Management’s Discussion and Analysis 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 credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit  risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not  have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At  December 31, 2011 and 2010, and for the years then ended, the Company adjusted its historical loss rates for the commercial  real estate portfolio segment based, in part, on loss rates of peer bank groups. The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of  probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated  probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon  quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic  conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as  determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.  The Company constantly re-evaluates its practices in determining the allowance for loan losses. During the fourth  quarter of 2011, the Company’s management decided to eliminate a previously unallocated component of the allowance. As  a result, the Company had no unallocated amount included in the allowance at December 31, 2011, compared to an  unallocated amount of $0.1 million, or 1.4% of the total allowance, at December 31, 2010. During 2010, the Company  implemented certain refinements to its allowance for loan losses methodology, specifically the way that historical loss factors  are calculated. Prior to September 30, 2010, the Company calculated average losses by loan segment using a rolling 12  quarter historical period. In order to better capture the effect of current economic conditions on the Company’s loan loss  experience, the Company calculated average losses by loan segment using a rolling 6 quarter historical period beginning with  the quarter ended September 30, 2010. Correspondingly, the Company reduced the level of adjustments made to historical  losses for “qualitative and environmental factors” since the updated historical losses are more representative of current  economic conditions.  On a quarterly basis, management makes an assessment to determine whether there have been events or economic  circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity  securities with an unrealized loss, the Company considers many factors including the severity and duration of the  impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value;  and recent events specific to the issuer or industry. Equity securities for which there is an unrealized loss that is deemed to be  other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains  (losses). For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the  Company has the intent to sell the debt security, (2) it is more likely than not that the entity will be required to sell the debt  security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis  of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that that it will be  required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference  between the debt security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not  more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write- down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings, as a realized loss in securities gains (losses), and is the difference between  the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is  recognized in other comprehensive income, net of applicable taxes. Assessment for Other-Than-Temporary Impairment of Securities  page 5