(2) Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at December 31, 2013 and 2012 is as follows:

(in thousands)	2013		2012
Commercial, financial, and agricultural	$	133,717	$	130,040
Real estate construction - residential	21,008		22,177
Real estate construction - commercial	55,076		43,486
Real estate mortgage - residential	225,541		221,223
Real estate mortgage - commercial	382,550		405,092
Installment and other consumer	21,655		24,966
Total loans	$	839,547	$	846,984

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of vehicles. At December 31, 2013, loans with a carrying value of $388.1 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

The following is a summary of loans to directors and executive officers or to entities in which such individuals had a beneficial interest of the Company, are summarized as follows:

(in thousands)
Balance at December 31, 2012	$	8,067
New loans	57
Amounts collected	(3,287		)
Balance at December 31, 2013	$	4,837

Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present unfavorable features.

Allowance for loan losses

The following is a summary of the allowance for loan losses for the years ended December 31, 2013, 2012, and 2011:

	Commercial,			Real Estate			Real Estate			Real Estate			Real Estate			Installment
	Financial, &			Construction -			Construction -			Mortgage -			Mortgage -			Loans to			Un-
(in thousands)	Agricultural			Residential			Commercial			Residential			Commercial			Individuals			allocated			Total
Balance at December 31, 2010	$	2,931		$	2,067		$	1,339		$	3,922		$	3,458		$	231		$	617		$	14,565
Additions:
Provision for loan losses	837			914			485			1,104			8,593			204			(614		)	11,523
Deductions:
Loans charged off	2,157			1,858			512			1,883			6,420			376			0			13,206
Less recoveries on loans	(193		)	(65		)	(250		)	(108		)	(103		)	(208		)	0			(927		)
Net loans charged off	1,964			1,793			262			1,775			6,317			168			0			12,279
Balance at December 31, 2011	$	1,804		$	1,188		$	1,562		$	3,251		$	5,734		$	267		$	3		$	13,809
Additions:
Provision for loan losses	1,732			(523		)	126			955			6,318			293			(1		)	8,900
Deductions:
Loans charged off	1,760			0			0			977			5,466			586			0			8,789
Less recoveries on loans	(161		)	(67		)	(23		)	(158		)	(248		)	(265		)	0			(922		)
Net loans charged off	1,599			(67		)	(23		)	819			5,218			321			0			7,867
Balance at December 31, 2012	$	1,937		$	732		$	1,711		$	3,387		$	6,834		$	239		$	2		$	14,842
Additions:
Provision for loan losses	992			318			(452		)	273			622			272			5			2,030
Deductions:
Loans charged off	895			119			633			812			1,301			420			0			4,180
Less recoveries on loans	(340		)	0			(5		)	(111		)	(368		)	(203		)	0			(1,027		)
Net loans charged off	555			119			628			701			933			217			0			3,153
Balance at December 31, 2013	$	2,374		$	931		$	631		$	2,959		$	6,523		$	294		$	7		$	13,719

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration.

The following table provides the balance in the allowance for loan losses at December 31, 2013 and 2012, and the related loan balance by impairment methodology.

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, and		Construction -		Construction -		Mortgage -		Mortgage -		Loans to		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Individuals		allocated		Total
December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	721	$	392	$	304	$	1,374	$	1,989	$	16	$	0	$	4,796
Collectively evaluated for impairment	1,653		539		327		1,585		4,534		278		7		8,923
Total	$	2,374	$	931	$	631	$	2,959	$	6,523	$	294	$	7	$	13,719
Loans outstanding:
Individually evaluated for impairment	$	4,015	$	2,204	$	6,615	$	6,517	$	15,422	$	43	$	0	$	34,816
Collectively evaluated for impairment	129,702		18,804		48,461		219,024		367,128		21,612		0		804,731
Total	$	133,717	$	21,008	$	55,076	$	225,541	$	382,550	$	21,655	$	0	$	839,547

December 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	213	$	125	$	542	$	1,069	$	2,071	$	0	$	0	$	4,020
Collectively evaluated for impairment	1,724		607		1,169		2,318		4,763		239		2		10,822
Total	$	1,937	$	732	$	1,711	$	3,387	$	6,834	$	239	$	2	$	14,842
Loans outstanding:
Individually evaluated for impairment	$	4,157	$	2,496	$	7,762	$	5,771	$	18,959	$	44	$	0	$	39,189
Collectively evaluated for impairment	125,883		19,681		35,724		215,452		386,133		24,922		0		807,795
Total	$	130,040	$	22,177	$	43,486	$	221,223	$	405,092	$	24,966	$	0	$	846,984

Impaired loans

Loans evaluated under ASC 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans totaled $35.1 million and $39.4 million at December 31, 2013 and 2012, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings. Total impaired loans of $35.1 million at December 31, 2013, includes $34.8 million of impaired loans individually evaluated for impairment and $259,000 of non-accrual consumer loans that were collectively evaluated for impairment. Total impaired loans of $39.4 million at December 31, 2012, includes $39.2 million of impaired loans individually evaluated for impairment and $174,000 of non-accrual consumer loans that were collectively evaluated for impairment.

The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At December 31, 2013 and 2012, $21.8 million and $36.1 million, respectively, of impaired loans were evaluated based on the fair value of the loan’s collateral. Once the impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2013, $4.8 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $35.1 million compared to $4.0 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $39.4 million at December 31, 2012. Management determined that $18.8 million, or 54%, of total impaired loans required no reserve allocation at December 31, 2013 compared to $14.7 million, or 37%, at December 31, 2012 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The categories of impaired loans at December 31, 2013 and 2012 are as follows:

(in thousands)	2013		2012
Non-accrual loans	$	23,680	$	31,081
Troubled debt restructurings continuing to accrue interest	11,395		8,282
Total impaired loans	$	35,075	$	39,363

The following tables provide additional information about impaired loans at December 31, 2013 and 2012, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2013
With no related allowance recorded:
Commercial, financial and agricultural	$	2,467	$	2,593	$	0
Real estate - construction residential	44		80		0
Real estate - construction commercial	6,101		7,148		0
Real estate - residential	2,121		2,654		0
Real estate - commercial	7,817		8,056		0
Consumer	259		282		0
Total	$	18,809	$	20,813	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,548	$	1,607	$	721
Real estate - construction residential	2,160		2,331		392
Real estate - construction commercial	514		514		304
Real estate - residential	4,396		4,570		1,374
Real estate - commercial	7,605		7,925		1,989
Consumer	43		45		16
Total	$	16,266	$	16,992	$	4,796
Total impaired loans	$	35,075	$	37,805	$	4,796

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2012
With no related allowance recorded:
Commercial, financial and agricultural	$	3,272	$	4,009	$	0
Real estate - construction residential	2,307		2,339		0
Real estate - construction commercial	1,879		2,102		0
Real estate - residential	1,939		2,393		0
Real estate - commercial	5,162		5,565		0
Consumer	174		186		0
Total	$	14,733	$	16,594	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	885	$	898	$	213
Real estate - construction residential	189		189		125
Real estate - construction commercial	5,883		6,011		542
Real estate - residential	3,832		3,999		1,069
Real estate - commercial	13,797		14,167		2,071
Consumer	44		44		0
Total	$	24,630	$	25,308	$	4,020
Total impaired loans	$	39,363	$	41,902	$	4,020

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2013 and 2012:

	2013				2012
			Interest				Interest
	Average		Recognized		Average		Recognized
	Recorded		For the		Recorded		For the
(in thousands)	Investment		Period Ended		Investment		Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	2,693	$	108	$	4,157	$	93
Real estate - construction residential	80		0		1,137		7
Real estate - construction commercial	7,437		6		1,692		0
Real estate - residential	2,612		51		3,169		50
Real estate - commercial	8,461		170		12,198		124
Consumer	290		3		170		1
Total	$	21,573	$	338	$	22,523	$	275
With an allowance recorded:
Commercial, financial and agricultural	$	1,677	$	29	$	776	$	29
Real estate - construction residential	2,409		0		189		0
Real estate - construction commercial	514		0		6,087		0
Real estate - residential	4,596		24		2,604		11
Real estate - commercial	8,157		113		11,271		99
Consumer	45		0		2		0
Total	$	17,398	$	166	$	20,929	$	139
Total impaired loans	$	38,971	$	504	$	43,452	$	414

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $504,000 and $414,000, for the years ended December 31, 2013 and 2012, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the years reported. Contractual interest lost on loans in non-accrual status was $1.2 million for the years ended December 31, 2013 and 2012, respectively.

