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Loans and Asset Quality Information

9 Months Ended

Sep. 30, 2016

Loans and Asset Quality Information [Abstract]

Note 8 – Loans and Asset Quality Information

Prior to July 1, 2016, Company’s banking subsidiary, First Bank, had certain loans and foreclosed real estate that were covered by loss share agreements between the FDIC and First Bank which afforded 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 FDIC-assisted purchase transactions. On July 1, 2014, the loss share provisions associated with non-single family assets related to the 2009 failed bank acquisition of Cooperative Bank expired. On April 1, 2016, the loss share provisions associated with non-single family assets related to the 2011 failed bank acquisition of The Bank of Asheville expired. Effective July 1, 2016, the Company terminated all of the loss share agreements with the FDIC such that all future losses and recoveries on loans and foreclosed real estate associated with the failed banks acquired through FDIC-assisted transactions will be borne solely by First Bank. As a result of the termination of the agreements, the Company recorded indemnification asset expense of $5.7 million during the three months ended September 30, 2016, which primarily related to the write-off of the remaining indemnification asset associated with the agreements.

In the information presented, the term “covered” is used to describe assets that were included in FDIC loss share agreements, while the term “non-covered” refers to the Company’s legacy assets, which are not included in any type of loss share arrangement. As discussed previously, all loss share agreements were terminated effective July 1, 2016 and thus the entire loan portfolio is now classified as non-covered. Certain prior period disclosures will continue to present the breakout of the loan portfolio between covered and non-covered.

As a result of the termination of all loss share agreements, the remaining balances associated with those loans and foreclosed real estate were reclassified from the covered portfolio to the non-covered portfolio. Balances related to the expired agreement and the termination of all remaining agreements as of the respective dates is as follows:

	Bank of Asheville non- single family agreement termination April 1, 2016		Remaining loss share agreement terminations July 1, 2016
Carrying value of total covered loans transferred to non-covered	$	17,737		78,387
Covered nonaccrual loans transferred to non-covered		2,785		4,194
Covered foreclosed real estate transferred to non-covered		1,165		385
Allowance for loan losses associated with covered loans transferred to allowance for non-covered loans		307		1,074

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

($ in thousands)	September 30, 2016				December 31, 2015				September 30, 2015
	Amount		Percentage		Amount		Percentage		Amount		Percentage
All loans:

Commercial, financial, and agricultural	$	248,877		9%	$	202,671		8%	$	199,630		8%
Real estate – construction, land development & other land loans		327,863		12%		308,969		12%		294,426		12%
Real estate – mortgage – residential (1-4 family) first mortgages		756,880		29%		768,559		31%		770,691		31%
Real estate – mortgage – home equity loans / lines of credit		239,049		9%		232,601		9%		224,639		9%
Real estate – mortgage – commercial and other		1,026,328		39%		957,587		38%		944,432		38%
Installment loans to individuals		52,264		2%		47,666		2%		47,120		2%
Subtotal		2,651,261		100%		2,518,053		100%		2,480,938		100%
Unamortized net deferred loan costs		198				873				765
Total loans	$	2,651,459			$	2,518,926			$	2,481,703

The following is a summary of the major categories of loans outstanding allocated to the non-covered and covered loan portfolios for periods when the FDIC loss share agreements were in effect. There were no covered loans at September 30, 2016:

($ in thousands)	December 31, 2015						September 30, 2015
	Non-covered		Covered		Total		Non-covered		Covered		Total

Commercial, financial, and agricultural	$	201,798		873		202,671		198,624		1,006		199,630
Real estate – construction, land development & other land loans		305,228		3,741		308,969		290,465		3,961		294,426
Real estate – mortgage – residential (1-4 family) first mortgages		692,902		75,657		768,559		692,431		78,260		770,691
Real estate – mortgage – home equity loans / lines of credit		221,995		10,606		232,601		213,435		11,204		224,639
Real estate – mortgage – commercial and other		945,823		11,764		957,587		932,254		12,178		944,432
Installment loans to individuals		47,666		—		47,666		47,120		—		47,120
Subtotal		2,415,412		102,641		2,518,053		2,374,329		106,609		2,480,938
Unamortized net deferred loan costs		873		—		873		765		—		765
Total	$	2,416,285		102,641		2,518,926		2,375,094		106,609		2,481,703

