ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in thousands, except share and per share data)

Forward Looking Statements

Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and as defined in the Private Securities Litigation Reform Act of 1995. Such statements are often, but not always, identified by the use of such words as "believes," "anticipates," "expects," and similar expressions. Such statements involve various important assumptions, risks, uncertainties, and other factors, many of which are beyond our control, which could cause actual results to differ materially from those expressed in such forward looking statements. These factors include, but are not limited to, the risk factors discussed in Part I, Item 1A of Ohio Valley's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and Ohio Valley's other securities filings. Readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation and disclaims any intention to republish revised or updated forward looking statements as a result of unanticipated future events.

Financial Overview

The Company is primarily engaged in commercial and retail banking, offering a blend of commercial, consumer and agricultural banking services within central and southeastern Ohio as well as western West Virginia. The banking services offered by the Bank include the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; and the making of construction and real estate loans. The Bank also offers individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. As part of its lending function, the Bank also offers credit card services. Loan Central engages in consumer finance, offering smaller balance personal and mortgage loans to individuals with higher credit risk history. Loan Central's line of business also includes seasonal tax refund loan services during the January through April periods. Ohio Valley Financial Services sells life insurance.

For the three months ended September 30, 2008, net income increased by $52, or 2.8%, compared to the same quarterly period in 2007, to finish at $1,885. Earnings per share for the third quarter of 2008 increased $.02, or 4.4%, compared to the same quarterly period in 2007, to finish at $.47 per share. For the nine months ended September 30, 2008, net income increased by $287, or 5.4%, compared to the same period in 2007, to finish at $5,581. Earnings per share for the first nine months of 2008 finished at

$1.38, up $.10, or 7.8%, over the same period in 2007. Earnings per share growth for both the quarterly and year-to-date periods ending September 30, 2008 continues to exceed the nominal dollar net income growth pace due to the Company's stock repurchase program, with increases in treasury stock repurchases lowering the weighted average number of common shares outstanding. The annualized net income to average asset ratio, or return on assets (ROA), and net income to average equity ratio, or return on equity (ROE), both increased to .95% and 12.20% during the first nine months of 2008, as compared to .92% and 11.72%, respectively, for the same period in 2007. The Company's growth in earnings during the first nine months of 2008 was accomplished primarily by: 1) net interest margin expansion as a result of the lower short-term interest rate environment initiated by the Federal Reserve Bank, which led to lower interest expense and an 8.1% year-to-date improvement in net interest income; and 2) noninterest income improvement of 10.0% over 2007's first nine months due to the increased transaction volume related to the Company's service charges on deposit accounts and seaonal tax clearing services performed in the first quarter of 2008.

The consolidated total assets of the Company decreased $6,853, or 0.9%, during the first nine months of 2008 as compared to year-end 2007, to finish at $776,565. This drop in assets was led by a decrease in the Company's loan balances, which decreased $17,110 from year-end 2007, and lower investment securities, which decreased $6,203 from year-end 2007. Loan growth continues to be challenged by the various economic trends that have had a negative impact on consumer spending, including the troubled housing crisis as well as rising energy and food costs. A lower consumer demand for loans has caused decreases in the Company's entire loan portfolio from year-end 2007, which include commercial, consumer and real estate loan balances. Maturity runoff of U.S. Government sponsored entity securities led the decrease in the Company's investment securities. The loan and investment security decreases contributed to an excess liquidity position, causing increases of $7,393 in interest-yielding deposits in other financial institutions and $3,818 in cash and cash equivalents, from year-end 2007. While the demand for loans decreased during the first nine months of 2008, the Company was able to benefit from growth in its total deposit liabilities of $4,973 from year-end 2007, to use as funding sources for potential earning asset growth during the remaining quarter of 2008. Interest-bearing deposit liability growth was led by surges in the Company's public fund NOW accounts, up $36,555 from year-end 2007, and Market Watch product, up $25,832 from year-end 2007, partially offset by a decrease in time deposits of $56,527 from year-end 2007. Furthermore, the Company's noninterest-bearing demand deposits decreased $1,363 from year-end 2007. The total deposits retained from year-end 2007 were partially used to fund the runoff in the Company's securities sold under agreements to repurchase ("repurchase agreements") and repayments of other borrowed funds, which decreased $5,856 and $7,242, respectively, from year-end 2007.

