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Loans and Asset Quality Information

6 Months Ended

Jun. 30, 2016

Loans and Asset Quality Information [Abstract]

Note 7 – Loans and Asset Quality Information

Certain 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 July 1, 2014, the loss share provisions associated with non-single family assets associated with the 2009 failed bank acquisition of Cooperative Bank expired, and the associated assets were reclassified as non-covered. On April 1, 2016, the loss share provisions of another agreement expired, which 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 those loans and foreclosed real estate were reclassified from the covered portfolio to the non-covered portfolio on April 1, 2016. The Company bears 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)	June 30, 2016				December 31, 2015				June 30, 2015
	Amount		Percentage		Amount		Percentage		Amount		Percentage
All loans (non-covered and covered):

Commercial, financial, and agricultural	$	244,862		9%	$	202,671		8%	$	179,909		7%
Real estate – construction, land development & other land loans		310,993		12%		308,969		12%		282,262		12%
Real estate – mortgage – residential (1-4 family) first mortgages		751,446		29%		768,559		31%		777,515		32%
Real estate – mortgage – home equity loans / lines of credit		238,794		9%		232,601		9%		220,534		9%
Real estate – mortgage – commercial and other		1,000,578		39%		957,587		38%		904,496		38%
Installment loans to individuals		50,387		2%		47,666		2%		47,244		2%
Subtotal		2,597,060		100%		2,518,053		100%		2,411,960		100%
Unamortized net deferred loan costs		1,074				873				819
Total loans	$	2,598,134			$	2,518,926			$	2,412,779

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

($ in thousands)	June 30, 2016				December 31, 2015				June 30, 2015
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Non-covered loans:

Commercial, financial, and agricultural	$	244,862		10%	$	201,798		8%	$	178,756		8%
Real estate – construction, land development & other land loans		310,832		12%		305,228		13%		278,406		12%
Real estate – mortgage – residential (1-4 family) first mortgages		683,367		27%		692,902		29%		694,794		30%
Real estate – mortgage – home equity loans / lines of credit		228,906		9%		221,995		9%		208,778		9%
Real estate – mortgage – commercial and other		1,000,319		40%		945,823		39%		890,158		39%
Installment loans to individuals		50,387		2%		47,666		2%		47,244		2%
Subtotal		2,518,673		100%		2,415,412		100%		2,298,136		100%
Unamortized net deferred loan costs		1,074				873				819
Total non-covered loans	$	2,519,747			$	2,416,285			$	2,298,955

The carrying amount of the covered loans at June 30, 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	$	—		—		—		—		—		—
Real estate – construction, land development & other land loans		—		—		161		162		161		162
Real estate – mortgage – residential (1-4 family) first mortgages		—		33		68,079		78,940		68,079		78,973
Real estate – mortgage – home equity loans / lines of credit		6		14		9,882		11,140		9,888		11,154
Real estate – mortgage – commercial and other		—		—		259		294		259		294
Installment loans to individuals		—		—		—		—		—		—
Total	$	6		47		78,381		90,536		78,387		90,583

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		(7,997	)
Transfers to foreclosed real estate		(1,036	)
Transfer to non-covered loans due to expiration of loss-share agreement		(17,530	)
Net loan (charge-offs) / recoveries		1,784
Accretion of loan discount		1,908
Carrying amount of nonimpaired covered loans at June 30, 2016	$	78,381

As reflected in the table above, the Company accreted $1,908,000 of the loan discount on covered purchased nonimpaired loans into interest income during the first six months of 2016. As of June 30, 2016, there was remaining loan discount of $11,179,000 related to covered 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 June 30, 2016, the Company also had $581,000 of loan discount related to covered 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.

Also, the Company accreted $43,000 of loan discount on non-covered purchased nonimpaired loans into interest income during the first six months of 2016. As of June 30, 2016, there was a remaining loan discount of $208,000 related to non-covered purchased accruing loans, which will be accreted into interest income over the lives of the respective loans. At June 30, 2016, the Company also had $391,000 of loan discount related to non-covered purchased nonaccruing loans, which the Company does not expect will be accreted into income.