As a result of the termination of the FDIC loss share agreements during the third quarter of 2016, there were no covered loans at September 30, 2016. The follow presents the carrying amount of the covered loans at December 31, 2015 detailed by impaired and nonimpaired purchased loans (as determined on the date of the acquisition):

($ 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. All balances of covered loans were transferred to non-covered as of the termination of the loss share agreements.

($ 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 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	)
Net loan recoveries		1,784
Accretion of loan discount		1,908
Transfer to non-covered loans due to expiration of loss-share agreement, April 1, 2016		(17,530	)
Transfer to non-covered loans due to termination of loss-share agreements, July 1, 2016		(78,381	)
Carrying amount of nonimpaired covered loans at September 30, 2016	$	—

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 2016 prior to the termination of the loss share agreements. There was no accretion or other activity on covered loans in the quarter ended September 30, 2016 with the exception of the transfer of the balance of covered loans to non-covered status. The Company also accreted $1,645,000 into interest income of loan discount on non-covered nonimpaired purchased loans during the first nine months of 2016.

As of September 30, 2016, there was a remaining loan discount of $12,358,000 related to purchased accruing loans, which will be accreted into interest income over the lives of the respective loans. At September 30, 2016, the Company also had $888,000 of loan discount related to 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 were previously 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		(3,400	)		(2,244	)		(1,156	)
Change due to loan charge-off		(428	)		(358	)		(70	)
Balance at September 30, 2016	$	963			219			744

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. There were no excess payments received during the three months ended September 30, 2016. For the nine month period ended September 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. For the three and nine months ended September 30, 2015, payments received that exceeded the carrying amount of the related purchased impaired loans were insignificant.

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)	September 30, 2016		December 31, 2015		September 30, 2015

Nonperforming assets
Nonaccrual loans	$	32,796		47,810		47,720
Restructured loans - accruing		27,273		31,489		33,075
Accruing loans > 90 days past due		—		—		—
Total nonperforming loans		60,069		79,299		80,795
Foreclosed real estate		10,103		9,994		10,873
Total nonperforming assets	$	70,172		89,293		91,668

Total covered nonperforming assets included above (1)	$	—		12,100		10,767

(1) All FDIC loss share agreements were terminated effective July 1, 2016 and, accordingly, assets previously covered under those agreements become non-covered on that date.

At September 30, 2016 and 2015, the Company had $1.7 million and $3.0 million in residential mortgage loans in process of foreclosure, respectively.

The following is a summary the Company’s nonaccrual loans by major categories.

($ in thousands)	September 30, 2016		December 31, 2015		September 30, 2015
Commercial, financial, and agricultural	$	2,253		2,964		2,852
Real estate – construction, land development & other land loans		3,858		4,704		5,434
Real estate – mortgage – residential (1-4 family) first mortgages		17,989		23,829		25,206
Real estate – mortgage – home equity loans / lines of credit		2,441		3,525		2,472
Real estate – mortgage – commercial and other		6,151		12,571		11,398
Installment loans to individuals		104		217		358
Total	$	32,796		47,810		47,720

Total covered nonperforming assets included above	$	—		7,816		5,373

The following table presents an analysis of the payment status of the Company’s loans as of September 30, 2016.

