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 2011 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 estimation 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, as well as all impaired loans, 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.

The Company evaluated characteristics in the loan portfolio and determined major segments and smaller classes within each segment for application of the allowance for loan losses methodology. These characteristics include collateral type, repayment sources, and (if applicable) the borrower’s business model.

During the first quarter of 2012, the Company revised its basis for determining segments and classes for the allowance for loan losses. In previous periods, the loan portfolio was segmented primarily by repayment source, whereas beginning with the first quarter of 2012 disaggregation is based primarily upon collateral type for secured loans and borrower type or repayment terms for unsecured loans. This aligns the allowance categories with those used for financial statements and other notes, providing greater uniformity and comparability. Consistent with accounting guidance, prior periods have not been restated and are shown as originally published using the segments and classes in effect for the period. These changes had an insignificant effect on the calculation of the balance in the allowance for loan losses.

Real Estate Construction

Construction, residential

Construction, other

Consumer Real Estate

Equity lines

Residential closed-end first liens

Residential closed-end junior liens

Commercial Real Estate

Multifamily real estate

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non Real Estate

Commercial and Industrial

Public Sector and IDA

Public sector and IDA

Consumer Non Real Estate

Credit cards

Automobile

Other consumer loans

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.

	Activity in the Allowance for Loan Losses for the three months ended March 31, 2012
	Real Estate Construction			Consumer Real Estate			Commercial Real Estate			Commercial Non Real Estate			Public Sector and IDA			Consumer Non Real Estate			Unallocated		Total
Balance, December 31, 2011	$	1,079		$	1,245		$	3,515		$	1,473		$	232		$	403		$	121	$	8,068
Charge-offs		---			(95	)		(537	)		---			---			(68	)		---		(700	)
Recoveries		---			---			---			---			---			23			---		23
Provision for loan losses		(405	)		1,102			242			(347	)		(147	)		124			103		672
Balance, March 31, 2012	$	674		$	2,252		$	3,220		$	1,126		$	85		$	482		$	224	$	8,063

	Activity in the Allowance for Loan Losses for the three months ended March 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		(36	)		(90	)		(118	)		---		---			---			(244	)
Recoveries		7			18			---			---		---			---			25
Provision for loan losses		72			(50	)		740			113		(59	)		(16	)		800
Balance, March 31, 2011	$	1,102		$	464		$	4,655		$	1,221	$	690		$	113		$	8,245

	Allowance for Loan Losses as of March 31, 2012
	Real Estate Construction		Consumer Real Estate		Commercial Real Estate		Commercial Non Real Estate		Public Sector and IDA		Consumer Non Real Estate		Unallocated		Total
Individually evaluated for impairment	$	13	$	169	$	42	$	361	$	---	$	8	$	---	$	593
Collectively evaluated for impairment		661		2,083		3,178		765		85		474		224		7,470
Total	$	674	$	2,252	$	3,220	$	1,126	$	85	$	482	$	224	$	8,063

	Allowance for Loan Losses 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 as of March 31, 2012
	Real Estate Construction			Consumer Real Estate			Commercial Real Estate			Commercial Non Real Estate			Public Sector and IDA			Consumer Non Real Estate			Unallocated			Total
Individually evaluated for impairment		$	6,367		$	1,055		$	4,849		$	649		$	---		$	67		$	---		$	12,987
Collectively evaluated for impairment			41,899			146,257			297,062			39,349			15,263			31,747			---			571,577
Total		$	48,266		$	147,312		$	301,911		$	39,998		$	15,263		$	31,814		$	---		$	584,564

	Loans 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

	Three Months ended March 31,					Year ended December 31,
	2012			2011		2011
Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees		1.38	%	1.40	%		1.37	%
Ratio of net charge-offs to average loans, net of unearned income and deferred fees(1)		0.46	%	0.15	%		0.43	%

