(4) Loans

The following table presents the composition of loans, segregated by class of loans, as of December 31:

	2012		2011

Commercial and Agricultural
Commercial	$	55,684,492	$	48,986,102
Agricultural		6,210,953		8,421,884

Real Estate
Commercial Construction		53,808,056		58,545,820
Residential Construction		5,852,238		3,530,502
Commercial		334,386,177		315,280,748
Residential		203,844,522		193,637,817
Farmland		49,056,861		48,225,406

Consumer and Other
Consumer		29,777,776		30,449,303
Other		8,428,936		9,243,739

Total Loans	$	747,050,011	$	716,321,321

Commercial and agricultural loans are extended to a diverse group of businesses within the Company's market area. These loans are often underwritten based on the borrower's ability to service the debt from income from the business. Real estate construction loans often require loan funds to be advanced prior to completion of the project. Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans. Consumer loans are originated at the bank level. These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (1) the risk grade assigned to commercial and consumer loans, (2) the level of classified commercial loans, (3) net charge-offs, (4) nonperforming loans, and (5) the general economic conditions in the Company's geographic markets.

The Company uses a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the grades is as follows:

•

Grades 1 and 2 - Borrowers with these assigned grades range in risk from virtual absence of risk to minimal risk. Such loans may be secured by Company-issued and controlled certificates of deposit or properly margined equity securities or bonds. Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans. Loans in this category fall into the "pass" classification.

•

Grades 3 and 4 - Loans assigned these "pass" risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

•

Grade 5 - This grade includes "special mention" loans on management's watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.

•

Grade 6 - This grade includes "substandard" loans in accordance with regulatory guidelines. This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms. Loans considered to be impaired are assigned this grade, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses. Generally, loans on which interest accrual has been stopped would be included in this grade.

•

Grades 7 and 8 - These grades correspond to regulatory classification definitions of "doubtful" and "loss," respectively. In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades. Management manages the Company's problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

The following tables present the loan portfolio by credit quality indicator (risk grade) as of December 31. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

2012	Pass		Special Mention		Substandard		Total Loans

Commercial and Agricultural
Commercial	$	49,947,552	$	1,417,735	$	4,319,205	$	55,684,492
Agricultural		6,155,864		-		55,089		6,210,953

Real Estate
Commercial Construction		37,256,301		1,663,588		14,888,167		53,808,056
Residential Construction		5,748,829		103,409		-		5,852,238
Commercial		298,222,139		9,759,473		26,404,565		334,386,177
Residential		183,222,020		11,412,973		9,209,529		203,844,522
Farmland		45,495,038		913,487		2,648,336		49,056,861

Consumer and Other
Consumer		28,839,058		293,467		645,251		29,777,776
Other		8,350,772		8,907		69,257		8,428,936

Total Loans	$	663,237,573	$	25,573,039	$	58,239,399	$	747,050,011

2011

Commercial and Agricultural
Commercial	$	42,586,230	$	1,480,726	$	4,919,146	$	48,986,102
Agricultural		8,153,224		-		268,660		8,421,884

Real Estate
Commercial Construction		28,745,596		2,814,113		26,986,111		58,545,820
Residential Construction		3,227,392		303,110		-		3,530,502
Commercial		272,062,206		14,789,290		28,429,252		315,280,748
Residential		175,099,480		8,343,336		10,195,001		193,637,817
Farmland		43,664,126		1,413,476		3,147,804		48,225,406

Consumer and Other
Consumer		29,372,493		361,714		715,096		30,449,303
Other		9,028,428		99,418		115,893		9,243,739

Total Loans	$	611,939,175	$	29,605,183	$	74,776,963	$	716,321,321

A loan's risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral. Loan risk grades are subject to reassessment at various times throughout the year as part of the Company's ongoing loan review process. Loans with an assigned risk grade of 6 or below and an outstanding balance of $50,000 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

In assessing the overall economic condition of the markets in which it operates, the Company monitors the unemployment rates for its major service areas. The unemployment rates are reviewed on a quarterly basis as part of the allowance for loan loss determination.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provision. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. Nonaccrual loans totaled $29,850,735 and $38,821,632 as of December 31, 2012 and 2011, respectively, and total recorded investment in loans past due 90 days or more and still accruing interest totaled $4,355 and $15,160, respectively. During its review of impaired loans, the Company determined the majority of its exposures on these loans were known losses. As a result, the exposures were charged off, reducing the specific allowances on impaired loans.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of December 31:

