3. Loans

Loans are comprised of the following:

	December 31,		December 31,
(In thousands)	2011		2010
Commercial and business loans	$	163,442	$	154,624
Government program loans		2,984		4,600
Total commercial and industrial	$	166,426	$	159,224
Real estate – mortgage:
Commercial real estate		118,857		131,632
Residential mortgages		24,031		23,764
Home Improvement and Home Equity loans		1,859		2,385
Total real estate mortgage		144,747		157,781
RE construction and development		50,400		65,182
Agricultural		35,811		46,308
Installment		11,282		12,891
Lease financing		49		305
Total Loans	$	408,715	$	441,691

The Company's loans are predominantly in the San Joaquin Valley, and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County, although the Company does participate in loans with other financial institutions, primarily in the state of California.

Commercial and industrial loans represent 40.7% of total loans at December 31, 2011 and are generally made to support the ongoing operations of small-to-medium sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide, working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases or other collateral including real estate. The remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower.

Real estate mortgage loans, representing 35.4% of total loans at December 31, 2011, are secured by trust deeds on primarily commercial property, but are also secured by trust deeds on single family residences. Repayment of real estate mortgage loans is generally from the cash flow of the borrower.

Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and commercial properties, including: office buildings, shopping centers; apartments and motels; owner occupied buildings; manufacturing facilities and more. Commercial real estate mortgage loans can also be used to refinance existing debt. Although real estate associated with the business is the primary collateral for commercial real estate mortgage loans, the underlying real estate is not the source of repayment. Commercial real estate loans are made under the premise that the loan will be repaid from the borrower's business operations, rental income associated with the real property, or personal assets.

Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and are generally of a shorter term than conventional mortgages, with maturities ranging from three to fifteen years on average.

Home Equity loans comprise a relatively small portion of total real estate mortgage loans, and are offered to borrowers for the purpose of home improvements, although the proceeds may be used for other purposes. Home equity loans are generally secured by junior trust deeds, but may be secured by 1st trust deeds.

Real estate construction and development loans, representing 12.3% of total loans at December 31, 2011, consist of loans for residential and commercial construction projects, as well as land acquisition and development, or land held for future development. Loans in this category are secured by real estate including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans is generally from long-term mortgages with other lending institutions obtained at completion of the project.

Agricultural loans represent 8.8% of total loans at December 31, 2011 and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.

In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At December 31, 2011 and 2010, these financial instruments include commitments to extend credit of $62.4 million and $67.8 million, respectively, and standby letters of credit of $2.5 million and $1.8 million, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments.

Occasionally, shared appreciation agreements are made between the Company and the borrower on certain construction loans where the Company agrees to receive interest on the loan at maturity rather than monthly and the borrower agrees to share in the profits of the project. Due to the difficulty in calculating future values, shared appreciation income is recognized when received. The Company does not participate in a significant number of shared appreciation projects. The Company received no shared appreciation income during the years ended December 31, 2011 and 2010.

The Company has, and expects to have, lending transactions in the ordinary course of its business with directors, officers, principal shareholders and their affiliates. These loans are granted on substantially the same terms, including interest rates and collateral, as those prevailing on comparable transactions with unrelated parties, and do not involve more than the normal risk of collectibility or present unfavorable features.

Loans to directors, officers, principal shareholders and their affiliates are summarized below:

	December 31,
(In thousands)	2011			2010
Aggregate amount outstanding, beginning of year		10,580			9,146
New loans or advances during year		1,959			5,783
Repayments during year		(9,295	)		(4,349	)
Aggregate amount outstanding, end of year	$	3,244		$	10,580
Loan commitments	$	3,001		$	4,030

Past Due Loans

The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the Loan Committee and monthly reports to the Board of Directors. Loans over 90 days past due and still accruing totaled $74,000 and $547,000 at December 31, 2011 and December 31, 2010, respectively. The following is a summary of delinquent loans at December 31, 2011:

