Allegheny Bancshares 10-Q 2009 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended March 31, 2009

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-50151

Allegheny Bancshares, Inc.

(Exact name of registrant as specified in its charter)

West Virginia	22-3888163
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

300 North Main Street
P. O. Box 487
Franklin, West Virginia 26807
(Address of principal executive offices, including zip code)

(304) 358-2311
(Registrant’s Telephone Number)

Indicate by check mark whether the registrant (1) 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 þ No o

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).  o Yes o 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 the definition of “accelerated filer,” “accelerated filer” and smaller reporting company” in rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated Filer o  Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

Common Stock, par value — $1.00
870,723 shares outstanding as of May 13, 2009

ALLEGHENY BANCSHARES, INC.

TABLE OF CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements		2
	Unaudited Consolidated Statements of Income — Three Months ended March 31, 2009 and 2008		2
	Consolidated Balance Sheets — March 31, 2009 (Unaudited) and December 31, 2008 (Audited)		3
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity — Three Months Ended March 31, 2009 and 2008		4
	Unaudited Consolidated Statements of Cash Flows — Three Months Ended March 31, 2009 and 2008		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		16
Item 4T.	Controls and Procedures		16
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		16
Item 2.	Changes in Securities		17
Item 3.	Defaults upon Senior Securities		17
Item 4.	Submission of Matters to a Vote of Security Holders		17
Item 5.	Other Information		17
Item 6.	Exhibits		17
	SIGNATURES		18
	CERTIFICATIONS		18
EX-31.1
EX-31.2
EX-32

Page 2

Part I. Financial Information

Item 1. Consolidated Financial Statements

Allegheny Bancshares, Inc.
Consolidated Statements of Income
(In thousands, except for share and per share information)
(Unaudited)

	Three Months Ended
	March 31,
	2009			2008
Interest and Dividend Income:
Loans and fees	$	2,666		$	2,880
Investment securities — taxable		103			145
Investment securities — nontaxable		149			177
Deposits and federal funds sold		28			59
Total Interest and Dividend Income		2,946			3,261
Interest Expense:
Deposits		945			1,248
Borrowings		74			107
Total Interest Expense		1,019			1,355
Net Interest Income		1,927			1,906
Provision for loan losses		77			61
Net Interest Income After Provision for Loan Losses		1,850			1,845
Noninterest Income:
Service charges on deposit accounts		189			186
Restricted equity security impairment		(604	)
Loss on sale of securities		(10	)
Other income		159			152
Total Noninterest Income		(266	)		338
Noninterest Expense:
Salaries and benefits		745			728
Occupancy expenses		94			90
Equipment expenses		147			153
Other expenses		492			386
Total Noninterest Expenses		1,478			1,357
Income before Income Taxes		106			826
Income Tax Expense		148			225
Net Income (Loss)	$	(42	)	$	601
Earnings Per Share
Net income	$	(.05	)	$	.68
Weighted Average Shares Outstanding		871,064			880,212

The accompanying notes are an integral part of these statements.

Page 3

Allegheny Bancshares, Inc.
Consolidated Balance Sheets
(In thousands, except for share and per share information)

	March 31, 2009			December 31, 2008
	Unaudited			Audited
ASSETS
Cash and due from banks	$	5,811		$	2,562
Federal funds sold		0			1,570
Interest bearing deposits in banks		4,020			4,637
Investment securities available for sale		24,921			25,685
Restricted equity securities		747			1,351
Loans receivable, net of allowance for loan losses of $1,304 and $1,396 respectively		158,446			156,982
Bank premises and equipment, net		6,177			6,249
Interest receivable		1,246			1,276
Bank owned life insurance		3,735			3,693
Other assets		1,349			725
Total Assets	$	206,452		$	204,730
LIABILITIES
Deposits
Noninterest bearing demand	$	20,110		$	20,197
Interest bearing
Demand		19,535			18,985
Savings		26,982			28,567
Time deposits over $100,000		30,794			28,211
Other time deposits		73,960			71,280
Total Deposits		171,381			167,240
Accrued expenses and other liabilities		824			841
Short-term borrowings		1,379			3,569
Long-term debt		5,865			5,920
Total Liabilities		179,449			177,570
STOCKHOLDERS’ EQUITY
Common stock; $1 par value, 2,000,000 shares Authorized, 900,000 issued		900			900
Additional paid in capital		900			900
Retained earnings		26,589			26,631
Accumulated other comprehensive income		233			320
Treasury stock (at cost, 29,277 shares in 2009 and 28,767 shares in 2008)		(1,619	)		(1,591	)
Total Stockholders’ Equity		27,003			27,160
Total Liabilities and Stockholders’ Equity	$	206,452		$	204,730

The accompanying notes are an integral part of these statements.

