8.	Allowance for Loan Losses

The following table summarizes the rollforward of the allowance for loan losses by portfolio segment (in thousands).


	Balance at December 31, 2011		Charge- Offs			Recoveries		Provision (Credit)			Balance at March 31, 2012
Commercial	$	2,365	$	(99	)	$	22	$	195		$	2,483
Commercial loans secured by real estate		9,400		(141	)		30		(734	)		8,555
Real estate- mortgage		1,270		(40	)		24		(4	)		1,250
Consumer		174		(27	)		11		8			166
Allocation for general risk		1,414		—			—		(90	)		1,324

Total	$	14,623	$	(307	)	$	87	$	(625	)	$	13,778


	Balance at December 31, 2010		Charge- Offs			Recoveries		Provision (Credit)			Balance at March 31, 2011
Commercial	$	3,851	$	(699	)	$	160	$	2,375		$	5,687
Commercial loans secured by real estate		12,717		(638	)		1		(2,972	)		9,108
Real estate- mortgage		1,117		(11	)		24		120			1,250
Consumer		206		(33	)		56		(31	)		198
Allocation for general risk		1,874		—			—		(92	)		1,782

Total	$	19,765	$	(1,381	)	$	241	$	(600	)	$	18,025

The following tables summarize the loan portfolio and allowance for loan loss by the primary segments of the loan portfolio (in thousands).


	At March 31, 2012
	Commercial		Commercial Loans Secured by Real Estate		Real Estate- Mortgage		Consumer		Total
Individually evaluated for impairment	$	51	$	3,595	$	—	$	—	$	3,646
Collectively evaluated for impairment		89,933		344,747		212,717		17,332		664,729

Total loans	$	89,984	$	348,342	$	212,717	$	17,332	$	668,375


	At March 31, 2012
	Commercial		Commercial Loans Secured by Real Estate		Real Estate- Mortgage		Consumer		Allocation for General Risk		Total
Specific reserve allocation	$	2	$	953	$	—	$	—	$	—	$	955
General reserve allocation		2,481		7,602		1,250		166		1,324		12,823

Total allowance for loan losses	$	2,483	$	8,555	$	1,250	$	166	$	1,324	$	13,778


	At December 31, 2011
	Commercial		Commercial Loans Secured by Real Estate		Real Estate- Mortgage		Consumer		Total
Individually evaluated for impairment	$	—	$	3,870	$	—	$	—	$	3,870
Collectively evaluated for impairment		83,124		345,908		212,663		18,172		659,867

Total loans	$	83,124	$	349,778	$	212,663	$	18,172	$	663,737


	At December 31, 2011
	Commercial		Commercial Loans Secured by Real Estate		Real Estate- Mortgage		Consumer		Allocation for General Risk		Total
Specific reserve allocation	$	—	$	968	$	—	$	—	$	—	$	968
General reserve allocation		2,365		8,432		1,270		174		1,414		13,655

Total allowance for loan losses	$	2,365	$	9,400	$	1,270	$	174	$	1,414	$	14,623

The segments of the Company's loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The loan categories used are consistent with the internal reports evaluated by the Company's management and Board of Directors to monitor risk and performance within various segments of its loan portfolio. The overall risk

profile for the commercial loan segment is driven by non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, as the majority of the commercial portfolio is centered in these types of accounts. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates for possible impairment any individual loan in the commercial segment with a loan balance in excess of $100,000 that is in nonaccrual status or classified as a Troubled Debt Restructure (TDR). Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or are classified as a TDR.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan's effective interest rate; (b) the loan's observable market price; or (c) the fair value of the collateral less selling costs for collateral dependant loans. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company's policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The need for an updated appraisal on collateral dependent loans is determined on a case by case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to support an appropriate and adequate allowance for loan losses. At a minimum, annual documented reevaluation of the property is completed by the bank's Assigned Risk department to support the value of the property.

When reviewing an appraisal associated with an existing collateral real estate dependant transaction, the Assigned Risk department must determine if there have been material changes to the underlying assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:

•

the passage of time;

•

the volatility of the local market;

•

the availability of financing;

•

natural disasters;

•

the inventory of competing properties;

•

new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the bank;

•

changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or

•

environmental contamination.

The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced or distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Assigned Risk department personnel determine that a reasonable value cannot be derived based on available information, a new appraisal is ordered. The determination of the need for a new appraisal, versus completion of a property valuation by the bank's Assigned Risk department personnel rests with the Assigned Risk department and not the originating account officer.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands).


	March 31, 2012
	Impaired Loans with Specific Allowance				Impaired Loans with no Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
Commercial loans	$	51	$	2	$	—	$	51	$	51
Commercial loans secured by real estate		2,603		953		992		3,595		4,605

Total impaired loans	$	2,654	$	955	$	992	$	3,646	$	4,656


	December 31, 2011
	Impaired Loans with Specific Allowance				Impaired Loans with no Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
Commercial loans secured by real estate	$	2,836	$	968	$	1,034	$	3,870	$	4,844

Total impaired loans	$	2,836	$	968	$	1,034	$	3,870	$	4,844

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).


