10-Q/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________

FORM 10-Q/A

(Amendment No. 1)

(Mark one)

XXX	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2011
	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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  XX 

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 August 12, 2011

POTOMAC BANCSHARES, INC
Explanatory Note

The sole purpose of this amendment to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, originally filed with the Securities and Exchange Commission on August 15, 2011, is to furnish Exhibit 101 to the Form 10-Q which contains the XBRL (eXtensible Business Reporting Language) Interactive Data File for the financial statements and notes included in Part 1, Item 1 of the form 10-Q. As permitted by Rule 405(a)(2)(ii) of Regulation S-T, Exhibit 101 was required to be furnished by amendment within 30 days of the original filing date of the Form 10-Q.

No changes have been made to the Form 10-Q other than the furnishing of Exhibit 101 described above. This amendment does not reflect subsequent events occurring after the original filing date of the Form 10-Q or modify or update in any way disclosures made in the Form 10-Q.

Pursuant to Rule 406T or Regulation S-T, the Interactive Data File on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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. **

*       Previously filed 

**     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: September 12, 2011	/s/ Robert F. Baronner, Jr.
	Robert F. Baronner, Jr.
	President & CEO
Date: September 12, 2011	/s/ Dean J. Cognetti
	Dean J. Cognetti
	Sr. Vice President and Interim Chief Financial Officer

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CONSOLIDATED BALANCE SHEETS [Parenthetical] (USD $) In Thousands, except Share data	Jun. 30, 2011	Dec. 31, 2010
Allowance for loan losses (in dollars)	$ 4,113	$ 5,012
Valuation allowance for other real estate owned (in dollars)	$ 379	$ 95
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized	5,000,000	5,000,000
Common stock, shares issued	3,671,691	3,671,691
Common stock, shares outstanding	3,671,691	3,671,691
Treasury stock, shares	281,513	281,513

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CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Per Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Interest and Dividend Income:
Interest and fees on loans	$ 2,880	$ 3,269	$ 5,873	$ 6,546
Interest on securities available for sale - taxable	192	216	360	412
Interest on securities available for sale - nontaxable	55	49	109	98
Interest on federal funds sold	0	1	1	2
Other interest and dividends	11	4	19	7
Total Interest and Dividend Income	3,138	3,539	6,362	7,065
Interest Expense:
Interest on deposits	757	1,023	1,652	2,101
Interest on securities sold under agreements to repurchase	16	20	35	40
Federal Home Loan Bank advances	11	15	22	61
Total Interest Expense	784	1,058	1,709	2,202
Net Interest Income	2,354	2,481	4,653	4,863
Provision for loan losses	175	461	599	771
Net Interest Income after Provision for Loan Losses	2,179	2,020	4,054	4,092
Noninterest Income:
Trust and financial services	230	227	451	437
Service charges on deposit accounts	480	478	909	914
(Loss) gain on sale of other real estate	(43)	30	(70)	142
Visa/MC fees	195	178	369	329
Cash surrender value of life insurance	59	59	116	118
Other operating income	107	121	201	205
Total Noninterest Income	1,028	1,093	1,976	2,145
Noninterest Expenses:
Salaries and employee benefits	1,247	1,142	2,483	2,402
Net occupancy expense of premises	151	144	322	334
Furniture and equipment expenses	210	227	410	437
FDIC assessment	106	154	259	274
Director and committee fees	47	44	81	75
Other professional fees	64	46	94	68
Printing, stationery and supplies	58	67	99	102
Communications	46	47	93	92
ATM and check card expenses	82	71	153	135
Miscellaneous real estate expense	45	9	48	28
Foreclosed property expense	186	110	299	291
Other real estate write downs	284	0	284	17
Other operating expenses	502	400	927	715
Total Noninterest Expenses	3,028	2,461	5,552	4,970
Income before Income Tax Expense	179	652	478	1,267
Income Tax Expense	6	214	48	407
Net Income	$ 173	$ 438	$ 430	$ 860
Earnings Per Share, basic and diluted (in dollars per share)	$ 0.05	$ 0.13	$ 0.13	$ 0.25

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DOCUMENT AND ENTITY INFORMATION	6 Months Ended
	Jun. 30, 2011	Aug. 12, 2011
Entity Registrant Name	POTOMAC BANCSHARES INC
Entity Central Index Key	0000925173
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	ptbs
Entity Common Stock, Shares Outstanding		3,390,178
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2011

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Allowance for Loan Losses

6 Months Ended

Jun. 30, 2011

Allowance For Loan Losses Disclosure [Abstract]

