(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, 2014 and September 30, 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.

September 30, 2014
	Beginning									Ending
	Balance		Charge-Offs			Recoveries		Provision		Balance

Commercial and Agricultural
Commercial	$	1,017	$	(453	)	$	69	$	29	$	662
Agricultural		294		-			2		8		304

Real Estate
Commercial Construction		1,782		(1,541	)		302		499		1,042
Residential Construction		138		-			-		-		138
Commercial		4,379		(761	)		109		522		4,249
Residential		3,278		(670	)		27		150		2,785
Farmland		312		(234	)		20		6		104

Consumer and Other
Consumer		243		(274	)		64		93		126
Other		363		-			14		1		378

	$	11,806	$	(3,933	)	$	607	$	1,308	$	9,788

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

The loss history period used at September 30, 2014 was based on the loss rate from the eight quarters ended June 30, 2014.

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 $12.7 million and $5.3 million as of September 30, 2014 and 2013, respectively. Specific allowance allocations were made for these loans totaling $1.1 million and $295 thousand as of September 30, 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 September 30, 2014, there were impaired loans totaling $4.41 million below the $250,000 review threshold which 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, 2013, impaired loans totaling $3.34 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 September 30, 2014 and 2013:

September 30, 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	$	99	$	563	$	662	$	100	$	46,381	$	46,481
Agricultural		-		304		304		-		23,017		23,017

Real Estate
Commercial Construction		59		983		1,042		3,039		47,416		50,455
Residential Construction		-		138		138		-		9,700		9,700
Commercial		283		3,966		4,249		21,348		306,150		327,498
Residential		605		2,180		2,785		5,522		198,791		204,313
Farmland		31		73		104		1,009		49,392		50,401

Consumer and Other
Consumer		-		126		126		-		23,448		23,448
Other		-		378		378		-		7,968		7,968

Total End of Period Balance	$	1,077	$	8,711	$	9,788	$	31,018	$	712,263	$	743,281

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