NOTE 4. Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2011, 2010 and 2009 were as follows:


					December 31,
		2011			2010			2009
					(in thousands)
Balance, beginning	$	7,111		$	5,970		$	4,521
Provision charged to operating expense		3,750			6,325			4,350
Recoveries added to the allowance		848			291			252
Loan losses charged to the allowance		(2,966	)		(5,475	)		(3,153	)
Balance, ending	$	8,743		$	7,111		$	5,970

Nonaccrual and past due loans by class at December 31, 2011 and 2010 were as follows:


	As of December 31, 2011
	(in thousands)
		30 - 59		60 - 89		90 or More								90 or More
		Days		Days		Days		Total Past						Days Past Due		Nonaccrual
		Past Due		Past Due		Past Due		Due		Current		Total Loans		Still Accruing		Loans

Commercial - Non Real Estate:
Commercial & Industrial	$	114	$	421	$	-	$	535	$	22,331	$	22,866	$	-	$	-
Commercial Real Estate:
Owner Occupied		174		9		447		630		82,476		83,106		-		600
Non-owner occupied		873		1,102		-		1,975		32,962		34,937		-		234
Construction and Farmland:
Residential		-		-		-		-		10,594		10,594		-		151
Commercial		-		-		-		-		24,375		24,375		-		-
Consumer:
Installment		114		13		5		132		13,053		13,185		5		-
Residential:
Equity Lines		217		30		-		247		33,182		33,429		-		177
Single family		2,187		194		717		3,098		176,111		179,209		89		1,287
Multifamily		-		-		-		-		4,517		4,517		-		-
All Other Loans		-		-		-		-		4,206		4,206		-		-

Total	$	3,679	$	1,769	$	1,169	$	6,617	$	403,807	$	410,424	$	94	$	2,449


	As of December 31, 2010
	(in thousands)
		30 - 59		60 - 89		90 or More								90 or More
		Days		Days		Days		Total Past						Past Due		Nonaccrual
		Past Due		Past Due		Past Due		Due		Current		Total Loans		Still Accruing		Loans

Commercial - Non Real Estate:
Commercial & Industrial	$	91	$	129	$	7	$	227	$	24,222	$	24,449	$	7	$	267
Commercial Real Estate:
Owner Occupied		1,100		938		177		2,215		81,176		83,391		-		1,071
Non-owner occupied		248		-		294		542		32,448		32,990		-		-
Construction and Farmland:
Residential		63		70		1,122		1,255		9,042		10,297		-		3,808
Commercial		1,222		-		911		2,133		23,462		25,595		-		-
Consumer:
Installment		181		72		3		256		14,262		14,518		3		-
Residential:
Equity Lines		781		60		-		841		41,848		42,689		-		190
Single family		1,814		490		502		2,806		162,176		164,982		-		3,041
Multifamily		-		-		-		-		4,908		4,908		-		-
All Other Loans		-		696		-		696		3,934		4,630		-		-

Total	$	5,500	$	2,455	$	3,016	$	10,971	$	397,478	$	408,449	$	10	$	8,377

Allowance for loan losses by segment for the years ended December 31, 2011 and 2010 were as follows:


	A s o f a nd fo r the Ye a r Ende d D e c e m be r 3 1, 2 0 11
	(in tho us a nds )

		Co ns tructio n			Res idential			Co mmercial								All Other
		and Farmland			Real Es tate			Real Es tate			Co mmercial			Co ns umer		Lo ans			Unallo cated			To tal
A llo wa nc e fo r c re dit lo s s e s :

Beginning Balance	$	1,386		$	3,457		$	1,231		$	819		$	182		$	36		$	-	$	7,111
Charge-Offs		(721	)		(1,203	)		(14	)		(572	)		(331	)		(125	)		-		(2,966	)
Reco veries		5			298			2			292			195			56			-		848
P ro vis io n		1,948			992			(162	)		538			85			156			193		3,750
Ending balance	$	2,618		$	3,544		$	1,057		$	1,077		$	131		$	123		$	193	$	8,743

Ending balance: Individually
evaluated fo r impairment	$	1,468		$	2,071		$	150		$	544		$	-		$	-		$	-	$	4,233

Ending balance: co llectively
evaluated fo r impairment	$	1,150		$	1,473		$	907		$	533		$	131		$	123		$	193	$	4,510

F ina nc ing re c e iv a ble s :

