Note 7 – Loans and Asset Quality Information

The loans and foreclosed real estate that were acquired in FDIC-assisted transactions are covered by loss share agreements between the FDIC and the Company's banking subsidiary, First Bank, which afford First Bank significant loss protection - see Note 2 to the financial statements included in the Company's 2011 Annual Report on Form 10-K for detailed information regarding these transactions. Because of the loss protection provided by the FDIC, the risk of the loans and foreclosed real estate that are covered by loss share agreements are significantly different from those assets not covered under the loss share agreements. Accordingly, the Company presents separately loans subject to the loss share agreements as “covered loans” in the information below and loans that are not subject to the loss share agreements as “non-covered loans.”

On April 1, 2016, one of the Company's loss share agreements with the FDIC expired. The agreement that expired related to the non-single family assets of The Bank of Asheville, a failed bank acquisition from January 2011. Accordingly, the remaining balances associated with these loans and foreclosed real estate were transferred from the covered portfolio to the non-covered portfolio on April 1, 2016. The Company will bear all future losses on this portfolio of loans and foreclosed real estate. Immediately prior to the transfer to non-covered status, the loans in this portfolio had a carrying value of $17.7 million and the foreclosed real estate in this portfolio had a carrying value of $1.2 million. Of the $17.7 million in loans that lost loss share protection, approximately $2.8 million were on nonaccrual status as of April 1, 2016. Additionally, approximately $0.3 million in allowance for loan losses associated with this portfolio of loans was transferred to the allowance for loan losses for non-covered loans on April 1, 2016.

The following is a summary of the major categories of total loans outstanding:

($ in thousands)	March 31, 2016					December 31, 2015					March 31, 2015
	Amount		Percentage			Amount		Percentage			Amount		Percentage
All loans (non-covered and covered):

Commercial, financial, and agricultural	$	228,867		9	%	$	202,671		8	%	$	176,013		7	%
Real estate – construction, land development & other land loans		302,052		12	%		308,969		12	%		285,319		12	%
Real estate – mortgage – residential (1-4 family) first mortgages		757,696		30	%		768,559		31	%		776,313		33	%
Real estate – mortgage – home equity loans / lines of credit		235,380		9	%		232,601		9	%		223,679		9	%
Real estate – mortgage – commercial and other		966,937		38	%		957,587		38	%		885,282		37	%
Installment loans to individuals		47,163		2	%		47,666		2	%		48,010		2	%
Subtotal		2,538,095		100	%		2,518,053		100	%		2,394,616		100	%
Unamortized net deferred loan costs		1,258					873					783
Total loans	$	2,539,353				$	2,518,926				$	2,395,399

The following is a summary of the major categories of non-covered loans outstanding:

($ in thousands)	March 31, 2016					December 31, 2015					March 31, 2015
	Amount		Percentage			Amount		Percentage			Amount		Percentage
Non-covered loans:

Commercial, financial, and agricultural	$	228,124		10	%	$	201,798		8	%	$	174,516		8	%
Real estate – construction, land development & other land loans		298,410		12	%		305,228		13	%		279,780		12	%
Real estate – mortgage – residential (1-4 family) first mortgages		684,085		28	%		692,902		29	%		690,910		31	%
Real estate – mortgage – home equity loans / lines of credit		225,245		9	%		221,995		9	%		211,337		9	%
Real estate – mortgage – commercial and other		955,550		39	%		945,823		39	%		870,234		38	%
Installment loans to individuals		47,158		2	%		47,666		2	%		48,010		2	%
Subtotal		2,438,572		100	%		2,415,412		100	%		2,274,787		100	%
Unamortized net deferred loan costs		1,258					873					783
Total non-covered loans	$	2,439,830				$	2,416,285				$	2,275,570

The carrying amount of the covered loans at March 31, 2016 consisted of impaired and nonimpaired purchased loans (as determined on the date of acquisition), as follows:

($ in thousands)	Impaired Purchased Loans – Carrying Value		Impaired Purchased Loans –Unpaid Principal Balance		Nonimpaired Purchased Loans – Carrying Value		Nonimpaired Purchased Loans - Unpaid Principal Balance		Total Covered Loans – Carrying Value		Total Covered Loans – Unpaid Principal Balance
Covered loans:
Commercial, financial, and agricultural	$	—		—		743		748		743		748
Real estate – construction, land development & other land loans		207		332		3,435		3,384		3,642		3,716
Real estate – mortgage – residential (1-4 family) first mortgages		80		564		73,531		85,962		73,611		86,526
Real estate – mortgage – home equity loans / lines of credit		7		14		10,128		11,516		10,135		11,530
Real estate – mortgage – commercial and other		873		1,973		10,514		11,105		11,387		13,078
Installment loans to individuals		—		—		5		35		5		35
Total	$	1,167		2,883		98,356		112,750		99,523		115,633

