EX-13 10 sec10k123115_ex13.htm ANNUAL REPORT TO SHAREHOLDERS 12/31/15

A record year with
Ohio Valley Banc Corp.
Annual Report 2015

Jon Jones, Western Cabell Regional Manager welcomes you to OVB Barboursville

MESSAGE FROM MANAGEMENT
Teamwork is a foreign concept to some, but at Ohio Valley Banc Corp., it was the cornerstone of the year 2015.
New opportunities were found in cooperative experiences with our fellow community banks. By now, you’ve seen the early 2016 announcement of the signing of a merger agreement with Milton Bancorp and The Milton Banking Company. That agreement is the result of teamwork on both sides; the ideals of community run strong in these organizations.
And while teamwork between banks showed us opportunities in the way we do business, teamwork with our communities led to history making events such as the first-ever OVB Community Bowl football game, the first OVB scholarship awarded at the Marshall Mid-Ohio Valley Center, and the acquisition and start of the renovation of the historic Second and State building, one of Ohio Valley Bank’s first offices.
Teamwork between our departments resulted in the opening of OVB Barboursville. Our branch of the future is the feature of this year’s Annual Report cover. And rightly so, as the opening of that office broke new ground in the way we serve our customers.
Teamwork even brought our employees together outside the bank to devote more than 2,400 man hours in community service. Each employee is given three days a year that they may spend in community service rather than working behind a desk. In greater numbers than ever before they chose to volunteer in groups. Imagine having a charitable event and not just one volunteer shows up, but a group of ten, a group of fifteen, a group of twenty. It is an amazing thing. We are humbled by the enthusiasm our bankers show for their communities every day.
However, our most impressive example of teamwork in 2015 was found just steps away. Inside the bank, your team held expenses down and looked for ways to improve income. Their efforts resulted in record income for the year ending 2015.
But you can see the results for yourself. Within these pages, we submit for your review the Ohio Valley Banc Corp. Annual Report for 2015.
Sincerely,

/s/Jeffrey E. Smith |  | /s/Thomas E. Wiseman
Jeffrey E. Smith |  | Thomas E. Wiseman
Chairman of the Board |  | President and CEO
Ohio Valley Banc Corp. |  | Ohio Valley Banc Corp.

1

Teamwork in 2015:
Our strategic focus on Internal Unity made your company stronger in 2015. They came together to build new offices, enhance the customer experience, and get the job done...whatever job needed to be done, from hosting crafts and story time in the Main Office lobby for kindergartners to cleaning and decorating the downtown.

Did you know?
Ohio Valley Bank & Loan
Central employees are given
hours off to use
for community service.
In 2015, they served for
2,544.5 hours.
That’s equal to 318 work days!
It’s like having a full-time
employee that just does
community service.
Do other companies do that?

Loan Central cleans and decorates downtown Ironton

When Community comes First,
service means more than assigning an account number
2

IMPACT Days included building homes for Habitat for Humanity, transporting homeless animals, visiting with children in the hospital, leading activities at the senior center, and raising awareness for cancer prevention through Relay for Life and Gabe’s Race. And these are just a few of the many creative ways our people serve their communities.

3

Teamwork in 2015: A great example of new opportunities that arose for your company through teamwork is Ohio Valley Bank’s work with fellow community bank, Farmers Bank of Pomeroy. In 2015, the two banks came together to organize and host the first-ever Cyber Security Summit.

Did you know?
The U.S. government
has spent $100 billion
on cybersecurity over
the past decade,
and has $14 billion
budgeted for
cybersecurity in 2016.
Forbes Magazine, Oct. 2015

OVB and Farmers pooled their resources and knowledge to lead the summit, a free event, which brought an industry-recognized cyber security specialist into the small communities of Gallipolis and Pomeroy in an open forum to answer the public’s questions.

Together we can achieve more
4

New Opportunities in Athens In December 2015, OVB expanded its territory with the opening of a loan production office on East State Street in Athens, Ohio. The OVB Athens Loan Office, under the leadership of veteran banker Brian Hall, is poised to deliver OVB’s brand of best-of-breed customer service and quality loan products to a new audience of consumers and business clients.

OHIO VALLEY BANK |  | LOAN CENTRAL

Athens, Ohio |  | Chillicothe, Ohio
Loan Office – 2097 East State St. Suite C |  | 1080 N. Bridge Street, Unit 43
Barboursville, West Virginia |  | Gallipolis, Ohio
6431 East State Route 60 |  | 2145 Eastern Avenue
Gallipolis, Ohio |  | Jackson, Ohio
Main Office - 420 Third Ave. |  | 345 Main Street
Mini Bank - 437 Fourth Ave. |  |
Inside Walmart - 2145 Eastern Ave. |  | Ironton, Ohio
Jackson Pike - 3035 State Route 160 |  | 710 Park Avenue
Inside Holzer - 100 Jackson Pike |  |
Loan Office - Walmart Plaza, 2145 Eastern Ave. |  | South Point, Ohio
|  | 348 County Road 410 Waverly, Ohio 505 West Emmitt Avenue
Jackson, Ohio 740 East Main St. |
Pomeroy, Ohio Inside Sav-a-Lot - 700 W. Main St. |  | Wheelersburg, Ohio 326 Center Street
Rio Grande, Ohio 27 North College Ave. |  |
Waverly, Ohio 507 West Emmitt Ave. |  |
Milton, West Virginia 280 East Main St. |  |
Point Pleasant, West Virginia 328 Viand St. |  |

5

Teamwork in 2015: Our last example of how teamwork for 2015 is all about community. Teamwork with our local schools and businesses helped your company make a direct and positive impact. Whether it was hosting a friendly competition between local schools as in the new OVB Community Bowl or working with Hoops Family Children’s Hospital to design a debit card to help them raise needed funds, your company’s efforts are making a difference in our hometowns.

Did you know?
OVB currently offers
17 designs for debit
cards which feature a
local school or charity.
www.ovbc.com/communitycards

Unveiling of Hoops Family Children’s Hospital debit card.

Together we can make a difference.
6

Historic Second & State property soon after OVB purchased it in 2015. OVB built the building in 1896. Now 120 years later, the property is back in OVB’s possession, and a massive restoration project is underway to bring it back to its former glory.

DIRECTORS |  |
OVBC DIRECTORS |  | OHIO VALLEY BANK DIRECTORS
Jeffrey E. Smith |  | Jeffrey E. Smith | Harold A. Howe
Chairman, Ohio Valley Banc Corp. and Ohio Valley Bank |  | Thomas E. Wiseman | Steven B. Chapman
|  | David W. Thomas | Anna P. Barnitz
Thomas E. Wiseman |  |  | Brent A. Saunders
President & CEO, Ohio Valley Banc Corp. and Ohio Valley Bank |  |  |
|  | DIRECTORS EMERITUS
David W. Thomas, Lead Director |  |
Former Chief Examiner, Ohio Division of Financial Institutions |  | W. Lowell Call | Barney A. Molnar
bank supervision and regulation |  | James L. Dailey | C. Leon Saunders
|  | Robert E. Daniel | Wendell B. Thomas
Steven B. Chapman |  | Art E. Hartley, Sr. | Lannes C. Williamson
Retired Certified Public Accountant |  |  |
|  | GenNEXT ADVISORY BOARD
Anna P. Barnitz |  |
Treasurer & CFO, Bob’s Market & Greenhouses, Inc. |  | Andrew J. Bush | David W. “Skymr” Bevens
wholesale horticultural products and retail landscaping stores |  | Mark A. Crawford | Hilary C. Nichols
|  | Bryan L. Minear | Kyle M. Curry
Brent A. Saunders |  | Heidi J. Wood | Christine J. Cline
Attorney, Halliday, Sheets & Saunders |  |  |
|  | WEST VIRGINIA ADVISORY BOARD
President & CEO, Holzer Consolidated Health Systems |  |
healthcare |  | Mario P. Liberatore | Stephen L. Johnson
|  | Richard L. Handley | E. Allen Bell
Harold A. Howe |  | Trenton M. Stover | John A. Myers
Self-employed, Real Estate Investment and Rental Property |  |  |

7

Officers

OVBC OFFICERS |  | OHIO VALLEY BANK OFFICERS |
EXECUTIVE OFFICERS |  | Jeffrey E. Smith | Chairman of the Board
Jeffrey E. Smith, Chairman of the Board |  | Thomas E. Wiseman | President and Chief Executive Officer
Thomas E. Wiseman, President and Chief Executive Officer |  | Larry E. Miller, II | Chief Operating Officer and Secretary
Larry E. Miller, II, Chief Operating Officer and Secretary |  | Katrinka V. Hart-Harris | Executive Vice President,
Katrinka V. Hart-Harris, Senior Vice President |  |  | Director of WV Operations & Special Projects
Scott W. Shockey, Senior Vice President & Chief Financial Officer |  | Scott W. Shockey | Executive Vice President, Chief Financial Officer
|  | Mario P. Liberatore | President, Ohio Valley Bank West Virginia
Mario P. Liberatore, Vice President |  |  |
Cherie A. Elliott, Vice President |  |  |  |
Jennifer L. Osborne, Vice President |  | SENIOR VICE PRESIDENTS |  |
Tom R. Shepherd, Vice President |  | Jennifer L. Osborne | Retail Lending |
Bryan F. Stepp, Vice President |  | Tom R. Shepherd | Chief Deposit Officer |
Frank W. Davison, Vice President |  | Bryan F. Stepp | Chief Lending Officer |
Bryan W. Martin, Vice President |  | Frank W. Davison | Financial Bank Group |
David K. Nadler, Vice President |  | Bryan W. Martin | Chief Administrative Officer |
Paula W. Clay, Assistant Secretary |  | David K. Nadler | Chief Risk/Credit Officer |
Cindy H. Johnston, Assistant Secretary |  |  |  |

LOAN CENTRAL OFFICERS |  | VICE PRESIDENTS |
|  | Richard D. Scott | Trust
Larry E. Miller, II | Chairman of the Board | Patrick H. Tackett | Corporate Banking
Cherie A. Elliott | President | Marilyn E. Kearns | Director of Human Resources
Timothy R. Brumfield | Vice President & Secretary | Fred K. Mavis | Business Development Officer
| Manager, Gallipolis Office | Rick A. Swain | Western Division Branch Manager
T. Joe Wilson | Manager, South Point Office | Bryna S. Butler | Corporate Communications
Joseph I. Jones | Manager, Waverly Office | Tamela D. LeMaster | Branch Administration/CRM
John J. Holtzapfel | Manager, Wheelersburg Office | Christopher L. Preston | Branch Administration/Business Development
Deborah G. Moore | Manager, Jackson Office | Gregory A. Phillips | Consumer Lending
Gregory G. Kauffman | Manager, Chillicothe Office | Diana L. Parks | Internal Audit Liaison
Gloria J. Webb | Manager, Ironton Office | John A. Anderson | Loan Operations
|  | Kyla R. Carpenter | Director of Marketing
|  | Allen W. Elliott | Director of Customer Support
|  | E. Kate Cox | Director of Cultural Enhancement
|  | Brian E. Hall | Corporate Banking

| ASSISTANT VICE PRESIDENTS |  |
| Melissa P. Mason | Shareholder Relations Manager & Trust Officer |
| Christopher S. Petro | Comptroller |
| Kimberly R. Williams | Systems Officer |
| Paula W. Clay | Assistant Secretary |
| Cindy H. Johnston | Assistant Secretary |
| Joe J. Wyant | Region Manager Jackson County |
| Brenda G. Henson | Manager Deposit Services |
| 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 Manager |
| Lori A. Edwards | Secondary Market Manager |
| Raymond G. Polcyn | Manager of Loan Production Office |
| Stephanie L. Stover | Retail Lending Operations Manager |
| Shawn R. Siders | Senior Credit Analyst |
| Brandon O. Huff | Systems Administrator |
| Jay D. Miller | Business Development Officer |
| Anita M. Good | Regional Branch Administrator |
| Angela S. Kinnaird | Customer Support Manager |
| Daniel T. Roush | Compliance Officer |
| ASSISTANT CASHIERS |
| Lois J. Scherer | EFT Officer
| Linda K. Roe | Director of Training and Development
| Glen P. Arrowood, II | Manager of Indirect Lending
| Shelly N. Boothe | Holzer Business Development & Sr. Personal Banker
| Michelle L. Hammond | Retail Lending Operations Supervisor
| Patricia G. Hapney | Retail Lending & Personal Banker
| Anthony W. Staley | Product Development/Business Sales & Support

Bankers prepare to serve lunch to the brave peace officers who have devoted their lives to protecting our communities.

8

SELECTED FINANCIAL DATA

|  | Years Ended December 31 |
|  | 2015 |  |  | 2014 |  |  | 2013 |  |  | 2012 |  |  | 2011 |  |
(dollars in thousands, except share and per share data) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
SUMMARY OF OPERATIONS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total interest income |  | $ | 36,334 |  |  | $ | 36,355 |  |  | $ | 35,958 |  |  | $ | 39,001 |  |  | $ | 44,040 |
Total interest expense |  |  | 2,839 |  |  |  | 2,875 |  |  |  | 3,573 |  |  |  | 6,346 |  |  |  | 10,169 |
Net interest income |  |  | 33,495 |  |  |  | 33,480 |  |  |  | 32,385 |  |  |  | 32,655 |  |  |  | 33,871 |
Provision for loan losses |  |  | 1,090 |  |  |  | 2,787 |  |  |  | 477 |  |  |  | 1,583 |  |  |  | 4,896 |
Total other income |  |  | 8,597 |  |  |  | 9,793 |  |  |  | 8,518 |  |  |  | 8,483 |  |  |  | 7,222 |
Total other expenses |  |  | 29,619 |  |  |  | 29,293 |  |  |  | 29,375 |  |  |  | 29,741 |  |  |  | 28,299 |
Income before income taxes |  |  | 11,383 |  |  |  | 11,193 |  |  |  | 11,051 |  |  |  | 9,814 |  |  |  | 7,898 |
Income taxes |  |  | 2,809 |  |  |  | 3,120 |  |  |  | 2,939 |  |  |  | 2,762 |  |  |  | 2,063 |
Net income |  |  | 8,574 |  |  |  | 8,073 |  |  |  | 8,112 |  |  |  | 7,052 |  |  |  | 5,835 |
PER SHARE DATA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earnings per share |  | $ | 2.08 |  |  | $ | 1.97 |  |  | $ | 2.00 |  |  | $ | 1.75 |  |  | $ | 1.46 |
Cash dividends declared per share |  | $ | 0.89 |  |  | $ | 0.84 |  |  | $ | 0.73 |  |  | $ | 1.09 |  |  | $ | 0.84 |
Book value per share |  | $ | 21.97 |  |  | $ | 20.94 |  |  | $ | 19.62 |  |  | $ | 18.66 |  |  | $ | 17.84 |
Weighted average number of common shares outstanding |  |  | 4,117,675 |  |  |  | 4,099,194 |  |  |  | 4,064,083 |  |  |  | 4,030,322 |  |  |  | 4,001,435 |
AVERAGE BALANCE SUMMARY: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total loans |  | $ | 589,953 |  |  | $ | 581,690 |  |  | $ | 555,314 |  |  | $ | 570,166 |  |  | $ | 625,603 |
Securities(1) |  |  | 188,754 |  |  |  | 170,314 |  |  |  | 175,809 |  |  |  | 202,413 |  |  |  | 185,684 |
Deposits |  |  | 694,218 |  |  |  | 673,410 |  |  |  | 664,061 |  |  |  | 705,111 |  |  |  | 720,936 |
Other borrowed funds(2) |  |  | 32,878 |  |  |  | 31,225 |  |  |  | 26,572 |  |  |  | 33,538 |  |  |  | 56,975 |
Shareholders’ equity |  |  | 88,720 |  |  |  | 83,887 |  |  |  | 77,989 |  |  |  | 74,031 |  |  |  | 69,866 |
Total assets |  |  | 828,444 |  |  |  | 799,448 |  |  |  | 779,113 |  |  |  | 822,573 |  |  |  | 858,017 |
PERIOD END BALANCES: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total loans |  | $ | 585,752 |  |  | $ | 594,768 |  |  | $ | 566,319 |  |  | $ | 558,288 |  |  | $ | 598,308 |
Securities(1) |  |  | 155,900 |  |  |  | 137,274 |  |  |  | 133,173 |  |  |  | 159,791 |  |  |  | 157,515 |
Deposits |  |  | 660,746 |  |  |  | 646,830 |  |  |  | 628,877 |  |  |  | 655,064 |  |  |  | 687,886 |
Shareholders’ equity |  |  | 90,470 |  |  |  | 86,216 |  |  |  | 80,419 |  |  |  | 75,820 |  |  |  | 71,843 |
Total assets |  |  | 796,285 |  |  |  | 778,668 |  |  |  | 747,368 |  |  |  | 769,223 |  |  |  | 804,177 |
KEY RATIOS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Return on average assets |  |  | 1.03 | % |  |  | 1.01 | % |  |  | 1.04 | % |  |  | 0.86 | % |  |  | 0.68 | %
Return on average equity |  |  | 9.66 | % |  |  | 9.62 | % |  |  | 10.40 | % |  |  | 9.53 | % |  |  | 8.35 | %
Dividend payout ratio |  |  | 42.74 | % |  |  | 42.62 | % |  |  | 36.56 | % |  |  | 62.29 | % |  |  | 57.59 | %
Average equity to average assets |  |  | 10.71 | % |  |  | 10.49 | % |  |  | 10.01 | % |  |  | 9.00 | % |  |  | 8.14 | %

(1) Securities include interest-bearing deposits with banks and FHLB and FRB stock.
(2) Other borrowed funds include subordinated debentures.
9

Consolidated Statements of Condition

|  | As of December 31 |
|  | 2015 |  |  | 2014 |
(dollars in thousands, except share and per share data) |  |  |  |  |  |
Assets |  |  |  |  |  |
Cash and noninterest-bearing deposits with banks |  | $ | 9,475 |  |  | $ | 9,315 |
Interest-bearing deposits with banks |  |  | 36,055 |  |  |  | 21,662 |
Total cash and cash equivalents |  |  | 45,530 |  |  |  | 30,977 |
Certificates of deposit in financial institutions |  |  | 1,715 |  |  |  | 980 |
Securities available for sale |  |  | 91,651 |  |  |  | 85,236 |
Securities held to maturity (estimated fair value: 2015 - $20,790; 2014 - $23,570) |  |  | 19,903 |  |  |  | 22,820 |
Federal Home Loan Bank and Federal Reserve Bank stock |  |  | 6,576 |  |  |  | 6,576 |
Total loans |  |  | 585,752 |  |  |  | 594,768 |
Less: Allowance for loan losses |  |  | (6,648 | ) |  |  | (8,334 | )
Net loans |  |  | 579,104 |  |  |  | 586,434 |
Premises and equipment, net |  |  | 10,404 |  |  |  | 9,195 |
Other real estate owned |  |  | 2,358 |  |  |  | 1,525 |
Accrued interest receivable |  |  | 1,819 |  |  |  | 1,806 |
Goodwill |  |  | 1,267 |  |  |  | 1,267 |
Bank owned life insurance and annuity assets |  |  | 28,352 |  |  |  | 25,612 |
Other assets |  |  | 7,606 |  |  |  | 6,240 |
Total assets |  | $ | 796,285 |  |  | $ | 778,668 |
Liabilities |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  | $ | 176,499 |  |  | $ | 161,794 |
Interest-bearing deposits |  |  | 484,247 |  |  |  | 485,036 |
Total deposits |  |  | 660,746 |  |  |  | 646,830 |
Other borrowed funds |  |  | 23,946 |  |  |  | 24,972 |
Subordinated debentures |  |  | 8,500 |  |  |  | 8,500 |
Accrued liabilities |  |  | 12,623 |  |  |  | 12,150 |
Total liabilities |  |  | 705,815 |  |  |  | 692,452 |
Commitments and Contingent Liabilities (See Note J) |  |  | ---- |  |  |  | ---- |
Shareholders’ Equity |  |  |  |  |  |  |  |
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 4,777,414 shares issued |  |  | 4,777 |  |  |  | 4,777 |
Additional paid-in capital |  |  | 35,318 |  |  |  | 35,318 |
Retained earnings |  |  | 65,782 |  |  |  | 60,873 |
Accumulated other comprehensive income |  |  | 305 |  |  |  | 960 |
Treasury stock, at cost (659,739 shares) |  |  | (15,712 | ) |  |  | (15,712 | )
Total shareholders’ equity |  |  | 90,470 |  |  |  | 86,216 |
Total liabilities and shareholders’ equity |  | $ | 796,285 |  |  | $ | 778,668 |

See accompanying notes to consolidated financial statements
10

Consolidated Statements of Income

For the years ended December 31 |  | 2015 |  |  | 2014 |  |  | 2013 |
(dollars in thousands, except per share data) |  |  |  |  |  |  |  |  |
Interest and dividend income: |  |  |  |  |  |  |  |  |
Loans, including fees |  | $ | 33,481 |  |  | $ | 33,635 |  |  | $ | 33,592 |
Securities: |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 1,849 |  |  |  | 1,717 |  |  |  | 1,339 |
Tax exempt |  |  | 526 |  |  |  | 555 |  |  |  | 570 |
Dividends |  |  | 293 |  |  |  | 312 |  |  |  | 322 |
Other interest |  |  | 185 |  |  |  | 136 |  |  |  | 135 |
|  |  | 36,334 |  |  |  | 36,355 |  |  |  | 35,958 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 2,191 |  |  |  | 2,236 |  |  |  | 2,917 |
Other borrowed funds |  |  | 478 |  |  |  | 474 |  |  |  | 391 |
Subordinated debentures |  |  | 170 |  |  |  | 165 |  |  |  | 265 |
|  |  | 2,839 |  |  |  | 2,875 |  |  |  | 3,573 |
Net interest income |  |  | 33,495 |  |  |  | 33,480 |  |  |  | 32,385 |
Provision for loan losses |  |  | 1,090 |  |  |  | 2,787 |  |  |  | 477 |
Net interest income after provision for loan losses |  |  | 32,405 |  |  |  | 30,693 |  |  |  | 31,908 |
Noninterest income: |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 1,573 |  |  |  | 1,627 |  |  |  | 1,802 |
Trust fees |  |  | 221 |  |  |  | 223 |  |  |  | 210 |
Income from bank owned life insurance and annuity assets |  |  | 681 |  |  |  | 672 |  |  |  | 1,176 |
Mortgage banking income |  |  | 242 |  |  |  | 228 |  |  |  | 506 |
Electronic refund check / deposit fees |  |  | 2,371 |  |  |  | 3,133 |  |  |  | 2,556 |
Debit / credit card interchange income |  |  | 2,399 |  |  |  | 2,174 |  |  |  | 1,963 |
Gain (loss) on other real estate owned |  |  | 99 |  |  |  | 113 |  |  |  | (692 | )
Gain on sale of securities |  |  | 163 |  |  |  | ---- |  |  |  | ---- |
Gain on sale of ProAlliance Corporation |  |  | ---- |  |  |  | 810 |  |  |  | ---- |
Other |  |  | 848 |  |  |  | 813 |  |  |  | 997 |
|  |  | 8,597 |  |  |  | 9,793 |  |  |  | 8,518 |
Noninterest expense: |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 17,498 |  |  |  | 17,878 |  |  |  | 17,570 |
Occupancy |  |  | 1,599 |  |  |  | 1,585 |  |  |  | 1,573 |
Furniture and equipment |  |  | 801 |  |  |  | 757 |  |  |  | 902 |
Professional fees |  |  | 1,375 |  |  |  | 1,151 |  |  |  | 1,031 |
Marketing expense |  |  | 860 |  |  |  | 1,004 |  |  |  | 791 |
FDIC insurance |  |  | 583 |  |  |  | 483 |  |  |  | 490 |
Data processing |  |  | 1,259 |  |  |  | 1,127 |  |  |  | 1,052 |
Software |  |  | 1,123 |  |  |  | 1,014 |  |  |  | 900 |
Foreclosed assets |  |  | 347 |  |  |  | 185 |  |  |  | 482 |
Other |  |  | 4,174 |  |  |  | 4,109 |  |  |  | 4,584 |
|  |  | 29,619 |  |  |  | 29,293 |  |  |  | 29,375 |
Income before income taxes |  |  | 11,383 |  |  |  | 11,193 |  |  |  | 11,051 |
Provision for income taxes |  |  | 2,809 |  |  |  | 3,120 |  |  |  | 2,939 |
NET INCOME |  | $ | 8,574 |  |  | $ | 8,073 |  |  | $ | 8,112 |
Earnings per share |  | $ | 2.08 |  |  | $ | 1.97 |  |  | $ | 2.00 |

