(3)

Loans

The following table presents the composition of loans segregated by class of loans, as of March 31, 2014 and December 31, 2013.

	March 31, 2014		December 31, 2013
Commercial and Agricultural
Commercial	$	43,979	$	48,107
Agricultural		12,654		10,666

Real Estate
Commercial Construction		54,608		52,739
Residential Construction		9,779		6,549
Commercial		337,835		341,783
Residential		202,159		206,258
Farmland		47,886		47,035

Consumer and Other
Consumer		23,693		25,676
Other		5,601		12,405

Total Loans	$	738,194	$	751,218

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 March 31, 2014 and December 31, 2013. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

March 31, 2014
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	37,721	$	2,705	$	3,553	$	43,979
Agricultural		12,475		13		166		12,654

Real Estate
Commercial Construction		44,861		1,523		8,224		54,608
Residential Construction		9,679		100		--		9,779
Commercial		312,175		9,154		16,506		337,835
Residential		179,656		13,630		8,873		202,159
Farmland		45,644		528		1,714		47,886

Consumer and Other
Consumer		22,810		260		623		23,693
Other		5,363		--		238		5,601

Total Loans	$	670,384	$	27,913	$	39,897	$	738,194

December 31, 2013
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	41,759	$	2,770	$	3,578	$	48,107
Agricultural		10,638		17		11		10,666

Real Estate
Commercial Construction		42,669		1,512		8,558		52,739
Residential Construction		6,341		208		--		6,549
Commercial		317,567		10,760		13,456		341,783
Residential		182,977		13,524		9,757		206,258
Farmland		44,777		507		1,751		47,035

Consumer and Other
Consumer		24,609		320		747		25,676
Other		12,355		1		49		12,405

Total Loans	$	683,692	$	29,619	$	37,907	$	751,218

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 March 31, 2014 and December 31, 2013:

March 31, 2014
	Accruing Loans

	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	$	709	$	--	$	709	$	1,976	$	41,294	$	43,979
Agricultural		86		--		86		51		12,517		12,654

Real Estate
Commercial Construction		441		--		441		7,824		46,343		54,608
Residential Construction		--		--		--		--		9,779		9,779
Commercial		6,176		--		6,176		9,128		322,531		337,835
Residential		2,941		--		2,941		3,814		195,404		202,159
Farmland		94		--		94		1,672		46,120		47,886

Consumer and Other
Consumer		332		15		347		252		23,094		23,693
Other		--		--		--		203		5,398		5,601

Total Loans	$	10,779	$	15	$	10,794	$	24,920	$	702,480	$	738,194


December 31, 2013
	Accruing Loans

	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	$	--	$	581	$	1,646	$	45,880	$	48,107
Agricultural		81		--		81		--		10,585		10,666

Real Estate
Commercial Construction		140		--		140		8,222		44,377		52,739
Residential Construction		--		--		--		--		6,549		6,549
Commercial		2,287		--		2,287		7,367		332,129		341,783
Residential		5,274		--		5,274		4,933		196,051		206,258
Farmland		351		--		351		1,630		45,054		47,035

Consumer and Other
Consumer		454		4		458		307		24,911		25,676
Other		198		--		198		9		12,198		12,405

Total Loans	$	9,366	$	4	$	9,370	$	24,114	$	717,734	$	751,218

The following table details impaired loan data as of March 31, 2014:

March 31, 2014
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected

With No Related
Allowance Recorded
Commercial	$	599	$	599	$	--	$	599	$	5		$	13
Agricultural		56		51		--		51		(9	)		--
Commercial Construction		7,460		4,354		--		4,354		8			8
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		21,196		20,686		--		20,686		130			132
Residential Real Estate		7,113		5,642		--		5,642		46			46
Farmland		349		348		--		348		(2	)		1
Consumer		256		251		--		251		4			5
Other		203		203		--		203		2			2

		37,232		32,134		--		32,134		184			207

With An Allowance Recorded
Commercial		1,380		1,380		423		1,380		--			--
Agricultural		--		--		--		--		--			--
Commercial Construction		5,922		3,470		1,548		3,470		--			--
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		6,466		6,109		407		6,109		46			46
Residential Real Estate		962		954		289		954		11			15
Farmland		1,324		1,324		233		1,324		--			--
Consumer		--		--		--		--		--			--
Other		--		--		--		--		--			--

