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, 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

	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

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, 2018						December 31, 2017
			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	$	824	$	840	$	-	$	727	$	988	$	-
Commercial and industrial		386		416		-		315		1,142		-
Multi-family residential		1,127		1,274		-		499		1,010		-
Single family non-owner occupied		2,761		3,095		-		2,042		3,521		-
Non-farm, non-residential		4,154		4,494		-		3,022		5,955		-
Agricultural		86		96		-		102		107		-
Farmland		1,464		1,547		-		395		414		-
Consumer real estate loans
Home equity lines		1,315		1,451		-		1,621		1,770		-
Single family owner occupied		15,451		18,390		-		16,633		18,964		-
Owner occupied construction		225		225		-		231		231		-
Consumer and other loans
Consumer loans		145		156		-		141		144		-
Total impaired loans with no allowance		27,938		31,984		-		25,728		34,246		-

Impaired loans with a related allowance
Commercial loans
Commercial and industrial		-		-		-		343		343		270
Multi-family residential		534		536		230		-		-		-
Single family non-owner occupied		-		-		-		446		446		62
Non-farm, non-residential		840		842		235		262		263		15
Farmland		-		-		-		936		974		233
Consumer real estate loans
Home equity lines		65		68		65		-		-		-
Single family owner occupied		3,631		3,683		922		5,586		5,606		1,978
Total impaired loans with an allowance		5,070		5,129		1,452		7,573		7,632		2,558
Total impaired loans (1)	$	33,008	$	37,113	$	1,452	$	33,301	$	41,878	$	2,558

(

)

Total impaired loans include loans totaling

$25.27

million as of

December 31, 2018,

and

$20.13

million as of

December 31, 2017,

that do

not

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

first

quarter of

2018,

the Company changed the threshold for quarterly reviews of individual loans that are deemed to be impaired from

$250

thousand to

$500

thousand or greater.

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,
	2018				2017				2016
(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	$	26	$	921	$	56	$	455	$	22	$	344
Commercial and industrial		19		383		14		556		16		646
Multi-family residential		47		910		53		523		21		308
Single family non-owner occupied		123		2,652		106		3,214		178		3,076
Non-farm, non-residential		133		4,828		122		4,052		307		8,573
Agricultural		-		164		5		124		-		-
Farmland		64		1,172		17		853		55		437
Consumer real estate loans
Home equity lines		44		1,637		50		1,365		30		1,223
Single family owner occupied		503		15,423		488		15,758		343		12,330
Owner occupied construction		8		244		8		234		9		497
Consumer and other loans
Consumer loans		9		161		9		75		5		60
Total impaired loans with no related allowance		976		28,495		928		27,209		986		27,494

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		-		-		-		107		-		-
Commercial and industrial		-		-		103		1,376		-		-
Multi-family residential		2		270		-		-		-		-
Single family non-owner occupied		7		110		27		479		23		518
Non-farm, non-residential		2		809		15		789		215		3,831
Farmland		-		307		22		442		14		108
Consumer real estate loans
Home equity lines		3		68		-		104		-		-
Single family owner occupied		158		5,296		161		4,805		118		4,452
Owner occupied construction		-		-		-		-		-		87
Total impaired loans with a related allowance		172		6,860		328		8,102		370		8,996
Total impaired loans	$	1,148	$	35,355	$	1,256	$	35,311	$	1,356	$	36,490

There were

impaired PCI loan pools as of

December 31, 2018

2017.

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

	Year Ended December 31,
	2018		2017		2016
(Amounts in thousands)
Interest income recognized	$	-	$	20	$	142
Average recorded investment		-		528		1,929

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, 2018						December 31, 2017
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	413	$	-	$	413	$	-	$	-	$	-
Commercial and industrial		428		-		428		211		-		211
Multi-family residential		1,395		-		1,395		498		-		498
Single family non-owner occupied		1,696		15		1,711		851		19		870
Non-farm, non-residential		4,020		-		4,020		2,448		-		2,448
Agricultural		86		-		86		102		-		102
Farmland		711		-		711		805		-		805
Consumer real estate loans
Home equity lines		614		271		885		882		306		1,188
Single family owner occupied		10,141		36		10,177		13,108		17		13,125
Consumer and other loans
Consumer loans		79		-		79		92		-		92
Total nonaccrual loans	$	19,583	$	322	$	19,905	$	18,997	$	342	$	19,339

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

$58

thousand as of

December 31, 2018,

and

thousand as of

December 31, 2017.

	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

	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

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, 2018

2017.

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

	December 31,
	2018						2017
(Amounts in thousands)	Nonaccrual (1)		Accruing		Total		Nonaccrual (1)		Accruing		Total
Commercial loans
Single family non-owner occupied	$	640	$	309	$	949	$	364	$	528	$	892
Non-farm, non-residential		-		314		314		-		295		295
Consumer real estate loans
Home equity lines		-		127		127		-		145		145
Single family owner occupied		1,941		5,417		7,358		1,565		6,496		8,061
Owner occupied construction		-		225		225		-		233		233
Consumer and other loans
Consumer loans		-		35		35		-		37		37
Total TDRs	$	2,581	$	6,427	$	9,008	$	1,929	$	7,734	$	9,663
Allowance for loan losses related to TDRs					$	568					$	642

(

)

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,
	2018		2017		2016
(Amounts in thousands)
Interest income recognized	$	264	$	222	$	424

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.

	Year Ended December 31,
	2018						2017
(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		-	$	-	$	-
Below market interest rate and extended payment term
Single family owner occupied		1		41		41		5		207		207
Consumer loans		-		-		-		1		36		36
Total		2	$	52	$	52		6	$	243	$	243

(

) Represents the loan balance immediately following modification

The following table presents loans modified as TDRs, by loan class, that were restructured within the previous

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

	Year Ended December 31,
	2018				2017
	Total		Recorded		Total		Recorded
	Contracts		Investment		Contracts		Investment
(Amounts in thousands)
Single family owner occupied		1	$	521		1	$	14
Total		1	$	521		1	$	14

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

	December 31, 2018		December 31, 2017
(Amounts in thousands)
Non-covered OREO	$	3,806	$	2,409
Covered OREO		32		105
Total OREO	$	3,838	$	2,514

Non-covered OREO secured by residential real estate	$	2,303	$	2,209
Residential real estate loans in the foreclosure process (1)		6,349		9,921

(

)

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