The carrying amount of the covered loans at December 31, 2015 consisted of impaired and nonimpaired purchased loans (as determined on the date of the acquisition), as follows:

($ in thousands)	Impaired Purchased Loans – Carrying Value		Impaired Purchased Loans –Unpaid Principal Balance		Nonimpaired Purchased Loans – Carrying Value		Nonimpaired Purchased Loans - Unpaid Principal Balance		Total Covered Loans – Carrying Value		Total Covered Loans – Unpaid Principal Balance
Covered loans:
Commercial, financial, and agricultural	$	—		—		873		886		873		886
Real estate – construction, land development & other land loans		277		365		3,464		3,457		3,741		3,822
Real estate – mortgage – residential (1-4 family) first mortgages		102		633		75,555		88,434		75,657		89,067
Real estate – mortgage – home equity loans / lines of credit		7		14		10,599		12,099		10,606		12,113
Real estate – mortgage – commercial and other		1,003		3,136		10,761		11,458		11,764		14,594
Total	$	1,389		4,148		101,252		116,334		102,641		120,482

The following table presents information regarding covered purchased nonimpaired loans since December 31, 2014. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond.

($ in thousands)
Carrying amount of nonimpaired covered loans at December 31, 2014	$	125,644
Principal repayments		(30,238	)
Transfers to foreclosed real estate		(1,211	)
Net loan (charge-offs) / recoveries		2,306
Accretion of loan discount		4,751
Carrying amount of nonimpaired covered loans at December 31, 2015		101,252
Principal repayments		(3,975	)
Transfers to foreclosed real estate		(869	)
Net loan (charge-offs) / recoveries		893
Accretion of loan discount		1,055
Carrying amount of nonimpaired covered loans at March 31, 2016	$	98,356

As reflected in the table above, the Company accreted $1,055,000 of the loan discount on purchased nonimpaired loans into interest income during the first quarter of 2016. As of March 31, 2016, there was remaining loan discount of $12,489,000 related to purchased accruing loans. If these loans continue to be repaid by the borrowers, the Company will accrete the remaining loan discount into interest income over the covered lives of the respective loans. In such circumstances, a corresponding entry to reduce the indemnification asset will be recorded amounting to approximately 80% of the loan discount accretion, which reduces noninterest income. At March 31, 2016, the Company also had $1,546,000 of loan discount related to purchased nonaccruing loans. It is not expected that a significant amount of this discount will be accreted, as it represents estimated losses on these loans.

The following table presents information regarding all purchased impaired loans since December 31, 2014, the majority of which are covered loans. The Company has applied the cost recovery method to all purchased impaired loans at their respective acquisition dates due to the uncertainty as to the timing of expected cash flows, as reflected in the following table.

($ in thousands) Purchased Impaired Loans	Contractual Principal Receivable			Fair Market Value Adjustment – Write Down (Nonaccretable Difference)			Carrying Amount
Balance at December 31, 2014	$	5,859			3,262			2,597
Change due to payments received		(634	)		(102	)		(532	)
Transfer to foreclosed real estate		(431	)		(336	)		(95	)
Other		(3	)		(3	)		—
Balance at December 31, 2015	$	4,791			2,821			1,970
Change due to payments received		(879	)		(711	)		(168	)
Change due to loan charge-off		(394	)		(324	)		(70	)
Balance at March 31, 2016	$	3,518			1,786			1,732

Because of the uncertainty of the expected cash flows, the Company is accounting for each purchased impaired loan under the cost recovery method, in which all cash payments are applied to principal. Thus, there is no accretable yield associated with the above loans. During the first quarter of 2016 and 2015, the Company received $69,000 and $0, respectively, in payments that exceeded the initial carrying amount of the purchased impaired loans, which is included in interest income.

Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and still accruing interest, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are summarized as follows:

ASSET QUALITY DATA ($ in thousands)	March 31, 2016		December 31, 2015		March 31, 2015

Non-covered nonperforming assets
Nonaccrual loans	$	35,741	$	39,994	$	47,416
Restructured loans - accruing		27,055		28,011		33,997
Accruing loans > 90 days past due		—		—		—
Total non-covered nonperforming loans		62,796		68,005		81,413
Foreclosed real estate		8,767		9,188		8,978
Total non-covered nonperforming assets	$	71,563	$	77,193	$	90,391

Covered nonperforming assets
Nonaccrual loans (1)	$	5,670	$	7,816	$	8,596
Restructured loans - accruing		3,459		3,478		3,874
Accruing loans > 90 days past due		—		—		—
Total covered nonperforming loans		9,129		11,294		12,470
Foreclosed real estate		1,569		806		2,055
Total covered nonperforming assets	$	10,698	$	12,100	$	14,525

Total nonperforming assets	$	82,261	$	89,293	$	104,916

____________________________________________________________________________________________________

(1)	At March 31, 2016, December 31, 2015, and March 31, 2015, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $9.0 million, $12.3 million, and $14.1 million, respectively.

At March 31, 2016, the Company had $2.1 million in residential mortgage loans in process of foreclosure.

The remaining tables in this note present information derived from the Company's allowance for loan loss model. Relevant accounting guidance requires certain disclosures to be disaggregated based on how the Company develops its allowance for loan losses and manages its credit exposure. This model combines loan types in a different manner than the tables previously presented.

The following table presents the Company's nonaccrual loans as of March 31, 2016.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial – unsecured	$	443		22		465
Commercial – secured		2,113		—		2,113
Secured by inventory and accounts receivable		84		—		84

Real estate – construction, land development & other land loans		3,950		—		3,950

Real estate – residential, farmland and multi-family		20,137		3,262		23,399

Real estate – home equity lines of credit		1,821		329		2,150

Real estate – commercial		7,086		2,057		9,143

Consumer		107		—		107
Total	$	35,741		5,670		41,411

The following table presents the Company's nonaccrual loans as of December 31, 2015.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial – unsecured	$	391		22		413
Commercial – secured		2,406		—		2,406
Secured by inventory and accounts receivable		83		—		83

Real estate – construction, land development & other land loans		4,155		52		4,207

Real estate – residential, farmland and multi-family		21,964		5,201		27,165

Real estate – home equity lines of credit		2,431		361		2,792

Real estate – commercial		8,262		2,180		10,442

Consumer		302		—		302
Total	$	39,994		7,816		47,810

The following table presents an analysis of the payment status of the Company's loans as of March 31, 2016.

($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual Loans		Current		Total Loans Receivable
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured	$	3		—		443		77,581		78,027
Commercial - secured		579		—		2,113		113,605		116,297
Secured by inventory and accounts receivable		19		—		84		40,083		40,186

Real estate – construction, land development & other land loans		1,211		118		3,950		275,585		280,864

Real estate – residential, farmland, and multi-family		9,837		1,824		20,137		810,797		842,595

Real estate – home equity lines of credit		1,043		76		1,821		212,030		214,970

Real estate - commercial		1,301		659		7,086		815,813		824,859

Consumer		226		131		107		40,310		40,774
Total non-covered	$	14,219		2,808		35,741		2,385,804		2,438,572
Unamortized net deferred loan costs										1,258
Total non-covered loans									$	2,439,830

Covered loans	$	5,173		5		5,670		88,675		99,523

Total loans	$	19,392		2,813		41,411		2,474,479		2,539,353

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at March 31, 2016.

The following table presents an analysis of the payment status of the Company's loans as of December 31, 2015.

($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual Loans		Current		Total Loans Receivable
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured	$	632		—		391		50,878		51,901
Commercial - secured		344		127		2,406		111,803		114,680
Secured by inventory and accounts receivable		28		—		83		38,875		38,986

Real estate – construction, land development & other land loans		1,499		379		4,155		284,345		290,378

Real estate – residential, farmland, and multi-family		12,691		3,271		21,964		813,817		851,743

Real estate – home equity lines of credit		920		96		2,431		207,998		211,445

Real estate - commercial		5,399		864		8,262		797,855		812,380

Consumer		273		255		302		43,069		43,899
Total non-covered	$	21,786		4,992		39,994		2,348,640		2,415,412
Unamortized net deferred loan costs										873
Total non-covered loans									$	2,416,285

Covered loans	$	3,313		402		7,816		91,110		102,641

Total loans	$	25,099		5,394		47,810		2,439,750		2,518,926

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at December 31, 2015.

