(4)

Loans

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

	2013		2012

Commercial and Agricultural
Commercial	$	48,107,448	$	55,684,492
Agricultural		10,665,938		6,210,953

Real Estate
Commercial Construction		52,738,783		53,808,056
Residential Construction		6,549,260		5,852,238
Commercial		341,783,538		334,386,177
Residential		206,257,927		203,844,522
Farmland		47,034,426		49,056,861

Consumer and Other
Consumer		25,675,560		29,777,776
Other		12,405,582		8,428,936

Total Loans	$	751,218,462	$	747,050,011

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.

2013	Pass		Special Mention		Substandard		Total Loans

Commercial and Agricultural
Commercial	$	41,759,281	$	2,770,284	$	3,577,883	$	48,107,448
Agricultural		10,637,705		16,830		11,403		10,665,938

Real Estate
Commercial Construction		42,668,320		1,512,301		8,558,162		52,738,783
Residential Construction		6,341,530		207,730		-		6,549,260
Commercial		317,567,749		10,759,954		13,455,835		341,783,538
Residential		182,977,361		13,523,478		9,757,088		206,257,927
Farmland		44,776,355		507,122		1,750,949		47,034,426

Consumer and Other
Consumer		24,608,175		320,473		746,912		25,675,560
Other		12,356,116		711		48,755		12,405,582

Total Loans	$	683,692,592	$	29,618,883	$	37,906,987	$	751,218,462

2012

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

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.

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
2013	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	$	581,281	$	-	$	581,281	$	1,646,418	$	45,879,749	$	48,107,448
Agricultural		81,036		-		81,036		-		10,584,902		10,665,938

Real Estate
Commercial Construction		139,826		-		139,826		8,221,745		44,377,212		52,738,783
Residential Construction		-		-		-		-		6,549,260		6,549,260
Commercial		2,287,341		-		2,287,341		7,366,703		332,129,494		341,783,538
Residential		5,273,586		-		5,273,586		4,933,420		196,050,921		206,257,927
Farmland		350,718		-		350,718		1,629,611		45,054,097		47,034,426

Consumer and Other
Consumer		453,580		3,991		457,571		307,456		24,910,533		25,675,560
Other		198,451		-		198,451		9,146		12,197,985		12,405,582

Total Loans	$	9,365,819	$	3,991	$	9,369,810	$	24,114,499	$	717,734,153	$	751,218,462

2012

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

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. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $968,700, $1,634,600 and $1,639,800 for the years ended December 31, 2013, 2012 and 2011, respectively.

The following table details impaired loan data as of December 31, 2013:

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

With No Related Allowance Recorded
Commercial	$	305,272	$	305,272	$	-	$	216,057	$	24,494		$	25,193
Agricultural		-		-		-		9,803		-			-
Commercial Construction		7,856,411		4,750,157		-		4,105,370		34,908			41,164
Commercial Real Estate		20,120,403		19,252,946		-		13,198,988		493,940			503,392
Residential Real Estate		7,836,718		6,361,592		-		4,564,666		224,439			209,330
Farmland		302,629		302,629		-		1,858,654		803			869
Consumer		313,194		307,456		-		252,944		18,469			21,109
Other		9,146		9,146		-		2,287		556			575

		36,743,773		31,289,198		-		24,208,769		797,609			801,632

With An Allowance Recorded
Commercial		1,452,798		1,452,798		433,714		1,689,125		14,845			20,748
Agricultural		-		-		-		-		-			-
Commercial Construction		5,922,674		3,471,587		830,546		5,025,176		(159	)		-
Commercial Real Estate		5,874,473		5,874,473		423,685		11,072,314		157,536			148,495
Residential Real Estate		1,949,301		1,849,301		526,005		3,661,706		25,739			24,414
Farmland		1,326,982		1,326,982		85,500		663,903		44,638			46,930
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		16,526,228		13,975,141		2,299,450		22,112,224		242,599			240,587

Total
Commercial		1,758,070		1,758,070		433,714		1,905,182		39,339			45,941
Agricultural		-		-		-		9,803		-			-
Commercial Construction		13,779,085		8,221,744		830,546		9,130,546		34,749			41,164
Commercial Real Estate		25,994,876		25,127,419		423,685		24,271,302		651,476			651,887
Residential Real Estate		9,786,019		8,210,893		526,005		8,226,372		250,178			233,744
Farmland		1,629,611		1,629,611		85,500		2,522,557		45,441			47,799
Consumer		313,194		307,456		-		252,944		18,469			21,109
Other		9,146		9,146		-		2,287		556			575

	$	53,270,001	$	45,264,339	$	2,299,450	$	46,320,993	$	1,040,208		$	1,042,219

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

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, 2013. The following tables present the number of loan contracts restructured during the 12 months ended December 31, 2013 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

2013	# of Contracts		Pre-Modification		Post-Modification

Commercial		1	$	83,748	$	81,277
Commercial Construction		2		228,633		225,959
Commercial Real Estate		1		225,852		225,852
Residential Real Estate		4		1,885,700		1,764,399

Total Loans		8	$	2,423,933	$	2,297,487

2012

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

2011

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:

	2013				2012				2011
	# of Contracts		Recorded Investment		# of Contracts		Recorded Investment		# of Contracts		Recorded Investment

Commercial		1	$	81,277		-	$	-		1	$	1,175,922
Commercial Construction		-		-		-		-		3		4,475,473
Commercial Real Estate		-		-		1		203,291		3		2,322,361
Residential Real Estate		-		-		1		10,000		-		-

Total Loans		1	$	81,277		2	$	213,291		7	$	7,973,756

At December 31, 2013, 2012 and 2011, all restructured loans were performing as agreed. However, two restructured loans totaling $81,277 and $10,000 at December 31, 2013 and 2012 failed to continue to perform as agreed and, as a result, the loans were charged off in August 2013 and January 2012, respectively. At December 31, 2011, two restructured loans totaling $999,133 and $51,998 failed to continue to perform as agreed and, as a result, the loans were charged off in March 2011 and December 2011, respectively.