Note 5.

Credit Quality

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 to be impaired.

The following tables present the recorded investment and related information for loans considered to be impaired, excluding PCI loans, as of the periods indicated:


	December 31, 2013
(Amounts in thousands)	Recorded Investment		Average Annual Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	—	$	3,850	$	—	$	—
Commercial and industrial		292		698		292		—
Multi-family residential		—		18		—		—
Single family non-owner occupied		289		939		317		—
Non-farm, non-residential		5,352		7,225		5,682		—
Agricultural		—		—		—		—
Farmland		351		370		363		—
Consumer real estate loans
Home equity lines		257		454		264		—
Single family owner occupied		2,006		2,156		2,414		—
Owner occupied construction		—		15		—		—
Consumer and other loans
Consumer loans		—		3		—		—

Total impaired loans with no related allowance		8,547		15,728		9,332		—
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land	$	—	$	1,057	$	—	$	—
Commercial and industrial		4,897		4,281		10,244		3,794
Multi-family residential		—		94		—		—
Single family non-owner occupied		375		892		375		47
Non-farm, non-residential		600		1,494		600		114
Agricultural		—		—		—		—
Farmland		—		—		—		—
Consumer real estate loans
Home equity lines		215		304		230		52
Single family owner occupied		4,844		4,498		5,035		735
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—

Total impaired loans with a related allowance		10,931		12,620		16,484		4,742

Total impaired loans	$	19,478	$	28,348	$	25,816	$	4,742


	December 31, 2012
(Amounts in thousands)	Recorded Investment		Average Annual Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	2,916	$	935	$	2,916	$	—
Commercial and industrial		284		320		284		—
Multi-family residential		—		517		—		—
Single family non-owner occupied		383		1,101		684		—
Non-farm, non-residential		5,282		2,619		5,362		—
Agricultural		—		—		—		—
Farmland		—		93		—		—
Consumer real estate loans
Home equity lines		276		370		277		—
Single family owner occupied		277		4,441		383		—
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		1		—		—

Total impaired loans with no related allowance		9,418		10,397		9,906		—
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		69		—		—
Commercial and industrial		3,318		4,510		8,502		3,192
Multi-family residential		378		143		397		18
Single family non-owner occupied		2,411		2,484		2,460		996
Non-farm, non-residential		2,781		5,820		2,958		358
Agricultural		—		—		—		—
Farmland		—		93		—		—
Consumer real estate loans
Home equity lines		223		150		230		223
Single family owner occupied		4,673		3,511		4,903		806
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—

Total impaired loans with a related allowance		13,784		16,780		19,450		5,593

Total impaired loans	$	23,202	$	27,177	$	29,356	$	5,593

The following table presents interest income recognized on impaired loans, excluding PCI loans, in the periods indicated:


	Year ended December 31,
(Amounts in thousands)	2013		2012		2011
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	294	$	3	$	—
Commercial and industrial		17		17		4
Multi-family residential		3		4		24
Single family non-owner occupied		99		56		39
Non-farm, non-residential		296		102		25
Agricultural		—		—		—
Farmland		12		—		—
Consumer real estate loans
Home equity lines		25		28		15
Single family owner occupied		70		113		43
Owner occupied construction		5		—		3
Consumer and other loans
Consumer loans		—		—		2

Total impaired loans with no related allowance		821		323		155
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		117		1		9
Commercial and industrial		18		948		21
Multi-family residential		7		3		—
Single family non-owner occupied		3		80		107
Non-farm, non-residential		29		317		191
Agricultural		—		—		—
Farmland		—		—		—
Consumer real estate loans
Home equity lines		12		1		—
Single family owner occupied		54		103		164
Owner occupied construction		—		—		—
Consumer and other loans
Consumer loans		—		—		—

Total impaired loans with a related allowance		240		1,453		492

Total impaired loans	$	1,061	$	1,776	$	647

As of December 31, 2013, the Company determined that 4 of the 7 PCI loan pools were impaired. No impairment was recognized on loan pools before 2013. The following tables present balance and interest income related to the impaired loan pools as of the dates, and in the periods, indicated:


	December 31,
(Amounts in thousands)	2013		2012
Recorded investment	$	52,033	$	—
Average annual recorded investment		35,220		—
Unpaid principal balance		69,320		—
Allowance for loan losses		747		—


	Year ended December 31,
(Amounts in thousands)	2013		2012		2011
Interest income recognized	$	1,966	$	—	$	—

As part of the ongoing monitoring of the Company’s loan portfolio, management tracks certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $3.0 million on an annual basis and at various times during the year. In addition, smaller commercial and retail loans are sampled for review during the year. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. 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. In order to meet repayment terms, these loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business.

•

Doubtful – This grade is assigned to loans on nonaccrual status. These loans have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is extremely 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 determined to be uncertain. This risk grade does not imply that the asset has no 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.

Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately in the following credit quality discussion. PCI loan pools are disaggregated and included in their applicable loan class in the following discussion. In addition, PCI loans are generally not classified as nonaccrual or nonperforming due to the accrual of interest income under the accretion method of accounting.