($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual Loans		Current		Total Loans Receivable

Commercial, financial, and agricultural	$	111		90		2,253		246,423		248,877
Real estate – construction, land development & other land loans		1,117		338		3,858		322,550		327,863
Real estate – mortgage – residential (1-4 family) first mortgages		2,835		1,052		17,989		735,004		756,880
Real estate – mortgage – home equity loans / lines of credit		670		65		2,441		235,873		239,049
Real estate – mortgage – commercial and other		3,670		261		6,151		1,016,246		1,026,328
Installment loans to individuals		345		258		104		51,557		52,264
Total	$	8,748		2,064		32,796		2,607,653		2,651,261
Unamortized net deferred loan costs										198
Total loans									$	2,651,459

The Company had no covered loans and no loans that were past due greater than 90 days and accruing interest at September 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

Commercial, financial, and agricultural	$	999		127		2,964		198,581		202,671
Real estate – construction, land development & other land loans		1,512		429		4,704		302,324		308,969
Real estate – mortgage – residential (1-4 family) first mortgages		15,443		3,614		23,829		725,673		768,559
Real estate – mortgage – home equity loans / lines of credit		1,276		105		3,525		227,695		232,601
Real estate – mortgage – commercial and other		5,591		864		12,571		938,561		957,587
Installment loans to individuals		278		255		217		46,916		47,666
Total loans	$	25,099		5,394		47,810		2,439,750		2,518,053
Unamortized net deferred loan costs										873
Total loans									$	2,518,926

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

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

As previously discussed in Note 4 – Acquisitions and Divestures, in connection with the branch exchange effective July 15, 2016, the Company acquired $152.2 million in performing loans and sold $150.6 million in performing loans. Allowance for loan losses totaling $1.0 million associated with loans sold were removed from the allowance as of the date of sale.

The following table presents the activity in the allowance for loan losses loans for the three and nine months ended September 30, 2016. There were no covered loans at September 30, 2016 and all reserves associated with previously covered loans have been transferred to the non-covered allowance.

($ 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			Covered			Total

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

Beginning balance	$	4,282			2,899			7,860			2,285			5,571			1,480			572			1,074			26,023
Charge-offs		(495	)		(161	)		(692	)		(196	)		(288	)		(223	)		—			—			(2,055	)
Recoveries		252			588			377			69			317			55			—			—			1,658
Transfer from covered status		—			3			788			281			1			—			1			(1,074	)		—
Removed due to branch loan sale		(263	)		(39	)		(347	)		(110	)		(228	)		(63	)		(1	)		—			(1,051	)
Provisions		755			(612	)		(492	)		54			(165	)		(38	)		498			—			—
Ending balance	$	4,531			2,678			7,494			2,383			5,208			1,211			1,070			—			24,575

As of and for the nine months ended September 30, 2016

Beginning balance	$	4,742			3,754			7,832			2,893			5,816			1,051			696			1,799			28,583
Charge-offs		(1,229	)		(638	)		(3,383	)		(930	)		(850	)		(741	)		—			(244	)		(8,015	)
Recoveries		554			799			672			188			602			308			—			1,958			5,081
Transfer from covered status		56			65			839			293			127			—			1			(1,381	)		—
Removed due to branch loan sale		(263	)		(39	)		(347	)		(110	)		(228	)		(63	)		1			—			(1,051	)
Provisions		671			(1,263	)		1,881			49			(259	)		656			374			(2,132	)		(23	)
Ending balance	$	4,531			2,678			7,494			2,383			5,208			1,211			1,070			—			24,575

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

Individually evaluated for impairment	$	9			169			1,306			5			444			—			—			—			1,933
Collectively evaluated for impairment	$	4,522			2,509			6,188			2,372			4,764			1,211			1,070			—			22,636
Loans acquired with deteriorated credit quality	$	—			—			—			6			—			—			—			—			6

Loans receivable as of September 30, 2016:

Ending balance – total	$	248,877			327,863			756,880			239,049			1,026,328			52,264			—			—			2,651,261
Unamortized net deferred loan costs																										198
Total loans																									$	2,651,459

