POTOMAC BANCSHARES INC - Quarter Report: 2012 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________

FORM 10-Q

(Mark one)

XXX	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended March 31, 2012

	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from	_______ to _______

Commission File Number 0-24958

POTOMAC BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)

West Virginia		55-0732247
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

111 East Washington Street
PO Box 906, Charles Town WV		25414-0906
(Address of Principal Executive Offices)		(Zip Code)

Registrant's telephone number, including area code	304-725-8431

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes		XX		No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes		XX		No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes				No		XX

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

3,390,178 as of May 14, 2012

POTOMAC BANCSHARES, INC. AND SUBSIDIARY
FORM 10-Q
March 31, 2012

INDEX

PART I.	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements.

	Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011 (Audited)	3

	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2012 and 2011	4

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended
	March 31, 2012 and 2011	5

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended
	March 31, 2012 and 2011	6

	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2012 and 2011	7

	Notes to Consolidated Financial Statements (Unaudited)	8 - 26

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	26 - 31

Item 4.	Controls and Procedures.	32

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings.	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	32

Item 4.	Mine Safety Disclosures.	32

Item 5.	Other Information.	32

Item 6.	Exhibits.	33

Signatures		34

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 evidences Congress’ determination that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by corporate management. This Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve risk and uncertainty. “Forward-looking statements” are easily identified by the use of words such as “could,” “anticipate,” “estimate,” “believe,” “confident,” and similar words that refer to a future outlook. To comply with the terms of the safe harbor, the company notes that a variety of factors could cause the company’s actual results and experiences to differ materially from the anticipated results or other expectations expressed in the company’s forward-looking statements.

The risks and uncertainties that may affect the operations, performance, development and results of the company’s business include, but are not limited to, the growth of the economy, unemployment, pricing in the real estate market, interest rate movements, the impact of competitive products, services and pricing, customer business requirements, the current economic environment posing significant challenges and affecting our financial condition and results of operations, the possibility of future FDIC assessments, Congressional legislation and similar matters (including changes as a result of rules and regulations adopted under the Dodd-Frank Wall Street Reform and Consumer Protection Act). The downgrade of U.S. government securities by one of the credit rating agencies could have a material adverse effect on the company’s operations, earnings and financial condition. We caution readers of this report not to place undue reliance on forward-looking statements which are subject to influence by unanticipated future events. Actual results, accordingly, may differ materially from management expectations.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

POTOMAC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)

	March 31,			December 31,
	2012			2011
Assets:
Cash and due from banks	$	1 571		$	1 485
Interest-bearing deposits in other financial institutions		26 770			11 445
Federal funds sold		740			794
Securities available for sale, at fair value		39 201			42 331
Loans held for sale		672			198
Loans, net of allowance for loan losses of $4,401 and
$4,484, respectively		200 845			202 761
Premises and equipment, net		7 834			7 923
Other real estate owned, net of valuation allowance of
$2,023 and $2,197, respectively		6 782			6 393
Accrued interest receivable		819			832
Bank owned life insurance		6 990			6 932
Federal Home Loan Bank of Pittsburgh stock		789			808
Other assets		5 282			5 491

Total Assets	$	298 295		$	287 393

Liabilities and Stockholders’ Equity:
Liabilities:
Deposits
Noninterest-bearing	$	43 313		$	37 050
Interest-bearing		221 715			216 067
Total Deposits		265 028			253 117
Securities sold under agreements to repurchase		4 333			3 415
Federal Home Loan Bank advances		1 221			1 523
Accrued interest payable		168			204
Other liabilities		1 680			3 669
Total Liabilities	$	272 430		$	261 928

Stockholders’ Equity:
Common stock, $1 per share par value; 5,000,000 shares
authorized; 3,671,691 shares issued and outstanding	$	3 672		$	3 672
Surplus		3 944			3 943
Undivided profits		22 968			22 648
Accumulated other comprehensive (loss), net		(1 853	)		(1 932	)
	$	28 731		$	28 331

Less cost of shares acquired for the treasury, 281,513 shares		2 866			2 866
Total Stockholders’ Equity	$	25 865		$	25 465
Total Liabilities and Stockholders’ Equity	$	298 295		$	287 393

See Notes to Consolidated Financial Statements.

POTOMAC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
(Unaudited)

	For the Three Months
	Ended March 31
	2012		2011
Interest and Dividend Income:
Interest and fees on loans	$	2 753	$	2 993
Interest on securities available for sale - taxable		117		168
Interest on securities available for sale - nontaxable		60		54
Interest on federal funds sold		- -		1
Other interest and dividends		12		8
Total Interest and Dividend Income		2 942		3 224

Interest Expense:
Interest on deposits		450		895
Interest on securities sold under agreements to repurchase		3		19
Federal Home Loan Bank advances		6		11
Total Interest Expense		459		925

Net Interest Income		2 483		2 299

Provision for Loan Losses		309		423

Net Interest Income after Provision for Loan Losses		2 174		1 876

Noninterest Income:
Trust and financial services		246		221
Service charges on deposit accounts		418		429
Visa/MC fees		198		174
Cash surrender value of life insurance		58		57
Other operating income		118		94
Total Noninterest Income		1 038		975

Noninterest Expenses:
Salaries and employee benefits		1 220		1 236
Net occupancy expense of premises		156		171
Furniture and equipment expenses		242		200
Loss on sale of other real estate		54		27
Accounting, audit and compliance		41		40
Computer services and online banking		105		69
FDIC assessment		98		153
Other professional fees		45		31
Printing, stationary and supplies		42		41
Communications		53		47
Foreclosed property expense		134		117
Write down of other real estate		142		- -
ATM and check card expenses		93		71
Other operating expenses		338		349
Total Noninterest Expenses		2 763		2 552
Income before Income Tax Expense		449		299
Income Tax Expense		129		42

Net Income	$	320	$	257

Earnings Per Share, basic and diluted	$	.09	$	.08

See Notes to Consolidated Financial Statements.

POTOMAC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)

	For the three months
	Ended March 31
	2012			2011
Net Income	$	320		$	257
Other comprehensive income, net of tax
Unrealized holding (losses) gains on securities,
net of tax of $22 and $61, respectively		(38	)		119
Deferred tax adjustment		117			- -
Other comprehensive income, net of tax		79			119
Comprehensive income	$	399		$	376

See Notes to Consolidated Financial Statements.

POTOMAC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
($ in thousands, except share and per share data)
(Unaudited)

											Accumulated
											Other
	Common				Undivided			Treasury			Comprehensive
	Stock		Surplus		Profits			Stock			(Loss)			Total
Balances, December 31, 2010	$	3 672	$	3 932	$	23 725		$	(2 866	)	$	(1 687	)	$	26 776

Net income		- -		- -		257			- -			- -			257
Other comprehensive income		- -		- -		- -			- -			119			119
Stock-based compensation expense		- -		4		- -			- -			- -			4
Cash dividends ($.01 per share)		- -		- -		(34	)		- -			- -			(34	)

Balances, March 31, 2011	$	3 672	$	3 936	$	23 948		$	(2 866	)	$	(1 568	)	$	27 122

Balances, December 31, 2011	$	3 672	$	3 943	$	22 648		$	(2 866	)	$	(1 932	)	$	25 465

Net income		- -		- -		320			- -			- -			320
Other comprehensive income		- -		- -		- -			- -			79			79
Stock-based compensation expense		- -		1		- -			- -			- -			1

Balances, March 31, 2012	$	3 672	$	3 944	$	22 968		$	(2 866	)	$	(1 853	)	$	25 865

See Notes to Consolidated Financial Statements.