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		(3,392	)		(2,253	)		(1,139	)
Change due to loan charge-off		(394	)		(324	)		(70	)
Balance at June 30, 2016	$	1,005			244			761

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 three months ended 2016, the Company received $1,062,000 in payments that exceeded the carrying amount of the related purchased impaired loans, of which $741,000 was recognized as discount accretion loan interest income and $321,000 was recorded as additional loan interest income. For the six month period ended June 30, 2016, the Company received $1,108,000 in payments that exceeded the carrying amount of the related purchased impaired loans, of which $780,000 was recognized as discount accretion loan interest income and $328,000 was recorded as additional loan interest income. No such excess payments were received in the first six months of 2015.

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)	June 30, 2016		December 31, 2015		June 30, 2015

Non-covered nonperforming assets
Nonaccrual loans	$	33,781	$	39,994	$	44,123
Restructured loans - accruing		25,826		28,011		32,059
Accruing loans > 90 days past due		—		—		—
Total non-covered nonperforming loans		59,607		68,005		76,182
Foreclosed real estate		10,221		9,188		9,954
Total non-covered nonperforming assets	$	69,828	$	77,193	$	86,136

Covered nonperforming assets
Nonaccrual loans (1)	$	4,194	$	7,816	$	7,378
Restructured loans - accruing		3,445		3,478		3,910
Accruing loans > 90 days past due		—		—		—
Total covered nonperforming loans		7,639		11,294		11,288
Foreclosed real estate		385		806		1,945
Total covered nonperforming assets	$	8,024	$	12,100	$	13,233

Total nonperforming assets	$	77,852	$	89,293	$	99,369

(1) At June 30, 2016, December 31, 2015, and June 30, 2015, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $5.0 million, $12.3 million, and $12.7 million, respectively.

At June 30, 2016 and 2015, the Company had $1.8 million and $5.1 million in residential mortgage loans in process of foreclosure, respectively.

The following table presents the Company’s nonaccrual loans as of June 30, 2016.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural	$	2,870		—		2,870
Real estate – construction, land development & other land loans		4,154		—		4,154
Real estate – mortgage – residential (1-4 family) first mortgages		17,315		3,841		21,156
Real estate – mortgage – home equity loans / lines of credit		2,406		353		2,759
Real estate – mortgage – commercial and other		6,821		—		6,821
Installment loans to individuals		215		—		215
Total	$	33,781		4,194		37,975

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

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural	$	2,964		—		2,964
Real estate – construction, land development & other land loans		4,652		52		4,704
Real estate – mortgage – residential (1-4 family) first mortgages		18,822		5,007		23,829
Real estate – mortgage – home equity loans / lines of credit		3,142		383		3,525
Real estate – mortgage – commercial and other		10,197		2,374		12,571
Installment loans to individuals		217		—		217
Total	$	39,994		7,816		47,810

The following table presents an analysis of the payment status of the Company’s loans as of June 30, 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	$	195		1,643		2,870		240,154		244,862
Real estate – construction, land development & other land loans		961		203		4,154		305,514		310,832
Real estate – mortgage – residential (1-4 family) first mortgages		2,574		763		17,315		662,715		683,367
Real estate – mortgage – home equity loans / lines of credit		765		221		2,406		225,514		228,906
Real estate – mortgage – commercial and other		1,998		373		6,821		991,127		1,000,319
Installment loans to individuals		368		253		215		49,551		50,387
Total non-covered	$	6,861		3,456		33,781		2,474,575		2,518,673
Unamortized net deferred loan costs										1,074
Total non-covered loans									$	2,519,747

Covered loans	$	172		1,473		4,194		72,548		78,387

Total loans	$	7,033		4,929		37,975		2,547,123		2,598,134

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at June 30, 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	$	999		127		2,964		197,708		201,798
Real estate – construction, land development & other land loans		1,512		429		4,652		298,635		305,228
Real estate – mortgage – residential (1-4 family) first mortgages		12,130		3,212		18,822		658,738		692,902
Real estate – mortgage – home equity loans / lines of credit		1,276		105		3,142		217,472		221,995
Real estate – mortgage – commercial and other		5,591		864		10,197		929,171		945,823
Installment loans to individuals		278		255		217		46,916		47,666
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 and six months ended June 30, 2016.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential (1-4 Family) First Mortgages			Real Estate – Mortgage – Home Equity Lines of Credit			Real Estate – Mortgage – Commercial and Other			Installment Loans to Individuals			Unallo- cated			Total