					Loans								Accruing
	Loans		Loans		90 or More								Loans 90 or
	30-60 Days		61-89 Days		Days		Total Past		Current		Total		More Days
December 31, 2011 (000's)	Past Due		Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Commercial and Business Loans		154		191		3,552		3,897		159,545	$	163,442		0
Government Program Loans		0		0		433		433		2,551		2,984		74
Total Commercial and Industrial		154		191		3,985		4,330		162,096		166,426		74

Commercial Real Estate Loans		1,248		2,514		0		3,762		115,095		118,857		0
Residential Mortgages		328		0		0		328		23,703		24,031		0
Home Improvement and Home Equity Loans		62		132		0		194		1,665		1,859		0
Total Real Estate Mortgage		1,638		2,646		0		4,284		140,463		144,747		0

Total RE Construction and Development Loans		0		0		6,150		6,150		44,250		50,400		0

Total Agricultural Loans		0		0		0		0		35,811		35,811		0

Consumer Loans		297		0		0		297		10,776		11,073		0
Overdraft protection Lines		0		0		0		0		85		85		0
Overdrafts		0		0		0		0		124		124		0
Total Installment		297		0		0		297		10,985		11,282		0

Lease Financing		0		0		0		0		49		49		0

Total Loans		2,089		2,837		10,135		15,061		393,654	$	408,715		74

The following is a summary of delinquent loans at December 31, 2010:

					Loans								Accruing
	Loans		Loans		90 or More								Loans 90 or
	30-60 Days		61-89 Days		Days		Total Past		Current		Total		More Days
December 31, 2010 (000's)	Past Due		Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Commercial and Business Loans	$	4,554	$	443	$	4,637	$	9,634	$	144,990	$	154,624	$	454
Government Program Loans		114		106		305		525		4,075		4,600		93
Total Commercial and Industrial		4,668		549		4,942		10,159		149,065		159,224		547

Commercial Real Estate Loans		0		0		1,405		1,405		130,227		131,632		0
Residential Mortgages		0		328		98		426		23,338		23,764		0
Home Improvement and Home Equity Loans		102		55		45		202		2,183		2,385		0
Total Real Estate Mortgage		102		383		1,548		2,033		155,748		157,781		0

Total RE Construction and Development Loans		4,004		3,395		1,630		9,029		56,153		65,182		0

Total Agricultural Loans		0		0		398		398		45,910		46,308		0

Consumer Loans		39		12		57		108		12,354		12,462		0
Overdraft protection Lines		0		0		0		0		74		74		0
Overdrafts		0		0		0		0		355		355		0
Total Installment		39		12		57		108		12,783		12,891		0

Lease Financing		0		0		0		0		305		305		0

Total Loans	$	8,813	$	4,339	$	8,575	$	21,727	$	419,964	$	441,691	$	547

Nonaccrual Loans

Commercial, construction and commercial real estate loans are placed on non-accrual status under the following circumstances:

–

When there is doubt regarding the full repayment of interest and principal.

–

When principal and/or interest on the loan has been in default for a period of 90-days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future.

–

When the loan is identified as having loss elements and/or is risk rated "8" Doubtful.

–

Other circumstances which jeopardize the ultimate collectability of the loan including certain troubled debt restructurings, identified loan impairment, and certain loans to facilitate the sale of OREO.

Loans meeting any of the preceding criteria are placed on non-accrual status and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

Loans that are secured by one-to-four family residential properties (e.g., residential mortgage loans and home equity loans) on which principal and/or interest is due and unpaid for 90 days or more are placed on non-accrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

Consumer loans to individuals for personal, family and household purposes, and unsecured or secured personal property where principal or interest is due and unpaid for 90 days or more are placed on non-accrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

When a loan is placed on non-accrual status and subsequent payments of interest (and principal) are received, the interest received may be accounted for in two separate ways:

Cost recovery method: If the loan is in doubt as to full collection, the interest received in subsequent payments is diverted from interest income to a valuation reserve and treated as a reduction of principal for financial reporting purposes.

