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, 2019
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	60,124	$	574	$	652	$	-	$	-	$	61,350
Commercial and industrial		90,609		1,524		1,494		-		-		93,627
Multi-family residential		94,122		822		1,330		-		-		96,274
Single family non-owner occupied		126,204		3,720		5,374		-		-		135,298
Non-farm, non-residential		565,732		4,687		14,478		-		-		584,897
Agricultural		8,862		71		496		-		-		9,429
Farmland		14,697		510		1,521		-		-		16,728
Consumer real estate loans
Home equity lines		83,844		683		1,822		-		-		86,349
Single family owner occupied		457,680		3,510		23,377		-		-		484,567
Owner occupied construction		14,200		-		672		-		-		14,872
Consumer and other loans
Consumer loans		91,457		3		567		-		-		92,027
Other		4,540		-		-		-		-		4,540
Total non-covered loans		1,612,071		16,104		51,783		-		-		1,679,958
Covered loans
Commercial loans
Construction, development, and other land		-		30		-		-		-		30
Single family non-owner occupied		205		-		11		-		-		216
Non-farm, non-residential		-		-		4		-		-		4
Consumer real estate loans
Home equity lines		7,625		3,047		359		-		-		11,031
Single family owner occupied		2,157		359		361		-		-		2,877
Total covered loans		9,987		3,436		735		-		-		14,158
Total loans	$	1,622,058	$	19,540	$	52,518	$	-	$	-	$	1,694,116

	December 31, 2018
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	61,877	$	661	$	970	$	-	$	-	$	63,508
Commercial and industrial		102,044		2,166		653		-		-		104,863
Multi-family residential		104,183		1,087		1,742		-		-		107,012
Single family non-owner occupied		131,443		4,395		4,259		-		-		140,097
Non-farm, non-residential		595,659		8,166		9,906		146		-		613,877
Agricultural		8,328		131		86		-		-		8,545
Farmland		16,898		538		1,469		-		-		18,905
Consumer real estate loans
Home equity lines		91,194		649		1,623		-		-		93,466
Single family owner occupied		482,794		4,355		23,814		-		-		510,963
Owner occupied construction		17,872		-		299		-		-		18,171
Consumer and other loans
Consumer loans		71,240		4		308		-		-		71,552
Other		5,310		-		-		-		-		5,310
Total non-covered loans		1,688,842		22,152		45,129		146		-		1,756,269
Covered loans
Commercial loans
Construction, development, and other land		-		35		-		-		-		35
Single family non-owner occupied		223		-		15		-		-		238
Non-farm, non-residential		-		-		6		-		-		6
Consumer real estate loans
Home equity lines		9,511		5,244		529		-		-		15,284
Single family owner occupied		2,507		355		390		-		-		3,252
Total covered loans		12,241		5,634		940		-		-		18,815
Total loans	$	1,701,083	$	27,786	$	46,069	$	146	$	-	$	1,775,084

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, 2019						December 31, 2018
			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	$	560	$	776	$	-	$	824	$	840	$	-
Commercial and industrial		63		82		-		386		416		-
Multi-family residential		1,255		1,662		-		1,127		1,274		-
Single family non-owner occupied		2,888		3,420		-		2,761		3,095		-
Non-farm, non-residential		4,525		5,129		-		4,154		4,494		-
Agricultural		217		224		-		86		96		-
Farmland		1,519		1,793		-		1,464		1,547		-
Consumer real estate loans
Home equity lines		1,436		1,551		-		1,315		1,451		-
Single family owner occupied		15,990		18,170		-		15,451		18,390		-
Owner occupied construction		222		222		-		225		225		-
Consumer and other loans
Consumer loans		284		317		-		145		156		-
Total impaired loans with no allowance		28,959		33,346		-		27,938		31,984		-

Impaired loans with a related allowance
Commercial loans
Commercial and industrial		-		-		-		-		-		-
Multi-family residential		-		-		-		534		536		230
Single family non-owner occupied		-		-		-		-		-		-
Non-farm, non-residential		1,250		1,250		301		840		842		235
Farmland		-		-		-		-		-		-
Consumer real estate loans
Home equity lines		-		-		-		65		68		65
Single family owner occupied		1,251		1,251		356		3,631		3,683		922
Total impaired loans with an allowance		2,501		2,501		657		5,070		5,129		1,452
Total impaired loans (1)	$	31,460	$	35,847	$	657	$	33,008	$	37,113	$	1,452