As of and for the three months ended June 30, 2016

Beginning balance	$	4,679			3,345			7,374			2,267			5,940			1,202			442			25,249
Charge-offs		(57	)		(137	)		(740	)		(285	)		(396	)		(238	)		—			(1,853	)
Recoveries		216			121			61			64			155			140			—			757
Transfer from covered category		56			62			51			12			126			—			—			307
Provisions		(612	)		(492	)		1,114			227			(254	)		376			130			489
Ending balance	$	4,282			2,899			7,860			2,285			5,571			1,480			572			24,949

As of and for the six months ended June 30, 2016

Beginning balance	$	4,742			3,754			7,832			2,893			5,816			1,051			696			26,784
Charge-offs		(734	)		(477	)		(2,691	)		(734	)		(562	)		(518	)		—			(5,716	)
Recoveries		302			211			295			119			285			253			—			1,465
Transfer from covered category		56			62			51			12			126			—			—			307
Provisions		(84	)		(651	)		2,373			(5	)		(94	)		694			(124	)		2,109
Ending balance	$	4,282			2,899			7,860			2,285			5,571			1,480			572			24,949

Ending balances as of June 30, 2016: Allowance for loan losses

Individually evaluated for impairment	$	14			172			1,263			11			478			70			—			2,008

Collectively evaluated for impairment	$	4,268			2,727			6,597			2,274			5,093			1,410			572			22,941

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

Loans receivable as of June 30, 2016:

Ending balance – total	$	244,862			310,832			683,367			228,906			1,000,319			50,387			—			2,518,673
Unamortized net deferred loan costs																							1,074
Total non-covered loans																						$	2,519,747

Ending balances as of June 30, 2016: Loans

Individually evaluated for impairment	$	859			4,614			20,201			383			12,845			72			—			38,974

Collectively evaluated for impairment	$	244,003			306,218			662,959			228,523			986,926			50,315			—			2,478,944

Loans acquired with deteriorated credit quality	$	—			—			207			—			548			—			—			755

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 (1-4 Family) First Mortgages			Real Estate – Mortgage – Home Equity Lines of Credit			Real Estate – Mortgage – Commercial and Other			Installment Loans to Individuals			Unallo- cated		Total

As of and for the year ended December 31, 2015

Beginning balance	$	6,769			8,158			10,136			4,753			6,466			1,916			147		38,345
Charge-offs		(2,908	)		(3,034	)		(4,904	)		(1,054	)		(2,804	)		(2,411	)		—		(17,115	)
Recoveries		831			998			279			121			904			413			—		3,546
Provisions		50			(2,368	)		2,321			(927	)		1,250			1,133			549		2,008
Ending balance	$	4,742			3,754			7,832			2,893			5,816			1,051			696		26,784

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

Individually evaluated for impairment	$	304			241			1,440			321			336			45			—		2,687

Collectively evaluated for impairment	$	4,438			3,513			6,392			2,572			5,480			1,006			696		24,097

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

Loans receivable as of December 31, 2015:

Ending balance – total	$	201,798			305,228			692,902			221,995			945,823			47,666			—		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	$	992			4,898			21,325			758			16,605			76			—		44,654

Collectively evaluated for impairment	$	200,806			300,330			671,577			221,237			928,637			47,590			—		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 and six months ended June 30, 2015.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential (1-4 Family) First Mortgages			Real Estate – Mortgage – Home Equity Lines of Credit			Real Estate – Mortgage – Commercial and Other			Installment Loans to Individuals			Unallo- cated		Total

As of and for the three months ended June 30, 2015

Beginning balance	$	5,738			7,144			9,327			3,983			5,709			1,565			304		33,770
Charge-offs		(1,407	)		(702	)		(818	)		(522	)		(1,026	)		(928	)		—		(5,403	)
Recoveries		256			52			146			37			193			103			—		787
Provisions		800			(1,067	)		(573	)		(115	)		788			376			792		1,001
Ending balance	$	5,387			5,427			8,082			3,383			5,664			1,116			1,096		30,155

As of and for the six months ended June 30, 2015

Beginning balance	$	6,769			8,158			10,136			4,753			6,466			1,916			147		38,345
Charge-offs		(2,301	)		(2,008	)		(2,257	)		(597	)		(2,022	)		(1,578	)		—		(10,763	)
Recoveries		343			318			159			58			395			195			—		1,468
Provisions		576			(1,041	)		44			(831	)		825			583			949		1,105
Ending balance	$	5,387			5,427			8,082			3,383			5,664			1,116			1,096		30,155

