Note 3. Loans and the Allowance for Loan Losses

The following is a summary of the balances in each class of the Company's loan portfolio as of the dates indicated:

	September 30, 2016			December 31, 2015
	(in thousands)
Mortgage loans on real estate:
Residential 1-4 family	$	97,278		$	96,997
Commercial		286,759			277,758
Construction		22,679			19,685
Second mortgages		16,895			15,148
Equity lines of credit		47,439			47,256
Total mortgage loans on real estate		471,050			456,844
Commercial loans		47,239			43,197
Consumer loans		49,628			50,427
Other		26,003			18,007
Total loans, net of deferred fees (1)		593,920			568,475
Less: Allowance for loan losses		(7,780	)		(7,738	)
Loans, net of allowance and deferred fees (1)	$	586,140		$	560,737

(1) Deferred loan fees totaled $480 thousand and $407 thousand at September 30, 2016 and December 31, 2015, respectively.

Overdrawn deposit accounts are reclassified as loans and included in the Other category in the table above. Overdrawn deposit accounts totaled $707 thousand and $648 thousand at September 30, 2016 and December 31, 2015, respectively.

CREDIT QUALITY INFORMATION

The Company uses internally-assigned risk grades to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company's internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.

The Company's internally assigned risk grades are as follows:

Pass: Loans are of acceptable risk.

Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management's close attention.

Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature.

Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions and values highly questionable or improbable.

Loss: Loans have been charged off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

The following table presents credit quality exposures by internally assigned risk ratings as of the dates indicated:

Credit Quality Information As of September 30, 2016
(in thousands)
	Pass		OAEM		Substandard		Total
Mortgage loans on real estate:
Residential 1-4 family	$	94,209	$	1,020	$	2,049	$	97,278
Commercial		267,661		6,834		12,264		286,759
Construction		21,776		162		741		22,679
Second mortgages		16,197		490		208		16,895
Equity lines of credit		47,083		213		143		47,439
Total mortgage loans on real estate		446,926		8,719		15,405		471,050
Commercial loans		43,230		2,611		1,398		47,239
Consumer loans		49,389		0		239		49,628
Other		26,003		0		0		26,003
Total	$	565,548	$	11,330	$	17,042	$	593,920

Credit Quality Information As of December 31, 2015
(in thousands)
	Pass		OAEM		Substandard		Total
Mortgage loans on real estate:
Residential 1-4 family	$	94,576	$	0	$	2,421	$	96,997
Commercial		261,749		7,394		8,615		277,758
Construction		18,931		0		754		19,685
Second mortgages		14,835		0		313		15,148
Equity lines of credit		47,161		0		95		47,256
Total mortgage loans on real estate		437,252		7,394		12,198		456,844
Commercial loans		40,268		467		2,462		43,197
Consumer loans		50,327		0		100		50,427
Other		18,007		0		0		18,007
Total	$	545,854	$	7,861	$	14,760	$	568,475

As of September 30, 2016 and December 31, 2015, the Company did not have any loans internally classified as Loss or Doubtful.

AGE ANALYSIS OF PAST DUE LOANS BY CLASS

All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection. Loans in nonaccrual status that are also past due are included in the aging categories in the table below.

Age Analysis of Past Due Loans as of September 30, 2016
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Total Current Loans ⁽¹⁾		Total Loans		Recorded Investment > 90 Days Past Due and Accruing
	(in thousands)
Mortgage loans on real estate:
Residential 1-4 family	$	304	$	562	$	826	$	1,692	$	95,586	$	97,278	$	0
Commercial		795		124		108		1,027		285,732		286,759		0
Construction		0		456		0		456		22,223		22,679		0
Second mortgages		195		0		77		272		16,623		16,895		0
Equity lines of credit		359		0		50		409		47,030		47,439		50
Total mortgage loans on real estate		1,653		1,142		1,061		3,856		467,194		471,050		50
Commercial loans		0		6		86		92		47,147		47,239		0
Consumer loans		1,981		824		2,647		5,452		44,176		49,628		2,566
Other		48		7		4		59		25,944		26,003		4
Total	$	3,682	$	1,979	$	3,798	$	9,459	$	584,461	$	593,920	$	2,620

⁽¹⁾ For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

In the table above, the consumer category includes student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $4.3 million at September 30, 2016.