		16,054		13,237		2,900		13,237		57			61

Total
Commercial		1,979		1,979		423		1,979		5			13
Agricultural		56		51		--		51		(9	)		--
Commercial Construction		13,382		7,824		1,548		7,824		8			8
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		27,662		26,795		407		26,795		176			178
Residential Real Estate		8,075		6,596		289		6,596		57			61
Farmland		1,673		1,672		233		1,672		(2	)		1
Consumer		256		251		--		251		4			5
Other		203		203		--		203		2			2

	$	53,286	$	45,371	$	2,900	$	45,371	$	241		$	268

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

December 31, 2013
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related
Allowance Recorded
Commercial	$	305	$	305	$	--	$	216	$	24	$	25
Agricultural		--		--		--		10		--		--
Commercial Construction		7,856		4,750		--		4,106		35		41
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		20,121		19,253		--		13,199		494		504
Residential Real Estate		7,837		6,362		--		4,564		224		209
Farmland		303		303		--		1,859		1		1
Consumer		313		307		--		253		18		21
Other		9		9		--		2		1		1

		36,744		31,289		--		24,209		797		802

With An Allowance Recorded
Commercial		1,453		1,453		434		1,689		15		21
Agricultural		--		--		--		--		--		--
Commercial Construction		5,923		3,472		830		5,025		--		--
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		5,874		5,874		424		11,072		157		148
Residential Real Estate		1,949		1,849		526		3,662		26		24
Farmland		1,327		1,327		85		664		45		47
Consumer		--		--		--		--		--		--
Other		--		--		--		--		--		--

		16,526		13,975		2,299		22,112		243		240

Total
Commercial		1,758		1,758		434		1,905		39		46
Agricultural		--		--		--		10		--		--
Commercial Construction		13,779		8,222		830		9,131		35		41
Residential Construction		--		--		--		--		--		--
Commercial Real Estate		25,995		25,127		424		24,271		651		652
Residential Real Estate		9,786		8,211		526		8,226		250		233
Farmland		1,630		1,630		85		2,523		46		48
Consumer		313		307		--		253		18		21
Other		9		9		--		2		1		1

	$	53,270	$	45,264	$	2,299	$	46,321	$	1,040	$	1,042

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

March 31, 2013
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected

With No Related
Allowance Recorded
Commercial	$	264	$	122	$	--	$	122	$	3		$	4
Agricultural		39		39		--		39		--			--
Commercial Construction		9,002		4,962		--		4,962		4			5
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		15,405		15,331		--		15,331		102			129
Residential Real Estate		2,726		2,382		--		2,382		10			18
Farmland		2,590		2,548		--		2,548		(1	)		3
Consumer		229		217		--		217		--			2
Other		--		--		--		--		--			--

		30,255		25,601		--		25,601		118			161

With An Allowance Recorded
Commercial		1,465		1,465		456		1,465		20			17
Agricultural		--		--		--		--		--			--
Commercial Construction		5,339		4,690		1,493		4,690		--			1
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		10,077		9,917		1,426		9,917		73			91
Residential Real Estate		6,959		5,916		1,118		5,916		40			36
Farmland		--		--		--		--		--			--
Consumer		--		--		--		--		--			--
Other		--		--		--		--		--			--

		23,840		21,988		4,493		21,988		133			145

Total
Commercial		1,729		1,587		456		1,587		23			21
Agricultural		39		39		--		39		--			--
Commercial Construction		14,341		9,652		1,493		9,652		4			6
Residential Construction		--		--		--		--		--			--
Commercial Real Estate		25,482		25,248		1,426		25,248		175			220
Residential Real Estate		9,685		8,298		1,118		8,298		50			54
Farmland		2,590		2,548		--		2,548		(1	)		3
Consumer		229		217		--		217		--			2
Other		--		--		--		--		--			--

	$	54,095	$	47,589	$	4,493	$	47,589	$	251		$	306

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 March 31, 2014. The following tables present the number of loan contracts restructured during the three month period ended March 31, 2014 and 2013. 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 Ended March 31, 2014
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification

Commercial RE		2	$	1,771	$	1,775

Total Loans		2	$	1,771	$	1,775

	Three Months Ended March 31, 2013
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification

Commercial Real Estate		1	$	84	$	81
Residential Real Estate		2		1,024		1,001

Total Loans		3	$	1,108	$	1,082

The company did not have any TDRs that subsequently defaulted for the three months ended March 31, 2014 and 2013.

At March 31, 2014 all restructured loans were performing as agreed.