Page 4

Allegheny Bancshares, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands)
(Unaudited)

											Accumulated
						Additional					Other
				Common		Paid In		Retained			Comprehensive			Treasury
	Total			Stock		Capital		Earnings			Income (Loss)			Stock
Balance, December 31, 2008	$	27,160		$	900	$	900	$	26,631		$	320		$	(1,591	)
Comprehensive Income
Net (Loss)		(42	)						(42	)
Change in unrealized gain on available for sale securities, net of income tax effect of $(45)		(87	)									(87	)
Total Comprehensive Loss		(129	)
Purchase of Treasury Stock		(28	)												(28	)
Balance, March 31, 2009	$	27,003		$	900	$	900	$	26,589		$	233		$	(1,619	)
Balance, December 31, 2007	$	26,731		$	900	$	900	$	25,836		$	154		$	(1,059	)
Comprehensive Income
Net income		601							601
Change in unrealized gain on available for sale securities, net of income tax effect of $110		213										213
Total Comprehensive Income		814
Purchase of Treasury Stock		(15	)												(15	)
Balance, March 31, 2008	$	27,530		$	900	$	900	$	26,437		$	367		$	(1,074	)

The accompanying notes are an integral part of these statements.

Page 5

Allegheny Bancshares, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Three Months Ended
	March 31,
	2009			2008
Cash Flows from Operating Activities:
Net (loss) income	$	(42	)	$	601
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		77			61
Depreciation and amortization		111			114
Net amortization of securities		10			—
Loss on sale of securities		10
Loss on restricted equity other than temporary impairment		604
Deferred income tax benefit		(63	)		69
Income from life insurance investment		(42	)		(43	)
Net change in:
Accrued income		30			(25	)
Other assets		(274	)		(55	)
Accrued expense and other liabilities		(260	)		257
Net Cash Provided by Operating Activities		161			979
Cash Flows from Investing Activities:
Net change in federal funds sold		1,570			(982	)
Net change in interest bearing deposits in banks		617			(7,072	)
Proceeds from sales, calls and maturities of available for sale securities		611			4,159
Proceeds from maturity of held to maturity securities		—			500
Purchase of securities available for sale		—			(1,047	)
Net increase in restricted investments		—			(14	)
Net increase in loans		(1,541	)		(2,030	)
Purchase of bank premises and equipment		(38	)		(14	)
Net Cash Used in Investing Activities		1,219			(6,500	)
Cash Flows from Financing Activities:
Net change in:
Demand and savings deposits		(1,121	)		1,692
Time deposits		5,263			6,849
Short-term borrowings		(2,190	)		(26	)
Curtailments of long-term borrowings		(55	)		(1,825	)
Purchase of treasury stock		(28	)		(15	)
Net Cash Provided by Financing Activities		1,869			6,675
Cash and due from banks
Net increase (decrease) in cash and due from banks		3,249			1,154
Cash and due from banks, beginning of period		2,562			2,846
Cash and due from banks, end of period	$	5,811		$	4,000
Supplemental Disclosure of Cash Paid During the Period for:
Interest	$	1,019		$	1,218
Income taxes	$	275		$	—

The accompanying notes are an integral part of these statements.

Page 6

ALLEGHENY BANCSHARES, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 ACCOUNTING PRINCIPLES:

The consolidated financial statements include the accounts of Allegheny Bancshares Inc. and its subsidiaries (the “Company”). Significant intercompany accounts and transactions have been eliminated in the consolidation.

The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general industry practices. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2009, and the results of operations for the periods ended March 31, 2008 and 2009. The notes included herein should be read in conjunction with the notes to the financial statements included in the 2008 Form 10-K included with the annual report to stockholders of Allegheny Bancshares, Inc.

