Note

Credit Quality

The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings

may

be upgraded or downgraded to reflect current information identified during the loan review process. The general characteristics of each risk grade are as follows:

●

Pass -- This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity, leverage, and industry conditions.

●

Special Mention -- This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are

not

corrected, the prospect of repayment

may

worsen.

●

Substandard -- This grade is assigned to loans that have well defined weaknesses that

may

make payment default, or principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms.

●

Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.

●

Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does

not

imply that the asset has

recovery or salvage value, but simply means that it is

not

practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery

may

be realized in the future.

The following tables present the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage,

80%;

therefore, covered loans are disclosed separately.

	June 30, 2017
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	55,503	$	791	$	2,575	$	-	$	-	$	58,869
Commercial and industrial		84,033		1,496		3,926		-		-		89,455
Multi-family residential		134,364		5,929		935		-		-		141,228
Single family non-owner occupied		130,245		6,832		5,073		-		-		142,150
Non-farm, non-residential		584,473		10,271		8,326		202		-		603,272
Agricultural		5,708		250		128		-		-		6,086
Farmland		25,542		642		2,416		-		-		28,600
Consumer real estate loans
Home equity lines		100,238		781		1,441		-		-		102,460
Single family owner occupied		473,303		4,109		23,170		-		-		500,582
Owner occupied construction		46,240		-		234		400		-		46,874
Consumer and other loans
Consumer loans		72,192		25		172		2		-		72,391
Other		4,296		-		-		-		-		4,296
Total non-covered loans		1,716,137		31,126		48,396		604		-		1,796,263
Covered loans
Commercial loans
Construction, development, and other land		2,418		248		894		-		-		3,560
Commercial and industrial		592		-		11		-		-		603
Single family non-owner occupied		917		-		103		-		-		1,020
Non-farm, non-residential		2,819		490		459		-		-		3,768
Agricultural		24		-		-		-		-		24
Farmland		118		-		258		-		-		376
Consumer real estate loans
Home equity lines		13,265		16,760		793		-		-		30,818
Single family owner occupied		3,730		878		1,068		-		-		5,676
Total covered loans		23,883		18,376		3,586		-		-		45,845
Total loans	$	1,740,020	$	49,502	$	51,982	$	604	$	-	$	1,842,108

	December 31, 2016
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	55,188	$	980	$	780	$	-	$	-	$	56,948
Commercial and industrial		87,581		3,483		1,137		-		3		92,204
Multi-family residential		126,468		6,992		768		-		-		134,228
Single family non-owner occupied		131,934		5,466		5,565		-		-		142,965
Non-farm, non-residential		579,134		10,236		9,102		202		-		598,674
Agricultural		5,839		164		-		-		-		6,003
Farmland		28,887		1,223		1,619		-		-		31,729
Consumer real estate loans
Home equity lines		104,033		871		1,457		-		-		106,361
Single family owner occupied		475,402		4,636		20,381		472		-		500,891
Owner occupied construction		43,833		-		702		-		-		44,535
Consumer and other loans
Consumer loans		77,218		11		216		-		-		77,445
Other		3,971		-		-		-		-		3,971
Total non-covered loans		1,719,488		34,062		41,727		674		3		1,795,954
Covered loans
Commercial loans
Construction, development, and other land		2,768		803		999		-		-		4,570
Commercial and industrial		882		-		13		-		-		895
Multi-family residential		-		-		8		-		-		8
Single family non-owner occupied		796		63		103		-		-		962
Non-farm, non-residential		6,423		537		552		-		-		7,512
Agricultural		25		-		-		-		-		25
Farmland		132		-		265		-		-		397
Consumer real estate loans
Home equity lines		14,283		20,763		771		-		-		35,817
Single family owner occupied		4,601		928		1,200		-		-		6,729
Consumer and other loans
Consumer loans		79		-		-		-		-		79
Total covered loans		29,989		23,094		3,911		-		-		56,994
Total loans	$	1,749,477	$	57,156	$	45,638	$	674	$	3	$	1,852,948

The Company identifies loans for potential impairment through a variety of means, including, but

not

limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If the Company determines that it is probable all principal and interest amounts contractually due will

not

be collected, the loan is generally deemed impaired.