(

)

Total impaired loans include loans totaling

$25.18

million as of

September 30, 2019,

and

$25.27

million as of

December 31, 2018,

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,
	2019					2018				2019				2018
(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	$	5		$	570	$	-	$	910	$	17	$	720	$	14	$	950
Commercial and industrial		2			66		3		311		7		277		6		378
Multi-family residential		5			1,269		5		1,402		21		1,385		15		832
Single family non-owner occupied		41			2,958		8		2,529		97		3,063		56		2,599
Non-farm, non-residential		20			4,590		-		3,926		84		4,832		39		5,028
Agricultural		9			223		-		103		11		108		-		187
Farmland		19			1,536		23		1,425		45		1,474		38		1,066
Consumer real estate loans
Home equity lines		17			1,463		3		1,514		31		1,452		20		1,719
Single family owner occupied		176			16,593		15		15,832		454		16,123		208		15,222
Owner occupied construction		3			224		-		229		7		223		6		249
Consumer and other loans
Consumer loans		6			319		-		210		10		187		6		164
Total impaired loans with no related allowance		303			29,811		57		28,391		784		29,844		408		28,394

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		-			-		-		-		-		-		-		-
Commercial and industrial		-			-		-		-		-		-		-		-
Multi-family residential		-			-		-		541		-		-		-		271
Single family non-owner occupied		-			-		-		849		-		-		7		644
Non-farm, non-residential		20			1,254		-		-		28		602		-		770
Farmland		-			-		-		413		-		-		-		409
Consumer real estate loans
Home equity lines		-			-		1		67		-		-		3		69
Single family owner occupied		(30	)		1,253		35		4,999		35		2,177		126		5,838
Owner occupied construction		-			-		-		-		-		-		-		-
Total impaired loans with a related allowance		(10	)		2,507		36		6,869		63		2,779		136		8,001
Total impaired loans	$	293		$	32,318	$	93	$	35,260	$	847	$	32,623	$	544	$	36,395

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, 2019						December 31, 2018
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	212	$	-	$	212	$	413	$	-	$	413
Commercial and industrial		14		-		14		428		-		428
Multi-family residential		1,144		-		1,144		1,395		-		1,395
Single family non-owner occupied		1,463		11		1,474		1,696		15		1,711
Non-farm, non-residential		3,753		-		3,753		4,020		-		4,020
Agricultural		217		-		217		86		-		86
Farmland		789		-		789		711		-		711
Consumer real estate loans
Home equity lines		657		227		884		614		271		885
Single family owner occupied		8,236		5		8,241		10,141		36		10,177
Consumer and other loans
Consumer loans		216		-		216		79		-		79
Total nonaccrual loans	$	16,701	$	243	$	16,944	$	19,583	$	322	$	19,905

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. Non-covered accruing loans contractually past due

days or more totaled

$107

thousand as of

September 30, 2019,

compared to

$58

thousand as of

December 31, 2018.

	September 30, 2019
	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	$	-	$	-	$	212	$	212	$	61,138	$	61,350
Commercial and industrial		537		792		-		1,329		92,298		93,627
Multi-family residential		-		-		1,144		1,144		95,130		96,274
Single family non-owner occupied		848		220		740		1,808		133,490		135,298
Non-farm, non-residential		418		978		2,725		4,121		580,776		584,897
Agricultural		37		-		47		84		9,345		9,429
Farmland		237		-		738		975		15,753		16,728
Consumer real estate loans
Home equity lines		705		128		500		1,333		85,016		86,349
Single family owner occupied		3,481		1,322		3,562		8,365		476,202		484,567
Owner occupied construction		-		-		-		-		14,872		14,872
Consumer and other loans
Consumer loans		1,013		147		144		1,304		90,723		92,027
Other		-		-		-		-		4,540		4,540
Total non-covered loans		7,276		3,587		9,812		20,675		1,659,283		1,679,958
Covered loans
Commercial loans
Construction, development, and other land		-		-		-		-		30		30
Single family non-owner occupied		11		-		-		11		205		216
Non-farm, non-residential		-		-		-		-		4		4
Consumer real estate loans
Home equity lines		476		2		-		478		10,553		11,031
Single family owner occupied		-		27		-		27		2,850		2,877
Total covered loans		487		29		-		516		13,642		14,158
Total loans	$	7,763	$	3,616	$	9,812	$	21,191	$	1,672,925	$	1,694,116