Age Analysis of Past Due Loans as of December 31, 2015
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Total Current Loans ⁽¹⁾		Total Loans		Recorded Investment > 90 Days Past Due and Accruing
	(in thousands)
Mortgage loans on real estate:
Residential 1-4 family	$	309	$	1,042	$	275	$	1,626	$	95,371	$	96,997	$	0
Commercial		1,266		31		23		1,320		276,438		277,758		23
Construction		161		0		0		161		19,524		19,685		0
Second mortgages		21		39		165		225		14,923		15,148		0
Equity lines of credit		170		0		0		170		47,086		47,256		0
Total mortgage loans on real estate		1,927		1,112		463		3,502		453,342		456,844		23
Commercial loans		500		88		232		820		42,377		43,197		164
Consumer loans		1,673		1,350		3,163		6,186		44,241		50,427		3,163
Other		64		3		6		73		17,934		18,007		6
Total	$	4,164	$	2,553	$	3,864	$	10,581	$	557,894	$	568,475	$	3,356

⁽¹⁾ For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

Although the portion of the student loan portfolio that is 90 days or more past due would normally be considered impaired, the Company does not include these loans in its impairment analysis. Because the federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans, management does not expect significant increases in past due student loans to have a material effect on the Company.

NONACCRUAL LOANS

The Company generally places commercial loans (including construction loans and commercial loans secured and not secured by real estate) in nonaccrual status when the full and timely collection of interest or principal becomes uncertain, part of the principal balance has been charged off and no restructuring has occurred or the loan reaches 90 days past due, unless the credit is well-secured and in the process of collection.

Under regulatory rules, consumer loans, which are loans to individuals for household, family and other personal expenditures, and consumer loans secured by real estate (including residential 1 - 4 family mortgages, second mortgages, and equity lines of credit) are not required to be placed in nonaccrual status. Although consumer loans and consumer loans secured by real estate are not required to be placed in nonaccrual status, the Company may elect to place these loans in nonaccrual status, if necessary to avoid a material overstatement of interest income. Generally, consumer loans secured by real estate are placed in nonaccrual status only when payments are 120 days past due.

Generally, consumer loans not secured by real estate are placed in nonaccrual status only when part of the principal has been charged off. If a charge-off has not occurred sooner for other reasons, a consumer loan not secured by real estate will generally be placed in nonaccrual status when payments are 120 days past due. These loans are charged off or written down to the net realizable value of the collateral when deemed uncollectible, when classified as a "loss," when repayment is unreasonably protracted, when bankruptcy has been initiated, or when the loan is 120 days or more past due unless the credit is well-secured and in the process of collection.

When management places a loan in nonaccrual status, the accrued unpaid interest receivable is reversed against interest income and the loan is accounted for by the cash basis or cost recovery method, until it qualifies for return to accrual status or is charged off. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or when the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments for at least six months.

The following table presents loans in nonaccrual status by class of loan as of the dates indicated:

Nonaccrual Loans by Class
	September 30, 2016		December 31, 2015
	(in thousands)
Mortgage loans on real estate
Residential 1-4 family	$	1,587	$	1,457
Commercial		6,366		2,623
Second mortgages		129		226
Equity lines of credit		93		0
Total mortgage loans on real estate		8,175		4,306
Commercial loans		196		276
Consumer loans		179		0
Total	$	8,550	$	4,582

The following table presents the interest income that the Company would have earned under the original terms of its nonaccrual loans and the actual interest recorded by the Company on nonaccrual loans for the periods presented:

	Nine Months Ended September 30,
	2016			2015
	(in thousands)
Interest income that would have been recorded under original loan terms		$	232	$	90
Actual interest income recorded for the period			182		65
Reduction in interest income on nonaccrual loans		$	50	$	25

TROUBLED DEBT RESTRUCTURINGS

The Company's loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company's loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company defines a TDR as nonperforming if the TDR is in nonaccrual status or is 90 days or more past due and still accruing interest at the report date.

When the Company modifies a loan, management evaluates any possible impairment as stated in the impaired loan section below.

The following table presents TDRs during the period indicated, by class of loan.