Allowance for Credit Losses [Text Block]

5.	Allowance for Loan Losses
	The following is a summary of transactions (in thousands) in the allowance for loan losses:

	June 30,			December 31,			June 30,
	2011			2010			2010
Balance at beginning of period	$	5 012		$	5 718		$	5 718
Provision charged to operating expense		599			1 599			771
Recoveries added to the allowance		93			321			122
Loan losses charged to the allowance		(1 591	)		(2 626	)		(1 034	)
Balance at end of period	$	4 113		$	5 012		$	5 577

Allowance for Loan Losses – By Segment
June 30, 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		- -			(12	)		(59	)		(581	)		(76	)		(863	)		- -		- -			(1 591	)
Recoveries		- -			11			6			5			65			6			- -		- -			93
Provision		(155	)		(42	)		64			(395	)		11			1 129			- -		(13	)		599
Ending balance	$	11		$	196		$	870		$	1 051		$	20		$	1 963		$	1	$	1		$	4 113
Individually evaluated
for impairment	$	- -		$	172		$	547		$	804		$	- -		$	633		$	- -	$	- -		$	2 156
Collectively evaluated
for impairment		11			24			323			247			20			1 330			1		1			1 957
	$	11		$	196		$	870		$	1 051		$	20		$	1 963		$	1	$	1		$	4 113
Financing receivables:
Ending balance	$	692		$	8 362		$	76 264		$	22 281		$	6 540		$	95 568		$	434	$	- -		$	210 141
Ending balance:
Individually evaluated
for impairment	$	- -		$	247		$	9 107		$	7 181		$	21		$	6 210		$	- -	$	- -		$	22 766
Collectively evaluated
for impairment		692			8 115			67 157			15 100			6 519			89 358		434			- -			187 375
Total	$	692		$	8 362		$	76 264		$	22 281		$	6 540		$	95 568		$	434	$	- -		$	210 141

Allowance for Loan Losses – By Segment
December 31, 2010
(in thousands)

					Commercial								All
	Farmland		Commercial		Real Estate		Construction		Consumer		Residential		Other		Unallocated		Total
Ending balance	$	166	$	239	$	859	$	2 022	$	20	$	1 691	$	1	$	14	$	5 012
Individually evaluated
for impairment	$	161	$	217	$	528	$	1 812	$	- -	$	429	$	- -	$	- -	$	3 147
Collectively evaluated
for impairment		5		22		331		210		20		1 262		1		14		1 865
	$	166	$	239	$	859	$	2 022	$	20	$	1 691	$	1	$	14	$	5 012
Financing receivables:
Ending balance	$	792	$	7 920	$	79 615	$	24 174	$	6 800	$	99 513	$	436	$	- -	$	219 250
Ending balance:
Individually evaluated
for impairment	$	539	$	367	$	9 398	$	11 484	$	- -	$	2 874	$	- -	$	- -	$	24 662
Collectively evaluated
for impairment		253		7 553		70 217		12 690		6 800		96 639	436			- -		194 588
Total	$	792	$	7 920	$	79 615	$	24 174	$	6 800	$	99 513	$	436	$	- -	$	219 250

Credit Quality Information – By Class
June 30, 2011
(in thousands)

			Special		Sub-
Internal Risk Rating Grades	Pass		Mention		Standard		Doubtful		Loss
Commercial – non real estate
Commercial and industrial	$	7 966	$	149	$	- -	$	241	$	6
Commercial real estate
Owner occupied		50 429		3 880		3 159		5 818		- -
Non-owner occupied		7 058		5 862		- -		58		- -
Construction
Residential		2 052		1 380		508		- -		658
Commercial		11 633		333		4 274		457		986
Real estate
Farmland		692		- -		- -		- -		- -
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		- -		335		23		N/A
1-4 family – first liens		N/A		3 177		895		1 052		1 147
1-4 family – junior liens		N/A		105		- -		173		- -
5 or more family		N/A		302		- -		- -		- -
Totals	$	79 830	$	15 188	$	9 171	$	7 822	$	2 797

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. Once a loan is designated as a loss, it will usually be cleared from the loan portfolio within 90 days. The majority of the loss loans above are in process of foreclosure and will be transferred to other real estate owned (including possible charge-offs) when foreclosures are completed.