	Accruing Loans
2012	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans

Commercial and Agricultural
Commercial	$	797,612	$	-	$	797,612	$	1,033,371	$	53,853,509	$	55,684,492
Agricultural		28,228		-		28,228		39,213		6,143,512		6,210,953

Real Estate
Commercial Construction		1,309,618		-		1,309,618		14,032,580		38,465,858		53,808,056
Residential Construction		-		-		-		-		5,852,238		5,852,238
Commercial		3,771,106		-		3,771,106		6,629,789		323,985,282		334,386,177
Residential		8,223,174		-		8,223,174		5,429,971		190,191,377		203,844,522
Farmland		140,095		-		140,095		2,413,104		46,503,662		49,056,861

Consumer and Other
Consumer		636,888		4,355		641,243		255,216		28,881,317		29,777,776
Other		4,557		-		4,557		17,491		8,406,888		8,428,936

Total Loans	$	14,911,278	$	4,355	$	14,915,633	$	29,850,735	$	702,283,643	$	747,050,011

2011

Commercial and Agricultural
Commercial	$	644,899	$	-	$	644,899	$	2,102,522	$	46,238,681	$	48,986,102
Agricultural		-		-		-		85,670		8,336,214		8,421,884

Real Estate
Commercial Construction		513,905		-		513,905		23,578,263		34,453,652		58,545,820
Residential Construction		33,541		-		33,541		-		3,496,961		3,530,502
Commercial		2,930,743		-		2,930,743		9,193,650		303,156,355		315,280,748
Residential		2,251,009		15,160		2,266,169		3,110,032		188,261,616		193,637,817
Farmland		376,426		-		376,426		486,683		47,362,297		48,225,406

Consumer and Other
Consumer		410,041		-		410,041		221,360		29,817,902		30,449,303
Other		-		-		-		43,452		9,200,287		9,243,739

Total Loans	$	7,160,564	$	15,160	$	7,175,724	$	38,821,632	$	670,323,965	$	716,321,321

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1,634,600, $1,639,800 and $1,621,700 for the years ended December 31, 2012, 2011 and 2010, respectively.

The following table details impaired loan data as of December 31, 2012:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Collected

With No Related Allowance Recorded
Commercial	$	1,508,236	$	1,041,938	$	-	$	1,052,916	$	27,407	$	28,410
Agricultural		39,213		39,213		-		58,056		-		-
Commercial Construction		10,624,917		6,414,986		-		9,194,360		27,377		51,820
Commercial Real Estate		16,565,971		15,505,907		-		26,482,274		430,339		420,549
Residential Real Estate		4,450,128		4,131,707		-		3,096,151		89,139		123,101
Farmland		2,828,539		2,413,103		-		2,326,180		42,588		55,258
Consumer		297,356		255,216		-		228,181		10,441		12,920
Other		17,491		17,491		-		24,414		1,191		1,291

		36,331,851		29,819,561		-		42,462,532		628,482		693,349

With An Allowance Recorded
Commercial		1,493,432		1,493,432		462,555		942,673		91,888		87,611
Agricultural		-		-		-		-		-		-
Commercial Construction		8,266,649		7,617,594		1,732,534		10,533,468		-		-
Commercial Real Estate		12,758,884		12,745,422		1,236,526		6,398,364		383,356		366,423
Residential Real Estate		5,514,994		4,421,809		840,492		4,288,062		144,661		117,266
Farmland		-		-		-		64,862		-		-
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-

		28,033,959		26,278,257		4,272,107		22,227,429		619,905		571,300

Total
Commercial		3,001,668		2,535,370		462,555		1,995,589		119,295		116,021
Agricultural		39,213		39,213		-		58,056		-		-
Commercial Construction		18,891,566		14,032,580		1,732,534		19,727,828		27,377		51,820
Commercial Real Estate		29,324,855		28,251,329		1,236,526		32,880,638		813,695		786,972
Residential Real Estate		9,965,122		8,553,516		840,492		7,384,213		233,800		240,367
Farmland		2,828,539		2,413,103		-		2,391,042		42,588		55,258
Consumer		297,356		255,216		-		228,181		10,441		12,920
Other		17,491		17,491		-		24,414		1,191		1,291

	$	64,365,810	$	56,097,818	$	4,272,107	$	64,689,961	$	1,248,387	$	1,264,649

The following table details impaired loan data as of December 31, 2011:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected

With No Related Allowance Recorded
Commercial	$	1,742,961	$	1,580,140	$	-	$	946,466	$	60,078		$	65,346
Agricultural		85,670		85,670		-		208,162		(4,024	)		-
Commercial Construction		17,699,542		12,799,454		-		13,309,517		116,077			143,443
Commercial Real Estate		34,686,574		29,384,623		-		27,027,403		832,590			834,161
Residential Real Estate		2,600,919		1,933,669		-		3,176,244		88,419			80,334
Farmland		277,656		227,233		-		342,280		66,273			66,273
Consumer		228,688		215,956		-		184,372		10,732			12,203
Other		51,666		43,452		-		39,621		1,107			1,606

		57,373,676		46,270,197		-		45,234,065		1,171,252			1,203,366

With An Allowance Recorded
Commercial		775,506		775,506		308,211		213,898		15,086			19,171
Agricultural		-		-		-		-		-			-
Commercial Construction		14,035,742		11,489,233		2,693,571		10,470,491		13,759			61,012
Commercial Real Estate		6,429,874		6,429,874		2,060,815		6,556,769		181,799			197,132
Residential Real Estate		4,771,867		4,041,950		674,998		3,858,609		97,383			96,534
Farmland		298,893		259,450		11,878		64,862		(17,958	)		-
Consumer		5,404		5,404		1,632		3,987		607			724
Other		-		-		-		19,566		-			-

		26,317,286		23,001,417		5,751,105		21,188,182		290,676			374,573

Total
Commercial		2,518,467		2,355,646		308,211		1,160,364		75,164			84,517
Agricultural		85,670		85,670		-		208,162		(4,024	)		-
Commercial Construction		31,735,284		24,288,687		2,693,571		23,780,008		129,836			204,455
Commercial Real Estate		41,116,448		35,814,497		2,060,815		33,584,172		1,014,389			1,031,293
Residential Real Estate		7,372,786		5,975,619		674,998		7,034,853		185,802			176,868
Farmland		576,549		486,683		11,878		407,142		48,315			66,273
Consumer		234,092		221,360		1,632		188,359		11,339			12,927
Other		51,666		43,452		-		59,187		1,107			1,606

	$	83,690,962	$	69,271,614	$	5,751,105	$	66,422,247	$	1,461,928		$	1,577,939

At December 31, 2010, the average recorded investment in impaired loans was $28,700,626 and the interest income recognized and collected on impaired loans was $484,984 and $694,764, respectively.

Troubled Debt Restructurings (TDRs) are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower's financial condition. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower's specific circumstances at a point in time. Not all loan modifications are TDRs. Loan modifications are reviewed and approved by the Company's senior lending staff, who then determine whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:

•

Interest rate reductions - Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

•

Amortization or maturity date changes - Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

•

Principal reductions - These are often the result of commercial real estate loan workouts where two new notes are created. The primary note is underwritten based upon our normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note. The terms of the secondary note vary by situation and often involve that note being charged off, or the principal and interest payments being deferred until after the primary note has been repaid. In situations where a portion of the note is charged off during modification, there is often no specific reserve allocated to those loans. This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is no additional exposure on those loans.

As discussed in Note 1, Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of December 31, 2012. The following tables present the number of loan contracts restructured during the 12 months ended December 31, 2012 and the pre- and post-modification recorded investment as well as the number of contracts and the recorded investment for those TDRs modified during the previous 12 months which subsequently defaulted during the period. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due.

Troubled Debt Restructurings

2012	# of Contracts		Pre-Modification		Post-Modification

Commercial		1	$	107,749	$	107,749
Commercial Real Estate		1		56,835		56,835
Residential Real Estate		5		1,082,585		1,079,614

Total Loans		7	$	1,247,169	$	1,244,198

Troubled Debt Restructurings

2011	# of Contracts		Pre-Modification		Post-Modification

Commercial		3	$	3,240,469	$	1,541,882
Commercial Construction		3		1,430,147		1,430,101
Commercial Real Estate		9		20,827,349		15,906,547
Residential Real Estate		8		1,505,356		1,456,878

Total Loans		23	$	27,003,321	$	20,335,408

Troubled debt restructurings that subsequently defaulted as of December 31 are as follows:

2012	# of Contracts		Recorded Investment

Residential Real Estate		1	$	10,000
Commercial Real Estate		1		203,291

Total Loans		2	$	213,291

2011

Commercial		1	$	1,175,922
Commercial Construction		3		4,475,473
Commercial Real Estate		3		2,322,361

Total Loans		7	$	7,973,756

At December 31, 2012 and 2011, all restructured loans were performing as agreed. However, three restructured loans totaling $999,133, $51,998 and $10,000 at December 31, 2011 failed to continue to perform as agreed and, as a result, the loans were charged off in March 2011, December 2011 and January 2012, respectively.