Ending balances as of September 30, 2016: Loans

Individually evaluated for impairment	$	1,732			4,181			21,611			310			11,291			1			—			—			39,126
Collectively evaluated for impairment	$	247,145			323,682			735,062			238,733			1,014,506			52,263			—			—			2,611,391
Loans acquired with deteriorated credit quality	$	—			—			207			6			531			—			—			—			744

The following table presents the activity in the allowance for loan losses for non-covered and 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 Non- Covered			Total Covered

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			2,281
Charge-offs		(2,908	)		(3,034	)		(4,904	)		(1,054	)		(2,804	)		(2,411	)		—		(17,115	)		(1,316	)
Recoveries		831			998			279			121			904			413			—		3,546			3,622
Provisions		50			(2,368	)		2,321			(927	)		1,250			1,133			549		2,008			(2,788	)
Ending balance	$	4,742			3,754			7,832			2,893			5,816			1,051			696		26,784			1,799

Ending balances as of December 31, 2015: Allowance for loan losses
Individually evaluated for impairment	$	304			241			1,440			321			336			45			—		2,687			554
Collectively evaluated for impairment	$	4,438			3,513			6,392			2,572			5,480			1,006			696		24,097			1,175
Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—		—			70

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			102,641
Unamortized net deferred loan costs																						873			—
Total non-covered loans																						2,416,285			102,641

Ending balances as of December 31, 2015: Loans
Individually evaluated for impairment	$	992			4,898			21,325			758			16,605			76			—		44,654			7,055
Collectively evaluated for impairment	$	200,806			300,330			671,577			221,237			928,637			47,590			—		2,370,177			94,197
Loans acquired with deteriorated credit quality	$	—			—			—			—			581			—			—		581			1,389

The following table presents the activity in the allowance for loan losses for non-covered and covered loans for the three and nine months ended September 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 Non- Covered			Total Covered

As of and for the three months ended September 30, 2015
Beginning balance	$	5,387			5,427			8,082			3,383			5,664			1,116			1,096		30,155			1,935
Charge-offs		(473	)		(642	)		(1,692	)		(129	)		(289	)		(419	)		—		(3,644	)		(84	)
Recoveries		354			626			82			47			150			118			—		1,377			1,730
Provisions		(187	)		(1,088	)		1,275			(498	)		226			223			316		267			(1,681	)
Ending balance	$	5,081			4,323			7,747			2,803			5,751			1,038			1,412		28,155			1,900

As of and for the nine months ended September 30, 2015
Beginning balance	$	6,769			8,158			10,136			4,753			6,466			1,916			147		38,345			2,281
Charge-offs		(2,774	)		(2,650	)		(3,949	)		(726	)		(2,311	)		(1,997	)		—		(14,407	)		(1,200	)
Recoveries		697			944			241			105			545			313			—		2,845			2,928
Provisions		389			(2,129	)		1,319			(1,329	)		1,051			806			1,265		1,372			(2,109	)
Ending balance	$	5,081			4,323			7,747			2,803			5,751			1,038			1,412		28,155			1,900

Ending balances as of September 30, 2015: Allowance for loan losses
Individually evaluated for impairment	$	93			270			1,502			46			456			42			—		2,409			466
Collectively evaluated for impairment	$	4,988			4,053			6,245			2,757			5,295			996			1,412		25,746			1,391
Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—		—			43

Loans receivable as of September 30, 2015:
Ending balance – total	$	198,624			290,465			692,431			213,435			932,254			47,120			—		2,374,329			106,609
Unamortized net deferred loan costs																						765			—
Total non-covered loans																						2,375,094			106,609

Ending balances as of September 30, 2015: Loans
Individually evaluated for impairment	$	909			5,126			20,857			435			18,521			77			—		45,925			5,167
Collectively evaluated for impairment	$	197,715			285,339			671,574			213,000			913,136			47,043			—		2,327,807			99,892
Loans acquired with deteriorated credit quality	$	—			—			—			—			597			—			—		597			1,520

The following table presents loans individually evaluated for impairment as of September 30, 2016.

