(2)

Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at September 30, 2016 and December 31, 2015 is as follows:

	September 30,		December 31,
(in thousands)	2016		2015
Commercial, financial, and agricultural	$	172,274	$	149,091
Real estate construction - residential		17,066		16,895
Real estate construction - commercial		48,743		33,943
Real estate mortgage - residential		256,786		256,086
Real estate mortgage - commercial		423,779		385,869
Installment and other consumer		29,123		23,196
Total loans	$	947,771	$	865,080

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson and the greater Kansas City metropolitan area. 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 automobile financing. At September 30, 2016, loans with a carrying value of $472.9 million, or $388.3 million fair value, 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 during the periods indicated.

	Three Months Ended September 30, 2016
	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	$	2,996		$	63		$	249	$	2,293		$	3,411		$	284		$	96	$	9,392
Additions:
Provision for loan losses		(94	)		(4	)		44		(152	)		450			50			6		300
Deductions:
Loans charged off		157			0			0		92			27			86			0		362
Less recoveries on loans		(26	)		0			0		(31	)		(36	)		(47	)		0		(140	)
Net loans charged off		131			0			0		61			(9	)		39			0		222
Balance at end of period	$	2,771		$	59		$	293	$	2,080		$	3,870		$	295		$	102	$	9,470

	Nine Months Ended September 30, 2016
	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	$	2,153		$	59	$	644		$	2,439		$	2,935		$	273		$	101	$	8,604
Additions:
Provision for loan losses		710			0		(852	)		66			944			106			1		975
Deductions:
Loans charged off		295			0		1			474			137			209			0		1,116
Less recoveries on loans		(203	)		0		(502	)		(49	)		(128	)		(125	)		0		(1,007	)
Net loans charged off		92			0		(501	)		425			9			84			0		109
Balance at end of period	$	2,771		$	59	$	293		$	2,080		$	3,870		$	295		$	102	$	9,470

	Three Months Ended September 30, 2015
	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	$	3,124		$	17		$	414	$	2,332		$	3,870		$	185		$	44	$	9,986
Additions:
Provision for loan losses		439			(27	)		137		(233	)		(503	)		66			121		0
Deductions:
Loans charged off		591			0			0		87			126			80			0		884
Less recoveries on loans		(28	)		(28	)		0		(45	)		(5	)		(38	)		0		(144	)
Net loans charged off		563			(28	)		0		42			121			42			0		740
Balance at end of period	$	3,000		$	18		$	551	$	2,057		$	3,246		$	209		$	165	$	9,246

	Nine Months Ended September 30, 2015
	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	$	1,779		$	171		$	466	$	2,527		$	3,846		$	270		$	40	$	9,099
Additions:
Provision for loan losses		1,319			(475	)		90		(277	)		(598	)		66			125		250
Deductions:
Loans charged off		741			0			5		298			159			241			0		1,444
Less recoveries on loans		(643	)		(322	)		0		(105	)		(157	)		(114	)		0		(1,341	)
Net loans (recovered) charged off		98			(322	)		5		193			2			127			0		103
Balance at end of period	$	3,000		$	18		$	551	$	2,057		$	3,246		$	209		$	165	$	9,246

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 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.

Beginning in the first quarter of 2016, the Company began to lengthen its look-back period with the intent to increase such period from three to five years over the next two years. The Company believes that the five-year look-back period, which is consistent with the Company’s practices prior to the start of the economic recession in 2008, provides a representative historical loss period in the current economic environment.

The following table provides the balance in the allowance for loan losses at September 30, 2016 and December 31, 2015, 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, 2016
Allowance for loan losses:
Individually evaluated for impairment	$	632	$	0	$	8	$	386	$	262	$	14	$	0	$	1,302
Collectively evaluated for impairment		2,139		59		285		1,694		3,608		281		102		8,168
Total	$	2,771	$	59	$	293	$	2,080	$	3,870	$	295	$	102	$	9,470
Loans outstanding:
Individually evaluated for impairment	$	1,811	$	0	$	51	$	5,195	$	2,068	$	117	$	0	$	9,242
Collectively evaluated for impairment		170,463		17,066		48,692		251,591		421,711		29,006		0		938,529
Total	$	172,274	$	17,066	$	48,743	$	256,786	$	423,779	$	29,123	$	0	$	947,771

December 31, 2015
Allowance for loan losses:
Individually evaluated for impairment	$	285	$	0	$	15	$	955	$	266	$	19	$	0	$	1,540
Collectively evaluated for impairment		1,868		59		629		1,484		2,669		254		101		7,064
Total	$	2,153	$	59	$	644	$	2,439	$	2,935	$	273	$	101	$	8,604
Loans outstanding:
Individually evaluated for impairment	$	1,005	$	0	$	102	$	5,936	$	3,081	$	144	$	0	$	10,268
Collectively evaluated for impairment		148,086		16,895		33,841		250,150		382,788		23,052		0		854,812
Total	$	149,091	$	16,895	$	33,943	$	256,086	$	385,869	$	23,196	$	0	$	865,080

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 individually evaluated for impairment totaled $9.2 million and $10.3 million at September 30, 2016 and December 31, 2015, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings (TDRs).