Cash basis: - This method is only used if the recorded investment or total contractual amount is expected to be fully collectible, under which circumstances the subsequent payments of interest is credited to interest income as received.

Loans on non-accrual status are usually not returned to accruing status unless and until all delinquent principal and/or interest has been brought current, there is no identified element of loss, and current and continued satisfactory performance is expected (loss of the contractual amount not the carrying amount of the loan). Repayment ability is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization.

Nonaccrual loans totaled $18.1 million and $34.4 million at December 31, 2011 and 2010, respectively. There were no remaining undisbursed commitments to extend credit on nonaccrual loans at December 31, 2011 and 2010.

The following is a summary of nonaccrual loan balances at December 31, 2011 and 2010 (in thousands).

	December 31, 2011		December 31, 2010
Commercial and Business Loans	$	4,722	$	13,238
Government Program Loans		358		211
Total Commercial and Industrial		5,080		13,449

Commercial Real Estate Loans		3,946		1,405
Residential Mortgages		43		98
Home Improvement and Home Equity Loans		0		89
Total Real Estate Mortgage		3,989		1,592

Total RE Construction and Development Loans		9,014		16,003

Total Agricultural Loans		0		3,107

Consumer Loans		15		68
Overdraft protection Lines		0		0
Overdrafts		0		0
Total Installment		15		68

Lease Financing		0		175
Total Loans	$	18,098	$	34,394

Impaired Loans

A loan is considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.

The Company applies its normal loan review procedures in making judgments regarding probable losses and loan impairment. The Company evaluates for impairment those loans on non-accrual status, graded doubtful, graded substandard or those that are troubled debt restructures. The primary basis for inclusion in impaired status under accepted accounting pronouncements is that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

A loan is not considered impaired if:

–

There is merely an insignificant delay or shortfall in the amounts of payments.

–

We expect to collect all amounts due, including interest accrued, at the contractual interest rate for the period of the delay.

Review for impairment does not include large groups of smaller balance homogeneous loans that are collectively evaluated to estimate the allowance for loan losses. The Company's present allowance for loan losses methodology, including migration analysis, captures required reserves for these loans in the formula allowance.

For loans determined to be impaired, the Company evaluates impairment based upon either the fair value of underlying collateral, discounted cash flows of expected payments, or observable market price.

–

For loans secured by collateral including real estate and equipment the fair value of the collateral less selling costs will determine the carrying value of the loan. The difference between the recorded investment in the loan and the fair value, less selling costs, determines the amount of impairment. The Company uses the measurement method based on fair value of collateral when the loan is collateral dependent and foreclosure is probable.

–

The discounted cash flow method of measuring the impairment of a loan is used for unsecured loans or for loans secured by collateral where the fair value cannot be easily determined. Under this method, the Company assesses both the amount and timing of cash flows expected from impaired loans. The estimated cash flows are discounted using the loan's effective interest rate. The difference between the amount of the loan on the Bank's books and the discounted cash flow amounts determines the amount of impairment to be provided. This method is used for most of the Company's troubled debt restructurings or other impaired loans where some payment stream is being collected.

–

The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process.

The method for recognizing interest income on impaired loans is dependent on whether the loan is on nonaccrual status or is a troubled debt restructuring. For income recognition, the existing nonaccrual and troubled debt restructuring policies are applied to impaired loans. Generally, except for certain troubled debt restructurings which are performing under the restructure agreement, the Company does not recognize interest income received on impaired loans, but reduces the carrying amount of the loan for financial reporting purposes.

Loans other than certain homogenous loan portfolios are reviewed on a quarterly basis for impairment. Impaired loans are written down to estimated realizable values by the establishment of specific reserves when required. The following is a summary of impaired loans at December 31, 2011.

