(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, 2013 and 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, 2013
	Beginning									Ending
	Balance		Charge-Offs			Recoveries		Provision		Balance

Commercial and Agricultural
Commercial	$	981	$	(45	)	$	38	$	43	$	1,017
Agricultural		296		(27	)		4		26		299

Real Estate
Commercial Construction		1,890		(791	)		120		756		1,975
Residential Construction		138		--			--		--		138
Commercial		5,163		(1,425	)		85		1,361		5,184
Residential		3,406		(279	)		18		267		3,412
Farmland		291		(21	)		16		20		306

Consumer and Other
Consumer		228		(233	)		55		223		273
Other		344		(4	)		9		4		353

	$	12,737	$	(2,825	)	$	345	$	2,700	$	12,957

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

Commercial and Agricultural
Commercial	$	1,071	$	(230	)	$	96	$	105	$	1,042
Agricultural		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

During 2012, the Company changed its loss history period used in calculating the ALLL from a one year average to a rolling eight quarter average. At June 30, 2012 the loss history period used was based on the annual loss rate from calendar year 2011, whereas the loss history period used at June 30, 2013 was based on the loss rate from the eight quarters ended March 31, 2013.

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 greater and an outstanding balance of $250,000 or more, regardless of the loans impairment classification. Effective March 31, 2013, management increased the dollar threshold of this review process from $50,000 to $250,000. The threshold change resulted in loans totaling $3.1 million at June 30, 2013 being removed from the individual impairment review process and being placed in the collective review process. These loans are now subject to general reserves.

Since not all loans in the substandard category are considered impaired, this quarterly review process may result in the identification of specific reserves on nonimpaired loans. Management considers those loans graded substandard, but not classified as impaired, to be higher risk loans and, therefore, makes specific allocations to the allowance for those loans if warranted. The total of such loans is $8,154 and $14,994 as of June 30, 2013 and 2012, respectively. Specific allowance allocations were made for these loans totaling $615 and $1,570 as of June 30, 2013 and 2012, respectively. Since these loans are not considered impaired, both the loan balance and related specific allocation are included in the "Collectively Evaluated for Impairment" column of the following tables.

At June 30, 2013, impaired loans totaling $2.17 million were below the $250,000 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. Likewise, at June 30, 2012, impaired loans totaling $748 thousand were below the $50,000 review threshold and 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.

The following tables present breakdowns of the allowance for loan losses, segregated by impairment methodology for June 30, 2013 and 2012:

June 30, 2013
	Ending Allowance Balance						Ending Loan Balance

	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Commercial and Agricultural
Commercial	$	551	$	466	$	1,017	$	2,388	$	48,770	$	51,158
Agricultural		--		299		299		--		14,177		14,177

Real Estate
Commercial Construction		1,580		395		1,975		10,007		42,692		52,699
Residential Construction		--		138		138		--		8,189		8,189
Commercial		1,080		4,104		5,184		23,144		302,173		325,317
Residential		982		2,430		3,412		6,591		201,971		208,562
Farmland		--		306		306		2,277		47,521		49,798

Consumer and Other
Consumer		--		273		273		--		27,439		27,439
Other		--		353		353		--		6,804		6,804

Total End of Period Balance	$	4,193	$	8,764	$	12,957	$	44,407	$	699,736	$	744,143

June 30, 2012
	Ending Allowance Balance						Ending Loan Balance

	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Commercial and Agricultural
Commercial	$	300	$	742	$	1,042	$	1,721	$	53,553	$	55,274
Agricultural		--		297		297		--		11,284		11,284

Real Estate
Commercial Construction		2,111		1,151		3,262		22,595		33,773		56,368
Residential Construction		--		138		138		--		4,169		4,169
Commercial		1,462		4,483		5,945		33,395		275,541		308,936
Residential		868		2,842		3,710		5,951		187,239		193,190
Farmland		--		331		331		2,277		46,471		48,748

Consumer and Other
Consumer		--		253		253		20		29,632		29,652
Other		--		315		315		--		8,740		8,740

Total End of Period Balance	$	4,741	$	10,552	$	15,293	$	65,959	$	650,402	$	716,361