POTOMAC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)

	For the Three Months Ended
	March			March
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	320		$	257
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for loan losses		309			423
Depreciation		110			125
Discount accretion and premium amortization on securities, net		56			75
Write down of other real estate		142			- -
Loss on sale of other real estate		54			27
Stock compensation expense		1			4
Proceeds from sale of loans		626			314
Origination of loans for sale		(1 100	)		(238	)
Change in cash surrender value of
bank owned life insurance		(58	)		(57	)
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		13			(52	)
Decrease in other assets		367			274
Decrease in accrued interest payable		(36	)		(1	)
Decrease in other liabilities		(1 989	)		(100	)
Net cash (used in) provided by operating activities	$	(1 185	)	$	1 051

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available for sale	$	- -		$	2 000
Proceeds from call of securities available for sale		8 000			3 000
Purchase of securities available for sale		(4 986	)		(15 000	)
Net (increase) decrease in loans		(204	)		5 230
Purchases of premises and equipment		(21	)		(12	)
Proceeds from sale of other real estate		1 226			470
Net cash provided by (used in) investing activities	$	4 015		$	(4 312	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits	$	6 263		$	246
Net increase in interest-bearing deposits		5 648			14 808
Net proceeds (repayment) of securities sold under agreements to repurchase		918			(367	)
Net repayment of Federal Home Loan Bank advances		(302	)		(296	)
Cash dividends		- -			(34	)
Net cash provided by financing activities	$	12 527		$	14 357

Increase in cash and cash equivalents	$	15 357		$	11 096


CASH AND CASH EQUIVALENTS
Beginning		13 724			12 905

Ending	$	29 081		$	24 001

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	495		$	926

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Unrealized loss on securities available for sale	$	(60	)	$	(180	)
Loans transferred to other real estate owned	$	1 812		$	914
Loans made on sale of other real estate owned	$	419		$	20

See Notes to Consolidated Financial Statements.

POTOMAC BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.	In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2012 and December 31, 2011, and the results of operations and comprehensive income for the three months ended March 31, 2012 and 2011, and cash flows and statements of changes in stockholders’ equity for the three months ended March 31, 2012 and 2011. The statements should be read in conjunction with Notes to Consolidated Financial Statements included in the Potomac Bancshares, Inc. annual report for the year ended December 31, 2011. The results of operations for the three month period ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.

	The consolidated financial statements of Potomac Bancshares, Inc. (the “company”) and its wholly-owned subsidiary, Bank of Charles Town (the “bank”), include the accounts of both companies. All material inter-company balances and transactions have been eliminated in consolidation.

	Certain reclassifications have been made to prior period amounts to conform to the current year presentation.

	In preparing these financial statements, the company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

2.	Stock-Based Compensation

	The 2003 Stock Incentive Plan was approved by stockholders on May 13, 2003, which authorized up to 183,600 shares of common stock to be used in the granting of incentive options to employees and directors. On April 24, 2007, the stockholders approved an additional 250,000 shares of common stock to be used in the granting of incentive options to employees and directors. This is the first and only stock incentive plan adopted by the company. Under the plan, the option price cannot be less than the fair market value of the stock on the date granted. An option’s maximum term is ten years from the date of grant. Employee options granted under the plan are subject to a five year vesting schedule. Director options immediately vest.

	Incremental stock-based compensation expense recognized for the three month periods ending March 31, 2012 and 2011 was $1 thousand and $4 thousand, respectively.

	Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award. Fair value is estimated using the Black-Scholes option-pricing model. There were no options granted during the first quarter of 2012 and 2011.

	Stock option plan activity for the three months ended March 31, 2012 is summarized below:

					Weighted
					Average
			Weighted		Remaining
			Average		Contractual	Aggregate
			Exercise		Life	Intrinsic
	Shares		Price		(in years)	Value
Options outstanding, January 1, 2012	119 908		$	14.76
Granted	- -			- -
Exercised	- -			- -
Canceled or expired	(8 180	)		14.54
Options outstanding, March 31, 2012	111 728			14.77	3	$	- -
Options exercisable, March 31, 2012	111 728			14.77	3	$	- -

	The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2012. The aggregate intrinsic values change based on changes in the market value of the company’s stock.

	As of March 31, 2012 there was $0 of total unrecognized compensation expense related to nonvested stock options.

3.	Securities

	The amortized cost and fair value of securities available for sale as of March 31, 2012 and December 31, 2011 (in thousands) are as follows:

	March 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
Obligations of U.S. Government
sponsored agencies	$	31 409	$	278	$	(29	)	$	31 658
State and municipal obligations		6 446		245		- -			6 691
Equity securities		1 099		- -		(247	)		852
	$	38 954	$	523	$	(276	)	$	39 201

	December 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
Obligations of U.S. Government
sponsored agencies	$	34 475	$	357	$	(9	)	$	34 823
State and municipal obligations		6 450		265		- -			6 715
Equity securities		1 099		- -		(306	)		793
	$	42 024	$	622	$	(315	)	$	42 331

	The primary purpose of the investment portfolio is to generate income and meet liquidity needs of the company through readily saleable financial instruments. The portfolio is made up of fixed rate bonds, whose prices move inversely with rates. At the end of any accounting period, the investment portfolio has unrealized gains and losses. The company monitors the portfolio, which is subject to liquidity needs, market rate changes and credit risk changes, to see if adjustments are needed. The primary concern in a loss situation is the credit quality of the business behind the instrument. There are five debt securities in the consolidated portfolio that has a loss at March 31, 2012. The primary cause of the temporary impairments in the company’s investments in debt securities was fluctuations in interest rates. Because the company intends to hold these investments in debt securities to maturity and it is more likely than not that the company will not be required to sell these investments before a recovery of unrealized losses, the company does not consider these investments to be other-than-temporarily impaired at March 31, 2012 and no impairment has been recognized.

	There are three equity security investments in the company’s portfolio with losses at March 31, 2012. The company considers these investments to be temporarily impaired at March 31, 2012 and is recognizing no impairment. These are community bank stock related holdings that the company has the ability and intent to hold until recovery.

	U.S. Government sponsored agencies include the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation debt securities with a fair value of $19.3 million as of March 31, 2012 and $25.3 million as of December 31, 2011.

	The following table summarizes the fair value and gross unrealized losses for securities aggregated by investment category and length of time that individual securities have been in a continuous gross unrealized loss position as of March 31, 2012 and December 31, 2011 (in thousands).

	March 31, 2012
	Less than 12 months					More than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Obligations of U.S. Government
sponsored agencies	$	7 957	$	(29	)	$	- -	$	- -		$	7 957	$	(29	)
Equity securities		- -		- -			852		(247	)		852		(247	)
Total	$	7 957	$	(29	)	$	852	$	(247	)	$	8 809	$	(276	)

3.	Securities (Continued)

	December 31, 2011
	Less than 12 months					More than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Obligations of U.S. Government
sponsored agencies	$	5 023	$	(9	)	$	- -	$	- -		$	5 023	$	(9	)
Equity securities		- -		- -			793		(306	)		793		(306	)
Total	$	5 023	$	(9	)	$	793	$	(306	)	$	5 816	$	(315	)

	The company’s investment in Federal Home Loan Bank (FHLB) stock totaled $789 thousand at March 31, 2012. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The company does not consider this investment to be other-than-temporarily impaired at March 31, 2012 and no impairment has been recognized. FHLB stock is shown as a separate line item on the balance sheet and is not a part of the available for sale securities portfolio.

	At March 31, 2012 and December 31, 2011, securities with carrying values of approximately $12.7 million and $12.8 million, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, other borrowings, and for other purposes as required or permitted by law.