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
December 31, 2011 (000's)	Balance		Allowance		Allowance		Investment		Allowance		Investment
Commercial and Business Loans	$	6,521	$	4,002	$	2,425	$	6,427	$	112	$	11,102
Government Program Loans		704		212		0		212		0	$	301
Total Commercial and Industrial		7,225		4,214		2,425		6,639		112		11,403

Commercial Real Estate Loans		8,457		4,209		4,094		8,303		523	$	7,258
Residential Mortgages		3,569		494		3,037		3,531		166	$	3,619
Home Improvement and Home Equity Loans		36		22		15		37		1	$	96
Total Real Estate Mortgage		12,062		4,725		7,146		11,871		690		10,973

Total RE Construction and Development Loans		11,535		9,014		2,418		11,432		71	$	17,184

Total Agricultural Loans		2,445		61		1,792		1,853		381	$	2,139

Consumer Loans		88		87		0		87		0	$	184
Overdraft protection Lines		0		0		0		0		0	$	0
Overdrafts		0		0		0		0		0	$	0
Total Installment		88		87		0		87		0		184

Leases Financing		0		0		0		0		0	$	55

Total Impaired Loans	$	33,355	$	18,101	$	13,781	$	31,882	$	1,254	$	41,938

The following is a summary of impaired loans at December 31, 2010.

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
December 31, 2010 (000's)	Balance		Allowance		Allowance		Investment		Allowance		Investment
Commercial and Business Loans	$	16,317	$	520	$	14,156	$	14,676	$	4,974	$	10,338
Government Program Loans		317		179		32		211		32		307
Total Commercial and Industrial		16,634		699		14,188		14,887		5,006		10,645

Commercial Real Estate Loans		6,448		2,761		3,664		6,425		476		7,386
Residential Mortgages		3,660		443		2,916		3,359		241		3,528
Home Improvement and Home Equity Loans		143		93		45		138		27		101
Total Real Estate Mortgage		10,251		3,297		6,625		9,922		744		11,015

Total RE Construction and Development Loans		26,584		5,572		17,187		22,759		4,890		23,725

Total Agricultural Loans		4,143		160		2,947		3,107		686		4,141

Consumer Loans		150		148		0		148		0		255
Overdraft protection Lines		0		0		0		0		0		0
Overdrafts		0		0		0		0		0		0
Total Installment		150		148		0		148		0		255

Lease Financing		175		175		0		175		0		54

Total Impaired Loans	$	57,937	$	10,051	$	40,947	$	50,998	$	11,326	$	49,835

In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructuring for which the loan is performing under the current contractual terms for a reasonable period of time, income is recognized under the accrual method.

Troubled Debt Restructurings

When the Company grants a concession to a borrower as part of a loan restructuring, the restructuring is accounted for as a troubled debt restructuring (TDR). TDR's are reported as a component of impaired loans.

A TDR is a type of restructuring in which the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Bank) to the borrower that it would not otherwise consider. Although the restructuring may take different forms, the Company's objective is to maximize recovery of its investment by granting relief to the borrower.

For a restructured loan to return to accrual status there needs to, among other factors, be at least 6 months successful payment history. In addition, the Company performs a financial analysis of the credit to determine whether the borrower has the ability to continue to perform successfully over the remaining life of the loan. This includes, but is not limited to, review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status.