($ in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Loans with no related allowance recorded:

Commercial, financial, and agricultural	$	1,674		1,796		—		872
Real estate – mortgage – construction, land development & other land loans		3,397		4,703		—		3,746
Real estate – mortgage – residential (1-4 family) first mortgages		10,321		12,522		—		9,098
Real estate – mortgage –home equity loans / lines of credit		143		202		—		140
Real estate – mortgage –commercial and other		6,103		7,049		—		8,777
Installment loans to individuals		1		2		—		2
Total impaired loans with no allowance	$	21,639		26,274		—		22,635

Loans with an allowance recorded:

Commercial, financial, and agricultural	$	58		110		9		229
Real estate – mortgage – construction, land development & other land loans		784		800		169		861
Real estate – mortgage – residential (1-4 family) first mortgages		11,497		11,725		1,306		12,021
Real estate – mortgage –home equity loans / lines of credit		173		179		11		358
Real estate – mortgage –commercial and other		5,719		5,887		444		5,548
Installment loans to individuals		—		—		—		61
Total impaired loans with allowance	$	18,231		18,701		1,939		19,078

Interest income recorded on impaired loans during the nine months ended September 30, 2016 was insignificant.

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

($ in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no related allowance recorded:

Commercial, financial, and agricultural	$	360		422		—		235
Real estate – mortgage – construction, land development & other land loans		3,944		7,421		—		4,651
Real estate – mortgage – residential (1-4 family) first mortgages		12,346		14,644		—		11,258
Real estate – mortgage –home equity loans / lines of credit		121		175		—		505
Real estate – mortgage –commercial and other		13,156		16,818		—		18,112
Installment loans to individuals		3		4		—		5
Total impaired loans with no allowance	$	29,930		39,484		—		34,766

Total covered impaired loans with no allowance included above	$	5,231		8,529		—		5,607

Impaired loans with an allowance recorded:

Commercial, financial, and agricultural	$	676		709		348		616
Real estate – mortgage – construction, land development & other land loans		954		976		241		1,980
Real estate – mortgage – residential (1-4 family) first mortgages		15,285		15,691		1,912		15,636
Real estate – mortgage –home equity loans / lines of credit		667		678		344		430
Real estate – mortgage –commercial and other		6,094		6,279		421		4,950
Installment loans to individuals		73		80		45		111
Total impaired loans with allowance	$	23,749		24,413		3,311		23,723

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

Interest income recorded on 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	Loans that represent above average risk due to minor weaknesses and warrant closer scrutiny by management. Collateral is generally required and felt to provide reasonable coverage with realizable liquidation values in normal circumstances. Repayment performance is satisfactory.
	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 September 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. As of the implementation of the revised grade definitions, there were approximately $29.7 million of consumer loans that had previously been assigned grade of “special mention” and were assigned a rating of “pass”, which impacts the comparability of the September 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 following table presents the Company’s recorded investment in loans by credit quality indicators as of September 30, 2016.

($ in thousands)
	Pass		Special Mention Loans		Classified Accruing Loans		Classified Nonaccrual Loans		Total

Commercial, financial, and agricultural	$	233,267		10,062		3,295		2,253		248,877
Real estate – construction, land development & other land loans		305,881		9,693		8,431		3,858		327,863
Real estate – mortgage – residential (1-4 family) first mortgages		684,241		16,997		37,653		17,989		756,880
Real estate – mortgage – home equity loans / lines of credit		226,103		1,394		9,111		2,441		239,049
Real estate – mortgage – commercial and other		977,505		27,950		14,722		6,151		1,026,328
Installment loans to individuals		51,561		349		250		104		52,264
Total	$	2,478,558		66,445		73,462		32,796		2,651,261
Unamortized net deferred loan costs										198
Total loans										2,651,459