The following table presents the activity in the allowance for loan losses for non-covered loans for the three months ended March 31, 2016.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential, Farmland, and Multi- family			Real Estate – Home Equity Lines of Credit			Real Estate – Commercial and Other			Consumer			Unallo- cated			Total

As of and for the three months ended March 31, 2016

Beginning balance	$	4,758			3,410			9,154			2,741			4,987			1,038			696			26,784
Charge-offs		(533	)		(259	)		(2,014	)		(466	)		(166	)		(425	)		—			(3,863	)
Recoveries		79			85			315			13			96			119			—			707
Provisions		612			(229	)		1,291			(285	)		252			234			(254	)		1,621
Ending balance	$	4,916			3,007			8,746			2,003			5,169			966			442			25,249

Ending balances as of March 31, 2016: Allowance for loan losses

Individually evaluated for impairment	$	118			183			1,427			—			554			—			—			2,282

Collectively evaluated for impairment	$	4,798			2,824			7,319			2,003			4,615			966			442			22,967

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—			—

Loans receivable as of March 31, 2016:

Ending balance – total	$	234,510			280,864			842,595			214,970			824,859			40,774			—			2,438,572
Unamortized net deferred loan costs																							1,258
Total non-covered loans																							2,439,830

Ending balances as of March 31, 2016: Loans

Individually evaluated for impairment	$	923			4,393			22,658			13			13,467			—			—			41,454

Collectively evaluated for impairment	$	233,587			276,471			819,937			214,957			810,828			40,774			—			2,396,554

Loans acquired with deteriorated credit quality	$	—			—			—			—			564			—			—			564

The following table presents the activity in the allowance for loan losses for non-covered loans for the year ended December 31, 2015.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential, Farmland, and Multi- family			Real Estate – Home Equity Lines of Credit			Real Estate – Commercial and Other			Consumer			Unallo- cated		Total

As of and for the year ended December 31, 2015

Beginning balance	$	8,391			6,470			9,720			3,731			9,045			841			147		38,345
Charge-offs		(3,684	)		(2,647	)		(5,682	)		(826	)		(2,639	)		(1,637	)		—		(17,115	)
Recoveries		876			993			321			100			888			368			—		3,546
Provisions		(825	)		(1,406	)		4,795			(264	)		(2,307	)		1,466			549		2,008
Ending balance	$	4,758			3,410			9,154			2,741			4,987			1,038			696		26,784

Ending balances as of December 31, 2015: Allowance for loan losses

Individually evaluated for impairment	$	190			213			1,478			313			333			160			—		2,687

Collectively evaluated for impairment	$	4,568			3,197			7,676			2,428			4,654			878			696		24,097

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—		—

Loans receivable as of December 31, 2015:

Ending balance	$	205,567			290,378			851,743			211,445			812,380			43,899			—		2,415,412
Unamortized net deferred loan costs																						873
Total non-covered loans																						2,416,285

Ending balances as of December 31, 2015: Loans

Individually evaluated for impairment	$	907			4,554			23,839			376			14,818			160			—		44,654

Collectively evaluated for impairment	$	204,660			285,824			827,904			211,069			796,981			43,739			—		2,370,177

Loans acquired with deteriorated credit quality	$	—			—			—			—			581			—			—		581

The following table presents the activity in the allowance for loan losses for non-covered loans for the three months ended March 31, 2015.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential, Farmland, and Multi- family			Real Estate – Home Equity Lines of Credit			Real Estate – Commercial and Other			Consumer			Unallo- cated		Total

As of and for the three months ended March 31, 2015

Beginning balance	$	8,391			6,470			9,720			3,731			9,045			841			147		38,345
Charge-offs		(944	)		(1,256	)		(1,569	)		(67	)		(923	)		(601	)		—		(5,360	)
Recoveries		88			267			16			17			202			91			—		681
Provisions		(1,778	)		525			2,659			482			(2,405	)		464			157		104
Ending balance	$	5,757			6,006			10,826			4,163			5,919			795			304		33,770

Ending balances as of March 31, 2015: Allowance for loan losses

Individually evaluated for impairment	$	131			415			1,690			—			505			—			—		2,741

