4. Credit Quality of Loans and Allowance for Loan Losses

A summary of the activity in the allowance for loan losses is as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Balance, beginning of period	$	7,078		$	6,752		$	7,276		$	8,813
Provision for loan losses		575			900			1,250			2,500
Recoveries		95			122			161			208
Loans charged-off		(526	)		(461	)		(1,465	)		(4,208	)
Balance, end of period	$	7,222		$	7,313		$	7,222		$	7,313

The Company monitors loan concentrations and evaluates individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity for each major standard industry classification segment. At June 30, 2012, one industry segment concentration, the oil and gas industry, aggregate more than 10% of the loan portfolio. The Company's exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately $127.5 million, or 17.0% of total loans. Additionally, the Company's exposure to loans secured by commercial real estate is monitored. At June 30, 2012, loans secured by commercial real estate (including commercial construction and multifamily loans) totaled approximately $314.5 million. Of the $314.5 million, $255.8 million represent CRE loans, 63% of which are secured by owner-occupied commercial properties. Of the $314.5 million in loans secured by commercial real estate, $3.6 million, or 1.1%, were on nonaccrual status at June 30, 2012.

Modifications by Class of Loans

(in thousands)

	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings as of June 30, 2012:
Commercial, financial, and agricultural		3	$	427	$	407
Consumer - other		1		14		10
			$	441	$	417

	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings as of December 31, 2011:
Commercial, financial, and agricultural		4	$	447	$	444
Consumer - other		1		14		12
			$	461	$	456

Trouble Debt Restructurings that Subsequently Defaulted (in thousands)

	June 30, 2012				June 30, 2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial, financial, and agricultural		3	$	249		-	$	-

For purposes of the determination of an allowance for loan losses on these troubled debt restructurings ("TDRs"), as an identified TDR, the Company considers a loss probable on the loan and, as a result is reviewed for specific impairment in accordance with the Company's allowance for loan loss methodology. If it is determined that losses are probable on such TDRs, either because of delinquency or other credit quality indicator, the Company establishes specific reserves for these loans. As of June 30, 2012, there have been no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs.

Allowance for Loan Losses and Recorded Investment in Loans
For the Six Months Ended June 30, 2012 (in thousands)
				Real Estate
	Coml, Fin, and Agric			Construction		Commercial			Residential			Consumer			Finance Leases Coml		Other		Total
Allowance for loan losses:
Beginning balance	$	1,734		$	1,661	$	2,215		$	936		$	710		$	19	$	1	$	7,276
Charge-offs		(565	)		-		(495	)		(84	)		(321	)		-		-		(1,465	)
Recoveries		103			9		-			2			47			-		-		161
Provision		384			357		246			103			156			3		1		1,250
Ending balance	$	1,656		$	2,027	$	1,966		$	957		$	592		$	22	$	2	$	7,222
Ending balance: individually evaluated for impairment	$	235		$	33	$	60		$	15		$	99		$	-	$	-	$	442

Loans:
Ending balance	$	233,629		$	55,111	$	271,141		$	112,343		$	72,859		$	3,974	$	2,398	$	751,455
Ending balance: individually evaluated for impairment	$	1,890		$	576	$	2,974		$	1,717		$	305		$	-	$	-	$	7,462

Allowance for Loan Losses and Recorded Investment in Loans
For the Year Ended December 31, 2011 (in thousands)
				Real Estate
	Coml, Fin, and Agric			Construction			Commercial			Residential			Consumer			Finance Leases Coml			Other		Total
Allowance for loan losses:
Beginning balance	$	1,664		$	2,963		$	2,565		$	862		$	730		$	29		$	-	$	8,813
Charge-offs		(1,109	)		(2,444	)		(1,246	)		(283	)		(671	)		(19	)		-		(5,772	)
Recoveries		152			14			1			4			138			1			-		310
Provision		1,027			1,128			895			353			513			8			1		3,925
Ending balance	$	1,734		$	1,661		$	2,215		$	936		$	710		$	19		$	1	$	7,276
Ending balance: individually evaluated for impairment	$	240		$	2		$	321		$	21		$	98		$	-		$	-	$	682