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

Commercial, financial, and agricultural	$	192,454		3,733		3,520		2,964		202,671
Real estate – construction, land development & other land loans		280,647		13,489		10,129		4,704		308,969
Real estate – mortgage – residential (1-4 family) first mortgages		664,618		39,895		40,217		23,829		768,559
Real estate – mortgage – home equity loans / lines of credit		212,391		7,374		9,311		3,525		232,601
Real estate – mortgage – commercial and other		897,579		33,155		14,282		12,571		957,587
Installment loans to individuals		46,209		776		464		217		47,666
Total	$	2,293,898		98,422		77,923		47,810		2,518,053
Unamortized net deferred loan costs										873
Total loans										2,518,926

Total covered loans included above	$	71,398		7,423		16,004		7,816		102,641

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 September 30, 2016 and 2015.

($ in thousands)	For the three months ended September 30, 2016						For the three months ended September 30, 2015
	Number of Contracts		Pre- Modification Restructured Balances		Post- Modification Restructured Balances		Number of Contracts		Pre- Modification Restructured Balances		Post- Modification Restructured Balances
TDRs – Accruing
Commercial, financial, and agricultural		1	$	1,071	$	1,071		—	$	—	$	—
Real estate – construction, land development & other land loans		—		—		—		1		235		235
Real estate – mortgage – residential (1-4 family) first mortgages		—		—		—		—		—		—
Real estate – mortgage – home equity loans / lines of credit		—		—		—		2		411		411
Real estate – mortgage – commercial and other		—		—		—		—		—		—
Installment loans to individuals		—		—		—		—		—		—

TDRs – Nonaccrual
Commercial, financial, and agricultural		—		—		—		—		—		—
Real estate – construction, land development & other land loans		—		—		—		2		495		495
Real estate – mortgage – residential (1-4 family) first mortgages		—		—		—		1		95		95
Real estate – mortgage – home equity loans / lines of credit		—		—		—		—		—		—
Real estate – mortgage – commercial and other		—		—		—		—		—		—
Installment loans to individuals		—		—		—		—		—		—

Total TDRs arising during period		1	$	1,071	$	1,071		6	$	1,236	$	1,236

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

($ in thousands)	For the nine months ended September 30, 2016						For the nine months ended September 30, 2015
	Number of Contracts		Pre- Modification Restructured Balances		Post- Modification Restructured Balances		Number of Contracts		Pre- Modification Restructured Balances		Post- Modification Restructured Balances
TDRs – Accruing
Commercial, financial, and agricultural		1	$	1,071	$	1,071		2	$	52	$	52
Real estate – construction, land development & other land loans		—		—		—		1		235		235
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		—		—		—		4		557		557
Installment loans to individuals		—		—		—		—		—		—

TDRs – Nonaccrual
Commercial, financial, and agricultural		—		—		—		—		—		—
Real estate – construction, land development & other land loans		—		—		—		3		496		496
Real estate – mortgage – residential (1-4 family) first mortgages		—		—		—		4		399		399
Real estate – mortgage – home equity loans / lines of credit		—		—		—		—		—		—
Real estate – mortgage – commercial and other		—		—		—		—		—		—
Installment loans to individuals		—		—		—		—		—		—

Total TDRs arising during period		1	$	1,071	$	1,071		16	$	2,004	$	2,004

Total covered TDRs arising during period included above		—		—		—		2	$	139	$	139

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

Accruing TDRs that subsequently defaulted
Real estate – mortgage – residential (1-4 family first mortgages)		—	$	—		1	$	152

Total accruing TDRs that subsequently defaulted		—	$	—		1	$	152

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

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

Accruing TDRs that subsequently defaulted
Commercial, financial, and agricultural		1	$	44		1	$	7
Real estate – mortgage – residential (1-4 family first mortgages)		—		—		2		186
Real estate – mortgage – commercial and other		1		21		—		—

Total accruing TDRs that subsequently defaulted		2	$	65		3	$	193
Total covererd accruing TDRs that subsequently defaulted included above		1	$	44		—	$	—