4. LOANS

The composition of the Company's loan portfolio, by loan class, as of June 30, 2017 and December 31, 2015 was as follows:

($ in thousands)	June 30, 2017			December 31, 2016

Commercial	$	122,803		$	126,311
Commercial Real Estate		355,060			344,210
Agriculture		101,340			101,905
Residential Mortgage		41,347			40,237
Residential Construction		24,802			23,650
Consumer		40,412			43,250

		685,764			679,563
Allowance for loan losses		(11,720	)		(10,899	)
Net deferred origination fees and costs		973			1,106

Loans, net	$	675,017		$	669,770

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit risk rating standards and criteria similar to those employed by state and federal banking regulatory agencies.

Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses. These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above. Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner-occupied real estate are primarily susceptible to changes in the market conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles. These same risks apply to Commercial loans whether secured by equipment, receivables or other personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space. Losses are dependent on the value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means.

Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or service. Agricultural loans are generally secured by inventory, receivables, equipment, and other real property. Agricultural loans primarily are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions such as drought or floods. Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks; non-payment due to diminished or lost income, over-extension of credit, a lack of borrower's cash flow to sustain payments, and shortfalls in collateral value. In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts.

Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the related risks described above but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion. Losses are primarily related to underlying collateral value and changes therein as described above. Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower. Based on this information the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower's cash flow to sustain payments, and shortfall in collateral value. In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment rate, loss of collateral value, and demand shifts.

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Collateral valuations are obtained at origination of the credit and periodically thereafter (generally annually but may be more frequent depending on the collateral type), once repayment is questionable, and the loan has been deemed classified.

As of June 30, 2017, approximately 51% in principal amount of the Company's loans were secured by commercial real estate, consisting primarily of loans secured by commercial properties and construction and land development loans. Approximately 6% in principal amount of the Company's loans were residential mortgage loans. Approximately 4% in principal amount of the Company's loans were residential construction loans. Approximately 15% in principal amount of the Company's loans were for agriculture and 18% in principal amount of the Company's loans were for general commercial uses including professional, retail and small businesses. Approximately 6% in principal amount of the Company's loans were consumer loans.

Once a loan becomes delinquent and repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral or a principal payment. If this is not forthcoming and payment of principal and interest in accordance with the contractual terms of the loan agreement becomes unlikely, the Company will consider the loan to be impaired and will estimate its probable loss, using the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. For collateral dependent loans, the Company will obtain an updated valuation of the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount. Depending on the length of time until final collection, the Company may periodically revalue the estimated loss and take additional charge-offs or specific reserves as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when the collateral is liquidated and the actual loss is confirmed. Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or judgment liens on the borrower's other assets.

At June 30, 2017 and December 31, 2016, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank ("FHLB") and the Federal Reserve Bank.

Non-accrual and Past Due Loans

The Company's loans by delinquency and non-accrual status, as of June 30, 2017 and December 31, 2016, were as follows:

($ in thousands)	Current & Accruing		30-59 Days Past Due & Accruing		60-89 Days Past Due & Accruing		90 Days or more Past Due & Accruing		Nonaccrual		Total Loans
June 30, 2017
Commercial	$	119,766	$	535	$	102	$	—	$	2,400	$	122,803
Commercial Real Estate		353,805		—		755		—		500		355,060
Agriculture		101,340		—		—		—		—		101,340
Residential Mortgage		41,220		—		—		—		127		41,347
Residential Construction		24,387		415		—		—		—		24,802
Consumer		39,512		899		1		—		—		40,412
Total	$	680,030	$	1,849	$	858	$	—	$	3,027	$	685,764

December 31, 2016
Commercial	$	121,311	$	—	$	—	$	—	$	5,000	$	126,311
Commercial Real Estate		343,186		484		—		—		540		344,210
Agriculture		101,905		—		—		—		—		101,905
Residential Mortgage		39,463		—		120		—		654		40,237
Residential Construction		23,650		—		—		—		—		23,650
Consumer		43,106		—		41		—		103		43,250
Total	$	672,621	$	484	$	161	$	—	$	6,297	$	679,563