NOTE 2 INVESTMENT SECURITIES:

The amortized costs of investment securities and their approximate fair values at March 31, 2009 and December 31, 2008 follows (in thousands of dollars):

	March 31, 2009				December 31, 2008
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Securities available for sale:
Mortgaged backed obligations of federal agencies	$	2,676	$	2,725	$	2,905	$	2,935
Government sponsored enterprises		5,980		6,135		6,008		6,177
Obligations of states and political subdivisions		15,278		15,502		15,652		15,991
Corporate obligations		501		428		501		451
Other equities		131		131		131		131
Total	$	24,566	$	24,921	$	25,197	$	25,685

     Consideration is given to current market conditions, historical trends in the individual securities, as well as trends in the overall market. Declines determined to be other than temporary are charged to operations and are shown on the income statement. There are no other-than-temporary impairment charges on investment securities during the first quarter of 2008 or 2009.

NOTE 3 RESTRICTED EQUITY SECURITIES:

Restricted equity securities are considered restricted due to lack of marketability. It consists of stock in the Federal Home Loan Bank (FHLB) and the parent company of the Bank’s Correspondent Bank (Correspondent). Investment in the FHLB stock is determined by the level of the Bank’s participation with FHLB various products and is collateral against outstanding borrowings from that institution. The FHLB stock is carried at cost, the “Correspondent” stock is carried at market value and each is restricted as to transferability. Management evaluates these restricted securities for other-than-temporary impairment on a quarterly basis, and more often when conditions warrant.

Page 7

ALLEGHENY BANCSHARES, INC.NOTES TO FINANCIAL STATEMENTS

NOTE 3 RESTRICTED EQUITY SECURITIES (CONTINUED):

Consideration is given to current market conditions, historical trends in the individual securities, as well as trends in the overall market. Declines determined to be other than temporary are charged to operations and are shown on the income statement. In view of the recent May 1 2009 closure of “Correspondent” by the Office of the Comptroller of the Currency, the Company recorded an other than temporary impairment (“OTTI”) non-cash charge. The carrying value of the Company’s “Correspondent” stock as of December 31, 2008 was approximately $603,515. The OTTI charge as of March 31, 2009 was $603,515, eliminating our carrying value of this stock. No other than temporary impairment charge was recognized in the same period in 2008.

NOTE 4 LOANS RECEIVABLE:

Loans outstanding are summarized as follows (in thousands of dollars):

	March 31,		December 31,
	2009		2008
Real estate loans	$	73,003	$	72,291
Commercial and industrial loans		71,571		70,680
Loans to individuals, primarily collateralized by autos		11,611		11,779
All other loans		3,565		3,628
Total Loans		159,750		158,378
Less allowance for loan losses		1,304		1,396
Net Loans Receivable	$	158,446	$	156,982

NOTE 5 ALLOWANCE FOR LOAN LOSSES:

A summary of transactions in the allowance for loan losses for the three months ended March 31, 2009 and 2008 follows (in thousands):

	Three Months Ended
	March 31,
	2009			2008
Balance, beginning of period	$	1,396		$	1,186
Provision charged to operating expenses		77			61
Recoveries of loans charged off		34			40
Loans charged off		(203	)		(28	)
Balance, end of period	$	1,304		$	1,259

NOTE 6 LONG TERM DEBT:

The Company has borrowed money from the Federal Home Loan Bank of Pittsburgh (FHLB). The interest rates on all of the notes payable as of March 31, 2009 were fixed at the time of the advance and fixed rates range from 4.14% to 5.57%. The FHLB notes are secured by FHLB Stock, as well as investment securities and mortgage loans. The weighted average interest rate is 4.88% at March 31, 2009.

Page 8

ALLEGHENY BANCSHARES, INC.NOTES TO FINANCIAL STATEMENTS

NOTE 7 BANK OWNED LIFE INSURANCE:

The Company, in an effort to attract and retain employees, offers a variety of benefits to full time employees. The costs of these benefits continue to grow faster than inflation. In order to offset some of these costs and to offer other benefits the Company has invested in a Bank Owned Life Insurance (BOLI) contract. Earnings on these contracts are tax exempt, and are very attractive in comparison with other long-term investments.

NOTE 8 FAIR VALUE:

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157,Fair Value Measurements,which provides a definition of fair value for accounting purposes, establishes a framework for measuring fair value and expands related financial disclosures. Statement No. 157 does not require any new fair value measurements and was initially effective for the Company beginning January 1, 2008. Statement No. 157 establishes a hierarchy that prioritizes the use of fair value inputs used in valuation methodologies into the following three levels.

