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. Determination of credit quality considers 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”) as well as larger, non-homogeneous loans that are in nonaccrual status or exhibit payment history or borrower financial positions that indicate the probability that collection will not occur according to the loan’s terms. Generally, impaired loans are risk rated “classified” or “special mention.” 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, “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 by the collective evaluation methodology. Further, restructured loans are individually evaluated for impairment, with invested amounts that exceed 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, reduced by selling costs.

The Company used a risk-based perspective to determine five major segments within the loan portfolio. Characteristics of loans within segments are further analyzed to determine sub-groups called loan classes. 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 collective evaluation methodology is applied to the non-impaired portfolio on a class basis.

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.

The categorization of loans used to determine the allowance for loan losses differs from the categorization of loans in the balance sheet and discussion of loans in the Management’s Discussion and Analysis (“MD&A”) section. While the categories may be similar, the balance sheet and MD&A base loan categorizations on collateral type. The allowance for loan losses methodology takes a risk-based approach to determine segments and classes for loss analysis.

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

Consumer Non-Real Estate: Consumer non-real estate loans carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral, such as automobiles which may depreciate more rapidly than other assets. In addition, these loans may be unsecured. Consumer loans are more likely than real estate loans to be immediately affected in an adverse manner by job loss, divorce, illness or personal bankruptcy.

Commercial & Industrial (non-real estate): Commercial loans not secured by real estate carry risks associated with the successful operation of a business, and the repayments of these loans depend on the profitability and cash flows of the business. Additional risk relates to the value of collateral where depreciation occurs and the valuation is less precise.

Commercial Real Estate: Loans secured by commercial real estate also carry risks associated with the success of the business and ability to generate a positive cash flow sufficient to service debts. Real estate security diminishes risks only to the extent that a market exists for the subject collateral.

Construction, Development and Land: Real estate secured construction loans carry risks that a project will not be completed as scheduled and budgeted and that the value of the collateral may, at any point, be less than the principal amount of the loan. Additional risks may occur if the general contractor, who may not be a loan customer, is unable to finish the project as planned due to financial pressures unrelated to the project.

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.

	Years ended December 31,
	2011			2010			2009
Balance at beginning of year	$	7,664		$	6,926		$	5,858
Loans charged off		(2,628	)		(2,810	)		(647	)
Recoveries of loans previously charged off		83			139			81
Provision for loan losses		2,949			3,409			1,634
Balance at end of year	$	8,068		$	7,664		$	6,926

	Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 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		(461	)		(266	)		(457	)		(655	)		(789	)		---			(2,628	)
Recoveries		14			68			---			1			---			---			83
Provision for loan losses		440			13			935			581			988			(8	)		2,949
Balance, December 31, 2011	$	1,052		$	401		$	4,511		$	1,035		$	948		$	121		$	8,068

	Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2010
	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated			Total
Balance, December 31, 2009	$	249		$	1,049		$	4,321		$	459		$	562		$	286		$	6,926
Charge-offs		(89	)		(358	)		(1,021	)		(927	)		(415	)		---			(2,810	)
Recoveries		10			67			61			1			---			---			139
Provision for loan losses		889			(172	)		672			1,575			602			(157	)		3,409
Balance, December 31, 2010	$	1,059		$	586		$	4,033		$	1,108		$	749		$	129		$	7,664

	Allowance for Loan Losses by Segment and Evaluation Method as of
	December 31, 2011
	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated			Total
Individually evaluated for impairment		$	---		$	---		$	1,014		$	62		$	47		$	---	$	1,123
Collectively evaluated for impairment			1,052			401			3,497			973			901			121		6,945
Total		$	1,052		$	401		$	4,511		$	1,035		$	948		$	121	$	8,068

	Loans by Segment and Evaluation Method as of
	December 31, 2011
	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Other Land			Unallocated			Total
Individually evaluated for impairment		$	238		$	---		$	9,067		$	139		$	3,152		$	---	$	12,596
Collectively evaluated for impairment			109,843			29,707			357,507			37,584			41,233			---		575,874
Total		$	110,081		$	29,707		$	366,574		$	37,723		$	44,385		$	---	$	588,470