4.	Loans

	The loan portfolio, stated at face amount, is composed of the following:

	March 31,		December 31,
	2012		2011
		(in thousands)
Commercial – non real estate
Commercial and industrial	$	7 618	$	8 361
Commercial real estate
Owner occupied		60 758		61 086
Non-owner occupied		17 274		15 796
Construction
Residential		2 306		2 492
Commercial		13 843		16 687
Real Estate
Farmland		561		598
Residential
Revolving open end		4 628		5 015
1 to 4 family – first liens		81 969		80 311
1 to 4 family – junior liens		7 189		7 530
5 or more family		3 065		3 088
Consumer loans
Titled vehicles		2 488		2 650
Deposit accounts		584		617
All other consumer loans		2 884		2 898
All other loans		79		116
Total loans		205 246		207 245
Less: allowance for loan losses		4 401		4 484

	$	200 845	$	202 761

4.	Loans (Continued)

	The FHLB of Pittsburgh has a blanket lien on all the company’s loans except those loans specifically pledged to the Federal Reserve and removed from the FHLB lien. Currently, the FHLB lien is securing an advance to the company in the amount of $1.2 million and letters of credit issued on behalf of a customer of the company in the amount of $11 million.

5.	Allowance for Loan Losses

	The following is a summary of transactions (in thousands) in the allowance for loan losses:

	March 31,			December 31,			March 31,
	2012			2011			2011
Balance at beginning of period	$	4 484		$	5 012		$	5 012

Provision charged to operating expense		309			3 343			423
Recoveries added to the allowance		66			183			52
Loan losses charged to the allowance		(458	)		(4 054	)		(642	)

Balance at end of period	$	4 401		$	4 484		$	4 845

Allowance for Loan Losses – By Segment
March 31, 2012
(in thousands)

							Commercial												All
	Farmland			Commercial			Real Estate			Construction			Consumer			Residential			Other		Unallocated		Total
Beginning balance	$	17		$	156		$	882		$	506		$	84		$	2 839		$	- -	$	- -	$	4 484
Charge-offs		- -			- -			- -			(354	)		(54	)		(50	)		- -		- -		(458	)
Recoveries		- -			6			2			2			54			2			- -		- -		66
Provision		(1	)		(6	)		(44	)		325			(19	)		54			- -		- -		309

Ending balance	$	16		$	156		$	840		$	479		$	65		$	2 845		$	- -	$	- -	$	4 401

Individually evaluated
for impairment	$	- -		$	159		$	100		$	125		$	33		$	510		$	- -	$	- -	$	927
Collectively evaluated
for impairment		16			(3	)		740			354			32			2 335			- -		- -		3 474
	$	16		$	156		$	840		$	479		$	65		$	2 845		$	- -	$	- -	$	4 401

Financing receivables:
Ending balance	$	561		$	7 618		$	78 032		$	16 149		$	5 956		$	96 851		$	79	$	- -	$	205 246

Ending balance:
Individually evaluated
for impairment	$	- -		$	159		$	6 698		$	3 705		$	101		$	6 485		$	- -	$	- -	$	17 148
Collectively evaluated
for impairment		561			7 459			71 334			12 444			5 855			90 366		79			- -		188 098
Total	$	561		$	7 618		$	78 032		$	16 149		$	5 956		$	96 851		$	79	$	- -	$	205 246

5.	Allowance for Loan Losses (Continued)

Allowance for Loan Losses – By Segment
December 31, 2011
(in thousands)

							Commercial												All
	Farmland			Commercial			Real Estate			Construction			Consumer			Residential			Other			Unallocated			Total
Beginning balance	$	166		$	239		$	859		$	2 022		$	20		$	1 691		$	1		$	14		$	5 012
Charge-offs		- -			(20	)		(653	)		(1 673	)		(172	)		(1 536	)		- -			- -			(4 054	)
Recoveries		- -			30			6			5			131			11			- -			- -			183
Provision		(149	)		(93	)		670			152			105			2 673			(1	)		(14	)		3 343

Ending balance	$	17		$	156		$	882		$	506		$	84		$	2 839		$	- -		$	- -		$	4 484

Individually evaluated
for impairment	$	- -		$	161		$	122		$	102		$	39		$	349		$	- -		$	- -		$	773
Collectively evaluated
for impairment		17			(5	)		760			404			45			2 490			- -			- -			3 711
	$	17		$	156		$	882		$	506		$	84		$	2 839		$	- -		$	- -		$	4 484

Financing receivables:
Ending balance	$	598		$	8 361		$	76 882		$	19 179		$	6 165		$	95 944		$	116		$	- -		$	207 245

Ending balance:
Individually evaluated
for impairment	$	- -		$	161		$	6 995		$	5 250		$	109		$	5 662		$	- -		$	- -		$	18 177
Collectively evaluated
for impairment		598			8 200			69 887			13 929			6 056			90 282			116			- -			189 068
Total	$	598		$	8 361		$	76 882		$	19 179		$	6 165		$	95 944		$	116		$	- -		$	207 245

Credit Quality Information – By Class
March 31, 2012
(in thousands)

			Special		Sub-
Internal Risk Rating Grades	Pass		Mention		Standard		Doubtful		Loss
Commercial – non real estate
Commercial and industrial	$	5 566	$	1 893	$	159	$	- -	$	- -
Commercial real estate
Owner occupied		39 066		12 405		9 287		- -		- -
Non-owner occupied		16 085		608		581		- -		- -
Construction
Residential		2 077		- -		229		- -		- -
Commercial		8 668		1 861		3 220		94		- -
Real estate
Farmland		561		- -		- -		- -		- -
Consumer
Titled vehicles		N/A		N/A		N/A		N/A		N/A
Deposit accounts		N/A		N/A		N/A		N/A		N/A
All other		N/A		N/A		N/A		N/A		N/A
Residential
Revolving open end		N/A		1 269		285		N/A		N/A
1-4 family – first liens		N/A		1 630		3 214		58		- -
1-4 family – junior liens		N/A		- -		265		- -		- -
5 or more family		N/A		- -		- -		- -		- -

Totals	$	72 023	$	19 666	$	17 240	$	152	$	- -

	As a matter of practice, we do not risk rate consumer or residential mortgage loans. Any of these loans listed in the risk rating table above are associated with commercial loans that have been risk rated as per our policy. When a loan is designated as a loss, the loss portion is charged off, and if applicable the remaining balance classified as substandard.

5.	Allowance for Loan Losses (Continued)

Credit Quality Information – By Class
March 31, 2012
(in thousands)

Non Risk Rated Loans	Performing		Nonperforming
Consumer – non real estate
Titled vehicles	$	2 484	$	4
Deposit accounts		584		- -
All other		2 882		2
Residential
Revolving open end		3 059		15
1-4 family – first liens		75 859		1 208
1-4 Family – junior liens		6 924		- -
5 or more family		3 065		- -
All other		79		- -
Totals	$	94 936	$	1 229

Credit Quality Information – By Class
December 31, 2011
(in thousands)

			Special		Sub-
Internal Risk Rating Grades	Pass		Mention		Standard		Doubtful		Loss
Commercial – non real estate
Commercial and industrial	$	8 094	$	105	$	162	$	- -	$	- -
Commercial real estate
Owner occupied		39 405		12 768		8 817		96		- -
Non-owner occupied		14 824		333		583		56		- -
Construction
Residential		1 986		- -		506		- -		- -
Commercial		10 077		2 123		4 397		90		- -
Real estate
Farmland		598		- -		- -		- -		- -
Consumer
Titled vehicles		N/A		N/A		N/A		N/A		N/A
Deposit accounts		N/A		N/A		N/A		N/A		N/A
All other		N/A		25		N/A		N/A		N/A
Residential
Revolving open end		N/A		1 276		224		N/A		N/A
1-4 family – first liens		N/A		2 894		2 351		N/A		N/A
1-4 family – junior liens		N/A		172		94		N/A		N/A
5 or more family		N/A		N/A		N/A		N/A		N/A
Totals	$	74 984	$	19 696	$	17 134	$	242	$	- -

