixed-rate mortgages originated. During the later part of 2011, management began limiting the maximum term to 15 years for fixed-rate real estate loans placed in the portfolio, which will reduce the duration of the mortgage portfolio over time. The exposure to rising interest rates at December 31, 2011 was comparable to the prior year end. Net interest income decreases in a declining rate environment due to the interest rate on many deposit accounts not being able to adjust downward. With interest rates so low, deposit accounts are perceived to be at or near an interest rate floor. Overall, management is comfortable with the current interest rate risk profile which reflects minimal exposure to interest rate changes.
Liquidity relates to the Company's ability to meet the cash demands and credit needs of its customers and is provided by the ability to readily convert assets to cash and raise funds in the market place. Total cash and cash equivalents, held to maturity securities maturing within one year and available for sale securities, totaling $137,948, represented 17.2% of total assets at December 31, 2011. In addition, the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity demands. At December 31, 2011, the Bank could borrow an additional $137,038 from the FHLB, of which $95,000 could be used for short-term, cash management advances. Furthermore, the Bank has established a borrowing line with the Federal Reserve. At December 31, 2011, this line had total availability of $45,059. Lastly, the Bank also has the ability to purchase federal funds from a correspondent bank. For further cash flow information, see the condensed consolidated statement of cash flows. Management does not rely on any single source of liquidity and monitors the level of liquidity based on many factors affecting the Company’s financial condition.
INFLATION
Consolidated financial data included herein has been prepared in accordance with US GAAP. Presently, US GAAP requires the Company to measure financial position and operating results in terms of historical dollars with the exception of securities available for sale, which are carried at fair value. Changes in the relative value of money due to inflation or deflation are generally not considered.
In management's opinion, changes in interest rates affect the financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as monetary and fiscal policies. A financial institution's ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today's volatile economic environment. The Company seeks to insulate itself from interest rate volatility by ensuring that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree.
CRITICAL ACCOUNTING POLICIES
The most significant accounting policies followed by the Company are presented in Note A to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those that 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.
The allowance for loan losses is a valuation allowance for probable incurred credit losses. 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. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans generally consist of loans with balances of $200 or more on nonaccrual status or nonperforming in nature. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance homogeneous loans, such as consumer and most residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and impaired loans that are not individually reviewed for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: Commercial Real Estate, Commercial and Industrial, Residential Real Estate, and Consumer.
Commercial and industrial loans consist of borrowings for commercial purposes to individuals, corporations, partnerships, sole proprietorships, and other business enterprises. Commercial and industrial loans are generally secured by business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or operations. The Company’s risk exposure is related to deterioration in the value of collateral securing the loan should foreclosure become necessary. Generally, business assets used or produced in operations do not maintain their value upon foreclosure, which may require the Company to write-down the value significantly to sell.
Commercial real estate consists of nonfarm, nonresidential loans secured by owner-occupied and nonowner-occupied commercial real estate as well as commercial construction loans. An owner-occupied loan relates to a borrower purchased building or space for which the repayment of principal is dependent upon cash flows from the ongoing business operations conducted by the party, or an affiliate of the party, who owns the property. Owner-occupied loans that are dependent on cash flows from operations can be adversely affected by current market conditions for their product or service. A nonowner-occupied loan is a property loan for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property. Nonowner-occupied loans that are dependent upon rental income are primarily impacted by local economic conditions which dictate occupancy rates and the amount of rent charged. Commercial construction loans consist of borrowings to purchase and develop raw land into one- to four-family residential properties. Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements. Repayment of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value which may be absorbed by the Company.
Residential real estate loans consist of loans to individuals for the purchase of one- to four-family primary residences with repayment primarily through wage or other income sources of the individual borrower. The Company’s loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.
Consumer loans are comprised of loans to individuals secured by automobiles, open-end home equity loans and other loans to individuals for household, family, and other personal expenditures, both secured and unsecured. These loans typically have maturities of 5 years or less with repayment dependent on individual wages and income. The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary. During the last several years, one of the most significant portions of the Company’s net loan charge-offs have been from consumer loans. Never the less, the Company has allocated the highest percentage of its allowance for loan losses as a percentage of loans to the other identified loan portfolio segments due to the larger dollar balances associated with such portfolios.
CONCENTRATIONS OF CREDIT RISK
The Company maintains a diversified credit portfolio, with residential real estate loans currently comprising the most significant portion. Credit risk is primarily subject to loans made to businesses and individuals in southeastern Ohio and 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, 2011. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements, whether as a result of new information, unanticipated future events or otherwise.

CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Table I |  | December 31 |
(dollars in thousands) |  | 2011 |  |  | 2010 |  |  | 2009 |
|  | 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 with banks |  | $ | 67,947 |  |  | $ | 163 |  |  |  | 0.24 | % |  | $ | 43,450 |  |  | $ | 93 |  |  |  | 0.21 | % |  | $ | 27,077 |  |  | $ | 58 |  |  |  | 0.21 | %
Federal fuunds sold |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 18 |  |  |  | - |  |  |  | 0.05 |
Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 102,740 |  |  |  | 2,043 |  |  |  | 1.99 |  |  |  | 93,846 |  |  |  | 2,462 |  |  |  | 2.62 |  |  |  | 97,124 |  |  |  | 3,038 |  |  |  | 3.13 |
Tax exempt |  |  | 14,997 |  |  |  | 849 |  |  |  | 5.66 |  |  |  | 11,678 |  |  |  | 735 |  |  |  | 6.30 |  |  |  | 9,916 |  |  |  | 659 |  |  |  | 6.64 |
Loans |  |  | 625,603 |  |  |  | 41,414 |  |  |  | 6.62 |  |  |  | 653,557 |  |  |  | 43,617 |  |  |  | 6.67 |  |  |  | 641,878 |  |  |  | 44,223 |  |  |  | 6.89 |
Total interest-earning assets |  |  | 811,287 |  |  |  | 44,469 |  |  |  | 5.48 | % |  |  | 802,531 |  |  |  | 46,907 |  |  |  | 5.85 | % |  |  | 776,013 |  |  |  | 47,978 |  |  |  | 6.18 | %
Non-interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  |  | 9,855 |  |  |  |  |  |  |  |  |  |  |  | 8,836 |  |  |  |  |  |  |  |  |  |  |  | 8,524 |  |  |  |  |  |  |  |  |
Other nonearning assets |  |  | 44,957 |  |  |  |  |  |  |  |  |  |  |  | 46,057 |  |  |  |  |  |  |  |  |  |  |  | 42,515 |  |  |  |  |  |  |  |  |
Allowance for loan losses |  |  | (8,082 | ) |  |  |  |  |  |  |  |  |  |  | (8,722 | ) |  |  |  |  |  |  |  |  |  |  | (8,100 | ) |  |  |  |  |  |  |  |
Total noninterest-earning assets |  |  | 46,730 |  |  |  |  |  |  |  |  |  |  |  | 46,171 |  |  |  |  |  |  |  |  |  |  |  | 42,939 |  |  |  |  |  |  |  |  |
Total asets |  | $ | 858,017 |  |  |  |  |  |  |  |  |  |  | $ | 848,702 |  |  |  |  |  |  |  |  |  |  | $ | 818,952 |  |  |  |  |  |  |  |  |
Liabilities and Shareholders' Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NOW accounts |  | $ | 104,937 |  |  | $ | 1,393 |  |  |  | 1.33 | % |  | $ | 100,054 |  |  | $ | 1,428 |  |  |  | 1.43 | % |  | $ | 92,550 |  |  | $ | 1,326 |  |  |  | 1.43 | %
Savings and Money Markets |  |  | 196,312 |  |  |  | 1,317 |  |  |  | 0.67 |  |  |  | 164,297 |  |  |  | 1,582 |  |  |  | 0.96 |  |  |  | 135,728 |  |  |  | 1,636 |  |  |  | 1.21 |