The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the dates indicated:

	June 30, 2017						December 31, 2016
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Amounts in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with no related allowance
Commercial loans
Construction, development, and other land	$	9	$	9	$	-	$	33	$	35	$	-
Commercial and industrial		316		335		-		346		383		-
Multi-family residential		543		639		-		294		369		-
Single family non-owner occupied		3,280		3,475		-		3,084		3,334		-
Non-farm, non-residential		3,308		4,047		-		3,829		4,534		-
Agricultural		128		128		-		-		-		-
Farmland		1,000		1,042		-		1,161		1,188		-
Consumer real estate loans
Home equity lines		1,039		1,113		-		913		968		-
Single family owner occupied		15,970		17,130		-		11,779		12,630		-
Owner occupied construction		234		234		-		573		589		-
Consumer and other loans
Consumer loans		42		44		-		62		103		-
Total impaired loans with no allowance		25,869		28,196		-		22,074		24,133		-

Impaired loans with a related allowance
Commercial loans
Construction, development, and other land		-		-		-		-		-		-
Commercial and industrial		2,324		2,324		185		-		-		-
Single family non-owner occupied		344		344		61		351		351		31
Non-farm, non-residential		865		874		124		-		-		-
Farmland		410		418		50		430		430		18
Consumer real estate loans
Home equity lines		-		-		-		-		-		-
Single family owner occupied		3,855		3,858		667		4,118		4,174		770
Total impaired loans with an allowance		7,798		7,818		1,087		4,899		4,955		819
Total impaired loans (1)	$	33,667	$	36,014	$	1,087	$	26,973	$	29,088	$	819

____________________________________

(

)

Includes loans totaling

$17.09

million as of

June 30, 2017,

and

$16.89

million as of

December 31, 2016,

that do

not

meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment

The following table presents the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the periods indicated:

	Three Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
(Amounts in thousands)	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	-	$	10	$	-	$	571	$	-	$	11	$	-	$	370
Commercial and industrial		1		321		4		1,039		3		325		4		593
Multi-family residential		3		557		-		299		3		457		-		184
Single family non-owner occupied		34		3,308		-		3,588		77		3,317		16		2,803
Non-farm, non-residential		21		3,330		171		9,893		25		3,027		242		10,814
Agricultural		-		128		-		-		-		127		-		-
Farmland		-		1,003		4		208		-		1,005		4		176
Consumer real estate loans
Home equity lines		5		1,052		8		1,450		20		1,047		15		1,398
Single family owner occupied		93		15,943		109		13,063		180		14,074		163		12,067
Owner occupied construction		2		234		2		583		5		233		5		412
Consumer and other loans
Consumer loans		2		43		-		38		2		46		-		36
Total impaired loans with no related allowance		161		25,929		298		30,732		315		23,669		449		28,853

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		-		-		-		-		-		214		-		-
Commercial and industrial		38		2,352		-		-		53		1,332		-		-
Single family non-owner occupied		5		344		6		677		13		344		13		517
Non-farm, non-residential		5		867		82		5,307		15		1,011		170		5,333
Farmland		-		411		-		-		-		205		-		-
Consumer real estate loans
Home equity lines		-		-		-		-		-		209		-		-
Single family owner occupied		33		3,393		29		4,550		68		4,883		67		4,755
Owner occupied construction		-		-		-		-		-		-		-		173
Total impaired loans with a related allowance		81		7,367		117		10,534		149		8,198		250		10,778
Total impaired loans	$	242	$	33,296	$	415	$	41,266	$	464	$	31,867	$	699	$	39,631

