(3) Loans

The following table presents the composition of loans segregated by class of loans, as of June 30, 2013 and December 31, 2012.

	June 30, 2013		December 31, 2012
Commercial and Agricultural
Commercial	$	51,158	$	55,684
Agricultural		14,177		6,211

Real Estate
Commercial Construction		52,699		53,808
Residential Construction		8,189		5,852
Commercial		325,317		334,386
Residential		208,562		203,845
Farmland		49,798		49,057

Consumer and Other
Consumer		27,439		29,778
Other		6,804		8,429

Total Loans	$	744,143	$	747,050

Commercial and industrial 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 (i) the risk grade assigned to commercial and consumer loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) 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 table presents the loan portfolio by credit quality indicator (risk grade) as of June 30, 2013 and December 31, 2012. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

June 30, 2013
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	45,294	$	1,778	$	4,086	$	51,158
Agricultural		14,148		16		13		14,177

Real Estate
Commercial Construction		40,316		2,128		10,255		52,699
Residential Construction		7,981		208		--		8,189
Commercial		301,651		10,783		12,883		325,317
Residential		185,643		13,184		9,735		208,562
Farmland		45,293		711		3,794		49,798

Consumer and Other
Consumer		26,309		385		745		27,439
Other		6,728		3		73		6,804

Total Loans	$	673,363	$	29,196	$	41,584	$	744,143

December 31, 2012
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	49,947	$	1,418	$	4,319	$	55,684
Agricultural		6,156		--		55		6,211

Real Estate
Commercial Construction		37,256		1,664		14,888		53,808
Residential Construction		5,749		103		--		5,852
Commercial		298,222		9,759		26,405		334,386
Residential		183,222		11,413		9,210		203,845
Farmland		45,495		914		2,648		49,057

Consumer and Other
Consumer		28,840		293		645		29,778
Other		8,351		9		69		8,429

Total Loans	$	663,238	$	25,573	$	58,239	$	747,050

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 $250,000 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 $24,685 and $29,851 as of June 30, 2013 and December 31, 2012, respectively, and total recorded investment in loans past due 90 days or more and still accruing interest approximated $0 and $4, respectively.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of June 30, 2013 and December 31, 2012:

June 30, 2013
	Accruing Loans
			90 Days
	30-89 Days		or More		Total Accruing		Nonaccrual
	Past Due		Past Due		Loans Past Due		Loans		Current Loans		Total Loans
Commercial and Agricultural
Commercial	$	691	$	--	$	691	$	2,432	$	48,035	$	51,158
Agricultural		--		--		--		--		14,177		14,177

Real Estate
Commercial Construction		494		--		494		10,166		42,039		52,699
Residential Construction		--		--		--		--		8,189		8,189
Commercial		2,244		--		2,244		5,234		317,839		325,317
Residential		3,651		--		3,651		4,340		200,571		208,562
Farmland		349		--		349		2,307		47,142		49,798

Consumer and Other
Consumer		483		--		483		206		26,750		27,439
Other		--		--		--		--		6,804		6,804

Total Loans	$	7,912	$	--	$	7,912	$	24,685	$	711,546	$	744,143

December 31, 2012
	Accruing Loans
			90 Days
	30-89 Days		or More		Total Accruing		Nonaccrual
	Past Due		Past Due		Loans Past Due		Loans		Current Loans		Total Loans
Commercial and Agricultural
Commercial	$	798	$	--	$	798	$	1,033	$	53,853	$	55,684
Agricultural		28		--		28		39		6,144		6,211

Real Estate
Commercial Construction		1,310		--		1,310		14,032		38,466		53,808
Residential Construction		--		--		--		--		5,852		5,852
Commercial		3,771		--		3,771		6,630		323,985		334,386
Residential		8,223		--		8,223		5,430		190,192		203,845
Farmland		140		--		140		2,413		46,504		49,057

Consumer and Other
Consumer		637		4		641		256		28,881		29,778
Other		5		--		5		18		8,406		8,429

Total Loans	$	14,912	$	4	$	14,916	$	29,851	$	702,283	$	747,050

The following table details impaired loan data as of June 30, 2013:

June 30, 2013
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	174	$	172	$	--	$	147	$	4	$	6
Agricultural		--		--		--		20		--		--
Commercial Construction		3,969		1,699		--		3,330		12		12
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		10,879		10,148		--		12,740		112		133
Residential Real Estate		4,327		3,685		--		3,033		62		67
Farmland		2,307		2,307		--		2,427		1		1
Consumer		217		206		--		212		4		6
Other		--		--		--		--		--		--

		21,873		18,217		--		21,909		195		225

With An Allowance Recorded
Commercial		2,374		2,374		551		1,919		22		30
Agricultural		--		--		--		--		--		--
Commercial Construction		11,017		8,467		1,580		6,578		6		9
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		13,436		13,436		1,080		11,677		240		234
Residential Real Estate		4,791		4,078		982		4,997		40		37
Farmland		--		--		--		--		--		--
Consumer		--		--		--		--		--		--
Other		--		--		--		--		--		--

