(5) Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the three month period ended March 31, 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other loan categories and periodically may result in reallocation within the provision categories.

March 31, 2012
	Beginning									Ending
	Balance		Charge-Offs			Recoveries		Provision		Balance

Commercial and Industrial
Commercial	$	1,071	$	(47	)	$	4	$	52	$	1,080
Industrial		297		--			--		--		297

Real Estate
Commercial Construction		3,123		(260	)		21		289		3,173
Residential Construction		138		--			--		--		138
Commercial		6,448		(1,297	)		11		1,438		6,600
Residential		3,695		(129	)		3		142		3,711
Farmland		365		--			4		--		369

Consumer and Other
Consumer		205		(19	)		25		21		232
Other		308		--			2		--		310

	$	15,650	$	(1,752	)	$	70	$	1,942	$	15,910

The following table details activity in the allowance for loan losses, segregated by class of loan, for the three month period ended March 31, 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other loan categories and periodically may result in reallocation within the provision categories.

March 31, 2011
	Beginning										Ending
	Balance		Charge-Offs			Recoveries		Provision			Balance

Commercial and Industrial
Commercial	$	4,415	$	(207	)	$	18	$	(1,111	)	$	3,115
Industrial		698		(455	)		1		(176	)		68

Real Estate
Commercial Construction		4,126		(2,088	)		18		1,213			3,269
Residential Construction		520		--			--		(122	)		398
Commercial		8,030		(4,484	)		95		4,768			8,409
Residential		5,942		(146	)		29		(1,733	)		4,092
Farmland		944		(20	)		--		(278	)		646

Consumer and Other
Consumer		3,074		(68	)		58		(793	)		2,271
Other		531		(66	)		5		(268	)		202

	$	28,280	$	(7,534	)	$	224	$	1,500		$	22,470

In 2012, The Company refined its methodology used in estimating the amount of the Allowance for Loan and Lease Losses. Management has been proactive in identifying problem loans, assessing exposure, and providing sufficient reserves to cover the exposures. The Allowance for Loan and Lease Losses was increased in anticipation of identified exposures resulting in confirmed losses. When losses were confirmed, they were promptly charged off. As a result, losses over the last three years have been very high. During this time, newer loans granted were made subject to higher underwriting standards and more conservative appraisals. Because of the prompt recognition of losses that drove the excessive charge-off history, management now believes the remaining losses incurred in the current portfolio, including newer loans made, will be less than unadjusted loss history factors will suggest. Considering the major losses taken, along with organizational and staffing changes, the validity of qualitative factors in determining adjustments of loss history needed to be reviewed. Recognizing the importance of credit administration and the role of personnel involved in granting, approving, administering, monitoring, and collecting loans, management concluded that greater weight should be placed on factors associated with those activities. The effect of these changes on the ALLL resulted in a reduction in the ALLL estimate of $1,496. Management believes the adjustments made will result in a better estimation of losses incurred in the portfolio.

The Company determines its individual reserves during its quarterly review of substandard loans. This process involves reviewing all loans with a risk grade of 6 or below and an outstanding balance of $50,000 or more. At March 31, 2012 and 2011, impaired loans totaling $869 and $824 were below the $50,000 review threshold and were not individually reviewed for impairment. Those loans were subject to the bank's general loan loss reserve methodology and are included in the "Collectively Evaluated for Impairment" column of the following tables. Since not all loans in the substandard category are considered impaired, this quarterly assessment often results in the identification of individual reserves which are placed against certain loans as part of management's allowance for loan loss calculation. The total of these loans and the related reserves are presented in the column titled "Substandard Loans Individually Reviewed for Impairment" in the following tables. The following tables present breakdowns of the allowance for loan losses, segregated by impairment methodology for March 31, 2012 and 2011:

March 31, 2012
					Ending Allowance Balance
	Nonaccrual/TDR		Substandard		Total
	Individually		Individually		Individually		Collectively
	Evaluated for		Evaluated for		Evaluated for		Evaluated for
	Impairment		Impairment		Impairment		Impairment		Total
Commercial and Industrial
Commercial	$	304	$	307	$	611	$	469	$	1,080
Industrial		--		--		--		297		297

Real Estate
Commercial Construction		2,755		169		2,924		249		3,173
Residential Construction		--		--		--		138		138
Commercial		1,023		217		1,240		5,360		6,600
Residential		788		823		1,611		2,100		3,711
Farmland		12		--		12		357		369

Consumer and Other
Consumer		--		54		54		178		232
Other		--		--		--		310		310

Total End of Period Allowance Balance	$	4,882	$	1,570	$	6,452	$	9,458	$	15,910

March 31, 2012
					Ending Loan Balance
	Nonaccrual/TDR		Substandard		Total
	Individually		Individually		Individually		Collectively
	Evaluated for		Evaluated for		Evaluated for		Evaluated for
	Impairment		Impairment		Impairment		Impairment		Total
Commercial and Industrial
Commercial	$	1,885	$	2,428	$	4,313	$	51,360	$	55,673
Industrial		--		--		--		8,848		8,848

Real Estate
Commercial Construction		23,322		2,299		25,621		30,799		56,420
Residential Construction		--		204		204		3,020		3,224
Commercial		35,665		5,567		41,232		259,157		300,389
Residential		6,086		4,193		10,279		184,589		194,868
Farmland		2,536		241		2,777		45,231		48,008

Consumer and Other
Consumer		--		41		41		29,602		29,643
Other		--		21		21		9,419		9,440

Total End of Period Loan Balance	$	69,494	$	14,994	$	84,488	$	622,025	$	706,513

March 31, 2011
					Ending Allowance Balance
	Nonaccrual/TDR		Substandard		Total
	Individually		Individually		Individually		Collectively
	Evaluated for		Evaluated for		Evaluated for		Evaluated for
	Impairment		Impairment		Impairment		Impairment		Total
Commercial and Industrial
Commercial	$	39	$	629	$	668	$	2,447	$	3,115
Industrial		--		3		3		65		68

Real Estate
Commercial Construction		1,981		1,132		3,113		156		3,269
Residential Construction		--		--		--		398		398
Commercial		2,785		4,821		7,606		803		8,409
Residential		198		1,284		1,482		2,610		4,092
Farmland		--		16		16		630		646

Consumer and Other
Consumer		8		47		55		2,216		2,271
Other		--		--		--		202		202

Total End of Period Allowance Balance	$	5,011	$	7,932	$	12,943	$	9,527	$	22,470

March 31, 2011
					Ending Loan Balance
	Nonaccrual/TDR		Substandard		Total
	Individually		Individually		Individually		Collectively
	Evaluated for		Evaluated for		Evaluated for		Evaluated for
	Impairment		Impairment		Impairment		Impairment		Total
Commercial and Industrial
Commercial	$	74	$	2,511	$	2,585	$	49,996	$	52,581
Industrial		313		57		370		9,345		9,715

Real Estate
Commercial Construction		15,164		11,738		26,902		45,743		72,645
Residential Construction		--		--		--		4,180		4,180
Commercial		27,774		20,852		48,626		295,227		343,853
Residential		2,982		7,480		10,462		194,104		204,566
Farmland		444		378		822		47,968		48,790

Consumer and Other
Consumer		92		95		187		32,495		32,682
Other		8		26		34		13,935		13,969

Total End of Period Loan Balance	$	46,851	$	43,137	$	89,988	$	692,993	$	782,981