Time deposits |  |  | 281,864 |  |  |  | 5,726 |  |  |  | 2.03 |  |  |  | 327,330 |  |  |  | 8,043 |  |  |  | 2.46 |  |  |  | 331,130 |  |  |  | 10,721 |  |  |  | 3.24 |
Repurchase Agreements |  |  | 19,196 |  |  |  | 17 |  |  |  | 0.09 |  |  |  | 26,991 |  |  |  | 57 |  |  |  | 0.21 |  |  |  | 27,540 |  |  |  | 75 |  |  |  | 0.27 |
Other borrowed money |  |  | 24,279 |  |  |  | 627 |  |  |  | 2.58 |  |  |  | 36,640 |  |  |  | 1,348 |  |  |  | 3.68 |  |  |  | 48,905 |  |  |  | 2,085 |  |  |  | 4.26 |
Subordinated debentures |  |  | 13,500 |  |  |  | 1,089 |  |  |  | 8.07 |  |  |  | 13,500 |  |  |  | 1,089 |  |  |  | 8.07 |  |  |  | 13,500 |  |  |  | 1,089 |  |  |  | 8.07 |
Total int-bearing liabilities |  |  | 640,088 |  |  |  | 10,169 |  |  |  | 1.59 | % |  |  | 668,812 |  |  |  | 13,547 |  |  |  | 2.03 | % |  |  | 649,353 |  |  |  | 16,932 |  |  |  | 2.61 | %
Noninterest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand Deposit accounts |  |  | 137,823 |  |  |  |  |  |  |  |  |  |  |  | 102,164 |  |  |  |  |  |  |  |  |  |  |  | 93,045 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 10,240 |  |  |  |  |  |  |  |  |  |  |  | 10,120 |  |  |  |  |  |  |  |  |  |  |  | 11,613 |  |  |  |  |  |  |  |  |
Total noninterest-bearing liabilities |  |  | 148,063 |  |  |  |  |  |  |  |  |  |  |  | 112,284 |  |  |  |  |  |  |  |  |  |  |  | 104,658 |  |  |  |  |  |  |  |  |
Shareholders' equity |  |  | 69,866 |  |  |  |  |  |  |  |  |  |  |  | 67,606 |  |  |  |  |  |  |  |  |  |  |  | 64,941 |  |  |  |  |  |  |  |  |
Total liabilities and shareholders' equity |  | $ | 858,017 |  |  |  |  |  |  |  |  |  |  | $ | 848,702 |  |  |  |  |  |  |  |  |  |  | $ | 818,952 |  |  |  |  |  |  |  |  |
Net interest earnings |  |  |  |  |  | $ | 34,300 |  |  |  |  |  |  |  |  |  |  | $ | 33,360 |  |  |  |  |  |  |  |  |  |  | $ | 31,046 |  |  |  |  |
Net interest earnings as a percent |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
of interest-earning assets |  |  |  |  |  |  |  |  |  |  | 4.23 | % |  |  |  |  |  |  |  |  |  |  | 4.16 | % |  |  |  |  |  |  |  |  |  |  | 4.00 | %
Net interest rate spread |  |  |  |  |  |  |  |  |  |  | 3.89 | % |  |  |  |  |  |  |  |  |  |  | 3.82 | % |  |  |  |  |  |  |  |  |  |  | 3.57 | %
Avg interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
to interest-earning assets |  |  |  |  |  |  |  |  |  |  | 78.90 | % |  |  |  |  |  |  |  |  |  |  | 83.34 | % |  |  |  |  |  |  |  |  |  |  | 83.68 | %