Comparison of Financial Condition at September 30, 2008 and December 31, 2007

The following discussion focuses, in more detail, on the consolidated financial condition of the Company at September 30, 2008 compared to December 31, 2007. The purpose of this discussion is to provide the reader a more thorough understanding of the consolidated financial statements. This discussion should be read in conjunction with the interim consolidated financial statements and the footnotes included in this Form 10-Q.

Cash and Cash Equivalents

The Company's cash and cash equivalents consist of cash and balances due from banks and federal funds sold. The amounts of cash and cash equivalents fluctuate on a daily basis due to customer activity and liquidity needs. At September 30, 2008, cash and cash equivalents had increased $3,818, or 22.6%, to $20,712 as compared to $16,894 at December 31, 2007. The increased liquidity position of the Company at September 30, 2008 was the result of lower loan demand and investment security maturities combined

with an increase in interest-bearing deposits. As liquidity levels vary continuously based on consumer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes that the current balance of cash and cash equivalents remains at a level that will meet cash obligations and provide adequate liquidity. Further information regarding the Company's liquidity can be found under the caption "Liquidity" in this Management's Discussion and Analysis.

Interest-Bearing Deposits in Other Financial Institutions

At September 30, 2008, the Company had a total of $8,026 invested as interest-bearing deposits in other financial institutions, an increase from only $633 at December 31, 2007. This increase is largely the result of the Company's excess liquidity position due to decreasing loan demand and excess deposit liabilities. Historically, the Company has typically invested its excess funds with various correspondent banks in the form of federal funds sold, a common strategy performed by most banks. Beginning in the second quarter of 2008, the Company utilized a new relationship with a deposit placement service provider known as CDARS, or the Certificate of Deposit Account Registry Service, to invest its excess funds. CDARS provides financial institutions with the means to invest its own funds through One-Way Sell transactions for various maturity terms. The rates offered for the terms selected by the Company, between 2.4 and 2.8% at a weighted average maturity of 7 weeks compare favorably to federal funds rate offerings that were 2.0% at September 30, 2008, and have since been lowered to 1.0%. The Company views this investment option as a margin-enhancing alternative when investing its excess funds and will continue to utilize this method when the need arises. Furthermore, CDARS balances are 100% secured by Federal Deposit Insurance Corporation ("FDIC") insurance as compared to federal funds sold balances which were considered unsecured as of this report's measurement date of September 30, 2008. Since then, as part of the FDIC's "Liquidity Guarantee Program" announced on October 14, 2008, federal funds sold balances (or inter-banking funding) will now be 100% guaranteed by the FDIC. The ability of the Company to issue these guaranteed federal funds sold balances will expire on June 30, 2009.

Securities

During the first nine months of 2008, investment securities decreased $6,203 to finish at $87,841, a decrease of 6.6% as compared to year-end 2007. The Company's investment securities portfolio consists of mortgage-backed securities, U.S. Government sponsored entity ("GSE") securities and obligations of states and political subdivisions. GSE securities decreased $9,976, or 25.3%, as a result of several large maturities during both the first and second quarters of 2008. In addition to attractive yield opportunities and a desire to increase diversification within the Company's securities portfolio, GSE securities have also been used to satisfy pledging requirements for repurchase agreements. At September 30, 2008, the Company's repurchase agreements decreased 14.5%, reducing the need to secure these balances and impacting the runoff in GSE securities. This decrease was partially offset by increases in both mortgage-backed securities and obligations of states and political subdivisions, which were up $2,141, or 5.5%, and $1,632, or 10.2%, respectively, from year-end 2007. The Company continues to benefit from the advantages of mortgage-backed securities, which make up the largest portion of the Company's investment portfolio, totaling $40,805, or 46.5% of total investments at September 30, 2008. The primary advantage of mortgage-backed securities has been the increased cash flows due to the more rapid (monthly) repayment of principal as compared to other types of investment securities, which deliver proceeds upon maturity or call date. Principal repayments from mortgage-backed securities totaled $6,257 from January 1, 2008 through September 30, 2008. For the remainder of 2008, the Company's focus will be to generate interest revenue primarily through loan growth, as loans generate the highest yields of total earning assets.

