LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses for the six months ended June 30, 2017 and 2016 was as follows:



Business Activities Loans	At or for the six months ended June 30, 2017
(In thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	5,145		$	1,952		$	2,721		$	601		$	10,419
Charged-off loans	(147		)	(189		)	(226		)	(17		)	(579		)
Recoveries on charged-off loans	3			2			64			2			71
Provision/(releases) for loan losses	502			345			560			15			1,422
Balance at end of period	$	5,503		$	2,110		$	3,119		$	601		$	11,333
Individually evaluated for impairment	380			4			10			—			394
Collectively evaluated	5,123			2,106			3,109			601			10,939
Total	$	5,503		$	2,110		$	3,119		$	601		$	11,333



Business Activities Loans	At or for the six months ended June 30, 2016
(In thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	4,430		$	1,590		$	2,747		$	672		$	9,439
Charged-off loans	(34		)	(90		)	(122		)	(17		)	(263		)
Recoveries on charged-off loans	13			44			28			15			100
Provision/(releases) for loan losses	451			157			30			(23		)	615
Balance at end of period	$	4,860		$	1,701		$	2,683		$	647		$	9,891
Individually evaluated for impairment	103			175			54			38			370
Collectively evaluated	4,757			1,526			2,629			609			9,521
Total	$	4,860		$	1,701		$	2,683		$	647		$	9,891



Acquired Loans	At or for the six months ended June 30, 2017
(In thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
Balance at beginning of period	$	—	$	—	$	—	$	—	$	—
Charged-off loans	—		—		—		—		—
Recoveries on charged-off loans	—		—		—		—		—
Provision/(releases) for loan losses	51		24		34		—		109
Balance at end of period	$	51	$	24	$	34	$	—	$	109
Individually evaluated for impairment	51		24		34		—		109
Collectively evaluated	—		—		—		—		—
Total	$	51	$	24	$	34	$	—	$	109

There were no loans meeting the definition of acquired for the six month period ending June 30, 2016

Loan Origination/Risk Management: The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Bank’s board of directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Bank's board of directors with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing loans and potential problem loans. The Bank seeks to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.

Credit Quality Indicators/Classified Loans: In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss. These ratings are used as inputs to the calculation of the allowance for loan losses. Consistent with regulatory guidelines, the Bank provides for the classification of loans which are considered to be of lesser quality as substandard, doubtful, or loss (i.e. risk rated 7, 8 and 9, respectively).

The following are the definitions of the Bank’s credit quality indicators:

Pass: Loans within all classes of commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low risk of loss related to these loans that are considered pass.

Special mention: Loans that do not expose the Bank to risk sufficient to warrant classification in one of the subsequent categories, but which possess some weaknesses, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which the lending officer may be unable to supervise properly because of: (i) lack of expertise, inadequate loan agreement; (ii) the poor condition of or lack of control over collateral; or (iii) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the Bank to sufficient risks to warrant classification.

Substandard: The Bank considers a loan substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans that the Bank classifies as doubtful have all of the weaknesses inherent in those loans that are classified as substandard but also have the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).

Loss: Loans that the Bank classifies as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.

The following tables present the Company’s loans by risk rating at June 30, 2017 and December 31, 2016:

Business Activities Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category



	Construction and land development				Commercial real estate other				Total commercial real estate
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	26,762	$	14,695	$	379,961	$	376,968	$	406,723	$	391,663
Special mention	29		—		6,882		5,868		6,911		5,868
Substandard	637		—		16,483		20,588		17,120		20,588
Total	$	27,428	$	14,695	$	403,326	$	403,424	$	430,754	$	418,119

Commercial and Industrial

Credit Risk Profile by Creditworthiness Category



	Commercial other				Agricultural and other loans to farmers				Tax exempt loans				Total commercial and industrial
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	154,639	$	98,968	$	31,014	$	31,279	$	38,091	$	15,679	$	223,747	$	145,926
Special mention	2,036		2,384		181		251		167		167		2,384		2,802
Substandard	1,759		2,234		264		278		—		—		2,023		2,512
Total	$	158,434	$	103,586	$	31,459	$	31,808	$	38,258	$	15,846	$	228,151	$	151,240

Acquired Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category



	Commercial construction and land development				Commercial real estate other				Total commercial real estate
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	16,167	$	—	$	280,638	$	—	$	296,805	$	—
Special mention	—		—		1,558		—		1,558		—
Substandard	300		—		9,167		—		9,467		—
Total	$	16,467	$	—	$	291,363	$	—	$	307,830	$	—

Commercial and Industrial

Credit Risk Profile by Creditworthiness Category



	Commercial other				Agricultural and other loans to farmers				Tax exempt loans				Total commercial and industrial
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	78,141	$	—	$	—	$	—	$	41,784	$	—	$	119,925	$	—
Special mention	875		—		—		—		—		—		875		—
Substandard	1,051		—		—		—		—		—		1,051		—
Total	$	80,067	$	—	$	—	$	—	$	41,784	$	—	$	121,851	$	—

The following table summarizes information about total loans rated Special Mention or higher as of June 30, 2017 and December 31, 2016. The table below includes consumer loans that are special mention and substandard accruing that are classified in the above table as performing based on payment activity.



	June 30, 2017						December 31, 2016
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Non-accrual	$	4,601	$	702	$	5,303	$	2,733	$	—	$	2,733
Substandard accruing	26,113		10,051		36,164		20,368		—		20,368
Total classified	30,714		10,753		41,467		23,101		—		23,101
Special mention	9,294		2,433		11,727		8,669		—		8,669
Total Criticized	$	40,008	$	13,186	$	53,194	$	31,770	$	—	$	31,770