Note C - Loans and Allowance for Loan Losses

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

Loans, net	$	590,964	$	631,936

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

Activity in the allowance for loan losses was as follows:	2011			2010			2009

Balance, beginning of year	$	9,386		$	8,198		$	7,799

Loans charged off:
Residential real estate		1,649			971			1,172
Commercial real estate		2,298			2,766			59
Commercial and industrial		4,725			191			568
Consumer		1,750			1,951			2,532
Total loans charged off		10,422			5,879			4,331

Recoveries of loans:
Residential real estate		198			40			41
Commercial real estate		1,394			70			58
Commercial and industrial		1,127			25			672
Consumer		765			1,061			747
Total recoveries of loans		3,484			1,196			1,518

Net loan charge-offs		( 6,938	)		(4,683	)		(2,813	)
Provision charged to operations		4,896			5,871			3,212
Balance, end of year	$	7,344		$	9,386		$	8,198

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Loans and Allowance for Loan Losses (continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2011:

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

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

December 31, 2011	Residential Real Estate		Commercial Real Estate		Commercial & Industrial		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	----	$	655	$	----	$	----	$	655
Collectively evaluated for impairment		1,730		2,968		636		1,355		6,689
Total ending allowance balance	$	1,730	$	3,623	$	636	$	1,355	$	7,344

Loans:
Loans individually evaluated for impairment	$	1,085	$	10,153	$	334	$	----	$	11,572
Loans collectively evaluated for impairment		225,404		209,303		44,866		107,163		586,736
Total ending loans balance	$	226,489	$	219,456	$	45,200	$	107,163	$	598,308

December 31, 2010	Residential Real Estate		Commercial Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	125	$	1,698	$	3,407	$	----	$	5,230
Collectively evaluated for impairment		868		1,443		388		1,457		4,156
Total ending allowance balance	$	993	$	3,141	$	3,795	$	1,457	$	9,386

Loans:
Loans individually evaluated for impairment	$	1,784	$	13,460	$	7,862	$	----	$	23,106
Loans collectively evaluated for impairment		235,094		213,162		47,444		122,516		618,216
Total ending loans balance	$	236,878	$	226,622	$	55,306	$	122,516	$	641,322

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Loans and Allowance for Loan Losses (continued)

Information regarding impaired loans is as follows:	2011		2010

Year-end loans with no allocated allowance for loan losses	$	8,081	$	7,884
Year-end loans with allocated allowance for loan losses		3,491		15,222
Total impaired loans	$	11,572	$	23,106

Amount of the allowance for loan losses allocated	$	655	$	5,230

		2011		2010		2009

Average of individually impaired loans during year	$	11,163	$	24,589	$	27,927
Interest income recognized during impairment	$	647	$	1,158	$	1,793
Cash-basis interest income recognized	$	608	$	1,083	$	1,690

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

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

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Loans and Allowance for Loan Losses (continued)

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2010:

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

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

	December 31, 2011		December 31, 2010

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

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Loans and Allowance for Loan Losses (continued)

The following table presents the recorded investment of nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of December 31, 2011 and 2010:

December 31, 2011	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	439	$	2,450
Commercial real estate:
Owner-occupied		----		125
Nonowner-occupied		----		86
Consumer:
Automobile		13		12
Home equity		----		5
Other		7		----
Total	$	459	$	2,678

December 31, 2010	Loans Past Due 90 Days And Still Accruing		Nonaccrual

Residential real estate	$	1,487	$	2,200
Commercial real estate:
Owner-occupied		----		428
Nonowner-occupied		----		432
Consumer:
Automobile		114		100
Home equity		43		104
Other		70		31
Total	$	1,714	$	3,295

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Loans and Allowance for Loan Losses (continued)

The following table presents the aging of the recorded investment of past due loans by class of loans as of December 31, 2011 and 2010:

