(2) Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at March 31, 2014 and December 31, 2013 is as follows:

	March 31,		December 31,
(in thousands)	2014		2013

Commercial, financial, and agricultural	$	132,346	$	133,717
Real estate construction - residential	22,060		21,008
Real estate construction - commercial	57,340		55,076
Real estate mortgage - residential	230,310		225,541
Real estate mortgage - commercial	384,130		382,550
Installment and other consumer	19,121		21,655
Total loans	$	845,307	$	839,547

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 automotive vehicles. At March 31, 2014, loans with a carrying value of $376.9 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

Allowance for Loan Losses

The following is a summary of the allowance for loan losses for the three months ended March 31, 2014 and 2013:

	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, 2013	$	2,374		$	931		$	631	$	2,959		$	6,523		$	294		$	7		$	13,719
Additions:
Provision for loan losses	93			(392		)	333		139			(153		)	(13		)	(7		)	0
Deductions:
Loans charged off	131			60			414		120			367			84			0			1,176
Less recoveries on loans	(116		)	0			0		(112		)	(16		)	(58		)	0			(302		)
Net loans charged off	15			60			414		8			351			26			0			874
Balance at March 31, 2014	$	2,452		$	479		$	550	$	3,090		$	6,019		$	255		$	0		$	12,845

Balance at December 31, 2012	$	1,937		$	732		$	1,711	$	3,387		$	6,834		$	239		$	2		$	14,842
Additions:
Provision for loan losses	(90		)	287			100		(189		)	844			47			1			1,000
Deductions:
Loans charged off	61			120			0		292			999			109			0			1,581
Less recoveries on loans	(42		)	0			0		(15		)	(161		)	(66		)	0			(284		)
Net loans charged off	19			120			0		277			838			43			0			1,297
Balance at March 31, 2013	$	1,828		$	899		$	1,811	$	2,921		$	6,840		$	243		$	3		$	14,545

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 March 31, 2014 and December 31, 2013, 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
March 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	1,069	$	307	$	36	$	1,808	$	1,482	$	51	$	0	$	4,753
Collectively evaluated for impairment	1,383		172		514		1,282		4,537		204		0		8,092
Total	$	2,452	$	479	$	550	$	3,090	$	6,019	$	255	$	0	$	12,845
Loans outstanding:
Individually evaluated for impairment	$	4,919	$	2,143	$	5,936	$	7,472	$	15,252	$	316	$	0	$	36,038
Collectively evaluated for impairment	127,427		19,917		51,404		222,838		368,878		18,805		0		809,269
Total	$	132,346	$	22,060	$	57,340	$	230,310	$	384,130	$	19,121	$	0	$	845,307

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

Impaired Loans

Loans evaluated under the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 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 $36.0 million and $35.1 million at March 31, 2014 and December 31, 2013, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings. Total impaired loans of $36.0 million at March 31, 2014 were individually evaluated for impairment compared to $34.8 million of impaired loans individually evaluated for impairment and $259,000 of non-accrual consumer loans that were collectively evaluated for impairment at December 31, 2013. Beginning in 2014, consumer non-accrual loans were included the individually evaluated impairment calculations.

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 March 31, 2014 and December 31, 2013, $32.7 million and $21.8 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 March 31, 2014, $4.8 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $36.0 million compared to $4.8 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $35.1 million at December 31, 2013. Management determined that $21.3 million, or 59%, of total impaired loans required no reserve allocation at March 31, 2014 compared to $18.8 million, or 54%, at December 31, 2013 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The categories of impaired loans at March 31, 2014 and December 31, 2013 are as follows:

	March 31,		December 31,
(in thousands)	2014		2013
Non-accrual loans	$	24,804	$	23,680
Troubled debt restructurings continuing to accrue interest	11,234		11,395
Total impaired loans	$	36,038	$	35,075

