NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the three months ended March 31, 2012 and 2011 and the year ended December 31, 2011 were as follows:


		Three Months Ended			Year Ended			Three Months Ended
		March 31, 2012		December 31, 2011				March 31, 2011
					(in thousands)

Balance, beginning	$	8,743		$	7,111		$	7,111
Provision charged to operating expense		300			3,750			900
Recoveries added to the allowance		81			848			100
Loan losses charged to the allowance		(237	)		(2,966	)		(834	)
Balance, ending	$	8,887		$	8,743		$	7,277

Nonaccrual and past due loans by class at March 31, 2012 and December 31, 2011 were as follows:


								As of March 31, 2012
								(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	$	647	$	823	$	449	$	1,919	$	21,991	$	23,910	$	449	$	-
Commercial Real Estate:
Owner Occupied		822		511		284		1,617		84,540		86,157		-		-
Non-owner occupied		1,187		-		-		1,187		34,452		35,639		-		646
Construction and Farmland:
Residential		-		-		-		-		9,806		9,806		-		147
Commercial		162		47		-		209		27,816		28,025		-		-
Consumer:
Installment		95		19		-		114		12,941		13,055		-		-
Residential:
Equity Lines		193		12		-		205		32,129		32,334		-		424
Single family		3,926		-		-		3,926		175,305		179,231		-		778
Multifamily		-		-		-		-		4,303		4,303		-		-
All Other Loans		-		-		-		-		3,962		3,962		-		-

Total	$	7,032	$	1,412	$	733	$	9,177	$	407,245	$	416,422	$	449	$	1,995


								As of December 31, 2011
								(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	$	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

Allowance for loan losses by segment at March 31, 2012 and December 31, 2011 were as follows:


					A s o f a nd fo r the Thre e M o nths Ende d M a rc h 3 1, 2 0 12
							(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	2,618		3,544		1,057		1,077	131		123		193		8,743
Charge-Offs	-		(173	)	(22	)	-	(35	)	(7	)	-		(237	)
Reco veries	1		53		1		6	18		2		-		81
P ro vis io n	(15	)	105		191		70	(7	)	7		(51	)	300

Ending balance	2,604		3,529		1,227		1,153	107		125		142		8,887

Ending balance: Individually evaluated fo r impairment	1,431		2,084		287		593	-		-		-		4,395

Ending balance: co llectively evaluated fo r impairment	1,173		1,445		940		560	107		125		142		4,492


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

Ending balance	37,831		215,868		121,796		23,910	13,055		3,962		-		416,422

Ending balance individually evaluated fo r impairment	3,351		9,409		5,693		593	-		-		-		19,046

Ending balance co llectively evaluated fo r impairment	34,480		206,459		116,103		23,317	13,055		3,962		-		397,376


							A s o f 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 collectively evaluated fo r impairment	31,612		207,407		111,857		22,267		13,185		4,206		-	390,534

Impaired loans by class at March 31, 2012 and December 31, 2011 were as follows:


				As of March 31, 2012
				(in thousands)
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized

With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate:
Owner Occupied		2,062		2,069		-		2,078		31
Non-owner occupied		2,114		2,124		-		2,126		36
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		356		356		-		363		2
Residential
Equity lines		174		174		-		189		-
Single family		2,557		2,563		-		2,569		25
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-
	$	7,263	$	7,286	$	-	$	7,325	$	94

With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	593	$	594	$	593	$	579	$	12
Commercial Real Estate:
Owner Occupied		284		284		92		296		-
Non-owner occupied		1,321		1,323		195		1,379		27
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		2,995		3,009		1,431		3,010		32
Residential
Equity lines		400		401		253		402		1
Single family		6,190		6,210		1,831		6,289		69
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-

	$	11,783	$	11,821	$	4,395	$	11,955	$	141

Total:
Commercial	$	593	$	594	$	593	$	579	$	12
Commercial Real Estate		5,781		5,800		287		5,879		94
Construction and Farmland		3,351		3,365		1,431		3,373		34
Residential		9,321		9,348		2,084		9,449		95
Other		-		-		-		-		-
Total	$	19,046	$	19,107	$	4,395	$	19,280	$	235

The average recorded investment of impaired loans for the three month period ended March 31, 2011 was $21.3 million. The interest income recognized on impaired loans for the three months ended March 31, 2011 was $234 thousand.


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

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.

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 potential 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 March 31, 2012 and December 31, 2011 was as follows:


						A s o f M a rc h 3 1, 2 0 12
							(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	$	18,396	$	2,575	$	767	$	2,140	$	32	$	- $	23,910
Co mmercial Real Es tate:
Owner Occupied		68,231		6,854		6,236		4,404		432		-	86,157
No n-o wner o ccupied		22,571		6,151		1,323		5,379		215		-	35,639
Co ns tructio n and Farmland:
Res idential		9,210		596		-		-		-		-	9,806
Co mmercial		19,062		1,805		3,040		4,019		99		-	28,025
Res idential:
Equity Lines		30,939		66		356		722		251		-	32,334
Single family		150,890		5,470		11,155		10,813		903		-	179,231
Multifamily		2,122		1,221		960		-		-		-	4,303
All o ther lo ans		3,242		-		720		-		-		-	3,962
To tal	$	324,663	$	24,738	$	24,557	$	27,477	$	1,932	$	- $	403,367


	Performing		Nonperforming
Co ns umer Credit Expo s ure by P ayment Activity	$	12,941	$	114


						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