Credit Quality Information – By Class (Continued)
June 30, 2011
(in thousands)

Non Risk Rated Loans	Performing		Nonperforming
Consumer – non real estate
Titled vehicles	$	3 101	$	7
Deposit accounts		815		- -
All other		2 614		3
Residential
Revolving open end		4 731		12
1-4 family – first liens		71 861		1 045
1-4 Family – junior liens		7 881		- -
5 or more family		2 829		- -
All other		434		- -
Totals	$	94 266	$	1 067

Credit Quality Information – By Class
December 31, 2010
(in thousands)

			Special		Sub-
Internal Risk Rating Grades	Pass		Mention		Standard		Doubtful		Loss
Commercial – non real estate
Commercial and industrial	$	7 371	$	180	$	95	$	106	$	166
Commercial real estate
Owner occupied		53 078		5 041		3 829		5 375		194
Non-owner occupied		11 470		628		- -		- -		- -
Construction
Residential		282		489		4 005		1 095		51
Commercial		10 348		2 789		3 575		1 363		- -
Real estate
Farmland		253		- -		- -		539		- -
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		N/A		N/A		N/A		N/A
1-4 family – first liens		N/A		3 234		956		1 434		242
1-4 family – junior liens		N/A		187		42		175		25
5 or more family		N/A		308		- -		- -		- -
Totals	$	82 802	$	12 856	$	12 502	$	10 087	$	678

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. Once a loan is designated as a loss, it will usually be cleared from the loan portfolio within 90 days. The majority of the loss loans above are in process of foreclosure and will be transferred to other real estate owned (including possible charge-offs) when foreclosures are completed.

Credit Quality Information – By Class (Continued)
December 31, 2010
(in thousands)

Non Risk Rated Loans	Performing		Nonperforming
Consumer – non real estate
Titled vehicles	$	3 705	$	8
Deposit accounts		737		- -
All other		2 345		7
Residential
Revolving open end		5 962		13
1-4 family – first liens		75 901		1 101
1-4 Family – junior liens		8 442		- -
5 or more family		1 668		- -
All other		436		- -
Totals	$	99 196	$	1 129

Impaired Loans – By Class
June 30, 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	$	75	$	75	$	N/A	$	97	$	2
Commercial real estate
Owner occupied		4 365		4 339		N/A		3 878		233
Non-owner occupied		- -		- -		N/A		15		- -
Construction
Residential		667		658		N/A		1 187		21
Commercial		4 796		4 771		N/A		3 252		307
Real estate
Farmland		- -		- -		N/A		- -		- -
Residential
Revolving open end		- -		- -		N/A		60		- -
1 to 4 family – first liens		3 005		2 984		N/A		1 500		42
1 to 4 family – junior liens		538		536		N/A		247		15
5 or more family		- -		- -		N/A		- -		- -
Consumer
Titled vehicles		- -		- -		N/A		- -		- -
Deposit accounts		- -		- -		N/A		- -		- -
All other consumer		- -		- -		N/A		- -		- -
All other		21		21		N/A		4		1
	$	13 467	$	13 384	$	N/A	$	10 240	$	621

With an allowance recorded:
							Average		Interest
	Unpaid		Recorded		Related		Recorded		Income
	Principal		Investment		Allowance		Investment		Recognized
Commercial – non real estate
Commercial and industrial	$	174	$	172	$	172	$	229	$	8
Commercial real estate
Owner occupied		4 762		4 710		525		4 908		394
Non-owner occupied		58		58		22		34		1
Construction
Residential		519		507		167		2 411		7
Commercial		1 284		1 245		637		3 287		27
Real estate
Farmland		- -		- -		- -		323		- -
Residential
Revolving open end		363		358		28		76		19
1 to 4 family – first liens		2 370		2 332		605		1 891		82
1 to 4 family – junior liens		- -		- -		- -		100		- -
5 or more family		- -		- -		- -		- -		- -
Consumer
Titled vehicles		- -		- -		- -		- -		- -
Deposit accounts		- -		- -		- -		- -		- -
All other consumer		- -		- -		- -		- -		- -
All other		- -		- -		- -		- -		- -
	$	9 530	$	9 382	$	2 156	$	13 259	$	538
Totals:
Commercial – non real estate	$	249	$	247	$	172	$	326	$	10
Commercial real estate		9 185		9 107		547		8 835		628
Construction		7 266		7 181		804		10 137		362
Real estate – farmland		- -		- -		- -		323		- -
Residential		6 276		6 210		633		3 874		158
Consumer		21		21		- -		4		1
All other		- -		- -		- -		- -		- -
	$	22 997	$	22 766	$	2 156	$	23 499	$	1 159