Troubled Debt Restructurings by Class
For the Three Months Ended September 30, 2016
(dollars in thousands)
	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification		Current Investment on September 30, 2016
Mortgage loans on real estate:
Residential 1-4 family		4	$	1,002	$	1,002	$	1,002
Commercial		1		150		150		150
Second mortgages		1		53		53		53
Equity lines of credit		1		93		93		93
Total mortgage loans on real estate		7		1,298		1,298		1,298
Consumer loans		2		8		8		8
Total		9	$	1,306	$	1,306	$	1,306

Troubled Debt Restructurings by Class
For the Three Months Ended September 30, 2015
(dollars in thousands)
	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification		Current Investment on September 30, 2015
Mortgage loans on real estate:
Commercial		1	$	194	$	194	$	0
Construction		1		435		435		410
Second mortgages		1		61		61		61
Total		3	$	690	$	690	$	664

Troubled Debt Restructurings by Class
For the Nine Months Ended September 30, 2016
(dollars in thousands)
	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification		Current Investment on September 30, 2016
Mortgage loans on real estate:
Residential 1-4 family		4	$	1,002	$	1,002	$	1,002
Commercial		1		150		150		150
Second mortgages		1		53		53		53
Equity lines of credit		1		93		93		93
Total mortgage loans on real estate		7		1,298		1,298		1,298
Commercial loans		1		152		152		109
Consumer loans		2		8		8		8
Total		10	$	1,458	$	1,458	$	1,415

Troubled Debt Restructurings by Class
For the Nine Months Ended September 30, 2015
(dollars in thousands)
	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification		Current Investment on September 30, 2015
Mortgage loans on real estate:
Commercial		1	$	194	$	194	$	193
Construction		1		435		435		410
Second mortgages		1		61		61		61
Total		3	$	690	$	690	$	664

Two of the loans restructured in the first nine months of 2016 were given below-market rates for debt with similar risk characteristics. Eight of the loans, which were part of a single borrowing relationship, were given terms not otherwise offered to borrowers with similar risk characteristics. Two of the loans restructured in the first nine months of 2015 were given below-market rates for debt with similar risk characteristics, while one loan was granted terms that the Company would not otherwise extend to borrowers with similar risk characteristics. At September 30, 2016 and December 31, 2015, the Company had no outstanding commitments to disburse additional funds on any TDR. At December 31, 2015, the Company had $53 thousand in loans secured by residential 1 - 4 family real estate that were in the process of foreclosure. There were no loans secured by residential 1 - 4 family real estate in the process of foreclosure at September 30, 2016.

In the three and nine months ended September 30, 2016 and 2015, there were no defaulting TDRs where the default occurred within twelve months of restructuring. The Company considers a TDR in default when any of the following occurs: the loan, as restructured, becomes 90 days or more past due; the loan is moved to nonaccrual status following the restructure; the loan is restructured again under terms that would qualify it as a TDR if it were not already so classified; or any portion of the loan is charged off.

All TDRs are factored into the determination of the allowance for loan losses and included in the impaired loan analysis, as discussed below.

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 when due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans and loans modified in a TDR. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole or remaining source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, when foreclosure is probable, instead of the discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allocation in the allowance or a charge-off to the allowance.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in the loan is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.

The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans with the associated allowance amount, if applicable, as of the dates presented. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the periods presented. The average balances are calculated based on daily average balances.

Impaired Loans by Class (in thousands)
	As of September 30, 2016												For the nine months ended September 30, 2016
				Recorded Investment
	Unpaid Principal Balance			Without Valuation Allowance			With Valuation Allowance			Associated Allowance			Average Recorded Investment			Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family		$	3,351		$	2,474		$	762		$	75		$	2,833		$	101
Commercial			13,992			9,409			3,756			304			10,645			418
Construction			623			533			96			34			454			32
Second mortgages			530			401			52			5			522			21
Equity lines of credit			93			93			0			0			31			2
Total mortgage loans on real estate		$	18,589		$	12,910		$	4,666		$	418		$	14,485		$	574
Commercial loans			1,061			196			777			180			772			57
Consumer loans			178			81			97			35			64			6
Total		$	19,828		$	13,187		$	5,540		$	633		$	15,321		$	637

