NOTE 4. Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2012, 2011 and 2010 were as follows:


					December 31,
		2012			2011			2010
					(in thousands)
Balance, beginning	$	8,743		$	7,111		$	5,970
Provision charged to operating expense		1,660			3,750			6,325
Recoveries added to the allowance		337			848			291
Loan losses charged to the allowance		(4,163	)		(2,966	)		(5,475	)
Balance, ending	$	6,577		$	8,743		$	7,111

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


								As of December 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	$	822	$	225	$	-	$	1,047	$	20,593	$	21,640	$	-	$	230
Commercial Real Estate:
Owner Occupied		610		374		90		1,074		84,090		85,164		-		90
Non-owner occupied		234		582		-		816		38,402		39,218		-		209
Construction and Farmland:
Residential		-		-		-		-		9,706		9,706		-		-
Commercial		93		44		-		137		28,033		28,170		-		131
Consumer:
Installment		116		10		9		135		13,172		13,307		9		-
Residential:
Equity Lines		109		-		-		109		31,593		31,702		-		287
Single family		4,059		733		524		5,316		177,601		182,917		199		1,467
Multifamily		-		-		-		-		2,808		2,808		-		-
All Other Loans		-		-		-		-		3,465		3,465		-		-

Total	$	6,043	$	1,968	$	623	$	8,634	$	409,463	$	418,097	$	208	$	2,414


								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

Allowance for loan losses by segment for the years ended December 31, 2012 and 2011 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 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		(1,313	)		(1,381	)		(1,118	)		(207	)		(116	)		(28	)		-			(4,163	)
Reco veries		4			67			146			36			73			11			-			337
P ro vis io n		(29	)		590			1,097			(26	)		19			16			(7	)		1,660
Ending balance	$	1,280		$	2,820		$	1,182		$	880		$	107		$	122		$	186		$	6,577

Ending balance: Individually
evaluated fo r impairment	$	141		$	1,176		$	305		$	737		$	-		$	-		$	-		$	2,359

Ending balance: co llectively
evaluated fo r impairment	$	1,139		$	1,644		$	877		$	143		$	107		$	122		$	186		$	4,218

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

Ending balance	$	37,876		$	217,427		$	124,382		$	21,640		$	13,307		$	3,465		$	-		$	418,097

Ending balance individually
evaluated fo r impairment	$	1,326		$	7,695		$	5,246		$	985		$	-		$	-		$	-		$	15,252

Ending balance co llectively evaluated
fo r impairment	$	36,550		$	209,732		$	119,136		$	20,655		$	13,307		$	3,465		$	-		$	402,845


						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

Impaired loans by class at December 31, 2012, 2011 and 2010 were as follows:


				As of December 31, 2012
				(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		1,632		1,636		-		2,323		130
Non-owner occupied		2,290		2,296		-		2,378		147
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		1,102		1,103		-		1,159		18
Residential:
Equity lines		287		287		-		469		1
Single family		4,406		4,417		-		5,683		210
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-
	$	9,717	$	9,739	$	-	$	12,012	$	506

With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	985	$	994	$	737	$	1,062	$	53
Commercial Real Estate:
Owner Occupied		-		-		-		-		-
Non-owner occupied		1,324		1,327		305		1,337		38
Construction and Farmland:
Residential		-		-		-		-		-
Commercial		224		225		141		227		9
Residential:
Equity lines		358		359		252		366		12
Single family		2,644		2,652		924		2,674		125
Multifamily		-		-		-		-		-
Other Loans		-		-		-		-		-
	$	5,535	$	5,557	$	2,359	$	5,666	$	237

Total:
Commercial	$	985	$	994	$	737	$	1,062	$	53
Commercial Real Estate		5,246		5,259		305		6,038		315
Construction and Farmland		1,326		1,328		141		1,386		27
Residential		7,695		7,715		1,176		9,192		348
Other		-		-		-		-		-
Total	$	15,252	$	15,296	$	2,359	$	17,678	$	743


				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

Recorded investment is defined as the summation of the principal balance, accrued interest, and net deferred loan fees or costs. For the year ended December 31, 2010, the average recorded investment of impaired loans was $3.9 million. The interest income recognized on impaired loans was $309 thousand in 2010.

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, 2012 and 2011 was as follows:


						A s o f D e c e m be r 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	$	16,132	$	2,289	$	1,099	$	1,891	$	229	$	-	$	21,640
Co mmercial Real Es tate:
Owner Occupied		72,916		6,503		1,737		3,918		90		-		85,164
No n-o wner o ccupied		22,810		5,303		4,332		6,773		-		-		39,218
Co ns tructio n and Farmland:
Res idential		9,548		158		-		-		-		-		9,706
Co mmercial		21,155		1,777		854		4,384		-		-		28,170
Res idential:
Equity Lines		30,165		426		172		843		96		-		31,702
Single family		148,904		12,048		10,672		10,780		513		-		182,917
Multifamily		1,905		903		-		-		-		-		2,808
All o ther lo ans		3,465		-		-		-		-		-		3,465
To tal	$	327,000	$	29,407	$	18,866	$	28,589	$	928	$	-	$	404,790


		P erfo rming		No nperfo rming
Co ns umer Credit Expo s ure by
P ayment Activity	$	13,172	$	135


						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

One consumer loan was rated as substandard for $8 thousand at December 31, 2012. One consumer loan was rated as watch for $17 thousand, one consumer loan was rated as special mention for $292 thousand, four consumer loans were rated as substandard for $19 thousand and one consumer loan was rated as doubtful for $5 thousand at December 31, 2011.