     Level 1 — Valuation is based upon quoted prices for identical instruments treaded in active markets.

     Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model —based valuation techniques for which all significant assumptions are observable in the market.

     Level 3 — Valuation is based upon significant inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of valuation methodologies used for assets recorded at fair values.

Investment securities available for sale:Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, when available. If quoted prices are not available, fair values are measured using independent pricing models. Level 1 securities include those traded by dealers or brokers in an active over the counter markets as well as U.S. Government sponsored enterprises. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include other equities that do not have an active market. Currently all of the Company’s investment securities available for sale are considered Level 2 securities and their fair value at March 31, 2009 is $24,920,815.

Restricted equity securities:Restricted equity securities that are restricted as to the transferability of the shares. Fair value measurement is based upon quoted prices when available, but due to the limited number of transactions, and the restrictions on transferability of these shares, a true active market does not always exist. As such, the restricted equity securities are considered as Level 3 securities, and their estimated fair value at December 31, 2008 is $1,351,215.

Loans:The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan loss is established in accordance with SFAS 114Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). The fair value was determined by the measurement of the fair value of the underlying collateral. Typically the collateral value is determined by applying a discount to an appraisal that was performed at or about the date of the loan. Due to the age of appraisals the changing market

Page 9

ALLEGHENY BANCSHARES, INC.NOTES TO FINANCIAL STATEMENTS

NOTE 8 FAIR VALUE (CONTINUED):

conditions of real estate the Company considers it’s impaired loans to be level 3 assets. At March 31, 2009, the aggregate carrying amount of impaired loans was $851,514.

Other Real Estate Owned:Certain assets such as other real estate owned (OREO) are measured at fair value less estimated holding costs and cost to sell. We believe that the fair value component in its valuation follows the provisions of SFAS No. 157. Due to age of appraisals and changing market conditions, the Company considers it’s OREO to be level 3 assets, and their value as of March 31, 2009 was $549,099.

NOTE 9 SUBSEQUENT EVENT — PURCHASE OF TWO BRANCH OFFICES:

On January 13, 2009, Pendleton Community Bank entered into an agreement to purchase two branch offices from Citizens National Bank (“CNB”). The two offices are in Marlinton, WV and Petersburg, WV. The Agreement can be found by accessing the website of the Securities and Exchange Commission under the filings of Allegheny Bancshares, Inc. and as part of the Current Report on Form 8-K filed on January 20, 2009. The purchase included the real estate and both offices of CNB as well as approximately $14 million loan portfolio and approximately $22 million in deposits. This acquisition took place on April 17^th 2009.

NOTE 10 BENEFIT PLANS:

Executive Performance Driven Plan: On June 4^th, 2008, the Company, approved the Pendleton Community Bank , Inc. Executive Performance Driven Plan. The Performance Plan provides for bonus compensation based on achievement of certain performance goals. The CEO is eligible to receive a bonus based on achievement of the performance criteria.

     For the Bank’s Chief Executive Officer, performance compensation will be based on the following individual categories (as reflected in the performance of Allegheny Bancshares, Inc.): Return on Average Equity, Increase in Earnings per Share, Return on Assets, Asset Growth Rate.

     The total performance compensation which may be earned by the CEO is between 0% and 11.50% of his base salary. The Company has accrued a liability and incurred a benefit expense of $2,553 for the first three months of 2009 for this plan based on the current budgeted performance for 2009.

Supplemental Retirement Agreement: On June 4th, 2008 the Bank entered into a non-qualified Supplemental Retirement Agreement (“SERP”) with the CEO. The SERP provide for the payment of a monthly supplemental executive retirement benefit equal to annual payments of $54,663 for a 15 year period. Such benefit shall be payable for a period of fifteen years, or under certain circumstances, prior to age 65. For each full calendar year the CEO completes with the Bank without separation of service, the CEO shall be credited with 8.33% of this benefit, toward 100% after 12 years. The Company has accrued a liability and incurred a benefit expense of $6,472 for the first three months of 2009 for this plan, and none for the first quarter of 2008.

Page 10

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

Allegheny Bancshares, Inc. (Company) is a single bank holding company organized under the laws of West Virginia. The Company provides financial services through its wholly owned subsidiary Pendleton Community Bank (Bank).

