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.

	December 31, 2017
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	57,768	$	1,367	$	882	$	-	$	-	$	60,017
Commercial and industrial		87,181		3,721		1,286		-		-		92,188
Multi-family residential		118,509		5,663		1,030		-		-		125,202
Single family non-owner occupied		130,689		7,271		3,710		-		-		141,670
Non-farm, non-residential		596,616		12,493		7,351		173		-		616,633
Agricultural		6,639		294		102		-		-		7,035
Farmland		22,875		210		2,564		-		-		25,649
Consumer real estate loans
Home equity lines		100,833		618		1,754		-		-		103,205
Single family owner occupied		471,382		5,480		25,824		-		-		502,686
Owner occupied construction		38,947		-		231		-		-		39,178
Consumer and other loans
Consumer loans		70,448		13		311		-		-		70,772
Other		5,001		-		-		-		-		5,001
Total non-covered loans		1,706,888		37,130		45,045		173		-		1,789,236
Covered loans
Commercial loans
Construction, development, and other land		1		38		-		-		-		39
Single family non-owner occupied		265		-		19		-		-		284
Non-farm, non-residential		-		-		9		-		-		9
Consumer real estate loans
Home equity lines		11,338		11,685		697		-		-		23,720
Single family owner occupied		2,996		411		489		-		-		3,896
Total covered loans		14,600		12,134		1,214		-		-		27,948
Total loans	$	1,721,488	$	49,264	$	46,259	$	173	$	-	$	1,817,184

	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:

	December 31, 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	$	727	$	988	$	-	$	33	$	35	$	-
Commercial and industrial		315		1,142		-		346		383		-
Multi-family residential		499		1,010		-		294		369		-
Single family non-owner occupied		2,042		3,521		-		3,084		3,334		-
Non-farm, non-residential		3,022		5,955		-		3,829		4,534		-
Agricultural		102		107		-		-		-		-
Farmland		395		414		-		1,161		1,188		-
Consumer real estate loans
Home equity lines		1,621		1,770		-		913		968		-
Single family owner occupied		16,633		18,964		-		11,779		12,630		-
Owner occupied construction		231		231		-		573		589		-
Consumer and other loans
Consumer loans		141		144		-		62		103		-
Total impaired loans with no allowance		25,728		34,246		-		22,074		24,133		-

Impaired loans with a related allowance
Commercial loans
Commercial and industrial		343		343		270		-		-		-
Single family non-owner occupied		446		446		62		351		351		31
Non-farm, non-residential		262		263		15		-		-		-
Farmland		936		974		233		430		430		18
Consumer real estate loans
Single family owner occupied		5,586		5,606		1,978		4,118		4,174		770
Total impaired loans with an allowance		7,573		7,632		2,558		4,899		4,955		819
Total impaired loans (1)	$	33,301	$	41,878	$	2,558	$	26,973	$	29,088	$	819

(

)

Includes loans totaling

$20.13

million as of

December 31, 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:

	Year Ended December 31,
	2017				2016				2015
(Amounts in thousands)	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	$	56	$	455	$	22	$	344	$	5	$	481
Commercial and industrial		14		556		16		646		-		324
Multi-family residential		53		523		21		308		4		269
Single family non-owner occupied		106		3,214		178		3,076		88		2,140
Non-farm, non-residential		122		4,052		307		8,573		312		11,677
Agricultural		5		124		-		-		-		-
Farmland		17		853		55		437		16		195
Consumer real estate loans
Home equity lines		50		1,365		30		1,223		36		813
Single family owner occupied		488		15,758		343		12,330		356		12,708
Owner occupied construction		8		234		9		497		10		359
Consumer and other loans
Consumer loans		9		75		5		60		8		98
Total impaired loans with no related allowance		928		27,209		986		27,494		835		29,064

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		-		107		-		-		-		-
Commercial and industrial		103		1,376		-		-		-		-
Single family non-owner occupied		27		479		23		518		25		575
Non-farm, non-residential		15		789		215		3,831		65		4,987
Farmland		22		442		14		108		-		-
Consumer real estate loans
Home equity lines		-		104		-		-		-		-
Single family owner occupied		161		4,805		118		4,452		26		3,731
Owner occupied construction		-		-		-		87		1		178
Total impaired loans with a related allowance		328		8,102		370		8,996		117		9,471
Total impaired loans	$	1,256	$	35,311	$	1,356	$	36,490	$	952	$	38,535

The following tables

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

	December 31,
	2017		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

	Year Ended December 31,
	2017		2016		2015
(Amounts in thousands)
Interest income recognized	$	20	$	142	$	364
Average recorded investment		528		1,929		3,309

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:

