The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans. The Company performs ongoing analysis of the loan portfolio to determine credit quality and identify impaired loans. Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral.

Impaired loans are those loans that have been modified in a troubled debt restructure and larger, non-homogeneous loans that are in nonaccrual or exhibit payment history or financial status that indicate the probability that collection will not occur according to the loan’s terms. Generally, impaired loans are risk rated “classified” or “other assets especially mentioned.” Impaired loans are measured at the lower of the invested amount or the fair market value. Impaired loans with an impairment loss are designated nonaccrual. Please refer to Note 1 of the 10-K, “Summary of Significant Accounting Policies” for additional information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs.

Using a risk-based perspective, the Company determined five major categories, called segments, within the non-impaired portfolio. Characteristics of loans within portfolio segments are further analyzed to determine sub-groups. These characteristics include collateral type, repayment sources, and (if applicable) the borrower’s business model. Subgroups with total balances exceeding 5% of Tier I and Tier II Capital are designated as loan classes.

The Company’s segments consist of real estate secured consumer loans, non-real estate secured consumer loans, commercial real estate, commercial and industrial loans and construction, development and land loans. Consumer real estate is composed of loans to purchase or build a primary residence as well as equity lines secured by a primary residence. Consumer non-real estate contains credit cards, automobile and other installment loans, and deposit overdrafts. Commercial real estate is composed of all commercial loans that are secured by real estate. The commercial and industrial segment is commercial loans that are not secured by real estate. Construction, development and other land loans are composed of loans to developers of residential and commercial properties.

Consumer Real Estate

Equity lines

Closed-end consumer real estate

Consumer construction

Consumer, Non-Real Estate

Credit cards

Consumer, general

Consumer overdraft

Commercial & Industrial

Commercial & industrial

Construction, Development and Land

Residential

Commercial

Commercial Real Estate

College housing

Office/Retail space

Nursing homes

Hotels

Municipalities

Medical professionals

Religious organizations

Convenience stores

Entertainment and sports

Nonprofits

Restaurants

General contractors

Other commercial real estate

Risk factors are analyzed for each class to estimate collective reserves. Factors include allocations for the historical charge-off percentage and changes in national and local economic and business conditions, in the nature and volume of the portfolio, in loan officers’ experience and in loan quality. Increased allocations for the risk factors applied to each class are made for special mention and classified loans. The Company allocates additional reserves for “high risk” loans, determined to be junior lien mortgages, high loan-to-value loans and interest-only loans.

The Company collects and discloses data in compliance with accounting guidance in effect for the year disclosed. In December 2010, the Company adopted accounting guidance for disclosures on the allowance for loan losses. Information for periods prior to December 31, 2010 is presented according to guidance in effect for those periods, while disclosures required by the 2010 guidance are made for periods ending December 31, 2010 and forward.

	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated		Total
Allowance for Loan Losses
Balance, December 31, 2010	$	1,059		$	586		$	4,033		$	1,108		$	749		$	129	$	7,664
Charge-offs		(212	)		(150	)		(260	)		(137	)		---			---		(759	)
Recoveries		7			28			---			1			---			---		36
Provision for loan losses		517			19			560			376			(113	)		194		1,553
Balance, June 30, 2011	$	1,371		$	483		$	4,333		$	1,348		$	636		$	323	$	8,494


Allowance for Loan Losses
Individually evaluated for impairment	$	215	$	---	$	413	$	560	$	3	$	---	$	1,191
Collectively evaluated for impairment		1,156		483		3,920		788		633		323		7,303
Total	$	1,371	$	483	$	4,333	$	1,348	$	636	$	323	$	8,494

Loans
Individually evaluated for impairment	$	436	$	---	$	4,667	$	587	$	1,741	$	---	$	7,431
Collectively evaluated for impairment		111,848		30,780		358,754		39,630		45,129		---		586,141
Total	$	112,284	$	30,780	$	363,421	$	40,217	$	46,870	$	---	$	593,572

Allowance for Loan Losses
Individually evaluated for impairment	$	27	$	---	$	565	$	508	$	100	$	---	$	1,200
Collectively evaluated for impairment		1,032		586		3,468		600		649		129		6,464
Total	$	1,059	$	586	$	4,033	$	1,108	$	749	$	129	$	7,664

Loans
Individually evaluated for impairment	$	505	$	---	$	5,151	$	698	$	2,437	$	---	$	8,791
Collectively evaluated for impairment		108,855		35,679		343,780		36,374		42,964		---		567,652
Total loans	$	109,360	$	35,679	$	348,931	$	37,072	$	45,401	$	---	$	576,443

	Six Months ended June 30,						Year ended December 31,
	2011			2010			2010
Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees		1.43	%		1.30	%		1.33	%
Ratio of net charge-offs to average loans, net of unearned income and deferred fees(1)		0.25	%		0.30	%		0.46	%