The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, less selling costs, or by discounting the total expected future cash flows. At September 30, 2016 and December 31, 2015, $4.7 million and $6.4 million, respectively, of impaired loans were evaluated based on the fair value less estimated selling costs of the loan’s collateral. Once the impairment amount is calculated a specific reserve allocation is recorded. At September 30, 2016, $1.3 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $9.2 million compared to $1.5 million of the Company's allowance for loan losses allocated to impaired loans totaling $10.3 million at December 31, 2015. Management determined that $2.1 million, or 23%, of total impaired loans required no reserve allocation at September 30, 2016 compared to $4.5 million, or 44%, at December 31, 2015 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The categories of impaired loans at September 30, 2016 and December 31, 2015 are as follows:

	September 30,		December 31,
(in thousands)	2016		2015
Non-accrual loans	$	3,587	$	4,418
Performing TDRs		5,655		5,850
Total impaired loans	$	9,242	$	10,268

The following tables provide additional information about impaired loans at September 30, 2016 and December 31, 2015, 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, 2016
With no related allowance recorded:
Commercial, financial and agricultural	$	787	$	927	$	0
Real estate - residential		1,345		1,346		0
Total	$	2,132	$	2,273	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,024	$	1,059	$	632
Real estate - construction commercial		51		56		8
Real estate - residential		3,850		3,914		386
Real estate - commercial		2,068		2,404		262
Consumer		117		147		14
Total	$	7,110	$	7,580	$	1,302
Total impaired loans	$	9,242	$	9,853	$	1,302

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2015
With no related allowance recorded:
Commercial, financial and agricultural	$	448	$	450	$	0
Real estate - residential		1,645		1,712		0
Real estate - commercial		2,446		2,572		0
Total	$	4,539	$	4,734	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	557	$	572	$	285
Real estate - construction commercial		102		115		15
Real estate - residential		4,291		4,320		955
Real estate - commercial		635		884		266
Consumer		144		182		19
Total	$	5,729	$	6,073	$	1,540
Total impaired loans	$	10,268	$	10,807	$	1,540

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans during the periods indicated.

	Three Months Ended September 30,									Nine Months Ended September 30,
	2016					2015				2016				2015
			Interest					Interest				Interest				Interest
	Average		Recognized			Average		Recognized		Average		Recognized		Average		Recognized
	Recorded		For the			Recorded		For the		Recorded		For the		Recorded		For the
(in thousands)	Investment		Period Ended			Investment		Period Ended		Investment		Period Ended		Investment		Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	460	$	(9	)	$	3,416	$	6	$	491	$	18	$	4,033	$	33
Real estate - construction residential		0		0			0		0		0		0		1,101		0
Real estate - construction commercial		0		0			0		0		0		0		2,002		0
Real estate - residential		2,050		27			2,326		5		1,640		63		2,924		26
Real estate - commercial		1,167		17			2,958		17		1,769		17		8,978		103
Consumer		0		0			0		0		0		0		10		1
Total	$	3,677	$	35		$	8,700	$	28	$	3,900	$	98	$	19,048	$	163
With an allowance recorded:
Commercial, financial and agricultural	$	1,398	$	(13	)	$	787	$	5	$	924	$	9	$	1,389	$	18
Real estate - construction residential		0		0			0		0		0		0		0		0
Real estate - construction commercial		51		0			55		0		64		0		28		0
Real estate - residential		2,992		20			4,850		30		3,741		78		4,713		80
Real estate - commercial		811		14			1,228		0		717		61		1,216		0
Consumer		118		(1	)		162		0		123		0		209		0
Total	$	5,370	$	20		$	7,082	$	35	$	5,569	$	148	$	7,555	$	98
Total impaired loans	$	9,047	$	55		$	15,782	$	63	$	9,469	$	246	$	26,603	$	261

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 $55,000 and $246,000, for the three months and nine months ended September 30, 2016, respectively, compared to $63,000 and $261,000 for the three and nine months ended September 30, 2015, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the periods reported.

