The Bank has a significant investment in bank-owned life insurance policies (“BOLI”) and provides endorsement split dollar life insurance to certain employees in the position of Vice President and higher after one year of service. The cash surrender values of BOLI were $21.4 million and $21.7 million as of December 31, 2011 and 2010, respectively. BOLI are initially recorded at the amount of premiums paid and are adjusted to current cash surrender values. Changes in cash surrender values are recorded in other non-interest income and are based on premiums paid less expenses plus accreted interest income. Earnings on BOLI resulted in non-interest income of approximately $736,000, $677,000 and $832,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company adopted guidance in FASB ASC Subtopic 715-60, “Compensation – Retirement Benefits – Defined Benefit Plans – Postretirement” effective January 1, 2008. The cumulative effective adjustment to retained earnings for the change in accounting principle was recorded January 1, 2008, in the amount of $1.9 million to accrue the post-retirement death benefits for endorsement split dollar life insurance plans. Expense related to these accruals is reflected in Salaries and Employee Benefits on the Consolidated Statements of Income and was approximately $61,000, $175,000, and $164,000 for the years ended December 31, 2011, 2010 and 2009, respectively. The accrual for the post-retirement death benefits is included in Other Liabilities on the Consolidated Balance Sheet and totaled $2.4 million as of December 31, 2011 and 2010.

Because the endorsement split dollar life insurance plans create imputed income to each applicable participant without generating cash to pay the tax expense associated with the imputed income, the Bank entered into Imputed Income Tax Reimbursement Agreements with the applicable officers. The Imputed Income Tax Reimbursement Agreements provide for annual cash payments to the participants until death for the previous tax year in amounts equal to a portion of federal income taxes attributable to (i) the income imputed to the applicable participant on the benefit under the Amended and Restated Split Dollar Agreement and (ii) the additional cash payments under the Imputed Income Tax Reimbursement Agreement. Each participant was 100% vested in benefits provided under Imputed Income Tax Reimbursement Agreements as of January 1, 2008. Service costs are based on the net present value of the sum of payments in accordance with each participant’s agreement. Interest accrues monthly at a rate of 7.0%.

Net other post-retirement benefits expense for Imputed Income Tax Reimbursement Agreements was as follows for the years ended December 31 (in thousands):

	2011	2010
Service cost	$ -	$ -
Interest cost	26	25
Net other post-retirement benefits expense	$26	$25

The accumulated post-retirement defined benefit obligation for Imputed Income Tax Reimbursement Agreements was as follows for the years ended December 31 (in thousands):

Accumulated other post-retirement benefit obligation:	2011	2010
Beginning balance	$392	$382
Service cost	-	-
Interest cost	26	25
Benefit payments	(15)	(15)
Ending balance	$403	$392

The accumulated post-retirement benefit obligation was included in Other Liabilities as of December 31, 2011 and 2010 and was equal to the funded status of the plan as of each applicable year-end, as there were no related assets recognized on the Consolidated Balance Sheet for the Imputed Income Tax Reimbursement Agreements.

NOTE 10 – BANK-OWNED LIFE INSURANCE AND IMPUTED INCOME TAX REIMBURSEMENT AGREEMENTS