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Loans Not Past Due		Total

Residential real estate	$	3,662	$	1,144	$	2,889	$	7,695	$	218,794	$	226,489
Commercial real estate:
Owner-occupied		182		----		125		307		142,259		142,566
Nonowner-occupied		69		232		86		387		55,032		55,419
Construction		204		----		----		204		21,267		21,471
Commercial and industrial		171		14		----		185		45,015		45,200
Consumer:
Automobile		864		110		13		987		44,715		45,702
Home equity		75		76		5		156		20,351		20,507
Other		506		162		7		675		40,279		40,954
Total	$	5,733	$	1,738	$	3,125	$	10,596	$	587,712	$	598,308

December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Loans Not Past Due		Total

Residential real estate	$	4,731	$	1,951	$	3,448	$	10,130	$	226,748	$	236,878
Commercial real estate:
Owner-occupied		1,564		17		428		2,009		147,033		149,042
Nonowner-occupied		87		----		432		519		55,470		55,989
Construction		----		----		----		----		21,591		21,591
Commercial and industrial		15		----		----		15		55,291		55,306
Consumer:
Automobile		1,010		342		213		1,565		56,706		58,271
Home equity		78		50		147		275		20,252		20,527
Other		793		238		101		1,132		42,586		43,718
Total	$	8,278	$	2,598	$	4,769	$	15,645	$	625,677	$	641,322

Troubled Debt Restructurings:

A troubled debt restructuring (“TDR”) is where the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. All TDR's are considered to be impaired. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or short-term interest-only payment terms.

The Company has allocated reserves for a portion of its TDR’s to reflect the fair values of the underlying collateral or the present value of the concessionary terms granted to the customer.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Loans and Allowance for Loan Losses (continued)

The following table presents the types of TDR loan modifications by class of loans as of December 31, 2011 and December 31, 2010:

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

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Loans and Allowance for Loan Losses (continued)

At December 31, 2011, the balance in TDR loans decreased $7,459, or 44.4%, from year-end 2010. This was largely impacted by partial charge-offs and subsequent payoffs recorded on one impaired commercial and industrial loan relationship totaling $6,668 during the first and fourth quarters of 2011. At December 31, 2011 and December 31, 2010, 97% and 100% of the Company’s TDR’s were performing according to their modified terms. The Company allocated $655 and $3,791 in reserves to customers whose loan terms have been modified in TDR’s as of December 31, 2011 and December 31, 2010, respectively. At December 31, 2011, the Company had $81 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDR’s as compared to none at December 31, 2010.

At The following table presents the post-modification balances of TDR loan modifications by class of loans that occurred during year ended December 31, 2011:

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

All of the Company’s TDR’s that occurred during the year ended December 31, 2011 were performing in accordance with their modified terms and did not experience any payment defaults within twelve months following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. TDR loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The TDR’s described above increased the allowance for losses by $544 and resulted in charge-offs of $414 during the year ended December 31, 2011. As of December 31, 2011, the Company had allocated $130 of reserves to customers whose loan terms have been modified during the year ended December 31, 2011.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. These risk categories are represented by a loan grading scale from 1 through 10. The Company analyzes loans individually with a higher credit risk rating and groups these loans into categories called “criticized” and "classified" assets. The Company considers its criticized assets to be loans that are graded 8 and its classified assets to be loans that are graded 9 through 10. The Company's risk categories are reviewed at least annually on loans that have aggregate borrowing amounts that meet or exceed $500.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Loans and Allowance for Loan Losses (continued)

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

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

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

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

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

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

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note C - Loans and Allowance for Loan Losses (continued)

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

The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau), but the scores are not updated. The Company focuses mostly on the performance and repayment ability of the borrower as an indicator of credit risk and does not consider a borrower's credit score to be a significant influence in the determination of a loan's credit risk grading.

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment of residential and consumer loans by class of loans based on payment activity as of December 31, 2011 and December 31, 2010:

December 31, 2011	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	45,677	$	20,502	$	40,947	$	223,600	$	330,726
Nonperforming		25		5		7		2,889		2,926
Total	$	45,702	$	20,507	$	40,954	$	226,489	$	333,652

December 31, 2010	Consumer
	Automobile		Home Equity		Other		Residential Real Estate		Total

Performing	$	58,057	$	20,380	$	43,617	$	233,191	$	355,245
Nonperforming		214		147		101		3,687		4,149
Total	$	58,271	$	20,527	$	43,718	$	236,878	$	359,394

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