Impaired Loans – By Class
December 31, 2010
(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	$	117	$	95	$	N/A	$	53	$	- -
Commercial real estate
Owner occupied		4 206		4 256		N/A		3 591		158
Non-owner occupied		75		- -		N/A		15		- -
Construction
Residential		1 188		1 183		N/A		1 769		52
Commercial		2 641		2 631		N/A		3 655		112
Real estate
Farmland		- -		- -		N/A		- -		- -
Residential
Revolving open end		- -		- -		N/A		- -		- -
1 to 4 family – first liens		1 259		1 242		N/A		1 351		15
1 to 4 family – junior liens		175		175		N/A		142		3
5 or more family		- -		- -		N/A		- -		- -
Consumer
Titled vehicles		- -		- -		N/A		- -		- -
Deposit accounts		- -		- -		N/A		- -		- -
All other consumer		- -		- -		N/A		- -		- -
All other		- -		- -		N/A		- -		- -
	$	9 661	$	9 582	$	N/A	$	10 576	$	340

With an allowance recorded:
							Average		Interest
	Unpaid		Recorded		Related		Recorded		Income
	Principal		Investment		Allowance		Investment		Recognized
Commercial – non real estate
Commercial and industrial	$	274	$	272	$	217	$	355	$	6
Commercial real estate
Owner occupied		5 201		5 142		528		4 972		272
Non-owner occupied		- -		- -		- -		- -		- -
Construction
Residential		2 786		2 767		600		3 910		175
Commercial		4 924		4 903		1 212		3 242		216
Real estate
Farmland		549		539		161		547		- -
Residential
Revolving open end		- -		- -		- -		- -		- -
1 to 4 family – first liens		1 412		1 390		362		1 186		56
1 to 4 family – junior liens		71		67		67		220		- -
5 or more family		- -		- -		- -		- -		- -
Consumer
Titled vehicles		- -		- -		- -		- -		- -
Deposit accounts		- -		- -		- -		- -		- -
All other consumer		- -		- -		- -		4		- -
All other		- -		- -		- -		- -		- -
	$	15 217	$	15 080	$	3 147	$	14 436	$	725
Totals:
Commercial – non real estate	$	391	$	367	$	217	$	408	$	6
Commercial real estate		9 482		9 398		528		8 578		430
Construction		11 539		11 484		1 812		12 576		555
Real estate – farmland		549		539		161		547		- -
Residential		2 917		2 874		429		2 899		74
Consumer		- -		- -		- -		4		- -
All other		- -		- -		- -		- -		- -
	$	24 878	$	24 662	$	3 147	$	25 012	$	1 065

Modifications
As of June 30, 2011
(in thousands except number of contracts)

	June 30, 2011
			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		2		72		72
Non owner occupied		- -		- -		- -
Construction
Residential		- -		- -		- -
Commercial		5		301		299
Real Estate
Farmland		- -		- -		- -
Residential
Revolving open end 1 to 4 family		- -		- -		- -
1 to 4 family – first liens		16		2 455		2 222
1 to 4 family – junior liens		10		367		362
5 or more family		- -		- -		- -
Consumer
Titled Vehicles		- -		- -		- -
Deposit Accounts		- -		- -		- -
All other consumer		1		22		21
All Other		- -		- -		- -
Totals	$	34	$	3 217	$	2 976

As of June 30, 2011 there were no troubled debt restructurings during 2011 that subsequently defaulted.

Recorded reserves for impaired loans total $2.2 million compared to total nonaccrual loans of $4.3 million. These loans are kept under constant scrutiny by the loan officers and credit administration.

Nonaccrual and Past Due Loans – By Class
June 30, 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	$	34	$	- -	$	8	$	42	$	8 320	$	8 362	$	- -	$	8
Commercial real estate
Owner Occupied		- -		590		- -		590		62 696		63 286		- -		- -
Non owner occupied		334		- -		- -		334		12 644		12 978		- -		- -
Construction
Residential		- -		- -		658		658		3 940		4 598		- -		658
Commercial		521		1 607		1 019		3 147		14 536		17 683		- -		1 231
Real Estate
Farmland		- -		- -		- -		- -		692		692		- -		- -
Residential
Revolving open end		- -		- -		- -		- -		5 101		5 101		- -		35
1 to 4 family – first liens		1 396		526		1 807		3 729		75 448		79 177		- -		2 357
1 to 4 family – junior liens		236		- -		- -		236		7 923		8 159		- -		- -
5 or more family		- -		- -		- -		- -		3 131		3 131		- -		- -
Consumer
Titled Vehicles		26		1		- -		27		3 081		3 108		- -		7
Deposit Accounts		- -		- -		- -		- -		815		815		- -		- -
All other consumer		14		- -		3		17		2 600		2 617		- -		3
All Other		- -		- -		- -		- -		434		434		- -		- -
Totals	$	2 561	$	2 724	$	3 495	$	8 780	$	201 361	$	210 141	$	- -	$	4 299
Percentage to Total Loans		1.22%		1.30%		1.66%		4.18%		95.82%				- -		2.05%