	March 31,						December 31,
	2012			2011			2011
Nonperforming assets:
Nonaccrual loans	$	1,789		$	2,339		$	1,398
Restructured loans in nonaccrual		3,539			5,314			3,806
Total nonperforming loans		5,328			7,653			5,204
Other real estate owned, net		940			2,222			1,489
Total nonperforming assets	$	6,268		$	9,875		$	6,693
Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned		1.07	%		1.67	%		1.13	%
Ratio of allowance for loan losses to nonperforming loans(1)		151.33	%		107.74	%		155.03	%

	March 31,						December 31,
	2012			2011			2011
Loans past due 90 days or more and still accruing	$	210		$	1,078		$	481
Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees		0.04	%		0.18	%		0.08	%
Accruing restructured loans	$	3,742		$	884		$	3,756
Impaired loans:
Impaired loans with no valuation allowance	$	9,933		$	---		$	5,505
Impaired loans with a valuation allowance		3,054			7,084			7,091
Total impaired loans	$	12,987		$	7,084		$	12,596
Valuation allowance		(593	)		(1,256	)		(1,123	)
Impaired loans, net of allowance	$	12,394		$	5,828		$	11,473
Average recorded investment in impaired loans(1)	$	14,555		$	7,690		$	8,734
Interest income recognized on impaired loans, after designation as impaired	$	24		$	20		$	141
Amount of income recognized on a cash basis	$	---		$	---		$	---

Nonaccrual loans that meet the Company’s balance thresholds are designated as impaired. No interest income was recognized on nonaccrual loans for the three months ended March 31, 2012 and March 31, 2011, respectively.

	Impaired Loans as of March 31, 2012
	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
Real Estate Construction
Construction, residential	$	1,256	$	1,251	$	1,251	$	---	$	---
Construction, other		5,111		5,102		3,480		1,622		13
Consumer Real Estate
Equity lines		---		---		---		---		---
Residential closed-end first liens		798		800		525		275		60
Residential closed-end junior liens		257		258		110		148		109
Commercial Real Estate
Multifamily real estate		529		529		529		---		---
Commercial real estate, owner occupied		4,320		4,334		3,909		425		42
Commercial real estate, other		---		---		---		---		---
Commercial Non Real Estate
Commercial and industrial		649		649		121		528		361
Public Sector and IDA
Public sector and IDA		---		---		---		---		---
Consumer Non Real Estate
Credit cards		---		---		---		---		---
Automobile		---		---		---		---		---
Other consumer loans		67		67		---		67		8
Total	$	12,987	$	12,990	$	9,925	$	3,065	$	593

	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 & Retail		3,500		3,500		---		3,500		57
Hotel		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

	For the Three Months Ended March 31, 2012
	Average Recorded Investment(1)		Interest Income Recognized
Real Estate Construction
Construction, residential	$	1,514	$	---
Construction, other		5,891		10
Consumer Real Estate
Equity lines		997		---
Residential closed-end first liens		258		---
Residential closed-end junior liens		---		---
Commercial Real Estate
Multifamily real estate		529		---
Commercial real estate, owner occupied		4,627		14
Commercial real estate, other		---		---
Commercial Non Real Estate
Commercial and industrial		671		---
Public Sector and IDA
Public sector and IDA		---		---
Consumer Non Real Estate
Credit cards		---		---
Automobile		---		---
Other consumer		68		---
Total	$	14,555	$	24

	Average Investment and Interest Income of Impaired Loans For the Year Ended
	December 31, 2011
	Average Recorded Investment(1)		Interest Income Recognized
Consumer Real Estate(2)
Closed-end Consumer Real Estate	$	450	$	3
Commercial Real Estate(2)
College Housing		281		7
Office & retail		292		---
Hotel		3,445		41
Medical Professionals		67		5
General Contractors		112		4
Other commercial real estate		1,139		24
Commercial & Industrial(2)
Commercial & Industrial		553		---
Construction, Development and Land(2)
Residential		2,143		49
Commercial		252		8
Total	$	8,734	$	141