Collectively evaluated for impairment	$	5,626			5,591			9,136			4,163			5,414			795			304		31,029

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—		—

Loans receivable as of March 31, 2015:

Ending balance – total	$	181,921			256,851			838,651			199,176			757,018			41,170			—		2,274,787
Unamortized net deferred loan costs																						783
Total non-covered loans																						2,275,570

Ending balances as of March 31, 2015: Loans

Individually evaluated for impairment	$	800			6,720			23,527			—			20,504			—			—		51,551

Collectively evaluated for impairment	$	181,121			250,131			815,124			199,176			735,883			41,170			—		2,222,605

Loans acquired with deteriorated credit quality	$	—			—			—			—			631			—			—		631

The following table presents the activity in the allowance for loan losses for covered loans for the three months ended March 31, 2016.

($ in thousands)	Covered Loans

As of and for the three months ended March 31, 2016
Beginning balance	$	1,799
Charge-offs		(241	)
Recoveries		1,204
Provision (reversal) for loan losses		(1,363	)
Ending balance	$	1,399

Ending balances as of March 31, 2016: Allowance for loan losses

Individually evaluated for impairment	$	438
Collectively evaluated for impairment		961
Loans acquired with deteriorated credit quality		−

Loans receivable as of March 31, 2016:

Ending balance – total	$	99,523

Ending balances as of March 31, 2016: Loans

Individually evaluated for impairment	$	5,105
Collectively evaluated for impairment		93,250
Loans acquired with deteriorated credit quality		1,168

The following table presents the activity in the allowance for loan losses for covered loans for the year ended December 31, 2015.

($ in thousands)	Covered Loans

As of and for the year ended December 31, 2015
Beginning balance	$	2,281
Charge-offs		(1,316	)
Recoveries		3,622
Provision (reversal) for loan losses		(2,788	)
Ending balance	$	1,799
Ending balances as of December 31, 2015: Allowance for loan losses

Individually evaluated for impairment	$	554
Collectively evaluated for impairment		1,175
Loans acquired with deteriorated credit quality		70

Loans receivable as of December 31, 2015:

Ending balance – total	$	102,641

Ending balances as of December 31, 2015: Loans

Individually evaluated for impairment	$	7,055
Collectively evaluated for impairment		94,197
Loans acquired with deteriorated credit quality		1,389

The following table presents the activity in the allowance for loan losses for covered loans for the three months ended March 31, 2015.

($ in thousands)	Covered Loans

As of and for the three months ended March 31, 2015
Beginning balance	$	2,281
Charge-offs		(440	)
Recoveries		653
Provisions (reversal) for loan losses		(268	)
Ending balance	$	2,226

Ending balances as of March 31, 2015: Allowance for loan losses

Individually evaluated for impairment	$	1,058
Collectively evaluated for impairment		1,144
Loans acquired with deteriorated credit quality		24

Loans receivable as of March 31, 2015:

Ending balance – total	$	119,829

Ending balances as of March 31, 2015: Loans

Individually evaluated for impairment	$	7,868
Collectively evaluated for impairment		110,099
Loans acquired with deteriorated credit quality		1,862

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2016.

($ in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	195		227		−		214
Commercial - secured		494		545		−		311
Secured by inventory and accounts receivable		−		−		−		−

Real estate – construction, land development & other land loans		3,858		7,422		−		3,890

Real estate – residential, farmland, and multi-family		8,943		10,289		−		9,683

Real estate – home equity lines of credit		13		16		−		7

Real estate – commercial		8,350		9,077		−		9,171

Consumer		−		−		−		−
Total non-covered impaired loans with no allowance	$	21,853		27,576		−		23,276

Total covered impaired loans with no allowance	$	3,743		6,363		−		4,487

Total impaired loans with no allowance recorded	$	25,596		33,936		−		27,763

Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	202		223		112		165
Commercial - secured		32		32		6		224
Secured by inventory and accounts receivable		−		−		−		−

Real estate – construction, land development & other land loans		535		541		183		584

Real estate – residential, farmland, and multi-family		13,715		14,347		1,427		13,566

Real estate – home equity lines of credit		−		−		−		188

Real estate – commercial		5,681		6,170		554		5,544

Consumer		−		−		−		80
Total non-covered impaired loans with allowance	$	20,165		21,313		2,282		20,351

Total covered impaired loans with allowance	$	2,530		2,692		438		2,872

Total impaired loans with an allowance recorded	$	22,695		24,005		2,720		23,223

Interest income recorded on non-covered and covered impaired loans during the three months ended March 31, 2016 was insignificant.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2015.

