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 to 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 (“TDR” or “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 Company’s 2010 Form 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.

Troubled debt restructurings impact the determination of the appropriate level of the allowance for loan losses. If the restructuring included forgiveness of a portion of principal or accrued interest, the charge-off is included in the historical charge-off rates applied to the collective evaluation methodology. Further, restructured loans are individually evaluated for impairment, with amounts below fair value accrued in the allowance for loan losses. TDRs that experience a payment default are examined to determine whether the default indicates collateral dependency or cash flows below those that were included in the fair value measurement. TDRs that are determined to be collateral dependent or for which decreased cash flows indicate a decline in fair value are charged down to fair value.

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.

	Activity in the Allowance for Loan Losses by Segment for the three months ended September 30, 2011
	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated			Total
Balance, June 30, 2011	$	1,371		$	483		$	4,333		$	1,348		$	636		$	323		$	8,494
Charge-offs		(217	)		(58	)		(41	)		(30	)		(100	)		---			(446	)
Recoveries		---			28			---			---			---			---			28
Provision for loan losses		61			8			339			(76	)		515			(204	)		643
Balance, September 30, 2011	$	1,215		$	461		$	4,631		$	1,242		$	1,051		$	119		$	8,719

	Activity in the Allowance for Loan Losses by Segment for the nine months ended September 30, 2011
	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated			Total
Balance, December 31, 2010	$	1,059		$	586		$	4,033		$	1,108		$	749		$	129		$	7,664
Charge-offs		(429	)		(208	)		(301	)		(167	)		(100	)		---			(1,205	)
Recoveries		7			56			---			1			---			---			64
Provision for loan losses		578			27			899			300			402			(10	)		2,196
Balance, September 30, 2011	$	1,215		$	461		$	4,631		$	1,242		$	1,051		$	119		$	8,719

	Allowance for Loan Losses by Segment and Evaluation Method as of
	September 30, 2011
	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated			Total
Individually evaluated for impairment		$	---		$	---		$	766		$	554		$	509		$	---	$	1,829
Collectively evaluated for impairment			1,215			461			3,865			688			542			119		6,890
Total		$	1,215		$	461		$	4,631		$	1,242		$	1,051		$	119	$	8,719

	Loans by Segment and Evaluation Method as of
	September 30, 2011
	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated			Total
Individually evaluated for impairment		$	256		$	---		$	5,414		$	581		$	3,789		$	---	$	10,040
Collectively evaluated for impairment			110,611			30,319			365,074			39,792			40,580			---		586,376
Total		$	110,867		$	30,319		$	370,488		$	40,373		$	44,369		$	---	$	596,416

	Allowance for Loan Losses by Segment and Evaluation Method as of
	December 31, 2010
	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated			Total
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 by Segment and Evaluation Method as of
	December 31, 2010
	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated			Total
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		$	109,360		$	35,679		$	348,931		$	37,072		$	45,401		$	---	$	576,443

	Nine Months ended September 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		1.46	%	1.34	%		1.33	%
Ratio of net charge-offs to average loans, net of unearned income and deferred fees(1)		0.26	%	0.31	%		0.46	%

	September 30,						December 31,
	2011			2010			2010
Nonperforming assets:
Nonaccrual loans	$	1,263		$	7,639		$	1,938
Restructured loans in nonaccrual		3,081			---			6,133
Total nonperforming loans		4,344			7,639			8,071
Other real estate owned, net		1,759			3,026			1,723
Total nonperforming assets	$	6,103		$	10,665		$	9,794
Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned		1.02	%		1.82	%		1.69	%
Ratio of allowance for loan losses to nonperforming loans(1)		200.71	%		102.03	%		94.97	%