Ending balances as of June 30, 2015: Allowance for loan losses

Individually evaluated for impairment	$	88			393			1,458			75			560			46			—		2,620

Collectively evaluated for impairment	$	5,299			5,034			6,624			3,308			5,104			1,070			1,096		27,535

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

Loans receivable as of June 30, 2015:

Ending balance – total	$	178,756			278,406			694,794			208,778			890,158			47,244			—		2,298,136
Unamortized net deferred loan costs																						819
Total non-covered loans																					$	2,298,955

Ending balances as of June 30, 2015: Loans

Individually evaluated for impairment	$	686			5,377			19,847			527			20,454			79			—		46,970

Collectively evaluated for impairment	$	178,070			273,029			674,947			208,251			869,090			47,165			—		2,250,552

Loans acquired with deteriorated credit quality	$	—			—			—			—			614			—			—		614

The following table presents the activity in the allowance for loan losses for covered loans for the three and six months ended June 30, 2016.

($ in thousands)	Covered Loans

As of and for the three months ended June 30, 2016
Beginning balance	$	1,399
Charge-offs		(4	)
Recoveries		756
Transferred to non-covered		(307	)
Provisions (reversal) for loan losses		(770	)
Ending balance	$	1,074

As of and for the six months ended June 30, 2016
Beginning balance	$	1,799
Charge-offs		(245	)
Recoveries		1,959
Transferred to non-covered		(307	)
Provisions (reversal) for loan losses		(2,132	)
Ending balance	$	1,074

Ending balances as of June 30, 2016: Allowance for loan losses

Individually evaluated for impairment	$	443
Collectively evaluated for impairment		631
Loans acquired with deteriorated credit quality		—

Loans receivable as of June 30, 2016:

Ending balance – total	$	78,387

Ending balances as of June 30, 2016: Loans

Individually evaluated for impairment	$	5,500
Collectively evaluated for impairment		72,881
Loans acquired with deteriorated credit quality		6

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 and six months ended June 30, 2015.

($ in thousands)	Covered Loans

As of and for the three months ended June 30, 2015
Beginning balance	$	2,226
Charge-offs		(676	)
Recoveries		545
Provisions (reversal) for loan losses		(160	)
Ending balance	$	1,935

As of and for the six months ended June 30, 2015
Beginning balance	$	2,281
Charge-offs		(1,116	)
Recoveries		1,198
Provisions (reversal) for loan losses		(428	)
Ending balance	$	1,935

Ending balances as of June 30, 2015: Allowance for loan losses

Individually evaluated for impairment	$	455
Collectively evaluated for impairment		1,434
Loans acquired with deteriorated credit quality		46

Loans receivable as of June 30, 2015:

Ending balance – total	$	113,824

Ending balances as of June 30, 2015: Loans

Individually evaluated for impairment	$	6,763
Collectively evaluated for impairment		105,290
Loans acquired with deteriorated credit quality		1,771

The following table presents loans individually evaluated for impairment as of June 30, 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	$	766		845		—		604

Real estate – mortgage – construction, land development & other land loans		3,764		7,420		—		3,863

Real estate – mortgage – residential (1-4 family) first mortgages		9,137		10,634		—		8,690

Real estate – mortgage –home equity loans / lines of credit		145		203		—		139

Real estate – mortgage –commercial and other		8,536		9,717		—		9,669

Installment loans to individuals		2		3		—		2
Total non-covered impaired loans with no allowance	$	22,350		28,822		—		22,967

Total covered impaired loans with no allowance	$	3,000		3,361		—		3,991

Total impaired loans with no allowance recorded	$	25,350		32,183		—		26,958

Non-covered loans with an allowance recorded:

Commercial, financial, and agricultural	$	93		111		14		286

Real estate – mortgage – construction, land development & other land loans		850		873		172		886

Real estate – mortgage – residential (1-4 family) first mortgages		11,271		11,447		1,263		12,196

Real estate – mortgage –home equity loans / lines of credit		238		238		11		420

Real estate – mortgage –commercial and other		4,857		5,036		478		5,490

Installment loans to individuals		70		80		70		82
Total non-covered impaired loans with allowance	$	17,379		17,785		2,008		19,360

Total covered impaired loans with allowance	$	2,506		2,665		443		2,750

Total impaired loans with an allowance recorded	$	19,885		20,450		2,451		22,110

Interest income recorded on non-covered and covered impaired loans during the six months ended June 30, 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	$	360		422		—		194