Loans

The loan portfolio represents the Company's largest asset category and is its most significant source of interest income. During the first nine months of 2008, total loans were down $17,110, or 2.7%, from

year-end 2007. Lower loan balances were mostly influenced by total commercial loans, which were down $15,717, or 6.2%, from year-end 2007. The Company's commercial loans include both commercial real estate and commercial and industrial loans. While commercial loan balances are down, management continues to place emphasis on its commercial lending, which generally yields a higher return on investment as compared to other types of loans. The Company's commercial and industrial loan portfolio, down $11,129, or 20.2%, from year-end 2007, consists of loans to corporate borrowers primarily in small to mid-sized industrial and commercial companies that include service, retail and wholesale merchants. Collateral securing these loans includes equipment, inventory, and stock. Commercial real estate, the Company's largest segment of commercial loans, decreased $4,588, or 2.3%, largely due to lower loan demand as well as commercial loan paydowns and payoffs. This segment of loans is mostly secured by commercial real estate and rental property. Commercial real estate consists of loan participations with other banks outside the Company's primary market area. Although the Company is not actively marketing participation loans outside its primary market area, it is taking advantage of the relationships it has with certain lenders in those areas where the Company believes it can profitably participate with an acceptable level of risk. The commercial loan portfolio, including participation loans, consists primarily of rental property loans (19.8% of portfolio), medical industry loans (14.4% of portfolio), land development loans (10.8% of portfolio), and hotel and motel loans (10.5% of portfolio). During the first nine months of 2008, the primary market areas for the Company's commercial loan originations, excluding loan participations, were in the areas of Gallia, Jackson and Franklin counties of Ohio, which accounted for 62.5% of total originations. The growing West Virginia markets also accounted for 27.2% of total originations for the same time period. While management believes lending opportunities exist in the Company's markets, future commercial lending activities will depend upon economic and related conditions, such as general demand for loans in the Company's primary markets, interest rates offered by the Company and normal underwriting considerations. Additionally, the potential for larger than normal commercial loan payoffs may limit loan growth during the remainder of 2008.

Generating residential real estate loans remains a key focus of the Company's lending efforts. Residential real estate loan balances comprise the largest portion of the Company's loan portfolio and consist primarily of one- to four-family residential mortgages and carry many of the same customer and industry risks as the commercial loan portfolio. During the first nine months of 2008, total residential real estate loan balances decreased $1,121, or 0.4%, from year-end 2007 to total $249,362. The decrease was largely driven by a reduction in the Company's one-year adjustable-rate mortgage balances of $8,007, or 19.0%, from year-end 2007. During 2006 and 2007, consumer demand for fixed-rate real estate loans continued to increase due to the continuation of lower, more affordable, mortgage rates. As long-term interest rates continue to remain relatively stable in 2008, consumers continue to pay off and refinance their variable rate mortgages, although the volume of refinancings continues to stabilize as compared to 2007 and 2006. This has resulted in lower one-year adjustable-rate mortgage balances at the end of 2008's nine-month period as compared to year-end 2007. Partially offsetting the decreases in variable rate real estate loan balances was an increase to the Company's five-year adjustable rate (2-step) product, with balances being up $6,219, or 95.2%, from year-end 2007. This product allows the consumer to secure a fixed initial interest rate for the first five years, with the loan adjusting to a variable interest rate for years 6-30. Real estate loan growth was also experienced in the Company's longer-termed, fixed-rate real estate loans, which were up $2,202, or 1.2%, from year-end 2007. Terms of these fixed-rate loans include 15-, 20- and 30-year periods. To help further satisfy demand for longer-termed, fixed-rate real estate loans, the Company continues to originate and sell some fixed-rate mortgages to the secondary market, and has sold $10,480 in loans during the first nine months of 2008, which were up $7,158, or 215.4%, over the volume sold during the first nine months of 2007. The remaining real estate loan portfolio balances decreased $1,335 primarily from the Company's residential construction loans.