	Three months ended March 31,
	2012		2011
Commercial	$	26	$	2,344
Commercial loans secured by real estate		3,732		6,821

Average investment in impaired loans	$	3,758	$	9,165


Interest income recognized:
Commercial	$	—	$	20
Commercial loans secured by real estate		—		153

Interest income recognized on a cash basis on impaired loans	$	—	$	173

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five "Pass" categories are aggregated, while the Pass 6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company's commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Company's internal Loan Review Department. The Loan Review Department is an experienced independent function which reports directly to the Board Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The approved scope of coverage for 2012 requires review of a minimum 55% of the commercial loan portfolio.

In addition to loan monitoring by the account officer and Loan Review Department, the Company also requires presentation of all credits rated Pass-6 with aggregate balances greater than $1,000,000, all credits rated Special Mention or Substandard with aggregate balances greater than $250,000, and all credits rated Doubtful with aggregate balances greater than $100,000 on an individual basis to the Company's Loan Loss Reserve Committee on a quarterly basis.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system (in thousands).


	March 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	87,691	$	1,955	$	338	$	—	$	89,984
Commercial loans secured by real estate		312,770		17,262		17,980		330		348,342

Total	$	400,461	$	19,217	$	18,318	$	330	$	438,326


	December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	80,175	$	2,186	$	763	$	—	$	83,124
Commercial loans secured by real estate		305,066		28,138		16,244		330		349,778

Total	$	385,241	$	30,324	$	17,007	$	330	$	432,902

It is generally the policy of the Bank that the outstanding balance of any residential mortgage loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs, unless the balance is minor. A charge down is recorded for any deficiency balance determined from the collateral evaluation. The remaining non-accrual balance is reported as impaired with no specific allowance. It is the policy of the Bank that the outstanding balance of any consumer loan that exceeds 90-days past due as to principal and/or interest is charged off. The following tables present the performing and non-performing outstanding balances of the residential and consumer portfolios (in thousands).


	March 31, 2012
	Performing		Non-Performing
Real estate- mortgage	$	211,714	$	1,003
Consumer		17,332		—

Total	$	229,046	$	1,003


	December 31, 2011
	Performing		Non-Performing
Real estate- mortgage	$	211,458	$	1,205
Consumer		18,172		—

Total	$	229,630	$	1,205

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans (in thousands).


	March 31, 2012
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due		Total Past Due		Total Loans		90 Days Past Due and Still Accruing
Commercial	$	89,922	$	62	$	—	$	—	$	62	$	89,984	$	—
Commercial loans secured by real estate		346,389		501		—		1,452		1,953		348,342		—
Real estate- mortgage		210,746		1,410		473		88		1,971		212,717		12
Consumer		17,255		29		48		—		77		17,332		—

Total	$	664,312	$	2,002	$	521	$	1,540	$	4,063	$	668,375	$	12


	December 31, 2011
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due		Total Past Due		Total Loans		90 Days Past Due and Still Accruing
Commercial	$	83,124	$	—	$	—	$	—	$	—	$	83,124	$	—
Commercial loans secured by real estate		347,671		650		—		1,457		2,107		349,778		—
Real estate- mortgage		209,060		2,133		629		841		3,603		212,663		—
Consumer		18,115		57		—		—		57		18,172		—

Total	$	657,970	$	2,840	$	629	$	2,298	$	5,767	$	663,737	$	—

An allowance for loan losses ("ALL") is maintained to absorb losses from the loan portfolio. The ALL is based on management's continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

Management tracks the historical net charge-off activity at each risk rating grade level for the entire commercial portfolio and at the aggregate level for the consumer, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios are based on a three year historical average of actual loss experience.

The Company uses a comprehensive methodology and procedural discipline to maintain an ALL to absorb inherent losses in the loan portfolio. The Company believes this is a critical accounting policy since it involves significant estimates and judgments. The allowance consists of three elements: 1) an allowance established on specifically identified problem loans, 2) formula driven general reserves established for loan categories based upon historical loss experience and other qualitative factors which include delinquency, non-performing and TDR loans, loan trends, economic trends, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies, and trends in policy, financial information, and documentation exceptions, and 3) a general risk reserve which provides support for variance from our assessment of the previously listed qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the Company's loan portfolio, and recognizes the model and estimation risk associated with the specific and formula driven allowances. The qualitative factors used in the formula driven general reserves are evaluated quarterly (and revised if necessary) by the Company's management to establish allocations which accommodate each of the listed risk factors.

"Pass" rated credits are segregated from "Criticized" and "Classified" credits for the application of qualitative factors.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.