Real estate – mortgage – construction, land development & other land loans		3,944		7,421		—		4,636

Real estate – mortgage – residential (1-4 family) first mortgages		8,713		9,803		—		7,309

Real estate – mortgage –home equity loans / lines of credit		114		161		—		425

Real estate – mortgage –commercial and other		11,565		13,144		—		16,590

Installment loans to individuals		3		4		—		5
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	$	632		662		304		607

Real estate – mortgage – construction, land development & other land loans		954		976		241		1,585

Real estate – mortgage – residential (1-4 family) first mortgages		12,612		12,768		1,440		12,931

Real estate – mortgage –home equity loans / lines of credit		644		645		321		430

Real estate – mortgage –commercial and other		5,621		5,806		336		4,353

Installment loans to individuals		73		80		45		75
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 regularly 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:

	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.
	5	Existing loans that meet the guidelines for a Risk Graded 6 loan, except the collateral coverage is sufficient to satisfy the debt with no risk of loss under reasonable circumstances.
	P (Pass)	Consumer loans (<$500,000) that are of satisfactory credit quality with borrowers who exhibit good personal credit history, average personal financial strength and moderate debt levels. These loans generally conform to Bank policy, but may include approved mitigated exceptions to the guidelines.
Special Mention:
	6	Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Bank.
Classified:
	7	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.
	8	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.
	9	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.
	F (Fail)	Consumer loans (<$500,000) with a well-defined weakness, such as exceptions of any kind with no mitigating factors, history of paying outside the terms of the note, insufficient income to support the current level of debt, etc.

In the second quarter of 2016, the Company made nonsubstantive changes to the numerical scale of risk grades. Previously, the description for grade 5 noted above was assigned a grade of 9. As a result of the change, most grade 9 loans were assigned a grade of 5 and the numerical grade assignments for the previous grades of 5 and below were moved one row lower in the descriptions. In the tables below, prior periods have been adjusted to be consistent with the presentation for June 30, 2016.

Also during the second quarter of 2016, the Company introduced a pass/fail grade system for smaller balance consumer loans (balances less than $500,000), primarily residential home loans and installment consumer loans. Accordingly, all such consumer loans are no longer graded on a scale of 1-9, but instead are assigned a rating of “pass” or “fail”, with “fail” loans being considered as classified loans. Substantially all of the $25.4 million of non-covered consumer loans and $4.3 million of covered consumer loans that had previously been assigned a grade of “special mention” were assigned a rating of “pass”, which impacts the comparability of the June 30, 2016 table below to prior periods.

The changes noted above had no significant impact on the Company’s allowance for loan loss calculation.

The June 30, 2016 table below also reflects the impact of the previously discussed reclassification of approximately $17.7 million of loans from the covered category to the non-covered category upon the expiration of the loss-share provisions with the FDIC. Approximately $3.8 million of these loans had “classified” grades.

The following table presents the Company’s recorded investment in loans by credit quality indicators as of June 30, 2016.

($ in thousands)
	Pass		Special Mention Loans		Classified Accruing Loans		Classified Nonaccrual Loans		Total
Non-covered loans:
Commercial, financial, and agricultural	$	235,000		2,855		4,137		2,870		244,862
Real estate – construction, land development & other land loans		288,017		9,781		8,880		4,154		310,832
Real estate – mortgage – residential (1-4 family) first mortgages		620,516		17,020		28,516		17,315		683,367
Real estate – mortgage – home equity loans / lines of credit		220,230		1,373		4,897		2,406		228,906
Real estate – mortgage – commercial and other		948,844		29,744		14,910		6,821		1,000,319
Installment loans to individuals		49,583		352		237		215		50,387
Total	$	2,362,190		61,125		61,577		33,781		2,518,673
Unamortized net deferred loan costs										1,074
Total non-covered loans									$	2,519,747

Total covered loans	$	58,153		1,745		14,295		4,194	$	78,387

Total loans	$	2,420,343		62,870		75,872		37,975	$	2,598,134

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

($ in thousands)
	Pass		Special Mention Loans		Classified Accruing Loans		Classified Nonaccrual Loans		Total
Non-covered loans:
Commercial, financial, and agricultural	$	191,905		3,453		3,476		2,964		201,798
Real estate – construction, land development & other land loans		277,300		13,296		9,980		4,652		305,228
Real estate – mortgage – residential (1-4 family) first mortgages		609,880		34,407		29,793		18,822		692,902
Real estate – mortgage – home equity loans / lines of credit		207,335		7,045		4,473		3,142		221,995
Real estate – mortgage – commercial and other		889,871		32,022		13,733		10,197		945,823
Installment loans to individuals		46,209		776		464		217		47,666
Total	$	2,222,500		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	$	71,398		7,423		16,004		7,816	$	102,641

Total loans	$	2,293,898		98,422		77,923		47,810	$	2,518,926

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 June 30, 2016 and 2015.