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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  |  |  |  | 2011 |  |  |  |  |  |  |  |  | 2010 |  |  |  |
|  | Increase (Decrease) |  |  | Increase (Decrease) |
|  | From Previous Years Due To |  |  | From Previous Years Due To |
|  | Volume |  |  | Yield/Rate |  |  | Total |  |  | Volume |  |  | Yield/Rate |  |  | Total |
Interest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing balances with banks |  | $ | 57 |  |  | $ | 13 |  |  | $ | 70 |  |  | $ | 35 |  |  | $ | - |  |  | $ | 35 |
Federal fuunds sold |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 217 |  |  |  | (636 | ) |  |  | (419 | ) |  |  | (99 | ) |  |  | (477 | ) |  |  | (576 | )
Tax exempt |  |  | 194 |  |  |  | (80 | ) |  |  | 114 |  |  |  | 112 |  |  |  | (36 | ) |  |  | 76 |
Loans |  |  | (1,853 | ) |  |  | (350 | ) |  |  | (2,203 | ) |  |  | 795 |  |  |  | (1,401 | ) |  |  | (606 | )
Total interest income |  |  | (1,385 | ) |  |  | (1,053 | ) |  |  | (2,438 | ) |  |  | 843 |  |  |  | (1,914 | ) |  |  | (1,071 | )
Interest expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NOW accts |  |  | 68 |  |  |  | (103 | ) |  |  | (35 | ) |  |  | 107 |  |  |  | (5 | ) |  |  | 102 |
Savings and Money Markets |  |  | 272 |  |  |  | (537 | ) |  |  | (265 | ) |  |  | 309 |  |  |  | (363 | ) |  |  | (54 | )
Time deposits |  |  | (1,031 | ) |  |  | (1,286 | ) |  |  | (2,317 | ) |  |  | (122 | ) |  |  | (2,556 | ) |  |  | (2,678 | )
Repurchase Agreements |  |  | (13 | ) |  |  | (27 | ) |  |  | (40 | ) |  |  | (2 | ) |  |  | (16 | ) |  |  | (18 | )
Other borrowed money |  |  | (383 | ) |  |  | (338 | ) |  |  | (721 | ) |  |  | (476 | ) |  |  | (261 | ) |  |  | (737 | )
Subordinated debentures |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total interest expense |  |  | (1,087 | ) |  |  | (2,291 | ) |  |  | (3,378 | ) |  |  | (184 | ) |  |  | (3,201 | ) |  |  | (3,385 | )
Net interest earnings |  | $ | (298 | ) |  | $ | 1,238 |  |  | $ | 940 |  |  | $ | 1,027 |  |  | $ | 1,287 |  |  | $ | 2,314 |

