Management’s Discussion and Analysis We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or  more industries. We use broadly accepted industry classification systems in order to classify borrowers into various industry  classifications. Loan concentrations to borrowers in the following industries exceeded 25% of the Bank’s total risk-based  capital at December 31, 2011 (and related balances at December 31, 2010).  The Company maintains the allowance for loan losses at a level that management deems appropriate to adequately  cover the Company’s estimate of probable losses in the loan portfolio. As of December 31, 2011 and 2010, respectively, the  allowance for loan losses was $6.9 million and $7.7 million, respectively, which management deemed to be adequate at each  of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are  described under “CRITICAL ACCOUNTING POLICIES”.  A summary of the changes in the allowance for loan losses and certain asset quality ratios for each of the five years in  the five year period ended December 31, 2011 is presented below.  As noted in the Company’s critical accounting policies, management assesses the adequacy of the allowance prior to  the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios,  past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability  to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan  portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors. This evaluation is  inherently subjective as it requires various material estimates and judgments including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was 1.87% at December 31, 2011, compared to 2.05% at December 31, 2010. In the  future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that influence our page 13 December 31 (In thousands) 2011 2010 Lessors of 1-4 family residential properties $ 43,767 38,679 Office buildings 20,004 24,185 Year ended December 31 (Dollars in thousands) 2011 2010 2009 2008 2007 Allowance for loan losses: Balance at beginning of period $ 7,676 6,495 4,398 4,105 4,044 Charge-offs: Commercial and industrial (679) (537) (495) (454) (62) Construction and land development (1,758) (1,487) (2,088) — — Commercial real estate  (422) — — Residential real estate  (533) (552) (704) (153) (143) Consumer installment (21) (111) (61) (98) (45) Total charge-offs (3,413) (2,687) (3,348) (705) (250) Recoveries: Commercial and industrial 34 63 47 102 14 Construction and land development 2 54 50 — — Commercial real estate  — — — 69 Residential real estate  155 151 92 6 199 Consumer installment 15 20 6 20 6 Total recoveries 206 288 195 128 288 Net (charge-offs) recoveries (3,207) (2,399) (3,153) (577) 38 Provision for loan losses 2,450 3,580 5,250 870 23 Ending balance $ 6,919 7,676 6,495 4,398 4,105 as a % of loans 1.87 % 2.05 1.73 1.19 1.27 as a % of nonperforming loans 67 65 69 99 918 Net charge-offs as a % of average loans 0.86 % 0.64 0.84 0.17 (0.01) Allowance for Loan Losses 