	June 30,						December 31,
	2011			2010			2010
Nonperforming assets:
Nonaccrual loans	$	1,819		$	7,167		$	1,938
Restructured loans in nonaccrual		5,030			---			6,133
Total nonperforming loans		6,849			7,167			8,071
Other real estate owned, net		1,855			3,170			1,723
Total nonperforming assets	$	8,704		$	10,337		$	9,794
Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned		1.46	%		1.76	%		1.69	%
Ratio of allowance for loan losses to nonperforming loans(1)		124.02	%		105.39	%		94.97	%

	June 30,						December 31,
	2011			2010			2010
Loans past due 90 days or more and still accruing	$	572		$	389		$	1,336
Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees		0.10	%		0.07	%		0.23	%
Accruing restructured loans		780			---			350
Impaired loans:
Total impaired loans	$	7,431		$	6,586		$	8,791
Impaired loans with no valuation allowance	$	2,377		$	---		$	1,115
Impaired loans with a valuation allowance	$	5,054		$	6,586		$	7,676
Valuation allowance		(1,191	)		(1,758	)		(1,200	)
Impaired loans, net of allowance	$	6,240		$	4,828		$	6,476
Average recorded investment in impaired loans(1)	$	7,733		$	6,927		$	7,526
Income recognized on impaired loans	$	24		$	---		$	17
Amount of income recognized on a cash basis	$	---		$	---		$	---

Nonaccrual loans that meet the Company’s balance thresholds are designated as impaired. Total nonaccrual loans at June 30, 2011 were $6,849, of which $6,365 were impaired, compared with $7,167 in nonaccruals at June 30, 2010, of which $6,586 were impaired. As of December 31, 2010 nonaccruals totaled $8,071, of which $7,612 were impaired. No interest income was recognized on nonaccrual loans for the six months ended June 30, 2011 or June 30, 2010.

	Average Recorded Investment(1) in Impaired Loans		Unpaid Principal Balance of Impaired Loans		(A) Total Recorded Investment(1) in Impaired Loans		Recorded Investment(1) in (A) for Which There is No Related Allowance		Recorded Investment(1) in (A) for Which There is a Related Allowance		Related Allowance for Impaired Loans		Interest Income Recognized
Consumer Real Estate(2)
Closed-end Consumer Real Estate	$	543	$	436	$	436	$	221	$	215	$	215	$	1

Commercial Real Estate(2)
Hotels		3,475		3,452		3,452		283		3,169		142		---
Medical Professionals		65		75		75		---		75		75		7
College Housing		196		367		367		367		---		---		3
Undeveloped Land		252		251		252		252		---		---		3
Other Commercial Real Estate		1,131		773		777		---		777		196		10

Commercial & Industrial(2)
Commercial & Industrial		597		587		587		---		587		560		---

Construction, Development and Land(2)
Residential		1,474		1,490		1,490		1,256		234		3		---

Total	$	7,733	$	7,431	$	7,436	$	2,379	$	5,057	$	1,191	$	24

	Average Recorded Investment(1) in Impaired Loans		Unpaid Principal Balance of Impaired Loans		(A) Total Recorded Investment(1) in Impaired Loan		Recorded Investment(1) in (A) for Which There is No Related Allowance		Recorded Investment(1) in (A) for Which There is a Related Allowance		Related Allowance for Impaired Loans		Interest Income Recognized
Consumer Real Estate(2)
Closed-end Consumer Real Estate	$	337	$	505	$	505	$	---	$	505	$	26	$	---

Commercial Real Estate(2)
Office & Retail		253		---		---		---		---		---		---
Hotel		2,767		3,509		3,509		287		3,222		267		---
Convenience stores		49		577		592		592		---		---		15
Other commercial real estate		337		1,065		1,066		---		1,066		299		1

Commercial & Industrial(2)
Commercial & Industrial		1,183		698		698		---		698		508		---

Construction, Development and Land(2)
Residential		2,579		2,185		2,185		---		2,185		100		---
Commercial		21		252		253		253		---		---		1

Total	$	7,526	$	8,791	$	8,808	$	1,132	$	7,676	$	1,200	$	17

June 30, 2011
	30 – 89 Days Past Due		90 or More Days Past Due		90 Days Past Due and Still Accruing		Nonaccruals (Including Impaired Nonaccruals)
Consumer Real Estate
Equity Lines	$	---	$	---	$	---	$	---
Closed-ended Consumer Real Estate		926		734		249		485
Consumer Construction		---		---		---		---

Consumer, Non-Real Estate
Credit Cards		14		7		7		---
Consumer General		309		25		25		---
Consumer Overdraft		47		18		11		---

Commercial Real Estate
College Housing		759		---		---		---
Office/Retail		---		---		---		---
Nursing Homes		---		---		---		---
Hotels		622		526		---		3,451
Municipalities		---		---		---		---
Medical Professionals		---		---		---		---
Religious Organizations		---		---		---		---
Convenience Stores		---		---		---		---
Entertainment and Sports		---		---		---		---
Nonprofits		---		---		---		---
Restaurants		---		---		---		---
General Contractors		2		---		---		---
Other Commercial Real Estate		1,200		476		---		476