The following tables provide additional information about impaired loans at March 31, 2014 and December 31, 2013, 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
March 31, 2014
With no related allowance recorded:
Commercial, financial and agricultural	$	2,182	$	2,239	$	0
Real estate - construction residential	43		77		0
Real estate - construction commercial	5,833		6,998		0
Real estate - residential	2,105		2,814		0
Real estate - commercial	11,155		11,417		0
Total	$	21,318	$	23,545	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	2,737	$	2,800	$	1,069
Real estate - construction residential	2,100		2,271		307
Real estate - construction commercial	103		104		36
Real estate - residential	5,367		5,536		1,808
Real estate - commercial	4,097		4,662		1,482
Consumer	316		351		51
Total	$	14,720	$	15,724	$	4,753
Total impaired loans	$	36,038	$	39,269	$	4,753

			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

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the periods indicated.

	Three Months Ended March 31,
	2014				2013
			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	$	2,496	$	21	$	2,937	$	25
Real estate - construction residential	117		0		369		0
Real estate - construction commercial	6,998		0		2,616		0
Real estate - residential	2,901		6		2,736		0
Real estate - commercial	11,809		66		5,480		29
Consumer	25		0		189		0
Total	$	24,346	$	93	$	14,327	$	54
With an allowance recorded:
Commercial, financial and agricultural	$	2,341	$	8	$	990	$	7
Real estate - construction residential	2,271		0		2,273		0
Real estate - construction commercial	105		0		6,475		1
Real estate - residential	5,479		40		4,082		20
Real estate - commercial	4,594		0		13,634		26
Consumer	343		0		45		0
Total	$	15,133	$	48	$	27,499	$	54
Total impaired loans	$	39,479	$	141	$	41,826	$	108

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 $141,000 and $108,000, for the three months ended March 31, 2014 and 2013, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the periods reported. Contractual interest lost on loans in non-accrual status was $289,000 and $350,000 for the three months ended March 31, 2014 and 2013, 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 March 31, 2014 and December 31, 2013.

	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
March 31, 2014
Commercial, Financial, and Agricultural	$	129,201	$	513	$	0	$	2,632	$	132,346
Real Estate Construction - Residential	19,821		96		0		2,143		22,060
Real Estate Construction - Commercial	51,347		56		1		5,936		57,340
Real Estate Mortgage - Residential	222,827		3,350		194		3,939		230,310
Real Estate Mortgage - Commercial	372,245		2,047		0		9,838		384,130
Installment and Other Consumer	18,535		261		9		316		19,121
Total	$	813,976	$	6,323	$	204	$	24,804	$	845,307
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

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 March 31, 2014 and December 31, 2013.

(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 March 31, 2014
Watch	$	16,988	$	2,485	$	5,928	$	26,615	$	24,169	$	285	$	76,470
Substandard	5,558		91		1,029		10,030		10,233		230		27,171
Non-accrual	2,632		2,143		5,936		3,939		9,838		316		24,804
Total	$	25,178	$	4,719	$	12,893	$	40,584	$	44,240	$	831	$	128,445
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

Troubled Debt Restructurings

At March 31, 2014, loans classified as troubled debt restructurings (TDRs) totaled $22.2 million, of which $11.0 million were on non-accrual status and $11.2 million were on accrual status. At December 31, 2013, TDRs totaled $21.5 million, of which $10.1 million were on non-accrual status and $11.4 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 $2.4 million and $2.2 million related to TDRs were allocated to the allowance for loan losses at March 31, 2014 and December 31, 2013, respectively.

The following table summarizes loans that were modified as TDRs during the periods indicated.

	Three Months Ended March 31,
	2014					2013
	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	2	$	244	$	244	0	$	0	$	0
Real estate construction - commercial	0	0		0		0	0		0
Real estate mortgage - residential	1	1,256		1,185		1	619		619
Real estate mortgage - commercial	0	0		0		0	0		0
Consumer	0	0		0		0	0		0
Total	3	$	1,500	$	1,429	1	$	619	$	619

(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 three months ended March 31, 2014, three loans meeting the TDR criteria were modified compared to one loan during the three months ended March 31, 2013. There were no loans modified as a TDR that defaulted during the three months ended March 31, 2014 and 2013, respectively, and within twelve months of their modification date.