Ending balance	$	34,969		$	217,155		$	118,043		$	22,866		$	13,185		$	4,206		$	-	$	410,424

Ending balance individually
evaluated fo r impairment	$	3,357		$	9,748		$	6,186		$	599		$	-		$	-		$	-	$	19,890

Ending balance co llectively evaluated
fo r impairment	$	31,612		$	207,407		$	111,857		$	22,267		$	13,185		$	4,206		$	-	$	390,534

	F o r the Ye a r Ende d D e c e m be r 3 1, 2 0 10
	(in tho us a nds )

		Co ns tructio n			Res idential			Co mmercial								All Other
		and Farmland			Real Es tate			Real Es tate			Co mmercial			Co ns umer		Lo ans			Unallo cated			To tal
A llo wa nc e fo r c re dit lo s s e s :

Ending balance	$	1,386		$	3,457		$	1,231		$	819		$	182		$	36		$	-	$	7,111

Ending balance: Individually
evaluated fo r impairment	$	622		$	1,623		$	273		$	139		$	-		$	-		$	-	$	2,657

Ending balance: co llectively
evaluated fo r impairment	$	764		$	1,834		$	958		$	680		$	182		$	36		$	-	$	4,454

F ina nc ing re c e iv a ble s :

Ending balance	$	35,892		$	212,579		$	116,381		$	24,449		$	14,518		$	4,630		$	-	$	408,449

Ending balance individually
evaluated fo r impairment	$	3,549		$	11,172		$	5,141		$	319		$	-		$	-		$	-	$	20,181

Ending balance co llectively evaluated
fo r impairment	$	32,343		$	201,407		$	111,240		$	24,130		$	14,518		$	4,630		$	-	$	388,268

Impaired loans by class at December 31, 2011 and 2010 were as follows:


	As of December 31, 2011
	(in thousands)
		Unpaid						Average		Interest
		Principal		Recorded	Related			Recorded		Income
		Balance		Investment	Allowance			Investment		Recognized

With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	5	$	5	$	-	$	2	$	-
Commercial Real Estate:
Owner Occupied		2,521		2,529		-		2,575		132
Non-owner occupied		2,552		2,567		-		2,623		110
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		361		361		-		466		21
Residential:
Equity lines		177		177		-		190		-
Single family		3,237		3,242		-		3,840		97
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-
	$	8,853	$	8,881	$	-	$	9,696	$	360

With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	594	$	600	$	544	$	602	$	26
Commercial Real Estate:
Owner Occupied		-		-		-		-		-
Non-owner occupied		1,112		1,124		150		1,128		64
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		2,997		3,006		1,468		3,012		147
Residential:
Equity lines		402		404		325		404		13
Single family		5,932		5,940		1,746		6,029		236
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-
	$	11,037	$	11,074	$	4,233	$	11,175	$	486

Total:
Commercial	$	599	$	605	$	544	$	604	$	26
Commercial Real Estate		6,185		6,220		150		6,326		306
Construction and Farmland		3,358		3,367		1,468		3,478		168
Residential		9,748		9,763		2,071		10,463		346
Other		-		-		-		-		-
Total	$	19,890	$	19,955	$	4,233	$	20,871	$	846


	As of December 31, 2010
	(in thousands)
		Unpaid						Average		Interest
		Principal		Recorded	Related			Recorded		Income
		Balance		Investment	Allowance			Investment		Recognized

With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate:
Owner Occupied		2,143		2,151		-		2,164		131
Non-owner occupied		2,144		2,153		-		2,153		34
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		2,447		2,447		-		2,451		70
Residential:
Equity lines		685		689		-		690		33
Single family		4,432		4,450		-		4,736		90
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-
	$	11,851	$	11,890	$	-	$	12,194	$	358

With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	319	$	319	$	139	$	695	$	29
Commercial Real Estate:
Owner Occupied		306		306		122		406		-
Non-owner occupied		548		549		151		202		23
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		1,102		1,102		622		1,259		68
Residential:
Equity lines		-		-		-		-		-
Single family		6,055		6,093		1,623		3,653		319
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-
	$	8,330	$	8,369	$	2,657	$	6,215	$	439

Total:
Commercial	$	319	$	319	$	139	$	695	$	29
Commercial Real Estate		5,141		5,159		273		4,925		188
Construction and Farmland		3,549		3,549		622		3,710		138
Residential		11,172		11,232		1,623		9,079		442
Other		-		-		-		-		-
Total	$	20,181	$	20,259	$	2,657	$	18,409	$	797

Recorded investment is defined as the summation of the principal balance, accrued interest, and net deferred loan fees or costs.