The following tables illustrate TDR activity that occurred during the periods indicated (in thousands):

	Year Ended December 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings

Commercial and Business Loans		5	$	2,240	$	2,041
Government Program Loans		0		0		0
Commercial Real Estate Loans		2		3,542		2,506
Residential Mortgages		2		852		847
Home Improvement and Home Equity Loans		0		0		0
RE Construction and Development Loans		0		0		0
Agricultural Loans		0		0		0
Consumer Loans		2		130		15
Overdraft protection Lines		0		0		0
Lease Financing		0		0		0
Total Loans		11	$	6,765	$	5,409

Year Ended December 31, 2011

	Number of Contracts		Recorded Investment
Troubled Debt Restructurings that Defaulted

Commercial and Business Loans		2	$	132
Government Program Loans		0		0
Commercial Real Estate Loans		0		0
Single Family Residential Loans		1		327
Home Improvement and Home Equity Loans		0		0
RE Construction and Development Loans		0		0
Agricultural Loans		0		0
Consumer Loans		1		85
Overdraft protection Lines		0		0
Lease Financing		0		0
Total Loans		4	$	545

The Company makes various types of concessions when structuring TDR's including rate reductions, payment extensions, and forbearance. At December 31, 2011, the Company had 41 restructured loans totaling $19.0 million with no additional obligations as compared to 48 restructured loans totaingl $24.9 million at December 31, 2010, of which one (1) had additional obligations of $36,000.

Credit Quality Indicators

As part of its credit monitoring program, the Company utilizes a risk rating system which quantifies the risk, the Company estimates it has assumed when entering into a loan transaction, and during the life of that loan. The system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems.

For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-going basis, loans and credit facilities are reviewed for internal and external influences impacting the credit facility that would warrant a change in the risk rating. Each loan credit facility is to be given a risk rating that takes into account factors that materially affect credit quality.

When assigning risk ratings, the Company evaluates two risk rating approaches, a facility rating and a borrower rating as follows.

Facility Rating:

The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires that it be rated differently from the risk rating assigned to the borrower. The Company assesses the risk impact of these factors:

Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, liquidation value and the Company's ability to dispose of the collateral.

Guarantees - The value of third party support arrangements varies widely. Unconditional guaranties from persons with demonstrable ability to perform are more substantial than that of closely related persons to the borrower who offer only modest support.

Unusual Terms - Credit may be extended on terms that subject the Company to higher level of risk than indicated in the rating of the borrower.

Borrower Rating:

The borrower rating is a measure of loss possibility based on the historical, current and anticipated financial characteristics of the borrower in the current risk environment. In arriving at the rating, the Company considers at least the following factors:

–

Quality of management

–

Liquidity

–

Leverage/capitalization

–

Profit margins/earnings trend

–

Adequacy of financial records

–

Alternative funding sources

–

Geographic risk

–

Industry risk

–

Cash flow risk

–

Accounting practices

–

Asset protection

–

Extraordinary risks

The Company assigns risk ratings to loans other than consumer loans and other homogeneous loan pools based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. When the borrower rating and the facility ratings differ, the lowest rating is to apply:

–

Grades 1 and 2 – These grades include loans which are given to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.

–

Grade 3 – This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower's balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics, which place them well above the minimum underwriting requirements.. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity.

–

Grades 4 and 5 – These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower's balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. The borrower may have recognized a loss over three or four years ago, recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers fully complying with all underwriting standards and are performing according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management's “watch list” While still considered pass loans, for loans given a grade 5, the borrower's financial condition, cash flow or operations evidence more than average risk and short term weaknesses that warrant a higher than average level of monitoring, supervision and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company's credit position. Loans with a grade rating are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.

–

Grade 6 – This grade includes “special mention” loans which are loans that are currently protected but are potentially weak. This generally is an interim grade classification and should usually be upgraded to an Acceptable rating or downgraded to Substandard within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company's credit position at some future date. Special Mention loans are often loans with weaknesses inherent from the loan origination, loan servicing, and perhaps some technical deficiencies. The main theme in Special Mention credits is the distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.

–

Grade 7 – This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. Substandard loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans also include impaired loans.

–

Grade 8 - This grade includes “doubtful” loans which have all the same characteristics that the Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

–

Grade 9 - This grade includes loans classified “loss” which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather is not practical or desirable to defer writing off asset even though partial recovery may be achieved in the future.