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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
As of December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Within One Year |  |  | After One but Within Five Years |  |  | After Five but Within Ten Years |  |  | After Ten Years |
|  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |
U.S. Treasury securities |  | $ | 5,513 |  |  |  | 0.23 | % |  | $ | - |  |  |  | - |  |  | $ | - |  |  |  | - |  |  | $ | - |  |  |  | - |
U.S. Government sponsored entity securities |  |  | 2,559 |  |  |  | 5.30 | % |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Obligations of states and political subdivisions |  |  | 648 |  |  |  | 7.41 | % |  |  | 3,901 |  |  |  | 5.20 | % |  |  | 10,289 |  |  |  | 3.23 | % |  |  | 7,987 |  |  |  | 5.17 | %
Agency mortgage-backed securities, residential |  |  | 1,148 |  |  |  | 4.66 | % |  |  | 55,342 |  |  |  | 3.75 | % |  |  | 16,219 |  |  |  | 3.44 | % |  |  | 4,912 |  |  |  | 3.40 | %
Total securities |  | $ | 9,868 |  |  |  | 2.53 | % |  | $ | 59,243 |  |  |  | 3.85 | % |  | $ | 26,508 |  |  |  | 3.36 | % |  | $ | 12,899 |  |  |  | 4.50 | %

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 category based on estimated average lives. Securities are shown at their carrying values, which include the market value adjustments for available for sale securities.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES |  |  |  |  |  |  |  |  |  |  |  |  |
TABLE IV |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  | Years Ended December 31 |
|  | 2011 |  |  | 2010 |  |  | 2009 |  |  | 2008 |  |  | 2007 |
Commercial loans(1) |  | $ | 4,259 |  |  | $ | 6,936 |  |  | $ | 5,777 |  |  | $ | 5,898 |  |  | $ | 5,273 |
Percentage of loans to total loans |  |  | 44.23 | % |  |  | 43.96 | % |  |  | 42.68 | % |  |  | 39.78 | % |  |  | 40.63 | %
Residential real estate loans |  |  | 1,730 |  |  |  | 993 |  |  |  | 822 |  |  |  | 806 |  |  |  | 327 |
Percentage of loans to total loans |  |  | 37.85 | % |  |  | 36.94 | % |  |  | 37.30 | % |  |  | 40.09 | % |  |  | 39.31 | %
Consumer loans(2) |  |  | 1,355 |  |  |  | 1,457 |  |  |  | 1,599 |  |  |  | 1,095 |  |  |  | 1,137 |
Percentage of loans to total loans |  |  | 17.92 | % |  |  | 19.10 | % |  |  | 20.02 | % |  |  | 20.13 | % |  |  | 20.06 | %
Allowance for Loan Losses |  | $ | 7,344 |  |  | $ | 9,386 |  |  | $ | 8,198 |  |  | $ | 7,799 |  |  | $ | 6,737 |
|  |  | 100 | % |  |  | 100 | % |  |  | 100 | % |  |  | 100 | % |  |  | 100 | %
Ratio of net charge-offs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
to average loans |  |  | 1.11 | % |  |  | 0.72 | % |  |  | 0.44 | % |  |  | 0.42 | % |  |  | 0.78 | %

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 commercial and industrial and commercial real estate loans.
(2) Includes automobile, home equity and other consumer loans.

SUMMARY OF NONPERFORMING AND PAST DUE LOANS |  |  |  |  |  |  |  |  |  |  |  |  |
TABLE V |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  | At December 31 |
|  | 2011 |  |  | 2010 |  |  | 2009 |  |  | 2008 |  |  | 2007 |
Impaired loans |  | $ | 11,572 |  |  | $ | 23,106 |  |  | $ | 27,644 |  |  | $ | 21,153 |  |  | $ | 6,871 |
Past due 90 days or more and still accruing |  |  | 459 |  |  |  | 1,714 |  |  |  | 1,639 |  |  |  | 1,878 |  |  |  | 927 |
Nonaccrual |  |  | 2,678 |  |  |  | 3,295 |  |  |  | 3,619 |  |  |  | 3,396 |  |  |  | 2,734 |
Accruing loans past due 90 days or more to |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
total loans |  |  | 0.08 | % |  |  | 0.27 | % |  |  | 0.25 | % |  |  | 0.30 | % |  |  | 0.14 | %
Nonaccrual loans as a % of total loans |  |  | 0.45 | % |  |  | 0.51 | % |  |  | 0.56 | % |  |  | 0.54 | % |  |  | 0.43 | %
Impaired loans as a % of total loans |  |  | 1.93 | % |  |  | 3.60 | % |  |  | 4.24 | % |  |  | 3.36 | % |  |  | 1.08 | %
Allowance for loan losses as a % |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
of total loans |  |  | 1.23 | % |  |  | 1.46 | % |  |  | 1.26 | % |  |  | 1.24 | % |  |  | 1.06 | %

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.
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.
In 2009, the Company changed its methodology for identifying impaired loans. Amounts as of December 31, 2008 have been reclassified to be consistent with the 2009 methodology. The change resulted in reclassifying current or performing loans as impaired loans for which full payment under the original terms is not probable. As of December 31, 2008, $13,054 of loans were reclassified as impaired loans and the related general allowance for loan losses allocation of $2,450 was reclassified as a specific allowance for loan losses. Prior to the change in methodology, the general allowance for loan losses allocation related to these loans was based on historical credit losses, and these allocations were materially consistent with amounts that would have been determined had the loans been classified as impaired. The reclassification had no impact on the allowance for loan losses, the provision for loan losses, net income or retained earnings. Amounts as of December 31, 2008 have been reclassified to be consistent with the 2009 methodology; however, amounts prior to December 31, 2008 have not been reclassified.

MATURITY AND REPRICING DATA OF LOANS |  |  |  |  |  |  |  |  |  |
As of December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |
TABLE VI |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | MATURITY / REPRICING |
|  | Within |  |  | After One but |  |  |  |  |  |  |
|  | One Year |  |  | Within Five Years |  |  | After Five Years |  |  | Total |
Residential real estate loans |  | $ | 33,443 |  |  | $ | 29,550 |  |  | $ | 163,496 |  |  | $ | 226,489 |
Commercial loans (1) |  |  | 145,793 |  |  |  | 95,110 |  |  |  | 23,753 |  |  |  | 264,656 |
Consumer loans (2) |  |  | 37,085 |  |  |  | 54,734 |  |  |  | 15,344 |  |  |  | 107,163 |
Total loans |  | $ | 216,321 |  |  | $ | 179,394 |  |  | $ | 202,593 |  |  | $ | 598,308 |
Loans maturing or repricing after one year with: |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest rates |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 96,596 |
Fixed interest rates |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 285,391 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 381,987 |

(1) Includes commercial and industrial and commercial real estate loans.
(2) Includes automobile, home equity and other consumer loans.

DEPOSITS |  |  |  |  |  |  |  |  |
Table VII |  |  |  |  |  |  |  |  |
(dollars in thousands) |  | As of December 31 |
|  | 2011 |  |  | 2010 |  |  | 2009 |
Interest-bearing deposits: |  |  |  |  |  |  |  |  |
NOW accounts |  | $ | 101,907 |  |  | $ | 101,833 |  |  | $ | 91,998 |
Money Market |  |  | 153,280 |  |  |  | 149,165 |  |  |  | 103,644 |
Savings accounts |  |  | 46,792 |  |  |  | 42,751 |  |  |  | 38,834 |
IRA accounts |  |  | 49,024 |  |  |  | 49,429 |  |  |  | 49,841 |
Certificates of Deposit |  |  | 198,740 |  |  |  | 259,654 |  |  |  | 276,557 |
|  |  | 549,743 |  |  |  | 602,832 |  |  |  | 560,874 |
Noninterest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  |  | 138,143 |  |  |  | 91,949 |  |  |  | 86,770 |
Total deposits |  | $ | 687,886 |  |  | $ | 694,781 |  |  | $ | 647,644 |

INTEREST RATE SENSITIVITY
Table VIII

Change in |  | December 31, 2011 |  | December 31, 2010
Interest Rates |  | % Change in |  | % Change in
Basis Points |  | Net Interest Income |  | Net Interest Income
+300 |  | (2.89%) |  | (2.47%)
+200 |  | (1.75%) |  | (1.66%)
+100 |  | (.76%) |  | (.95%)
-100 |  | (2.36%) |  | (2.32%)

CONTRACTUAL OBLIGATIONS
Table IX
The following table presents, as of December 31, 2011, 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 |
|  | Note |  |  | One Year |  |  | One to |  |  | Three to |  |  | Over |  |  |  |
|  | Reference |  |  | or Less |  |  | Three Years |  |  | Five Years |  |  | Five Years |  |  | Total |
Deposits without a stated maturity |  |  | E |  |  | $ | 440,122 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 440,122 |
Consumer and brokered time deposits |  |  | E |  |  |  | 141,710 |  |  |  | 93,893 |  |  |  | 11,234 |  |  |  | 927 |  |  |  | 247,764 |
Repurchase agreements |  |  | F |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Other borrowed funds |  |  | G |  |  |  | 3,944 |  |  |  | 8,829 |  |  |  | 2,134 |  |  |  | 5,389 |  |  |  | 20,296 |
Subordinated debentures |  |  | H |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 13,500 |  |  |  | 13,500 |

KEY RATIOS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
TABLE X |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | 2011 |  |  | 2010 |  |  | 2009 |  |  | 2008 |  |  | 2007 |
Return on average assets |  |  | 0.68 | % |  |  | 0.60 | % |  |  | 0.81 | % |  |  | 0.91 | % |  |  | 0.82 | %
Return on average equity |  |  | 8.35 | % |  |  | 7.54 | % |  |  | 10.23 | % |  |  | 11.62 | % |  |  | 10.40 | %
Dividend payout ratio |  |  | 57.59 | % |  |  | 65.67 | % |  |  | 47.95 | % |  |  | 42.94 | % |  |  | 46.66 | %
Average equity to average assets |  |  | 8.14 | % |  |  | 7.97 | % |  |  | 7.93 | % |  |  | 7.84 | % |  |  | 7.87 | %