	December 31, 2018
	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	$	-	$	407	$	518	$	62,990	$	63,508
Commercial and industrial		306		-		262		568		104,295		104,863
Multi-family residential		113		-		1,274		1,387		105,625		107,012
Single family non-owner occupied		514		1,115		992		2,621		137,476		140,097
Non-farm, non-residential		1,332		540		2,398		4,270		609,607		613,877
Agricultural		109		-		-		109		8,436		8,545
Farmland		640		-		392		1,032		17,873		18,905
Consumer real estate loans
Home equity lines		408		209		334		951		92,515		93,466
Single family owner occupied		5,006		3,495		4,445		12,946		498,017		510,963
Owner occupied construction		-		-		-		-		18,171		18,171
Consumer and other loans
Consumer loans		507		200		59		766		70,786		71,552
Other		-		-		-		-		5,310		5,310
Total non-covered loans		9,046		5,559		10,563		25,168		1,731,101		1,756,269
Covered loans
Commercial loans
Construction, development, and other land		-		-		-		-		35		35
Single family non-owner occupied		15		-		-		15		223		238
Non-farm, non-residential		-		-		-		-		6		6
Consumer real estate loans
Home equity lines		176		38		91		305		14,979		15,284
Single family owner occupied		166		-		-		166		3,086		3,252
Total covered loans		357		38		91		486		18,329		18,815
Total loans	$	9,403	$	5,597	$	10,654	$	25,654	$	1,749,430	$	1,775,084

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 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, 2019,

December 31, 2018.

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

	September 30, 2019						December 31, 2018
(Amounts in thousands)	Nonaccrual (1)		Accruing		Total		Nonaccrual (1)		Accruing		Total
Commercial loans
Construction, development, and other land	$	-	$	-	$	-	$	-	$	-	$	-
Single family non-owner occupied		556		600		1,156		640		309		949
Non-farm, non-residential		-		309		309		-		314		314
Consumer real estate loans
Home equity lines		3		116		119		-		127		127
Single family owner occupied		1,963		5,023		6,986		1,941		5,417		7,358
Owner occupied construction		-		222		222		-		225		225
Consumer and other loans
Consumer loans		-		33		33		-		35		35
Total TDRs	$	2,522	$	6,303	$	8,825	$	2,581	$	6,427	$	9,008
Allowance for loan losses related to TDRs					$	356					$	568

(

)

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
	2019		2018		2019		2018
(Amounts in thousands)
Interest income recognized	$	56	$	73	$	203	$	207

The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated:

	Three Months Ended September 30,
	2019						2018
(Amounts in thousands)	Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment (1)		Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment (1)
Below market interest rate
Single family owner occupied		-	$	-	$	-		1	$	11	$	11
Total below market interest rate		-		-		-		1		11		11
Payment deferral
Single family owner occupied		1		33		29		-		-		-
Home equity lines		-		-		-		-		-		-
Total principal deferral		1		33		29		0		-		-
Total		1	$	33	$	29		1	$	11	$	11

(

) Represents the loan balance immediately following modification

	Nine Months Ended September 30,
	2019						2018
(Amounts in thousands)	Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment (1)		Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment (1)
Below market interest rate
Single family owner occupied		-	$	-	$	-		1	$	11	$	11
Total below market interest rate		-		-		-		1		11		11
Below market interest rate and extended payment term
Single family owner occupied		2	$	221	$	218		1	$	41	$	41
Single family non-owner occupied		2		488		480		-		-		-
Total below market interest rate and extended payment term		4		709		698		1		41		41
Payment deferral
Single family owner occupied		1		33		29		-		-		-
Home equity lines		-		-		-		-		-		-
Total principal deferral		1		33		29		-		-		-
Total		5	$	742	$	727		2	$	52	$	52

(

) Represents the loan balance immediately following modification

There were

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

months as of

September 30, 2019

2018.

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, 2019		December 31, 2018
(Amounts in thousands)
Non-covered OREO	$	2,528	$	3,806
Covered OREO		-		32
Total OREO	$	2,528	$	3,838

Non-covered OREO secured by residential real estate	$	1,530	$	2,303
Residential real estate loans in the foreclosure process (1)		2,275		6,349

(

)

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