Non-accrual loans amounted to $3,027,000 at June 30, 2017 and were comprised of one commercial loan totaling $2,400,000, two commercial real estate loans totaling $500,000 and two residential mortgage loans totaling $127,000. Non-accrual loans amounted to $6,297,000 at December 31, 2016 and were comprised of one commercial loan totaling $5,000,000, two commercial real estate loans totaling $540,000, three residential mortgage loans totaling $654,000, and one consumer loan totaling $103,000. All non-accrual loans are measured for impairment based upon the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of collateral, if the loan is collateral dependent. If the measurement of the non-accrual loan is less than the recorded investment in the loan, an impairment is recognized through the establishment of a specific reserve sufficient to cover expected losses and/or a charge-off against the allowance for loan losses. If the loan is considered to be collateral dependent, it is generally the Company's policy to charge-off the portion of any non-accrual loan that the Company does not expect to collect by writing the loan down to the estimated net realizable value of the underlying collateral. There were no commitments to lend additional funds to borrowers whose loans were on non-accrual status at June 30, 2017.

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Loans to be considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 6 (substandard) or worse. Once identified, impaired loans are measured individually for impairment using one of three methods: present value of expected cash flows discounted at the loan's effective interest rate; the loan's observable market price; or fair value of collateral if the loan is collateral dependent. In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, and is promptly charged-off against the allowance for loan losses.

Impaired loans, segregated by loan class, as of June 30, 2017 and December 31, 2016 were as follows:

($ in thousands)	Unpaid Contractual Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance
June 30, 2017
Commercial	$	4,003	$	—	$	3,541	$	3,541	$	827
Commercial Real Estate		1,614		500		1,033		1,533		48
Agriculture		—		—		—		—		—
Residential Mortgage		2,676		127		2,323		2,450		571
Residential Construction		805		—		805		805		87
Consumer		591		—		591		591		25
Total	$	9,689	$	627	$	8,293	$	8,920	$	1,558

December 31, 2016
Commercial	$	5,578	$	—	$	5,578	$	5,578	$	898
Commercial Real Estate		885		540		283		823		39
Agriculture		—		—		—		—		—
Residential Mortgage		3,392		654		2,380		3,034		584
Residential Construction		820		—		820		820		98
Consumer		708		103		601		704		25
Total	$	11,383	$	1,297	$	9,662	$	10,959	$	1,644

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the three months ended June 30, 2017 and June 30, 2016 was as follows:

($ in thousands)	Three Months Ended June 30, 2017				Three Months Ended June 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial	$	4,542	$	8	$	940	$	10
Commercial Real Estate		1,164		4		880		4
Agriculture		—		—		—		—
Residential Mortgage		2,736		23		3,265		23
Residential Construction		808		10		992		11
Consumer		592		9		739		9
Total	$	9,842	$	54	$	6,816	$	57

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the six months ended June 30, 2017 and June 30, 2016 was as follows:

($ in thousands)	Six Months Ended June 30, 2017				Six Months Ended June 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial	$	4,887	$	17	$	933	$	22
Commercial Real Estate		1,050		8		1,006		8
Agriculture		—		—		—		—
Residential Mortgage		2,835		54		3,369		47
Residential Construction		812		19		996		23
Consumer		630		17		933		53
Total	$	10,214	$	115	$	7,237	$	153

Troubled Debt Restructurings

The Company's loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), which are loans on which concessions in terms have been granted because of the borrowers' financial difficulties and, as a result, the Company receives less than the current market-based compensation for the loan. These concessions may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are placed on non-accrual status at the time of restructure and may only be returned to accruing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.

When a loan is modified, it is measured based upon the present value of future cash flows discounted at the contractual interest rate of the original loan agreement, or the fair value of collateral less selling costs if the loan is collateral dependent. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan.

The Company had $6,900,529 and $9,663,000 in TDR loans as of June 30, 2017 and December 31, 2016, respectively. Specific reserves for TDR loans totaled $1,543,141 and $1,644,000 as of June 30, 2017 and December 31, 2016, respectively. TDR loans performing in compliance with modified terms totaled $4,500,529 and $4,662,000 as of June 30, 2017 and December 31, 2016, respectively. There were no commitments to advance additional funds on existing TDR loans as of June 30, 2017.

There were no loans modified as TDRs during the three and six months ended June 30, 2017.

There were no loans modified as TDRs during the three months ended June 30, 2016.

