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.

	September 30, 2017
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	69,257	$	2,791	$	904	$	-	$	-	$	72,952
Commercial and industrial		85,368		1,844		2,972		-		-		90,184
Multi-family residential		119,399		5,882		716		-		-		125,997
Single family non-owner occupied		132,000		6,839		4,374		-		-		143,213
Non-farm, non-residential		593,809		11,126		8,243		202		-		613,380
Agricultural		5,743		235		118		-		-		6,096
Farmland		25,097		153		2,647		-		-		27,897
Consumer real estate loans
Home equity lines		100,375		850		1,663		-		-		102,888
Single family owner occupied		471,378		5,705		24,159		-		-		501,242
Owner occupied construction		46,802		-		232		-		-		47,034
Consumer and other loans
Consumer loans		70,459		27		209		-		-		70,695
Other		4,856		-		-		-		-		4,856
Total non-covered loans		1,724,543		35,452		46,237		202		-		1,806,434
Covered loans
Commercial loans
Construction, development, and other land		-		39		1		-		-		40
Single family non-owner occupied		271		-		21		-		-		292
Non-farm, non-residential		-		-		10		-		-		10
Consumer real estate loans
Home equity lines		12,242		13,840		768		-		-		26,850
Single family owner occupied		3,136		425		534		-		-		4,095
Total covered loans		15,649		14,304		1,334		-		-		31,287
Total loans	$	1,740,192	$	49,756	$	47,571	$	202	$	-	$	1,837,721

	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:

	September 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	$	662	$	999	$	-	$	33	$	35	$	-
Commercial and industrial		146		1,093		-		346		383		-
Multi-family residential		381		836		-		294		369		-
Single family non-owner occupied		2,485		3,891		-		3,084		3,334		-
Non-farm, non-residential		3,905		6,239		-		3,829		4,534		-
Agricultural		118		122		-		-		-		-
Farmland		990		1,037		-		1,161		1,188		-
Consumer real estate loans
Home equity lines		1,624		1,766		-		913		968		-
Single family owner occupied		16,768		18,932		-		11,779		12,630		-
Owner occupied construction		233		233		-		573		589		-
Consumer and other loans
Consumer loans		61		63		-		62		103		-
Total impaired loans with no allowance		27,373		35,211		-		22,074		24,133		-

Impaired loans with a related allowance
Commercial loans
Construction, development, and other land		-		-		-		-		-		-
Commercial and industrial		2,400		2,400		262		-		-		-
Single family non-owner occupied		771		772		69		351		351		31
Non-farm, non-residential		865		874		325		-		-		-
Farmland		410		418		50		430		430		18
Consumer real estate loans
Home equity lines		-		-		-		-		-		-
Single family owner occupied		3,771		3,779		754		4,118		4,174		770
Total impaired loans with an allowance		8,217		8,243		1,460		4,899		4,955		819
Total impaired loans (1)	$	35,590	$	43,454	$	1,460	$	26,973	$	29,088	$	819

(

)

Includes loans totaling

$20.07

million as of

September 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 September 30,								Nine Months Ended September 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	$	32	$	907	$	22	$	600	$	32	$	309	$	22	$	447
Commercial and industrial		5		754		6		1,029		8		468		10		738
Multi-family residential		-		509		15		562		3		474		15		309
Single family non-owner occupied		11		3,304		91		3,498		88		3,313		107		3,035
Non-farm, non-residential		68		5,244		65		8,930		93		3,766		307		10,186
Agricultural		4		127		-		-		4		127		-		-
Farmland		17		1,003		5		204		17		1,004		9		186
Consumer real estate loans
Home equity lines		15		1,683		6		1,157		35		1,259		21		1,318
Single family owner occupied		137		17,478		91		13,175		317		15,209		254		12,436
Owner occupied construction		1		235		2		585		6		234		7		470
Consumer and other loans
Consumer loans		1		62		2		63		3		52		2		45
Total impaired loans with no related allowance		291		31,306		305		29,803		606		26,215		754		29,170

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		-		-		-		-		-		143		-		-
Commercial and industrial		50		2,516		-		-		103		1,727		-		-
Single family non-owner occupied		8		778		5		682		21		488		18		572
Non-farm, non-residential		-		872		45		4,658		15		964		215		5,108
Farmland		-		413		-		-		-		275		-		-
Consumer real estate loans
Home equity lines		-		-		-		-		-		139		-		-
Single family owner occupied		24		3,814		24		4,130		92		4,527		91		4,547
Owner occupied construction		-		-		-		-		-		1		-		115
Total impaired loans with a related allowance		82		8,393		74		9,470		231		8,264		324		10,342
Total impaired loans	$	373	$	39,699	$	379	$	39,273	$	837	$	34,479	$	1,078	$	39,512