Nonaccrual and Past Due Loans – By Class
December 31, 2010
(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	$	80	$	92	$	2	$	174	$	7 746	$	7 920	$	- -	$	97
Commercial real estate
Owner Occupied		612		- -		- -		612		66 905		67 517		- -		- -
Non owner occupied		194		- -		- -		194		11 904		12 098		- -		- -
Construction
Residential		238		- -		- -		238		5 684		5 922		- -		- -
Commercial		115		- -		285		400		17 852		18 252		- -		405
Real Estate
Farmland		- -		- -		539		539		253		792		- -		539
Residential
Revolving open end		- -		- -		- -		- -		5 975		5 975		- -		38
1 to 4 family – first liens		2 269		416		881		3 566		79 125		82 691		- -		1 099
1 to 4 family – junior liens		135		19		- -		154		8 717		8 871		- -		42
5 or more family		- -		- -		- -		- -		1 976		1 976		- -		- -
Consumer
Titled Vehicles		37		2		- -		39		4 310		4 349		- -		8
Deposit Accounts		11		- -		- -		11		774		785		- -		- -
All other consumer		3		- -		5		8		1 658		1 666		- -		5
All Other		- -		- -		- -		- -		436		436		- -		- -
Totals	$	3 694	$	529	$	1 712	$	5 935	$	213 315	$	219 250	$	- -	$	2 233
Percentage to Total Loans		1.69%		0.24%		0.78%		2.71%		97.29%				- -%		1.02%

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) still accruing interest
• 60 to 89 days past due (principal or interest) still accruing interest
• 90 days or more past due (principal or interest) still accruing interest
• Nonaccrual status.

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One

6 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

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 June 30, 2011 and December 31, 2010, and the results of operations for the three months and six months ended June 30, 2011 and 2010, and cash flows and statements of changes in stockholders’ equity for the six months ended June 30, 2011 and 2010. 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, 2010. The results of operations for the three month and six month periods ended June 30, 2011 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.

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Weighted Average Number of Shares Outstanding and Earnings Per Share

6 Months Ended

Jun. 30, 2011

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

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 the three months and six months ended June 30, 2011 and June 30, 2010 earnings per share.

	Three Months Ended			Three Months Ended
	June 30, 2011			June 30, 2010
	Average Shares	Per Share Amount		Average Shares	Per Share Amount
Basic earnings per share	3 390 178	$	.05	3 390 178	$	.13
Effect of dilutive securities:
Stock options	- -			- -
Diluted earnings per share	3 390 178	$	.05	3 390 178	$	.13
	Six Months Ended			Six Months Ended
	June 30, 2011			June 30, 2010
	Average Shares	Per Share Amount		Average Shares	Per Share Amount
Basic earnings per share	3 390 178	$	.13	3 390 178	$	.25
Effect of dilutive securities:
Stock options	- -			- -
Diluted earnings per share	3 390 178	$	.13	3 390 178	$	.25

For the three months and six months ended June 30, 2011, stock options representing 120,974 average shares, and for the three months and six months ended June 30, 2010, stock options representing 126,224 average shares were not included in the calculation of earnings per share as their effect would have been anti-dilutive.

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Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2011

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Recent Accounting Pronouncements [Text Block]

8.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the company’s consolidated financial statements. In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010. The company has included the required disclosures in its consolidated financial statements. The Securities Exchange Commission (SEC) issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting.” The rule requires companies to submit financial statements in extensible business reporting language (XBRL) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The required disclosures will be presented as an exhibit in an amended filing.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The company has adopted ASU 2011-02 and included the required disclosures in its consolidated financial statements.

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 company is currently assessing the impact that ASU 2011-03 will have on its 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 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 IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The company is currently assessing the impact that ASU 2011-04 will have on 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. Adoption of ASU 2011-05 is not expected to have a material impact on the company’s consolidated financial statements.