Impaired Loans by Class (in thousands)
	As of December 31, 2015											For the Year Ended December 31, 2015
			Recorded Investment
	Unpaid Principal Balance		Without Valuation Allowance			With Valuation Allowance			Associated Allowance			Average Recorded Investment			Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family	$	2,994		$	1,530		$	1,261		$	146		$	2,267		$	132
Commercial		10,203			6,166			3,208			608			9,305			473
Construction		99			0			99			36			465			5
Second mortgages		535			499			0			0			571			21
Total mortgage loans on real estate	$	13,831		$	8,195		$	4,568		$	790		$	12,608		$	631
Commercial loans		330			207			68			8			952			28
Consumer loans		12			12			0			0			13			1
Total	$	14,173		$	8,414		$	4,636		$	798		$	13,573		$	660

MONITORING OF LOANS AND EFFECT OF MONITORING FOR THE ALLOWANCE FOR LOAN LOSSES

Loan officers are responsible for continual portfolio analysis and prompt identification and reporting of problem loans, which includes assigning a risk grade to each applicable loan at its origination and revising such grade as the situation dictates. Loan officers maintain frequent contact with borrowers, which should enable the loan officer to identify potential problems before other personnel. In addition, meetings with loan officers and upper management are held to discuss problem loans and review risk grades. Nonetheless, in order to avoid over-reliance upon loan officers for problem loan identification, the Company's loan review system provides for review of loans and risk grades by individuals who are independent of the loan approval process. Risk grades and historical loss rates (determined by migration analysis) by risk grades are used as a component of the calculation of the allowance for loan losses.

ALLOWANCE FOR LOAN LOSSES

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and probable losses inherent in the loan portfolio. The Company segments the loan portfolio into categories as defined by Schedule RC-C of the Federal Financial Institutions Examination Council Consolidated Reports of Condition and Income Form 041 (Call Report). Loans are segmented into the following pools: commercial, real estate-construction, real estate-mortgage, consumer and other loans. The Company also sub-segments the real estate-mortgage segment into four classes: residential 1-4 family, commercial real estate, second mortgages and equity lines of credit.

The Company uses an internally developed risk evaluation model in the estimation of the credit risk process. The model and assumptions used to determine the allowance are independently validated and reviewed to ensure that the theoretical foundation, assumptions, data integrity, computational processes and reporting practices are appropriate and properly documented.

Each portfolio segment has risk characteristics as follows:

Commercial: Commercial loans carry risks associated with the successful operation of a business or project, in addition to other risks associated with the ownership of a business. The repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

Real estate-construction: Construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may at any point in time be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be the loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

Real estate-mortgage: Residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral. Commercial real estate loans carry risks associated with the successful operation of a business if owner occupied. If non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts.

Consumer loans: Consumer loans carry risks associated with the continued credit-worthiness of the borrowers and the value of the collateral. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

Other loans: Other loans are loans to mortgage companies, loans for purchasing or carrying securities, and loans to insurance, investment and finance companies. These loans carry risks associated with the successful operation of a business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time, depend on interest rates or fluctuate in active trading markets.

Each segment of the portfolio is pooled by risk grade or by days past due. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades. A historical loss percentage is then calculated by migration analysis and applied to each pool. The migration analysis applied to all pools is able to track the risk grading and historical performance of individual loans throughout a number of periods set by management, which provides management with information regarding trends (or migrations) in a particular loan segment. At December 31, 2015 and September 30, 2016, management used twelve-quarter migration periods.

Management also provides an allocated component of the allowance for loans that are specifically identified that may be impaired, and are individually analyzed for impairment. An allocated allowance is established when the discounted present value of expected future cash flows from the impaired loan (or the collateral value or observable market price of the impaired loan) is lower than the carrying value of that loan.

Based on credit risk assessments and management's analysis of qualitative factors, additional loss factors are applied to loan balances. These additional qualitative factors include: economic conditions, trends in growth, loan concentrations, changes in certain loans, changes in underwriting, changes in management and changes in the legal and regulatory environment.

ALLOWANCE FOR LOAN LOSSES BY SEGMENT

The total allowance reflects management's estimate of losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $7.8 million adequate to cover loan losses inherent in the loan portfolio at September 30, 2016.

