Audited Financial Statements At December 31, 2011 and 2010, nonaccrual loans amounted to $10.4 and 11.8 million, respectively. The gross  interest income which would have been recorded under the original terms of those loans had they been accruing interest,  amounted to approximately $494 thousand, $346 thousand and $161 thousand for the years ended December 31, 2011, 2010,  and 2009, respectively. At December 31, 2011 and 2010, there were no loans 90 days past due and still accruing interest. The allowance for loan losses as of and for the years ended December 31, 2011, 2010 and 2009, is presented below. The Company assesses the adequacy of its allowance for loan losses 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, current asset  quality trends, 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 loss rates and other pertinent factors, including regulatory  recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing  of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off  after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is  unlikely. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, is deemed to be uncollectible.  The Company deems loans impaired when, based on current information and events, it is probable that the Company  will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts  due according to the contractual terms means that both the interest and principal payments of a loan will be collected as  scheduled in the loan agreement.  An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The  impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future  cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, impairment measurement is  based on the fair value of the collateral, less estimated disposal costs.  The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the  portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge- offs, net of recoveries of amounts previously charged-off.  In assessing the adequacy of the allowance, the Company also considers the results of its ongoing independent loan  review process. The Company’s loan review process assists in determining whether there are loans in the portfolio whose  credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Company’s loan  review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may  have been conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan  review results in the determination of whether or not it is probable that we will be able to collect all amounts due according to  the contractual terms of a loan.  As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five  segments: commercial and industrial loans, construction and land development loans, commercial real estate, residential real  estate, and consumer installment loans. The Company analyzes each segment and estimates an allowance allocation for each  loan segment.  The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for  these types of loans. The estimates for these loans are established by category and based on the Company’s internal system of  Allowance for Loan Losses Year ended December 31 (In thousands) 2011 2010 2009 Beginning balance $ 7,676 $ 6,495 $ 4,398 Charged-off loans (3,413) (2,687) (3,348) Recovery of previously charged-off loans 206 288 195 Net Charge-offs (3,207) (2,399) (3,153) Provision for loan losses 2,450 3,580 5,250 Ending balance $ 6,919 $ 7,676 $ 6,495 page 53