(3)

Loans

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

	September 30, 2013		December 31, 2012
Commercial and Agricultural
Commercial	$	49,162	$	55,684
Agricultural		17,613		6,211

Real Estate
Commercial Construction		44,950		53,808
Residential Construction		4,680		5,852
Commercial		335,444		334,386
Residential		207,758		203,845
Farmland		49,288		49,057

Consumer and Other
Consumer		26,235		29,778
Other		12,914		8,429

Total Loans	$	748,044	$	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 September 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.

September 30, 2013
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	44,155	$	1,780	$	3,227	$	49,162
Agricultural		17,584		17		12		17,613

Real Estate
Commercial Construction		33,924		2,274		8,752		44,950
Residential Construction		4,473		207		--		4,680
Commercial		312,492		11,487		11,465		335,444
Residential		184,368		12,517		10,873		207,758
Farmland		45,078		480		3,730		49,288

Consumer and Other
Consumer		25,133		326		776		26,235
Other		12,860		2		52		12,914

Total Loans	$	680,067	$	29,090	$	38,887	$	748,044

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 $24,163 and $29,851 as of September 30, 2013 and December 31, 2012, respectively, and total recorded investment in loans past due 90 days or more and still accruing interest approximated $2 and $4, respectively.

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

September 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		$	689	$	--	$	689	$	1,616	$	46,857	$	49,162
Agricultural			11		--		11		--		17,602		17,613

Real Estate
Commercial Construction			686		--		686		8,483		35,781		44,950
Residential Construction			--		--		--		--		4,680		4,680
Commercial			6,127		--		6,127		5,325		323,992		335,444
Residential			4,543		--		4,543		4,852		198,363		207,758
Farmland			137		--		137		3,606		45,545		49,288

Consumer and Other
Consumer			489		2		491		272		25,472		26,235
Other			--		--		--		9		12,905		12,914

Total Loans		$	12,682	$	2	$	12,684	$	24,163	$	711,197	$	748,044

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 September 30, 2013:

September 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	$	266	$	265	$	--	$	98	$	11	$	14
Agricultural		--		--		--		13		--		--
Commercial Construction		8,335		5,010		--		2,220		17		23
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		8,559		8,064		--		8,493		95		113
Residential Real Estate		7,378		5,830		--		2,022		157		152
Farmland		2,277		2,277		--		1,618		--		--
Consumer		295		281		--		141		12		14
Other		--		--		--		--		--		--

		27,110		21,727		--		14,605		292		316

With An Allowance Recorded
Commercial		1,465		1,465		108		1,280		14		19
Agricultural		--		--		--		--		--		--
Commercial Construction		5,924		3,473		573		4,386		--		--
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		15,061		15,061		1,559		7,785		287		285
Residential Real Estate		2,804		2,804		774		3,331		65		64
Farmland		1,329		1,329		202		--		44		47
Consumer		--		--		--		--		--		--
Other		--		--		--		--		--		--

		26,583		24,132		3,216		16,782		410		415

Total
Commercial		1,731		1,730		108		1,378		25		33
Agricultural		--		--		--		13		--		--
Commercial Construction		14,259		8,483		573		6,606		17		23
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		23,620		23,125		1,559		16,278		382		398
Residential Real Estate		10,182		8,634		774		5,353		222		216
Farmland		3,606		3,606		202		1,618		44		47
Consumer		295		281		--		141		12		14
Other		--		--		--		--		--		--

	$	53,693	$	45,859	$	3,216	$	31,387	$	702	$	731

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 September 30, 2012:

September 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	$	85	$	34	$	--	$	1,056	$	4		$	2
Agricultural		109		109		--		64		8			18
Commercial Construction		10,527		8,205		--		10,121		(9	)		1
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		35,399		30,152		--		30,141		670			667
Residential Real Estate		4,291		3,694		--		2,751		84			99
Farmland		2,340		2,297		--		2,297		31			44
Consumer		226		208		--		219		5			6
Other		--		--		--		27		--			--

		52,977		44,699		--		46,676		793			837

With An Allowance Recorded
Commercial		1,677		1,677		514		759		69			64
Agricultural		--		--		--		--		--			--
Commercial Construction		12,331		10,610		1,786		11,506		1			4
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		4,789		4,059		864		4,282		115			116
Residential Real Estate		5,260		4,547		1,050		4,244		79			78
Farmland		--		--		--		87		--			--
Consumer		--		--		--		--		--			--
Other		--		--		--		--		--			--

		24,057		20,893		4,214		20,878		264			262

Total
Commercial		1,762		1,711		514		1,815		73			66
Agricultural		109		109		--		64		8			18
Commercial Construction		22,858		18,815		1,786		21,627		(8	)		5
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		40,188		34,211		864		34,423		785			783
Residential Real Estate		9,551		8,241		1,050		6,995		163			177
Farmland		2,340		2,297		--		2,384		31			44
Consumer		226		208		--		219		5			6
Other		--		--		--		27		--			--

	$	77,034	$	65,592	$	4,214	$	67,554	$	1,057		$	1,099

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 September 30, 2013. The following tables present the number of loan contracts restructured during the three and nine month period ended September 30, 2013 and September 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 September 30, 2013						Nine Months Ending September 30, 2013
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification		# of Contracts		Pre-Modification		Post-Modification

Commercial Construction		--	$	--	$	--		2	$	229	$	226
Commercial RE		--		--		--		1		226		226
Residential RE		--		--		--		2		1,025		1,001

Total Loans		--		--		--		5	$	1,480	$	1,453

	Three Months Ending September 30, 2013				Nine Months Ending September 30, 2013
Troubled Debt Restructurings
That Subsequently Defaulted
	# of Contracts		Recorded Investment		# of Contracts		Recorded Investment

Commercial		1	$	81		1	$	81

Total Loans		1	$	81		1	$	81

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

Commercial Real Estate		----	$	----	$	----		1	$	57	$	57
Residential Real Estate		2		248		248		3		646		645

Total Loans		2	$	248	$	248		4	$	703	$	702

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

Commercial Construction		----	$	----		1	$	64
Residential Real Estate		----		----		1		50

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

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