Impaired loans at December 31, 2009 were as follows:


		December 31,
		2009
		(in thousands)
Impaired loans for which,
an allowance has been provided	$	7,496
no allowance has been provided		147
Total impaired loans	$	7,643

Allowance provided for impaired
loans included in ALLL	$	2,253

Average balance of impaired loans	$	3,893

Interest income recognized	$	309

The Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Descriptions of these ratings are as follows:


Pass	Pass loans exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.

Watch	Watch loans exhibit income volatility, negative operating trends, and a highly leveraged balance sheet. A higher level of supervision is required for these loans as the potential for a negative event could impact the borrower's ability to repay the loan.
Special mention	Special mention loans exhibit a potential weakness, if left uncorrected, may negatively affect the borrower's ability to repay its debt obligation. The risk of default is not imminent and the borrower still demonstrates sufficient cash flow to support the loan.
Substandard	Substandard loans exhibit well defined weaknesses and have a high probability of default. The borrowers exhibit adverse financial trends but still have the ability to service debt obligations.

Doubtful	Doubtful loans exhibit all of the characteristics inherent in substandard loans but the weaknesses make collection or full liquidation highly questionable.

Loss	Loss loans are considered uncollectible and of such little value that its continuance as a bankable asset is not warranted.

Credit quality information by class at December 31, 2011 and 2010 was as follows:


	A s o f D e c e m be r 3 1, 2 0 11
	(in tho us a nds )
						Special
INTERNAL RISK RATING GRADES		P as s		Watch		Mentio n	Subs tandard			Do ubtful		Lo s s		To tal

Co mmercial - No n Real Es tate:
Co mmercial &Indus trial	$	16,960	$	2,668	$	991	$	2,215	$	32	$	-	$	22,866
Co mmercial Real Es tate:
Owner Occupied		65,651		6,613		5,759		4,641		442		-		83,106
No n-o wner o ccupied		21,573		6,688		1,330		5,113		233		-		34,937
Co ns tructio n and Farmland:
Res idential		9,839		-		755		-		-		-		10,594
Co mmercial		15,990		1,657		2,595		4,029		104		-		24,375
Res idential:
Equity Lines		31,862		227		355		985		-		-		33,429
Single family		150,520		5,939		10,249		11,134		1,367		-		179,209
Multifamily		2,320		1,230		967		-		-		-		4,517
All o ther lo ans		3,485		-		721		-		-		-		4,206
To tal	$	318,200	$	25,022	$	23,722	$	28,117	$	2,178	$	-	$	397,239


		P erfo rming		No nperfo rming
Co ns umer Credit Expo s ure by
P ayment Activity	$	13,053	$	132


	A s o f D e c e m be r 3 1, 2 0 10
	(in tho us a nds )
						Special
INTERNAL RISK RATING GRADES		P as s		Watch		Mentio n	Subs tandard			Do ubtful		Lo s s		To tal

Co mmercial - No n Real Es tate:
Co mmercial &Indus trial	$	19,990	$	845	$	1,535	$	1,812	$	267	$	-	$	24,449
Co mmercial Real Es tate:
Owner Occupied		65,983		5,686		8,823		2,899		-		-		83,391
No n-o wner o ccupied		25,569		3,322		3,113		986		-		-		32,990
Co ns tructio n and Farmland:
Res idential		7,875		1,556		-		-		-		-		9,431
Co mmercial		17,492		790		2,378		2,672		3,129		-		26,461
Res idential:
Equity Lines		41,430		182		67		860		150		-		42,689
Single family		147,445		3,674		2,229		9,132		2,502		-		164,982
Multifamily		3,272		1,636		-		-		-		-		4,908
All o ther lo ans		4,581		49		-		-		-		-		4,630
To tal	$	333,637	$	17,740	$	18,145	$	18,361	$	6,048	$	-	$	393,931


		P erfo rming		No nperfo rming
Co ns umer Credit Expo s ure by
P ayment Activity	$	14,262	$	256

One consumer loan was rated as watch for $17,000, one consumer loan was rated as special mention for $292,000, four consumer loans were rated as substandard for $19,000 and one consumer loan was rated as doubtful for $5,000 at December 31, 2011. One consumer loan was rated as watch for $23,000 and two consumer loans were rated as substandard for $10,000 at December 31, 2010.