NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the six months ended June 30, 2012 and 2011 and the year ended December 31, 2011 were as follows:


	Six Months Ended June 30, 2012			Year Ended December 31, 2011			Six Months Ended June 30, 2011
	(in thousands)

Balance, beginning	$	8,743		$	7,111		$	7,111
Provision charged to operating expense		600			3,750			1,800
Recoveries added to the allowance		131			848			452
Loan losses charged to the allowance		(846	)		(2,966	)		(1,529	)
Balance, ending	$	8,628		$	8,743		$	7,834

Nonaccrual and past due loans by class at June 30, 2012 and December 31, 2011 were as follows:


	As of June 30, 2012 (in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Days Past Due Still Accruing		Nonaccrual Loans

Commercial - Non Real Estate:
Commercial & Industrial	$	424	$	15	$	2	$	441	$	21,890	$	22,331	$	2	$	-
Commercial Real Estate:
Owner Occupied		380		1,051		99		1,530		91,030		92,560		-		384
Non-owner occupied		1,076		139		-		1,215		36,462		37,677		-		139
Construction and Farmland:
Residential		-		-		-		-		11,312		11,312		-		-
Commercial		210		105		162		477		28,288		28,765		162		144
Consumer:
Installment		83		16		-		99		12,912		13,011		-		-
Residential:
Equity Lines		331		-		-		331		32,827		33,158		-		420
Single family		2,491		249		-		2,740		179,511		182,251		-		605
Multifamily		-		-		-		-		4,215		4,215		-		-
All Other Loans		-		-		-		-		3,225		3,225		-		-

Total	$	4,995	$	1,575	$	263	$	6,833	$	421,672	$	428,505	$	164	$	1,692


	As of December 31, 2011 (in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Past Due Still Accruing		Nonaccrual 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 June 30, 2012 and December 31, 2011 were as follows:


	As of and for the Six Months Ended June 30, 2012 (in thousands )

	Co nstruction and Farmland		Residential Real Estate			Commercial Real Estate			Commercial			Consumer			All Other Loans			Unallocated		Total
Allowa nce for credit losses :

Beginning Balance	$	2,618	$	3,544		$	1,057		$	1,077		$	131		$	123		$	193	$	8,743
Charge-Offs		-		(436	)		(278	)		(46	)		(76	)		(10	)		-		(846	)
Recoveries		1		57			1			25			42			5			-		131
Provision		56		(152	)		738			(279	)		23			(11	)		225		600

Ending balance	$	2,675	$	3,013		$	1,518		$	777		$	120		$	107		$	418	$	8,628

Ending balance: Individually evaluated for impairment	$	1,430	$	1,582		$	294		$	247		$	-		$	-		$	-	$	3,553

Ending balance: collectively evaluated for impairment	$	1,245	$	1,431		$	1,224		$	530		$	120		$	107		$	418	$	5,075


F inancing rece ivables:

Ending balance	$	40,077	$	219,624		$	130,237		$	22,331		$	13,011		$	3,225		$	-	$	428,505

Ending balance individually evaluated for impairment	$	3,347	$	8,278		$	6,037		$	247		$	-		$	-		$	-	$	17,909

Ending balance collectively evaluated for impairment	$	36,730	$	211,346		$	124,200		$	22,084		$	13,011		$	3,225		$	-	$	410,596


	As of and for the Twelve Months Ended Decembe r 31, 2011 (in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate			Commercial			Consumer			All Other Loans			Unallocated		Total
Allowa nce for credit losses:

Beginning Balance	$	1,386		$	3,457		$	1,231		$	819		$	182		$	36		$	-	$	7,111
Charge-Offs		(721	)		(1,203	)		(14	)		(572	)		(331	)		(125	)		-		(2,966	)
Recoveries		5			298			2			292			195			56			-		848
Provision		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 for impairment	$	1,468		$	2,071		$	150		$	544		$	-		$	-		$	-	$	4,233

Ending balance: collectively evaluated for impairment	$	1,150		$	1,473		$	907		$	533		$	131		$	123		$	193	$	4,510


F inancing receivables:

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

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

Ending balance collectively evaluated for impairment	$	31,612		$	207,407		$	111,857		$	22,267		$	13,185		$	4,206		$	-	$	390,534

Impaired loans by class at June 30, 2012 and December 31, 2011 were as follows:


	As of June 30, 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		2,454		2,462		-		2,675		68
Non-owner occupied		2,248		2,254		-		2,382		72
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		353		353		-		362		4
Residential
Equity lines		171		171		-		189		-
Single family		3,871		3,881		-		4,186		73
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-
	$	9,097	$	9,121	$	-	$	9,794	$	217

With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	247	$	247	$	247	$	248	$	8
Commercial Real Estate:
Owner Occupied		-		-		-		-		-
Non-owner occupied		1,335		1,338		294		1,345		53
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		2,994		3,015		1,430		3,017		62
Residential
Equity lines		399		399		251		403		2
Single family		3,837		3,847		1,331		3,929		112
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-

	$	8,812	$	8,846	$	3,553	$	8,942	$	237

Total:
Commercial	$	247	$	247	$	247	$	248	$	8
Commercial Real Estate		6,037		6,054		294		6,402		193
Construction and Farmland		3,347		3,368		1,430		3,379		66
Residential		8,278		8,298		1,582		8,707		187
Other		-		-		-		-		-
Total	$	17,909	$	17,967	$	3,553	$	18,736	$	454

The average recorded investment of impaired loans for the three month period ended June 30, 2012 was $18.7 million. The interest income recognized on impaired loans for the three months ended June 30, 2012 was $228 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 June 30, 2012 and December 31, 2011 was as follows:


	As of June 30, 2012 (in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total

Co mmercial - Non Real Estate:
Co mmercial &Indus trial	$	18,074	$	2,510	$	81	$	1,634	$	32	$	-	$	22,331
Co mmercial Real Es tate:
Owner Occupied		74,850		6,798		6,614		4,055		243		-		92,560
No n-o wner o ccupied		23,346		5,656		1,785		6,752		138		-		37,677
Co ns tructio n and Farmland:
Res idential		10,644		-		668		-		-		-		11,312
Co mmercial		19,832		2,032		2,921		3,882		sd98		-		28,765
Res idential:
Equity Lines		31,777		70		144		918		249		-		33,158
Single family		153,414		6,677		11,034		10,394		732		-		182,251
Multifamily		2,091		2,124		-		-		-		-		4,215
All o ther lo ans		3,225		-		-		-		-		-		3,225
To tal	$	337,253	$	25,867	$	23,247	$	27,635	$	1,492	$	-	$	415,494


	P erfo rming		No nperfo rming
Co ns umer Credit Expo s ure by
P ayment Activity	$	12,912	$	99


	A s o f D e c e m be r 3 1, 2 0 11 (in tho us a nds )
INTERNAL RISK RATING GRADES	P as s		Watch		Special 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