Note E –Allowance For Loan Losses

Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. Management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors.

Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these types of loan types is often based more upon specific credit reviews, with consideration given to the potential impairment of certain credits and historical loss rates, adjusted for economic conditions and other inherent risk factors.

The following summarizes the activity in the allowance for loan loss, by portfolio segment, for the three months ended March 31, 2012 and 2011. The following also presents the balance in the allowance for loan loss disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans, by portfolio segment, as of March 31, 2012 and December 31, 2011.

(In thousands)	Commercial and industrial	Commercial real estate	Residential real estate	Home equity	Consumer	DDA overdrafts	Total
Three Months Ended
March 31, 2012:
Allowance for loan loss
Beginning balance	$ 590	$ 11,666	$ 3,591	$ 2,773	$ 88	$ 701	$ 19,409
Charge-offs	(69)	(1,989)	(198)	(509)	(59)	(335)	(3,159)
Recoveries	3	96	4	1	29	295	428
Provision	25	682	353	701	51	138	1,950
Ending balance	$ 549	$ 10,455	$ 3,750	$ 2,966	$ 109	$ 799	$ 18,628

Three Months Ended
March 31, 2011:
Allowance for loan loss
Beginning balance	$ 1,864	$ 8,488	$ 4,149	$ 2,640	$ 95	$ 988	$ 18,224
Charge-offs	(75)	(34)	(550)	(237)	(44)	(434)	(1,374)
Recoveries	3	2	6	1	38	428	478
Provision	(213)	419	611	218	3	48	1,086
Ending balance	$ 1,579	$ 8,875	$ 4,216	$ 2,622	$ 92	$ 1,030	$ 18,414

As of March 31, 2012:
Allowance for loan loss
Evaluated for impairment:
Individually	$ -	$ 951	$ -	$ -	$ -	$ -	$ 951
Collectively	549	9,504	3,750	2,966	109	799	17,677
Total	$ 549	$ 10,455	$ 3,750	$ 2,966	$ 109	$ 799	$ 18,628

Loans
Evaluated for impairment:
Individually	$ -	$ 13,383	$ 474	$ 299	$ -	$ -	$ 14,156
Collectively	108,707	732,203	644,306	434,296	35,448	2,848	1,957,808
Total	$ 108,707	$ 745,586	$ 644,780	$ 434,595	$ 35,448	$ 2,848	$ 1,971,964

As of December 31, 2011:
Allowance for loan loss
Evaluated for impairment:
Individually	$ -	$ 2,666	$ -	$ -	$ -	$ -	$ 2,666
Collectively	590	9,000	3,591	2,773	88	701	16,743
Total	$ 590	$ 11,666	$ 3,591	$ 2,773	$ 88	$ 701	$ 19,409

Loans
Evaluated for impairment:
Individually	$ 81	$ 15,311	$ 476	$ 298	$ -	$ -	$ 16,166
Collectively	130,818	716,835	638,109	432,702	35,845	2,628	1,956,937
Total	$ 130,899	$ 732,146	$ 638,585	$ 433,000	$ 35,845	$ 2,628	$ 1,973,103

Credit Quality Indicators

All commercial loans within the portfolio are subject to internal risk grading. All non-commercial loans are evaluated based on payment history. The Company’s internal risk ratings for commercial loans are: Exceptional, Good, Acceptable, Pass/Watch, Special Mention, Substandard and Doubtful. Each internal risk rating is defined in the loan policy using the following criteria: balance sheet yields, ratios and leverage, cash flow spread and coverage, prior history, capability of management, market position/industry, potential impact of changing economic, legal, regulatory or environmental conditions, purpose structure, collateral support, and guarantor support. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process. Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of probable loss.

The Company categorizes loans into risk categories based on relevant information regarding the customer’s debt service ability, capacity, overall collateral position along with other economic trends, and historical payment performance. The risk grades for each credit are updated when the Company receives current financial information, the loan is reviewed by the Company’s internal loan review/credit administration departments, or the loan becomes delinquent or impaired. The risk grades are updated a minimum of annually for loans rated exceptional, good, acceptable, or pass/watch. Loans rated special mention, substandard or doubtful are reviewed at least quarterly. The Company uses the following definitions for its risk ratings:

Risk Rating	Description

Exceptional	Loans classified as exceptional are secured with liquid collateral conforming to the internal loan policy. Loans rated within this category pose minimal risk of loss to the bank and the risk grade within this pool of loans is generally updated on an annual basis.