The following table presents, by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS
(in thousands)
For the Nine Months Ended September 30, 2016	Commercial			Real Estate - Construction		Real Estate - Mortgage ⁽¹⁾			Consumer			Other			Total
Allowance for Loan Losses:
Balance at the beginning of period	$	633		$	985	$	5,628		$	279		$	213		$	7,738
Charge-offs		(915	)		0		(393	)		(132	)		(99	)		(1,539	)
Recoveries		33			3		192			23			30			281
Provision for loan losses		1,209			93		(305	)		175			128			1,300
Ending balance	$	960		$	1,081	$	5,122		$	345		$	272		$	7,780
Ending balance individually evaluated for impairment	$	180		$	34	$	384		$	35		$	0		$	633
Ending balance collectively evaluated for impairment		780			1,047		4,738			310			272			7,147
Ending balance	$	960		$	1,081	$	5,122		$	345		$	272		$	7,780
Loan Balances:
Ending balance individually evaluated for impairment	$	973		$	629	$	16,947		$	178		$	0		$	18,727
Ending balance collectively evaluated for impairment		46,266			22,050		431,424			49,450			26,003			575,193
Ending balance	$	47,239		$	22,679	$	448,371		$	49,628		$	26,003		$	593,920

For the Year Ended December 31, 2015	Commercial			Real Estate - Construction		Real Estate - Mortgage ⁽¹⁾			Consumer			Other			Total
Allowance for Loan Losses:
Balance at the beginning of period	$	595		$	703	$	5,347		$	219		$	211		$	7,075
Charge-offs		(293	)		0		(321	)		(92	)		(191	)		(897	)
Recoveries		50			1		393			39			52			535
Provision for loan losses		281			281		209			113			141			1,025
Ending balance	$	633		$	985	$	5,628		$	279		$	213		$	7,738
Ending balance individually evaluated for impairment	$	8		$	36	$	754		$	0		$	0		$	798
Ending balance collectively evaluated for impairment		625			949		4,874			279			213			6,940
Ending balance	$	633		$	985	$	5,628		$	279		$	213		$	7,738
Loan Balances:
Ending balance individually evaluated for impairment	$	275		$	99	$	12,664		$	12		$	0		$	13,050
Ending balance collectively evaluated for impairment		42,922			19,586		424,495			50,415			18,007			555,425
Ending balance	$	43,197		$	19,685	$	437,159		$	50,427		$	18,007		$	568,475

⁽¹⁾ The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.

CHANGES IN ACCOUNTING METHODOLOGY

Historical loss rates calculated by migration analysis are determined by the performance of a loan over a period of time (the migration period). This migration period can be lengthened or shortened based on management's assessment of the most appropriate length of time over which to analyze losses in the loan portfolio. The Company can also calculate multiple migration periods, allowing management to assess the migration of loans based on more than one starting point.

In the third quarter of 2016, management made the following changes to its method for calculating the allowance:

The number of migration periods was changed from one to four. Each migration period remains at twelve quarters, the length of the migration period used by the Company in prior periods. This change reduced the provision for loan losses by $293 thousand.

The Company further sub-segmented its pool of consumer loans not secured by real estate to separate a pool of loans that share characteristics with each other that are not shared with other consumer loans. The new sub-segment is comprised of loans purchased from a single source for which management does not expect any charge-offs against the allowance. Accordingly, beginning with the third quarter of 2016, the historic loss factor does not apply to this group of loans. In addition, management determined that some of the qualitative factors that had previously been applied to these loans when they were grouped with all other consumer loans were no longer appropriate once these loans were separated into a new sub-segment. Creating this new sub-segment, which includes no anticipated losses, and applying the relevant qualitative factors to it reduced the provision for loan losses by $491 thousand.

As part of the process to determine whether a new sub-segment was appropriate, management analyzed the qualitative factors applied to each segment of the portfolio. Based on this analysis, management changed its qualitative factor adjustments on the Company's student loan portfolio to better reflect those factors that could potentially have an impact on the portfolio. This change reduced the provision for loan losses by $63 thousand.

The following table represents the effect on the loan loss provision as a result of these changes in methodology. It compares the methodology actually used for the nine months ended September 30, 2016 to that used in prior periods.

	Calculated Provision Based on Current Quarter Methodology			Calculated Provision Based on Prior Quarter Methodology			Difference
	(in thousands)
Portfolio Segment:
Commercial	$	1,209		$	1,491		$	(282	)
Real estate - construction		93			(5	)		98
Real estate - mortgage		(305	)		(195	)		(110	)
Consumer loans		175			729			(554	)
Other		128			127			1
Total	$	1,300		$	2,147		$	(847	)

The allowance for loan losses was 1.31% of total loans at September 30, 2016, compared to 1.33% at June 30, 2016 and 1.36% at December 31, 2015.