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Employee Benefit Plans

6 Months Ended

Jun. 30, 2011

Compensation and Retirement Disclosure [Abstract]

Pension and Other Postretirement Benefits Disclosure [Text Block]

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
	June 30,			June 30,			June 30,		June 30,
	2011			2010			2011		2010
	(in thousands)						(in thousands)
Components of Net Periodic Benefit Cost
Service cost	$	- -		$	- -		$	3	$	3
Interest cost		100			104			9		8
Expected return on plan assets		(119	)		(115	)		- -		- -
Amortization of net obligation at transition		- -			- -			5		5
Recognized net actuarial loss		38			24			- -		- -
Net periodic benefit cost	$	19		$	13		$	17	$	16
	Pension Benefits						Other Postretirement Benefits
	Six Months Ended						Six Months Ended
	June 30,			June 30,			June 30,		June 30,
	2011			2010			2011		2010
	(in thousands)						(in thousands)
Components of Net Periodic Benefit Cost
Service cost	$	- -		$	- -		$	6	$	6
Interest cost		200			207			18		17
Expected return on plan assets		(238	)		(230	)		- -		- -
Amortization of net obligation at transition		- -			- -			10		9
Recognized net actuarial loss		76			48			- -		- -
Net periodic benefit cost	$	38		$	25		$	34	$	32

Employer Contribution

The company anticipates the 2011 contribution for the pension plan will approximate $10 thousand and has made this payment as of June 30, 2011. The company has made payments of $10 thousand for the other postretirement benefit plans for the first six months of 2011 and anticipates remaining payments for 2011 to total $10 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.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [Parenthetical] (USD $) In Thousands, except Per Share data	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Tax on unrealized holding gains	$ 197	$ 40
Cash dividends (in dollars per share)	$ 0.01

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Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

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 six month periods ending June 30, 2011 and 2010 was $8 thousand and $17 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 six months of 2011 and 2010.
	Stock option plan activity for the six months ended June 30, 2011 is summarized below:

				Weighted
				Average
		Weighted		Remaining
		Average		Contractual	Aggregate
		Exercise		Life	Intrinsic
	Shares	Price		(in years)	Value
Options outstanding, January 1, 2011	120 974	$	14.76
Granted	- -		- -
Exercised	- -		- -
Canceled or expired	- -		- -
Options outstanding, June 30, 2011	120 974		14.76	4	$	- -
Options exercisable, June 30, 2011	116 896		14.73	4	$	- -

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 June 30, 2011. The aggregate intrinsic values change based on changes in the market value of the company’s stock.

As of June 30, 2011 there was $8 thousand of total unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining requisite service period.

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Securities

6 Months Ended

Jun. 30, 2011

Investments, Debt and Equity Securities [Abstract]

Marketable Securities [Text Block]

3.	Securities
	The amortized cost and fair value of securities available for sale as of June 30, 2011 and December 31, 2010 (in thousands) are as follows:

	June 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
Obligations of U. S. Government
sponsored agencies	$	47 560	$	420	$	(4	)	$	47 976
State and municipal obligations		6 653		142		(7	)		6 788
Equity securities		1 098		- -		(124	)		974
	$	55 311	$	562	$	(135	)	$	55 738
	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
Obligations of U. S. Government
sponsored agencies	$	36 207	$	241	$	(160	)	$	36 288
State and municipal obligations		5 537		71		(84	)		5 524
Equity securities		1 100		- -		(222	)		878
	$	42 844	$	312	$	(466	)	$	42 690

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 six accounts in the consolidated portfolio that have losses at June 30, 2011. 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 June 30, 2011 and no impairment has been recognized.

There are two equity security investments in the company’s portfolio with losses at June 30, 2011. The company considers these investments to be temporarily impaired at June 30, 2011 and is recognizing no impairment. These are community bank stock related holdings.

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 $20.4 million as of June 30,2011 and $11.7 million as of December 31, 2010

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 June 30, 2011 and December 31, 2010 (in thousands).