		31,618		28,355		4,193		25,171		308		310

Total
Commercial		2,548		2,546		551		2,066		26		36
Agricultural		--		--		--		20		--		--
Commercial Construction		14,986		10,166		1,580		9,908		18		21
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		24,315		23,584		1,080		24,417		352		367
Residential Real Estate		9,118		7,763		982		8,030		102		104
Farmland		2,307		2,307		--		2,427		1		1
Consumer		217		206		--		212		4		6
Other		--		--		--		--		--		--

	$	53,491	$	46,572	$	4,193	$	47,080	$	503	$	535

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

December 31, 2012
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	1,508	$	1,042	$	--	$	1,053	$	27	$	28
Agricultural		39		39		--		58		--		--
Commercial Construction		10,625		6,415		--		9,194		27		52
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		16,566		15,506		--		26,482		430		421
Residential Real Estate		4,450		4,132		--		3,096		89		123
Farmland		2,829		2,413		--		2,326		43		55
Consumer		297		255		--		228		10		13
Other		18		18		--		24		1		1

		36,332		29,820		--		42,461		627		693

With An Allowance Recorded
Commercial		1,493		1,493		463		943		92		88
Agricultural		--		--		--		--		--		--
Commercial Construction		8,267		7,618		1,733		10,534		--		--
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		12,759		12,745		1,236		6,399		384		366
Residential Real Estate		5,515		4,422		840		4,288		145		117
Farmland		--		--		--		65		--		--
Consumer		--		--		--		--		--		--
Other		--		--		--		--		--		--

		28,034		26,278		4,272		22,229		621		571

Total
Commercial		3,001		2,535		463		1,996		119		116
Agricultural		39		39		--		58		--		--
Commercial Construction		18,892		14,033		1,733		19,728		27		52
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		29,325		28,251		1,236		32,881		814		787
Residential Real Estate		9,965		8,554		840		7,384		234		240
Farmland		2,829		2,413		--		2,391		43		55
Consumer		297		255		--		228		10		13
Other		18		18		--		24		1		1

	$	64,366	$	56,098	$	4,272	$	64,690	$	1,248	$	1,264

The following table details impaired loan data as of June 30, 2012:

June 30, 2012
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected

With No Related Allowance Recorded
Commercial	$	1,546	$	1,456	$	--	$	1,568	$	49		$	40
Agricultural		45		45		--		42		--			--
Commercial Construction		11,998		9,694		--		11,079		(7	)		4
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		33,857		28,254		--		30,136		358			325
Residential Real Estate		2,748		2,152		--		2,280		46			42
Farmland		2,340		2,297		--		2,297		32			44
Consumer		256		237		--		225		3			5
Other		38		36		--		40		--			--

		52,828		44,171		--		47,667		481			460

With An Allowance Recorded
Commercial		290		290		300		300		2			5
Agricultural		--		--		--		--		--			--
Commercial Construction		17,961		12,966		2,111		11,954		--			--
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		5,163		5,141		1,462		4,394		55			53
Residential Real Estate		4,852		4,139		868		4,092		46			45
Farmland		--		--		--		130		--			--
Consumer		--		--		--		--		--			--
Other		--		--		--		--		--			--

		28,266		22,536		4,741		20,870		103			103

Total
Commercial		1,836		1,746		300		1,868		51			45
Agricultural		45		45		--		42		--			--
Commercial Construction		29,959		22,660		2,111		23,033		(7	)		4
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		39,020		33,395		1,462		34,530		413			378
Residential Real Estate		7,600		6,291		868		6,372		92			87
Farmland		2,340		2,297		--		2,427		32			44
Consumer		256		237		--		225		3			5
Other		38		36		--		40		--			--

	$	81,094	$	66,707	$	4,741	$	68,537	$	584		$	563

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 June 30, 2013. The following tables present the number of loan contracts restructured during the three and six month period ended June 30, 2013 and June 30, 2012. It shows 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 twelve 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.

	Three Months Ending June 30, 2013						Six Months Ending June 30, 2013
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification		# of Contracts		Pre-Modification		Post-Modification

Commercial		--	$	--	$	--		1	$	84	$	81
Commercial Construction		2		229		226		2		229		226
Commercial RE		1		226		226		1		226		226
Residential RE		--		--		--		2		1,024		1,001

Total Loans		3	$	455	$	452		6	$	1,563	$	1,534

Three Months Ending June 30, 2013

Six Months Ending June 30, 2013

Troubled Debt Restructurings

That Subsequently Defaulted

# of Contracts

Recorded Investment

# of Contracts

Recorded Investment

Commercial Construction

----

Residential RE

----

Total Loans

----

	Three Months Ending June 30, 2012						Six Months Ending June 30, 2012
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification		# of Contracts		Pre-Modification		Post-Modification

Commercial RE		----	$	----	$	----		1	$	57	$	57
Residential RE		----		----		----		1		227		224

Total Loans		----	$	----	$	----		2	$	284	$	281

	Three Months Ending June 30, 2012				Six Months Ending June 30, 2012
Troubled Debt Restructurings
That Subsequently Defaulted
	# of Contracts		Recorded Investment		# of Contracts		Recorded Investment

Commercial Construction		----	$	----		1	$	64
Residential RE		----		----		1		50

Total Loans		----	$	----		2	$	114

At June 30, 2013 all restructured loans were performing as agreed.