Loans:
Ending balance	$	223,283		$	52,712		$	280,798		$	113,582		$	69,980		$	4,276		$	1,674	$	746,305
Ending balance: individually evaluated for impairment	$	2,341		$	901		$	2,271		$	1,142		$	287		$	-		$	-	$	6,942

Credit Quality Indicators by Class of Loans
As of June 30, 2012 (in thousands)

Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category
	Commercial, Financial, and Agricultural		Commercial Real Estate Construction		Commercial Real Estate Other		Commercial Total		% of Total Commercial
Pass	$	226,921	$	39,505	$	257,927	$	524,353		95.66	%
Special mention		2,539		753		8,798		12,090		2.21	%
Substandard		3,985		3,087		4,416		11,488		2.10	%
Doubtful		184		-		-		184		0.03	%
	$	233,629	$	43,345	$	271,141	$	548,115		100.00	%

Residential Credit Exposure
Credit Risk Profile by Creditworthiness Category
	Residential Construction		Residential Prime		Residential Subprime		Residential Total		% of Total Residential
Pass	$	11,467	$	108,015	$	-	$	119,482		96.27	%
Special mention		-		1,350		-		1,350		1.09	%
Substandard		299		2,978		-		3,277		2.64	%
	$	11,766	$	112,343	$	-	$	124,109		100.00	%

Consumer and Commercial Credit Exposure
Credit Risk Profile Based on Payment Activity
	Consumer Credit Card		Consumer Other		Finance Leases Commercial		Other Loans		Consumer Total		% of Total Consumer
Performing	$	5,185	$	67,376	$	3,974	$	2,398	$	78,933		99.62	%
Nonperforming		3		295		-		-		298		0.38	%
	$	5,188	$	67,671	$	3,974	$	2,398	$	79,231		100.00	%

Credit Quality Indicators by Class of Loans
As of December 31, 2011 (in thousands)

Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category
	Commercial, Financial, and Agricultural		Commercial Real Estate Construction		Commercial Real Estate Other		Commercial Total		% of Total Commercial
Pass	$	216,465	$	36,631	$	264,542	$	517,638		94.88	%
Special Mention		1,705		1,104		10,755		13,564		2.49	%
Substandard		4,809		3,728		5,501		14,038		2.57	%
Doubtful		304		-		-		304		0.06	%
	$	223,283	$	41,463	$	280,798	$	545,544		100.00	%

Residential Credit Exposure
Credit Risk Profile by Creditworthiness Category
	Residential Construction		Residential Prime		Residential Subprime		Residential Total		% of Total Residential
Pass	$	9,041	$	104,965	$	-	$	114,006		91.33	%
Special mention		1,077		5,152		-		6,229		4.99	%
Substandard		1,131		3,465		-		4,596		3.68	%
	$	11,249	$	113,582	$	-	$	124,831		100.00	%

Consumer and Commercial Credit Exposure
Credit Risk Profile Based on Payment Activity
	Consumer Credit Card		Consumer Other		Finance Leases Commercial		Other Loans		Consumer Total		% of Total Consumer
Performing	$	5,182	$	64,497	$	4,276	$	1,674	$	75,629		99.60	%
Nonperforming		18		283		-		-		301		0.40	%
	$	5,200	$	64,780	$	4,276	$	1,674	$	75,930		100.00	%

Age Analysis of Past Due Loans by Class of Loans (in thousands)

	30-59 Days Past Due (1)		60-89 Days Past Due (1)		Greater than 90 Days Past Due (1)		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing
As of June 30, 2012
Commercial, financial, and agricultural	$	1,081	$	225	$	1,649	$	2,955	$	230,674	$	233,629	$	23
Commercial real estate - construction		288		1,133		128		1,549		41,796		43,345		-
Commercial real estate - other		1,170		10		2,597		3,777		267,364		271,141		-
Consumer - credit card		13		21		3		37		5,151		5,188		3
Consumer - other		261		95		193		549		67,122		67,671		-
Residential - construction		-		-		-		-		11,766		11,766		-
Residential - prime		1,518		368		723		2,609		109,734		112,343		36
Residential - subprime		-		-		-		-		-		-		-
Other loans		80		8		-		88		2,310		2,398		-
Finance leases commercial		-		-		-		-		3,974		3,974		-
	$	4,411	$	1,860	$	5,293	$	11,564	$	739,891	$	751,455	$	62