	30 – 89 Days Past Due		90 or More Days Past Due		90 Days Past Due and Still Accruing		Nonaccruals (Including Impaired Nonaccruals)
Real Estate Construction
Construction, Residential	$	---	$	1,256	$	---	$	1,256
Construction, Other		---		---		---		---
Consumer Real Estate
Equity Lines		200		---		---		---
Residential closed-end first liens		1,404		556		163		717
Residential closed-end junior liens		172		35		---		182
Commercial Real Estate
Multifamily Real Estate		1,334		250		---		529
Commercial Real Estate, Owner Occupied		1,605		1,413		36		1,991
Commercial Real Estate, Other		---		---		---		---
Commercial Non Real Estate
Commercial and Industrial		45		489		5		586
Public Sector and IDA
Public Sector and IDA		---		---		---		---
Consumer Non Real Estate
Credit Cards		3		1		1		---
Automobile		186		5		5		---
Other Consumer Loans		94		67		---		67
Total	$	5,043	$	4,072	$	210	$	5,328

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

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)
Real Estate Construction
Construction, 1-4 Family Residential	$	12,763	$	---	$	---
Construction, Other		26,175		2,961		---
Consumer Real Estate
Equity Lines		18,845		200		---
Closed-End First Liens		117,866		566		1,682
Closed-End, Junior Liens		6,813		5		279
Commercial Real Estate
Multifamily Residential Real Estate		29,839		1,232		164
Commercial RE Owner-Occupied		167,227		---		1,510
Commercial RE Non Owner-Occupied		93,920		3,170		---
Commercial Non Real Estate
C & I, Non Real Estate		39,182		16		152
Public Sector and IDA
States & Political Subdivisions		15,263		---		---
Consumer Non Real Estate
Credit Cards		6,319		---		---
Automobile		12,548		95		73
Other Consumer		12,669		9		34
Total	$	559,429	$	8,254	$	3,894

	Pass		Special Mention		Classified (Excluding Impaired)
Consumer Real Estate
Equity Lines	$	17,971	$	---	$	14
Closed-ended 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		---		---
Hotel		24,498		---		616
Municipalities		19,230		---		---
Medical Professionals		18,577		---		---
Religious Organizations		15,852		---		---
Convenience Stores		10,519		---		---
Entertainment and Sports		7,346		---		---
Nonprofit		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

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.

	Restructurings that occurred during the three months ended March 31, 2012
	Number of Contracts		Pre-Modification Outstanding Principal Balance		Post-Modification Outstanding Principal Balance		Impairment Accrued
Consumer Real Estate
Closed-end first liens		3	$	305	$	324	$	47
Closed-end junior liens		1		143		147		109
Commercial Real Estate
Commercial real estate, owner occupied		1		17		22		---
Total		5	$	465	$	493	$	156

The modifications provided payment relief primarily by extending maturity dates without reducing interest rates or amounts owed. Restructured loans are designated impaired and measured for impairment. Of the consumer real estate loans summarized above, two were loans previously modified and reported as troubled debt restructurings in prior quarters. The Company granted additional modifications in the first quarter of 2012, increasing the balance by $10 from December 31, 2011. The loans restructured in the current period are secured by real estate and the impairment measurement is based upon the fair value (reduced by selling costs) of the underlying collateral. The impairment measurement resulted in $156 accrued to the allowance for loan losses.

The following table presents restructured loans that were modified between the dates of April 1, 2011 and March 31, 2012 and that experienced payment default during the three months ended March 31, 2012. The company defines default as one or more payments that occur more than 30 days past the due date.

	Number of Contracts		Principal Balance		Impairment Accrued
Consumer Real Estate
Closed-end first liens		1	$	17	$	---
Commercial Real Estate
Multifamily		1		250		---
Commercial Non Real Estate
Commercial and industrial		1		58		---
Consumer Non Real Estate
Other consumer		1		67		8
Total		4	$	392	$	8

Of the restructured loans that experienced a payment delay of 30 days or more during the period, $267 are secured by real estate. The remaining restructured loans that experienced payment default during the period are secured by collateral other than 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. All of the above loans are in nonaccrual status.