The following tables provide information on impaired PCI loan pools as of and for the dates indicated:

	June 30, 2017		December 31, 2016
(Amounts in thousands, except impaired loan pools)
Unpaid principal balance	$	1,048	$	1,086
Recorded investment		1,042		1,085
Allowance for loan losses related to PCI loan pools		4		12

Impaired PCI loan pools		1		1

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
(Amounts in thousands)
Interest income recognized	$	10	$	35	$	20	$	118
Average recorded investment		1,053		2,666		1,064		2,728

The Company generally places a loan on nonaccrual status when it is

days or more past due. PCI loans are generally

not

classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. The following table presents nonaccrual loans, by loan class, as of the dates indicated:

	June 30, 2017						December 31, 2016
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	131	$	17	$	148	$	72	$	32	$	104
Commercial and industrial		204		-		204		332		13		345
Multi-family residential		543		11		554		294		-		294
Single family non-owner occupied		1,350		21		1,371		1,242		24		1,266
Non-farm, non-residential		3,726		27		3,753		3,295		30		3,325
Agricultural		128		-		128		-		-		-
Farmland		1,410		-		1,410		1,591		-		1,591
Consumer real estate loans
Home equity lines		838		280		1,118		705		400		1,105
Single family owner occupied		11,780		90		11,870		7,924		109		8,033
Owner occupied construction		-		-		-		336		-		336
Consumer and other loans
Consumer loans		36		-		36		63		-		63
Total nonaccrual loans	$	20,146	$	446	$	20,592	$	15,854	$	608	$	16,462

The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans

days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are

not

generally considered nonaccrual. There were

non-covered accruing loans contractually past due

days or more as of

June 30, 2017,

December 31, 2016.

	June 30, 2017
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	111	$	-	$	-	$	111	$	58,758	$	58,869
Commercial and industrial		215		107		146		468		88,987		89,455
Multi-family residential		200		-		69		269		140,959		141,228
Single family non-owner occupied		1,321		25		743		2,089		140,061		142,150
Non-farm, non-residential		484		179		2,070		2,733		600,539		603,272
Agricultural		-		-		128		128		5,958		6,086
Farmland		142		-		343		485		28,115		28,600
Consumer real estate loans
Home equity lines		128		115		300		543		101,917		102,460
Single family owner occupied		2,582		1,956		5,511		10,049		490,533		500,582
Owner occupied construction		282		-		-		282		46,592		46,874
Consumer and other loans
Consumer loans		367		65		3		435		71,956		72,391
Other		-		-		-		-		4,296		4,296
Total non-covered loans		5,832		2,447		9,313		17,592		1,778,671		1,796,263
Covered loans
Commercial loans
Construction, development, and other land		-		-		17		17		3,543		3,560
Commercial and industrial		-		-		-		-		603		603
Single family non-owner occupied		-		-		-		-		1,020		1,020
Non-farm, non-residential		-		-		-		-		3,768		3,768
Agricultural		-		-		-		-		24		24
Farmland		-		-		-		-		376		376
Consumer real estate loans
Home equity lines		283		124		35		442		30,376		30,818
Single family owner occupied		-		3		68		71		5,605		5,676
Total covered loans		283		127		120		530		45,315		45,845
Total loans	$	6,115	$	2,574	$	9,433	$	18,122	$	1,823,986	$	1,842,108