($ in thousands)	For the three months ended June 30, 2016						For the three months ended June 30, 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		—	$	—	$	—		1		8		8
Real estate – construction, land development & other land loans		—		—		—		—		—		—
Real estate – mortgage – residential (1-4 family) first mortgages		—		—		—		1		152		152
Real estate – mortgage – home equity loans / lines of credit		—		—		—		—		—		—
Real estate – mortgage – commercial and other		—		—		—		—		—		—
Installment loans to individuals		—		—		—		—		—		—

Non-covered TDRs – Nonaccrual
Commercial, financial, and agricultural		—		—		—		—		—		—
Real estate – construction, land development & other land loans		—		—		—		—		—		—
Real estate – mortgage – residential (1-4 family) first mortgages		—		—		—		—		—		—
Real estate – mortgage – home equity loans / lines of credit		—		—		—		—		—		—
Real estate – mortgage – commercial and other		—		—		—		—		—		—
Installment loans to individuals		—		—		—		—		—		—
Total non-covered TDRs arising during period		—		—		—		2		160		160

Total covered TDRs arising during period– Accruing		—	$	—	$	—		—	$	—	$	—
Total covered TDRs arising during period – Nonaccrual		—		—		—		—		—		—
Total TDRs arising during period		—	$	—	$	—		2	$	160	$	160

The following table presents information related to loans modified in a troubled debt restructuring during the six months ended June 30, 2016 and 2015.

($ in thousands)	For the six months ended June 30, 2016						For the six months ended June 30, 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		—	$	—	$	—		1	$	8	$	8
Real estate – construction, land development & other land loans		—		—		—		—		—		—
Real estate – mortgage – residential (1-4 family) first mortgages		—		—		—		2		265		265
Real estate – mortgage – home equity loans / lines of credit		—		—		—		—		—		—
Real estate – mortgage – commercial and other		—		—		—		1		51		51
Installment loans to individuals		—		—		—		—		—		—

Non-covered TDRs – Nonaccrual
Commercial, financial, and agricultural		—		—		—		—		—		—
Real estate – construction, land development & other land loans		—		—		—		1		1		1
Real estate – mortgage – residential (1-4 family) first mortgages		—		—		—		3		304		304
Real estate – mortgage – home equity loans / lines of credit		—		—		—		—		—		—
Real estate – mortgage – commercial and other		—		—		—		—		—		—
Installment loans to individuals		—		—		—		—		—		—
Total non-covered TDRs arising during period		—		—		—		8		629		629

Total covered TDRs arising during period– Accruing		—	$	—	$	—		2	$	139	$	139
Total covered TDRs arising during period – Nonaccrual		—		—		—		—		—		—
Total TDRs arising during period		—	$	—	$	—		10	$	768	$	768

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended June 30, 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 June 30, 2016				For the three months ended June 30, 2015
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment

Non-covered accruing TDRs that subsequently defaulted
Commercial, financial, and agricultural		—	$	—		1	$	7

Total non-covered TDRs that subsequently defaulted		—	$	—		1	$	7

Total accruing covered TDRs that subsequently defaulted		—	$	—		—	$	—

Total accruing TDRs that subsequently defaulted		—	$	—		1	$	7

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the six months ended June 30, 2016 and 2015 are presented in the table below.

($ in thousands)	For the six months ended June 30, 2016				For the six months ended June 30, 2015
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment

Non-covered accruing TDRs that subsequently defaulted
Commercial, financial, and agricultural		—	$	—		1	$	7
Real estate – mortgage – residential (1–4 family first mortgages)		—				1		34
Real estate – mortgage – commercial and other		1		21		—		—

Total non-covered TDRs that subsequently defaulted		1	$	21		2	$	41

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

Total accruing TDRs that subsequently defaulted		2	$	65		2	$	41