	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

	Year ended December 31,
	2011			2010			2009
Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees		1.37	%		1.33	%		1.17	%
Ratio of net charge-offs to average loans, net of unearned income and deferred fees		0.43	%		0.46	%		0.10	%

	December 31,
	2011			2010			2009
Nonperforming assets:
Nonaccrual loans	$	1,398		$	1,938		$	4,098
Restructured loans in nonaccrual		3,806			6,133			---
Total nonperforming loans		5,204			8,071			4,098
Other real estate owned, net		1,489			1,723			2,126
Total nonperforming assets	$	6,693		$	9,794		$	6,224
Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned		1.13	%		1.69	%		1.05	%
Ratio of allowance for loan losses to nonperforming loans(1)		155.03	%		94.96	%		168.99	%

	December 31,
	2011			2010			2009
Loans past due 90 days or more and still accruing	$	481		$	1,336		$	1,697
Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees		0.08	%		0.23	%		0.29	%
Accruing restructured loans	$	3,756		$	350		$	2,652
Impaired loans:
Total impaired loans	$	12,596		$	8,791		$	7,680
Impaired loans with no valuation allowance	$	5,505		$	1,115		$	50
Impaired loans with a valuation allowance	$	7,091		$	7,676		$	7,630
Valuation allowance		(1,123	)		(1,200	)		(2,495	)
Impaired loans, net of allowance	$	11,473		$	7,591		$	5,185
Average recorded investment in impaired loans(1)	$	8,734		$	7,526		$	7,851
Income recognized on impaired loans, after designation as impaired	$	141		$	17		$	169
Amount of income recognized on a cash basis	$	---		$	---		$	---

Total nonaccrual loans at December 31, 2011 amount to $5,204 compared with $8,071 at December 31, 2010. As of December 31, 2009 nonaccruals totaled $4,098. No interest income was recognized on nonaccrual loans for the years ended December 31, 2011, 2010 or 2009. Nonaccrual loans that meet the Company’s balance thresholds are designated as impaired.

	Impaired Loans as of December 31, 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	$	237	$	237	$	237	$	---	$	---

Commercial Real Estate(2)
College Housing		366		366		366		---		---
Office and Retail		3,500		3,500		---		3,500		57
Hotels		3,319		3,320		2,794		526		16
Medical Professionals		66		67		---		67		66
General Contractors		703		703		176		527		402
Other Commercial Real Estate		1,113		1,112		425		687		474

Commercial & Industrial(2)
Commercial & Industrial		139		139		---		139		62

Construction, Development and Land(2)
Residential		2,901		2,912		1,256		1,656		46
Commercial		252		252		252		---		---
Total	$	12,596	$	12,608	$	5,506	$	7,102	$	1,123

	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 for Impaired Loans
	For the Year Ended December 31, 2011				For the Year Ended December 31, 2010
	Average Recorded Investment(1)		Interest Income Recognized		Average Recorded Investment(1)		Interest Income Recognized
Consumer Real Estate(2)
Closed-end Consumer Real Estate	$	450	$	3	$	337	$	---

Commercial Real Estate(2)
College Housing		281		7		---		---
Office and Retail		292		---		253		---
Hotels		3,445		41		2,767		---
Medical Professionals		67		5		---		---
Convenience Stores		---		---		49		15
General Contractors		112		4		---		---
Other Commercial Real Estate		1,139		24		337		1

Commercial & Industrial(2)
Commercial & Industrial		553		---		1,183		---

Construction, Development and Land(2)
Residential		2,143		49		2,579		---
Commercial		252		8		21		1
Total	$	8,734	$	141	$	7,526	$	17

December 31, 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		1,735		658		346		313
Consumer Construction		---		---		---		---

Consumer Non-Real Estate
Credit Cards		26		8		8		---
Consumer General		270		38		38		---
Consumer Overdraft		---		---		---		---

Commercial Real Estate
College Housing		452		250		---		250
Office/Retail		---		---		---		---
Nursing Homes		---		---		---		---
Hotels		616		526		---		1,397
Municipalities		---		---		---		---
Medical Professionals		---		---		---		---
Religious Organizations		---		---		---		---
Convenience Stores		---		---		---		---
Entertainment and Sports		---		---		---		---
Nonprofits		---		---		---		---
Restaurants		---		---		---		---
General Contractors		103		---		---		703
Other Commercial Real Estate		815		488		63		1,112

Commercial and Industrial
Commercial and Industrial		31		26		26		139

Construction, Development and Land
Residential		---		1,290		---		1,290
Commercial		252		---		---		---
Total	$	4,300	$	3,284	$	481	$	5,204

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.