Credit Quality Information – By Class
December 31, 2011
(in thousands)

Non Risk Rated Loans	Performing		Nonperforming
Consumer – non real estate
Titled vehicles	$	2 645	$	5
Deposit accounts		617		- -
All other		2 870		3
Residential
Revolving open end		3 498		17
1-4 family – first liens		74 227		839
1-4 Family – junior liens		7 264		- -
5 or more family		3 088		- -
All other		116		- -
Totals	$	94 325	$	864

5.	Allowance for Loan Losses (Continued)

Impaired Loans – By Class
March 31, 2012
(in thousands)

With no related allowance:
							Average		Interest
	Unpaid		Recorded		Related		Recorded		Income
	Principal		Investment		Allowance		Investment		Recognized
Commercial – non real estate
Commercial and industrial	$	- -	$	- -	$	N/A	$	48	$	- -
Commercial real estate
Owner occupied		4 291		4 089		N/A		3 734		39
Non-owner occupied		584		582		N/A		233		9
Construction
Residential		110		110		N/A		584		1
Commercial		3 175		2 810		N/A		3 389		4
Real estate
Farmland		- -		- -		N/A		- -		- -
Residential
Revolving open end		285		285		N/A		217		5
1 to 4 family –first liens		516		438		N/A		1 096		3
1 to 4 family – junior liens		- -		- -		N/A		142		- -
5 or more family		- -		- -		N/A		- -		- -
Consumer
Titled vehicles		- -		- -		N/A		4		- -
Deposit accounts		- -		- -		N/A		- -		- -
All other consumer		- -		- -		N/A		- -		- -
All other		- -		- -		N/A		- -		- -
	$	8 961	$	8 314	$	N/A	$	9 447	$	61

With an allowance recorded:
							Average		Interest
	Unpaid		Recorded		Related		Recorded		Income
	Principal		Investment		Allowance		Investment		Recognized
Commercial – non real estate
Commercial and industrial	$	162	$	159	$	159	$	164	$	1
Commercial real estate
Owner occupied		2 042		2 027		100		4 177		30
Non-owner occupied		- -		- -		- -		162		- -
Construction
Residential		121		119		29		450		- -
Commercial		669		666		96		1 596		11
Real estate
Farmland		- -		- -		- -		- -		- -
Residential
Revolving open end		1 272		1 269		33		585		16
1 to 4 family – first liens		3 612		3 584		435		2 780		33
1 to 4 family – junior liens		915		909		42		480		18
5 or more family		- -		- -		- -		- -		- -
Consumer
Titled vehicles		- -		- -		- -		- -		- -
Deposit accounts		- -		- -		- -		- -		- -
All other consumer		102		101		33		57		2
All other		- -		- -		- -		- -		- -
	$	8 895	$	8 834	$	927	$	10 451	$	111

Totals:
Commercial – non real estate	$	162	$	159	$	159	$	212	$	1
Commercial real estate		6 917		6 698		100		8 306		78
Construction		4 075		3 705		125		6 019		16
Real estate –farmland		- -		- -		- -		- -		- -
Residential		6 600		6 485		510		5 300		75
Consumer		102		101		33		61		2
All other		- -		- -		- -		- -		- -
	$	17 856	$	17 148	$	927	$	19 898	$	172

5.	Allowance for Loan Losses (Continued)

Impaired Loans – By Class
December 31, 2011
(in thousands)

With no related allowance:
							Average		Interest
	Unpaid		Recorded		Related		Recorded		Income
	Principal		Investment		Allowance		Investment		Recognized
Commercial – non real estate
Commercial and industrial	$	- -	$	- -	$	N/A	$	67	$	- -
Commercial real estate
Owner occupied		4 622		4 440		N/A		3 752		217
Non-owner occupied		587		583		N/A		132		11
Construction
Residential		512		506		N/A		799		14
Commercial		4 106		3 976		N/A		3 353		168
Real estate
Farmland		- -		- -		N/A		- -		- -
Residential
Revolving open end		225		224		N/A		160		15
1 to 4 family –first liens		948		870		N/A		1 257		26
1 to 4 family – junior liens		- -		- -		N/A		177		- -
5 or more family		- -		- -		N/A		- -		- -
Consumer
Titled vehicles		- -		- -		N/A		- -		- -
Deposit accounts		- -		- -		N/A		- -		- -
All other consumer		- -		- -		N/A		4		- -
All other		- -		- -		N/A		- -		- -
	$	11 000	$	10 599	$	N/A	$	9 701	$	451

With an allowance recorded:
							Average		Interest
	Unpaid		Recorded		Related		Recorded		Income
	Principal		Investment		Allowance		Investment		Recognized
Commercial – non real estate
Commercial and industrial	$	163	$	161	$	161	$	187	$	8
Commercial real estate
Owner occupied		1 989		1 972		122		4 800		93
Non-owner occupied		- -		- -		- -		163		- -
Construction
Residential		- -		- -		- -		979		- -
Commercial		771		768		102		2 443		30
Real estate
Farmland		- -		- -		- -		108		- -
Residential
Revolving open end		1 277		1 274		31		331		65
1 to 4 family – first liens		2 550		2 540		299		2 342		102
1 to 4 family – junior liens		758		754		19		311		28
5 or more family		- -		- -		- -		- -		- -
Consumer
Titled vehicles		- -		- -		- -		- -		- -
Deposit accounts		- -		- -		- -		- -		- -
All other consumer		109		109		39		37		3
All other		- -		- -		- -		- -		- -
	$	7 617	$	7 578	$	773	$	11 701	$	329

Totals:
Commercial – non real estate	$	163	$	161	$	161	$	254	$	8
Commercial real estate		7 198		6 995		122		8 847		321
Construction		5 389		5 250		102		7 574		212
Real estate –farmland		- -		- -		- -		108		- -
Residential		5 758		5 662		349		4 578		236
Consumer		109		109		39		41		3
All other		- -		- -		- -		- -		- -
	$	18 617	$	18 177	$	773	$	21 402	$	780

5.	Allowance for Loan Losses (Continued)

Modifications
(in thousands except number of contracts)

For the Three Months Ended
March 31, 2012

		Pre-		Post-
		Modification		Modification
	Number	Outstanding		Outstanding
	Of	Recorded		Recorded
	Contracts	Investment		Investment
Troubled Debt Restructurings

Commercial – non real estate
Commercial and industrial	- -	$	- -	$	- -
Commercial real estate
Owner occupied	- -		- -		- -
Non owner occupied	- -		- -		- -
Construction
Residential	- -		- -		- -
Commercial	- -		- -		- -
Real Estate
Farmland	- -		- -		- -
Residential
Revolving open end 1 to 4 family	- -		- -		- -
1 to 4 family – first liens	1		227		226
1 to 4 family – junior liens	- -		- -		- -
5 or more family	- -		- -		- -
Consumer
Titled vehicles	- -		- -		- -
Deposit accounts	- -		- -		- -
All other consumer	- -		- -		- -
All other	- -		- -		- -

Totals	1	$	227	$	226

For the Three Months
Ended March 31,2012

	Number	Outstanding
	Of	Recorded
	Contracts	Investment
Troubled Debt Restructurings
That Subsequently Defaulted

Commercial – non real estate
Commercial and industrial	- -	$	- -
Commercial real estate
Owner occupied	- -		- -
Non owner occupied	- -		- -
Construction
Residential	- -		- -
Commercial	- -		- -
Real Estate
Farmland	- -		- -
Residential
Revolving open end 1 to 4 family	- -		- -
1 to 4 family – first liens	5		715
1 to 4 family – junior liens	3		110
5 or more family	- -		- -
Consumer
Titled vehicles	- -		- -
Deposit accounts	- -		- -
All other consumer	- -		- -
All other	- -		- -
Totals	8	$	825

	Total Troubled Debt Restructurings as of March 31, 2012 were $12.0 million.