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due.

The following table provides aging information for the Company’s past due and non-accrual loans at December 31, 2013 and 2012.

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total

December 31, 2013
Commercial, Financial, and Agricultural	$	131,091	$	942	$	0	$	1,684	$	133,717
Real Estate Construction - Residential	18,738		66		0		2,204		21,008
Real Estate Construction - Commercial	48,230		595		0		6,251		55,076
Real Estate Mortgage - Residential	217,179		4,068		129		4,165		225,541
Real Estate Mortgage - Commercial	372,651		725		100		9,074		382,550
Installment and Other Consumer	21,048		291		14		302		21,655
Total	$	808,937	$	6,687	$	243	$	23,680	$	839,547

December 31, 2012
Commercial, Financial, and Agricultural	$	126,884	$	1,821	$	0	$	1,335	$	130,040
Real Estate Construction - Residential	19,390		290		0		2,497		22,177
Real Estate Construction - Commercial	35,117		607		0		7,762		43,486
Real Estate Mortgage - Residential	213,694		2,199		0		5,330		221,223
Real Estate Mortgage - Commercial	390,032		1,122		0		13,938		405,092
Installment and Other Consumer	24,221		520		6		219		24,966
Total	$	809,338	$	6,559	$	6	$	31,081	$	846,984

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch status when (1) one or more weaknesses that could jeopardize timely liquidation exits; or (2) the margin or liquidity of an asset is sufficiently tenuous that adverse trends could result in a collection problem. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.

The following table presents the risk categories by class at December 31, 2013 and 2012.

(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and other Consumer		Total

At December 31, 2013
Watch	$	15,016	$	2,007	$	6,111	$	26,331	$	23,662	$	388	$	73,515
Substandard	7,553		92		1,403		8,579		14,510		281		32,418
Non-accrual	1,684		2,204		6,251		4,165		9,074		302		23,680
Total	$	24,253	$	4,303	$	13,765	$	39,075	$	47,246	$	971	$	129,613

At December 31, 2012
Watch	$	14,814	$	4,580	$	6,459	$	26,063	$	29,753	$	672	$	82,341
Substandard	6,485		396		2,035		5,472		11,027		423		25,838
Non-accrual	1,335		2,497		7,762		5,330		13,938		219		31,081
Total	$	22,634	$	7,473	$	16,256	$	36,865	$	54,718	$	1,314	$	139,260

Troubled Debt Restructurings

At December 31, 2013, loans classified as troubled debt restructurings (TDRs) totaled $21.5 million, of which $10.1 million were on non-accrual status and $11.4 million were on accrual status. At December 31, 2012, loans classified as TDRs totaled $22.4 million, of which $14.1 million were on non-accrual status and $8.3 million were on accrual status. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $2.2 million and $1.5 million related to TDRs were allocated to the allowance for loan losses at December 31, 2013 and 2012, respectively.

The following table summarizes loans that were modified as TDRs during the years ended December 31, 2013 and 2012.

	2013					2012
	Recorded Investment (1)					Recorded Investment (1)
(in thousands)	Number of Contracts	Pre- Modification		Post- Modification		Number of Contracts	Pre- Modification		Post- Modification
Troubled Debt Restructurings
Commercial, financial and agricultural	0	$	0	$	0	4	$	637	$	613
Real estate construction - commercial	0	0		0		1	43		41
Real estate mortgage - residential	3	2,156		1,992		5	657		657
Real estate mortgage - commercial	1	1,282		1,282		2	645		644
Consumer	0	0		0		2	44		44
Total	4	$	3,438	$	3,274	14	$	2,026	$	1,999

(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon during the period ended are not reported.

The Company’s portfolio of loans classified as TDRs include concessions such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, charged-off, or the collateral for the loan is foreclosed and sold. The Company considers a loan in TDR status in default when the borrower’s payment according to the modified terms is at least 90 days past due or has defaulted due to expiration of the loan’s maturity date. During the year ended December 31, 2013, four loans meeting the TDR criteria were modified compared to fourteen loans during the year ended December 31, 2012. There were no loans modified as a TDR that defaulted during the year December 31, 2013, and within twelve months of their modification date compared to one loan during the year ended December 31, 2012.