Also contributing to the loan portfolio decrease were consumer loans, which were down $821, or 0.6%, from year-end 2007. The Company's consumer loans are secured by automobiles, mobile homes, recreational vehicles and other personal property. Personal loans and unsecured credit card receivables

are also included as consumer loans. The decrease in consumer volume was mostly attributable to the automobile indirect lending segment, which decreased $2,083, or 7.2%, from year-end 2007. While the automobile lending segment continues to represent the largest portion of the Company's consumer loan portfolio, management's emphasis on profitable loan growth with higher returns has contributed most to the reduction in loan volume within this area. Indirect automobile loans bear additional costs from dealers that partially offset interest revenue and lower the rate of return. Furthermore, economic factors that have weakened the economy and consumer spending have caused a decline in automobile loan volume. As short-term rates have aggressively moved down since September 2007, continued competition with local banks and alternative methods of financing, such as captive finance companies offering loans at below-market interest rates, have continued to challenge automobile loan growth during the first nine months of 2008. Partially offsetting the decreases in auto loans was an increase to the Company's capital line loan balances, which increased $1,432, or 7.4%, from year-end 2007.

The Company recognized an increase of $549 in other loans from year-end 2007. Other loans consist primarily of state and municipal loans and overdrafts. This increase was largely due to an increase in overdrafts of $282.

The Company continues to monitor the pace of its loan volume, as it has experienced a 2.2% drop-off within its total loan portfolio during the first nine months of 2008. The well-documented housing market crisis and rising energy costs have impacted consumer spending and have led to lower consumer demand for loans. Furthermore, the Company continues to view the consumer loan segment as a decreasing portfolio, due to higher loan costs, increased competition in automobile loans and a lower return on investment as compared to the other loan portfolios. As a result, the Company expects total loan growth in 2008 to be challenged, with volume to continue at a stable-to-declining pace throughout the rest of the year. The Company remains committed to sound underwriting practices without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the credit quality of the portfolio.

Allowance for Loan Losses

Management continually monitors the loan portfolio to identify potential portfolio risks and to detect potential credit deterioration in the early stages, and then establishes reserves based upon its evaluation of these inherent risks. During the first nine months of 2008, the Company's allowance for loan losses remained relatively stable, finishing at $6,797, as compared to $6,737 at year-end 2007. This stable level of reserves was, in part, due to the declining levels of the Company's loan portfolio, down 2.7% from year-end 2007. The level of nonperforming loans, which consist of nonaccruing loans and accruing loans past due 90 days or more, increased from $3,661 at year-end 2007 to $4,334 at September 30, 2008. During the first quarter, the Company experienced problems with one of its commercial borrowers that was unable to meet the debt requirements of its loans. During this time, the Company stopped recognizing interest income on the loans, reversed all interest that had been accrued and unpaid and classified the loans as nonperforming. At March 31, 2008, the ratio of nonperforming loans to total loans grew to 1.40% as a result of this classification. During the second quarter, continued analysis of these loans was performed, which included the reviews of updated appraisals that reflected a decline in market values due to deteriorating market conditions. This analysis, along with continued loan deterioration of this large commercial borrower, prompted management to charge down the loan by $750, including estimated costs to sell, to the estimated fair value of the collateral. Subsequently, the Company acquired these properties through foreclosure and transferred the loans to other real estate owned ("OREO"). This shifted approximately $4,214 from nonperforming loans to nonperforming assets, which contributed to the increase in its nonperforming assets from $3,922 at year-end 2007 to $8,947 at September 30, 2008. As a result, the Company's ratio of nonperforming loans to total loans decreased to .70% at September 30, 2008, while the ratio of nonperforming assets to total assets increased from .50% at year-end 2007 to 1.15% at September 30, 2008.

During the first nine months of 2008, net charge-offs totaled $2,250, which were down $1,769 from the same period in 2007, in large part due to commercial charge-offs of specific allocations that were reflected in the allowance for loan losses from 2007. Management believes that the allowance for loan losses is adequate and reflects probable incurred losses in the loan portfolio. Asset quality remains a key focus, as management continues to stress not just loan growth, but quality in loan underwriting as well.

Deposits

Deposits, both interest- and noninterest-bearing, continue to be the most significant source of funds used by the Company to support earning assets. Deposits are influenced by changes in interest rates, economic conditions and competition from other banks. During the first nine months of 2008, total deposits were up $4,973, or 0.8%, from year-end 2007. The change in deposits came primarily from an increase in the Company's interest-bearing demand deposits and money market deposit balances.