5.	Allowance for Loan Losses (Continued)

Nonaccrual and Past Due Loans – By Class
March 31, 2012
(in thousands)

													90 Days
	30-59		60-89		90 Days								Past Due
	Days		Days		or more		Total				Total		Still		Non-
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing		Accrual
Commercial – non real estate
Commercial and industrial	$	79	$	- -	$	- -	$	79	$	7 539	$	7 618	$	- -	$	91
Commercial real estate
Owner occupied		224		- -		1 244		1 468		59 290		60 758		- -		1 333
Non owner occupied		- -		330		179		509		16 765		17 274		- -		179
Construction
Residential		- -		- -		- -		- -		2 306		2 306		- -		119
Commercial		480		231		2 216		2 927		10 916		13 843		- -		2 566
Real Estate
Farmland		- -		- -		- -		- -		561		561		- -		- -
Residential
Revolving open end		- -		- -		- -		- -		4 628		4 628		- -		16
1 to 4 family – first liens		301		217		522		1 040		80 929		81 969		- -		1 998
1 to 4 family – junior liens		167		172		- -		339		6 850		7 189		- -		- -
5 or more family		- -		- -		- -		- -		3 065		3 065		- -		- -
Consumer
Titled vehicles		5		- -		- -		5		2 483		2 488		- -		4
Deposit accounts		- -		- -		- -		- -		584		584		- -		- -
All other consumer		3		- -		2		5		2 879		2 884		- -		2
All other		- -		- -		- -		- -		79		79		- -		- -
Totals	$	1 259	$	950	$	4 163	$	6 372	$	198 874	$	205 246	$	- -	$	6 308

Percentage to Total Loans		.61%		0.46%		2.03%		3.10%		96.90%				0.00%		3.07%

Included in the 30 or more days past due loans are non-accrual loans in the amount of $4.9 million. The remaining $1.4 million are in current status.

Nonaccrual and Past Due Loans – By Class
December 31, 2011
(in thousands)

													90 Days
	30-59		60-89		90 Days								Past Due
	Days		Days		or more		Total				Total		Still		Non-
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing		Accrual
Commercial – non real estate
Commercial and industrial	$	- -	$	6	$	- -	$	6	$	8 355	$	8 361	$	- -	$	93
Commercial real estate
Owner occupied		2 376		996		344		3 716		57 370		61 086		- -		1 339
Non owner occupied		- -		- -		179		179		15 617		15 796		- -		179
Construction
Residential		- -		- -		385		385		2 107		2 492		- -		506
Commercial		19		44		1 602		1 665		15 022		16 687		143		3 693
Real Estate
Farmland		- -		- -		- -		- -		598		598		- -		- -
Residential
Revolving open end		- -		- -		- -		- -		5 015		5 015		- -		17
1 to 4 family – first liens		1 386		139		360		1 885		78 426		80 311		61		1 408
1 to 4 family – junior liens		176		- -		- -		176		7 354		7 530		- -		- -
5 or more family		- -		- -		- -		- -		3 088		3 088		- -		- -
Consumer
Titled vehicles		1		15		- -		16		2 634		2 650		- -		5
Deposit accounts		- -		- -		- -		- -		617		617		- -		- -
All other consumer		8		4		3		15		2 883		2 898		- -		3
All other		- -		- -		- -		- -		116		116		- -		- -
Totals	$	3 966	$	1 204	$	2 873	$	8 043	$	199 202	$	207 245	$	204	$	7 243

Percentage to Total Loans		1.91%		0.58%		1.39%		3.88%		96.12%				.10%		3.49%

Allowance for Loan Losses (Continued)

Included in the 30 or more days past due loans are non-accrual loans in the amount of $3.7 million. The remaining non-accrual loans of $3.5 million are in current status.

The past due policy of the bank is to report all classes of loans past due in the following categories:

30 to 59 days past due (principal or interest)
60 to 89 days past due (principal or interest)
90 days or more past due (principal or interest)
Nonaccrual status.

6.	Employee Benefit Plans

	Components of net periodic benefit cost for the pension and postretirement benefit plans are shown below:

	Pension Benefits						Other Postretirement Benefits
	Three Months Ended						Three Months Ended
	March 31,			March 31,			March 31,		March 31,
	2012			2011			2012		2011
	(in thousands)						(in thousands)
Components of Net Periodic Benefit Cost
Service cost	$	- -		$	- -		$	1	$	3
Interest cost		102			100			3		9
Expected return on plan assets		(119	)		(119	)		- -		- -
Recognized net actuarial loss		- -			38			- -		- -
Amortization of net obligation at transition		- -			- -			- -		5
Amortization of prior service cost		- -			- -			- -		- -
Amortization of net loss		53			- -			- -		- -

Net periodic benefit cost	$	36		$	19		$	4	$	17

Employer Contribution

The company anticipates the 2012 contribution for the pension plan will approximate $2 million and has made this payment as of March 31, 2012. The company has made payments of $4 thousand for the other postretirement benefit plans for the first three months of 2012 and anticipates remaining payments for 2012 to total $13 thousand.

The company’s defined benefit pension plan was frozen as of October 31, 2009. Benefits of all existing participants stopped accruing and no new participants could be admitted to the plan after that date.

The company sponsors an unfunded postretirement life insurance plan covering certain retirees with 25 years of service who are over the age of 60 and an unfunded health care plan for certain retirees that met certain eligibility requirements. These plans are not available to future retirees.

7.	Weighted Average Number of Shares Outstanding and Earnings Per Share

	The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential diluted common stock had no effect on March 31, 2012 and March 31, 2011 earnings per share.

	Three Months Ended			Three Months Ended
	March 31, 2012			March 31, 2011
	Average Shares	Per Share Amount		Average Shares	Per Share Amount
Basic earnings per share	3 390 178	$	.09	3 390 178	$	.08
Effect of dilutive securities:
Stock options	- -			- -

Diluted earnings per share	3 390 178	$	.09	3 390 178	$	.08

	For the quarter ended March 31, 2012, stock options representing 111,728 average shares, and for the quarter ended March 31, 2011, stock options representing 120,974 average shares were not included in the calculation of earnings per share as their effect would have been anti-dilutive.

8.	Recent Accounting Pronouncements

	In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the company’s consolidated financial statements.

	In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The company has included the required disclosures in its consolidated financial statements.

	In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The company has included the required disclosures in its consolidated financial statements.

8.	Recent Accounting Pronouncements (continued)

	In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The company does not expect the adoption of ASU 2011- 11 to have a material impact on its consolidated financial statements.

	In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The company has included the required disclosures in its consolidated financial statements.

9.	Fair Value Measurements

	Determination of Fair Value

	The company uses fair value measurements to record fair value adjustments for certain assets and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

	The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

	Fair Value Hierarchy

	In accordance with this guidance, the company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

	Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

	Level 2—Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 for substantially the full term of the asset or liability.

9.	Fair Value Measurements (Continued)

	Level 3—Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

	A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

	The following methods and assumptions were used by the company in estimating fair value disclosures for financial instruments:

	Cash and Short-Term Investments

	The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

	Securities

	Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). Certain of the equity securities with inactive markets utilize Level 3 which may include judgment or estimation.

	Loans

	For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered.

	Loans held for sale

	The fair value of loans held for sale is based on outstanding commitments from investors.

	FHLB Stock

	The carrying amounts of FHLB stock approximate fair value based on redemption provisions of the FHLB.

	Bank Owned Life Insurance (BOLI)

	The carrying amounts of BOLI approximate fair value.

