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Real estate acquired by the Company as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until sold, and is carried at the balance of the loan at the time of acquisition or at estimated fair value less estimated costs to sell, whichever is less. 

Under Generally Accepted Accounting Principles, the Company is required to account for certain loan modifications or restructurings as "troubled debt restructurings." In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Company for economic or legal reasons related to the borrower's financial difficulties grants a concession to the borrower that the Company would not otherwise consider under current market conditions. Debt restructurings or loan modifications for a borrower do not necessarily always constitute troubled debt restructurings, however, and troubled debt restructurings do not necessarily result in nonaccrual loans. The Company had no troubled debt restructuring as of December 31, 2002. 

Nonperforming loans, defined for these purposes as nonaccrual loans plus accruing loans past due 90 days or more, totaled $4.3 million and $7.0 million at December 31, 2002 and 2001, respectively. The Company's foreclosed property amounted to $2.3 million and $6.0 million at December 31, 2002 and 2001, respectively. The Company's total nonperforming assets as a percentage of total assets, which consist of nonperforming loans plus foreclosed property, were 0.4%, or $6.6 million, at December 31, 2002 compared to 0.9%, or $13.0 million, at December 31, 2001. The following table sets forth the composition of the Company’s nonperforming assets, including accruing loans past due 90 or more days, as of the dates indicated. The decrease in nonperforming assets was due to the sale of a commercial real estate property at book value, the resolution of several problem credits, improvement in the amount of loans past due and writedowns of OREO properties. 

## TABLE 3 - NONPERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS 

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$^{(1)}$Nonperforming loans and assets include accruing loans 90 days or more past due. 

ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at an appropriate level based on management’s analysis of the potential risk of loss in the loan portfolio. The Company's policy is to establish reserves for estimated losses on delinquent and other problem loans when it determines that losses are expected to be incurred on such loans and leases. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loss experience, current economic conditions, volume, growth, composition of the portfolio and other relevant factors. The allowance is increased by provisions for loan losses, which are charged against income. 