See accompanying notes to consolidated financial statements
11

Consolidated Statements of
Comprehensive Income

For the years ended December 31 |  | 2015 |  |  | 2014 |  |  | 2013 |
(dollars in thousands) |  |  |  |  |  |  |  |  |
NET INCOME |  | $ | 8,574 |  |  | $ | 8,073 |  |  | $ | 8,112 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |
Change in unrealized gain (loss) on available for sale securities |  |  | (830 | ) |  |  | 1,077 |  |  |  | (2,057 | )
Reclassification adjustment for realized (gains) |  |  | (163 | ) |  |  | ---- |  |  |  | ---- |
|  |  | (993 | ) |  |  | 1,077 |  |  |  | (2,057 | )
Related tax (expense) benefit |  |  | 338 |  |  |  | (366 | ) |  |  | 699 |
Total other comprehensive income (loss), net of tax |  |  | (655 | ) |  |  | 711 |  |  |  | (1,358 | )
Total comprehensive income |  | $ | 7,919 |  |  | $ | 8,784 |  |  | $ | 6,754 |

See accompanying notes to consolidated financial statements
12

Consolidated Statements of Changes in
Shareholders’ Equity

For the years ended December 31, 2015, 2014, and 2013 |  |  |  |
(dollars in thousands, except share and per share data) |  |  |  |
|  | Common Stock |  |  | Additional Paid-In Capital |  |  | Retained Earnings |  |  | Accumulated Other Comprehensive Income |  |  | Treasury Stock |  | Total Shareholders' Equity |
Balances at January 1, 2013 |  | $ | 4,722 |  |  | $ | 34,109 |  |  | $ | 51,094 |  |  | $ | 1,607 |  | $ | (15,712 | ) | $ | 75,820 |
Net income |  |  | ---- |  |  |  | ---- |  |  |  | 8,112 |  |  |  | ---- |  |  | ---- |  |  | 8,112 |
Other comprehensive income (loss), net |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | (1,358 | ) |  | ---- |  |  | (1,358 | )
Common stock issued to ESOP, 28,634 shares |  |  | 28 |  |  |  | 612 |  |  |  | ---- |  |  |  | ---- |  |  | ---- |  |  | 640 |
Common stock issued through dividend reinvestment,7,915 shares |  |  | 8 |  |  |  | 162 |  |  |  | ---- |  |  |  | ---- |  |  | ---- |  |  | 170 |
Cash dividends, $.73 per share |  |  | ---- |  |  |  | ---- |  |  |  | (2,965 | ) |  |  | ---- |  |  | ---- |  |  | (2,965 | )
Balances at December 31, 2013 |  |  | 4,758 |  |  |  | 34,883 |  |  |  | 56,241 |  |  |  | 249 |  |  | (15,712 | ) |  | 80,419 |
Net income |  |  | ---- |  |  |  | ---- |  |  |  | 8,073 |  |  |  | ---- |  |  | ---- |  |  | 8,073 |
Other comprehensive income (loss), net |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | 711 |  |  | ---- |  |  | 711 |
Common stock issued to ESOP, 14,618 shares |  |  | 15 |  |  |  | 336 |  |  |  | ---- |  |  |  | ---- |  |  | ---- |  |  | 351 |
Common stock issued through dividend reinvestment,4,304 shares |  |  | 4 |  |  |  | 99 |  |  |  | ---- |  |  |  | ---- |  |  | ---- |  |  | 103 |
Cash dividends, $.84 per share |  |  | ---- |  |  |  | ---- |  |  |  | (3,441 | ) |  |  | ---- |  |  | ---- |  |  | (3,441 | )
Balances at December 31, 2014 |  |  | 4,777 |  |  |  | 35,318 |  |  |  | 60,873 |  |  |  | 960 |  |  | (15,712 | ) |  | 86,216 |
Net income |  |  | ---- |  |  |  | ---- |  |  |  | 8,574 |  |  |  | ---- |  |  | ---- |  |  | 8,574 |
Other comprehensive income (loss), net |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | (655 | ) |  | ---- |  |  | (655 | )
Cash dividends, $.89 per share |  |  | ---- |  |  |  | ---- |  |  |  | (3,665 | ) |  |  | ---- |  |  | ---- |  |  | (3,665 | )
Balances at December 31, 2015 |  | $ | 4,777 |  |  | $ | 35,318 |  |  | $ | 65,782 |  |  | $ | 305 |  |  | (15,712 | ) | $ | 90,470 |

See accompanying notes to consolidated financial statements
13

Consolidated Statements of Cash Flows

For the years ended December 31 |  | 2015 |  |  | 2014 |  |  | 2013 |
(dollars in thousands) |  |  |  |  |  |  |  |  |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |
Net income |  | $ | 8,574 |  |  | $ | 8,073 |  |  | $ | 8,112 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Depreciation |  |  | 872 |  |  |  | 795 |  |  |  | 827 |
Net amortization of securities |  |  | 432 |  |  |  | 732 |  |  |  | 1,436 |
Net realized (gain) on sale of securities |  |  | (163 | ) |  |  | ---- |  |  |  | ---- |
Proceeds from sale of loans in secondary market |  |  | 6,746 |  |  |  | 4,286 |  |  |  | 13,187 |
Loans disbursed for sale in secondary market |  |  | (6,504 | ) |  |  | (4,058 | ) |  |  | (12,681 | )
Amortization of mortgage servicing rights |  |  | 93 |  |  |  | 77 |  |  |  | 118 |
(Recovery) impairment of mortgage servicing rights |  |  | ---- |  |  |  | ---- |  |  |  | (121 | )
Gain on sale of loans |  |  | (335 | ) |  |  | (305 | ) |  |  | (503 | )
Deferred tax (benefit) expense |  |  | 591 |  |  |  | (517 | ) |  |  | 144 |
Provision for loan losses |  |  | 1,090 |  |  |  | 2,787 |  |  |  | 477 |
Common stock issued to ESOP |  |  | ---- |  |  |  | 351 |  |  |  | 640 |
Earnings on bank owned life insurance and annuity assets |  |  | (681 | ) |  |  | (672 | ) |  |  | (724 | )
Gain on sale of ProAlliance Corporation |  |  | ---- |  |  |  | (810 | ) |  |  | ---- |
(Gain) loss on sale of other real estate owned |  |  | (99 | ) |  |  | (25 | ) |  |  | 115 |
(Appreciation) write-down of other real estate owned |  |  | ---- |  |  |  | (88 | ) |  |  | 577 |
Change in accrued interest receivable |  |  | (13 | ) |  |  | 95 |  |  |  | 156 |
Change in accrued liabilities |  |  | 473 |  |  |  | 1,326 |  |  |  | 270 |
Change in other assets |  |  | (678 | ) |  |  | (366 | ) |  |  | 1,128 |
Net cash provided by operating activities |  |  | 10,398 |  |  |  | 11,681 |  |  |  | 13,158 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Proceeds from sales of securities available for sale |  |  | 10,550 |  |  |  | ---- |  |  |  | ---- |
Proceeds from maturities of securities available for sale |  |  | 15,085 |  |  |  | 15,318 |  |  |  | 24,577 |
Purchases of securities available for sale |  |  | (33,251 | ) |  |  | (16,077 | ) |  |  | (17,105 | )
Proceeds from maturities of securities held to maturity |  |  | 3,482 |  |  |  | 827 |  |  |  | 1,813 |
Purchases of securities held to maturity |  |  | (626 | ) |  |  | (885 | ) |  |  | (1,196 | )
Net change in certificates of deposit in financial institutions |  |  | (735 | ) |  |  | (980 | ) |  |  | ---- |
Purchases of Federal Reserve Bank stock |  |  | ---- |  |  |  | ---- |  |  |  | (1,495 | )
Redemptions of Federal Home Loan Bank stock |  |  | ---- |  |  |  | 1,200 |  |  |  | ---- |
Net change in loans |  |  | 5,049 |  |  |  | (29,936 | ) |  |  | (9,572 | )
Proceeds from sale of other real estate owned |  |  | 458 |  |  |  | 821 |  |  |  | 1,935 |
Proceeds from sale of ProAlliance Corporation |  |  | ---- |  |  |  | 810 |  |  |  | ---- |
Purchases of premises and equipment |  |  | (1,950 | ) |  |  | (985 | ) |  |  | (1,152 | )
Proceeds from bank owned life insurance |  |  | ---- |  |  |  | ---- |  |  |  | 1,249 |
Purchases of bank owned life insurance and annuity assets |  |  | (3,000 | ) |  |  | ---- |  |  |  | ---- |
Net cash (used in) investing activities |  |  | (4,938 | ) |  |  | (29,887 | ) |  |  | (946 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Change in deposits |  |  | 13,916 |  |  |  | 17,953 |  |  |  | (26,187 | )
Proceeds from common stock through dividend reinvestment |  |  | ---- |  |  |  | 103 |  |  |  | 170 |
Cash dividends |  |  | (3,665 | ) |  |  | (3,441 | ) |  |  | (2,965 | )
Repayment of subordinated debentures |  |  | ---- |  |  |  | ---- |  |  |  | (5,000 | )
Proceeds from Federal Home Loan Bank borrowings |  |  | 400 |  |  |  | 7,575 |  |  |  | 5,853 |
Repayment of Federal Home Loan Bank borrowings |  |  | (1,671 | ) |  |  | (1,612 | ) |  |  | (1,393 | )
Change in other short-term borrowings |  |  | 113 |  |  |  | 261 |  |  |  | 3 |
Net cash provided by (used in) financing activities |  |  | 9,093 |  |  |  | 20,839 |  |  |  | (29,519 | )
Cash and cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents |  |  | 14,553 |  |  |  | 2,633 |  |  |  | (17,307 | )
Cash and cash equivalents at beginning of year |  |  | 30,977 |  |  |  | 28,344 |  |  |  | 45,651 |
Cash and cash equivalents at end of year |  | $ | 45,530 |  |  | $ | 30,977 |  |  | $ | 28,344 |
Supplemental disclosure: |  |  |  |  |  |  |  |  |  |  |  |
Cash paid for interest |  | $ | 2,784 |  |  | $ | 3,274 |  |  | $ | 4,158 |
Cash paid for income taxes |  |  | 2,450 |  |  |  | 3,567 |  |  |  | 2,950 |
Transfers from loans to other real estate owned |  |  | 1,381 |  |  |  | 879 |  |  |  | 314 |
Other real estate owned sales financed by the Bank |  |  | 189 |  |  |  | 390 |  |  |  | 466 |

See accompanying notes to consolidated financial statements
14

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”), an Ohio state-chartered bank that is a member of the Federal Reserve Bank and is regulated primarily by the Ohio Division of Financial Institutions and the Federal Reserve Board. Ohio Valley also has a subsidiary that engages in consumer lending to individuals with higher credit risk history, Loan Central, Inc.; a subsidiary insurance agency that facilitates the receipts of insurance commissions, Ohio Valley Financial Services Agency, LLC; and a limited purpose property and casualty insurance company, OVBC Captive, Inc. 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 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., Ohio Valley Financial Services Agency, LLC, and OVBC Captive, Inc. 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.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, noninterest-bearing deposits with banks, federal funds sold and interest-bearing deposits with banks with maturity terms of less than 90 days. 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.
Certificates of deposit in financial institutions: Certificates of deposit in financial institutions are carried at cost and have maturity terms of 90 days or greater.
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.
15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
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 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”) and Federal Reserve Bank (“FRB”) Stock: The Bank is a member of the FHLB system. Additionally, the Bank is a member of the FRB system. Members are required to own a certain amount of stock based on their level of borrowings and other factors and may invest in additional amounts. FHLB stock and FRB stock are carried at cost, classified as restricted securities, 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.
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.
16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
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 for the consumer and real estate portfolio segment and 5 years for the commercial portfolio segment. Prior to 2014, the commercial portfolio’s historical loss factor was based on a period of 3 years. During the first quarter of 2014, management extended the loan loss history to 5 years due to the significant decline in net charge-offs that have been experienced since the first quarter of 2012. The total loan portfolio’s 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 and Industrial, Commercial Real Estate, 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.
17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
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.
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 6 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. 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.
At December 31, 2015, there were no changes to the accounting policies or methodologies within any of the Company’s loan portfolio segments from the prior period.
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 |
|  | 2015 |  |  | 2014 |
Residential real estate loans |  |  | 38.22 | % |  |  | 37.60 | %
Commercial real estate loans |  |  | 28.90 | % |  |  | 29.86 | %
Consumer loans |  |  | 18.89 | % |  |  | 18.42 | %
Commercial and industrial loans |  |  | 13.99 | % |  |  | 14.12 | %
|  |  | 100.00 | % |  |  | 100.00 | %

Approximately 6.06% of total loans were unsecured at December 31, 2015, up from 5.66% at December 31, 2014.
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, 2015, the Bank’s primary correspondent balance was $34,933 on deposit at the Federal Reserve Bank, Cleveland, Ohio.
18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
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 method 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 $2,358 and $1,525 at December 31, 2015 and 2014.
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. Goodwill is the only intangible asset with an indefinite life on our balance sheet. The Company has selected December 31, 2015 as the date to perform its annual qualitative impairment test. Given that the Company has been profitable and had positive equity, the qualitative assessment indicated that it was more likely than not that the fair value of goodwill was more than the carrying amount, resulting in no impairment.
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 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, 2015 and 2014, the Company’s MSR assets were $429 and $484, respectively.
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: 4,117,675 for 2015; 4,099,194 for 2014; 4,064,083 for 2013. 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.
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.
19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity, 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 for a certain key executive that earns interest.
Employee Stock Ownership Plan: Compensation expense is based on the market price of shares as they are committed to be allocated to participant accounts.
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 a third-party correspondent and the Federal Reserve Bank of $36,535 and $22,122 was required to meet regulatory reserve and clearing requirements at year-end 2015 and 2014. The balances on deposit with a third-party correspondent do not earn interest.
Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”).
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
At December 31, 2015 and 2014, the Company’s only derivatives on hand were interest rate swaps, which are classified as stand-alone derivatives. See Note F for more specific disclosures related to interest rate swaps.
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 2014 and 2013 have been reclassified to conform with the presentation for 2015. These reclassifications had no effect on the net results of operations or shareholders’ equity.
20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
Adoption of New Accounting Standards: In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-04, "Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40)" (ASU 2014-04). The amendments in ASU 2014-04 clarify the circumstances under which an in substance repossession or foreclosure occurs and when a creditor is considered to have received physical possession of a residential real estate property collateralizing a residential real estate loan. The amendments in ASU 2014-04 also require interim and annual disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 was effective for reporting periods beginning after December 15, 2014. The effect of adopting ASU 2014-04 did not have a material effect on the Company’s financial statements.
In June 2014, the FASB issued ASU 2014-11 “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. The amendments in ASU 2014-11 change the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. 2014-11 is effective for reporting periods beginning after December 15, 2014. The effect of adopting ASU 2014-11 did not have a material effect on the Company’s financial statements.
In May 2014, FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company's financial statements.
In April 2015, the FASB issued ASU No. 2015-03 “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”, as subsequently amended by ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. Further, the amendment indicates the SEC would not object to a ratable amortization of debt issuance costs on line-of-credit arrangements. This update will be effective for interim and annual periods beginning after December 15, 2015, and is to be applied retrospectively. The Company has determined that this guidance will not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. The update provides updated accounting and reporting requirements for both public and non-public entities. The most significant provisions that will impact the Company is: 1) equity securities available for sale will be measured at fair, value with the changes in fair value recognized in the income statement; 2) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments at amortized cost on the balance sheet; 3) utilization of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 4) require separate presentation of both financial assets and liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. The update will be effective for interim and annual periods beginning after December 15, 2017, using a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. Early adoption is not permitted.
21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities
The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at December 31, 2015 and 2014 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:

|  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Estimated Fair Value |
Securities Available for Sale |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2015 |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government sponsored entity securities |  | $ | 9,011 |  |  | $ | ---- |  |  | $ | (46 | ) |  | $ | 8,965 |
Agency mortgage-backed securities, residential |  |  | 82,178 |  |  |  | 981 |  |  |  | (473 | ) |  |  | 82,686 |
Total securities |  | $ | 91,189 |  |  | $ | 981 |  |  | $ | (519 | ) |  | $ | 91,651 |
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government sponsored entity securities |  | $ | 9,019 |  |  | $ | 2 |  |  | $ | (104 | ) |  | $ | 8,917 |
Agency mortgage-backed securities, residential |  |  | 74,762 |  |  |  | 1,693 |  |  |  | (136 | ) |  |  | 76,319 |
Total securities |  | $ | 83,781 |  |  | $ | 1,695 |  |  | $ | (240 | ) |  | $ | 85,236 |

|  | Amortized Cost |  |  | Gross Unrecognized Gains |  |  | Gross Unrecognized Losses |  |  | Estimated Fair Value |
Securities Held to Maturity |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2015 |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 19,898 |  |  | $ | 892 |  |  | $ | (5 | ) |  | $ | 20,785 |
Agency mortgage-backed securities, residential |  |  | 5 |  |  |  | ---- |  |  |  | ---- |  |  |  | 5 |
Total securities |  | $ | 19,903 |  |  | $ | 892 |  |  | $ | (5 | ) |  | $ | 20,790 |
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 22,811 |  |  | $ | 939 |  |  | $ | (189 | ) |  | $ | 23,561 |
Agency mortgage-backed securities, residential |  |  | 9 |  |  |  | ---- |  |  |  | ---- |  |  |  | 9 |
Total securities |  | $ | 22,820 |  |  | $ | 939 |  |  | $ | (189 | ) |  | $ | 23,570 |

At year-end 2015 and 2014, 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.
During 2015, proceeds from the sales of debt securities totaled $10,550 with gross gains of $163 recognized. There were no sales of debt securities during 2014 and 2013.
Securities with a carrying value of approximately $59,267 at December 31, 2015 and $68,238 at December 31, 2014 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, 2015, 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 |  | $ | 1,001 |  |  | $ | 1,001 |  |  | $ | 377 |  |  | $ | 386 |
Due in one to five years |  |  | 8,010 |  |  |  | 7,964 |  |  |  | 6,909 |  |  |  | 7,242 |
Due in five to ten years |  |  | ---- |  |  |  | ---- |  |  |  | 10,529 |  |  |  | 11,057 |
Due after ten years |  |  | ---- |  |  |  | ---- |  |  |  | 2,083 |  |  |  | 2,100 |
Agency mortgage-backed securities, residential |  |  | 82,178 |  |  |  | 82,686 |  |  |  | 5 |  |  |  | 5 |
Total debt securities |  | $ | 91,189 |  |  | $ | 91,651 |  |  | $ | 19,903 |  |  | $ | 20,790 |

22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities (continued)
The following table summarizes securities with unrealized losses at December 31, 2015 and December 31, 2014, aggregated by major security type and length of time in a continuous unrealized loss position:

December 31, 2015 |  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
Securities Available for Sale |  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |
U.S. Government sponsored entity securities |  | $ | 7,964 |  |  | $ | (46) |  |  | $ | ---- |  |  | $ | ---- |  |  | $ | 7,964 |  |  | $ | (46 | )
Agency mortgage-backed securities, residential |  |  | 42,112 |  |  |  | (407 | ) |  |  | 3,645 |  |  |  | (66 | ) |  |  | 45,757 |  |  |  | (473 | )
Total available for sale |  | $ | 50,076 |  |  | $ | (453 | ) |  | $ | 3,645 |  |  | $ | (66 | ) |  | $ | 53,721 |  |  | $ | (519 | )

|  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
Securities Held to Maturity |  | Fair Value |  |  | Unrecognized Loss |  |  | Fair Value |  |  | Unrecognized Loss |  |  | Fair Value |  |  | Unrecognized Loss |
Obligations of states and political subdivisions |  | $ | 995 |  |  | $ | (5 | ) |  | $ | ---- |  |  | $ | ---- |  |  | $ | 995 |  |  | $ | (5 | )
Total held to maturity |  | $ | 995 |  |  | $ | (5 | ) |  | $ | ---- |  |  | $ | ---- |  |  | $ | 995 |  |  | $ | (5 | )

December 31, 2014 |  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
Securities Available for Sale |  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |  |  | Fair Value |  |  | Unrealized Loss |
U.S. Government sponsored entity securities |  | $ | ---- |  |  | $ | ---- |  |  | $ | 7,911 |  |  | $ | (104 | ) |  | $ | 7,911 |  |  | $ | (104 | )
Agency mortgage-backed securities, residential |  |  | 11,232 |  |  |  | (20 | ) |  |  | 8,397 |  |  |  | (116 | ) |  |  | 19,629 |  |  |  | (136 | )
Total available for sale |  | $ | 11,232 |  |  | $ | (20 | ) |  | $ | 16,308 |  |  | $ | (220 | ) |  | $ | 27,540 |  |  | $ | (240 | )

|  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
Securities Held to Maturity |  | Fair Value |  |  | Unrecognized Loss |  |  | Fair Value |  |  | Unrecognized Loss |  |  | Fair Value |  |  | Unrecognized Loss |
Obligations of states and political subdivisions |  | $ | 1,171 |  |  | $ | (9 | ) |  | $ | 2,916 |  |  | $ | (180 | ) |  | $ | 4,087 |  |  | $ | (189 | )
Total held to maturity |  | $ | 1,171 |  |  | $ | (9 | ) |  | $ | 2,916 |  |  | $ | (180 | ) |  | $ | 4,087 |  |  | $ | (189 | )

Unrealized losses on the Company’s debt securities have not been recognized into income because the issuers’ securities are of high credit quality as of December 31, 2015, 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, 2015 and 2014 represents an other-than-temporary impairment.
23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses
Loans are comprised of the following at December 31:

|  | 2015 |  |  | 2014 |
Residential real estate |  | $ | 223,875 |  |  | $ | 223,628 |
Commercial real estate: |  |  |  |  |  |  |  |
Owner-occupied |  |  | 73,458 |  |  |  | 78,848 |
Nonowner-occupied |  |  | 72,002 |  |  |  | 71,229 |
Construction |  |  | 23,852 |  |  |  | 27,535 |
Commercial and industrial |  |  | 81,936 |  |  |  | 83,998 |
Consumer: |  |  |  |  |  |  |  |
Automobile |  |  | 44,566 |  |  |  | 42,849 |
Home equity |  |  | 20,841 |  |  |  | 18,291 |
Other |  |  | 45,222 |  |  |  | 48,390 |
|  |  | 585,752 |  |  |  | 594,768 |
Less: Allowance for loan losses |  |  | 6,648 |  |  |  | 8,334 |
Loans, net |  | $ | 579,104 |  |  | $ | 586,434 |

The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2015, 2014 and 2013:

December 31, 2015 |  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial & Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 1,426 |  |  | $ | 4,195 |  |  | $ | 1,602 |  |  | $ | 1,111 |  |  | $ | 8,334 |
Provision for loan losses |  |  | 103 |  |  |  | (469 | ) |  |  | 777 |  |  |  | 679 |  |  |  | 1,090 |
Loans charged off |  |  | (828 | ) |  |  | (1,971 | ) |  |  | (24 | ) |  |  | (1,428 | ) |  |  | (4,251 | )
Recoveries |  |  | 386 |  |  |  | 204 |  |  |  | 234 |  |  |  | 651 |  |  |  | 1,475 |
Total ending allowance balance |  | $ | 1,087 |  |  | $ | 1,959 |  |  | $ | 2,589 |  |  | $ | 1,013 |  |  | $ | 6,648 |

December 31, 2014 |  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial & Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 1,169 |  |  | $ | 2,914 |  |  | $ | 1,279 |  |  | $ | 793 |  |  | $ | 6,155 |
Provision for loan losses |  |  | 458 |  |  |  | 1,408 |  |  |  | (28 | ) |  |  | 949 |  |  |  | 2,787 |
Loans charged off |  |  | (487 | ) |  |  | (235 | ) |  |  | (41 | ) |  |  | (1,216 | ) |  |  | (1,979 | )
Recoveries |  |  | 286 |  |  |  | 108 |  |  |  | 392 |  |  |  | 585 |  |  |  | 1,371 |
Total ending allowance balance |  | $ | 1,426 |  |  | $ | 4,195 |  |  | $ | 1,602 |  |  | $ | 1,111 |  |  | $ | 8,334 |

December 31, 2013 |  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial & Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 1,329 |  |  | $ | 3,946 |  |  | $ | 783 |  |  | $ | 847 |  |  | $ | 6,905 |
Provision for loan losses |  |  | 377 |  |  |  | (1,375 | ) |  |  | 1,031 |  |  |  | 444 |  |  |  | 477 |
Loans charged off |  |  | (819 | ) |  |  | (2 | ) |  |  | (600 | ) |  |  | (1,279 | ) |  |  | (2,700 | )
Recoveries |  |  | 282 |  |  |  | 345 |  |  |  | 65 |  |  |  | 781 |  |  |  | 1,473 |
Total ending allowance balance |  | $ | 1,169 |  |  | $ | 2,914 |  |  | $ | 1,279 |  |  | $ | 793 |  |  | $ | 6,155 |

24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
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, 2015 and 2014:

December 31, 2015 |  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial & Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | ---- |  |  | $ | 311 |  |  | $ | 1,850 |  |  | $ | 3 |  |  | $ | 2,164 |
Collectively evaluated for impairment |  |  | 1,087 |  |  |  | 1,648 |  |  |  | 739 |  |  |  | 1,010 |  |  |  | 4,484 |
Total ending allowance balance |  | $ | 1,087 |  |  | $ | 1,959 |  |  | $ | 2,589 |  |  | $ | 1,013 |  |  | $ | 6,648 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 1,001 |  |  | $ | 7,318 |  |  | $ | 8,691 |  |  | $ | 218 |  |  | $ | 17,228 |
Loans collectively evaluated for impairment |  |  | 222,874 |  |  |  | 161,994 |  |  |  | 73,245 |  |  |  | 110,411 |  |  |  | 568,524 |
Total ending loans balance |  | $ | 223,875 |  |  | $ | 169,312 |  |  | $ | 81,936 |  |  | $ | 110,629 |  |  | $ | 585,752 |

December 31, 2014 |  | Residential Real Estate |  |  | Commercial Real Estate |  |  | Commercial & Industrial |  |  | Consumer |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | ---- |  |  | $ | 2,506 |  |  | $ | 900 |  |  | $ | 6 |  |  | $ | 3,412 |
Collectively evaluated for impairment |  |  | 1,426 |  |  |  | 1,689 |  |  |  | 702 |  |  |  | 1,105 |  |  |  | 4,922 |
Total ending allowance balance |  | $ | 1,426 |  |  | $ | 4,195 |  |  | $ | 1,602 |  |  | $ | 1,111 |  |  | $ | 8,334 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 1,415 |  |  | $ | 11,711 |  |  | $ | 6,824 |  |  | $ | 219 |  |  | $ | 20,169 |
Loans collectively evaluated for impairment |  |  | 222,213 |  |  |  | 165,901 |  |  |  | 77,174 |  |  |  | 109,311 |  |  |  | 574,599 |
Total ending loans balance |  | $ | 223,628 |  |  | $ | 177,612 |  |  | $ | 83,998 |  |  | $ | 109,530 |  |  | $ | 594,768 |

25

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 the years ended December 31, 2015, 2014 and 2013:

December 31, 2015 |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance for Loan Losses Allocated |  |  | Average Impaired Loans |  |  | Interest Income Recognized |  |  | Cash Basis Interest Recognized |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 204 |  |  | $ | 204 |  |  | $ | 204 |  |  | $ | 204 |  |  | $ | 13 |  |  | $ | 13 |
Nonowner-occupied |  |  | 396 |  |  |  | 396 |  |  |  | 107 |  |  |  | 402 |  |  |  | 75 |  |  |  | 75 |
Commercial and industrial |  |  | 4,355 |  |  |  | 4,355 |  |  |  | 1,850 |  |  |  | 3,545 |  |  |  | 149 |  |  |  | 149 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 218 |  |  |  | 218 |  |  |  | 3 |  |  |  | 219 |  |  |  | 8 |  |  |  | 8 |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 1,001 |  |  |  | 1,001 |  |  |  | ---- |  |  |  | 809 |  |  |  | 45 |  |  |  | 45 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 3,812 |  |  |  | 3,265 |  |  |  | ---- |  |  |  | 2,747 |  |  |  | 181 |  |  |  | 181 |
Nonowner-occupied |  |  | 5,178 |  |  |  | 2,773 |  |  |  | ---- |  |  |  | 3,439 |  |  |  | 49 |  |  |  | 49 |
Construction |  |  | 680 |  |  |  | 680 |  |  |  | ---- |  |  |  | 544 |  |  |  | ---- |  |  |  | ---- |
Commercial and industrial |  |  | 4,336 |  |  |  | 4,336 |  |  |  | ---- |  |  |  | 3,985 |  |  |  | 180 |  |  |  | 180 |
Total |  | $ | 20,180 |  |  | $ | 17,228 |  |  | $ | 2,164 |  |  | $ | 15,894 |  |  | $ | 700 |  |  | $ | 700 |

December 31, 2014 |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance for Loan Losses Allocated |  |  | Average Impaired Loans |  |  | Interest Income Recognized |  |  | Cash Basis Interest Recognized |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  | $ | ---- |  |  | $ | ---- |  |  | $ | ---- |  |  | $ | ---- |  |  | $ | 6 |  |  | $ | 6 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 1,177 |  |  |  | 1,177 |  |  |  | 414 |  |  |  | 471 |  |  |  | 32 |  |  |  | 32 |
Nonowner-occupied |  |  | 7,656 |  |  |  | 7,656 |  |  |  | 2,092 |  |  |  | 8,303 |  |  |  | 398 |  |  |  | 398 |
Commercial and industrial |  |  | 2,356 |  |  |  | 2,356 |  |  |  | 900 |  |  |  | 2,441 |  |  |  | 110 |  |  |  | 110 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 219 |  |  |  | 219 |  |  |  | 6 |  |  |  | 219 |  |  |  | 7 |  |  |  | 7 |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 1,415 |  |  |  | 1,415 |  |  |  | ---- |  |  |  | 882 |  |  |  | 58 |  |  |  | 58 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 3,125 |  |  |  | 2,578 |  |  |  | ---- |  |  |  | 2,135 |  |  |  | 113 |  |  |  | 113 |
Nonowner-occupied |  |  | 1,298 |  |  |  | 300 |  |  |  | ---- |  |  |  | 300 |  |  |  | 50 |  |  |  | 50 |
Commercial and industrial |  |  | 4,703 |  |  |  | 4,468 |  |  |  | ---- |  |  |  | 2,278 |  |  |  | 180 |  |  |  | 180 |
Total |  | $ | 21,949 |  |  | $ | 20,169 |  |  | $ | 3,412 |  |  | $ | 17,029 |  |  | $ | 954 |  |  | $ | 954 |

26

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

December 31, 2013 |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance for Loan Losses Allocated |  |  | Average Impaired Loans |  |  | Interest Income Recognized |  |  | Cash Basis Interest Recognized |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  | $ | 253 |  |  | $ | 253 |  |  | $ | 93 |  |  | $ | 101 |  |  | $ | 12 |  |  | $ | 12 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 290 |  |  |  | 290 |  |  |  | 157 |  |  |  | 116 |  |  |  | ---- |  |  |  | ---- |
Nonowner-occupied |  |  | 3,776 |  |  |  | 3,776 |  |  |  | 1,504 |  |  |  | 3,846 |  |  |  | 187 |  |  |  | 187 |
Commercial and industrial |  |  | 2,658 |  |  |  | 2,658 |  |  |  | 864 |  |  |  | 1,836 |  |  |  | 142 |  |  |  | 142 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 218 |  |  |  | 218 |  |  |  | 7 |  |  |  | 87 |  |  |  | 9 |  |  |  | 9 |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 766 |  |  |  | 766 |  |  |  | ---- |  |  |  | 539 |  |  |  | 47 |  |  |  | 47 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 2,188 |  |  |  | 1,641 |  |  |  | ---- |  |  |  | 1,469 |  |  |  | 73 |  |  |  | 73 |
Nonowner-occupied |  |  | 6,106 |  |  |  | 5,094 |  |  |  | ---- |  |  |  | 5,699 |  |  |  | 311 |  |  |  | 311 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | 3 |  |  |  | 3 |
Total |  | $ | 16,255 |  |  | $ | 14,696 |  |  | $ | 2,625 |  |  | $ | 13,693 |  |  | $ | 784 |  |  | $ | 784 |

The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees.
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.
The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of December 31, 2015 and December 31, 2014, other real estate owned secured by residential real estate totaled $1,131 and $368, respectively. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $988 and $1,692 as of December 31, 2015 and December 31, 2014, respectively.
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, 2015 and 2014:

|  | Loans Past Due 90 Days And Still Accruing |  |  | Nonaccrual |
December 31, 2015 |  |  |  |  |  |
Residential real estate |  | $ | 20 |  |  | $ | 2,048 |
Commercial real estate: |  |  |  |  |  |  |  |
Owner-occupied |  |  | ---- |  |  |  | 404 |
Nonowner-occupied |  |  | ---- |  |  |  | 2,737 |
Construction |  |  | ---- |  |  |  | 769 |
Commercial and industrial |  |  | ---- |  |  |  | 1,152 |
Consumer: |  |  |  |  |  |  |  |
Automobile |  |  | 18 |  |  |  | 27 |
Home equity |  |  | ---- |  |  |  | 96 |
Other |  |  | 1 |  |  |  | 3 |
Total |  | $ | 39 |  |  | $ | 7,236 |

27

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

|  | Loans Past Due 90 Days And Still Accruing |  |  | Nonaccrual |
December 31, 2014 |  |  |  |  |  |
Residential real estate |  | $ | ---- |  |  | $ | 3,768 |
Commercial real estate: |  |  |  |  |  |  |  |
Owner-occupied |  |  | ---- |  |  |  | 1,484 |
Nonowner-occupied |  |  | ---- |  |  |  | 4,013 |
Commercial and industrial |  |  | ---- |  |  |  | 95 |
Consumer: |  |  |  |  |  |  |  |
Automobile |  |  | 15 |  |  |  | 18 |
Home equity |  |  | ---- |  |  |  | 103 |
Other |  |  | 58 |  |  |  | 68 |
Total |  | $ | 73 |  |  | $ | 9,549 |

The following table presents the aging of the recorded investment of past due loans by class of loans as of December 31, 2015 and 2014:

December 31, 2015 |  | 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 |  | $ | 2,564 |  |  | $ | 1,484 |  |  | $ | 1,708 |  |  | $ | 5,756 |  |  | $ | 218,119 |  |  | $ | 223,875 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 141 |  |  |  | 33 |  |  |  | 371 |  |  |  | 545 |  |  |  | 72,913 |  |  |  | 73,458 |
Nonowner-occupied |  |  | 35 |  |  |  | 334 |  |  |  | 2,737 |  |  |  | 3,106 |  |  |  | 68,896 |  |  |  | 72,002 |
Construction |  |  | ---- |  |  |  | 2 |  |  |  | 769 |  |  |  | 771 |  |  |  | 23,081 |  |  |  | 23,852 |
Commercial and industrial |  |  | 31 |  |  |  | 88 |  |  |  | 1,077 |  |  |  | 1,196 |  |  |  | 80,740 |  |  |  | 81,936 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | 727 |  |  |  | 197 |  |  |  | 36 |  |  |  | 960 |  |  |  | 43,606 |  |  |  | 44,566 |
Home equity |  |  | 75 |  |  |  | ---- |  |  |  | 76 |  |  |  | 151 |  |  |  | 20,690 |  |  |  | 20,841 |
Other |  |  | 420 |  |  |  | 104 |  |  |  | 4 |  |  |  | 528 |  |  |  | 44,694 |  |  |  | 45,222 |
Total |  | $ | 3,993 |  |  | $ | 2,242 |  |  | $ | 6,778 |  |  | $ | 13,013 |  |  | $ | 572,739 |  |  | $ | 585,752 |

December 31, 2014 |  | 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 |  | $ | 3,337 |  |  | $ | 612 |  |  | $ | 3,489 |  |  | $ | 7,438 |  |  | $ | 216,190 |  |  | $ | 223,628 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | 74 |  |  |  | 62 |  |  |  | 1,422 |  |  |  | 1,558 |  |  |  | 77,290 |  |  |  | 78,848 |
Nonowner-occupied |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | 71,229 |  |  |  | 71,229 |
Construction |  |  | 932 |  |  |  | ---- |  |  |  | ---- |  |  |  | 932 |  |  |  | 26,603 |  |  |  | 27,535 |
Commercial and industrial |  |  | ---- |  |  |  | 10 |  |  |  | 24 |  |  |  | 34 |  |  |  | 83,964 |  |  |  | 83,998 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile |  |  | 616 |  |  |  | 149 |  |  |  | 33 |  |  |  | 798 |  |  |  | 42,051 |  |  |  | 42,849 |
Home equity |  |  | ---- |  |  |  | ---- |  |  |  | 103 |  |  |  | 103 |  |  |  | 18,188 |  |  |  | 18,291 |
Other |  |  | 655 |  |  |  | 20 |  |  |  | 126 |  |  |  | 801 |  |  |  | 47,589 |  |  |  | 48,390 |
Total |  | $ | 5,614 |  |  | $ | 853 |  |  | $ | 5,197 |  |  | $ | 11,664 |  |  | $ | 583,104 |  |  | $ | 594,768 |

Troubled Debt Restructurings:
A troubled debt restructuring (“TDR”) occurs when 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; a reduction in the contractual principal and interest payments of the loan; or short-term interest-only payment terms.
28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
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.
The following table presents the types of TDR loan modifications by class of loans as of December 31, 2015 and December 31, 2014:

|  | TDR’s Performing to Modified Terms |  |  | TDR’s Not Performing to Modified Terms |  |  | Total TDR’s |
December 31, 2015 |  |  |  |  |  |  |  |  |
Residential real estate: |  |  |  |  |  |  |  |  |
Interest only payments |  | $ | 1,001 |  |  | $ | ---- |  |  | $ | 1,001 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 433 |  |  |  | ---- |  |  |  | 433 |
Rate reduction |  |  | ---- |  |  |  | 232 |  |  |  | 232 |
Reduction of principal and interest payments |  |  | 604 |  |  |  | ---- |  |  |  | 604 |
Maturity extension at lower stated rate than market rate |  |  | 1,996 |  |  |  | ---- |  |  |  | 1,996 |
Credit extension at lower stated rate than market rate |  |  | 204 |  |  |  | ---- |  |  |  | 204 |
Nonowner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 300 |  |  |  | 2,473 |  |  |  | 2,773 |
Rate reduction |  |  | 396 |  |  |  | ---- |  |  |  | 396 |
Commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 7,579 |  |  |  | ---- |  |  |  | 7,579 |
Credit extension at lower stated rate than market rate |  |  | 226 |  |  |  | 391 |  |  |  | 617 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  |  |  |  |  |  |  |  |  |  |
Maturity extension at lower stated rate than market rate |  |  | 218 |  |  |  | ---- |  |  |  | 218 |
Total TDR’s |  | $ | 12,957 |  |  | $ | 3,096 |  |  | $ | 16,053 |

|  | TDR’s Performing to Modified Terms |  |  | TDR’s Not Performing to Modified Terms |  |  | Total TDR’s |
December 31, 2014 |  |  |  |  |  |  |  |  |
Residential real estate: |  |  |  |  |  |  |  |  |
Interest only payments |  | $ | 520 |  |  | $ | ---- |  |  | $ | 520 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 457 |  |  |  | ---- |  |  |  | 457 |
Rate reduction |  |  | ---- |  |  |  | 244 |  |  |  | 244 |
Reduction of principal and interest payments |  |  | 627 |  |  |  | ---- |  |  |  | 627 |
Maturity extension at lower stated rate than market rate |  |  | 1,046 |  |  |  | ---- |  |  |  | 1,046 |
Credit extension at lower stated rate than market rate |  |  | 204 |  |  |  | ---- |  |  |  | 204 |
Nonowner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 3,535 |  |  |  | 4,013 |  |  |  | 7,548 |
Rate reduction |  |  | 408 |  |  |  | ---- |  |  |  | 408 |
Commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 6,429 |  |  |  | ---- |  |  |  | 6,429 |
Credit extension at lower stated rate than market rate |  |  | 395 |  |  |  | ---- |  |  |  | 395 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  |  |  |  |  |  |  |  |  |  |
Maturity extension at lower stated rate than market rate |  |  | 219 |  |  |  | ---- |  |  |  | 219 |
Total TDR’s |  | $ | 13,840 |  |  | $ | 4,257 |  |  | $ | 18,097 |

29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
During the year ended December 31, 2015, the TDR's described above increased the allowance for loan losses and provision expense by $93 with corresponding charge-offs of $1,422. The charge-offs of $1,422 during 2015 included $1,304 that were related to specific reserves that had already been provided for during 2014, and, as a result, did not impact provision expense during 2015. During the year ended December 31, 2014, the TDR's described above increased the allowance for loan losses and provision expense by $623 with no corresponding charge-offs.
At December 31, 2015, the balance in TDR loans decreased $2,044, or 11.3%, from year-end 2014. The decrease was largely due to a $3,127 payoff of a commercial real estate loan during the third quarter of 2015. The effects from this large loan payoff were partially offset by advances of $1,157 to an existing commercial and industrial loan. The Company had 81% of its TDR's performing according to their modified terms at December 31, 2015, as compared to 77% at December 31, 2014. The Company's specific allocations in reserves to customers whose loan terms have been modified in TDR’s totaled $1,669 at December 31, 2015, as compared to $2,998 in reserves at December 31, 2014. This decrease in specific allocations was largely due to a $1,304 partial charge-off of an existing specific allocation on a collateral-dependent commercial real estate loan during the second quarter of 2015. At December 31, 2015, the Company had $995 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDR’s, as compared to $1,871 at December 31, 2014.
The following table presents the pre- and post-modification balances of TDR loan modifications by class of loans that occurred during the years ended December 31, 2015 and 2014:

|  | TDR’s Performing to Modified Terms |  |  | TDR’s Not Performing to Modified Terms |
|  | Pre-Modification Recorded Investment |  |  | Post-Modification Recorded Investment |  |  | Pre-Modification Recorded Investment |  |  | Post-Modification Recorded Investment |
December 31, 2015 |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  | $ | 495 |  |  | $ | 495 |  |  |  | ---- |  |  |  | ---- |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Maturity extension at lower stated rate than market rate |  |  | 1,025 |  |  |  | 1,025 |  |  |  | ---- |  |  |  | ---- |
Commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit extension at lower stated rate than market rate |  |  | 226 |  |  |  | 226 |  |  |  | ---- |  |  |  | ---- |
Total TDR’s |  | $ | 1,746 |  |  | $ | 1,746 |  |  |  | ---- |  |  |  | ---- |

30

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

|  | TDR’s Performing to Modified Terms |  |  | TDR’s Not Performing to Modified Terms |
|  | Pre-Modification Recorded Investment |  |  | Post-Modification Recorded Investment |  |  | Pre-Modification Recorded Investment |  |  | Post-Modification Recorded Investment |
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  | $ | 457 |  |  | $ | 457 |  |  |  | ---- |  |  |  | ---- |
Maturity extension at lower stated rate than market rate |  |  | 746 |  |  |  | 746 |  |  |  | ---- |  |  |  | ---- |
Credit extension at lower stated rate than market rate |  |  | 204 |  |  |  | 204 |  |  |  | ---- |  |  |  | ---- |
Commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest only payments |  |  | 4,073 |  |  |  | 4,073 |  |  |  | ---- |  |  |  | ---- |
Credit extension at lower stated rate than market rate |  |  | 395 |  |  |  | 395 |  |  |  | ---- |  |  |  | ---- |
Total TDR’s |  | $ | 5,875 |  |  | $ | 5,875 |  |  |  | ---- |  |  |  | ---- |

All of the Company’s loans that were restructured during the twelve months ended December 31, 2015 and 2014 were performing in accordance with their modified terms. Furthermore, there were no TDR’s described above at December 31, 2015 and 2014 that experienced any payment defaults within twelve months following their 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 loans modified during the twelve months ended December 31, 2015 and 2014 had no impact on the provision expense or the allowance for loan losses. As of December 31, 2015 and 2014, the Company had no allocation of reserves to customers whose loan terms were modified during the year ended of 2015 and 2014.
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.
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.
31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
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 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 re-evaluation date. As of December 31, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of commercial loans by class of loans is as follows:

December 31, 2015 |  | Pass |  |  | Criticized |  |  | Classified |  |  | Total |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 62,287 |  |  | $ | 6,738 |  |  | $ | 4,433 |  |  | $ | 73,458 |
Nonowner-occupied |  |  | 61,577 |  |  |  | 6,305 |  |  |  | 4,120 |  |  |  | 72,002 |
Construction |  |  | 23,080 |  |  |  | ---- |  |  |  | 772 |  |  |  | 23,852 |
Commercial and industrial |  |  | 70,852 |  |  |  | 5,232 |  |  |  | 5,852 |  |  |  | 81,936 |
Total |  | $ | 217,796 |  |  | $ | 18,275 |  |  | $ | 15,177 |  |  | $ | 251,248 |

December 31, 2014 |  | Pass |  |  | Criticized |  |  | Classified |  |  | Total |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 72,232 |  |  | $ | 2,102 |  |  | $ | 4,514 |  |  | $ | 78,848 |
Nonowner-occupied |  |  | 60,491 |  |  |  | 2,127 |  |  |  | 8,611 |  |  |  | 71,229 |
Construction |  |  | 27,364 |  |  |  | ---- |  |  |  | 171 |  |  |  | 27,535 |
Commercial and industrial |  |  | 76,395 |  |  |  | 495 |  |  |  | 7,108 |  |  |  | 83,998 |
Total |  | $ | 236,482 |  |  | $ | 4,724 |  |  | $ | 20,404 |  |  | $ | 261,610 |

The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau) but not thereafter. 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.
32

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (continued)
For residential and consumer loan classes, the Company 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, 2015 and December 31, 2014:

|  | Consumer |  |  |  |  |  |  |
December 31, 2015 |  | Automobile |  |  | Home Equity |  |  | Other |  |  | Residential Real Estate |  |  | Total |
Performing |  | $ | 44,521 |  |  | $ | 20,745 |  |  | $ | 45,218 |  |  | $ | 221,807 |  |  | $ | 332,291 |
Nonperforming |  |  | 45 |  |  |  | 96 |  |  |  | 4 |  |  |  | 2,068 |  |  |  | 2,213 |
Total |  | $ | 44,566 |  |  | $ | 20,841 |  |  | $ | 45,222 |  |  | $ | 223,875 |  |  | $ | 334,504 |

|  | Consumer |  |  |  |  |  |  |
December 31, 2014 |  | Automobile |  |  | Home Equity |  |  | Other |  |  | Residential Real Estate |  |  | Total |
Performing |  | $ | 42,816 |  |  | $ | 18,188 |  |  | $ | 48,264 |  |  | $ | 219,860 |  |  | $ | 329,128 |
Nonperforming |  |  | 33 |  |  |  | 103 |  |  |  | 126 |  |  |  | 3,768 |  |  |  | 4,030 |
Total |  | $ | 42,849 |  |  | $ | 18,291 |  |  | $ | 48,390 |  |  | $ | 223,628 |  |  | $ | 333,158 |

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 6.06% of total loans were unsecured at December 31, 2015, up from 5.66% at December 31, 2014.
Note D - Premises and Equipment
Following is a summary of premises and equipment at December 31:

|  | 2015 |  |  | 2014 |
Land |  | $ | 2,055 |  |  | $ | 2,045 |
Buildings |  |  | 10,890 |  |  |  | 11,083 |
Leasehold improvements |  |  | 2,066 |  |  |  | 2,767 |
Furniture and equipment |  |  | 4,334 |  |  |  | 15,146 |
|  |  | 19,345 |  |  |  | 31,041 |
Less accumulated depreciation |  |  | 8,941 |  |  |  | 21,846 |
Total premises and equipment |  | $ | 10,404 |  |  | $ | 9,195 |

The following is a summary of the future minimum operating lease payments for facilities leased by the Company. Operating lease expense was $464 in 2015, $515 in 2014, and $529 in 2013.

2016 |  | $ | 445 |
2017 |  |  | 277 |
2018 |  |  | 139 |
2019 |  |  | 23 |
2020 |  |  | 19 |
|  | $ | 903 |

33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note E - Deposits
Following is a summary of interest-bearing deposits at December 31:

|  | 2015 |  |  | 2014 |
NOW accounts |  | $ | 124,524 |  |  | $ | 112,571 |
Savings and Money Market |  |  | 200,976 |  |  |  | 198,788 |
Time: |  |  |  |  |  |  |  |
In denominations of $250,000 or less |  |  | 146,975 |  |  |  | 164,219 |
In denominations of more than $250,000 |  |  | 11,772 |  |  |  | 9,458 |
Total time deposits |  |  | 158,747 |  |  |  | 173,677 |
Total interest-bearing deposits |  | $ | 484,247 |  |  | $ | 485,036 |

Following is a summary of total time deposits by remaining maturity at December 31, 2015:

2016 |  | $ | 82,413 |
2017 |  |  | 44,750 |
2018 |  |  | 16,200 |
2019 |  |  | 9,873 |
2020 |  |  | 5,001 |
Thereafter |  |  | 510 |
Total |  | $ | 158,747 |

Brokered deposits, included in time deposits, were $28,998 and $28,976 at December 31, 2015 and 2014, respectively.
Note F - Interest Rate Swaps
The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. The Company utilizes interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. As part of this strategy, the Company provides its customer with a fixed-rate loan while creating a variable-rate asset for the Company by the customer entering into an interest rate swap with the Company on terms that match the loan. The Company offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. These interest rate swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative. At December 31, 2015, the Company had interest rate swaps associated with commercial loans with a notional value of $10,727 and a fair value of $29. This is compared to interest rate swaps with a notional value of $11,684 and a fair value of $38 at December 31, 2014. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreement. To further offset the risk exposure related to market value fluctuations of its interest rate swaps, the Company maintains collateral deposits on hand with a third-party correspondent, which totaled $350 at December 31, 2015 and December 31, 2014.
34

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note G - Other Borrowed Funds
Other borrowed funds at December 31, 2015 and 2014 are comprised of advances from the Federal Home Loan Bank (“FHLB”) of Cincinnati and promissory notes. At December 31, 2015, FHLB Borrowings included $117 in capitalized lease obligations.

|  |  | FHLB Borrowings |  |  | Promissory Notes |  |  |  | Totals
| 2015 |  |  | $ | 20,028 |  |  | $ | 3,918 |  |  | $ | 23,946
| 2014 |  |  | $ | 21,181 |  |  | $ | 3,791 |  |  | $ | 24,972

Pursuant to collateral agreements with the FHLB, advances are secured by $214,712 in qualifying mortgage loans, $78,012 in commercial loans and $5,081 in FHLB stock at December 31, 2015. Fixed-rate FHLB advances of $19,911 mature through 2042 and have interest rates ranging from 1.34% to 3.31% and a year-to-date weighted average cost of 2.08% at December 31, 2015, as compared to 2.14% at December 31, 2014. There were no variable-rate FHLB borrowings at December 31, 2015.
At December 31, 2015, the Company had a cash management line of credit enabling it to borrow up to $75,000 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 $75,000 available on this line of credit at December 31, 2015.
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 $176,662 at December 31, 2015. Of this maximum borrowing capacity of $176,662, the Company had $121,952 available to use as additional borrowings, of which $75,000 could be used for short-term, cash management advances, as mentioned above.
Promissory notes, issued primarily by Ohio Valley, are due at various dates through a final maturity date of December 4, 2017, and have fixed rates ranging from 1.15% to 1.50% and a year-to-date weighted average cost of 1.38% at December 31, 2015, as compared to 2.34% at December 31, 2014. At December 31, 2015, there were no promissory notes payable by Ohio Valley to related parties. See Note K for further discussion of related party transactions.
Letters of credit issued on the Bank’s behalf by the FHLB to collateralize certain public unit deposits as required by law totaled $34,800 at December 31, 2015 and $29,500 at December 31, 2014.
Scheduled principal payments over the next five years:

|  | FHLB Borrowings |  |  | Promissory Notes |  |  | Totals |
2016 |  | $ | 1,771 |  |  | $ | 2,538 |  |  | $ | 4,309 |
2017 |  |  | 1,601 |  |  |  | 1,380 |  |  |  | 2,981 |
2018 |  |  | 4,537 |  |  |  | ---- |  |  |  | 4,537 |
2019 |  |  | 1,467 |  |  |  | ---- |  |  |  | 1,467 |
2020 |  |  | 1,369 |  |  |  | ---- |  |  |  | 1,369 |
Thereafter |  |  | 9,283 |  |  |  | ---- |  |  |  | 9,283 |
|  | $ | 20,028 |  |  | $ | 3,918 |  |  | $ | 23,946 |

35

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 were required to be redeemed no later than September 7, 2030. Given the current capital levels and interest cost savings, the Company redeemed the full amount of the subordinated debentures on March 7, 2013, at a redemption price of 104.24%. The redemption was funded by a capital distribution from the Bank.
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 was fixed at 6.58% for five years, and then converted to a floating-rate term on March 15, 2012, based on a rate equal to the 3-month LIBOR plus 1.68%. The interest rate on these trust preferred securities was 2.19% at December 31, 2015 and 1.92% at December 31, 2014. 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.
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.
Note I - Income Taxes
The provision for income taxes consists of the following components:

|  | 2015 |  |  | 2014 |  |  | 2013 |
Current tax expense |  | $ | 2,218 |  |  | $ | 3,637 |  |  | $ | 2,795 |
Deferred tax (benefit) expense |  |  | 591 |  |  |  | (517 | ) |  |  | 144 |
Total income taxes |  | $ | 2,809 |  |  | $ | 3,120 |  |  | $ | 2,939 |

The source of deferred tax assets and deferred tax liabilities at December 31:

|  | 2015 |  |  | 2014 |
Items giving rise to deferred tax assets: |  |  |  |  |  |
Allowance for loan losses |  | $ | 2,302 |  |  | $ | 2,882 |
Deferred compensation |  |  | 2,089 |  |  |  | 2,008 |
Deferred loan fees/costs |  |  | 273 |  |  |  | 288 |
Other real estate owned |  |  | 370 |  |  |  | 370 |
Accrued bonus |  |  | 166 |  |  |  | ---- |
Other |  |  | 143 |  |  |  | 84 |
Items giving rise to deferred tax liabilities: |  |  |  |  |  |  |  |
Mortgage servicing rights |  |  | (149 | ) |  |  | (167 | )
FHLB stock dividends |  |  | (1,074 | ) |  |  | (1,074 | )
Unrealized gain on securities available for sale |  |  | (157 | ) |  |  | (495 | )
Prepaid expenses |  |  | (234 | ) |  |  | (206 | )
Depreciation and amortization |  |  | (740 | ) |  |  | (451 | )
Other |  |  | (5 | ) |  |  | (2 | )
Net deferred tax asset |  | $ | 2,984 |  |  | $ | 3,237 |

36

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note I - Income Taxes (continued)
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 the future reversals of existing taxable temporary differences, deductions against forecasted income and tax planning strategies.
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:

|  | 2015 |  |  | 2014 |  |  | 2013 |
Statutory tax |  | $ | 3,870 |  |  | $ | 3,806 |  |  | $ | 3,757 |
Effect of nontaxable interest |  |  | (437 | ) |  |  | (418 | ) |  |  | (322 | )
Effect of nontaxable insurance premiums |  |  | (336 | ) |  |  | (142 | ) |  |  | ---- |
Income from bank owned insurance, net |  |  | (210 | ) |  |  | (217 | ) |  |  | (195 | )
Effect of postretirement benefits |  |  | 71 |  |  |  | 238 |  |  |  | ---- |
Effect of nontaxable life insurance death proceeds |  |  | (11 | ) |  |  | ---- |  |  |  | (154 | )
Effect of state income tax |  |  | 66 |  |  |  | 73 |  |  |  | 76 |
Tax credits |  |  | (221 | ) |  |  | (231 | ) |  |  | (230 | )
Other items |  |  | 17 |  |  |  | 11 |  |  |  | 7 |
Total income taxes |  | $ | 2,809 |  |  | $ | 3,120 |  |  | $ | 2,939 |

At December 31, 2015 and December 31, 2014, 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. As previously reported, the Internal Revenue Service (“IRS”) has proposed that Loan Central, as a tax return preparer, be assessed a penalty for allegedly negotiating or endorsing checks issued by the U.S. Treasury to taxpayers. The penalty would amount to approximately $1.2 million. Loan Central appealed this matter within the IRS. Loan Central was notified that the Appeals Office will not concede the penalty, and the penalty has been assessed. The Company is employing further IRS procedures, and the IRS is currently processing the Company’s claims. The matter may still be resolved at the IRS. If the matter is not resolved at the IRS, the matter may have to be resolved through the judicial system. Based on consultation with legal counsel, management remains confident that it is highly unlikely that the penalty recommendation will be sustained. Therefore, the Company did not recognize any interest and/or penalties related to this matter 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 2012. The tax years 2012-2014 remain open to federal and state examinations.
37

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:

|  | 2015 |  |  | 2014 |
Fixed rate |  | $ | 65 |  |  | $ | 223 |
Variable rate |  |  | 59,028 |  |  |  | 51,011 |
Standby letters of credit |  |  | 3,322 |  |  |  | 4,110 |

The interest rate on fixed-rate commitments ranged from 3.75% to 6.25% at December 31, 2015.
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 refund product provider. The clearing agreement is effective through December 31, 2019 and is renewable in 3-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 receives a fee paid by the third-party tax refund product 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 2015. A summary of activity on these borrower relationships with aggregate debt greater than $120 is as follows:

Total loans at January 1, 2015 |  | $ | 5,184 |
New loans |  |  | 135 |
Repayments |  |  | (1,162 | )
Other changes |  |  | (168 | )
Total loans at December 31, 2015 |  | $ | 3,989 |

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 2015 and 2014 were $30,169 and $14,616.
38

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 $288, $278, and $227 for 2015, 2014 and 2013.
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 322,056 and 324,675 at December 31, 2015 and 2014. In addition, the subsidiaries made contributions to its ESOP Trust as follows:

|  | Years ended December 31 |
|  | 2015 |  |  | 2014 |  |  | 2013 |
Number of shares issued |  |  | ---- |  |  |  | 14,618 |  |  |  | 28,634 |
Fair value of stock contributed |  | $ | ---- |  |  | $ | 351 |  |  | $ | 640 |
Cash contributed |  |  | 674 |  |  |  | 300 |  |  |  | 73 |
Total expense |  | $ | 674 |  |  | $ | 651 |  |  | $ | 713 |

Life insurance contracts with a cash surrender value of $26,367 and annuity assets of $1,985 at December 31, 2015 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 $6,033 and $5,806 at December 31, 2015 and 2014. Expenses related to the plans for each of the last three years amounted to $338, $604, and $787. In association with the split-dollar life insurance plan, the present value of the postretirement benefit totaled $3,062 at December 31, 2015 and $2,852 at December 31, 2014.
During the fourth quarter of 2015, the Company recorded $941 in proceeds expected to be received from the settlement of two BOLI policies. The triggering event occurred in December 2015, resulting in a $908 reduction to BOLI assets and a net gain of $33 that was recorded to income. The proceeds of $941 had not yet been collected by year-end 2015 and, therefore, were recorded as other assets at December 31, 2015.
Note M - Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
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, or 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.
39

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note M - Fair Value of Financial Instruments (continued)
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: The fair values for 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: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly 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. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Other Real Estate Owned: 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. Fair value is commonly 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.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management’s own assumptions of fair value based on factors that include recent market data or industry-wide statistics. On an as-needed basis, the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs that typically approximate 10%.
40

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, 2015, Using |
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |
U.S. Government sponsored entity securities |  |  | ---- |  |  | $ | 8,965 |  |  |  | ---- |
Agency mortgage-backed securities, residential |  |  | ---- |  |  |  | 82,686 |  |  |  | ---- |

|  | Fair Value Measurements at December 31, 2014, Using |
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |
U.S. Government sponsored entity securities |  |  | ---- |  |  | $ | 8,917 |  |  |  | ---- |
Agency mortgage-backed securities, residential |  |  | ---- |  |  |  | 76,319 |  |  |  | ---- |

There were no transfers between Level 1 and Level 2 during 2015 or 2014.
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, 2015, Using |
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |
Impaired loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Nonowner-occupied |  |  | ---- |  |  |  | ---- |  |  | $ | 2,473 |
Commercial and industrial |  |  | ---- |  |  |  | ---- |  |  |  | 3,779 |
Other real estate owned: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | ---- |  |  |  | ---- |  |  |  | 1,147 |

41

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

|  | Fair Value Measurements at December 31, 2014, Using |
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |
Impaired loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  |  | ---- |  |  |  | ---- |  |  | $ | 1,679 |
Nonowner-occupied |  |  | ---- |  |  |  | ---- |  |  |  | 5,270 |
Commercial and industrial |  |  | ---- |  |  |  | ---- |  |  |  | 2,532 |
Other real estate owned: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | ---- |  |  |  | ---- |  |  |  | 1,147 |

At December 31, 2015, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $7,811, with a corresponding valuation allowance of $1,559, resulting in an increase of $741 in provision expense during the year ended December 31, 2015, with $1,422 in additional charge-offs recognized. At December 31, 2014, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $12,773, with a corresponding valuation allowance of $3,292, resulting in an increase of $1,044 in provision expense during the year ended December 31, 2014, with no additional charge-offs recognized.
Other real estate owned that was measured at fair value less costs to sell at December 31, 2015 had a net carrying amount of $1,147, which is made up of the outstanding balance of $2,217, net of a valuation allowance of $1,070 at December 31, 2015. There were no corresponding write-downs during 2015. Other real estate owned that was measured at fair value less costs to sell at December 31, 2014 had a net carrying amount of $1,147, which is made up of the outstanding balance of $2,217, net of a valuation allowance of $1,070 at December 31, 2014. There were $88 in net appreciation during 2014.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2015 and December 31, 2014:

December 31, 2015 |  | Fair Value |  | Valuation Technique(s) | Unobservable Input(s) | Range |  | (Weighted Average) |
Impaired loans: |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |
Nonowner-occupied |  | $ | 2,473 |  |  | Sales approach | Adjustment to comparables | 0% to 12.5% |  | 5.7% |
Commercial and industrial |  |  | 3,779 |  |  | Sales approach | Adjustment to comparables | 0.9% to 30% |  | 14.3% |
Other real estate owned: |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | 1,147 |  |  | Sales approach | Adjustment to comparables | 0% to 35% |  |  | 15.2% |

December 31, 2014 |  |  |  |  |  |  |  |
Impaired loans: |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 1,679 |  | Sales approach | Adjustment to comparables | 0.3% to 62% |  | 18% |
|  |  |  |  | Income approach | Capitalization Rate | 10% |  | 10% |
Nonowner-occupied |  |  | 2,597 |  | Income approach | Capitalization Rate | 6.5% |  | 6.5% |
Nonowner-occupied |  |  | 2,673 |  | Sales approach | Adjustment to comparables | 0% to 12.5% |  | 5.7% |
Commercial and industrial |  |  | 2,532 |  | Sales approach | Adjustment to comparables | 10% to 30% |  | 21.42% |
Other real estate owned: |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |
Construction |  |  | 1,147 |  | Sales approach | Adjustment to comparables | 5% to 35% |  |  | 18% |

42

Note M - Fair Value of Financial Instruments (continued)
The carrying amounts and estimated fair values of financial instruments at December 31, 2015 and December 31, 2014 are as follows:

|  |  |  |  | Fair Value Measurements at December 31, 2015 Using: |
|  | Carrying Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 45,530 |  |  | $ | 45,530 |  |  | $ | ---- |  |  | $ | ---- |  |  | $ | 45,530 |
Certificates of deposit in financial institutions |  |  | 1,715 |  |  |  | ---- |  |  |  | 1,715 |  |  |  | ---- |  |  |  | 1,715 |
Securities available for sale |  |  | 91,651 |  |  |  | ---- |  |  |  | 91,651 |  |  |  | ---- |  |  |  | 91,651 |
Securities held to maturity |  |  | 19,903 |  |  |  | ---- |  |  |  | 9,814 |  |  |  | 10,976 |  |  |  | 20,790 |
Federal Home Loan Bank and Federal Reserve Bank stock |  |  | 6,576 |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |
Loans, net |  |  | 579,104 |  |  |  | ---- |  |  |  | ---- |  |  |  | 582,427 |  |  |  | 582,427 |
Accrued interest receivable |  |  | 1,819 |  |  |  | ---- |  |  |  | 224 |  |  |  | 1,595 |  |  |  | 1,819 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 660,746 |  |  |  | 176,499 |  |  |  | 484,636 |  |  |  | ---- |  |  |  | 661,135 |
Other borrowed funds |  |  | 23,946 |  |  |  | ---- |  |  |  | 23,672 |  |  |  | ---- |  |  |  | 23,672 |
Subordinated debentures |  |  | 8,500 |  |  |  | ---- |  |  |  | 5,368 |  |  |  | ---- |  |  |  | 5,368 |
Accrued interest payable |  |  | 449 |  |  |  | 4 |  |  |  | 445 |  |  |  | ---- |  |  |  | 449 |

|  |  |  |  | Fair Value Measurements at December 31, 2014 Using: |
|  | Carrying Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 30,977 |  |  | $ | 30,977 |  |  | $ | ---- |  |  | $ | ---- |  |  | $ | 30,977 |
Certificates of deposit in financial institutions |  |  | 980 |  |  |  | ---- |  |  |  | 980 |  |  |  | ---- |  |  |  | 980 |
Securities available for sale |  |  | 85,236 |  |  |  | ---- |  |  |  | 85,236 |  |  |  | ---- |  |  |  | 85,236 |
Securities held to maturity |  |  | 22,820 |  |  |  | ---- |  |  |  | 12,144 |  |  |  | 11,426 |  |  |  | 23,570 |
Federal Home Loan Bank and Federal Reserve Bank stock |  |  | 6,576 |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |
Loans, net |  |  | 586,434 |  |  |  | ---- |  |  |  | ---- |  |  |  | 591,594 |  |  |  | 591,594 |
Accrued interest receivable |  |  | 1,806 |  |  |  | ---- |  |  |  | 230 |  |  |  | 1,576 |  |  |  | 1,806 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 646,830 |  |  |  | 161,794 |  |  |  | 485,503 |  |  |  | ---- |  |  |  | 647,297 |
Other borrowed funds |  |  | 24,972 |  |  |  | ---- |  |  |  | 24,555 |  |  |  | ---- |  |  |  | 24,555 |
Subordinated debentures |  |  | 8,500 |  |  |  | ---- |  |  |  | 4,979 |  |  |  | ---- |  |  |  | 4,979 |
Accrued interest payable |  |  | 394 |  |  |  | 4 |  |  |  | 390 |  |  |  | ---- |  |  |  | 394 |

43

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note M - Fair Value of Financial Instruments (continued)
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Certificates of deposit in financial institutions: The carrying amounts of certificates of deposit in financial institutions approximate fair values and are classified as Level 2.
Securities Held to Maturity: The fair values for securities held to maturity are determined in the same manner as securities held for sale and discussed earlier in this note. Level 3 securities consist of nonrated municipal bonds and tax credit (“QZAB”) bonds.
Federal Home Loan Bank and Federal Reserve Bank stock: It is not practical to determine the fair value of either Federal Home Loan Bank or Federal Reserve Bank stock due to restrictions placed on its transferability.
Loans: Fair values of loans are estimated as follows: The fair value of fixed rate loans is estimated by discounting future cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
Deposit Liabilities: The fair values disclosed for noninterest-bearing deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
Other Borrowed Funds: The carrying values of the Company’s short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification. The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Subordinated Debentures: The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Accrued Interest Receivable and Payable: The carrying amount of accrued interest approximates fair value resulting in a classification that is consistent with the earning assets and interest-bearing liabilities with which it is associated.
Off-balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
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.
44

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. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company and the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Bank holding companies meeting the requirements of the Federal Reserve Board’s Small Bank Holding Company Policy are exempt from compliance with the consolidated capital requirements, although their bank subsidiaries are still subject to the bank capital requirements. Effective May 15, 2015, the Federal Reserve Board amended the Small Bank Holding Company Policy to increase from $500 million to $1 billion the asset threshold for a bank to qualify under the Policy. Pursuant to that Policy, at December 31, 2015, the Company was not subject to the consolidated capital requirements. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Capital amounts and ratios for December 31, 2014 are calculated using Basel I rules. Management believes that as of December 31, 2015, the Bank met all capital adequacy requirements to which it was subject.
Prompt corrective action regulations provide five classifications: 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 capital restoration plans are required. At year-end 2015 and 2014, the Bank met the capital requirements to be deemed well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
At year-end, consolidated actual capital levels and minimum required levels for the Company and the Bank were:

|  | Actual |  |  | Minimum Required To Be Adequately Capitalized Under Prompt Corrective Action Regulations |  |  | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations |
|  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |
2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 104,047 |  |  |  | 18.2 | % |  |  | N/A |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |
Bank |  |  | 91,006 |  |  |  | 16.3 |  |  | $ | 44,799 |  |  |  | 8.0 | % |  | $ | 55,999 |  |  |  | 10.0 | %
Common equity Tier 1 capital (to risk weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 88,899 |  |  |  | 15.6 |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |
Bank |  |  | 84,686 |  |  |  | 15.1 |  |  |  | 25,199 |  |  |  | 4.5 |  |  |  | 36,399 |  |  |  | 6.5 |
Tier 1 capital (to risk weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 97,399 |  |  |  | 17.1 |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |
Bank |  |  | 84,686 |  |  |  | 15.1 |  |  |  | 33,599 |  |  |  | 6.0 |  |  |  | 44,799 |  |  |  | 8.0 |
Tier 1 capital (to average assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 97,399 |  |  |  | 12.2 |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |
Bank |  |  | 84,686 |  |  |  | 10.8 |  |  |  | 31,280 |  |  |  | 4.0 |  |  |  | 39,100 |  |  |  | 5.0 |
2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 99,607 |  |  |  | 17.4 | % |  | $ | 45,765 |  |  |  | 8.0 | % |  |  | N/A |  |  |  | N/A |
Bank |  |  | 87,670 |  |  |  | 15.6 |  |  |  | 44,935 |  |  |  | 8.0 |  |  | $ | 56,169 |  |  |  | 10.0 | %
Tier 1 capital (to risk weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 92,442 |  |  |  | 16.2 |  |  |  | 22,883 |  |  |  | 4.0 |  |  |  | N/A |  |  |  | N/A |
Bank |  |  | 80,637 |  |  |  | 14.4 |  |  |  | 22,468 |  |  |  | 4.0 |  |  |  | 33,701 |  |  |  | 6.0 |
Tier 1 capital (to average assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 92,442 |  |  |  | 11.8 |  |  |  | 31,306 |  |  |  | 4.0 |  |  |  | N/A |  |  |  | N/A |
Bank |  |  | 80,637 |  |  |  | 10.5 |  |  |  | 30,702 |  |  |  | 4.0 |  |  |  | 38,377 |  |  |  | 5.0 |

45

Note N – Regulatory Matters (continued)
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, 2016 approximately $8,347 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.
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 |  | 2015 |  |  | 2014 |
Cash and cash equivalents |  | $ | 2,233 |  |  | $ | 2,875 |
Investment in subsidiaries |  |  | 96,759 |  |  |  | 91,991 |
Notes receivable – subsidiaries |  |  | 3,881 |  |  |  | 3,782 |
Other assets |  |  | 63 |  |  |  | 47 |
Total assets |  | $ | 102,936 |  |  | $ | 98,695 |
Liabilities |  |  |  |  |  |  |  |
Notes payable |  | $ | 3,918 |  |  | $ | 3,791 |
Subordinated debentures |  |  | 8,500 |  |  |  | 8,500 |
Other liabilities |  |  | 48 |  |  |  | 188 |
Total liabilities |  |  | 12,466 |  |  |  | 12,479 |
Shareholders’ Equity |  |  |  |  |  |  |  |
Total shareholders’ equity |  |  | 90,470 |  |  |  | 86,216 |
Total liabilities and shareholders’ equity |  | $ | 102,936 |  |  | $ | 98,695 |

CONDENSED STATEMENTS OF INCOME

|  | Years ended December 31: |
Income: |  | 2015 |  |  | 2014 |  |  | 2013 |
Interest on notes |  | $ | 53 |  |  | $ | 84 |  |  | $ | 85 |
Other operating income |  |  | ---- |  |  |  | 34 |  |  |  | 68 |
Dividends from subsidiaries |  |  | 3,500 |  |  |  | 3,500 |  |  |  | 8,500 |
Gain on sale of ProAlliance Corporation |  |  | ---- |  |  |  | 810 |  |  |  | ---- |
Expenses: |  |  |  |  |  |  |  |  |  |  |  |
Interest on notes |  |  | 53 |  |  |  | 84 |  |  |  | 86 |
Interest on subordinated debentures |  |  | 170 |  |  |  | 165 |  |  |  | 265 |
Operating expenses |  |  | 345 |  |  |  | 384 |  |  |  | 456 |
Income before income taxes and equity in undistributed earnings of subsidiaries .. |  |  | 2,985 |  |  |  | 3,795 |  |  |  | 7,846 |
Income tax benefit |  |  | 167 |  |  |  | (108 | ) |  |  | 214 |
Equity in undistributed earnings of subsidiaries |  |  | 5,422 |  |  |  | 4,386 |  |  |  | 52 |
Net Income |  | $ | 8,574 |  |  | $ | 8,073 |  |  | $ | 8,112 |

46

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: |  | 2015 |  |  | 2014 |  |  | 2013 |
Net Income |  | $ | 8,574 |  |  | $ | 8,073 |  |  | $ | 8,112 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Gain on sale of ProAlliance Corporation |  |  | ---- |  |  |  | (810 | ) |  |  | ---- |
Equity in undistributed earnings of subsidiaries |  |  | (5,422 | ) |  |  | (4,386 | ) |  |  | (52 | )
Common stock issued to ESOP |  |  | ---- |  |  |  | 351 |  |  |  | 640 |
Change in other assets |  |  | (16 | ) |  |  | 323 |  |  |  | (60 | )
Change in other liabilities |  |  | (141 | ) |  |  | (334 | ) |  |  | (15 | )
Net cash provided by operating activities |  |  | 2,995 |  |  |  | 3,217 |  |  |  | 8,625 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Proceeds from sale of ProAlliance Corporation |  |  | ---- |  |  |  | 810 |  |  |  | ---- |
Investment in OVBC Captive |  |  | ---- |  |  |  | (250 | ) |  |  | ---- |
Change in notes receivable |  |  | (100 | ) |  |  | (262 | ) |  |  | (97 | )
Net cash provided by (used in) investing activities |  |  | (100 | ) |  |  | 298 |  |  |  | (97 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Change in notes payable |  |  | 128 |  |  |  | 262 |  |  |  | 3 |
Proceeds from common stock through dividend reinvestment |  |  | ---- |  |  |  | 103 |  |  |  | 170 |
Cash dividends paid |  |  | (3,665 | ) |  |  | (3,441 | ) |  |  | (2,965 | )
Repayment of subordinated debentures |  |  | ---- |  |  |  | ---- |  |  |  | (5,000 | )
Net cash used in financing activities |  |  | (3,537 | ) |  |  | (3,076 | ) |  |  | (7,792 | )
Cash and cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents |  |  | (642 | ) |  |  | 439 |  |  |  | 736 |
Cash and cash equivalents at beginning of year |  |  | 2,875 |  |  |  | 2,436 |  |  |  | 1,700 |
Cash and cash equivalents at end of year |  | $ | 2,233 |  |  | $ | 2,875 |  |  | $ | 2,436 |

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 90.9%, 90.6% and 90.5% of total consolidated revenues for the years ended December 31, 2015, 2014 and 2013, 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.
47

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note P - Segment Information (continued)
Segment information is as follows:

|  | Year Ended December 31, 2015 |
|  | Banking |  |  | Consumer Finance |  |  | Total Company |
Net interest income |  | $ | 30,175 |  |  | $ | 3,320 |  |  | $ | 33,495 |
Provision expense |  |  | 1,055 |  |  |  | 35 |  |  |  | 1,090 |
Noninterest income |  |  | 7,880 |  |  |  | 717 |  |  |  | 8,597 |
Noninterest expense |  |  | 26,983 |  |  |  | 2,636 |  |  |  | 29,619 |
Tax expense |  |  | 2,347 |  |  |  | 462 |  |  |  | 2,809 |
Net income |  |  | 7,670 |  |  |  | 904 |  |  |  | 8,574 |
Assets |  |  | 782,715 |  |  |  | 13,570 |  |  |  | 796,285 |

|  | Year Ended December 31, 2014 |
|  | Banking |  |  | Consumer Finance |  |  | Total Company |
Net interest income |  | $ | 30,172 |  |  | $ | 3,308 |  |  | $ | 33,480 |
Provision expense |  |  | 2,645 |  |  |  | 142 |  |  |  | 2,787 |
Noninterest income |  |  | 8,897 |  |  |  | 896 |  |  |  | 9,793 |
Noninterest expense |  |  | 26,806 |  |  |  | 2,487 |  |  |  | 29,293 |
Tax expense |  |  | 2,587 |  |  |  | 533 |  |  |  | 3,120 |
Net income |  |  | 7,031 |  |  |  | 1,042 |  |  |  | 8,073 |
Assets |  |  | 764,510 |  |  |  | 14,158 |  |  |  | 778,668 |

|  | Year Ended December 31, 2013 |
|  | Banking |  |  | Consumer Finance |  |  | Total Company |
Net interest income |  | $ | 29,141 |  |  | $ | 3,244 |  |  | $ | 32,385 |
Provision expense |  |  | 364 |  |  |  | 113 |  |  |  | 477 |
Noninterest income |  |  | 7,711 |  |  |  | 807 |  |  |  | 8,518 |
Noninterest expense |  |  | 26,914 |  |  |  | 2,461 |  |  |  | 29,375 |
Tax expense |  |  | 2,440 |  |  |  | 499 |  |  |  | 2,939 |
Net income |  |  | 7,134 |  |  |  | 978 |  |  |  | 8,112 |
Assets |  |  | 732,905 |  |  |  | 14,463 |  |  |  | 747,368 |

48

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

|  | Quarters Ended |
|  | Mar. 31 |  |  | Jun. 30 |  |  | Sept. 30 |  |  | Dec. 31 |
2015 |  |  |  |  |  |  |  |  |  |  |  |
Total interest income |  | $ | 9,627 |  |  | $ | 8,866 |  |  | $ | 9,016 |  |  | $ | 8,825 |
Total interest expense |  |  | 697 |  |  |  | 717 |  |  |  | 731 |  |  |  | 694 |
Net interest income |  |  | 8,930 |  |  |  | 8,149 |  |  |  | 8,285 |  |  |  | 8,131 |
Provision for loan losses (1) |  |  | (78 | ) |  |  | 799 |  |  |  | (11 | ) |  |  | 380 |
Noninterest income (2) |  |  | 3,489 |  |  |  | 1,917 |  |  |  | 1,584 |  |  |  | 1,607 |
Noninterest expense |  |  | 7,427 |  |  |  | 7,554 |  |  |  | 7,727 |  |  |  | 6,911 |
Net income |  |  | 3,624 |  |  |  | 1,410 |  |  |  | 1,642 |  |  |  | 1,898 |
Earnings per share |  | $ | 0.88 |  |  | $ | 0.34 |  |  | $ | 0.40 |  |  | $ | 0.46 |
2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total interest income |  | $ | 9,508 |  |  | $ | 8,925 |  |  | $ | 8,904 |  |  | $ | 9,018 |
Total interest expense |  |  | 726 |  |  |  | 738 |  |  |  | 696 |  |  |  | 715 |
Net interest income |  |  | 8,782 |  |  |  | 8,187 |  |  |  | 8,208 |  |  |  | 8,303 |
Provision for loan losses (3) |  |  | 494 |  |  |  | 1,386 |  |  |  | (682 | ) |  |  | 1,589 |
Noninterest income (2) |  |  | 4,118 |  |  |  | 1,912 |  |  |  | 2,106 |  |  |  | 1,657 |
Noninterest expense |  |  | 7,295 |  |  |  | 6,997 |  |  |  | 7,244 |  |  |  | 7,757 |
Net income |  |  | 3,564 |  |  |  | 1,344 |  |  |  | 2,742 |  |  |  | 423 |
Earnings per share |  | $ | 0.87 |  |  | $ | 0.33 |  |  | $ | 0.67 |  |  | $ | 0.10 |
2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total interest income |  | $ | 9,480 |  |  | $ | 8,764 |  |  | $ | 8,748 |  |  | $ | 8,966 |
Total interest expense |  |  | 1,059 |  |  |  | 923 |  |  |  | 818 |  |  |  | 773 |
Net interest income |  |  | 8,421 |  |  |  | 7,841 |  |  |  | 7,930 |  |  |  | 8,193 |
Provision for loan losses (4) |  |  | 31 |  |  |  | (189 | ) |  |  | 833 |  |  |  | (198 | )
Noninterest income (2) |  |  | 3,940 |  |  |  | 1,965 |  |  |  | 1,574 |  |  |  | 1,039 |
Noninterest expense |  |  | 7,948 |  |  |  | 7,317 |  |  |  | 7,320 |  |  |  | 6,790 |
Net income |  |  | 3,223 |  |  |  | 1,942 |  |  |  | 1,061 |  |  |  | 1,886 |
Earnings per share |  | $ | 0.79 |  |  | $ | 0.48 |  |  | $ | 0.26 |  |  | $ | 0.47 |

(1) During the first and third quarters of 2015, the Company experienced negative provision expense as a result of lower general allocations of the allowance for loan losses. General allocations were impacted by improved economic trends that include: decreasing historical loan loss factor, lower delinquencies and lower classified/criticized assets.
(2) The Company’s noninterest income was significantly impacted by seasonal tax refund processing fees. The Bank serves as a facilitator for the clearing of tax refunds for a single tax refund product provider. The Bank processes electronic refund checks/deposits associated with taxpayer refunds, and will, in turn, receive a fee paid by the third-party tax refund product provider for each transaction processed. Due to the seasonal nature of tax refund transactions, the majority of income was recorded during the first quarter.
(3) During the third quarter of 2014, the Company experienced negative provision expense that was primarily related to a decrease in specific allocations impacted by the improvement in collateral values of an impaired commercial real estate loan relationship. A re-appraisal of the commercial properties securing the loan identified asset appreciation, which resulted in a $524 reduction to the specific allocation related to the loan.
(4) During most of 2013, the Company experienced minimal to negative provision expense as a result of lower general allocations of the allowance for loan losses. General allocations were impacted by improved economic trends that include: decreasing historical loan loss factor, lower delinquencies and lower classified/criticized assets.
49

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note R – Subsequent Events
On January 7, 2016, Ohio Valley and Milton Bancorp, Inc. (“MB”), entered into an Agreement and Plan of Merger “Merger Agreement”). The Merger Agreement provides for a business combination whereby MB will merge with and into Ohio Valley and MB’s banking subsidiary, The Milton Banking Company, will merge with and into the Bank. At December 31, 2015, MB operates five branches with assets of $141 million, loans of $110 million and deposits of $126 million. After the merger, the Company's total assets will exceed $900 million and branches will increase to 19 locations. The merger consideration was valued at approximately $20 million at the time of signing the merger agreement. The transaction is subject to certain conditions, including the approval of regulatory authorities and the shareholders of MB. The merger is expected to be completed by the third quarter of 2016.
50

Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Shareholders
Ohio Valley Banc Corp.
We have audited the accompanying consolidated statements of condition of Ohio Valley Banc Corp. (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the three-year period ended December 31, 2015. We also have audited the Company's internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/Crowe Horwath LLP
Crowe Horwath LLP

Louisville, Kentucky
March 15, 2016
51

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, 2015, in relation to criteria for effective internal control over financial reporting as described in the 2013 “Internal Control Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that, as of December 31, 2015, 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, 2016 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/Thomas E. Wiseman
Thomas E. Wiseman
President, CEO
/s/Scott W. Shockey
Scott W. Shockey
Senior Vice President, CFO
March 15, 2016
52

Summary of Common Stock Data
OHIO VALLEY BANC CORP.
Years ended December 31, 2015 and 2014
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, 2014.

2015 |  | High |  |  | Low |
First Quarter |  | $ | 24.56 |  |  | $ | 22.40 |
Second Quarter |  |  | 23.49 |  |  |  | 22.10 |
Third Quarter |  |  | 25.48 |  |  |  | 22.40 |
Fourth Quarter |  |  | 26.03 |  |  |  | 23.25 |

2014 |  | High |  |  | Low |
First Quarter |  | $ | 23.00 |  |  | $ | 22.00 |
Second Quarter |  |  | 23.00 |  |  |  | 21.50 |
Third Quarter |  |  | 24.00 |  |  |  | 22.35 |
Fourth Quarter |  |  | 24.54 |  |  |  | 22.64 |

Shown below is a table which reflects the dividends declared per share on Ohio Valley’s common shares. As of February 28, 2016, the number of holders of record of common shares was 2,170.

Dividends per share |  | 2015 |  |  | 2014 |
First Quarter |  | $ | .21 |  |  | $ | .21 |
Second Quarter |  |  | .26 |  |  |  | .21 |
Third Quarter |  |  | .21 |  |  |  | .21 |
Fourth Quarter |  |  | .21 |  |  |  | .21 |

During the second quarter of 2015, Ohio Valley paid a regular quarterly dividend of $0.21 per share and a special dividend of $0.05 per share.
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, a 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.
53

Performance Graph
OHIO VALLEY BANC CORP.
Year ended December 31, 2015
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, 2010 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 59 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 59 banks in the SNL Index.

Index |  | 12/31/10 |  | 12/31/11 |  | 12/31/12 |  | 12/31/13 |  | 12/31/14 |  | 12/31/15 |
Ohio Valley Banc Corp. |  | 100.00 |  | 99.60 |  | 106.35 |  | 131.49 |  | 149.17 |  | 154.87 |
SNL $500M-$1B Bank Index |  | 100.00 |  | 87.98 |  | 112.79 |  | 146.26 |  | 160.46 |  | 181.11 |
S&P 500 |  | 100.00 |  | 102.11 |  | 118.45 |  | 156.82 |  | 178.28 |  | 180.75 |

54

Management’s Discussion and analysis of
Financial Condition and results of operations
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 and which 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, taxes, the effects of implementation of legislation and the continuing economic uncertainty in various parts of the world; 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, 2015. 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.
SUMMARY OF SIGNIFICANT TRANSACTIONS AND EVENTS:
On January 7, 2016, Ohio Valley and Milton Bancorp, Inc., an Ohio corporation (“MB”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides for a business combination whereby MB will merge with and into Ohio Valley (the “Merger”), with Ohio Valley as the surviving corporation in the Merger. In addition, MB’s banking subsidiary, The Milton Banking Company, a state- chartered bank incorporated under the laws of the State of Ohio (“Milton Bank”), will merge with and into Ohio Valley’s banking subsidiary. The boards of directors of Ohio Valley and MB have approved the Merger Agreement.
At the effective time and as a result of the Merger, each of the 400 MB common shares issued and outstanding shall be converted into the right to receive, at the election of the holder thereof, the following: (i) 1,636 of OVBC common shares; (ii) cash in the amount of $37,219; or (iii) a combination of cash and OVBC common shares. The form of consideration to be received by each MB shareholder is subject to reallocation in order to ensure that 20% of the outstanding MB shares are exchanged for cash and 80% of the outstanding MB shares are exchanged for OVBC common shares. Each of the 1,237 MB preferred shares issued and outstanding shall be converted into the right to receive a cash payment in the amount of $3,600 per MB preferred share. Ohio Valley intends to finance all or part of the cash portion of the purchase price through borrowed funds.
It is anticipated that the transaction will be 8 percent accretive to Ohio Valley’s earnings per share in the first full fiscal year of operation following the merger, assuming MB cost savings of 15 percent. MB operates five branches with assets of $141 million, loans of $110 million and deposits of $126 million. After the merger, the Company's total assets will exceed $900 million and branches will increase to 19 locations. The merger consideration was valued at $20 million at the time of signing the merger agreement. The transaction is subject to certain conditions, including the approval of regulatory authorities and the shareholders of MB. The merger is expected to be completed by the third quarter of 2016.
55

Management’s Discussion and analysis of
Financial Condition and results of operations
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 financial 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 $8,574 for 2015, an increase of 6.2% from 2014. Earnings per share were $2.08 for 2015, an increase of 5.6% from 2014. The increase in net income and earnings per share for 2015 was primarily due to lower provision for loan loss expense, which was down $1,697, compared to 2014. The decrease in provision for loan loss expense during 2015 was mostly caused by the impact of higher general allocations of the allowance for loan losses experienced during 2014 that were not repeated in 2015. The increase in prior year general allocations was mostly due to the downgrades of two impaired commercial credits during the second quarter of 2014, which increased the Company’s classified assets and economic risk factors within the allowance for loan losses. Lower provision expense during 2015 was also impacted by increases in specific allocations of the allowance for loan losses experienced during 2014. The increase in prior year specific allocations was mostly due to the collateral value impairment of a commercial real estate loan recorded during the fourth quarter of 2014.
During 2015, the Company’s net interest income finished relatively stable, increasing $15, or .05%, from 2014. Average earning assets increased during 2015 by $26,703, or 3.6%, as compared to 2014, coming primarily from interest-bearing balances with banks and loans. Interest-bearing balances with banks were impacted by higher balances maintained within the Company’s Federal Reserve Bank clearing account, while the increase in average loan balances was reflective of an increased loan demand within the Company’s residential real estate and consumer loan portfolios. While average earning assets grew, the Company’s net interest margin decreased 15 basis points from 4.54% in 2014 to 4.39% in 2015. Contributing to the decline in net interest margin were lower asset yields, which more than offset the reduction in funding costs. Furthermore, the additional balances maintained within the Federal Reserve clearing account have a dilutive effect on the net interest margin due to the balances only earning 25 basis points for most of 2015.
The benefits of higher net interest income and lower provision expense in 2015 were partially offset by a 12.2% decrease in noninterest income during 2015, as compared to 2014. The decrease came largely from the sale of the Company’s 9% ownership interest in ProAlliance Corporation (“ProAlliance”), during the third quarter of 2014. The sale of Pro Alliance, a specialty property and casualty insurance company, generated a total gain of $810 during the previous year. Further impacting lower noninterest income were less tax processing fees through the Company’s electronic refund check/deposit (“ERC/ERD”) transactions. ERC/ERD transactions involve the payment of a tax refund to the taxpayer after the Bank has received the refund from the federal/state government. Although the Bank experienced a higher volume of tax refunds processed in 2015, tax refund processing fees were still lower than the year before, decreasing $762, or 24.3%, as compared to 2014. The decrease in total fees was due to the reduced per item fees received by the Company under a new contract entered into with the third-party tax refund product provider in October 2014 that impacted 2015’s tax season. To partially offset the decreasing effects of ERC/ERD fees and sale of Pro Alliance, the Company’s noninterest income saw positive contributions come from debit/credit card interchange income and gains on sale of securities. The Company’s interchange fees from debit and credit card transactions improved by $225, or 10.4%, during 2015, as compared to 2014, primarily from the Company’s continued marketing approach in offering incentives to customers to utilize the bank’s debit and credit cards for purchases. Furthermore, the Company took opportunities during the second and third quarters of 2015 to sell some of its lower-yielding, U.S. Government agency (“Agency”) mortgage-backed securities. Proceeds from the sale of securities during 2015 totaled $10,550, with gross gains of $163 recognized, while the Company did not recognize any security sales during 2014.
56

Management’s Discussion and analysis of
Financial Condition and results of operations
During 2015, the Company experienced higher costs associated with noninterest expenses, which increased $326, or 1.1%, as compared to the previous year. Growth in overhead came primarily from professional fees, foreclosure costs and data processing expenses, which collectively increased $518 during 2015. These increases were partially offset by lower salaries and employee benefits, which decreased $380 during 2015, as compared to the previous year. This decrease was primarily related to expense recorded in the fourth quarter of 2014 that incorporated the effects of new mortality expectations on various nonqualified defined benefit plans. The one-time adjustment to expense at the end of 2014 was not repeated in 2015, contributing to the decline in benefit costs.
During 2014, Ohio Valley generated net income of $8,073, a decrease of 0.5% from 2013. Earnings per share were $1.97 for 2014, a decrease of 1.5% from 2013. The decrease in net income and earnings per share for 2014 was primarily due to higher provision for loan loss expense, which was up $2,310, compared to 2013. The increase in provision for loan loss expense was mostly due to higher general allocations of the allowance for loan losses largely from the downgrade of two impaired commercial credits previously mentioned. Provision expense during 2014 was also impacted by higher specific allocations that was largely due to the collateral value impairment of a commercial real estate loan previously mentioned.
The effects of higher provision expense were partially offset by strong improvement in both net interest and noninterest income during 2014, as compared to 2013. Contributing to the overall increase in net interest income were higher average earning assets, which increased during 2014 by $20,881, or 2.9%, as compared to 2013, coming primarily from loans. The increase in average loan balances was reflective of the higher loan demand by customers within the Company’s market areas. The Company’s noninterest income also improved by 15.0% during 2014 as compared to the previous year. The increase came largely from the sale of the Company’s 9% ownership interest in ProAlliance. As previously mentioned, the sale generated a total gain of $810 during the third quarter of 2014. The Company also experienced lower losses on the sale of foreclosed property during 2014, which generated an increase of $805 in net revenues from other real estate owned (“OREO”). Furthermore, the Company benefited from increased transaction volume related to its ERC/ERD fee income, which increased $577, or 22.6%. The Company’s interchange fees from debit and credit card transactions also improved by $211, or 10.7%, during 2014 as compared to 2013. Partially offsetting the increases within noninterest income was a decrease in earnings from tax-free bank owned life insurance (“BOLI”) investments. During the first quarter of 2013, the Company received $1,249 in cash proceeds from the settlement of two BOLI policies, which yielded net BOLI proceeds of $452 that were recorded to income. This income from the first quarter of 2013 was not repeated in 2014, and, as a result, BOLI and annuity asset earnings were down $504, or 42.9%, in 2014.
57