	December 31, 2016
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	33	$	5	$	17	$	55	$	56,893	$	56,948
Commercial and industrial		174		30		149		353		91,851		92,204
Multi-family residential		163		-		281		444		133,784		134,228
Single family non-owner occupied		1,302		159		835		2,296		140,669		142,965
Non-farm, non-residential		1,235		332		2,169		3,736		594,938		598,674
Agricultural		-		5		-		5		5,998		6,003
Farmland		224		343		565		1,132		30,597		31,729
Consumer real estate loans
Home equity lines		78		136		658		872		105,489		106,361
Single family owner occupied		4,777		2,408		3,311		10,496		490,395		500,891
Owner occupied construction		342		336		-		678		43,857		44,535
Consumer and other loans
Consumer loans		371		90		15		476		76,969		77,445
Other		-		-		-		-		3,971		3,971
Total non-covered loans		8,699		3,844		8,000		20,543		1,775,411		1,795,954
Covered loans
Commercial loans
Construction, development, and other land		434		-		32		466		4,104		4,570
Commercial and industrial		-		-		-		-		895		895
Multi-family residential		-		-		-		-		8		8
Single family non-owner occupied		24		-		-		24		938		962
Non-farm, non-residential		32		-		-		32		7,480		7,512
Agricultural		-		-		-		-		25		25
Farmland		-		-		-		-		397		397
Consumer real estate loans
Home equity lines		108		146		62		316		35,501		35,817
Single family owner occupied		58		-		39		97		6,632		6,729
Owner occupied construction		-		-		-		-		-		-
Consumer and other loans
Consumer loans		-		-		-		-		79		79
Total covered loans		656		146		133		935		56,059		56,994
Total loans	$	9,355	$	3,990	$	8,133	$	21,478	$	1,831,470	$	1,852,948

The Company

may

make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Restructured loans in excess of

$250

thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Restructured loans under

$250

thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain troubled debt restructurings (“TDRs”) are classified as nonperforming at the time of restructuring and are returned to performing status after

six

months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. PCI loans are generally

not

considered TDRs as long as the loans remain in the assigned loan pool.

covered loans were recorded as TDRs as of

June 30, 2017,

December 31, 2016.

The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:

	June 30, 2017						December 31, 2016
(Amounts in thousands)	Nonaccrual (1)		Accruing		Total		Nonaccrual (1)		Accruing		Total
Commercial loans
Single family non-owner occupied	$	35	$	880	$	915	$	38	$	892	$	930
Non-farm, non-residential		-		295		295		-		4,160		4,160
Consumer real estate loans
Home equity lines		-		152		152		-		158		158
Single family owner occupied		1,559		7,023		8,582		905		7,503		8,408
Owner occupied construction		-		235		235		341		239		580
Total TDRs	$	1,594	$	8,585	$	10,179	$	1,284	$	12,952	$	14,236

Allowance for loan losses related to TDRs					$	770					$	670

___________________________________

(

)

Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.

The following table presents interest income recognized on TDRs for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
(Amounts in thousands)
Interest income recognized	$	1	$	75	$	85	$	153

The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated. The post-modification recorded investment represents the loan balance immediately following modification.

	Three Months Ended June 30,
	2017						2016
(Amounts in thousands)	Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment		Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment
Below market interest rate
Single family owner occupied		1	$	241	$	241		-	$	-	$	-
Below market interest rate and extended payment term
Single family owner occupied		5		949		949		1		115		115
Total		6	$	1,190	$	1,190		1	$	115	$	115

	Six Months Ended June 30,
	2017						2016
(Amounts in thousands)	Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment		Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment
Below market interest rate
Single family owner occupied		1	$	241	$	241		-	$	-	$	-
Below market interest rate and extended payment term
Single family owner occupied		5		949		949		1		115		115
Total		6	$	1,190	$	1,190		1	$	115	$	115

There were

payment defaults on loans modified as TDRs that were restructured within the previous

months as of

June 30, 2017

2016.

The following table provides information about other real estate owned (“OREO”), which consists of properties acquired through foreclosure, as of the dates indicated:

	June 30, 2017		December 31, 2016
(Amounts in thousands)
Non-covered OREO	$	3,914	$	5,109
Covered OREO		124		276
Total OREO	$	4,038	$	5,385

Non-covered OREO secured by residential real estate	$	1,518	$	1,746
Residential real estate loans in the foreclosure process (1)		5,127		2,539

_________________________________________________________________________________________

(

)

The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction.