(2) Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at September 30, 2013 and December 31, 2012 is as follows:

	September 30,		December 31,
(in thousands)	2013		2012
Commercial, financial, and agricultural	$	132,923	$	130,040
Real estate construction - residential	23,664		22,177
Real estate construction - commercial	48,489		43,486
Real estate mortgage - residential	220,174		221,223
Real estate mortgage - commercial	375,876		405,092
Installment and other consumer	21,916		24,966
Total loans	$	823,042	$	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 September 30, 2013, loans with a carrying value of $383.4 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 and nine months ended September 30, 2013, and 2012:

	Three Months Ended September 30, 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 beginning of period	$	2,119		$	932	$	2,202		$	2,456		$	7,415		$	233		$	1	$	15,358
Additions:
Provision for loan losses	444			32		(216		)	4			(294		)	25			5		0
Deductions:
Loans charged off	654			0		135			368			178			91			0		1,426
Less recoveries on loans	(201		)	0		0			(39		)	(34		)	(48		)	0		(322		)
Net loans charged off	453			0		135			329			144			43			0		1,104
Balance at end of period	$	2,110		$	964	$	1,851		$	2,131		$	6,977		$	215		$	6	$	14,254

	Nine Months Ended September 30, 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 beginning of period	$	1,937		$	732	$	1,711		$	3,387		$	6,834		$	239		$	2	$	14,842
Additions:
Provision for loan losses	725			351		273			(586		)	1,142			91			4		2,000
Deductions:
Loans charged off	817			119		135			754			1,205			271			0		3,301
Less recoveries on loans	(265		)	0		(2		)	(84		)	(206		)	(156		)	0		(713		)
Net loans charged off	552			119		133			670			999			115			0		2,588
Balance at end of period	$	2,110		$	964	$	1,851		$	2,131		$	6,977		$	215		$	6	$	14,254

	Three Months Ended September 30, 2012
	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 beginning of period	$	3,045		$	709		$	1,644	$	3,560		$	6,107		$	232		$	17		$	15,314
Additions:
Provision for loan losses	1,239			(68		)	90		118			3,241			91			(11		)	4,700
Deductions:
Loans charged off	742			0			0		41			2,366			154			0			3,303
Less recoveries on loans	(18		)	0			0		(19		)	(96		)	(76		)	0			(209		)
Net loans charged off	724			0			0		22			2,270			78			0			3,094
Balance at end of period	$	3,560		$	641		$	1,734	$	3,656		$	7,078		$	245		$	6		$	16,920

	Nine Months Ended September 30, 2012
	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 beginning of period	$	1,804		$	1,188		$	1,562		$	3,251		$	5,734		$	267		$	3	$	13,809
Additions:
Provision for loan losses	2,469			(614		)	149			913			4,793			187			3		7,900
Deductions:
Loans charged off	846			0			0			618			3,666			425			0		5,555
Less recoveries on loans	(133		)	(67		)	(23		)	(110		)	(217		)	(216		)	0		(766		)
Net loans charged off	713			(67		)	(23		)	508			3,449			209			0		4,789
Balance at end of period	$	3,560		$	641		$	1,734		$	3,656		$	7,078		$	245		$	6	$	16,920

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. Although the allowance for loan losses are comprised of specific and general allocations, the entire allowance is available to absorb credit losses.

The following table provides the balance in the allowance for loan losses at September 30, 2013 and December 31, 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
September 30, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	576	$	248	$	250	$	719	$	2,782	$	6	$	0	$	4,581
Collectively evaluated for impairment	1,534		716		1,601		1,412		4,195		209		6		9,673
Total	$	2,110	$	964	$	1,851	$	2,131	$	6,977	$	215	$	6	$	14,254
Loans outstanding:
Individually evaluated for impairment	$	4,392	$	2,254	$	7,101	$	5,217	$	16,948	$	44	$	0	$	35,956
Collectively evaluated for impairment	128,531		21,410		41,388		214,957		358,928		21,872		0		787,086
Total	$	132,923	$	23,664	$	48,489	$	220,174	$	375,876	$	21,916	$	0	$	823,042

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 $36.2 million and $39.4 million at September 30, 2013 and December 31, 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 $36.2 million at September 30, 2013, includes $36.0 million of impaired loans individually evaluated for impairment and $220,000 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 specific reserve component applies to loans evaluated individually 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 September 30, 2013 and December 31, 2012, $32.4 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 September 30, 2013, $4.6 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $36.2 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 $12.2 million, or 34%, of total impaired loans required no reserve allocation at September 30, 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 incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying percentages to pools of loans by asset type. Loans not individually evaluated are aggregated based on similar risk characteristics. Historical loss rates for each risk group, which are updated quarterly, are quantified using all recorded loan charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent economic environment. These historical loss rates for each risk group are used as the starting point to determine allowance provisions. The Company’s methodology includes factors that allow management to adjust its estimates of losses based on the most recent information available. The rates are then adjusted to reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

The categories of impaired loans at September 30, 2013 and December 31, 2012 are as follows:

	September 30,		December 31,
(in thousands)	2013		2012
Non-accrual loans	$	28,610	$	31,081
Troubled debt restructurings continuing to accrue interest	7,566		8,282
Total impaired loans	$	36,176	$	39,363

The following tables provide additional information about impaired loans at September 30, 2013 and December 31, 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
September 30, 2013
With no related allowance recorded:
Commercial, financial and agricultural	$	2,501	$	2,581	$	0
Real estate - construction residential	104		139		0
Real estate - construction commercial	2,861		3,459		0
Real estate - residential	2,419		3,214		0
Real estate - commercial	4,084		4,344		0
Consumer	220		238		0
Total	$	12,189	$	13,975	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,891	$	1,984	$	576
Real estate - construction residential	2,150		2,272		248
Real estate - construction commercial	4,240		4,240		250
Real estate - residential	2,798		2,931		719
Real estate - commercial	12,864		13,772		2,782
Consumer	44		44		6
Total	$	23,987	$	25,243	$	4,581
Total impaired loans	$	36,176	$	39,218	$	4,581

			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 three and nine months ended September 30, 2013 and 2012.