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

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

Impaired PCI loan pools		-		1

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
(Amounts in thousands)
Interest income recognized	$	-	$	12	$	20	$	130
Average recorded investment		-		1,139		705		2,195

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:

	September 30, 2017						December 31, 2016
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	126	$	-	$	126	$	72	$	32	$	104
Commercial and industrial		118		-		118		332		13		345
Multi-family residential		330		-		330		294		-		294
Single family non-owner occupied		1,626		20		1,646		1,242		24		1,266
Non-farm, non-residential		3,352		-		3,352		3,295		30		3,325
Agricultural		118		-		118		-		-		-
Farmland		870		-		870		1,591		-		1,591
Consumer real estate loans
Home equity lines		828		350		1,178		705		400		1,105
Single family owner occupied		11,517		50		11,567		7,924		109		8,033
Owner occupied construction		-		-		-		336		-		336
Consumer and other loans
Consumer loans		57		-		57		63		-		63
Total nonaccrual loans	$	18,942	$	420	$	19,362	$	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

September 30, 2017,

December 31, 2016.

	September 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	$	25	$	-	$	-	$	25	$	72,927	$	72,952
Commercial and industrial		226		36		47		309		89,875		90,184
Multi-family residential		341		185		-		526		125,471		125,997
Single family non-owner occupied		405		186		861		1,452		141,761		143,213
Non-farm, non-residential		523		17		2,623		3,163		610,217		613,380
Agricultural		6		-		-		6		6,090		6,096
Farmland		849		410		343		1,602		26,295		27,897
Consumer real estate loans
Home equity lines		242		105		298		645		102,243		102,888
Single family owner occupied		3,133		1,414		6,199		10,746		490,496		501,242
Owner occupied construction		330		-		-		330		46,704		47,034
Consumer and other loans
Consumer loans		360		62		38		460		70,235		70,695
Other		-		-		-		-		4,856		4,856
Total non-covered loans		6,440		2,415		10,409		19,264		1,787,170		1,806,434
Covered loans
Commercial loans
Construction, development, and other land		-		-		-		-		40		40
Single family non-owner occupied		72		-		-		72		220		292
Non-farm, non-residential		-		-		-		-		10		10
Consumer real estate loans
Home equity lines		291		-		118		409		26,441		26,850
Single family owner occupied		-		-		28		28		4,067		4,095
Total covered loans		363		-		146		509		30,778		31,287
Total loans	$	6,803	$	2,415	$	10,555	$	19,773	$	1,817,948	$	1,837,721

	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

September 30, 2017,

December 31, 2016.

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

	September 30, 2017						December 31, 2016
(Amounts in thousands)	Nonaccrual (1)		Accruing		Total		Nonaccrual (1)		Accruing		Total
Commercial loans
Single family non-owner occupied	$	33	$	875	$	908	$	38	$	892	$	930
Non-farm, non-residential		-		295		295		-		4,160		4,160
Consumer real estate loans
Home equity lines		-		148		148		-		158		158
Single family owner occupied		1,484		6,690		8,174		905		7,503		8,408
Owner occupied construction		-		234		234		341		239		580
Total TDRs	$	1,517	$	8,242	$	9,759	$	1,284	$	12,952	$	14,236

Allowance for loan losses related to TDRs					$	707					$	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 September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
(Amounts in thousands)
Interest income recognized	$	74	$	143	$	159	$	296

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 September 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 and extended payment term
Single family owner occupied		1	$	42	$	42		-	$	-	$	-
Total		1	$	42	$	42		-	$	-	$	-

	Nine Months Ended September 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 and extended payment term
Single family owner occupied		3	$	141	$	141		1	$	115	$	115
Total		3	$	141	$	141		1	$	115	$	115

There

were

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

months as of

September 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:

	September 30, 2017		December 31, 2016
(Amounts in thousands)
Non-covered OREO	$	3,543	$	5,109
Covered OREO		54		276
Total OREO	$	3,597	$	5,385

Non-covered OREO secured by residential real estate	$	971	$	1,746
Residential real estate loans in the foreclosure process (1)		10,025		2,539


( 1 )		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