(

) Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the nine month period ended September 30, 2016 and September 30, 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other loan categories and periodically may result in reallocation within the provision categories.

September 30, 2016
	Beginning										Ending
	Balance		Charge-Offs			Recoveries		Provision			Balance

Commercial and Agricultural
Commercial	$	855	$	(291	)	$	54	$	(127	)	$	491
Agricultural		203		(18	)		3		93			281

Real Estate
Commercial Construction		691		(25	)		813		(1,021	)		458
Residential Construction		20		-			-		2			22
Commercial		3,851		(992	)		197		2,231			5,287
Residential		1,990		(243	)		32		(114	)		1,665
Farmland		912		-			137		(187	)		862

Consumer and Other
Consumer		63		(180	)		44		176			103
Other		19		-			6		9			34

	$	8,604	$	(1,749	)	$	1,286	$	1,062		$	9,203

September 30, 2015
	Beginning									Ending
	Balance		Charge-Offs			Recoveries		Provision		Balance

Commercial and Agricultural
Commercial	$	497	$	(257	)	$	45	$	17	$	302
Agricultural		304		(5	)		3		4		306

Real Estate
Commercial Construction		1,223		(96	)		282		282		1,691
Residential Construction		138		-			-		-		138
Commercial		3,665		(275	)		138		296		3,824
Residential		2,425		(910	)		95		85		1,695
Farmland		104		(40	)		10		3		77

Consumer and Other
Consumer		67		(167	)		47		53		-
Other		379		(26	)		15		1		369

	$	8,802	$	(1,776	)	$	635	$	741	$	8,402

For the year ended December 31, 2015 the Company’s historical loss ratio within the ALLL calculation was based on a rolling 8 quarter historical loss period. During the first quarter of 2016 Company management implemented a change to its allowance for loan loss methodology by expanding the historical loss period from a rolling 8 quarters to 16 quarters. Management believes the longer historical loss period better reflects the current and expected loss behavior of the loan portfolio within the current credit cycle. The transition to a rolling 16 quarter loss period will be complete in the first quarter of 2017. As of September 30, 2016, this change in the historical loss period resulted in an increase to the allowance for loan losses of $986,000.

Management continually evaluates the allowance for loan losses methodology seeking to refine and enhance this process as appropriate, and it is likely that the methodology will continue to evolve over time.

The Company determines its individual reserves during its quarterly review of substandard loans. This process involves reviewing all loans with a risk grade of 6 or greater and an outstanding balance of $250,000 or more, regardless of the loans impairment classification. At September 30, 2016, there were 160 impaired loans totaling $4.6 million below the $250,000 review threshold which were not individually reviewed for impairment. Those loans were subject to the bank’s general loan loss reserve methodology and are included in the “Collectively Evaluated for Impairment” column of the following tables. Likewise, at September 30, 2015, there were 156 impaired loans totaling $3.9 million which were below the $250,000 review threshold and were subject to the bank’s general loan loss reserve methodology and are included in the “Collectively Evaluated for Impairment” column of the following tables.

Since not all loans in the substandard category are considered impaired, this quarterly review process may result in the identification of specific reserves on unimpaired loans. Management considers those loans graded substandard, but not classified as impaired, to be higher risk loans and, therefore, makes specific allocations to the allowance for those loans if warranted. The total of such loans is $12.45 million and $14.03 million as of September 30, 2016 and 2015, respectively. Specific allowance allocations were made for these loans totaling $742 thousand and $1.3 million as of September 30, 2016 and 2015, respectively. Since these loans are not considered impaired, both the loan balance and related specific allocation are included in the “Collectively Evaluated for Impairment” column of the following tables.

The following tables present breakdowns of the allowance for loan losses, segregated by impairment methodology for September 30, 2016 and 2015:

September 30, 2016
	Ending Allowance Balance						Ending Loan Balance

	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Commercial and Agricultural
Commercial	$	-	$	491	$	491	$	8	$	45,765	$	45,773
Agricultural		-		281		281		-		26,547		26,547

Real Estate
Commercial Construction		22		436		458		380		33,344		33,724
Residential Construction		-		22		22		-		10,325		10,325
Commercial		2,470		2,817		5,287		24,363		325,029		349,392
Residential		435		1,230		1,665		3,200		191,845		195,045
Farmland		33		829		862		1,047		72,754		73,801

Consumer and Other
Consumer		-		103		103		-		20,378		20,378
Other		-		34		34		-		21,132		21,132

Total End of Period Balance	$	2,960	$	6,243	$	9,203	$	28,998	$	747,119	$	776,117