	June 30, 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	$	2 996	$	(4	)	$	- -	$	- -	$	2 996	$	(4	)
State and municipal obligations		1 402		(7	)		- -		- -		1 402		(7	)
Equity securities		141		(124	)		- -		- -		141		(124	)
Total	$	4 539	$	(135	)	$	- -	$	- -	$	4 539	$	(135	)

	December 31, 2010
		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		$	9 899	$	(147	)	$	1 108	$	(13	)	$	11 007	$	(160	)
State and municipal obligations			1 912		(84	)		- -		- -			1 912		(84	)
Equity securities			878		(222	)		- -		- -			878		(222	)
Total		$	12 689	$	(453	)	$	1 108	$	(13	)	$	13 797	$	(466	)

The company’s investment in Federal Home Loan Bank (FHLB) stock totaled $690 thousand at June 30, 2011. 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. Despite the FHLB’s temporary suspension of repurchases of excess capital stock on a regular basis, the company does not consider this investment to be other-than-temporarily impaired at June 30, 2011 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 June 30, 2011 and December 31, 2010, securities with carrying values of approximately $17.6 million and $24 million, respectively, were pledged to secure municipal deposits, securities sold under agreements to repurchase, other borrowings, and for other purposes as required or permitted by law.

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Loans

6 Months Ended

Jun. 30, 2011

Loans Receivable Disclosure [Abstract]

Loans Receivable Disclosure [Text Block]

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

	June 30,		December 31,
	2011		2010
	(in thousands)
Commercial – non real estate
Commercial and industrial	$	8 362	$	7 920
Commercial real estate
Owner occupied		63 286		67 517
Non-owner occupied		12 978		12 098
Construction
Residential		4 598		5 922
Commercial		17 683		18 252
Real Estate
Farmland		692		792
Residential
Revolving open end		5 101		5 975
1 to 4 family – first liens		79 177		82 691
1 to 4 family – junior liens		8 159		8 871
5 or more family		3 131		1 976
Consumer loans
Titled vehicles		3 108		3 713
Deposit accounts		815		737
All other consumer loans		2 617		2 350
All other loans		434		436
Total loans		210 141		219 250
Less: allowance for loan losses		4 113		5 012
	$	206 028	$	214 238

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 $2.1 million and letters of credit issued on behalf of a customer of the company in the amount of $11 million.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (USD $) In Thousands	Common Stock	Surplus	Undivided Profits	Treasury Stock	Accumulated Other Comprehensive (Loss)	Comprehensive Income	Total
Balance at Dec. 31, 2009	$ 3,672	$ 3,898	$ 21,931	$ (2,866)	$ (1,063)		$ 25,572
Comprehensive income
Net income	0	0	860	0	0	860	860
Other comprehensive income:
unrealized holding gains arising during the period	0	0	0	0	78	78	78
Total comprehensive income						938
Stock-based compensation expense	0	17	0	0	0		17
Balance at Jun. 30, 2010	3,672	3,915	22,791	(2,866)	(985)		26,527
Balance at Dec. 31, 2010	3,672	3,932	23,725	(2,866)	(1,687)		26,776
Comprehensive income
Net income	0	0	430	0	0	430	430
Other comprehensive income:
unrealized holding gains arising during the period	0	0	0	0	383	383	383
Total comprehensive income						813
Stock-based compensation expense	0	8	0	0	0		8
Cash dividends ($.01 per share)	0	0	(66)	0	0		(66)
Balance at Jun. 30, 2011	$ 3,672	$ 3,940	$ 24,089	$ (2,866)	$ (1,304)		$ 27,531

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 430	$ 860
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	599	771
Depreciation	245	281
Additional write down of other real estate	284	17
Discount accretion and premium amortization on securities, net	150	82
Loss (Gain) on sale of other real estate	70	(142)
Loss on disposal of fixed assets	0	2
Stock compensation expense	8	17
Proceeds from sale of loans	686	1,091
Origination of loans for sale	(610)	(994)
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable	58	(39)
(Increase) decrease in other assets	(10)	303
Decrease in accrued interest payable	(88)	(12)
Increase in other liabilities	27	1,462
Net cash provided by operating activities	1,849	3,699
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available for sale	2,915	0
Proceeds from call of securities available for sale	9,000	19,545
Purchase of securities available for sale	(24,533)	(24,875)
Net decrease in loans	4,929	4,520
Purchases of premises and equipment	(77)	(42)
Proceeds from sale of other real estate	1,391	1,353
Net cash (used in) provided by investing activities	(6,375)	501
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits	5	(303)
Net increase (decrease) in interest-bearing deposits	1,278	(1,087)
Net purchase of securities sold under agreements to repurchase	1,743	269
Net repayment of Federal Home Loan Bank advances	(595)	(549)
Cash dividends	(33)	0
Net cash provided by (used in) financing activities	2,398	(1,670)
(Decrease) increase in cash and cash equivalents	(2,128)	2,530
CASH AND CASH EQUIVALENTS
Beginning	12,905	12,623
Ending	10,777	15,153
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest	1,797	2,214
Income taxes	0	0
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain on securities available for sale	580	118
Loans transferred to other real estate owned	2,683	2,226
Loans made on sale of other real estate	68	298
Dividends declared	$ 33	$ 0

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Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

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 recent 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. 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).