Loans modified as TDRs during the six months ended June 30, 2016 were as follows:

($ in thousands)	Six Months Ended June 30, 2016
	Number of Contracts		Pre-modification outstanding recorded investment			Post- modification outstanding recorded investment
Commercial		1		$	180		$	180
Total		1		$	180		$	180

Loan modifications generally involve reductions in the interest rate, payment extensions, forgiveness of principal, or forbearance. There were no loans modified as a TDR within the previous 12 months and for which there was a payment default during the three and six months ended June 30, 2017 and June 30, 2016.

Credit Quality Indicators

All loans are rated using the credit risk ratings and criteria adopted by the Company. Risk ratings are adjusted as future circumstances warrant. All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State bank regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss. For the definitions of each risk rating, see Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

The following table presents the risk ratings by loan class as of June 30, 2017 and December 31, 2016:

($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
June 30, 2017
Commercial	$	111,835	$	7,690	$	3,278	$	—	$	—	$	122,803
Commercial Real Estate		341,999		11,806		1,255		—		—		355,060
Agriculture		101,295		—		45		—		—		101,340
Residential Mortgage		40,111		1,107		129		—		—		41,347
Residential Construction		24,802		—		—		—		—		24,802
Consumer		39,393		500		519		—		—		40,412
Total	$	659,435	$	21,103	$	5,226	$	—	$	—	$	685,764

December 31, 2016
Commercial	$	112,656	$	7,294	$	6,361	$	—	$	—	$	126,311
Commercial Real Estate		331,653		11,058		1,499		—		—		344,210
Agriculture		101,820		—		85		—		—		101,905
Residential Mortgage		37,831		1,751		655		—		—		40,237
Residential Construction		23,070		436		144		—		—		23,650
Consumer		41,826		547		877		—		—		43,250
Total	$	648,856	$	21,086	$	9,621	$	—	$	—	$	679,563

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by loan class for the three and six months ended June 30, 2017.

Three months ended June 30, 2017
($ in thousands)	Commercial			Commercial Real Estate		Agriculture		Residential Mortgage			Residential Construction		Consumer			Unallocated		Total
Balance as of March 31, 2017	$	3,808		$	4,723	$	1,287	$	701		$	454	$	381		$	145	$	11,499
Provision for loan losses		(869	)		160		88		(114	)		22		(12	)		725		—

Charge-offs		—			—		—		—			—		(5	)		—		(5	)
Recoveries		121			—		—		90			1		14			—		226
Net recoveries		121			—		—		90			1		9			—		221
Balance as of June 30, 2017	$	3,060		$	4,883	$	1,375	$	677		$	477	$	378		$	870	$	11,720

Six months ended June 30, 2017
($ in thousands)	Commercial			Commercial Real Estate		Agriculture		Residential Mortgage			Residential Construction		Consumer			Unallocated		Total
Balance as of December 31, 2016	$	3,571		$	3,910	$	1,262	$	660		$	440	$	498		$	558	$	10,899
Provision for loan losses		(634	)		973		113		(73	)		35		(126	)		312		600

Charge-offs		—			—		—		—			—		(16	)		—		(16	)
Recoveries		123			—		—		90			2		22			—		237
Net recoveries		123			—		—		90			2		6			—		221
Balance as of June 30, 2017	$	3,060		$	4,883	$	1,375	$	677		$	477	$	378		$	870	$	11,720

The following table details the allowance for loan losses allocated to loans individually and collectively evaluated for impairment by loan class as of June 30, 2017.

($ in thousands)	Commercial			Commercial Real Estate			Agriculture			Residential Mortgage			Residential Construction			Consumer			Unallocated			Total
Period-end amount allocated to:
Loans individually evaluated for impairment		$	827		$	48		$	—		$	571		$	87		$	25		$	—		$	1,558
Loans collectively evaluated for impairment			2,233			4,835			1,375			106			390			353			870			10,162
Ending Balance		$	3,060		$	4,883		$	1,375		$	677		$	477		$	378		$	870		$	11,720

The following table details activity in the allowance for loan losses by loan class for the three and six months ended June 30, 2016.