Good	Loans classified as good have similar characteristics that include a strong balance sheet, satisfactory debt service coverage ratios, strong management and/or guarantors, and little exposure to economic cycles. Loans within this category are generally reviewed on an annual basis. Loans in this category generally have a low chance of loss to the bank.

Acceptable	Loans classified as acceptable have acceptable liquidity levels, adequate debt service coverage ratios, experienced management, and have average exposure to economic cycles. Loans within this category generally have a low risk of loss to the bank.

Pass/watch	Loans classified as pass/watch have erratic levels of leverage and/or liquidity, cash flow is volatile and the borrower is subject to moderate economic risk. A borrower in this category poses a low to moderate risk of loss to the bank.

Special mention	Loans classified as special mention have a potential weakness(es) that deserves management’s close attention. The potential weakness could result in deterioration of the loan repayment or the bank’s credit position at some future date. A loan rated in this category poses a moderate loss risk to the bank.

Substandard	Loans classified as substandard reflect a customer with a well defined weakness that jeopardizes the liquidation of the debt. Loans in this category have the possibility that the bank will sustain some loss if the deficiencies are not corrected and the bank’s collateral value is weakened by the financial deterioration of the borrower.

Doubtful	Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that make collection of the full contract amount highly improbable. Loans rated in this category are most likely to cause the bank to have a loss due to a collateral shortfall or a negative capital position.

The following presents loans by the Company’s credit quality indicators, by class, as of March 31, 2012 and December 31, 2011:

(In thousands)	Commercial and industrial	Commercial real estate	Residential real estate	Home equity	Consumer	DDA overdrafts	Total
March 31, 2012:
Risk Grade
Exceptional	$ 3,728	$ 41	-	-	-	-	$ 3,769
Good	5,546	106,612	-	-	-	-	112,158
Acceptable	73,755	430,433	-	-	-	-	504,188
Pass/watch	24,314	160,772	-	-	-	-	185,086
Special mention	420	16,545	-	-	-	-	16,965
Substandard	828	30,955	-	-	-	-	31,783
Doubtful	116	228	-	-	-	-	344
Total	$ 108,707	$ 745,586					854,293

Payment Activity
Performing			$ 644,526	$ 434,458	$ 35,448	$ 2,847	$ 1,117,279
Non-performing			254	137	-	1	392
Total			$ 644,780	$ 434,595	$ 35,448	$ 2,848	$ 1,971,964

December 31, 2011:
Risk Grade
Exceptional	$ 4,220	$ 42	-	-	-	-	$ 4,262
Good	6,728	107,718	-	-	-	-	114,446
Acceptable	93,077	411,721	-	-	-	-	504,798
Pass/watch	25,246	161,598	-	-	-	-	186,844
Special mention	470	16,802	-	-	-	-	17,272
Substandard	1,037	34,265	-	-	-	-	35,302
Doubtful	121	-	-	-	-	-	121
Total	$ 130,899	$ 732,146					863,045

Payment Activity
Performing			$ 637,586	$ 431,199	$ 35,845	$ 2,616	1,107,246
Non-performing			999	1,801	-	12	2,812
Total			$ 638,585	$ 433,000	$ 35,845	$ 2,628	$ 1,973,103

Aging Analysis of Accruing and Non-Accruing Loans

The following presents an aging analysis of the Company’s accruing and non-accruing loans, by class, as of March 31, 2012 and December 31, 2011:

(In thousands)	Commercial and industrial	Commercial real estate	Residential real estate	Home equity	Consumer	DDA overdrafts	Total
March 31, 2012:
30 – 59 days past due	$ 31	$ 1,569	$ 3,345	$ 1,273	$ 51	$ 301	$ 6,570
60 – 89 days past due	32	897	509	150	7	2	1,597
Over 90 days past due	-	170	254	137	-	1	562
Non-accrual	181	16,840	2,040	1,359	-	-	20,420
	244	19,476	6,148	2,919	58	304	29,149
Current	108,463	726,110	638,632	431,676	35,390	2,544	1,942,815
Total	$ 108,707	$ 745,586	$ 644,780	$ 434,595	$ 35,448	$ 2,848	$ 1,971,964