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2013				2012				2013				2012
			Interest				Interest				Interest				Interest
			Recognized				Recognized				Recognized				Recognized
	Average		For the		Average		For the		Average		For the		Average		For the
	Recorded		Period		Recorded		Period		Recorded		Period		Recorded		Period
(in thousands)	Investment		Ended		Investment		Ended		Investment		Ended		Investment		Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	2,598	$	22	$	3,074	$	23	$	2,643	$	71	$	3,315	$	66
Real estate - construction residential	139		0		1,589		0		242		0		737		7
Real estate - construction commercial	3,459		0		1,879		0		3,803		0		1,653		0
Real estate - residential	3,168		10		2,299		5		3,179		10		3,333		47
Real estate - commercial	4,346		29		3,598		28		4,348		86		10,582		87
Consumer	202		0		181		0		212		1		162		1
Total	$	13,912	$	61	$	12,620	$	56	$	14,427	$	168	$	19,782	$	208
With an allowance recorded:
Commercial, financial and agricultural	$	1,996	$	7	$	2,890	$	7	$	2,031	$	34	$	2,615	$	21
Real estate - construction residential	2,272		0		189		0		2,273		0		189		0
Real estate - construction commercial	4,240		0		6,192		0		4,240		0		6,180		0
Real estate - residential	2,920		2		3,037		4		2,947		38		2,566		11
Real estate - commercial	13,210		35		15,072		2		13,524		106		14,209		1
Consumer	44		0		0		0		44		0		0		0
Total	$	24,682	$	44	$	27,380	$	13	$	25,059	$	178	$	25,759	$	33
Total impaired loans	$	38,594	$	105	$	40,000	$	69	$	39,486	$	346	$	45,541	$	241

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 $105,000 and $346,000, and $69,000 and $241,000, for the three and nine months ended September 30, 2013 and 2012, respectively. The average recorded investment on impaired loans is calculated on a monthly basis during the periods reported. Contractual interest lost on loans in non-accrual status was $929,000 at September 30, 2013 compared to $966,000 at September 30, 2012. During the three and nine months ended September 30, 2013, $1,000 and $93,000, respectively, in interest was recognized on loans in non-accrual status on a cash basis. During the three and nine months ended September 30, 2012, there was no significant interest recognized on loans in non-accrual status.

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 September 30, 2013 and December 31, 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
September 30, 2013
Commercial, Financial, and Agricultural	$	130,695	$	185	$	15	$	2,028	$	132,923
Real Estate Construction - Residential	21,249		160		0		2,255		23,664
Real Estate Construction - Commercial	41,388		0		0		7,101		48,489
Real Estate Mortgage - Residential	213,627		1,798		377		4,372		220,174
Real Estate Mortgage - Commercial	362,293		992		0		12,591		375,876
Installment and Other Consumer	21,378		261		14		263		21,916
Total	$	790,630	$	3,396	$	406	$	28,610	$	823,042

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 September 30, 2013 and December 31, 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 September 30, 2013
Watch	$	14,825	$	933	$	3,763	$	23,272	$	24,985	$	399	$	68,177
Substandard	8,506		2,564		1,082		7,794		13,885		416		34,247
Non-accrual	2,028		2,255		7,101		4,372		12,591		263		28,610
Total	$	25,359	$	5,752	$	11,946	$	35,438	$	51,461	$	1,078	$	131,034

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 September 30, 2013, loans classified as troubled debt restructurings (TDRs) totaled $19.3 million, of which $11.7 million was on non-accrual status and $7.6 million was on accrual status. At December 31, 2012, loans classified as TDRs totaled $22.4 million, of which $14.1 million was on non-accrual status and $8.3 million was 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 $1.3 million and $1.5 million related to TDRs were allocated to the allowance for loan losses at September 30, 2013 and December 31, 2012, respectively.

The following table summarizes loans that were modified as TDRs during the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,
	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	2	$	100	$	100
Real estate construction - commercial	0	0		0		0	0		0
Real estate mortgage - residential	0	0		0		2	644		644
Total	0	$	0	$	0	4	$	744	$	744

	Nine Months Ended September 30,
	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	3	$	297	$	280
Real estate construction - commercial	0	0		0		1	43		42
Real estate mortgage - residential	1	618		481		2	644		644
Total	1	$	618	$	481	6	$	984	$	966

(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 nine months ended September 30, 2013, one loan meeting the TDR criteria was modified compared to six loans during the nine months ended September 30, 2012. During the three months ended September 30, 2013 there were no new loans modified as TDRs and four loans modified as TDRs during the three months ended September 30, 2012. There were no loans modified as a TDR that defaulted during the three and nine months ended September 30, 2013, and within twelve months of their modification date. No loans modified as a TDR during the three and nine months ended September 30, 2012 defaulted.