Three months ended June 30, 2016
($ in thousands)	Commercial			Commercial Real Estate			Agriculture		Residential Mortgage			Residential Construction			Consumer			Unallocated		Total
Balance as of March 31, 2016	$	2,980		$	3,636		$	965	$	702		$	401		$	589		$	334	$	9,607
Provision for loan losses		315			(52	)		104		(12	)		(12	)		(45	)		152		450

Charge-offs		(130	)		—			—		—			—			(15	)		—		(145	)
Recoveries		10			—			81		—			1			26			—		118
Net charge-offs		(120	)		—			81		—			1			11			—		(27	)
Balance as of June 30, 2016	$	3,175		$	3,584		$	1,150	$	690		$	390		$	555		$	486	$	10,030

Six months ended June 30, 2016
($ in thousands)	Commercial			Commercial Real Estate			Agriculture		Residential Mortgage			Residential Construction		Consumer			Unallocated		Total
Balance as of December 31, 2015	$	3,097		$	3,343		$	1,060	$	739		$	334	$	641		$	37	$	9,251
Provision for loan losses		280			256			9		(50	)		54		(98	)		449		900

Charge-offs		(230	)		(15	)		—		—			—		(35	)		—		(280	)
Recoveries		28			—			81		1			2		47			—		159
Net charge-offs		(202	)		(15	)		81		1			2		12			—		(121	)
Balance as of June 30, 2016	$	3,175		$	3,584		$	1,150	$	690		$	390	$	555		$	486	$	10,030

The following table details the allowance for loan losses allocated to loans individually and collectively evaluated for impairment by loan class as of June 30, 2016.

($ in thousands)	Commercial			Commercial Real Estate			Agriculture			Residential Mortgage			Residential Construction			Consumer			Unallocated			Total
Period-end amount allocated to:
Loans individually evaluated for impairment		$	36		$	40		$	—		$	598		$	109		$	36		$	—		$	819
Loans collectively evaluated for impairment			3,139			3,544			1,150			92			281			519			486			9,211
Ending Balance		$	3,175		$	3,584		$	1,150		$	690		$	390		$	555		$	486		$	10,030

The following table details activity in the allowance for loan losses and the amount allocated to loans individually and collectively evaluated for impairment as of and for the year ended December 31, 2016.

Year ended December 31, 2016

($ in thousands)	Commercial			Commercial Real Estate			Agriculture		Residential Mortgage			Residential Construction		Consumer			Unallocated		Total
Balance as of December 31, 2015	$	3,097		$	3,343		$	1,060	$	739		$	334	$	641		$	37	$	9,251
Provision for loan losses		883			582			121		(67	)		101		(341	)		521		1,800

Charge-offs		(446	)		(15	)		—		(13	)		—		(65	)		—		(539	)
Recoveries		37			—			81		1			5		263			—		387
Net charge-offs		(409	)		(15	)		81		(12	)		5		198			—		(152	)
Ending Balance	$	3,571		$	3,910		$	1,262	$	660		$	440	$	498		$	558	$	10,899
Period-end amount allocated to:
Loans individually evaluated for impairment	$	898		$	39		$	—	$	584		$	98	$	25		$	—	$	1,644
Loans collectively evaluated for impairment		2,673			3,871			1,262		76			342		473			558		9,255
Balance as of December 31, 2016	$	3,571		$	3,910		$	1,262	$	660		$	440	$	498		$	558	$	10,899

The Company's investment in loans as of June 30, 2017, June 30, 2016, and December 31, 2016 related to each balance in the allowance for loan losses by loan class and disaggregated on the basis of the Company's impairment methodology was as follows:

($ in thousands)	Commercial		Commercial Real Estate		Agriculture		Residential Mortgage		Residential Construction		Consumer		Total
June 30, 2017
Loans individually evaluated for impairment	$	3,541	$	1,533	$	—	$	2,450	$	805	$	591	$	8,920
Loans collectively evaluated for impairment		119,262		353,527		101,340		38,897		23,997		39,821		676,844
Ending Balance	$	122,803	$	355,060	$	101,340	$	41,347	$	24,802	$	40,412	$	685,764

June 30, 2016
Loans individually evaluated for impairment	$	818	$	869	$	—	$	2,986	$	987	$	773	$	6,433
Loans collectively evaluated for impairment		131,529		312,664		92,766		40,684		16,567		42,046		636,256
Ending Balance	$	132,347	$	313,533	$	92,766	$	43,670	$	17,554	$	42,819	$	642,689

December 31, 2016
Loans individually evaluated for impairment	$	5,578	$	823	$	—	$	3,034	$	820	$	704	$	10,959
Loans collectively evaluated for impairment		120,733		343,387		101,905		37,203		22,830		42,546		668,604
Ending Balance	$	126,311	$	344,210	$	101,905	$	40,237	$	23,650	$	43,250	$	679,563