The Bank is a full service commercial bank offering financial services through four financial centers located in the West Virginia towns of Franklin, Moorefield and Marlinton, and a financial center near Harrisonburg, Virginia. Currently its primary trade areas are these towns and the West Virginia counties of Pendleton, Hardy, Pocahontas, and in Rockingham County, Virginia.

The following discussion and analysis is provided to address information about the Company’s financial condition and results of operations that may not otherwise be apparent from reading the Consolidated Financial Statements and notes. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related notes to the Consolidated Financial Statements.

Forward Looking Statements

The following discussion contains statements that refer to future expectations, contain projections of the results of operations or of financial condition or state other information that is “forward-looking.” “Forward-looking” statements are easily identified by the use of words such as “could,” “could anticipate,” “estimate,” “believe,” and similar words that refer to the future outlook. There is always a degree of uncertainty associated with “forward-looking” statements. The Company’s management believes that the expectations reflected in such statements are based upon reasonable assumptions and on the facts and circumstances existing at the time of these disclosures. Actual results could differ significantly from those anticipated.

Many factors could cause the Company’s actual results to differ materially from the results contemplated by the forward-looking statements. Some factors, which could negatively affect the results, include:

• General economic conditions, either nationally or within the Company’s markets, could be less favorable than expected;

• Changes in market interest rates could affect interest margins and profitability;

• Competitive pressures could be greater than anticipated; and

• Legal or accounting changes could affect the Company’s results.

Critical Accounting Policy

The financial condition and results of operations as presented in the Consolidated Financial Statements and the Notes to Consolidated Financial Statements are dependent on the accounting policies. The policies selected and applied involve judgments, estimates, and may change from period to period based upon economic conditions. In addition, changes in generally accepted accounting principles could impact the calculations of these estimates, and even though this would not affect the true values, it could affect the timing of recognizing income or expense.

The following discussion of allowance for loans loss is, in management’s opinion, the most important and critical policy that affects the financial condition and results of operations. This critical policy involves the most difficult and complex judgments about the unknown losses that currently exist in the Company’s largest asset, its loan portfolio.

Page 11

Allowance for Loan Losses and Provision for Loan Losses

The provision for loan losses was $77,000 and $61,000 for the three month periods ended March 31, 2009 and 2008 respectively. The allowance for loan losses (“ALL”) was $1,304,000 (.82% of loans) at the end of the first three months of 2008 compared with $1,396,000 (.88% of loans) at December 31, 2008. The ALL increase was caused by a combination of recoveries on charged off loans and an increase to the provision to the ALL. The Company continues to monitor the loan portfolio for signs of weakness or developing credit problems. Loan loss provision for each period is determined after evaluating the loan portfolio and determining the level of reserves necessary to absorb current charge-offs and maintain the reserve at adequate levels. See Note 4 for the amounts.

The ALL is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans, industry historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Managements’ valuation of the ALL is based upon two principals of accounting: 1) SFAS No. 5 Accounting for Contingencies and SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The Company utilizes both of theses accounting standards by first identifying problem loans above a certain threshold and estimating losses based on the underlying collateral values, and second taking the remainder of the loan portfolio and separating the portfolio into pools of loans based on grade of loans as determined by the Company’s internal grading system. We apply loss percentages based upon our historical loss rates, and make adjustments based on economic conditions. The determination of the ALL is subjective and actual losses may be more or less than the amount of the allowance. However management believes that the allowance is a fair estimate of losses that exists in the loan portfolio as of the balance sheet date.

Results of Operations Overview

Net loss of $42,000 for the first three months of 2009 represents a decrease of 106.99% compared to the same period a year ago. This represents a $0.05 loss per share as compared to $0.68 income for the same period a year ago. Included in the first quarter results for 2009 was an other-than-temporary (“OTTI”) non-cash impairment charge of $604 thousand dollars pre-tax, equivalent to a $559 thousand after tax or $0.64 per share. The impairment charge relates to certain restricted stock of Silverton Financial Services (“SFS”), a bank holding company which owned Pendleton Community Bank’s correspondent bank. On May 1, 2009 the Office of the Comptroller of the Currency closed the bank. This OTTI charge represents the complete write off of the carrying value of SFS. Consolidated annualized returns on average equity and average assets for the three months ended March 31, 2009 were (0.62%) and (0.08%), respectively, compared with 8.90% and 1.22% for the same period in 2008. Net interest income was fairly consistent from year to year, the decrease in the Company’s net income was due to a combination of the OTTI charge and an increase in non interest expense.