($ in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	234		276		−		128
Commercial - secured		128		151		−		70
Secured by inventory and accounts receivable		−		−		−		−

Real estate – construction, land development & other land loans		3,922		7,397		−		4,557

Real estate – residential, farmland, and multi-family		10,423		12,109		−		9,723

Real estate – home equity lines of credit		−		−		−		95

Real estate – commercial		9,992		11,022		−		14,585

Consumer		−		−		−		1
Total non-covered impaired loans with no allowance	$	24,699		30,955		−		29,159

Total covered impaired loans with no allowance	$	5,231		8,529		−		5,607

Total impaired loans with no allowance recorded	$	29,930		39,484		−		34,766

Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	129		140		77		137
Commercial - secured		416		443		113		513
Secured by inventory and accounts receivable		−		−		−		−

Real estate – construction, land development & other land loans		632		640		213		1,217

Real estate – residential, farmland, and multi-family		13,416		13,586		1,478		14,039

Real estate – home equity lines of credit		376		376		313		75

Real estate – commercial		5,407		5,592		333		3,968

Consumer		160		160		160		32
Total non-covered impaired loans with allowance	$	20,536		20,937		2,687		19,981

Total covered impaired loans with allowance	$	3,213		3,476		624		3,742

Total impaired loans with an allowance recorded	$	23,749		24,413		3,311		23,723

Interest income recorded on non-covered and covered impaired loans during the year ended December 31, 2015 was insignificant.

The Company tracks credit quality based on its internal risk ratings. Upon origination a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower's credit score, the loan-to-value ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process are declined. After loans are initially graded, they are monitored monthly for credit quality based on many factors, such as payment history, the borrower's financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management's evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.

The following describes the Company's internal risk grades in ascending order of likelihood of loss:

	Numerical Risk Grade	Description
Pass:
	1	Loans with virtually no risk, including cash secured loans.
	2	Loans with documented significant overall financial strength. These loans have minimum chance of loss due to the presence of multiple sources of repayment – each clearly sufficient to satisfy the obligation.
	3	Loans with documented satisfactory overall financial strength. These loans have a low loss potential due to presence of at least two clearly identified sources of repayment – each of which is sufficient to satisfy the obligation under the present circumstances.
	4	Loans to borrowers with acceptable financial condition. These loans could have signs of minor operational weaknesses, lack of adequate financial information, or loans supported by collateral with questionable value or marketability.
Watch or Standard:
	9	Existing loans that meet the guidelines for a Risk Graded 5 loan, except the collateral coverage is sufficient to satisfy the debt with no risk of loss under reasonable circumstances.
Special Mention:
	5	Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Bank.
Classified:
	6	An existing loan inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.
	7	Loans that have a well-defined weakness that make the collection or liquidation in full highly questionable and improbable. Loss appears imminent, but the exact amount and timing is uncertain.
	8	Loans that are considered uncollectible and are in the process of being charged-off. This grade is a temporary grade assigned for administrative purposes until the charge-off is completed.

The following table presents the Company's recorded investment in loans by credit quality indicators as of March 31, 2016.

($ in thousands)	Credit Quality Indicator (Grouped by Internally Assigned Grade)
	Pass (Grades 1, 2, & 3)		Pass – Acceptable/ Average (Grade 4)		Watch or Standard Loans (Grade 9)		Special Mention Loans (Grade 5)		Classified Loans (Grades 6, 7, & 8)		Nonaccrual Loans		Total
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured	$	51,823		23,955		47		1,069		690		443		78,027
Commercial - secured		58,192		52,083		32		2,234		1,643		2,113		116,297
Secured by inventory and accounts receivable		18,743		20,565		-		233		561		84		40,186

Real estate – construction, land development & other land loans		100,984		156,482		560		10,633		8,255		3,950		280,864

Real estate – residential, farmland, and multi-family		214,520		529,934		3,910		42,657		31,437		20,137		842,595

Real estate – home equity lines of credit		134,515		68,243		1,537		5,140		3,714		1,821		214,970

Real estate - commercial		288,882		483,699		7,120		25,116		12,956		7,086		824,859

Consumer		26,347		13,451		4		656		209		107		40,774
Total	$	894,006		1,348,412		13,210		87,738		59,465		35,741		2,438,572
Unamortized net deferred loan costs														1,258
Total non-covered loans													$	2,439,830

Total covered loans	$	12,035		57,128		248		7,251		17,191		5,670		99,523

Total loans	$	906,041		1,405,540		13,458		94,989		76,656		41,411		2,539,353

At March 31, 2016, there was an insignificant amount of loans that were graded “8” with an accruing status.