	December 31,
	2017						2016
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	-	$	-	$	-	$	72	$	32	$	104
Commercial and industrial		211		-		211		332		13		345
Multi-family residential		498		-		498		294		-		294
Single family non-owner occupied		851		19		870		1,242		24		1,266
Non-farm, non-residential		2,448		-		2,448		3,295		30		3,325
Agricultural		102		-		102		-		-		-
Farmland		805		-		805		1,591		-		1,591
Consumer real estate loans
Home equity lines		882		306		1,188		705		400		1,105
Single family owner occupied		13,108		17		13,125		7,924		109		8,033
Owner occupied construction		-		-		-		336		-		336
Consumer and other loans
Consumer loans		92		-		92		63		-		63
Total nonaccrual loans	$	18,997	$	342	$	19,339	$	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. Non-covered accruing loans contractually past due

days or more totaled

thousand as of

December 31, 2017.

There were

non-covered accruing loans contractually past due

days or more as of

December 31, 2016.

	December 31, 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	$	20	$	365	$	-	$	385	$	59,632	$	60,017
Commercial and industrial		232		40		142		414		91,774		92,188
Multi-family residential		544		-		185		729		124,473		125,202
Single family non-owner occupied		223		302		331		856		140,814		141,670
Non-farm, non-residential		2,433		383		1,536		4,352		612,281		616,633
Agricultural		123		-		-		123		6,912		7,035
Farmland		113		-		692		805		24,844		25,649
Consumer real estate loans
Home equity lines		226		198		485		909		102,296		103,205
Single family owner occupied		6,959		2,418		8,186		17,563		485,123		502,686
Owner occupied construction		326		79		-		405		38,773		39,178
Consumer and other loans
Consumer loans		439		97		17		553		70,219		70,772
Other		-		-		-		-		5,001		5,001
Total non-covered loans		11,638		3,882		11,574		27,094		1,762,142		1,789,236
Covered loans
Commercial loans
Construction, development, and other land		-		-		-		-		39		39
Single family non-owner occupied		-		-		-		-		284		284
Non-farm, non-residential		-		-		-		-		9		9
Consumer real estate loans
Home equity lines		402		-		173		575		23,145		23,720
Single family owner occupied		70		-		-		70		3,826		3,896
Total covered loans		472		-		173		645		27,303		27,948
Total loans	$	12,110	$	3,882	$	11,747	$	27,739	$	1,789,445	$	1,817,184

	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
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 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

December 31,

201

December 31, 2016.

The following table presents loans modified as TDRs, by loan class

and accrual status, as of the dates indicated:

	December 31,
	2017						2016
(Amounts in thousands)	Nonaccrual (1)		Accruing		Total		Nonaccrual (1)		Accruing		Total
Commercial loans
Single family non-owner occupied	$	364	$	528	$	892	$	38	$	892	$	930
Non-farm, non-residential		-		295		295		-		4,160		4,160
Consumer real estate loans
Home equity lines		-		145		145		-		158		158
Single family owner occupied		1,565		6,496		8,061		905		7,503		8,408
Owner occupied construction		-		233		233		341		239		580
Consumer and other loans
Consumer loans		-		37		37		-		-		-
Total TDRs	$	1,929	$	7,734	$	9,663	$	1,284	$	12,952	$	14,236

Allowance for loan losses related to TDRs					$	642					$	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:

	Year Ended December 31,
	2017		2016		2015
(Amounts in thousands)
Interest income recognized	$	222	$	424	$	608

The following table presents

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.

	Year Ended December 31,
	2017						2016
	Total		Pre-Modification		Post-Modification		Total		Pre-Modification		Post-Modification
(Amounts in thousands)	Contracts		Recorded Investment		Recorded Investment		Contracts		Recorded Investment		Recorded Investment
Below market interest rate and extended payment term
Single family owner occupied		5	$	207	$	207		1	$	115	$	115
Consumer loans		1		36		36				-		-
Total		6	$	243	$	243		1	$	115	$	115

The following table presents

loans modified as TDRs, by loan class, that were restructured during the previous

months for which there was a payment default during the periods indicated:

	Year Ended December 31,
	2017				2016
	Total		Recorded		Total		Recorded
	Contracts		Investment		Contracts		Investment
(Amounts in thousands)
Single family owner occupied		1	$	14		-	$	-
Total		1	$	14		-	$	-

The following table

provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:

	December 31,
	2017		2016
(Amounts in thousands)
Non-covered OREO	$	2,409	$	5,109
Covered OREO		105		276
Total OREO	$	2,514	$	5,385

Non-covered OREO secured by residential real estate	$	2,209	$	1,746
Residential real estate loans in the foreclosure process (1)		9,921		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