	September 30,						December 31,
	2011			2010			2010
Loans past due 90 days or more and still accruing	$	339		$	533		$	1,336
Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees		0.06	%		0.09	%		0.23	%
Accruing restructured loans		5,524			---			350
Impaired loans:
Total impaired loans	$	10,040		$	7,207		$	8,791
Impaired loans with no valuation allowance	$	2,286		$	---		$	1,115
Impaired loans with a valuation allowance	$	7,754		$	7,207		$	7,676
Valuation allowance		(1,829	)		(1,148	)		(1,200	)
Impaired loans, net of allowance	$	8,211		$	6,059		$	6,476
Average recorded investment in impaired loans(1)	$	7,834		$	7,928		$	7,526
Income recognized on impaired loans, after designation as impaired	$	90		$	15		$	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 September 30, 2011 were $4,344, of which $4,229 were impaired, compared with $7,639 in nonaccruals at September 30, 2010, of which $7,207 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 nine months ended September 30, 2011 or September 30, 2010.

	Impaired Loans as of September 30, 2011
	Unpaid Principal Balance		(A) Total Recorded Investment(1)		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
Consumer Real Estate(2)
Closed-end Consumer Real Estate	$	256	$	256	$	256	$	---	$	---

Commercial Real Estate(2)
Hotels		3,432		3,434		279		3,155		125
Medical Professionals		71		71		---		71		71
College Housing		366		373		373		---		---
Undeveloped Land		252		254		254		---		---
Other Commercial Real Estate		1,165		1,175		---		1,175		487
General Contractors		128		131		---		131		83

Commercial & Industrial(2)
Commercial & Industrial		581		581		---		581		554

Construction, Development and Land(2)
Residential		3,789		3,811		1,256		2,555		509

Total	$	10,040	$	10,086	$	2,418	$	7,668	$	1,829

	Average Investment and Interest Income for Impaired Loans
	For the Three Months Ended September 30, 2011				For the Nine Months Ended September 30, 2011
	Average Recorded Investment(1)		Interest Income Recognized		Average Recorded Investment(1)		Interest Income Recognized
Consumer Real Estate(2)
Closed-end Consumer Real Estate	$	476	$	1	$	520	$	2

Commercial Real Estate(2)
Hotels		3,438		24		3,464		39
Medical Professionals		73		2		67		9
College Housing		373		6		260		13
Undeveloped Land		254		2		254		8
Other Commercial Real Estate		1,175		13		1,150		25
General Contractors		131		2		46		5

Commercial & Industrial(2)
Commercial & Industrial		585		---		593		---

Construction, Development and Land(2)
Residential		2,278		---		1,480		22

Total	$	8,783	$	50	$	7,834	$	123

	Impaired Loans as of December 31, 2010
	Unpaid Principal Balance		(A) Total Recorded Investment(1)		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
Consumer Real Estate(2)
Closed-end Consumer Real Estate	$	505	$	505	$	---	$	505	$	26

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

Commercial & Industrial(2)
Commercial & Industrial		698		698		---		698		508

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

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

	Average Investment and Interest Income of Impaired Loans For the Year Ended
	December 31, 2010
	Average Recorded Investment(1)		Interest Income Recognized
Consumer Real Estate(2)
Closed-end Consumer Real Estate	$	337	$	---

Commercial Real Estate(2)
Office & retail		253		---
Hotel		2,767		---
Convenience stores		49		---
Other commercial real estate		337		15
				1
Commercial & Industrial(2)
Commercial & Industrial		1,183		---

Construction, Development and Land(2)
Residential		2,579		---
Commercial		21		1

Total	$	7,526	$	17

September 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		1,807		466		285		180
Consumer Construction		---		---		---		---

Consumer Non-Real Estate
Credit Cards		15		7		7		---
Consumer General		276		14		14		---
Consumer Overdraft		155		---		---		---

Commercial Real Estate
College Housing		704		---		---		---
Office/Retail		---		---		---		---
Nursing Homes		---		---		---		---
Hotels		619		526		---		1,503
Municipalities		---		---		---		---
Medical Professionals		---		---		---		---
Religious Organizations		---		---		---		---
Convenience Stores		---		---		---		---
Entertainment and Sports		---		---		---		---
Nonprofits		---		---		---		---
Restaurants		---		---		---		---
General Contractors		---		---		---		---
Other Commercial Real Estate		1,406		476		---		476