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 Company’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, the ultimate collectibility of interest or principal is no longer probable. In general, loans are placed on non-accrual when they become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual, including the delinquency status of the loan, the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial condition of the borrower indicates that the timely collectibility of interest and principal is probable and the borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six months.

The following table provides aging information for the Company’s past due and non-accrual loans at September 30, 2016 and December 31, 2015.

	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, 2016
Commercial, Financial, and Agricultural	$	170,674	$	443	$	0	$	1,157	$	172,274
Real Estate Construction - Residential		16,815		251		0		0		17,066
Real Estate Construction - Commercial		48,692		0		0		51		48,743
Real Estate Mortgage - Residential		253,884		1,138		60		1,704		256,786
Real Estate Mortgage - Commercial		422,409		811		0		559		423,779
Installment and Other Consumer		28,846		160		1		116		29,123
Total	$	941,320	$	2,803	$	61	$	3,587	$	947,771
December 31, 2015
Commercial, Financial, and Agricultural	$	148,597	$	185	$	1	$	308	$	149,091
Real Estate Construction - Residential		16,895		0		0		0		16,895
Real Estate Construction - Commercial		33,776		65		0		102		33,943
Real Estate Mortgage - Residential		251,253		2,511		0		2,322		256,086
Real Estate Mortgage - Commercial		383,684		643		0		1,542		385,869
Installment and Other Consumer		22,840		207		5		144		23,196
Total	$	857,045	$	3,611	$	6	$	4,418	$	865,080

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 one or more weaknesses that may result in the deterioration of the repayment exits or the Company’s credit position at some future date. 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. A loan is classified as a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, where the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs which continue to accrue interest are classified as performing TDRs. Loans classified as TDRs which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual loans for presentation purposes. 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, 2016 and December 31, 2015.

(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, 2016
Watch	$	9,858	$	662	$	1,167	$	18,078	$	45,869	$	0	$	75,634
Substandard		140		0		0		1,201		462		0		1,803
Performing TDRs		654		0		0		3,492		1,509		0		5,655
Non-accrual		1,157		0		51		1,704		559		116		3,587
Total	$	11,809	$	662	$	1,218	$	24,475	$	48,399	$	116	$	86,679
At December 31, 2015
Watch	$	8,663	$	1,267	$	1,296	$	22,191	$	24,303	$	186	$	57,906
Substandard		421		0		37		3,737		1,485		36		5,716
Performing TDRs		697		0		0		3,615		1,538		0		5,850
Non-accrual		308		0		102		2,322		1,542		144		4,418
Total	$	10,089	$	1,267	$	1,435	$	31,865	$	28,868	$	366	$	73,890

Troubled Debt Restructurings

At September 30, 2016, loans classified as TDRs totaled $6.3 million, of which $597,000 were classified as nonperforming TDRs and included in non-accrual loans and $5.7 million were classified as performing TDRs. At December 31, 2015, loans classified as TDRs totaled $6.4 million, of which $527,000 were classified as nonperforming TDRs and included in non-accrual loans and $5.9 million were classified as performing TDRs. Both performing and nonperforming TDRs are considered impaired loans. 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 $445,000 and $910,000 related to TDRs were allocated to the allowance for loan losses at September 30, 2016 and December 31, 2015, respectively.

The following table summarizes loans that were modified as TDRs during the periods indicated.

	Three Months Ended September 30,
	2016						2015
	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		2	$	32	$	32		0	$	0	$	0
Real estate mortgage - residential		4		298		296		0		0		0
Total		6	$	330	$	328		0	$	0	$	0

	Nine Months Ended September 30,
	2016						2015
	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		2	$	32	$	32		3	$	250	$	240
Real estate mortgage - residential		5		376		374		3		510		464
Real estate mortgage - commercial		0		0		0		4		1,273		1,137
Total		7	$	408	$	406		10	$	2,033	$	1,841

(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 for the borrower given financial condition such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. There were six loans and seven loans meeting the TDR criteria during the three and nine months ended September 30, 2016, respectively, compared to no loans and ten loans during the three and nine months ended September 30, 2015, respectively.

Upon default of a TDR, which is considered to be 90 days or more past due under the modified terms, impairment is measured based on the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses, provided for as a specific reserve within the allowance for loan losses, or in the process of foreclosure. There was one TDR that defaulted during the three and nine months ended September 30, 2016 and is in the process of foreclosure within twelve months of its modification date and no TDR’s defaulted during 2015. See Lending and Credit Management section for further information.