The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for December 31, 2011 and 2010. The Company did not carry any loans graded as loss at December 31, 2011 or 2010.

	Commercial
December 31, 2011	and Lease		Commercial
(000's)	Financing		RE		Construction		Agricultural		Total
Grades 1and 2		725		0		0		40		765
Grade 3		184		7,026		897		0		8,107
Grades 4 and 5 – pass		149,815		104,468		28,596		33,990		316,869
Grade 6 – special mention		10,431		749		0		0		11,180
Grade 7 – substandard		5,320		6,614		20,097		1,781		33,812
Grade 8 – doubtful
Total		166,475		118,857		49,590		35,811		370,733

	Commercial
December 31, 2010	and Lease		Commercial
(000's)	Financing		RE		Construction		Agricultural		Total
Grades 1and 2	$	990	$	1,112	$	0	$	79	$	2,181
Grade 3		302		6,786		937		0		8,025
Grades 4 and 5 – pass		134,058		113,515		33,082		41,597		322,252
Grade 6 – special mention		7,770		4,419		10,737		1,525		24,451
Grade 7 – substandard		16,409		5,800		20,426		3,107		45,742
Grade 8 – doubtful		0		0		0		0		0
Total	$	159,529	$	131,632	$	65,182	$	46,308	$	402,651

The Company follows consistent underwriting standards outlined in its loan policy for consumer and other homogenous loans, but does not specifically assign as risk rating when these loans are originated. Consumer loans are monitored for credit risk and are considered “pass” loans until some issue or event requires that the credit be downgraded to special mention or worse. The following tables summarize the credit risk ratings for consumer related loans and other homogenous loans for December 31, 2011 and 2010.

	December 31, 2011								December 31, 2010
(000's)	Single family Residential		Home Improvement		Installment		Total		Single family Residential		Home Improvement		Installment		Total
Not graded		18,858		1,801		9,615		30,274	$	18,236	$	2,225	$	11,429	$	31,890
Pass		4,796		22		1,163		5,981		3,964		22		1,313		5,299
Special Mention		0		0		423		423		195		0		0		195
Substandard		377		36		81		494		1,369		138		149		1,656
Total		24,031		1,859		11,282		37,172	$	23,764	$	2,385	$	12,891	$	39,040

The Company analyzes risk characteristics inherent in each loan portfolio segment as part of the quarterly review of the adequacy of the allowance for loan losses. The following summarizes some of the key risk characteristics for the eleven segments of the loan portfolio (Consumer loans include three segments):

Commercial and business loans – Commercial loans are subject to the effects of economic cycles and tend to exhibit increased risk as economic conditions deteriorate, or if the economic downturn is prolonged. The Company considers this segment to be one of higher risk given the size of individual loans and the overall portfolio.

Government program loans – This is a relatively a small part of the Company's loan portfolio, but has historically had a high percentage of loans that have migrated from pass to substandard given there vulnerability to economic cycles.

Commercial real estate loans – This segment is considered to have more risk in part because of the vulnerability of commercial businesses to economic cycles as well as the exposure to fluctuations in real estate prices because most of these loans are secured by real estate. Losses in this segment have however been historically low because most of the loans are real estate secured.

Single family residential loans – This segment is considered to have low risk factors both from the Company and peer statistics. These loans are secured by first deeds of trust. The losses experienced over the past twelve quarters are isolated to approximately seven loans and are generally the result of short sales.

Home improvement and home equity loans – Because of their junior lien position, these loans are inherently considered to have a higher risk level. Because residential real estate has been severely distressed in the recent past, the anticipated risk for this loan segment has increased.

Real estate construction loans – This segment in a normal economy is considered to have a higher risk profile due to construction and market value issues in conjunction with normal credit risks. In the current distressed residential real estate markets the risk has increased.

Agricultural loans – This segment is considered to have risks associated with weather, insects, and marketing issues. In addition, concentrations in certain crops or certain agricultural areas can increase risk.