Commercial and Industrial
Commercial and Industrial		---		208		28		768

Construction, Development and Land
Residential		---		302		---		1,669
Commercial		129		252		252		---
Total	$	4,008	$	2,548	$	572	$	6,849

December 31, 2010
	30 – 89 Days Past Due		90 or More Days Past Due		90 Days Past Due and Still Accruing		Nonaccruals (Including Impaired Nonaccruals)
Consumer Real Estate
Equity Lines	$	69	$	---	$	---	$	---
Closed-ended Consumer Real Estate		1,868		1,178		612		783
Consumer Construction		---		---		---		---

Consumer, Non-Real Estate
Credit Cards		67		42		29		---
Consumer General		518		45		37		---
Consumer Overdraft		---		---		---		---

Commercial Real Estate
College Housing		224		262		---		---
Office/Retail		---		---		---		---
Nursing Homes		---		---		---		---
Hotels		---		802		---		3,509
Municipalities		---		---		---		---
Medical Professionals		---		181		---		---
Religious Organizations		---		---		---		---
Convenience Stores		9		577		577		---
Entertainment and Sports		---		---		---		---
Nonprofits		---		---		---		---
Restaurants		---		---		---		---
General Contractors		---		85		---		---
Other Commercial Real Estate		792		136		---		715

Commercial and Industrial
Commercial and Industrial		740		609		81		879

Construction, Development and Land
Residential		---		2,185		---		2,185
Commercial		25		---		---		---
Total	$	4,312	$	6,102	$	1,336	$	8,071

Credit quality indicators, which the Company terms risk grades, are assigned through the Company’s credit review function for larger loans and selective review of loans that fall below credit review thresholds. Loans that do not indicate heightened risk are graded as “pass.” Loans that appear to have elevated credit risk because of frequent or persistent past due status, which is less than 75 days, or that show weakness in the borrower’s financial condition are risk graded “special mention.” Loans with frequent or persistent delinquency exceeding 75 days or that have a higher level of weakness in the borrower’s financial condition are graded “classified.” Classified loans have regulatory risk ratings of “substandard” and “doubtful.” Allocations are increased by 50% and by 100% for loans with grades of “special mention” and “classified,” respectively.

	Pass		Special Mention		Classified (Excluding Impaired)
Consumer Real Estate
Equity Lines	$	16,752	$	19	$	24
Closed-end Consumer Real Estate		90,351		569		1,967
Consumer Construction		2,166		---		---

Consumer, Non-Real Estate
Credit Cards		6,393		---		3
Consumer General		23,965		51		103
Consumer Overdraft		265		---		---

Commercial Real Estate
College Housing		86,989		457		470
Office/Retail		75,650		---		3,769
Nursing Homes		14,455		---		---
Hotels		21,688		1,862		622
Municipalities		16,318		---		---
Medical Professionals		16,267		---		---
Religious Organizations		16,555		---		---
Convenience Stores		9,768		---		---
Entertainment and Sports		7,176		---		---
Nonprofits		6,502		---		---
Restaurants		6,860		---		---
General Contractors		5,159		17		1,053
Other Commercial Real Estate		66,602		---		1,115

Commercial and Industrial
Commercial and Industrial		39,397		56		177

Construction, Development and Land
Residential		15,935		---		2,400
Commercial		23,697		2,962		135

Total	$	568,310	$	5,993	$	11,838

	Pass		Special Mention		Classified (Excluding Impaired)
Consumer Real Estate
Equity Lines	$	15,735	$	---	$	119
Closed-ended Consumer Real Estate		85,313		731		2,969
Consumer Construction		3,988		---		---

Consumer, Non-Real Estate
Credit Cards		6,446		---		14
Consumer General		28,730		392		94
Consumer Overdraft		3		---		---

Commercial Real Estate
College Housing		88,110		461		1,016
Office/Retail		60,540		3,500		848
Nursing Homes		28,018		---		---
Hotel		10,689		1,878		625
Municipalities		16,979		---		---
Medical Professionals		17,111		---		181
Religious Organizations		12,643		---		---
Convenience Stores		9,010		9		---
Entertainment and Sports		7,694		---		---
Nonprofit		6,421		---		---
Restaurants		6,740		---		153
General Contractors		6,175		---		240
Other Commercial Real Estate		63,679		111		951

Commercial and Industrial
Commercial and Industrial		34,826		129		1,419

Construction, Development and Land
Residential		25,760		---		2,633
Commercial		14,405		---		164

Total	$	549,015	$	7,211	$	11,426

The Company finances mortgages under “best efforts” contracts with mortgage purchasers. The mortgages are designated as held for sale upon initiation. There have been no major reclassifications from portfolio loans to held for sale. Occasionally, the Company purchases or sells participations in loans. The Company has not purchased any participations in 2011. All participation loans previously purchased met the Company’s normal underwriting standards at the time the participation was entered. Participation loans are included in the appropriate portfolio balances to which the allowance methodology is applied.