Interest-bearing NOW account balances increased $33,956, or 51.7%, during the first nine months of 2008 as compared to year-end 2007. This growth was largely driven by a $36,555 increase in public fund balances related to the local city and county school construction projects currently in process within Gallia County, Ohio.

Further deposit growth came from the Company's money market deposit balances, which were up $27,343, or 37.8%, during the first nine months of 2008 as compared to year-end 2007. This increase was from the Company's Market Watch money market account product, which generated $25,832 in new deposit balances from year-end 2007, mostly during the second quarter of 2008. Introduced in August 2005, the Market Watch product is a limited transaction investment account with tiered rates that competes with current market rate offerings and serves as an alternative to certificates of deposit for some customers. In the second quarter of 2008, the Company began marketing a special six-month introductory rate offer of 3.50% APY that would be for new Market Watch accounts. This special offer was well received by the Bank's customers and contributed to most of the year-to-date increase in 2008. As a result, Market Watch deposit balances increased $20,670, or 28.4%, during the second quarter of 2008.

Partially offsetting money market deposit growth were time deposits, decreasing $56,527, or 16.6%, from year-end 2007. Time deposits, particularly CD's, are the most significant source of funding for the Company's earning assets, making up 47.9% of total deposits. With loan balances on a declining pace, down 2.7% from year-end 2007, there has not been an aggressive need to deploy time deposits as a funding source. Yet, as market rates have aggressively lowered since September 2007, the Company has seen the cost of its retail CD balances continue to reprice downward (as a lagging effect to the actions by the Federal Reserve) to reflect current deposit rates. This lagging effect has caused the Company's retail CD portfolio to become more of an attractive funding source to fund earning assets, producing an average cost of 4.24% during the first nine months of 2008 as compared to 4.85% during the same period in 2007. Wholesale fund deposits (i.e., brokered and network CD issuances) have not been as responsive to the decline in short-term market rates, producing an average cost of 4.80% during the first nine months of 2008 as compared to 4.85% during the same period in 2007, well exceeding the price to fund asset growth with retail CD balances. As a result, management will continue to emphasize its core deposit funding and retail CD balances as a more affordable and cost effective source to subsidize earning asset growth as compared to wholesale deposits.

The Company's interest-free funding source, noninterest bearing demand deposits, also decreased $1,363, or 1.7%, from year-end 2007.

The Company will continue to experience increased competition for deposits in its market areas, which should challenge its net growth in retail CD balances. The Company will continue to emphasize growth

in its core deposits as well as to utilize its retail CD funding sources during the remainder of 2008, reflecting the Company's efforts to reduce its reliance on higher cost funding.

Securities Sold Under Agreements to Repurchase

Repurchase agreements, which are financing arrangements that have overnight maturity terms, were down $5,856, or 14.5%, from year-end 2007. This decrease was mostly due to seasonal fluctuations of two commercial accounts in the first nine months of 2008.

Other Borrowed Funds

The Company also accesses other funding sources, including short-term and long-term borrowings, to fund asset growth and satisfy short-term liquidity needs. Other borrowed funds consist primarily of Federal Home Loan Bank (FHLB) advances and promissory notes. During the first nine months of 2008, other borrowed funds were down $7,242, or 10.8%, from year-end 2007. Management used the growth in deposit proceeds to repay FHLB borrowings during the first nine months of 2008. While deposits continue to be the primary source of funding for growth in earning assets, management will continue to utilize various wholesale borrowings to help manage interest rate sensitivity and liquidity.

Subordinated Debentures and Trust Preferred Securities

On March 22, 2007, a trust formed by Ohio Valley issued $8,500 of adjustable-rate trust preferred securities as part of a pooled offering of such securities. The Company used the proceeds from these trust preferred securities to pay off $8,500 in higher cost trust preferred security debt on March 26, 2007. The replacement of the higher cost trust preferred security debt was a strategy by management to lower interest rate pressures that were impacting interest expense and help improve the Company's net interest margin. The early extinguishment and replacement of this higher cost debt improved earnings by nearly $54 pre-tax ($35 after taxes) during the first nine months of 2008 as compared to the same period in 2007. For additional discussion on the terms and conditions of this new trust preferred security issuance, please refer to "Note
7 - Subordinated Debentures and Trust Preferred Securities" within Item 1, Notes . . .