Management’s Discussion and analysis of
Financial Condition and results of operations
During 2014, the Company experienced lower costs associated with noninterest expenses, which decreased $82, or 0.3%, as compared to the previous year. This change can be attributed mostly to lower foreclosure costs, furniture and equipment expenses, and state taxes, which collectively decreased $852 from 2013. These decreases were partially offset by increases in salaries and employee benefits, marketing expenses, and professional service costs, which collectively increased $641 from 2013. The largest of these was a $308 increase in salaries and employee benefits, primarily coming from a one-time expense associated with new mortality expectations to various benefit plans previously mentioned.
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 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 the percentage of net interest income to 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 exceeds the net interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and stockholders' equity, also support interest-earning assets. 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, 2015. Tables I and II have been prepared to summarize the significant changes outlined in this analysis.
Net interest income of $34,161 on an FTE basis increased $44 in 2015, or 0.1%, compared to the $34,117 earned in 2014. The nominal change in net interest income was impacted by a decrease in the FTE net interest margin, with positive contributions coming from higher average earning assets. For the year ended December 31, 2015, average earning assets increased $26,703, or 3.6%, from 2014, which occurred primarily from loans, securities and the Company’s Federal Reserve Bank clearing account. Higher average loan balances were impacted by a loan demand increase in the residential real estate and consumer loan portfolios during 2015. In addition, the Company’s taxable security purchases increased during 2015, particularly within the Agency mortgage-backed investment segment. The Company further benefited from increased earnings within taxable securities during 2015, primarily from less bond premium expense on Agency mortgage-backed securities, which contributed to a 7 basis point improvement in the yield on taxable securities. While average earning assets grew during 2015, the Company experienced a decline in its FTE net interest margin from 4.54% in 2014 to 4.39% in 2015. The positive effects from average loan growth were completely offset by lower yields on loan originations, which have been negatively impacted by the continued low interest rates prevalent in the market. The lower margin in 2015 was also impacted by the Company’s Federal Reserve Bank clearing account earning just 25 basis points for most of the year. This, combined with the fact that these Federal Reserve Bank balances contributed most to the overall average earning asset growth in 2015, contributed to the margin decline in 2015. Partially offsetting the negative effects to the margin were lower rates paid on interest-bearing deposit liabilities and a continued change in deposit mix to lower-cost core deposits from time deposit accounts and FHLB borrowings. For most of 2015, the Federal Reserve held the prime interest rate at 3.25%, and the target federal funds rate at a range from 0.0% to 0.25%. This sustained low-rate environment continued to impact the repricings of various Bank deposit products, especially time deposits. Management continues to emphasize its lower-cost core deposit relationship balances, which consist of noninterest-bearing demand accounts and interest-bearing NOW, savings and money market balances. As a result, the Company benefited from higher core deposit average balances in 2015 (increasing $22,035) while experiencing minimal change to its higher-cost time deposit, other borrowed money and subordinated debenture balances.
58

Management’s Discussion and analysis of
financial Condition and results of operations
Net interest income of $34,117 on an FTE basis increased $1,244 in 2014, or 3.8%, compared to the $32,873 earned in 2013. The increase in net interest income was mainly due to an increase in average earning assets and net interest margin improvement. For the year ended December 31, 2014, average earning assets increased $20,881, or 2.9%, from 2013, which occurred primarily in loans. Higher average loan balances were impacted mostly by a loan demand increase in commercial and municipality related financings during 2014. In addition, the Company was able to generate a stronger net interest margin over 2013. At December 31, 2014, the Company’s FTE net interest margin increased 4 basis points from 4.50% in 2013 to 4.54% in 2014. The net interest margin increased during 2014 as the Company’s average loan growth offset the impact of lower yields on loan originations, which have been negatively impacted by the continued low interest rates prevalent in the market. The Company further benefited from increased earnings within taxable securities during 2014, even though the related average balances were down 7.3% from 2013. The earnings improvement came primarily from less bond premium expense on Agency mortgage-backed securities, which contributed to a 50 basis point improvement in the yield on taxable securities during 2014. Margin improvement was also impacted by lower rates paid on interest-bearing deposits and a continued change in deposit mix to lower-cost core deposits from time deposit accounts and FHLB borrowings. The sustained low-rate environment maintained by the Federal Reserve during 2014 continued to impact the repricings of various Bank deposit products, especially time deposits. Interest rates on time deposit balances continue to reprice at lower rates, which continue to lower funding costs. Management continues to emphasize its lower-cost core deposit relationship balances, which consist of noninterest-bearing demand accounts and interest-bearing NOW, savings and money market balances. As a result, the Company benefited from higher core deposit average balances in 2014 (increasing $24,534) while experiencing a lower level of higher-cost time deposit, other borrowed money and subordinated debenture balances (decreasing $10,532).
For 2015, average earning assets increased $26,703, or 3.6%, as compared to an increase of $20,881, or 2.9%, in 2014. Average loan balances represent the largest composition of earning assets. During 2015, average loans increased $8,263, or 1.4%, while increasing $26,376, or 4.8%, during 2014. Average loan growth was positively impacted by consumer auto and capital lines during the second half of 2014 and all of 2015. Loan balances also grew from commercial and municipal loan originations during all of 2014. However, during 2015, the Company began experiencing the negative effects from larger commercial loan payoffs and competitive pressures that limited new commercial loan production within the Company’s market areas. This deceleration of commercial loan balances during 2015 contributed to a smaller composition of average loans to average earning assets at year-end 2015 of 75.8%, as compared to 77.4% at year-end 2014. During 2014, average earning assets increased $20,881, or 2.9%, as compared to a decrease of $41,456, or 5.4%, in 2013. Contributing most to the asset growth improvement from 2013 to 2014 were the Company’s average loan balances. During 2014, average loans increased $26,376, or 4.8%, while decreasing $14,852, or 2.6%, during 2013. While average loans continue to be the Company’s highest portion of earning assets, it is this segment of earning assets that had been negatively impacted by economic pressures that limited the demand for consumer and commercial spending within the Company’s market areas. However, the Company began experiencing loan balance growth from commercial and municipal loan originations during the second half of 2013 and all of 2014, while also experiencing loan growth from consumer auto and recreational vehicle financings during the second half of 2014. This improvement of higher loan volume within the Company’s lending activity contributed to a larger composition of average loans to average earning assets at year-end 2014 of 77.4%, as compared to 76.0% at year-end 2013.
59

Management’s Discussion and analysis of
financial Condition and results of operations
CONSOLIDATED AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST INCOME
Table I

(dollars in thousands) |  | December 31 |
|  | 2015 |  |  |  | 2014 |  |  | 2013 |
|  | Average Balance |  |  | Income/ Expense |  |  | Yield/ Average |  |  | Average Balance |  |  | Income/ Expense |  |  | Yield/ Average |  |  | Average Balance |  |  | Income/ Expense |  |  | Yield/ Average |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing balances with banks |  | $ | 73,383 |  |  | $ | 185 |  |  |  | 0.25 | % |  | $ | 56,528 |  |  | $ | 136 |  |  |  | 0.24 | % |  | $ | 54,168 |  |  | $ | 135 |  |  |  | 0.25 | %
Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 99,201 |  |  |  | 2,142 |  |  |  | 2.16 |  |  |  | 96,880 |  |  |  | 2,029 |  |  |  | 2.09 |  |  |  | 104,506 |  |  |  | 1,661 |  |  |  | 1.59 |
Tax exempt |  |  | 16,170 |  |  |  | 792 |  |  |  | 4.90 |  |  |  | 16,906 |  |  |  | 835 |  |  |  | 4.94 |  |  |  | 17,135 |  |  |  | 856 |  |  |  | 4.99 |
Loans |  |  | 589,953 |  |  |  | 33,881 |  |  |  | 5.74 |  |  |  | 581,690 |  |  |  | 33,992 |  |  |  | 5.84 |  |  |  | 555,314 |  |  |  | 33,794 |  |  |  | 6.09 |
Total interest-earning assets |  |  | 778,707 |  |  |  | 37,000 |  |  |  | 4.75 | % |  |  | 752,004 |  |  |  | 36,992 |  |  |  | 4.92 | % |  |  | 731,123 |  |  |  | 36,446 |  |  |  | 4.98 | %
Noninterest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  |  | 10,347 |  |  |  |  |  |  |  |  |  |  |  | 9,749 |  |  |  |  |  |  |  |  |  |  |  | 9,460 |  |  |  |  |  |  |  |  |
Other nonearning assets |  |  | 47,186 |  |  |  |  |  |  |  |  |  |  |  | 44,764 |  |  |  |  |  |  |  |  |  |  |  | 45,580 |  |  |  |  |  |  |  |  |
Allowance for loan losses |  |  | (7,796 | ) |  |  |  |  |  |  |  |  |  |  | (7,069 | ) |  |  |  |  |  |  |  |  |  |  | (7,050 | ) |  |  |  |  |  |  |  |
Total noninterest-earning assets |  |  | 49,737 |  |  |  |  |  |  |  |  |  |  |  | 47,444 |  |  |  |  |  |  |  |  |  |  |  | 47,990 |  |  |  |  |  |  |  |  |
Total assets |  | $ | 828,444 |  |  |  |  |  |  |  |  |  |  | $ | 799,448 |  |  |  |  |  |  |  |  |  |  | $ | 779,113 |  |  |  |  |  |  |  |  |
Liabilities and Shareholders’ Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NOW accounts |  | $ | 125,104 |  |  | $ | 462 |  |  |  | 0.37 | % |  | $ | 112,644 |  |  | $ | 458 |  |  |  | 0.41 | % |  | $ | 112,356 |  |  | $ | 473 |  |  |  | 0.42 | %
Savings and money market |  |  | 200,575 |  |  |  | 431 |  |  |  | 0.21 |  |  |  | 201,524 |  |  |  | 431 |  |  |  | 0.21 |  |  |  | 197,815 |  |  |  | 420 |  |  |  | 0.21 |
Time deposits |  |  | 168,969 |  |  |  | 1,298 |  |  |  | 0.77 |  |  |  | 170,196 |  |  |  | 1,347 |  |  |  | 0.79 |  |  |  | 185,381 |  |  |  | 2,024 |  |  |  | 1.09 |
Other borrowed money |  |  | 24,378 |  |  |  | 478 |  |  |  | 1.96 |  |  |  | 22,725 |  |  |  | 474 |  |  |  | 2.09 |  |  |  | 17,197 |  |  |  | 391 |  |  |  | 2.27 |
Subordinated debentures |  |  | 8.500 |  |  |  | 170 |  |  |  | 2.00 |  |  |  | 8.500 |  |  |  | 165 |  |  |  | 1.94 |  |  |  | 9,375 |  |  |  | 265 |  |  |  | 2.83 |
Total int.-bearing liabilities |  |  | 527,526 |  |  |  | 2,839 |  |  |  | 0.54 | % |  |  | 515,589 |  |  |  | 2,875 |  |  |  | 0.56 | % |  |  | 522,124 |  |  |  | 3,573 |  |  |  | 0.68 | %
Noninterest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposit accounts |  |  | 199,570 |  |  |  |  |  |  |  |  |  |  |  | 189,046 |  |  |  |  |  |  |  |  |  |  |  | 168,509 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 12,628 |  |  |  |  |  |  |  |  |  |  |  | 10,926 |  |  |  |  |  |  |  |  |  |  |  | 10,491 |  |  |  |  |  |  |  |  |
Total noninterest-bearing liabilities |  |  | 212,198 |  |  |  |  |  |  |  |  |  |  |  | 199,972 |  |  |  |  |  |  |  |  |  |  |  | 179,000 |  |  |  |  |  |  |  |  |
Shareholders’ equity |  |  | 88,720 |  |  |  |  |  |  |  |  |  |  |  | 83,887 |  |  |  |  |  |  |  |  |  |  |  | 77,989 |  |  |  |  |  |  |  |  |
Total liabilities and shareholders’ equity |  | $ | 828,444 |  |  |  |  |  |  |  |  |  |  | $ | 799,448 |  |  |  |  |  |  |  |  |  |  | $ | 779,113 |  |  |  |  |  |  |  |  |
Net interest earnings |  |  |  |  |  | $ | 34,161 |  |  |  |  |  |  |  |  |  |  | $ | 34,117 |  |  |  |  |  |  |  |  |  |  | $ | 32,873 |  |  |  |  |
Net interest earnings as a percent of interest-earning assets |  |  |  |  |  |  |  |  |  |  | 4.39 | % |  |  |  |  |  |  |  |  |  |  | 4.54 | % |  |  |  |  |  |  |  |  |  |  | 4.50 | %
Net interest rate spread |  |  |  |  |  |  |  |  |  |  | 4.21 | % |  |  |  |  |  |  |  |  |  |  | 4.36 | % |  |  |  |  |  |  |  |  |  |  | 4.30 | %
Average interest-bearing liabilities to average earning assets |  |  |  |  |  |  |  |  |  |  | 67.74 | % |  |  |  |  |  |  |  |  |  |  | 68.56 | % |  |  |  |  |  |  |  |  |  |  | 71.41 | %

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.
60

Management’s Discussion and analysis of
financial Condition and results of operations
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME & EXPENSE
Table II

(dollars in thousands) |  | 2015 |  |  | 2014 |
|  | Increase (Decrease) From Previous Year Due to |  |  | Increase (Decrease) From Previous Year Due to |
|  | Volume |  |  | Yield/Rate |  |  | Total |  |  | Volume |  |  | Yield/Rate |  |  | Total |
Interest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing balances with banks |  | $ | 42 |  |  | $ | 7 |  |  | $ | 49 |  |  | $ | 6 |  |  | $ | (5 | ) |  | $ | 1 |
Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 49 |  |  |  | 64 |  |  |  | 113 |  |  |  | (128 | ) |  |  | 496 |  |  |  | 368 |
Tax exempt |  |  | (36 | ) |  |  | (7 | ) |  |  | (43 | ) |  |  | (12 | ) |  |  | (9 | ) |  |  | (21 | )
Loans |  |  | 479 |  |  |  | (590 | ) |  |  | (111 | ) |  |  | 1,571 |  |  |  | (1,373 | ) |  |  | 198 |
Total interest income |  |  | 534 |  |  |  | (526 | ) |  |  | 8 |  |  |  | 1,437 |  |  |  | (891 | ) |  |  | 546 |
Interest expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NOW accounts |  |  | 48 |  |  |  | (44 | ) |  |  | 4 |  |  |  | 1 |  |  |  | (16 | ) |  |  | (15 | )
Savings and money market |  |  | (2 | ) |  |  | 2 |  |  |  | ---- |  |  |  | 8 |  |  |  | 3 |  |  |  | 11 |
Time deposits |  |  | (10 | ) |  |  | (39 | ) |  |  | (49 | ) |  |  | (155 | ) |  |  | (522 | ) |  |  | (677 | )
Other borrowed money |  |  | 34 |  |  |  | (30 | ) |  |  | 4 |  |  |  | 117 |  |  |  | (34 | ) |  |  | 83 |
Subordinated debentures |  |  | ---- |  |  |  | 5 |  |  |  | 5 |  |  |  | (23 | ) |  |  | (77 | ) |  |  | (100 | )
Total interest expense |  |  | 70 |  |  |  | (106 | ) |  |  | (36 | ) |  |  | (52 | ) |  |  | (646 | ) |  |  | (698 | )
Net interest earnings |  | $ | 464 |  |  | $ | (420 | ) |  | $ | 44 |  |  | $ | 1,489 |  |  | $ | (245 | ) |  | $ | 1,244 |

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.

The Company’s average assets during 2015 and 2014 were also affected by changes in its average interest-bearing balances with banks. At year-end 2015, average interest-bearing balances with banks increased $16,855, or 29.8%, as compared to an increase of $2,360, or 4.4%, in 2014. These balances are driven primarily by the Company’s use of its Federal Reserve Bank clearing account. The trend of larger average interest-bearing balances with banks has been primarily due to seasonal excess funds that result from the clearing of tax refund checks and deposits. These ERC/ERD deposits occur primarily during the first half of the year and are the result of the Company’s relationship with a third-party tax refund product 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 causes 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. As loan growth began to normalize during 2015, the Company utilized less of its short-term Federal Reserve funds to satisfy loan demand. In addition, the Company’s average core deposits continued to grow during 2015 while experiencing a lesser degree of maturity runoff in time deposits. As a result, average interest-bearing balances with banks increased to 9.4% of average earning assets in 2015, as compared to 7.5% and 7.4% in 2014 and 2013, respectively.
61

Management’s Discussion and analysis of
financial Condition and results of operations
The Company’s average investment securities, both taxable and tax exempt, decreased during 2015, with its percentage of earning assets averaging 14.8% for the year, compared to 15.1% for 2014 and 16.6% for 2013. The Company has focused on growing earning assets primarily through loans, which has contributed to a lower asset composition of securities. Management continues to focus on generating loan growth as this portion of earning assets provides the greatest return to the Company. Management maintains securities at a dollar level adequate enough to provide ample liquidity and cover pledging requirements.
Average interest-bearing liabilities increased 2.3% between 2014 and 2015, while decreasing 1.3% between 2013 and 2014. The fluctuations of interest-bearing deposits since 2013 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 32.0%, 33.0% and 35.5% of total interest-bearing liabilities at year-end 2015, 2014 and 2013, respectively. As interest rates on time deposits have continued to readjust to current market rates in 2015, competitive pricing pressures have grown, contributing to a continued maturity runoff of time deposits during 2015 and 2014. In addition, the Company’s other borrowings and subordinated debentures continue to represent the smallest composition of average interest-bearing liabilities, finishing at 6.2%, 6.0% and 5.1% at year-end 2015, 2014 and 2013, respectively. During 2014, the Company utilized a portion of its FHLB borrowing capacity to fund specific fixed-rate loans with similar maturity terms which led to the composition shift increase.
The Company’s core deposit segment of interest-bearing liabilities, which include NOW and savings and money market accounts, together represented 61.7% of average interest-bearing liabilities in 2015, compared to 60.9% in 2014 and 59.4% in 2013. As certificates of deposit (“CD”) market rates continue to adjust downward, and the spread between a short-term CD rate and a statement savings rate is minimal, many customers choose to invest balances into a more liquid product.
The overall composition shift of higher demand, NOW, savings and money market balances combined with lower time deposits from 2013 to 2015 has served as a cost effective contribution to the net interest margin. The average cost of the “growing” interest-bearing NOW, savings and money market account core segment was 0.27%, 0.28% and 0.29% during the years ended 2015, 2014 and 2013, respectively. The higher average cost of the time deposit, other borrowed money and subordinated debenture segments was 0.96%, 0.99% and 1.26% during the years ended 2015, 2014 and 2013, respectively.
The net interest margin decreased 15 basis points to 4.39% in 2015 from 4.54% in 2014. Conversely, the net interest margin increased 4 basis points to 4.54% in 2014 from 4.50% in 2013. These changes to the net interest margin are largely impacted by the net interest rate spread. During 2015, the net interest rate spread decreased 15 basis points to 4.21%, resulting from the decrease in average yield on interest-earning assets of 17 basis point from 4.92% to 4.75%, which exceeded the decrease in average cost of interest-bearing liabilities of 2 basis points from 0.56% to 0.54%. Conversely, during 2014, the net interest rate spread increased 6 basis points to 4.36%, resulting from the decrease in average cost of interest-bearing liabilities of 12 basis points from 0.68% to 0.56%, which exceeded the decrease in average yield on interest-earning assets of 6 basis points from 4.98% to 4.92%. Partially offsetting the net interest rate spread increase in 2014 was a 2 basis point decrease in contributions from interest-free funds (i.e., demand deposits, shareholders' equity), which lowered from 0.20% in 2013 to 0.18% in 2014.
62

Management’s Discussion and analysis of
financial Condition and results of operations
During 2015, total interest income on an FTE basis increased $8 as compared to an increase of $546, or 1.5%, during 2014. The nominal interest income improvement from 2014 to 2015 came primarily from average earning asset growth and improved asset yields associated with taxable securities. The Company experienced a 1.4% increase in average loan balances from 2014 to 2015, primarily from its residential real estate and consumer loan portfolios. These positive contributions to interest income were almost completely offset by lower loan yields, which decreased 10 basis points from 2014 to 2015. Lower loan yields can be attributable to the sustained low interest rate environment the Federal Reserve has maintained since 2008. The significant improvement in interest income from 2013 to 2014 came primarily from the increase in average earning loan balances combined with the improved asset yields associated with taxable securities. The Company experienced a 4.7% increase in average loan balances from 2013 to 2014, primarily from its commercial loan portfolio. This growth in loans completely offset the effects of lower loan yields, which decreased 25 basis points from 2013 to 2014.
Asset yields during 2015, 2014 and 2013 were also impacted by the average balance changes in the Company’s interest-bearing Federal Reserve Bank clearing account. The Company continues to utilize its interest-bearing Federal Reserve Bank clearing account to manage seasonal tax refund deposits, as well as to fund earning asset growth and maturities of retail CD’s. This interest-bearing account carried an interest rate of just .25% during most of 2015. As excess funds from core deposits grew during 2015, loan growth also began to decelerate, which caused the Company to utilize less of its Federal Reserve deposits to fund loan demand. This led to an average earning asset composition shift away from loans and into more interest-bearing deposits with banks during 2015. Conversely, during 2014 and most of 2013, the Company utilized more of its Federal Reserve Bank clearing deposits to fund higher-yielding loans and maturities of higher-costing CD balances, which had a positive impact to asset yields and net interest margin. While total earning asset yields have declined each year between 2013 and 2015, the composition shift of less loan balances and higher interest-bearing balances with banks as a percentage of average earning assets in 2015 caused asset yields to change from a 6 basis point decrease in 2014 to a 17 basis point decrease in 2015.
During 2015, total interest income on average earning assets decreased $21, or .06%, as compared to 2014. Conversely, total interest income increased $397, or 1.1%, during 2014, as compared to 2013. The changes in interest income from 2013 to 2015 were impacted most by the commercial loan portfolio. During the second half of 2013, commercial loan demand within the Company’s market areas began to improve, with increasing loan originations continuing into most of 2014. This generated a 10.3% increase in average commercial loans over 2013. As a result, commercial interest and fee revenue increased $748, or 6.2%, during the year ended 2014, as compared to 2013. The Company then began experiencing large payoffs of various commercial loans during 2015, along with increasing competition for loan opportunities within its markets. The decline in balances from loan payoffs and competitive pressures caused the commercial loan portfolio to stabilize by year-end 2015, finishing with average commercial loans of $268,000 during both 2015 and 2014. As a result, commercial interest and fee revenue decreased $110, or 0.9%, during the year ended 2015, as compared to 2014.
The Company’s interest and fees from its residential real estate loan portfolio decreased $143, or 1.2%, during the year ended 2015 compared to 2014, and decreased $662, or 5.3%, during the year ended 2014 compared to 2013. As part of management’s interest rate risk strategy, the Company continues to sell a portion of its long-term, fixed-rate real estate loans to the Federal Home Loan Mortgage Corporation, while retaining the servicing rights for those mortgages. This strategy continues to generate loan sale and servicing fee revenue within noninterest income, but has also yielded lower interest and fee revenues during 2014 and 2015. The Company has experienced a composition shift from higher-yielding, long-term, fixed-rate loan balances to lower-yielding, adjustable-rate mortgage originations. While this shift to more lower-yielding loans has placed additional pressure on asset yields, the Company has benefited from a higher level of real estate loan balances at year-end 2015. As a result, the degree of decrease in real estate loan interest and fee revenues has declined (improved) from 2014 to 2015.
63