	Deposit Liabilities

	The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity fixed rate certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

	Short-Term Borrowings

	The carrying amounts of borrowings under repurchase agreements and federal funds purchased approximate fair value.

	FHLB Advances

	The fair values of the company’s FHLB advances are estimated using discounted cash flow analysis based on the company’s incremental borrowing rates for similar types of borrowing arrangements.

9.	Fair Value Measurements (Continued)

	Accrued Interest

	The carrying amounts of accrued interest approximate fair value.

	Off-Balance Sheet Financial Instruments

	At March 31, 2012 and December 31, 2011, the fair value of loan commitments and standby-letters of credit was immaterial. Therefore, they have not been included in the following table.

	The carrying amounts and estimated fair values of the company’s financial instruments are as follows (in thousands):

			Fair Value Measurements at March 31, 2012 using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Carrying Value		Level 1		Level 2		Level 3		Balance
Assets
Cash and cash equivalents	$	29 081	$	29 081	$	-	$	-	$	29 081
Securities available for sale		39 201		-		38 537		664		39 201
Loans, net		200 845		-		197 710		5 593		203 303
Loans held for sale		672		-		672		-		672
FHLB Stock		789		-		789		-		789
BOLI		6 990		-		6 990		-		6 990
Accrued interest receivable		819		-		819		-		819
Liabilities
Deposits	$	265 028	$	-	$	266 209	$	-	$	266 209
Securities sold under
agreement to repurchase		4 333		-		4 333		-		4,333
FHLB advances		1 221		-		1 228		-		1 228
Accrued interest payable		168		-		168		-		168

9.	Fair Value Measurements (Continued)

			Fair Value Measurements at December 31, 2011 using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Carrying Value		Level 1		Level 2		Level 3		Balance
Assets
Cash and cash equivalents	$	13 724	$	13 724	$	-	$	-	$	13 724
Securities available for sale		42 331		-		41 687		644		42 331
Loans, net		202 761		-		196 240		6 497		202 737
Loans held for sale		198		-		198		-		198
FHLB Stock		808		-		808		-		808
BOLI		6 932		-		6 932		-		6 932
Accrued interest receivable		832		-		832		-		832
Liabilities
Deposits	$	253 117	$	-	$	253 885	$	-	$	253 885
Securities sold under
agreement to repurchase		3 415		-		3 415		-		3 415
FHLB advances		1 523		-		1 534		-		1 534
Accrued interest payable		204		-		204		-		204

	Assets and Liabilities Measured at Fair Value on a Recurring Basis

	The following table presents the balances (in thousands) of financial assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011:

			Fair Value Measurements at March 31, 2012 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	March 31		Assets		Inputs		Inputs
Description	2012		(Level 1)		(Level 2)		(Level 3)
Available for sale debt securities
U.S. Government sponsored
agency securities	$	31 658	$	- -	$	31 658	$	- -
State and municipal securities		6 691		- -		6 691		- -

Total available for sale debt securities		38 349		- -		38 349		- -

Available for sale equity securities
Financial services industry		852		- -		188		664

Total available for sale securities	$	39 201	$	- -	$	38 537	$	664

9.	Fair Value Measurements (Continued)

			Fair Value Measurements at December 31, 2011 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31		Assets		Inputs		Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
Available for sale debt securities
U.S. Government sponsored
agency securities	$	34 823	$	- -	$	34 823	$	- -
State and municipal securities		6 715		- -		6 715		- -

Total available for sale debt securities		41 538		- -		41 538		- -

Available for sale equity securities
Financial services industry		793		- -		149		644

Total available for sale securities	$	42 331	$	- -	$	41 687	$	644

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) (in thousands)

	Quantitative information about Level 3 Fair Value Measurement for March 31, 2012
	Fair				Range
	Value		Valuation Technique(s)	Unobservable Input	(Weighted Average)
Asset

Available for sale equity securities
Financial services industry	$	664	Discounted Market Price	Lack of marketability	10% - 30% (20%)
			to approximate book value

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	($ in thousands)

	Available for Sale Equity Securities
Beginning Balance January 1, 2012	$	644

Transfers into Level 3		- -
Transfers out of Level 3		- -
Total gains (unrealized)
included in other
comprehensive income		20

Ending Balance March 31, 2012	$	664

9.	Fair Value Measurements (Continued)

	Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

	Certain assets are measured at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

	The following describes the valuation techniques used by the company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

	Loans held for sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the periods ended March 31, 2012 and December 31, 2011. Gains and losses on the sale of loans are recorded within other operating income on the consolidated statements of operations.

	Impaired Loans: Loans are generally designated as impaired when, in the judgment of management based on current information and events, it is probable that some amounts due according to the contractual terms of the loan agreement may not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

	Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. The value of real estate collateral is determined by internal evaluation or an appraisal outside of the company or a comparative market analysis (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, or property is in the process of being appraised then the fair value is considered Level 3.

	The following table summarizes the company’s financial assets that were measured at fair value (in thousands) on a nonrecurring basis as of March 31, 2012 and December 31, 2011.

			Carrying Value at March 31, 2012
			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Input		Input
Description	March 31, 2012		(Level 1)		(Level 2)		(Level 3)
Assets
Loans Held For Sale	$	672	$	- -	$	672	$	--
Impaired loans with a
valuation allowance		7 907		- -		2 314		5 593

OREO		6 782		- -		6 381		401

			Carrying Value at December 31, 2011
			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Input		Input
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Assets
Loans Held For Sale	$	198	$	- -	$	198	$	- -
Impaired loans with a
valuation allowance		6 805		- -		308		6 497

OREO		6 393		- -		4 365		2 028

	Quantitative information about Level 3 Fair Value Measurement for March 31, 2012
	Fair				Range
	Value (000s)		Valuation Technique(s)	Unobservable Input	(Weighted Average)
Asset

Impaired loans with a
Valuation allowance	$	5 593	Appraisal and income or	Market discount	0% - 100% (10%)
			market valuation

OREO		401	Appraisal, internal evaluation or	Market discount	0% - 5% (5%)
			market analysis

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	($ in thousands)

	Impaired Loans			Other Real Estate Owned
Beginning Balance January 1, 2012	$	6 497			2 028

Transfers into Level 3		645			- -
Transfers out of Level 3		(1 521	)		(1 223	)
Realized and unrealized gains and (losses)
included in earnings		25			(44	)
Settlements		(53	)		(360	)

Ending Balance March 31, 2012	$	5 593		$	401

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

	CRITICAL ACCOUNTING POLICIES

	General

	The company’s financial statements are prepared in accordance with U. S. generally accepted accounting principles. The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, U. S. generally accepted accounting principles may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (1) losses be accrued when they are probable of occurring and are capable of estimation and (2) losses be accrued based on the differences between the margin value of collateral and the loan balance.

The allowance consists of specific and general components. The specific component relates to loans (other than consumer and residential mortgage loans) that are classified as substandard. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for environmental factors such as economic, concentration and growth trends. The bank uses a twelve month rolling average period for use in calculating the historical loss factor.

FINANCIAL OVERVIEW

The first quarter of 2012 has provided positive results with net income of $320 thousand, up almost 25% over the same period in 2011. The bank has produced two consecutive quarters of income despite the challenging economic environment. There has been significant positive movement in the unemployment rate in our local market over the past twelve months. We are seeing loan growth in the residential real estate portfolio.

In addition to those items outside management control, the actions taken in the past year are creating improvement in economic performance. Interest expense as a result of decreases in deposit rates, are a significant reason for our ability to produce a profit. Management has aggressively marketed our inventory of other real estate. However, the inventory is still higher than what we would prefer. Management is hopeful that sales of other real estate will continue at a moderate pace.