	30-59 Days Past Due (1)		60-89 Days Past Due (1)		Greater than 90 Days Past Due (1)		Total Past Due		Current		Tota l Loans		Recorded Investment > 90 days and Accruing
As of December 31, 2011
Commercial, financial, and agricultural	$	622	$	242	$	1,856	$	2,720	$	220,563	$	223,283	$	64
Commercial real estate - construction		673		166		358		1,197		40,266		41,463		-
Commercial real estate - other		3,185		-		1,878		5,063		275,735		280,798		-
Consumer - credit card		79		-		19		98		5,102		5,200		19
Consumer - other		410		193		269		872		63,908		64,780		8
Residential - construction		-		-		-		-		11,249		11,249		-
Residential - prime		2,457		469		685		3,611		109,971		113,582		140
Residential - subprime		-		-		-		-		-		-		-
Other loans		118		-		-		118		1,556		1,674		-
Finance leases commercial		-		-		-		-		4,276		4,276		-
	$	7,544	$	1,070	$	5,065	$	13,679	$	732,626	$	746,305	$	231

(1)

Past due amounts may include loans on nonaccrual status.

Impaired Loans by Class of Loans (in thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
As of June 30, 2012
With no related allowance recorded:
Commercial, financial, and agricultural	$	1,182	$	1,310	$	-	$	1,072	$	6
Commercial real estate - construction		513		513		-		676		1
Commercial real estate - other		2,590		3,064		-		2,809		2
Consumer - other		119		129		-		93		1
Residential - prime		1,649		1,649		-		1,548		14
Subtotal:	$	6,053	$	6,665	$	-	$	6,198	$	24
With an allowance recorded:
Commercial, financial, and agricultural		906		906		235		1,020		8
Commercial real estate - construction		63		63		33		34		-
Commercial real estate - other		384		384		60		247		-
Consumer - other		186		186		99		232		1
Residential - prime		68		68		15		159		-
Subtotal:	$	1,607	$	1,607	$	442	$	1,692	$	9
Totals:
Commercial		5,638		6,240		328		5,858		17
Consumer		305		315		99		325		2
Residential		1,717		1,717		15		1,707		14
Grand total:	$	7,660	$	8,272	$	442	$	7,890	$	33

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
As of December 31, 2011
With no related allowance recorded:
Commercial, financial, and agricultural	$	1,157	$	1,248	$	-	$	2,311	$	2
Commercial real estate - construction		897		963		-		4,511		9
Commercial real estate - other		1,029		1,029		-		2,958		31
Consumer - other		48		59		-		65		3
Residential - prime		851		851		-		1,334		28
Finance leases commercial		-		-		-		4		-
Other loans		-		-		-		3		-
Subtotal:	$	3,982	$	4,150	$	-	$	11,186	$	73
With an allowance recorded:
Commercial, financial, and agricultural		1,184		1,184		240		1,140		58
Commercial real estate - construction		4		4		2		1,580		-
Commercial real estate - other		1,242		1,242		321		1,639		98
Consumer - other		239		242		98		202		10
Residential - prime		291		291		21		255		1
Subtotal:	$	2,960	$	2,963	$	682	$	4,816	$	167
Totals:
Commercial		5,513		5,670		563		14,143		198
Consumer		287		301		98		267		13
Residential		1,142		1,142		21		1,589		29
Other		-		-		-		3		-
Grand total:	$	6,942	$	7,113	$	682	$	16,002	$	240

Loans on Nonaccrual Status

(in thousands)

	June 30, 2012		December 31, 2011
Commercial, financial, and agricultural	$	1,912	$	1,897
Commercial real estate - construction		983		902
Commercial real estate - other		2,597		2,271
Consumer - credit card		-		-
Consumer - other		295		275
Residential - construction		-		-
Residential - prime		1,583		884
Residential - subprime		-		-
Other loans		-		-
Finance leases commercial		-		-
	$	7,370	$	6,229

The amount of interest that would have been recorded on nonaccrual loans, had the loans not been classified as nonaccrual, totaled approximately $306,000 and $484,000 for the six months ended June 30, 2012 and 2011, respectively. Interest actually received on nonaccrual loans at June 30, 2012 and 2011 was $23,000 and $96,000, respectively.