Management’s Discussion and analysis of
financial Condition and results of operations
During the year ended 2015, consumer loan interest and fees increased $99, or 1.1%, as compared to 2014, while decreasing $43, or 0.5%, during the year ended 2014, as compared to 2013. The improvement in consumer loan revenue during 2015 was reflective of the average consumer loan balance growth experienced during 2015 and 2014. Average loan balance growth came primarily from increased auto loan financings and higher capital line balances. Consumer interest during 2015 and 2014 continued to be negatively impacted by lower asset yields reflective of the sustained low rate environment.
The Company’s interest income from taxable investment securities improved during both 2015 and 2014, increasing $113, or 5.6%, in 2015 and $368, or 22.2%, in 2014. The improvement came primarily from Agency mortgage-backed securities. Since 2014, the investment prices for Agency mortgage-backed securities have adjusted closer to their par values, resulting in less premiums and higher return yields. Furthermore, a slower pace of refinancing volume evident during 2014 also limited principal repayment proceeds from Agency mortgage-backed securities, causing monthly premium expense to amortize more slowly. These effects contributed to an improvement in the yield on taxable securities of 7 basis points during 2015 and 50 basis points during 2014.
In relation to the overall decline in earning asset yields, the Company’s interest-bearing liability costs also decreased 2 basis points during 2015 and 12 basis points during 2014. The lower costs have caused interest expense to drop $36, or 1.3%, from 2014 to 2015 and $698, or 19.5%, from 2013 to 2014 as a result of lower rates paid on interest-bearing liabilities. The sustained low short-term rates maintained by the Federal Reserve have continued to impact the repricings of various Bank deposit products, especially time deposits. The interest rate on time deposits continued to contribute most to the decrease in funding costs, which continued to reprice at lower rates. The year-to-date weighted average costs of the Company’s time deposits have decreased from 1.09% at year-end 2013 to 0.79% at year-end 2014 and 0.77% at year-end 2015.
Further contributing to lower interest-bearing deposit expense has been the Company’s continued emphasis on growing core deposits during 2015, 2014 and 2013. The Company continues to experience a deposit composition shift from a higher level of average time deposits to an increasing level of average core deposit balances in demand, NOW, savings and money market balances. The Company’s average time deposit balances with a weighted average cost of 0.8% decreased $1,227 during 2015 and $15,185 during 2014. This is compared to the average balance increase of $11,511 and $3,997 in lower costing, interest-bearing core deposit balances with a weighted average cost of 0.3% during 2015 and 2014, respectively. As a result of decreases in the average market interest rates mentioned above and the deposit composition shift to lower-costing, interest-bearing deposit balances, the Company’s total weighted average funding costs have decreased to 0.54% at year-end 2015, as compared to 0.56% at year-end 2014 and 0.68% at year-end 2013.
Further impacting lower funding costs were decreases in interest expense incurred on the Company’s subordinated debentures during the year ended 2014. Prior to 2013, the Company had received proceeds from the issuance of two trust preferred securities classified as subordinated debentures totaling $13,500. During the first quarter of 2013, the Company redeemed one of the subordinated debentures totaling $5,000 that had a fixed rate of 10.6%. The redemption supported the Company’s continued emphasis on lowering funding costs to strengthen the net interest margin. As a result, the Company benefited from a $100, or 37.8%, decrease in interest expense on subordinated debentures during the year ended 2014 as compared to 2013.
64

Management’s Discussion and analysis of
financial Condition and results of operations
While the Company experienced margin improvement during 2014 primarily due to improved average loan balances and a lower deposit mix of higher-costing time deposits, the margin decreased 15 basis points during 2015. Margin compression was already evident during 2014, when comparing a 4 basis point net interest margin increase in 2014 to a 21 basis point net interest margin increase in 2013. This smaller pace of improvement in 2014 and the decline in 2015 was attributed to the limited opportunities at which interest rates on core deposits could adjust downward in both years. With interest rates so low, the Company’s core deposit accounts are perceived to be at, or near, their interest rate floors. In addition, the Company’s CDs that had higher interest rates have either repriced to current market rates or have matured and left the portfolio, as a result of which our ability to continue lowering interest paid on deposits has been severely limited, contributing to the decline in the net interest margin during 2015.
The Company will continue to focus growing the average loan portfolio and re-deploying the excess liquidity retained within the Federal Reserve account into higher yielding assets as opportunities arise. Further decreases in interest rates by the Federal Reserve would 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 face pressure on its net interest income and margin improvement if loan balances do not continue 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. Provision for loan loss 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 provision expense during the years ended 2015, 2014 and 2013 totaled $1,090, $2,787 and $477, respectively. The Company experienced a $2,310 increase in provision expense during 2014, largely related to higher specific and general allocations within the allowance for loan losses. The allocations were provided for in 2014, causing a significant decrease in provision expense from 2014 to 2015. The Company’s general allocation evaluates several factors that include: average historical loan loss trends, economic risk, asset quality, and changes in classified and criticized assets. During the first quarter of 2014, adjustments were made to the commercial loan loss factor, extending the range of loan loss period from a 3-year rolling average to a 5-year rolling average. This update was due to the significant decline in net charge-offs that had been experienced since the first quarter of 2012 that were contributing to lower historical loan loss factors for commercial loans. By extending the historical loss period to five years, management felt the historical factor would be more representative of the risk of losses attributable to commercial loans. Management also increased the economic risk factor during the first quarter of 2014 by adjusting the criticized/classified asset thresholds to incorporate more risk potential within the Company’s special mention and substandard loan portfolios. Further impacting the general allocations in 2014 were increases in classified assets related to commercial loan downgrades. During the second quarter of 2014, the Company experienced a downgrade of two commercial credits that shifted $12,000 from a criticized loan classification to a classified loan classification. The two commercial credits were impaired and had been individually evaluated for impairment since the prior year-end of 2013. As more current information became readily available, management determined the downgrades were necessary due to a continuing trend of decreasing cash flow coverage ratios of the borrower. These downgrades increased classified assets, which led to a higher economic risk factor that required additional general reserves within the allowance for loan losses. As a result of the allowance calculation adjustments during the first quarter and the second quarter commercial loan downgrades, the Company’s general allocation of the allowance for loan losses increased $1,392 from $3,530 at December 31, 2013 to $4,922 at December 31, 2014, which contributed to higher provision expense during the year ended December 31, 2014. During 2015, the Company has experienced improvements (declines) in its average loan loss history, as well as declines in its classified asset portfolio, resulting in lower provision expense and general allocations in 2015, as compared to 2014.
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Elevated provision expense during 2014 also came from the Company’s specific allocations. The Company identified the asset impairment of one commercial real estate loan relationship that required specific reserves of $1,340 to be recorded in the fourth quarter of 2014. These impairment charges were based on collateral values and required a corresponding increase to provision for loan losses expense. Consequently, during the second quarter of 2015, this specific allocation was charged off. Since this specific allocation had already been provided for during the fourth quarter of 2014, the charge-off did not have an impact to provision expense in 2015. This contributed to a decrease in the Company’s specific allocations from $3,412 at December 31, 2014 to $2,164 at December 31, 2015.
During 2015, the Company’s net charge-offs totaled $2,776, as compared to $608 in net charge-offs recognized during 2014. The increase was largely due to the charge-off of a specific allocation of the impaired commercial real estate loan previously mentioned. The charge-off did not have a direct impact to the provision expense since the allocation was already provided for during 2014. The remaining charge-off increases came primarily from residential real estate and other commercial real estate loans. The effect of higher charge-offs during 2015 had a direct effect in partially offsetting the provision expense decreases impacted by lower classified assets and less collateral value impairments. During 2014, the Company’s net charge-offs totaled $608, a decrease of $619, or 50.4%, from the $1,227 in net charge-offs recognized during 2013. This decrease was largely due to lower charge-offs experienced within the residential real estate and commercial and industrial loan segments.
Management believes that the allowance for loan losses was adequate at December 31, 2015 to absorb probable losses in the portfolio. The allowance for loan losses was 1.13% of total loans at December 31, 2015, as compared to 1.40% at December 31, 2014 and 1.09% at December 31, 2013. 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
During 2015, total noninterest income decreased $1,196, or 12.2%, as compared to 2014. The decline in noninterest revenue was primarily from the sale of the Company’s 9% ownership interest in ProAlliance during the third quarter of 2014. The Company recorded the first installment of $135 during the first quarter of 2014 and the second installment of $675 in August 2014. The proceeds from the sale of $810 was reported as a gain on sale. The total after-tax impact to the Company’s 2014 net income from the gain was $535.
The Company’s noninterest income was also negatively impacted by a reduction in seasonal tax refund processing revenue classified as ERC/ERD fees. During the year ended 2015, the Company’s ERC/ERD fees decreased by $762, or 24.3%, as compared to the same period in 2014, largely due to reduced transaction fees associated with each refund facilitated. On October 21, 2014, the Bank entered into a new agreement with the third-party tax refund product provider. Due to competitive pressures, the new agreement provided for a different fee structure, including different fees depending upon the tax refund product selected, and fees that were lower for each refund facilitated, with a reduction in per transaction fees in future years. As a result, even though the Company experienced an increase in the number of ERC/ERD transactions that were facilitated, the lower fee structure caused tax processing revenues to be lower than the year before. As a result of ERC/ERD fee activity being mostly seasonal, the majority of income was recorded during the first half of 2015. While ERC/ERD fees were down, management continues to be pleased with the significant contribution this revenue source has made, accounting for 28.0% of total noninterest income at year-end 2015.
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Partially offsetting the declines in noninterest income was growth from the Company’s debit and credit interchange income, which increased $225, or 10.4%, during the year ended 2015 as compared to 2014. The volume of transactions utilizing the Company’s credit card and Jeanie® Plus debit card continue to increase from a year ago. The Company continues to promote consumer spending by offering incentive based credit and debit cards that permit their users to redeem accumulated points for merchandise, as well as cash incentives paid, particularly to business users based on transaction criteria. 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.
As earning asset yields during 2015 continued to decline, the Company took opportunities to sell some of its lower-yielding investment securities. During the second and third quarters of 2015, the Company recorded gross gains of $163 on the sale of $10,387 in Agency mortgage-backed securities, while reinvesting the proceeds into higher-yielding securities. The shift of balances to higher-yielding assets had a positive effect on the margin.
The Company’s remaining noninterest income categories were down $12, or 0.3%, during the year ended 2015 as compared to 2014. This decline was in large part due to service charges on deposit accounts decreasing $54, or 3.3%, impacted by fewer overdraft items from the prior year.
Total noninterest income increased $1,275, or 15.0%, in 2014 as compared to 2013. The success of higher noninterest income recognized in 2014 was related to the gain on sale of ProAlliance, lower losses related to the sale and write-downs of foreclosed OREO property, and increased earnings from ERC/ERD fees and debit/credit card interchange income. The increases were partially offset by a decrease in earnings from the Company’s BOLI and annuity asset investments during 2014.
Net gains on the sale of OREO were $113 during 2014, compared to net losses of $692 recorded during 2013. This $805 improvement was primarily related to higher property impairment losses experienced in 2013 coming from one OREO property. The impairment charges were recorded on a commercial real estate property after a re-evaluation of the carrying values were performed. The result was a $504 impairment charge that was recorded in the fourth quarter of 2013. The impairment charge was recorded as a write-down to the carrying value of the commercial real estate property. A further re-evaluation of this commercial property in 2014 identified no additional impairment of collateral values from year-end 2013. Further impacting OREO revenue improvement in 2014 were additional losses on OREO that were impacted by the sale of one commercial property during the fourth quarter of 2013. This sale resulted in a net loss of $156 in 2013 that did not repeat in 2014.
During 2014, the Company also experienced increased seasonal tax refund processing fees classified as ERC/ERD fees. During the year ended 2014, the Company’s ERC/ERD fees increased by $577, or 22.6%, as compared to the same period in 2013. The increase was due to an increase in the number of ERC/ERD transactions that were processed during 2014.
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The Company also experienced noninterest income growth from its debit and credit interchange income, which increased $211, or 10.7%, during the year ended 2014 as compared to 2013. This was the result of increases in the volume of transactions utilizing the Company’s credit card and Jeanie® Plus debit cards.
Total noninterest revenue improvement in 2014 was partially offset by a decrease in the Company’s earnings from tax-free BOLI and annuity investments. BOLI investments are maintained by the Company in association with various benefit plans, including deferred compensation plans, director retirement plans and supplemental retirement plans. During the first quarter of 2013, the Company received $1,249 in cash proceeds from the settlement of two BOLI policies, which yielded net BOLI proceeds of $452 that were recorded to income. This income from the first quarter of 2013 was not repeated in 2014. As a result, BOLI and annuity asset earnings were down $504, or 42.9%, during the year ended 2014, as compared to 2013.
Total noninterest revenue improvement was also partially offset by lower mortgage banking income affected by the declining volume of real estate loans being sold to the secondary market. To help manage consumer demand for longer-termed, fixed-rate real estate mortgages, the Company continues to sell a portion of the real estate loans it originates to the secondary market. Historic low interest rates on long-term fixed-rate mortgage loans continue to provide consumers with opportunities to refinance their existing mortgages. The decision to sell long-term fixed-rate mortgages at lower rates also helps to minimize the interest rate risk exposure to rising rates. During the year ended December 31, 2013, the Company experienced a higher level of refinancing demand as compared to the year ended 2014. As a result, the Company sold 37 loans to the secondary market during the year ended 2014, down from 108 loans sold during the year ended 2013, and mortgage banking income during 2014 was down $278, or 54.9%, as compared to 2013.
The Company’s remaining noninterest income categories were down $346, or 11.5%, during the year ended 2014 as compared to 2013, in large part due to a decrease in overdraft items, which contributed to a $175, or 9.7%, decrease in service charges on deposit accounts. Other noninterest income was down $184, or 18.5%, largely due to decreases in loan insurance sales and dividends from ProAlliance.
NONINTEREST EXPENSE
Management continues to work diligently to minimize the growth in noninterest expense. For 2015, total noninterest expense increased $326, or 1.1%. Contributing most to the increase in net overhead expense for 2015 were professional fees, foreclosure costs and data processing expenses. Increases in total noninterest expense were partially offset by decreases in salaries and employee benefits.
The Company’s largest noninterest expense item, salaries and employee benefits, decreased $380, or 2.1%, during 2015 as compared to 2014. The decrease was largely due to lower employee benefit costs associated with various nonqualified defined benefit plans. During the fourth quarter of 2014, the Company incorporated recently issued data in establishing the liability associated with its nonqualified defined benefit plans. The data was in relation to new mortality tables issued by the Society of Actuaries (“SOA”) in October of 2014. The SOA-revised mortality tables reflected longer life expectancies, along with an expectation that the trend will continue. In following U.S. generally accepted accounting principles, the Company used the revised mortality tables to update its own assumption data that impact its nonqualified defined benefit plans. Furthermore, in relation to a decrease in long-term interest rates, management reduced the discount rate assumption for the nonqualified benefit plans. The combination of these two adjustments being recorded in 2014 and not being repeated in 2015 contributed to a $730 decrease in nonqualified benefit employee benefit expense from the prior year. Partially offsetting the decreases in employee plan benefit expense was a $259, or 2.0%, increase in salary and health insurance expense. This was primarily due to annual merit increases and higher insurance premiums. During 2015, the Company experienced a lower full-time equivalent employee base, decreasing from 264 employees at year-end 2014 to 248 employees at year-end 2015.
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Noninterest expense during 2015 was also impacted by a decrease of $144, or 14.3%, in marketing costs. The decrease was a result of the significant donations made in 2014 as part of the Company’s “Community First” initiative that emphasizes giving back to the communities in which it does business.
Noninterest expense during 2015 reflected increases in various overhead areas, including furniture/equipment costs, which increased $44, or 5.8%, as compared to 2014. This increase was impacted mostly by higher depreciation costs on furniture and equipment purchases related to the Company’s new Barboursville, WV branch location that commenced operations in the first quarter of 2015.
During 2015, the Company experienced a $224, or 19.5%, increase in various professional service fees, which included accounting, audit and legal costs. A portion of this increase was impacted by the upcoming merger between the Company and Milton Bancorp, Inc.
Also contributing to higher noninterest expense during 2015 were FDIC assessments, which increased $100, or 20.7%, as compared to 2014. This increase was related to an increase in the average quarterly assessment rates during 2015 versus 2014.
Data processing expenses during 2015 increased $132, or 11.7%, as compared to 2014, in relation to the continued growth in transaction volume with the Company’s debit and credit cards. Higher data processing charges were also impacted by the Company’s Big Rewards customer incentive platform.
The Company also recognized a $109, or 10.8%, increase in software expense during 2015. The Company continues to utilize the software resources available in the banking industry to maximize computer network efficiencies, and enhance customer convenience. Management continues to monitor the growing trend of cyber security risks. The Company utilizes software technology to detect and minimize these security risks that could have a material adverse effect on the Company’s results of operations and financial condition.
Further contributing to higher noninterest expense during 2015 were foreclosed asset costs, which increased $162, or 87.6%, as compared to 2014. This increase was related to various expenses incurred in 2015 in association with the liquidations of various commercial real estate properties in process of foreclosure. Foreclosure expenses include the costs in maintaining the properties, which consist of taxes, management fees and general maintenance.
In 2015, the Company’s other noninterest expenses increased $65, or 1.6%, as compared to 2014. The increase was largely from customer incentive expenses, increasing $125, or 16.1%, over 2014. This increasing trend of higher customer incentives has been part of management’s emphasis on further building and maintaining core deposit relationships while increasing interchange revenue.
For 2014, total noninterest expense decreased $82, or 0.3%. Contributing most to the decrease in net overhead expense for 2014 were lower foreclosure costs, furniture and equipment expenses, and state tax expense. Decreases in total noninterest expense were partially offset by increases in salaries and employee benefits, marketing expenses and professional service costs.
The Company’s largest noninterest expense item, salaries and employee benefits, increased $308, or 1.8%, during 2014 as compared to 2013. The increase was largely due to higher employee benefit costs associated with various nonqualified defined benefit plans and health insurance, partially offset by decreases in salaries expense. As previously mentioned, the Company recorded expense adjustments to the liability associated with its nonqualified defined benefit plans during the fourth quarter of 2014. Further impacting employee benefit expense during 2014 were higher health insurance costs, which increased $90, as compared to 2013. Partially offsetting the increases in employee benefit expense was a $172, or 1.5%, decrease in salary expense. During 2014, the Company experienced a lower full-time equivalent employee base, decreasing from 273 employees at year-end 2013 to 264 employees at year-end 2014. Furthermore, the Company ceased operations with its South Point, Ohio branch location in May 2014, which contributed to lower salary costs for 2014.
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Management’s Discussion and analysis of
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The closing of the South Point branch also contributed to a decrease in overhead expense during 2014, impacting the Company’s furniture/equipment costs, which decreased $145, or 16.1%, as compared to 2013, resulting from lower equipment maintenance costs and a decrease in depreciation expense.
Also contributing to lower noninterest expense during 2014 were foreclosed asset costs, which decreased $297, or 61.6%, as compared to 2013. This decrease was related to various expenses incurred from 2013 in association with the liquidations of various commercial real estate properties in process of foreclosure.
In 2014, the Company’s other noninterest expenses decreased $475, or 10.4%, as compared to 2013, largely impacted by a reduction in state taxes disbursed during 2014. Effective January 1, 2014, the State of Ohio’s corporate franchise tax was replaced with the financial institutions tax. The new tax is based on equity capital and a single gross receipts apportionment factor, while the corporate franchise tax was based on net worth and three apportionment factors. As a result of the new Ohio tax methodology for financial institutions, the Company’s state tax expense decreased $410, or 48.0%, from 2013.
Partially offsetting decreases in some noninterest expense categories were increases in professional fees, marketing costs and software expense during 2014. The Company experienced a $120, or 11.6%, increase in various professional services related to accounting and consulting during 2014. A portion of this increase was associated with the start-up of OVBC Captive, Inc., the Company’s new limited purpose property and casualty insurance company, which was capitalized in July 2014. Marketing expense during 2014 was up $213, or 26.9%, primarily from donations, which increased $240, or 116.7%, during 2014, as part of the Company’s “Community First” initiative. Higher software expenses were also recognized in 2014, increasing $114, or 12.7%, as the Company continued to take advantage of the resources being offered to financial institutions to help improve network efficiencies and enhance customer convenience.
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. During 2015, the Company experienced net interest margin compression as a result of lower earning asset yields completely offsetting higher average earning asset growth and lower funding costs. Noninterest revenues also decreased by 12.2%, while overhead expenses were up 1.1% from the prior year. As a result, net revenue levels during 2015 were outpaced by higher overhead expense, causing the year-to-date efficiency ratio to increase (regress) to 69.3% at December 31, 2015, as compared to 66.7% at December 31, 2014. During 2014, the Company benefited from a 3.4% net interest income improvement due to higher average earning assets and lower funding costs. Noninterest revenues also grew by 15.0%, while overhead expenses were reduced by $82 from the prior year. As a result, net revenue levels during 2014 outpaced overhead expense, causing the year-to-date efficiency ratio to decrease (improve) to 66.7% at December 31, 2014, as compared to 71.0% at December 31, 2013.
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Management’s Discussion and analysis of
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FINANCIAL CONDITION:
CASH AND CASH EQUIVALENTS
The Company’s cash and cash equivalents consist of cash, as well as interest- and non-interest bearing balances due from banks. The amounts of cash and cash equivalents fluctuate on a daily basis due to customer activity and liquidity needs. At December 31, 2015, cash and cash equivalents had increased $14,553, or 47.0%, to $45,530 as compared to $30,977 at December 31, 2014. The increase in cash and cash equivalents was largely affected by a $14,393, or 66.4%, increase within the Company’s interest-bearing deposits from year-end 2014, mostly from its Federal Reserve Bank clearing account. The Company continues to utilize its interest-bearing Federal Reserve Bank clearing account to manage seasonal tax refund deposits, as well as to fund earning asset growth and maturities of retail CD’s. Since year-end 2014, the Company has experienced a 2.2% increase in its deposit liabilities generated by larger checking, statement savings and municipal public fund deposits, contributing to higher excess funds at year-end 2015. The interest rate paid on both the required and excess reserve balances is based on the targeted federal funds rate established by the Federal Open Market Committee, which currently is 0.50%. 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 0.50%. 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 invest excess funds into longer-term, higher-yielding assets, primarily loans, 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.
[Missing Graphic Reference]
CERTIFICATES OF DEPOSIT
At December 31, 2015, the Company had $1,715 in certificates of deposit owned by the Captive. This represented an increase of $735 from year-end 2014. During the third quarter of 2015, the Captive invested in four new certificates totaling $980 with maturity terms ranging from 1.5 to 3 years. The Captive also experienced one certificate maturity of $245 during the same period.
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. During 2015, the balance of total securities increased $3,498, or 3.2%, compared to year-end 2014. The increase came mostly from Agency mortgage-backed securities, which increased $6,363, or 8.3%, from year-end 2014. The Company’s investment securities portfolio is made up mostly of Agency mortgage-backed securities, representing 74.1% of total investments at December 31, 2015. During the year ended 2015, the Company invested $33,251 in new Agency mortgage-backed securities, while receiving principal repayments of $15,088. The monthly repayment of principal has been the primary advantage of Agency mortgage-backed securities as compared to other types of investment securities, which deliver proceeds upon maturity or call date.
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SECURITIES
Table III

|  | MATURING |
As of December 31, 2015 |  | Within One Year |  |  | After One but Within Five Years |  |  | After Five but Within Ten Years |  |  | After Ten Years |
(dollars in thousands) |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |
U.S. Government sponsored entity securities |  | $ | 1,001 |  |  |  | 0.70 | % |  | $ | 7,964 |  |  |  | 0.78 | % |  | $ | ---- |  |  |  | ---- |  |  | $ | ---- |  |  |  | ---- |
Obligations of states and political subdivisions |  |  | 386 |  |  |  | 5.59 | % |  |  | 7,242 |  |  |  | 5.56 | % |  |  | 11,057 |  |  |  | 5.32 | % |  |  | 2,100 |  |  |  | 5.96 | %
Agency mortgage-backed securities, residential |  |  | ---- |  |  |  | ---- |  |  |  | 44,638 |  |  |  | 2.98 | % |  |  | 38,053 |  |  |  | 2.29 | % |  |  | ---- |  |  |  | ---- |
Total securities |  | $ | 1,387 |  |  |  | 2.06 | % |  | $ | 59,844 |  |  |  | 3.00 | % |  | $ | 49,110 |  |  |  | 2.97 | % |  | $ | 2,100 |  |  |  | 5.96 | %

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 fair values, which include the market value adjustments for available for sale securities.