Net Interest Income

The Company’s taxable equivalent net interest income increased by 2.12% for the first three months of 2009 compared to the first three months of 2008. This increase resulted primarily due to the decrease in the interest expense on deposits. Average balance of interest bearing liabilities grew by 1.24% while average balance of total earning assets grew by 2.20%. The Company’s tax equivalent yield on earnings assets for first three months of 2009 was 4.28% compared to 4.29% for same period in 2008 as the cost of funds decreased by 90 basis points while the yield on earning assets decreased 77 basis points.

Page 12

As shown in the interest sensitivity analysis in Table II, the Company is in a liability sensitive position, meaning our liabilities mature and reprice faster than our assets in a stable rate environment. In the last two years, the Federal Reserve lowered rates by 400 basis points, and in the first quarter of 2009 we have seen rates stabilize. This rate decrease has increased the prepayment speeds on assets with investments being called and loans being refinanced. Dropping rates can have a negative effect on interest margins, even for liability sensitive banks since the rates on earning assets can and will typically drop greater than banks can drop the costs of deposits.

Table I shows the average balances for interest bearing assets and liabilities, the rates earned on earning assets and the rates paid on deposits and borrowed funds.

TABLE I

Allegheny Bancshares, Inc.
Net Interest Margin Analysis
(On a Fully Taxable Equivalent Basis)(Dollar Amounts in Thousands)

	Three Months Ended								Three Months Ended
	March 31, 2009								March 31, 2008
	Average			Income/					Average		Income/
	Balance			Expense		Rates			Balance		Expense		Rates
Interest Income
Loans1,2	$	158,921		$	2,688		6.77	%	$	147,747	$	2,866		7.76	%
Federal funds sold		90			0		0.00	%		1,654		15		3.63	%
Interest bearing deposits		3,845			28		2.91	%		4,446		41		3.68	%
Investments			��
Taxable		10,789			103		3.82	%		13,031		148		4.54	%
Nontaxable2		15,591			226		5.80	%		18,280		268		5.86	%
Total Earning Assets		189,236			3,045		6.44	%		185,158		3,338		7.21	%
Interest Expense
Demand deposits		18,531			41		0.89	%		18,280		47		1.03	%
Savings		27,499			21		0.31	%		32,537		125		1.54	%
Time deposits		101,985			883		3.46	%		94,540		1,076		4.55	%
Short-term borrowings		1,690			1		0.24	%		1,397		8		2.29	%
Long-term debt		6,905			73		4.23	%		7,940		98		4.94	%
Total Interest Bearing
Liabilities	$	156,610		$	1,019		2.60	%	$	154,694	$	1,354		3.50	%
Net Interest Margin1					2,026							1,984
Net Yield on Interest
Earning Assets							4.28	%						4.29	%

1	Interest on loans includes loan fees
2	An incremental tax rate of 34% was used to calculate the tax equivalent income

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Noninterest Income

Noninterest income decreased to ($266,000) for the 3 months ending March 31, 2009, compared to $338,000 for the same period in 2008. As discussed in the “Results of Operations Overview” above, this decrease was almost entirely caused by the other-than-temporary-impairment charge on a restricted equity investment of the Company. Other than this impairment charge, noninterest income has been fairly stable during the first three months of 2009 as compared to the same period in 2008. The small increases in overdraft protection and ATM and debit card income were offset by decreases in insurance premiums and loss on sale of a security.

Noninterest Expenses

Total noninterest expense increased $121,000 or 8.92% for the first three months of 2009, as compared to 2008. Salaries and benefits increased by 2.34% due to merit increases, and higher benefit costs.

Other expenses increased by approximately $106,000 or 27.46%. The main reasons for this increase include $52,000 increase in FDIC insurance cost as well as $76,000 in fees associated with the upcoming acquisition of two branch offices of Citizens National Bank (See Note 8 to the financial statements).

