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

Commercial and Agricultural
Commercial	$	981	$	(105	)	$	51	$	95	$	1,022
Agricultural		296		(27	)		4		24		297

Real Estate
Commercial Construction		1,890		(1,779	)		193		1,601		1,905
Residential Construction		138		--			--		--		138
Commercial		5,163		(1,865	)		293		1,677		5,268
Residential		3,406		(535	)		28		481		3,380
Farmland		291		(21	)		22		19		311

Consumer and Other
Consumer		228		(333	)		82		300		277
Other		344		(4	)		10		3		353

	$	12,737	$	(4,669	)	$	683	$	4,200	$	12,951

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

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 September 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 September 30, 2013 was based on the loss rate from the eight quarters ended June 30, 2013.

During the third quarter, management implemented a change to its methodology for calculating the allowance for loan losses. This change was intended to better reflect the current position of the loan portfolio. Prior to the third quarter, the allowance for loan loss calculation incorporated a qualitative factor related to improvements in credit administration. These improvements, which began in 2008, included organizational changes to credit administration, specifically related to managing past due loans, grading of loans, recognition of losses and underwriting of new loans. Primary among the organizational changes was the appointment of experienced lending officers to oversee the lending function, as well as the appointment of a chief credit officer. Management feels these organizational changes are now fully implemented, as evidenced by a lower charge-off rate, and therefore, the qualitative factor is no longer relevant. The removal of this qualitative factor did not result in a significant adjustment to the recorded allowance for loan loss balance.

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 $4.3 million at September 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 $5.3 million and $13.4 million as of September 30, 2013 and 2012, respectively. Specific allowance allocations were made for these loans totaling $295 thousand and $1.2 million as of September 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 September 30, 2013, impaired loans totaling $3.34 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 September 30, 2012, impaired loans totaling $944 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 September 30, 2013 and 2012:

September 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	$	108	$	914	$	1,022	$	1,555	$	47,607	$	49,162
Agricultural		--		297		297		--		17,613		17,613

Real Estate
Commercial Construction		573		1,332		1,905		7,702		37,248		44,950
Residential Construction		--		138		138		--		4,680		4,680
Commercial		1,559		3,709		5,268		22,729		312,715		335,444
Residential		774		2,606		3,380		6,949		200,809		207,758
Farmland		202		109		311		3,583		45,705		49,288

Consumer and Other
Consumer		--		277		277		--		26,235		26,235
Other		--		353		353		--		12,914		12,914

Total End of Period Balance	$	3,216	$	9,735	$	12,951	$	42,518	$	705,526	$	748,044

September 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	$	514	$	408	$	922	$	1,701	$	52,580	$	54,281
Agricultural		--		294		294		--		12,594		12,594

Real Estate
Commercial Construction		1,786		318		2,104		18,743		35,309		54,052
Residential Construction		--		138		138		--		6,038		6,038
Commercial		864		5,693		6,557		34,165		277,228		311,393
Residential		1,050		2,435		3,485		7,751		189,508		197,259
Farmland		--		331		331		2,277		47,201		49,478

Consumer and Other
Consumer		--		253		253		11		29,574		29,585
Other		--		305		305		--		11,842		11,842

Total End of Period Balance	$	4,214	$	10,175	$	14,389	$	64,648	$	661,874	$	726,522