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.

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.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Off-Balance Sheet Financial Instruments

At June 30, 2011 and December 31, 2010, 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:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
		(in thousands)				(in thousands)
Financial assets:
Cash	$	10 052	$	10 052	$	10 180	$	10 180
Federal funds sold		725		725		2 725		2 725
Securities available for sale		55 738		55 738		42 690		42 690
Loans, net		206 028		203 878		214 238		212 200
Loans held for sale		- -		- -		76		76
FHLB stock		690		690		765		765
BOLI		6 813		6 813		6 397		6 397
Accrued interest receivable		902		902		960		960
Financial liabilities:
Deposits	$	258 705	$	259 905	$	257 422	$	258 240
Securities sold under
agreements to repurchase		9 125		9 125		7 382		7 382
FHLB advances		2 122		2 142		2 717		2 734
Accrued interest payable		273		273		361		361

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 June 30, 2011 and December 31, 2010:

			Fair Value Measurements at June 30, 2011 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	June 30		Assets		Inputs		Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
Available for sale debt securities
U.S. Government sponsored
agency securities	$	47 976	$	- -	$	47 976	$	- -
State and municipal securities		6 788		- -		6 788		- -
Total available for sale debt securities		54 764		- -		54 764		- -
Available for sale equity securities
Financial services industry		974		- -		974		- -
Total available for sale securities	$	55 738	$	- -	$	55 738	$	- -

			Fair Value Measurements at December 31, 2010 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31		Assets		Inputs		Inputs
Description	2010		(Level 1)		(Level 2)		(Level 3)
Available for sale debt securities
U.S. Government sponsored
agency securities	$	36 288	$	- -	$	36 288	$	- -
State and municipal securities		5 524		- -		5 524		- -
Total available for sale debt securities		41 812		- -		41 812		- -
Available for sale equity securities
Financial services industry		878		- -		878		- -
Total available for sale securities	$	42 690	$	- -	$	42 690	$	- -

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 June 30, 2011 and December 31, 2010. Gains and losses on the sale of loans are recorded within other operating income on the consolidated statements of income.

Impaired Loans : Loans are designated as impaired when, in the judgment of management based on current information and events, it is likely 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 income.

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 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 following table summarizes the company’s financial assets that were measured at fair value (in thousands) on a nonrecurring basis as of June 30, 2011 and December 31, 2010.

			Carrying Value at June 30, 2011
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Input		Input
Description	June 30, 2011		(Level 1)		(Level 2)		(Level 3)
Assets
Impaired loans with a
valuation allowance	$	7 226	$	- -	$	7 072	$	154
OREO		7 501		- -		7 501		- -
			Carrying Value at December 31, 2010
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Input		Input
Description	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Assets
Impaired loans with a
valuation allowance	$	11 933	$	- -	$	10 593	$	1 340
OREO		6 563		- -		6 563		- -

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
Assets:
Cash and due from banks	$ 2,205	$ 2,185
Interest-bearing deposits in other financial institutions	7,847	7,995
Federal funds sold	725	2,725
Securities available for sale, at fair value	55,738	42,690
Loans held for sale	0	76
Loans, net of allowance for loan losses of $4,113 and $5,012, respectively	206,028	214,238
Premises and equipment, net	8,101	8,270
Other real estate owned, net of valuation allowance of $379 and $95, respectively	7,501	6,563
Accrued interest receivable	902	960
Federal Home Loan Bank of Pittsburgh stock	690	765
Other assets	11,030	11,142
Total Assets	300,767	297,609
Liabilities and Stockholders' Equity:
Noninterest-bearing	26,700	26,695
Interest-bearing	232,005	230,727
Total Deposits	258,705	257,422
Securities sold under agreements to repurchase	9,125	7,382
Federal Home Loan Bank advances	2,122	2,717
Accrued interest payable	273	361
Other liabilities	3,011	2,951
Total Liabilities	273,236	270,833
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	3,940	3,932
Undivided profits	24,089	23,725
Accumulated other comprehensive (loss), net	(1,304)	(1,687)
Stockholder's Equity before treasury stock	30,397	29,642
Less cost of shares acquired for the treasury, 281,513 shares	2,866	2,866
Total Stockholders' Equity	27,531	26,776
Total Liabilities and Stockholders' Equity	$ 300,767	$ 297,609