Total assets have increased $10.9 million or 3.8% from the December 31, 2011 total of $287.4 million to $298.3 million at March 31, 2012. Net loans have decreased approximately $1.9 million from the December 31, 2011 total of $202.8 million to $200.9 million at March 31, 2012 due to the pay down of existing loans, loan charge-offs and the transfer of loans to OREO. Other real estate, net of valuation allowance, has increased $389 thousand. With the decrease in loans and increase in deposits excess funds have been invested in securities, and overnight funds at the Federal Reserve.

Total deposits have increased $11.9 million or 4.7% at March 31, 2012 compared to December 31, 2011. Interest-bearing deposits have increased 2.6% during the first quarter of 2012, with non-interest bearing deposits increasing 16.9%. Other liabilities have decreased approximately $2 million dollars. The decrease is primarily due to a $2 million contribution to the pension plan.

The Tier 1 capital to average assets ratio (leverage capital ratio) is 8.70% at March 31, 2012 compared to 8.56% at December 31, 2011. This capital ratio is within the regulatory guidelines for “well capitalized”.

The following table is an analysis of the company’s allowance for loan losses with amounts shown in thousands. Management monitors the loan portfolio on a continual basis with procedures that allow for problem loans and potentially problem loans to be highlighted and watched. Written reports are prepared on a monthly basis for all loans including commercial loans graded below a certain level for management review and are reported to the Board of Directors on a quarterly basis. In addition, a subcommittee of the board of directors meets monthly to review all classified assets. Based on experience, these loan policies and the bank’s grading and review system, management believes the loan loss allowance is adequate.

	March 31,		December 31,		March 31,
	2012		2011		2011
Balance at beginning of period	$	4 484	$	5 012	$	5 012
Charge-offs:
Commercial, financial and agricultural		- -		20		- -
Real estate – construction		354		1 673		57
Real estate – mortgage		50		2 189		540
Consumer		54		172		45
Total charge-offs		458		4 054		642
Recoveries:
Commercial, financial and agricultural		6		30		5
Real estate – construction		2		5		5
Real estate – mortgage		4		17		9
Consumer		54		131		33
Total recoveries		66		183		52
Net charge-offs		392		3 871		590
Provision charged to operations		309		3 343		423
Balance at end of period	$	4 401	$	4 484	$	4 845

Ratio of net charge-offs (annualized) during the period
to average loans outstanding during the period	0.76%		1.84%		1.09%

Loans are placed on nonaccrual status when the loan officer or collections officer who is supervising a particular loan determines that it is no longer prudent for a loan to continue to accrue interest, the loan is to be placed on nonaccrual status.

Generally it is the policy of this bank to stop accruing interest when principal or interest is greater than 90 days past due based upon the loan’s contractual terms, unless the loan is well secured and in the process of collection. Furthermore, should the bank become aware of events which have occurred or are expected to occur which causes doubt as to the full collectability of principal or interest in the future, even though the loan is currently less than 90 days past due, the loan is considered for nonaccrual status.

In order to justify the continuation of the accrual of interest on a loan which is greater than 90 days past due, the loan must be well secured and in the process of collection. The majority of the current non-accrual loans as shown in the chart below are in the process of collection. Following is a table showing the risk elements in the loan portfolio with amounts in thousands.

	March 31,		December 31,		March 31,
	2012		2011		2011
Nonperforming Assets
Nonaccrual loans (1)	$	6 308	$	7 243	$	2 674
Foreclosed properties		6 782		6 393		6 980
Total nonperforming assets	$	13 090	$	13 636	$	9 654


Performing troubled debt restructures (2)	$	8 655	$	9 078	$	- -

Loans past due 90 days accruing interest	$	0	$	204	$	276
Allowance for loan losses to period end loans		2.14%		2.16%		2.28%
Nonperforming assets to period end loans and
foreclosed properties, net		6.17%		6.38%		4.40%

Performing troubled debt restructures to period end loans		4.22%		4.38%		- -%

(1) Currently there are 7 TDR’s in non-performing assets with a balance of $3.4 million.
(2) Within this amount is 1 TDR with a balance totaling $35 thousand 30 or more days past due.

The details of the income statements for the three month period ended March 31, 2012 and 2011 are highlighted below.

Ø Year to date net income in 2012 is $320 thousand compared to net income of $257 thousand in 2011. The loan portfolio has decreased as the result of foreclosures and normal run off. Deposits have increased slightly. However, the increase in volume has been offset by significant decreases in rates paid on deposit accounts. Decline in property values have further affected the net income as other real estate write downs have been charged against income. In addition net losses on the sale of other real estate doubled in the first quarter of 2012 compared to net losses in the same period in 2011.

Ø Interest income has decreased to $2.9 million at March 31, 2012 from $3.2 million at March 31, 2011. The reduction is primarily due to a decrease of approximately $240 thousand in the loan portfolio. This coupled with historically low interest rates has created the slight reduction in interest income.

Ø Total interest expense has decreased 50.4% in 2012 compared to 2011. Interest on deposits has decreased 49.7% during the first quarter of 2012 when compared with the first quarter of 2011.

Ø Provision for loan loss has decreased 27% when compared to the March 31, 2011 quarter.

Ø Net interest margin at March 31, 2012 is 3.80%. This is an increase from the net interest margin of 3.56% at December 31, 2011 and 3.44% at March 31, 2011. During the first three months of 2012, the overall average rate on loans decreased to 5.36% at March 31, 2012 compared to 5.53% at December 31, 2011 and 5.64% for the quarter ending March 31, 2011. The overall average rate being paid on deposits decreased to .83% from 1.21% at December 31, 2011 and from 1.53% at March 31, 2011.

Noninterest income increased 6.5% for the three months ended March 31, 2012 compared to March 31, 2011 and decreased 18% for the three months ended March 31, 2012 compared to the three months ended December 31, 2011. Some significant income items are listed here.

Ø Trust income increased 11.3% when compared to the March 31, 2011 quarter and increased 13.36% when compared to the December 31, 2011 quarter. The increase, in both cases, are due to new customer volume as rates have remained relatively steady.

Ø Visa and MasterCard fees have increased 13.8% on a year to date basis compared to the same period in 2011. The increase is due to an overall increase in consumer spending and the likelihood that consumers continue to get more comfortable with using credit/debit cards versus cash.

Ø The primary cause of the decrease in non-interest income compared to the December quarter was the termination of an other post-retirement benefit plan in the fourth quarter of 2011.

Year to date total noninterest expense increased about 8.27% for the three months ended March 31, 2012 compared to the same period in 2011. The quarterly result was an increase of 4% over the December 31, 2011 quarter. Excluding expenses and losses related to foreclosed properties non-interest expense increased by 1.04% when compared to the March 31, 2011 quarter, and decreased 1.82% when compared to the December 31, 2011 quarter. Some details of the remaining accounts are listed below.

Ø Equipment expense increased 21% over the March 31, 2011 quarter. The increase is a combination of increases in expenses related to our banking software and the expense of new computers purchased.

Ø Computer services and online banking expense increased 52.2% over the first quarter 2011 results. The increase is due to increases in costs related to the bank’s core software and additional online banking expenses related to new resources provided to customers.

Ø Loss on sale of other real estate increased 100% in the first quarter of 2012 as compared to the first quarter of 2011. The increase is primarily due to the housing market slump lowering values in our market area coupled with a moderate amount of foreclosed properties remaining in the market.

Ø The FDIC assessment expense has decreased 36% from the March 31, 2011 quarterly total. The decrease is due to the change in the base rate of the calculation. The rate is now calculated on average assets as opposed to total deposits.

Ø Other professional fees have increased 45.2% over the March 2011 quarter. The primary reason for the increase is one time professional fees related to the design of new materials explaining the changes in the deposit accounts and fees related to updating materials for the bank’s new “tag line”.

