(4)	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, 2014 and March 31, 2013. 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, 2014
	Beginning									Ending
	Balance		Charge-Offs			Recoveries		Provision		Balance

Commercial and Agricultural
Commercial	$	1,017	$	(27	)	$	14	$	7	$	1,011
Agricultural		294		--			1		2		297

Real Estate
Commercial Construction		1,782		--			182		125		2,089
Residential Construction		138		--			--		--		138
Commercial		4,379		(236	)		6		131		4,280
Residential		3,278		(293	)		6		38		3,029
Farmland		312		--			--		1		313

Consumer and Other
Consumer		243		(102	)		25		23		189
Other		363		--			1		--		364

	$	11,806	$	(658	)	$	235	$	327	$	11,710

March 31, 2013
	Beginning									Ending
	Balance		Charge-Offs			Recoveries		Provision		Balance

Commercial and Agricultural
Commercial	$	981	$	(31	)	$	18	$	39	$	1,007
Agricultural		296		--			4		--		300

Real Estate
Commercial Construction		1,890		(692	)		80		511		1,789
Residential Construction		138		--			--		--		138
Commercial		5,163		(485	)		43		593		5,314
Residential		3,406		(187	)		5		228		3,452
Farmland		291		(1	)		11		1		302

Consumer and Other
Consumer		228		(101	)		32		123		282
Other		344		(4	)		1		5		346

	$	12,737	$	(1,501	)	$	194	$	1,500	$	12,930

The loss history period used at March 31, 2014 was based on the loss rate from the eight quarters ended December 31, 2013.

During the third quarter 2013, 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.

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 $7.4 million and $10.6 million as of March 31, 2014 and 2013, respectively. Specific allowance allocations were made for these loans totaling $620 thousand and $645 thousand as of March 31, 2014 and 2013, 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 March 31, 2014, impaired loans totaling $3.99 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 March 31, 2013, impaired loans totaling $1.97 million were below the $250,000 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 March 31, 2014 and 2013:

March 31, 2014
	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	$	423	$	588	$	1,011	$	1,469	$	42,510	$	43,979
Agricultural		--		297		297		--		12,654		12,654

Real Estate
Commercial Construction		1,548		541		2,089		7,683		46,925		54,608
Residential Construction		--		138		138		--		9,779		9,779
Commercial		407		3,873		4,280		26,192		311,643		337,835
Residential		289		2,740		3,029		4,412		197,747		202,159
Farmland		233		80		313		1,614		46,272		47,886

Consumer and Other
Consumer		--		189		189		--		23,693		23,693
Other		--		364		364		9		5,592		5,601

Total End of Period Balance	$	2,900	$	8,810	$	11,710	$	41,379	$	696,815	$	738,194

March 31, 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	$	456	$	551	$	1,007	$	1,554	$	51,352	$	52,906
Agricultural		--		300		300		--		7,856		7,856

Real Estate
Commercial Construction		1,493		296		1,789		9,442		42,652		52,094
Residential Construction		--		138		138		--		7,570		7,570
Commercial		1,426		3,888		5,314		25,175		303,677		328,852
Residential		1,118		2,334		3,452		7,173		197,485		204,658
Farmland		--		302		302		2,277		45,931		48,208

Consumer and Other
Consumer		--		282		282		--		28,379		28,379
Other		--		346		346		--		6,297		6,297

Total End of Period Balance	$	4,493	$	8,437	$	12,930	$	45,621	$	691,199	$	736,820