The following table presents the Company's recorded investment in loans by credit quality indicators as of December 31, 2015.

($ in thousands)	Credit Quality Indicator (Grouped by Internally Assigned Grade)
	Pass (Grades 1, 2, & 3)		Pass – Acceptable/ Average (Grade 4)		Watch or Standard Loans (Grade 9)		Special Mention Loans (Grade 5)		Classified Loans (Grades 6, 7, & 8)		Nonaccrual Loans		Total
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured	$	26,978		22,276		-		1,196		1,060		391		51,901
Commercial - secured		56,428		51,464		32		2,478		1,872		2,406		114,680
Secured by inventory and accounts receivable		18,955		19,120		-		252		576		83		38,986

Real estate – construction, land development & other land loans		106,881		158,563		578		11,545		8,656		4,155		290,378

Real estate – residential, farmland, and multi-family		216,549		532,859		4,083		43,654		32,634		21,964		851,743

Real estate – home equity lines of credit		135,828		62,638		1,544		5,232		3,772		2,431		211,445

Real estate - commercial		292,433		464,824		7,605		26,339		12,917		8,262		812,380

Consumer		29,617		13,194		51		303		432		302		43,899
Total	$	883,669		1,324,938		13,893		90,999		61,919		39,994		2,415,412
Unamortized net deferred loan costs														873
Total non-covered loans													$	2,416,285

Total covered loans	$	11,537		59,611		250		7,423		16,004		7,816	$	102,641

Total loans	$	895,206		1,384,549		14,143		98,422		77,923		47,810	$	2,518,926

At December 31, 2015, there was an insignificant amount of loans that were graded “8” with an accruing status.

Troubled Debt Restructurings

The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

The vast majority of the Company's troubled debt restructurings modified related to interest rate reductions combined with restructured amortization schedules. The Company does not generally grant principal forgiveness.

All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for determination of the allowance for loan losses. The Company's troubled debt restructurings can be classified as either nonaccrual or accruing based on the loan's payment status. The troubled debt restructurings that are nonaccrual are reported within the nonaccrual loan totals presented previously.

The following table presents information related to loans modified in a troubled debt restructuring during the three months ended March 31, 2016 and 2015.

($ in thousands)

For the three months ended
March 31, 2016

For the three months ended
March 31, 2015

Number of Contracts

Pre-

Modification Restructured Balances

Post-

Modification Restructured Balances

Number of Contracts

Pre-
Modification Restructured Balances

Post-
Modification Restructured Balances

Non-covered TDRs – Accruing

Commercial, financial, and agricultural:

Commercial – unsecured

−

Commercial – secured

−

Secured by inventory and accounts receivable

−

Real estate – construction, land development & other land loans

−

Real estate – residential, farmland, and multi-family

−

113

Real estate – home equity lines of credit

−

Real estate – commercial

−

Consumer

−

Non-covered TDRs – Nonaccrual

Commercial, financial, and agricultural:

Commercial – unsecured

−

Commercial – secured

−

Secured by inventory and accounts receivable

−

Real estate – construction, land development & other land loans

Real estate – residential, farmland, and multi-family

−

305

Real estate – home equity lines of credit

−

Real estate – commercial

−

Consumer

−

Total non-covered TDRs arising during period

−

469

Total covered TDRs arising during period– Accruing

−

139

Total covered TDRs arising during period – Nonaccrual

−

Total TDRs arising during period

−

608

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended March 31, 2016 and 2015 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate.

($ in thousands)	For the three months ended March 31, 2016				For the three months ended March 31, 2015
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment

Non-covered accruing TDRs that subsequently defaulted
Real estate – residential, farmland, and multi-family		1	$	21		1	$	34

Total non-covered TDRs that subsequently defaulted		1	$	21		1	$	34

Total accruing covered TDRs that subsequently defaulted		1	$	44		-	$	-

Total accruing TDRs that subsequently defaulted		2	$	65		1	$	34