Commercial and Industrial
Commercial and Industrial		84		475		33		581

Construction, Development and Land
Residential		---		1,604		---		1,604
Commercial		---		---		---		---
Total	$	5,066	$	3,568	$	339	$	4,344

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	$	16,259	$	9	$	---
Closed-end Consumer Real Estate		89,945		767		1,559
Consumer Construction		2,072		---		---

Consumer Non-Real Estate
Credit Cards		6,508		---		---
Consumer General		23,433		58		66
Consumer Overdraft		252		---		---

Commercial Real Estate
College Housing		88,705		455		405
Office/Retail		74,155		422		3,768
Nursing Homes		15,521		---		---
Hotels		22,810		1,850		619
Municipalities		20,996		---		---
Medical Professionals		17,382		---		---
Religious Organizations		16,604		---		---
Convenience Stores		9,747		---		---
Entertainment and Sports		7,148		---		---
Nonprofits		6,755		---		---
Restaurants		6,742		---		---
General Contractors		4,984		137		827
Other Commercial Real Estate		63,840		---		1,204

Commercial and Industrial
Commercial and Industrial		39,579		174		39

Construction, Development and Land
Residential		15,096		---		---
Commercial		22,390		2,961		133

Total	$	570,923	$	6,833	$	8,620

	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. All participation loans 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.

The Company modified loans that were classified troubled debt restructurings during the nine months ended September 30, 2011. The following tables present restructurings by class that occurred during the three and nine-month periods ended September 30, 2011.

	Restructurings that occurred during the three months ended September 30, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Impairment Accrued
Construction, Development and Land
Residential		1	$	2,400	$	2,300	$	507

Commercial Real Estate
General contractors		2		128		128		15
Other commercial real estate		1		392		392		291
Total		4	$	2,920	$	2,820	$	813

	Restructurings that occurred during the nine months ended
	September 30, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Impairment Accrued
Consumer Real Estate
Closed-ended Consumer Real Estate		1	$	75	$	75	$	---

Commercial and Industrial		1		50		50		50

Construction, Development and Land
Residential		2		2,634		2,534		510

Commercial Real Estate
College housing		2		422		332		---
Medical professionals		3		73		73		71
General contractors		2		128		128		15
Other commercial real estate		3		696		688		476
Total		14	$	4,078	$	3,880	$	1,122

The modifications included providing payment relief by temporarily changing amortizing loans to interest only payments, extending the maturity, changing a letter of credit to a single-payment note, partial forgiveness of principal, or a combination of these modifications.

Partial charge-offs on two loans to separate borrowers totaled $215. Restructured loans are designated impaired and measured for impairment. The impairment measurement resulted in $1,122 accrued to the allowance for loan losses. The impairment for restructured loans secured by real estate is based upon the fair value (reduced by selling costs) of the underlying collateral. The full amount of restructured loans that are not secured by real estate is accrued to the allowance for loan losses.

The following tables present restructured loans that were modified within the past three and nine months and that subsequently experienced payment default. The company defines default as one or more payments that occur more than 30 days past the due date.

	Restructurings that occurred during the three months ended September 30, 2011
	Number of Contracts		Recorded Investment		Impairment Accrued
Commercial Real Estate
General contractors		2	$	128	$	---
Other commercial real estate		1		392		291
Total		3	$	520	$	291

	Restructurings that occurred during the nine months ended September 30, 2011
	Number of Contracts		Recorded Investment		Impairment Accrued
Construction, Development and Land
Residential		1	$	234	$	3

Commercial Real Estate
College housing		1		255		---
General contractors		2		131		15
Other commercial real estate		3		700		476
Total		7	$	1,320	$	494

The above restructured loans that experienced a payment default are all secured by real estate. The impairment measurement is based upon the fair value of the underlying collateral and as such, was not significantly affected by the payment default. Restructured loans that become more than 90 days past due are designated nonaccrual. Nonaccrual levels are factored into allowance methodology for collectively-evaluated loans.