December 31, 2011:
30 – 59 days past due	$ 1,243	$ 576	$ 4,912	$ 1,906	$ 133	$ 883	$ 9,653
60 – 89 days past due	-	2,839	408	228	5	14	3,494
Over 90 days past due	-	-	42	112	-	12	166
Non-accrual	375	18,930	957	1,689	-	-	21,951
	1,618	22,345	6,319	3,935	138	909	35,264
Current	129,281	709,801	632,266	429,065	35,707	1,719	1,937,839
Total	$ 130,899	$ 732,146	$ 638,585	$ 433,000	$ 35,845	$ 2,628	$ 1,973,103

Impaired Loans

The following presents the Company’s impaired loans, by class, as of March 31, 2012 and December 31, 2011:

(In thousands)	Commercial and industrial	Commercial real estate	Residential real estate	Home equity	Consumer	DDA overdrafts	Total
March 31, 2012:
With no related allowance recorded
Recorded investment	$ -	$ 3,487	$ -	$ -	$ -	$ -	$ 3,487
Unpaid principal
balance	-	8,413	-	-	-	-	8,413

With an allowance recorded
Recorded investment	$ 181	$ 13,524	$ 2,293	$ 1,496	$ -	$ 1	$ 17,495
Unpaid principal
balance	181	13,524	2,293	1,496	-	1	17,495
Related allowance	36	1,294	270	176	-	1	1,777

December 31, 2011:
With no related allowance recorded
Recorded investment	$ 78	$ 2,840	$ -	$ -	$ -	$ -	$ 2,918
Unpaid principal	78	6,036	-	-	-	-	6,114
balance

With an allowance recorded
Recorded investment	$ 297	$ 16,090	$ 1,000	$ 1,801	$ -	$ 12	$ 19,200
Unpaid principal
balance	297	16,090	1,000	1,801	-	12	19,200
Related allowance	53	3,044	139	240	-	12	3,488

The following table presents information related to the average recorded investment and interest income recognized on the Company’s impaired loans, by class, for the three months ended March 31, 2012 and 2011:

(In thousands)	Commercial and industrial	Commercial real estate	Residential real estate	Home equity	Consumer	DDA overdrafts	Total
March 31, 2012:
With no related allowance recorded
Average recorded
investment	$ -	$ 5,216	$ -	$ -	$ -	$ -	$ 5,216
Interest income
recognized	-	50	-	-	-	-	50

With an allowance recorded
Average recorded
investment	$ 118	$ 13,447	$ 1,052	$ 1,521	$ -	$ -	$ 16,138
Interest income
recognized	2	147	11	6	-	-	166

March 31, 2011:
With no related allowance recorded
Average recorded
investment	$ -	$ 16,215	$ 481	$ 1,047	$ -	$ -	$ 17,743
Interest income
recognized	-	103	8	2	-	-	113

With an allowance recorded
Average recorded
investment	$ 282	$ 8,392	$ 1,221	$ 791	$ -	$ -	$ 10,686
Interest income
recognized	-	-	-	-	-	-	-

Approximately $0.2 million and $0.1 million of interest income would have been recognized during the three months ended March 31, 2012 and 2011, if such loans had been current in accordance with their original terms. There were no commitments to provide additional funds on non-accrual, impaired or other potential problem loans at March 31, 2012.

Loan Modifications

The Company’s policy on loan modifications typically does not allow for modifications that would be considered a concession from the Company. However, when there is a modification, the Company evaluates each modification to determine if the modification constitutes a troubled debt restructuring (“TDR”) in accordance with ASU 2011-02, whereby a modification of a loan would be considered a TDR when both of the following conditions are met: (1) a borrower is experiencing financial difficulty and (2) the modification constitutes a concession. When determining whether the borrower is experiencing financial difficulties, the Company reviews whether the debtor is currently in payment default on any of its debt or whether it is probable that the debtor would be in payment default in the foreseeable future without the modification. Other indicators of financial difficulty include whether the debtor has declared or is in the process of declaring bankruptcy, the debtor’s ability to continue as a going concern, or the debtor’s projected cash flow to service its debt (including principal and interest) in accordance with the contractual terms for the foreseeable future, without a modification.

At March 31, 2012, the Company’s TDRs totaled less than $0.4 million. There was no material difference between the pre-modification and post-modification balances. The impact on the allowance for loan losses was insignificant. The TDRs did not default during the three months ended March 31, 2012.