Income Tax Expense

Income tax expense is a 139.62% of pretax income for the first quarter of 2009 compared to 27.24% for the same period in 2008. This tax expense is higher than pre tax income due to the majority of the other-than-temporary-impairment charge not being tax deductible. The loss on the OTTI charge for income tax purposes is considered a capital loss and only deductible to the extent that the Company has capital gains. Currently the Company does not have the expectation that it could realistically generate enough capital gains to fully offset the capital losses that have arisen from the OTTI charges on the restricted stock. To that extent, it must consider excess losses as non tax deductible and not derive any tax benefit from the excess capital losses over realistically expected capital gains. It appears that $484,000 of the OTTI charge will not be tax deductible as of March 31, 2009.

Loans and Provision for Loan Loss

Total loans were $158,446,000 at March 31, 2009, compared to $156,982,000 at December 31, 2008, representing a 0.87% increase. This growth in the loan portfolio is led by growth in the Commercial loans as well as Real Estate loans. A schedule of loans by type is shown in Note 3 to the financial statements. Approximately 86% of the loan portfolio is secured by real estate at March 31, 2009.

Loan Portfolio Risk Factors

Nonperforming loans include nonaccrual loans, loans over 90 days past due and restructured loans. Nonaccrual loans are loans in which interest accruals have been discontinued. Loans are placed in a nonaccrual status when management has information that indicates that principal or interest may not be collectable. The Company has a substantial amount of loans in the loan portfolio related to agribusinesses. Restructured loans are loans for which a borrower has been granted a concession on the interest rate or the original repayment terms because of financial difficulties.

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The following table summarizes the Company’s nonperforming loans at March 31, 2009 and December 31, 2008 (in thousands of dollars):

	March 31,		December 31,
	2009		2008
Nonaccrual loans	$	55	$	659
Restructured loans		137		139
Loans delinquent 90 days or more		408		1,034
Total Nonperforming Loans	$	600	$	1,832

Deposits

The Company’s primary funding source is deposits from individuals, businesses and government entities located within it’s trade area. The Company’s deposits increased $4,141,000 or 2.48% during the first three months of 2009. A schedule of deposits by type is shown in the balance sheets. The primary reason for this increase was the increase in certificates of deposits (CDs). Savings accounts decreased as customers are searching for more yield. Much of this deposit growth it is believed to be due to a “flight to quality” as customers seek safe investments due to recent turmoil in the equity markets. Time deposits of $100,000 or more were 17.90% and 16.87% of total deposits at March 31, 2009 and December 31, 2008, respectively.

Borrowings

The Company borrows funds from the Federal Home Loan Bank (FHLB) to provide liquidity and to reduce interest rate risk. As competition for deposits have increased during periods of loan growth, FHLB borrowings have been utilized to help fund the loan growth. These borrowings have a fixed rate of interest and are amortized over a period of 2 to 20 years. Interest rates on these obligations range from 4.14% to 5.57%.

Capital

The Company continues to maintain a strong capital position to support future growth. Capital as a percentage of total assets was 13.31% at March 31, 2009 and significantly exceeded regulatory requirements. The Company is considered to be well capitalized under the regulatory framework for prompt corrective actions.

Uncertainties and Trends

Management is not aware of any known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on liquidity, capital resources or operations. Additionally, management is not aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have such an effect.

Liquidity and Interest Sensitivity

Liquidity reflects our ability to ensure that funds are available to meet present and future obligations. At March 31, 2009, the Company had liquid assets of approximately $5.81 million in the form of cash and due from banks. Management believes that the Company’s liquid assets are adequate at March 31, 2009. Additional liquidity may be provided by the growth in deposit accounts and loan repayments. In the event the Company would need additional funds, it has the ability to purchase federal funds and borrow under established lines of credit of $87.6 million.

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At March 31, 2009, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 33.18% for the one year repricing period. This rate reflects a very conservative estimate since we show an immediate runoff of accounts without a specific maturity date, and does not reflect the historical movement of funds during varying interest rate environments. Adjusted for historical repricing trends in response to interest rate changes, the adjusted Gap Ratio is -18.36%. This indicates that the Company is liability sensitive. But this negative gap ratio is within guidelines set by the Company and the Company expects interest income would remain stable in both a declining and increasing interest rate environment. Management constantly monitors the Company’s interest rate risk and has decided that the current position is an acceptable risk for a community bank operating in a rural environment. Table II shows the Company’s interest sensitivity.

