(4) Allowance for Loan Losses

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

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

Commercial and Agricultural
Commercial	$	1,071	$	(407	)	$	105	$	153	$	922
Agricultural		297		(3	)		--		--		294

Real Estate
Commercial Construction		3,123		(1,929	)		74		836		2,104
Residential Construction		138		--			--		--		138
Commercial		6,448		(4,273	)		217		4,165		6,557
Residential		3,695		(632	)		9		413		3,485
Farmland		365		(39	)		5		--		331

Consumer and Other
Consumer		205		(75	)		63		60		253
Other		308		(11	)		8		--		305

	$	15,650	$	(7,369	)	$	481	$	5,627	$	14,389

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

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

Commercial and Agricultural
Commercial	$	4,415	$	(718	)	$	124	$	(1,591	)	$	2,230
Agricultural		698		(455	)		401		(257	)		387

Real Estate
Commercial Construction		4,126		(4,218	)		548		4,217			4,673
Residential Construction		520		--			--		(159	)		361
Commercial		8,030		(12,175	)		517		6,730			3,102
Residential		5,942		(1,291	)		120		(910	)		3,861
Farmland		944		(61	)		1		(317	)		567

Consumer and Other
Consumer		3,074		(192	)		123		(1,371	)		1,634
Other		531		(100	)		6		(342	)		95

	$	28,280	$	(19,210	)	$	1,840	$	6,000		$	16,910

In 2012, the Company refined its methodology used in estimating the amount of the Allowance for Loan and Lease Losses (ALLL). 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. Additionally, during the quarter ended September 30, 2012, management reviewed the appropriateness of continuing to use a one-year annual loss rate to determine losses incurred in the loan portfolio segments of loans collectively reviewed for impairment. Consideration was given to the trends in losses incurred over prior quarters and economic indicators impacting the company. Management concluded that the one-year charge-off history should be expanded to include quarters from the current year. Thus, the annualized loss rates used for the September 30, 2012 allowance for loan loss calculation was based on an expanded period that includes all 4 quarters of 2011 and the first 2 quarters of 2012. The effect of these changes on the ALLL resulted in a reduction in the ALLL estimate of $3,422. 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 September 30, 2012 and 2011, impaired loans totaling $944 and $881 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 September 30, 2012 and 2011:

September 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 Agricultural
Commercial	$	514	$	214	$	728	$	194	$	922
Agricultural		--		--		--		294		294

Real Estate
Commercial Construction		1,786		58		1,844		260		2,104
Residential Construction		--		--		--		138		138
Commercial		864		376		1,240		5,317		6,557
Residential		1,050		566		1,616		1,869		3,485
Farmland		--		--		--		331		331

Consumer and Other
Consumer		--		--		--		253		253
Other		--		--		--		305		305

Total End of Period Allowance Balance	$	4,214	$	1,214	$	5,428	$	8,961	$	14,389

September 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 Agricultural
Commercial	$	1,701	$	2,390	$	4,091	$	50,190	$	54,281
Agricultural		--		--		--		12,594		12,594

Real Estate
Commercial Construction		18,743		1,793		20,536		33,516		54,052
Residential Construction		--		--		--		6,038		6,038
Commercial		34,165		6,069		40,234		271,159		311,393
Residential		7,751		2,900		10,651		186,608		197,259
Farmland		2,277		263		2,540		46,938		49,478

Consumer and Other
Consumer		11		6		17		29,568		29,585
Other		--		18		18		11,824		11,842

Total End of Period Loan Balance	$	64,648	$	13,439	$	78,087	$	648,435	$	726,522

September 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 Agricultural
Commercial	$	39	$	647	$	686	$	1,544	$	2,230
Agricultural		7		--		7		380		387

Real Estate
Commercial Construction		4,323		256		4,579		94		4,673
Residential Construction		--		--		--		361		361
Commercial		689		408		1,097		2,005		3,102
Residential		2,036		958		2,994		867		3,861
Farmland		--		11		11		556		567

Consumer and Other
Consumer		5		63		68		1,566		1,634
Other		--		--		--		95		95

Total End of Period Allowance Balance	$	7,099	$	2,343	$	9,442	$	7,468	$	16,910

September 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 Agricultural
Commercial	$	1,609	$	2,881	$	4,490	$	47,162	$	51,652
Agricultural		152		221		373		13,399		13,772

Real Estate
Commercial Construction		29,064		1,650		30,714		32,390		63,104
Residential Construction		--		--		--		2,628		2,628
Commercial		34,888		4,533		39,421		280,701		320,122
Residential		8,692		4,970		13,662		181,771		195,433
Farmland		487		380		867		46,819		47,686

Consumer and Other
Consumer		16		40		56		30,882		30,938
Other		--		31		31		15,633		15,664

Total End of Period Loan Balance	$	74,908	$	14,706	$	89,614	$	651,385	$	740,999