Management has not had to sell a debt security in order to maintain sufficient liquidity, as maturing securities have historically accomplished this. However, as overall average earning asset yields continued to decline from 2014, management took the opportunity to sell some of its lower-yielding, Agency mortgage-backed securities. During the second and third quarters of 2015, the Company sold $10,387 in Agency mortgage-backed securities that were collectively yielding 1.38% at a gain of $163. The Company used the proceeds from the sale to help fund new Agency mortgage-backed security purchases totaling $25,150 at an interest yield of 2.0%, which had a positive impact on the net interest margin.
Since 2008, the reinvestment rates on debt securities have shown limited returns due to the sustained low rate environment. However, market rates in recent years have generally improved having a positive impact to security asset yields. As a result, the weighted average FTE yield on debt securities at year-end 2015 was 2.43%, as compared to 2.38% at year-end 2014 and 1.92% at year-end 2013. The improving returns since 2013 were primarily due to the slower pace with which bond premium expenses have been amortizing on Agency mortgage-backed securities, causing interest rate yields on these securities to increase. Yet, as a result of minimal returns on debt securities, 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.
LOANS
In 2015, the Company's primary category of earning assets and most significant source of interest income, total loans, decreased $9,016, or 1.5%, to finish at $585,752. Lower loan balances were mostly impacted by the commercial loan portfolio, which includes both commercial real estate and commercial and industrial loans. The decline came primarily from the commercial real estate segment. Management continues to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans.
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Management’s Discussion and analysis of
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Commercial real estate, the Company’s largest segment of commercial loans, decreased $8,300, or 4.7%, from year-end 2014. Commercial real estate 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. Participation loans represent a small percentage of the total commercial real estate loan segment and carry the same underwriting guidelines as other commercial real estate offerings. Commercial real estate loans were down largely from its owner-occupied loan portfolio during 2015, which decreased $5,390, or 6.8%, from year-end 2014. This change was in large part due to the loan payoffs of several larger owner-occupied loans during 2015. 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. The Company’s construction loans also decreased $3,683, or 13.4%, from year-end 2014 due to several large paydowns and transfers from construction phase. 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 Company’s nonowner-occupied loans remained relatively flat from year-end 2014, increasing $773, or 1.1%. Nonowner-occupied 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.
At December 31, 2015, the Company’s commercial and industrial loan portfolio was down from year-end 2015 by $2,062, or 2.5%. The decrease came from various large loan payoffs and paydowns primarily within the Company’s West Virginia market. 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.
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Management’s Discussion and analysis of
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Total loans received positive contributions from the Company’s consumer loan portfolio, which increased $1,099, or 1.0%, from year-end 2014. 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 consumer loan portfolio during 2015 benefited mostly from home equity line balances, which increased $2,550, or 13.9%, from year-end 2014. The Company’s automobile lending portfolio also increased $1,717, or 4.0%, from year-end 2014. The automobile lending component comprises the largest portion of the Company’s consumer loan portfolio, representing 40.3% of total consumer loans at December 31, 2015. In recent years, the Company’s interest rates offered on indirect automobile opportunities had 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. However, in 2015, the Company targeted more auto dealers within its market areas, which increased loan origination opportunities. In addition, the Company’s interest rate offerings on auto loans have become more competitive with local banks, which has contributed to consumer loan growth. With auto loan volume increasing, the Company will continue to maintain a strict loan underwriting process on its consumer auto loan offerings to limit future loss exposure.
The Company will continue to place more emphasis on loan portfolios (i.e. commercial and, to a smaller extent, residential real estate) with higher returns than auto loans. 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 significant focus of the Company’s lending efforts. Residential real estate loan balances comprise the largest segment of the Company’s total 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 2015, total residential real estate loan balances increased $247, or 0.1%, from year-end 2014. Within the real estate portfolio, long-term fixed-rate mortgages have been decreasing while short-term adjustable-rate mortgage balances have been increasing. The decrease in long-term, fixed-rate loans came mostly from the Company’s 15-, 20- and 30-year fixed-rate loans, which declined $10,979, or 11.0%, from year-end 2014. As part of management’s interest rate risk strategy, the Company continues to sell most of its long-term fixed-rate residential mortgages to the Federal Home Loan Mortgage Corporation, while maintaining the servicing rights for those mortgages. During 2015, the refinancing volume for long-term fixed-rate real estate loans trended upward, contributing to a 57.4% increase in real estate loans sold during the year ended 2015 compared to 2014. A customer that does not qualify for a long-term, secondary market loan may choose from one of the Company's other adjustable-rate mortgage products. This resulted in higher balances of adjustable-rate mortgages, which were up $11,781, or 11.6%, from year-end 2014. The increase came primarily from the Company’s three-, five- and 15-year adjustable-rate mortgages.
The remaining real estate loan portfolio balances decreased $555, or 2.5%, from year-end 2014. This increase came primarily from the Company's other variable-rate loan products being offered to its customers as alternative financing options.
The Company will continue to follow its secondary market strategy until long-term interest rates increase back to a range that falls within an acceptable level of interest rate risk for the Company. Furthermore, the Company will continue to monitor the pace of its loan volume and remain consistent in its approach to sound underwriting practices and a focus on asset quality.
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Management’s Discussion and analysis of
financial Condition and results of operations
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 troubled debt restructurings (“TDR’s”), are considered in the determination of the overall adequacy of the allowance for loan losses. For additional detail on TDR loans, please refer to Note C to the consolidated financial statements
During 2015, the Company’s allowance for loan losses decreased $1,686, or 20.2%, to finish at $6,648 as compared to $8,334 at year-end 2014. The change in reserves was largely due to the charge-off of a specific allocation, as well as reduced general allocations related to lower classified assets and economic risk factor decreases. Management continues to focus on improving asset quality and lowering credit risk while working to maintain its relationships with its borrowers.
The allowance was impacted mostly by lower specific allocations from year-end 2014, which decreased $1,248, or 36.6%. As part of the Company’s quarterly analysis of the allowance for loan losses, management reviewed the fair values of the underlying collateral and the present value of estimated future cash flows on various impaired loans to determine if any impairments existed. During the second quarter of 2015, a $1,304 charge-off was taken on the specific allocation of a collateral dependent impaired commercial real estate loan. This specific allocation had already been provided for during the fourth quarter of 2014 due to the asset impairment of related collateral values. As a result, the charge-off of this specific allocation did not have a direct impact to the provision expense in 2015. Further impacting lower specific reserves was the payoff of two loans with one commercial real estate loan relationship during the third quarter of 2015. Prior to payoff, $621 had been allocated for based on the collateral values associated with the two impaired commercial loans. In September 2015, the Company was successful in collecting the full amount of principal on both loans, which resulted in none of the specific allocation being used. Partially offsetting the decreases in specific reserves were the asset impairments of two commercial and industrial loan relationships that required specific reserves of $990 during the second and third quarters of 2015.
On a quarterly basis, management also reviewed various factors that directly impact allocations of the allowance, which include: historical loan losses, loan delinquency levels, local economic conditions and unemployment rates, criticized/classified asset coverage levels and loan loss recoveries. As a result of these factors, the general allocation component of the allowance for loan losses decreased $438, or 8.9%, from year-end 2014. Although the Company experienced an increase in net loan charge-offs during the year ended December 31, 2015, the average historical loan loss factor was down from year-end 2014. The average historical loan loss factor is based on a 5-year loan loss history for commercial loans and 3 years for real estate and consumer loans. The Company also experienced a decrease (improvement) in its classified assets from year-end 2014, which was largely due to the payoffs, partial charge-offs and risk rating upgrades associated with various commercial real estate and commercial and industrial loans. The positive effects from lower average historical charge-offs and classified assets were partially offset by an increase in criticized assets from year-end 2014. The majority of the criticized asset growth came during the third quarter of 2015, with various commercial real estate and commercial and industrial loans being downgraded due to growing risks in their repayment ability.
75

Management’s Discussion and analysis of
financial Condition and results of operations
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Table IV

(dollars in thousands) |  | Years Ended December 31 |
|  | 2015 |  |  | 2014 |  |  | 2013 |  |  | 2012 |  |  | 2011 |
Commercial loans(1) |  | $ | 4,548 |  |  | $ | 5,797 |  |  | $ | 4,193 |  |  | $ | 4,729 |  |  | $ | 4,129 |
Percentage of loans to total loans |  |  | 42.89 | % |  |  | 43.98 | % |  |  | 43.21 | % |  |  | 41.60 | % |  |  | 42.22 | %
Residential real estate loans |  |  | 1,087 |  |  |  | 1,426 |  |  |  | 1,169 |  |  |  | 1,329 |  |  |  | 1,860 |
Percentage of loans to total loans |  |  | 38.22 | % |  |  | 37.60 | % |  |  | 38.73 | % |  |  | 40.49 | % |  |  | 39.86 | %
Consumer loans(2) |  |  | 1,013 |  |  |  | 1,111 |  |  |  | 793 |  |  |  | 847 |  |  |  | 1,355 |
Percentage of loans to total loans |  |  | 18.89 | % |  |  | 18.42 | % |  |  | 18.06 | % |  |  | 17.91 | % |  |  | 17.92 | %
Allowance for loan losses |  | $ | 6,648 |  |  | $ | 8,334 |  |  | $ | 6,155 |  |  | $ | 6,905 |  |  | $ | 7,344 |
|  |  | 100.00 | % |  |  | 100.00 | % |  |  | 100.00 | % |  |  | 100.00 | % |  |  | 100.00 | %
Ratio of net charge-offs to average loans |  |  | .47 | % |  |  | .10 | % |  |  | .22 | % |  |  | .35 | % |  |  | 1.11 | %

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 |
|  | 2015 |  |  | 2014 |  |  | 2013 |  |  | 2012 |  |  | 2011 |
Impaired loans |  | $ | 17,228 |  |  | $ | 20,169 |  |  | $ | 14,696 |  |  | $ | 17,401 |  |  | $ | 11,572 |
Past due 90 days or more and still accruing |  |  | 39 |  |  |  | 73 |  |  |  | 78 |  |  |  | 359 |  |  |  | 459 |
Nonaccrual |  |  | 7,236 |  |  |  | 9,549 |  |  |  | 3,580 |  |  |  | 3,626 |  |  |  | 2,678 |
Accruing loans past due 90 days or more tototal loans |  |  | .01 | % |  |  | .01 | % |  |  | .02 | % |  |  | .06 | % |  |  | .08 | %
Nonaccrual loans as a % of total loans |  |  | 1.23 | % |  |  | 1.61 | % |  |  | .63 | % |  |  | .65 | % |  |  | .45 | %
Impaired loans as a % of total loans |  |  | 2.94 | % |  |  | 3.39 | % |  |  | 2.60 | % |  |  | 3.12 | % |  |  | 1.93 | %
Allowance for loan losses as a % of totalloans |  |  | 1.13 | % |  |  | 1.40 | % |  |  | 1.09 | % |  |  | 1.24 | % |  |  | 1.23 | %

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.
76

Management’s Discussion and analysis of
financial Condition and results of operations
MATURITY AND REPRICING DATA OF LOANS
As of December 31, 2015
Table VI

(dollars in thousands) |  | MATURING / REPRICING |
|  | Within One Year |  |  | After One but Within Five Years |  |  | After Five Years |  |  | Total |
Residential real estate loans |  | $ | 43,041 |  |  | $ | 83,559 |  |  | $ | 97,275 |  |  | $ | 223,875 |
Commercial loans(1) |  |  | 131,209 |  |  |  | 90,766 |  |  |  | 29,273 |  |  |  | 251,248 |
Consumer loans(2) |  |  | 40,106 |  |  |  | 52,079 |  |  |  | 18,444 |  |  |  | 110,629 |
Total loans |  | $ | 214,356 |  |  | $ | 226,404 |  |  | $ | 144,992 |  |  | $ | 585,752 |

Loans maturing or repricing after one year with: |
Variable interest rates |  | $ | 171,229 |
Fixed interest rates |  |  | 200,167 |
Total |  | $ | 371,396 |

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

Impaired loans at December 31, 2015 decreased $2,941, or 14.6%, from year-end 2014, largely from $1,422 in partial charge-offs taken on one commercial real estate loan and a $3,127 payoff of one commercial real estate loan relationship. The Company also experienced a decrease in its troubled assets, with nonperforming loans to total loans finishing at 1.24% at December 31, 2015, down from 1.62% at year-end 2014. Nonperforming loans consist of nonaccruing loans and accruing loans past due 90 days or more. Nonperforming loans finished at $7,275 at year-end 2015, compared to $9,622 at year-end 2014, due to partial charge-offs taken on the commercial real estate loan previously mentioned that was classified as nonaccrual, and various payoffs of other commercial real estate and residential real estate loans classified as nonaccrual. These factors also contributed to a decrease in the Company’s nonperforming assets-to-total-assets ratio, which totaled 1.21% at December 31, 2015, as compared to 1.43% at year-end 2014. Nonperforming loans and nonperforming assets at December 31, 2015 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 lower general and specific allocations of the allowance, the ratio of the allowance for loan losses to total loans decreased to 1.13% at December 31, 2015, compared to 1.40% at December 31, 2014. Management believes that the allowance for loan losses is adequate at December 31, 2015 to absorb probable losses in the 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. 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.
77

Management’s Discussion and analysis of
financial Condition and results of operations
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. Deposits are attractive sources of funding because of their stability and generally low cost as compared with other funding sources. 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, 2015, 2014 and 2013. Total deposits increased $13,916, or 2.2%, from the end of 2014 to finish at $660,746 at December 31, 2015. The increase came mostly from the Company’s “core” deposit balances, which include noninterest-bearing deposits, as well as interest-bearing demand, savings, and money market deposits. The Bank focuses on core deposit relationships with consumers from local markets who can maintain multiple accounts and services at the Bank. The Company 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 noninterest-bearing demand accounts, and interest-bearing NOW, savings and money market accounts, at December 31, 2015 than at December 31, 2014. The Company also benefited from a lesser portion of deposits being held in brokered and retail time deposits at December 31, 2015 than at December 31, 2014.
Contributing most to the 2015 growth in deposits was the Company’s interest-free funding source, noninterest-bearing demand deposits, which were up $14,705, or 9.1%, from year-end 2014. Demand deposit growth came primarily from the Company’s business checking accounts and other noninterest-bearing products, particularly those offering incentive rewards to customers.
DEPOSITS
Table VII

|  | As of December 31 |
(dollars in thousands) |  | 2015 |  |  | 2014 |  |  | 2013 |
Interest-bearing deposits: |  |  |  |  |  |  |  |  |
NOW accounts |  | $ | 124,524 |  |  | $ | 112,571 |  |  | $ | 106,342 |
Money market |  |  | 132,901 |  |  |  | 137,076 |  |  |  | 142,691 |
Savings accounts |  |  | 68,075 |  |  |  | 61,712 |  |  |  | 57,546 |
IRA accounts |  |  | 40,930 |  |  |  | 42,406 |  |  |  | 45,490 |
Certificates of deposit |  |  | 117,817 |  |  |  | 131,271 |  |  |  | 126,985 |
|  |  | 484,247 |  |  |  | 485,036 |  |  |  | 479,054 |
Noninterest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  |  | 176,499 |  |  |  | 161,794 |  |  |  | 149,823 |
Total deposits |  | $ | 660,746 |  |  | $ | 646,830 |  |  | $ | 628,877 |

78

Management’s Discussion and analysis of
financial Condition and results of operations
The Company’s interest-bearing NOW account balances also increased $11,953, or 10.6%, during 2015. Changes in NOW account balances are generally driven by public fund account balances. 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 account 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 relationships.
Further increases in the Company’s deposit balances came from savings account balances, which increased $6,363, or 10.3%, from year-end 2014, coming primarily from the statement savings product.
The Company’s time deposits decreased $14,930, or 8.6%, from year-end 2014. The increased emphasis on core relationship deposits has caused time deposits to represent a smaller percentage of total deposits, finishing at 24.0% of total deposits at December 31, 2015 compared to 26.9% of total deposits at December 31, 2014. Historically, time deposits, particularly CD’s, had been the most significant source of funding for the Company’s earning assets. As market rates remain at low levels, the Company has seen the cost of its retail CD balances continue to reprice downward to reflect current deposit rates. As CD market rates continue to adjust downward, the spread between a short-term CD rate and a statement savings rate has become small enough that many customers choose to invest balances into a more liquid product, perhaps hoping for rising rates in the near future. As a result, the Company has experienced a decrease within its retail CD balances, which were down $12,026, or 8.6%, from year-end 2014. The Company’s preference of core deposit funding sources has created a lesser reliance on wholesale funding deposits (i.e., brokered and internet CD issuances) in recent years. As a result, wholesale CD balances decreased $14,930, or 8.6%, during 2015. 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.
Partially offsetting the deposit increases above were decreases in the Company’s money market accounts, which were down $4,175, or 3.1%, from year-end 2014. The decrease came largely from the Company’s Market Watch product. The Market Watch product is a limited transaction investment account with tiered market rates that serve as an alternative to CD’s for some customers. With an added emphasis on further building and maintaining core deposit relationships, the Company had marketed several attractive incentive offerings in the past to draw customers to this particular product. During 2015, the Market Watch interest rates continued to adjust down to current market rates, which resulted in the product’s decrease in deposit balances.
79

Management’s Discussion and analysis of
financial Condition and results of operations
The Company will continue to experience increased competition for deposits in its market areas, which should challenge net growth. The Company will continue to emphasize growth and retention within its core deposit relationships during 2015, reflecting the Company’s efforts to reduce its reliance on higher cost funding and improving net interest income.
OTHER BORROWED FUNDS
The Company also accesses other funding sources, including short-term and long-term borrowings, to fund potential asset growth and satisfy short-term liquidity needs. Other borrowed funds consist primarily of FHLB advances and promissory notes. During 2015, other borrowed funds were down $1,026, or 4.1%, from year-end 2014, due to monthly principal repayments. While deposits continue to be the primary source of funding for growth in earning assets, management will continue to utilize FHLB advances and promissory notes to help manage interest rate sensitivity and liquidity.
SUBORDINATED DEBENTURES
The Company received proceeds from the issuance of two trust preferred securities from September 7, 2000 totaling $5,000 at a fixed rate of 10.6% and March 22, 2007 totaling $8,500 at a fixed rate of 6.58%. The $8,500 trust preferred security is now at an adjustable rate equal to the 3-month LIBOR plus 1.68%. The Company does not report the securities issued by the trust as liabilities, but instead, reports as liabilities the subordinated debentures issued by the Company and held by the trust. Given the current capital levels and interest cost savings, the Company redeemed the full amount of the $5,000 subordinated debenture on March 7, 2013, at a redemption price of 104.24%, which resulted in a premium of $212. The redemption was funded by a capital distribution from the Bank. The redemption supports the Company’s continued emphasis on lowering funding costs to strengthen the net interest margin as average earning assets continue to decline.
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. Management does not anticipate that the Company’s current off-balance sheet activities will have a material impact on the results of operations and financial condition.
80

Management’s Discussion and analysis of
financial Condition and results of operations
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, 2015, the Bank’s capital exceeded the requirements to be deemed “well capitalized” under applicable prompt corrective action regulations. Total shareholders' equity at December 31, 2015 of $90,470 was up $4,254, or 4.9%, as compared to the balance of $86,216 at December 31, 2014. Contributing most to this increase was year-to-date net income of $8,574, partially offset by cash dividends paid of $3,665, or $0.89 per share.
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 following table presents the Company’s estimated net interest income sensitivity:

INTEREST RATE SENSITIVITY |  |  |  |
Table VIII |  |  |  |
Change in |  | December 31, 2015 |  | December 31, 2014
Interest Rates |  | % Change in |  | % Change in
Basis Points |  | Net Interest Income |  | Net Interest Income
+300 |  | (.03%) |  | (2.08%)
+200 |  | .18% |  | (1.16%)
+100 |  | .19% |  | (.49%)
-100 |  | (2.48%) |  | (2.81%)

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 the Company to do so. At December 31, 2015, the interest rate risk profile reflects limited exposure to an increase in interest rates. This is a change from the prior year’s liability sensitive position at December 31, 2014. Contributing to the change in interest rate risk profile was the increase in liquidity due to growth in noninterest-bearing deposit balances. The additional liquidity is maintained in an interest-bearing account at the Federal Reserve, and the interest rate is highly correlated to any rate change implemented by the Federal Reserve as part of its monetary policy. In a declining rate environment, net interest income is impacted by 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. As a result, net interest income decreases in a declining interest rate environment.
81

Management’s Discussion and analysis of
financial Condition and results of operations
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 $137,558, represented 17.3% of total assets at December 31, 2015. In addition, the FHLB offers advances to the Bank, which further enhances the Bank's ability to meet liquidity demands. At December 31, 2015, the Bank could borrow an additional $121,952 from the FHLB, of which $75,000 could be used for short-term, cash management advances. Furthermore, the Bank has established a borrowing line with the Federal Reserve. At December 31, 2015, this line had total availability of $41,470. 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.
82

Management’s Discussion and analysis of
financial Condition and results of operations
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 for the consumer and real estate portfolio segment and 5 years for the commercial portfolio segment. Prior to 2014, the commercial portfolio’s historical loss factor was based on a period of 3 years. During the first quarter of 2014, management extended the loan loss history to 5 years due to the significant decline in net charge-offs that have been experienced since the first quarter of 2012. By extending the historical loan loss period to 5 years, management feels the historical factor is more representative of the expected losses to be incurred on commercial loans. The total loan portfolio’s 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.
CONTRACTUAL OBLIGATIONS
The following table presents, as of December 31, 2015, 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.

Table IX |  | Payments Due In |
(dollars in thousands) |  | Note Reference |  | One Year or Less |  |  | One to Three Years |  |  | Three to Five Years |  |  | Over Five Years |  |  | Total |
Deposits without a stated maturity |  | E |  | $ | 501,999 |  |  | $ | ---- |  |  | $ | ---- |  |  | $ | ---- |  |  | $ | 501,999 |
Consumer and brokered time deposits |  | E |  |  | 82,413 |  |  |  | 60,950 |  |  |  | 14,874 |  |  |  | 510 |  |  |  | 158,747 |
Other borrowed funds |  | G |  |  | 4,309 |  |  |  | 7,518 |  |  |  | 2,836 |  |  |  | 9,283 |  |  |  | 23,946 |
Subordinated debentures |  | H |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | 8,500 |  |  |  | 8,500 |
Lease obligations |  | D |  |  | 445 |  |  |  | 416 |  |  |  | 42 |  |  |  | ---- |  |  |  | 903 |

83

Management’s Discussion and analysis of
financial Condition and results of operations
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.

KEY RATIOS
Table X |  | 2015 |  |  | 2014 |  |  | 2013 |  |  | 2012 |  |  | 2011 |
Return on average assets |  |  | 1.03 | % |  |  | 1.01 | % |  |  | 1.04 | % |  |  | .86 | % |  |  | .68 | %
Return on average equity |  |  | 9.66 | % |  |  | 9.62 | % |  |  | 10.40 | % |  |  | 9.53 | % |  |  | 8.35 | %
Dividend payout ratio |  |  | 42.74 | % |  |  | 42.62 | % |  |  | 36.56 | % |  |  | 62.29 | % |  |  | 57.59 | %
Average equity to average assets |  |  | 10.71 | % |  |  | 10.49 | % |  |  | 10.01 | % |  |  | 9.00 | % |  |  | 8.14 | %

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Management’s Discussion and analysis of
financial Condition and results of operations
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 6 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. Nevertheless, 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.
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Ohio Valley Banc Corp. Email: investorrelations@ovbc.com Web: www.ovbc.com Phone: 1-800-468-6682 Headquarters: 420 Third Avenue, Gallipolis, Ohio Traded on The NASDAQ Global Market Symbol OVBC