NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the three months ended March 31, 2013 and 2012 and the year ended December 31, 2012 were as follows:


		Three Months Ended			Year Ended			Three Months Ended
		March 31,			December 31,			March 31,
		2013			2012			2012
					(in thousands)
Balance, beginning	$	6,577		$	8,743		$	8,743
Provision charged to operating expense		383			1,660			300
Recoveries added to the allowance		42			337			81
Loan losses charged to the allowance		(42	)		(4,163	)		(237	)
Balance, ending	$	6,960		$	6,577		$	8,887

Nonaccrual and past due loans by class at March 31, 2013 and December 31, 2012 were as follows:


								March 31, 2013
								(in thousands)
														90 or More
		30 - 59		60 - 89		90 or More								Days Past
		Days		Days		Days		Total Past						Due Still		Nonaccrual
		Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing		Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	35	$	—	$	549	$	584	$	20,813	$	21,397	$	319	$	230
Commercial Real Estate:
Owner Occupied		1,009		252		—		1,261		90,451		91,712		—		85
Non-owner occupied		1,166		576		—		1,742		42,381		44,123		—		203
Construction and Farmland:
Residential		99		—		—		99		4,617		4,716		—		—
Commercial		92		—		—		92		26,643		26,735		—		125
Consumer:
Installment		144		17		3		164		12,999		13,163		3		—
Residential:
Equity
Lines		825		40		65		930		30,496		31,426		65		278
Single
family		4,230		1,402		375		6,007		178,228		184,235		244		1,796
Multifamily		—		—		—		—		2,812		2,812		—		—
All Other Loans		—		—		—		—		3,531		3,531		—		—
Total	$	7,600	$	2,287	$	992	$	10,879	$	412,971	$	423,850	$	631	$	2,717


								December 31, 2012
								(in thousands)
														90 or More
		30 - 59		60 - 89		90 or More								Past Due
		Days		Days		Days		Total Past						Still		Nonaccrual
		Past Due		Past Due		Past Due		Due		Current		Total Loans		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

Allowance for loan losses by segment at March 31, 2013 and December 31, 2012 were as follows:


								As of and for the Three Months Ended
											March 31, 2013
											(in thousands)
		Construction			Residential			Commercial									All Other
		and Farmland			Real Estate			Real Estate		Commercial				Consumer			Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	1,280		$	2,820		$	1,182		$	880		$	107		$	122		$	186	$	6,577
Charge-Offs		—			—			—			(14	)		(23	)		(5	)		—		(42	)
Recoveries		1			3			1			16			17			4			—		42
Provision		(428	)		(26	)		62			(111	)		(12	)		13			885		383
Ending balance	$	853		$	2,797		$	1,245		$	771		$	89		$	134		$	1,071	$	6,960

evaluated Ending balance: for impairment^Individually	$	139		$	1,179		$	298		$	630		$	—		$	—		$	—	$	2,246

evaluated Ending balance: for impairment^collectively	$	714		$	1,618		$	947		$	141		$	89		$	134		$	1,071	$	4,714
Financing receivables:
Ending balance	$	31,451		$	218,473		$	135,835	$	21,397			$	13,163		$	3,531		$	—	$	423,850
Ending balance individually
evaluated for impairment	$	1,308		$	7,777		$	5,064		$	868		$	—		$	—		$	—	$	15,017
Ending balance collectively
evaluated for impairment	$	30,143		$	210,696		$	130,771	$	20,529			$	13,163		$	3,531		$	—	$	408,833


								As of and for the Twelve Months Ended
											December 31, 2012
											(in thousands)
		Construction			Residential			Commercial									All Other
		and Farmland			Real Estate			Real Estate		Commercial				Consumer			Loans			Unallocated			Total
Allowance for credit losses:
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	)
Recoveries		4			67			146			36			73			11			—			337
Provision		(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 for impairment	$	141		$	1,176		$	305		$	737		$	—		$	—		$	—		$	2,359
Ending balance: collectively
evaluated for impairment	$	1,139		$	1,644		$	877		$	143		$	107		$	122		$	186		$	4,218
Financing receivables:
Ending balance	$	37,876		$	217,427		$	124,382		$	21,640		$	13,307		$	3,465		$	—		$	418,097
Ending balance individually
evaluated for impairment	$	1,326		$	7,695		$	5,246		$	985		$	—		$	—		$	—		$	15,252
Ending balance collectively
evaluated for impairment	$	36,550		$	209,732		$	119,136		$	20,655		$	13,307		$	3,465		$	—		$	402,845

Impaired loans by class at March 31, 2013 and December 31, 2012 were as follows:


						As of
						March 31, 2013
						(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		1,475		1,478		—		1,691		19
Non-owner occupied		2,274		2,278		—		2,347		30
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		1,085		1,087		—		1,111		9
Residential:
Equity lines		463		463		—		648		1
Single family		3,911		3,920		—		5,079		27
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	9,208	$	9,226	$	—	$	10,876	$	86
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	868	$	877	$	630	$	963	$	11
Commercial Real Estate:
Owner Occupied		—		—		—		—		—
Non-owner occupied		1,315		1,318		298		1,322		18
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		223		224		139		225		2
Residential:
Equity lines		218		219		218		216		1
Single family		3,185		3,195		961		3,202		37
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	5,809	$	5,833	$	2,246	$	5,928	$	69
Total:
Commercial	$	868	$	877	$	630	$	963	$	11
Commercial Real Estate		5,064		5,074		298		5,360		67
Construction and Farmland		1,308		1,311		139		1,336		11
Residential		7,777		7,797		1,179		9,145		66
Other		—		—		—		—		—
Total	$	15,017	$	15,059	$	2,246	$	16,804	$	155


						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

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, 2013 and December 31, 2012 was as follows:


								As of
								March 31, 2013
								(in thousands)
						Special
INTERNAL RISK RATING GRADES		Pass		Watch		Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	16,039	$	2,197	$	1,007	$	1,924	$	230	$	—	$	21,397
Commercial Real Estate:
Owner Occupied		79,054		6,700		1,984		3,889		85		—		91,712
Non-owner occupied		29,785		3,508		4,063		6,767		—		—		44,123
Construction and Farmland:
Residential		4,558		158		—		—		—		—		4,716
Commercial		20,143		1,885		349		4,358		—		—		26,735
Residential:
Equity Lines		29,683		564		379		706		94		—		31,426
Single family		150,384		12,285		10,030		10,919		617		—		184,235
Multifamily		1,916		896		—		—		—		—		2,812
All other loans		3,531		—		—		—		—		—		3,531
Total	$	335,093	$	28,193	$	17,812	$	28,563	$	1,026	$	—	$	410,687


		Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	12,999	$	164


								As of
								December 31, 2012
								(in thousands)
						Special
INTERNAL RISK RATING GRADES		Pass		Watch		Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	16,132	$	2,289	$	1,099	$	1,891	$	229	$	—	$	21,640
Commercial Real Estate:
Owner Occupied		72,916		6,503		1,737		3,918		90		—		85,164
Non-owner occupied		22,810		5,303		4,332		6,773		—		—		39,218
Construction and Farm land:
Residential		9,548		158		—		—		—		—		9,706
Commercial		21,155		1,777		854		4,384		—		—		28,170
Residential:
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 other loans		3,465		—		—		—		—		—		3,465
Total	$	327,000	$	29,407	$	18,866	$	28,589	$	928	$	—	$	404,790


		Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	13,172	$	135