Ø Foreclosed property expense has increased 14.5% in 2012 compared to 2011. The increase in expense is due to new inventory being added to other real estate and ongoing costs of existing inventory not yet sold.

Ø Write down of other real estate has increased significantly during the first quarter of 2012 compared to both the December 31, 2011 and March 31, 2011 quarters. The increase is due to the continual drop in property values. The write downs were executed based on new appraisals.

Ø ATM and check card expenses have increased 31% in the first three months of 2012 compared to the same time period in 2011. The increase is due to a significant increase in the number of transactions as well as a slight increase in per transaction fees.

LIQUIDITY

Liquidity is a measure of the Bank’s ability to respond to sudden changes in funding needs or funding sources. Examples of sudden changes could involve a sudden increase in loan demand, a funding need, or it might involve a large decrease in deposited funds, a funding source. The role of cash management is to manage assets and liabilities so that the Bank can respond to such fluctuations in sources and uses of cash. Management spends much of its time assessing our liquidity position.

Management is informed of the liquidity information via reports and committee discussion. The President is provided a weekly “dashboard” report of our liquidity information. The Asset/Liability Committee reviews and discusses our liquidity position on a quarterly basis. The committee has set a benchmark minimum liquidity ratio of 15%.

Public funds are required to have collateral pledged against their balances above the FDIC insurance limits. Generally the bank has pledged securities or obtained letters of credit from the Federal Home Loan Bank of Pittsburgh to cover public funds. Two additional strategies to cover these funds are now being used. In the case of public funds in the form of CDs, the bank is utilizing the CDARS network to insure their funds. We are also using the Insured Cash Sweep (ICS) product to secure public funds. Both of the programs provide complete coverage through FDIC insurance. Most importantly, the securities that had been pledged against the public funds can be used as a source of cash if the need would arise. The securities are effectively converted from a non liquid asset to a liquid asset.

Liquid assets of the company include cash and due from banks, securities purchased under agreements to resell, federal funds sold, securities available for sale, and loans and investments maturing within one year. The company’s statement of cash flows details this liquidity since January 1, 2012.

Operating Activities. The company’s net income usually provides cash from the bank’s operating activities. The net income figure is adjusted for certain noncash transactions such as depreciation expense that reduces net income but does not require a cash outlay. During 2012, the net income as adjusted has used cash of $1.2 million. Interest income earned on loans and investment securities is the company’s major income source.

Investing Activities. Customer core deposits and company noncore funding provide the funds used to invest in loans and investment securities. In addition, the principal portion of loan payments, loan payoffs and maturity of investment securities provide cash flow. Purchases of bank premises and equipment are an investing activity. We have taken advantage of our noncore funding capabilities since deposit growth is not always sufficient. The net amount of cash provided by investing activities in 2012 is $4.0 million.

Financing Activities. Customer core deposits and company noncore funding provide the financing for the investing activities as stated above. If the company has an excess of funds on any given day, the bank will sell these funds to make additional interest income to fund activities. Likewise, if the company has a shortage of funds on any given day it will purchase funds and pay interest for the use of these funds. Financing activities also include payment of dividends to shareholders, purchase of shares of the company’s common stock for the treasury and repayment of any noncore funding. The net amount of cash provided by financing activities in 2012 is $12.5 million.

At March 31, 2012, cash and due from banks, interest-bearing deposits in financial institutions, securities purchased under agreements to resell, federal funds sold and loans and securities maturing within one year were $47.2 million.

Noncore funding capabilities, including borrowing, provide additional liquidity. The subsidiary bank maintains a federal funds line with one financial institution and is a member of the Federal Home Loan Bank of Pittsburgh. In July 2009 the subsidiary bank secured a credit line with the Federal Reserve discount window. At March 31, 2012, the subsidiary bank has total credit available through these institutions of approximately $89.2 million.

ANALYSIS OF CAPITAL

The adequacy of the company’s capital is reviewed by management on an ongoing basis in terms of the size, composition, and quality of the company’s asset and liability levels, and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses.

The Federal Reserve, the Comptroller of the Currency and the Federal Deposit Insurance Corporation have adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0% must be Tier 1 capital, composed of common equity, retained earnings and a limited amount of perpetual preferred stock, less certain goodwill items. All capital ratios are within the regulatory guidelines for a “well-capitalized” institution as noted below.

	March 31, 2012 (000’s)

				Minimum
				Capital
	Actual			Requirement
	Amount		Ratio	Amount			Ratio
Total capital to risk weighted assets	$	27 910	13.46%		$	16 583	8.00%
Tier 1 capital to risk weighted assets	$	25 297	12.20%		$	8 291	4.00%
Tier 1 capital to average assets	$	25 297	8.70%		$	11 625	4.00%


	December 31, 2011 (000’s)

				Minimum
				Capital
	Actual			Requirement
	Amount		Ratio	Amount			Ratio
Total capital to risk weighted assets	$	27 487	13.10%		$	16 782	8.00%
Tier 1 capital to risk weighted assets	$	24 842	11.84%		$	8 391	4.00%
Tier 1 capital to average assets	$	24 842	8.56%		$	11 602	4.00%

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the date of this quarterly report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

There are no material legal proceedings to which the Registrant or its subsidiary, directors or officers is a party or by which they, or any of them, are threatened. All legal proceedings presently pending or threatened against Potomac Bancshares, Inc. and its subsidiary involve routine litigation incidental to the business of the company or the subsidiary and are either not material in respect to the amount in controversy or fully covered by insurance.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

			(c) Total Number
			of Shares
	(a) Total		Purchased as	(d) Maximum Number
	Number of	(b) Average	Part of Publicly	of Shares that May
	Shares	Price Paid	Announced	Yet be Purchased
Period	Purchased	Per Share	Programs	Under the Program
January 1 through
January 31	NONE	- -	283 553	83 617
February 1 through
February 29	NONE	- -	283 553	83 617
March 1 through
March 31	NONE	- -	283 553	83 617

On February 12, 2002, the company’s Board of Directors originally authorized the repurchase program. The program authorized the repurchase of up to 10% of the company’s stock over the next twelve months. The stock may be purchased in the open market and/or in privately negotiated transactions as management and the board of directors determine prudent. The program has been extended on annual basis at Potomac’s reorganization meeting.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information

	(b)		There have been no changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors since the registrant last provided disclosure in response to Item 7(d)(2)(ii)(G) of Schedule 14A.

Item 6. Exhibits

	31.1		Certification Under Exchange Act Rule 13a-14, Chief Executive Officer (and Section 302 of Sarbanes-Oxley Act of 2002)

	31.2		Certification Under Exchange Act Rule 13a-14, Chief Financial Officer (and Section 302 of Sarbanes-Oxley Act of 2002)

	32		Certification Pursuant to 18 U.S.C. Section 1350, Chief Executive Officer and Chief Financial Officer (pursuant to Section 906 of Sarbanes-Oxley Act of 2002)

	101.INS		XBRL Instance Document. **

	101.SCH		XBRL Taxonomy Extension Schema. **

	101.CAL		XBRL Taxonomy Extension Calculation Linkbase. **

	101.LAB		XBRL Taxonomy Extension Label Linkbase. **

	101.PRE		XBRL Taxonomy Extension Presentation Linkbase. **

	101.DEF		XBRL Taxonomy Definition Linkbase. **

	**		Furnished, not filed, herewith

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		POTOMAC BANCSHARES, INC.

Date: May 15, 2012		/s/ Robert F. Baronner, Jr.
		Robert F. Baronner, Jr.
		President & CEO

Date: May 15, 2012		/s/ Dean Cognetti
		Dean Cognetti
		Sr. Vice President and Chief Financial Officer