TABLE II

Allegheny Bancshares, Inc.
Interest Sensitivity Analysis
March 31, 2009
(In Thousands of Dollars)

	0-3			4-12			1-5			Over 5
	Months			Months			Years			Years			Total
Uses of Funds:
Loans		18,171			22,336			58,066			61,177			159,750
Federal funds sold
Interest bearing deposits		3,511						509						4,020
Investment securities		503			1,665			14,724			8,029			24,921
Restricted Investments											747			747
Total		22,185			24,001			73,299			69,953			189,438
Sources of Funds:
Deposits:
Interest bearing demand		19,535												19,535
Savings		26,982												26,982
Time deposits over $100,000		2,517			16,262			9,388			2,627			30,794
Other time deposits		10,728			30,619			23,013			9,600			73,960
Short-term borrowings		1,379												1,379
Long-term debt		56			1,172			1,668			2,969			5,865
Total		61,197			48,053			34,069			15,196			158,515
Discrete Gap		(39,012	)		(24,052	)		39,230			54,757
Cumulative Gap		(39,012	)		(63,064	)		(23,834	)		30,923
Ratio of Cumulative Gap To Total Earning Assets		-20.53	%		-33.18	%		-12.54	%		16.32	%

Table II reflects the earlier of the maturity or repricing dates for various assets and liabilities at March 31, 2009. In preparing the above table, no assumptions are made with respect to loan prepayments or deposit run offs. Loan principal payments are included in the earliest period in which the loan matures or can be repriced. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or repricing. A loan with a floating rate, such as the majority of our residential loan portfolio, that has reached a contractual floor or ceiling level is being treated as a fixed rate loan until the rate is

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again free to float. In the current rate environment, this has the effect of causing the table II to model our adjustable rate loans as fixed rate loans. However in a rising interest rate environment when these loans would be repriced at rates above the contractual floor, and are once again free to float, many of our loans would move from the over 5 year timeframe to a more current timeframe.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in Quantitative and Qualitative Disclosures about Market Risk as reported in the 2007 Form 10-K.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers that file periodic reports under the Securities Exchange Act of 1934 (the “Act”) are now required to include in those reports certain information concerning the issuer’s controls and procedures for complying with the disclosure requirements of the federal securities laws. Under rules adopted by the Securities and Exchange Commission effective August 29, 2002, these disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure.

     We have established disclosure controls and procedures to ensure that material information related to Allegheny Bancshares, Inc. and its subsidiary is made known to our principal executive officer and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. These disclosure controls and procedures consist principally of communications between and among the Chief Executive Officer and the Chief Financial Officer to identify any new transactions, events, trends, contingencies or other matters that may be material to the Company’s operations. As required, we have evaluated the effectiveness of these disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, the Company’s management, including the Chief Financial Officer, concluded that such disclosure controls and procedures were operating effectively as designed as of the date of such evaluation.

Changes in Internal Controls

During the period reported upon, there were no significant changes in the Company’s internal controls pertaining to its financial reporting and control of its assets or in other factors that could significantly affect these controls.

Part II. Other Information

Item 1. Legal Proceedings —

Not Applicable

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Item 2. Changes in Securities —

During the 3-month period ending March 31, 2009, the Company purchased some of the Company’s stock to be held as treasury stock. This was not part of publicly announced plan. The details of the transaction were as follows:

	Total Number		Average
	Of shares		Price per
Date	Purchased		Share
March 03, 2009		500	$	60.00
March 11, 2009		500	$	60.00

Item 3. Defaults Upon Senior Securities —

Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders —

Not Applicable

Item 5. Other Information —

Not Applicable

Item 6. Exhibits

     The following Exhibits are filed as part of this Form 10-Q

No.	Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

The following exhibit is incorporated by reference to the Exhibits to Allegheny Bancshares, Inc. Form 10-KSB filed March 30, 2003.

No.	Description	Exhibit Number
3.1	Articles of Incorporation — Allegheny Bancshares, Inc.	E2

The following exhibit is incorporated by reference to the Exhibits to Allegheny Bancshares, Inc. Form 10-K filed March 31, 2006.

No.	Description	Exhibit Number
3.3	Bylaws of Allegheny Bancshares, Inc.	3.3

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SIGNATURE

In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant causes this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

ALLEGHENY BANCSHARES, INC.
By:	/s/ WILLIAM A. LOVING
	William A. Loving, Jr.
	Executive Vice President and Chief Executive Officer
By:	/s/ L. KIRK BILLINGSLEY
	L. Kirk Billingsley
	Chief Financial Officer

Date: May 7, 2009