(4)	Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the six month period ended June 30, 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.

June 30, 2012
	Beginning									Ending
	Balance		Charge-Offs			Recoveries		Provision		Balance

Commercial and Industrial
Commercial	$	1,071	$	(230	)	$	96	$	105	$	1,042
Industrial		297		--			--		--		297

Real Estate
Commercial Construction		3,123		(474	)		35		578		3,262
Residential Construction		138		--			--		--		138
Commercial		6,448		(3,397	)		18		2,876		5,945
Residential		3,695		(275	)		5		285		3,710
Farmland		365		(39	)		5		--		331

Consumer and Other
Consumer		205		(41	)		48		41		253
Other		308		--			7		--		315

	$	15,650	$	(4,456	)	$	214	$	3,885	$	15,293

The following table details activity in the allowance for loan losses, segregated by class of loan, for the six month period ended June 30, 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.

June 30, 2011
	Beginning										Ending
	Balance		Charge-Offs			Recoveries		Provision			Balance

Commercial and Industrial
Commercial	$	4,415	$	(703	)	$	120	$	(1,187	)	$	2,645
Industrial		698		(455	)		--		(178	)		65

Real Estate
Commercial Construction		4,126		(4,062	)		26		1,886			1,976
Residential Construction		520		--			--		(144	)		376
Commercial		8,030		(10,890	)		160		6,086			3,386
Residential		5,942		(751	)		41		(1,234	)		3,998
Farmland		944		(21	)		--		(300	)		623

Consumer and Other
Consumer		3,074		(125	)		87		(905	)		2,131
Other		531		(69	)		6		(274	)		194

	$	28,280	$	(17,076	)	$	440	$	3,750		$	15,394

In 2012, the Company refined its methodology used in estimating the amount of the Allowance for Loan and Lease Losses (ALLL). Allowance management has been proactive in identifying problem loans, assessing exposure, and providing sufficient reserves to cover the exposures. The ALLL 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 $1,530. 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 June 30, 2012 and 2011, impaired loans totaling $748 and $796 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 June 30, 2012 and 2011:

June 30, 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	$	300	$	220	$	520	$	522	$	1,042
Industrial		--		--		--		297		297

Real Estate
Commercial Construction		2,111		165		2,276		986		3,262
Residential Construction		--		--		--		138		138
Commercial		1,462		190		1,652		4,293		5,945
Residential		868		700		1,568		2,142		3,710
Farmland		--		--		--		331		331

Consumer and Other
Consumer		--		--		--		253		253
Other		--		--		--		315		315

Total End of Period Allowance Balance	$	4,741	$	1,275	$	6,016	$	9,277	$	15,293

June 30, 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	$	1,721	$	2,410	$	4,131	$	51,143	$	55,274
Industrial		--		--		--		11,284		11,284

Real Estate
Commercial Construction		22,595		1,889		24,484		31,884		56,368
Residential Construction		--		204		204		3,965		4,169
Commercial		33,395		5,524		38,919		270,017		308,936
Residential		5,951		4,304		10,255		182,935		193,190
Farmland		2,277		266		2,543		46,205		48,748

Consumer and Other
Consumer		20		7		27		29,625		29,652
Other		--		20		20		8,720		8,740

Total End of Period Loan Balance	$	65,959	$	14,624	$	80,583	$	635,778	$	716,361

June 30, 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	$	--	$	606	$	606	$	2,039	$	2,645
Industrial		--		7		7		58		65

Real Estate
Commercial Construction		1,421		390		1,811		165		1,976
Residential Construction		--		--		--		376		376
Commercial		1,453		605		2,058		1,328		3,386
Residential		1,967		964		2,931		1,067		3,998
Farmland		--		51		51		572		623

Consumer and Other
Consumer		--		63		63		2,068		2,131
Other		--		--		--		194		194

Total End of Period Allowance Balance	$	4,841	$	2,686	$	7,527	$	7,867	$	15,394

June 30, 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	$	256	$	1,751	$	2,007	$	46,459	$	48,466
Industrial		149		221		370		11,595		11,965

Real Estate
Commercial Construction		35,781		5,020		40,801		27,625		68,426
Residential Construction		--		--		--		4,046		4,046
Commercial		25,803		6,219		32,022		298,170		330,192
Residential		9,456		5,298		14,754		186,365		201,119
Farmland		212		691		903		47,107		48,010

Consumer and Other
Consumer		12		61		73		31,998		32,071
Other		--		32		32		14,783		14,815

Total End of Period Loan Balance	$	71,669	$	19,293	$	90,962	$	668,148	$	759,110