Consumer loans (including three segments: consumer loans, overdrafts, and overdraft protection lines) – This segment is higher risk because many of the loans are unsecured.

Commercial lease financing – This segment of the portfolio is small and but is considered to be vulnerable to economic cycles given the nature of the leasing relationship where businesses are relatively small or have minimal cash flow. This lending program was terminated in 2005.

The following summarizes the activity in the allowance for credit losses by loan category for the years ended December 31, 2011 and 2010.

	Commercial			Real			RE
	and			Estate			Construction					Installment			Lease
2011 (in 000's)	Industrial			Mortgage			Development			Agricultural		& Other			Financing			Unallocated		Total
Beginning balance		8,209			1,620			5,763			850		49			3			26		16,520
Provision for credit losses		7,268			114			5,563			-342		676			108			215		13,602

Charge-offs		(9,340	)		((453	)		(6,771	)		-		(620	)		(110	)				(17,294	)
Recoveries		650			135			24			-		11			-					820
Net charge-offs		(8,690	)		(318	)		(6,747	)		-		(609	)		(110	)		-		(16,473	)

Ending balance	$	6,787		$	1,416		$	4,579		$	508	$	116		$	1		$	241	$	13,648
Period-end amount allocated to:
Loans individually evaluated for impairment		112			690			71			381		0			0			0		1,254

Loans collectively evaluated for impairment		6,675			726			4,508			127		116			1			241		12,395
Ending balance	$	6,787		$	1,416		$	4,579		$	508	$	116		$	1		$	241	$	13,648

	Commercial			Real			RE
	and			Estate			Construction						Installment			Lease
2010 (in 000's)	Industrial			Mortgage			Development			Agricultural			& Other			Financing			Unallocated		Total
Beginning balance		7,125			1,426			5,561			334			535			35			0		15,016
Provision for credit losses		3,639			1,610			5,613			1,181			357			49			26		12,475

Charge-offs		(3,484	)		(1,416	)		(5,421	)		(676	)		(858	)		(81	)				(11,936	)
Recoveries		929			0			10			11			15			0					965
Net charge-offs		(2,555	)		(1,416	)		(5,411	)		(665	)		(843	)		(81	)		0		(10,971	)

Ending balance		8,209			1,620			5,763			850			49			3			26		16,520
Period-end amount allocated to:
Loans individually evaluated for impairment		5,006			744			4,890			686			0			0			0		11,326
Loans collectively evaluated for impairment		3,203			876			873			164			49			3			26		5,194
Ending balance		8,209			1,620			5,763			850			49			3			26		16,520

The following summarizes information with respect to the loan balances at December 31, 2011 and 2010.

	December 31, 2011						December 31, 2010
	Loans		Loans				Loans		Loans
	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
(000's)	for Impairment		for Impairment		Loans		for Impairment		for Impairment		Loans
Commercial and Business Loans	$	6,427	$	157,015	$	163,442	$	14,676	$	139,948	$	154,624
Government Program Loans		212		2772		2,984		211		4,389		4,600
Total Commercial and Industrial		6,639		159,787		166,426		14,887		144,337		159,224

Commercial Real Estate Loans		8,303		110,554		118,857		6,425		125,207		131,632
Residential Mortgage Loans		3,531		20,500		24,031		3,359		20,405		23,764
Home Improvement and Home Equity Loans		37		1822		1,859		138		2,247		2,385
Total Real Estate Mortgage		11,871		132,876		144,747		9,922		147,859		157,781

Total RE Construction and Development Loans		11,432		38,968		50,400		22,759		42,423		65,182

Total Agricultural Loans		1,853		33,958		35,811		3,107		43,201		46,308

Total Installment Loans		87		11,195		11,282		148		12,743		12,891

Commercial Leases Financing		0		49		49		175		130		305

Total Loans	$	31,882	$	376,833	$	408,715	$	50,998	$	390,693	$	441,691