December 31, 2011
	Pass		Special Mention		Classified (Excluding Impaired)
Consumer Real Estate
Equity Lines	$	17,971	$	---	$	14
Closed-end Consumer Real Estate		87,882		595		1,332
Consumer Construction		2,050		---		---

Consumer Non-Real Estate
Credit Cards		6,594		---		1
Consumer General		22,679		42		105
Consumer Overdraft		285		---		1

Commercial Real Estate
College Housing		88,157		452		215
Office/Retail		73,106		420		267
Nursing Homes		16,173		---		---
Hotels		24,498		---		616
Municipalities		19,230		---		---
Medical Professionals		18,577		---		---
Religious Organizations		15,852		---		---
Convenience Stores		10,519		---		---
Entertainment and Sports		7,346		---		---
Nonprofits		3,265		3,170		---
Restaurants		6,138		---		387
General Contractors		4,550		109		247
Other Commercial Real Estate		63,422		---		790

Commercial and Industrial
Commercial and Industrial		37,252		196		137

Construction, Development and Land
Residential		15,732		---		---
Commercial		22,409		2,961		130
Total	$	563,687	$	7,945	$	4,242

December 31, 2010
	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 year ended December 31, 2011. The following table presents restructurings by class that occurred during the year ended December 31, 2011.

	Restructurings that occurred during the year ended December 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment(1)		Impairment Accrued as of 12/31/2011
Consumer Real Estate
Closed-end Consumer Real Estate		2	$	290	$	92	$	---

Commercial Real Estate
College housing		2		419		332		---
Medical professionals		3		79		79		66
General contractors		2		128		128		128
Other commercial real estate		3		680		726		474

Commercial and Industrial		1		50		50		50

Construction, Development and Land
Residential		3		2,474		1,645		47

Total		16	$	4,120	$	3,052	$	765

The restructurings that occurred in 2011 and 2010 resulted in partial forgiveness of principal, 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, or a combination of these modifications. Of the loans that were restructured in 2011, five received partial charge-offs totaling $1,143. The bulk of the partial charge offs stemmed from one construction loan for which $789 was charged off. Of the loans that were restructured in 2010, four received partial charge-offs totaling $916. The bulk of the partial charge offs stemmed from one commercial loan for which $501 was charged off. Partial charge-offs are included in the loss ratios applied in the determination of the allowance for collectively-evaluated loans.

Restructured loans are designated impaired and measured for impairment. The impairment measurement for restructured loans that occurred in 2011 resulted in an accrual to the allowance for loan losses of $765 and $459 at December 31, 2011 and December 31, 2010 respectively. The impairment for restructured secured loans is based upon the fair value (reduced by selling costs) of the underlying real estate or other collateral. The full amount of unsecured restructured loans is accrued to the allowance for loan losses.

The following table presents restructured loans that were modified during 2011 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 and subsequently defaulted during the year ended December 31, 2011
	Number of Contracts		Recorded Investment		Impairment Accrued
Consumer Real Estate
Closed-end Consumer Real Estate		2	$	92	$	---

Commercial Real Estate
College housing		1		250		---
General contractors		2		128		128
Other commercial real estate		3		687		474

Commercial and Industrial		1		50		50

Construction, Development and Land
Residential		3		1,645		46
Total		12	$	2,852	$	698

Most of the above restructured loans that experienced a payment default are secured by real estate, for which the impairment measurement is based upon the fair value of the underlying collateral (reduced by selling costs). The amount of the loan balance that exceeds the collateral value is accrued in the allowance for loan losses. One loan reported above is unsecured and is fully accrued in the allowance for loan losses. Because fair value measurements of the above restructured loans are based upon fair value of collateral, the payment default did not significantly impact the measurement of impairment. Restructured loans that become more than 90 days past due are designated nonaccrual. Nonaccrual levels are factored into allowance methodology for collectively-evaluated loans.