The following tables present loans held for investment, by internal credit risk grade, as of the periods indicated:


	December 31, 2013
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	30,719	$	1,094	$	3,139	$	303	$	—	$	35,255
Commercial and industrial		87,589		1,056		2,919		3,891		—		95,455
Multi-family residential		67,257		2,237		703		—		—		70,197
Single family non-owner occupied		121,367		4,501		9,316		375		—		135,559
Non-farm, non-residential		440,334		21,046		14,500		31		—		475,911
Agricultural		2,306		8		10		—		—		2,324
Farmland		27,421		1,721		3,472		—		—		32,614
Consumer real estate loans
Home equity lines		107,411		1,355		2,789		215		—		111,770
Single family owner occupied		460,166		8,170		27,507		169		—		496,012
Owner occupied construction		28,242		261		200		—		—		28,703
Consumer and other loans
Consumer loans		69,973		864		472		—		4		71,313
Other		3,918		—		8		—		—		3,926

Total non-covered loans		1,446,703		42,313		65,035		4,984		4		1,559,039
Covered loans
Commercial loans
Construction, development, and other land		9,722		1,378		4,714		51		—		15,865
Commercial and industrial		2,865		247		189		24		—		3,325
Multi-family residential		1,472		—		461		—		—		1,933
Single family non-owner occupied		4,362		1,519		1,552		16		—		7,449
Non-farm, non-residential		13,077		4,630		16,901		38		—		34,646
Agricultural		164		—		—		—		—		164
Farmland		572		—		301		—		—		873
Consumer real estate loans
Home equity lines		66,797		1,138		1,269		2		—		69,206
Single family owner occupied		10,832		148		5,939		—		—		16,919
Owner occupied construction		198		—		986		—		—		1,184
Consumer and other loans
Consumer loans		118		—		—		—		—		118
Other		—		—		—		—		—		—

Total covered loans		110,179		9,060		32,312		131		—		151,682

Total loans	$	1,556,882	$	51,373	$	97,347	$	5,115	$	4	$	1,710,721


	December 31, 2012
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	41,850	$	1,497	$	13,546	$	541	$	—	$	57,434
Commercial and industrial		77,573		2,506		4,821		3,838		—		88,738
Multi-family residential		60,161		4,043		1,490		—		—		65,694
Single family non-owner occupied		112,562		5,938		16,092		1,320		—		135,912
Non-farm, non-residential		399,907		15,975		32,808		120		—		448,810
Agricultural		1,657		19		33		—		—		1,709
Farmland		28,887		2,262		3,421		—		—		34,570
Consumer real estate loans
Home equity lines		104,750		2,739		3,592		—		—		111,081
Single family owner occupied		436,587		9,599		27,319		—		42		473,547
Owner occupied construction		15,841		382		—		—		—		16,223
Consumer and other loans
Consumer loans		76,787		867		501		8		—		78,163
Other		5,657		8		1		—		—		5,666

Total non-covered loans		1,362,219		45,835		103,624		5,827		42		1,517,547
Covered loans
Commercial loans
Construction, development, and other land		6,463		2,120		17,834		178		—		26,595
Commercial and industrial		6,225		445		197		81		—		6,948
Multi-family residential		1,962		—		649		—		—		2,611
Single family non-owner occupied		6,065		2,223		3,015		125		—		11,428
Non-farm, non-residential		23,855		5,477		19,189		44		—		48,565
Agricultural		143		—		1		—		—		144
Farmland		935		—		156		—		—		1,091
Consumer real estate loans
Home equity lines		16,323		11,981		53,116		25		—		81,445
Single family owner occupied		16,011		927		5,786		237		—		22,961
Owner occupied construction		484		—		1,160		—		—		1,644
Consumer and other loans
Consumer loans		2,987		562		125		—		—		3,674
Other		—		—		—		—		—		—

Total covered loans		81,453		23,735		101,228		690		—		207,106

Total loans	$	1,443,672	$	69,570	$	204,852	$	6,517	$	42	$	1,724,653

As of December 31, 2013, non-covered special mention and classified loans decreased $42.99 million, or 27.68%, compared to December 31, 2012, which was primarily due to loan workout activity across the portfolio coupled with continued credit improvement. Credit quality also significantly improved in the covered loan portfolio with special mention and classified loans declining $84.15 million, or 66.97%, as of December 31, 2013, compared to December 31, 2012.

The following table presents nonaccrual loans, by loan class, as of the dates indicated:


	December 31,
	2013						2012
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	1,187	$	761	$	1,948	$	405	$	1,990	$	2,395
Commercial and industrial		5,341		92		5,433		3,912		35		3,947
Multi-family residential		—		—		—		378		—		378
Single family non-owner occupied		1,966		222		2,188		7,071		21		7,092
Non-farm, non-residential		2,685		—		2,685		5,938		951		6,889
Agricultural		—		—		—		2		—		2
Farmland		441		301		742		—		—		—
Consumer real estate loans
Home equity lines		765		232		997		872		436		1,308
Single family owner occupied		6,567		1,555		8,122		5,219		831		6,050
Owner occupied construction		—		190		190		—		59		59
Consumer and other loans
Consumer loans		201		—		201		126		—		126
Other		—		—		—		—		—		—

Total		19,153		3,353		22,506		23,923		4,323		28,246
Purchased impaired loans		8		—		8		8		—		8

Total nonaccrual loans	$	19,161	$	3,353	$	22,514	$	23,931	$	4,323	$	28,254

The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. There were no non-covered accruing loans contractually past due 90 days or more as of December 31, 2013, or December 31, 2012. Accruing loans contractually past due 90 days or more were $86 thousand as of December 31, 2013, which was attributed to covered home equity lines. There were no accruing loans contractually past due 90 days or more as of December 31, 2012.


	December 31, 2013
(Amounts in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total Past Due		Current Loans		Total Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	118	$	10	$	532	$	660	$	34,595	$	35,255
Commercial and industrial		93		39		2,631		2,763		92,692		95,455
Multi-family residential		115		—		—		115		70,082		70,197
Single family non-owner occupied		611		554		1,203		2,368		133,191		135,559
Non-farm, non-residential		1,014		318		1,770		3,102		472,809		475,911
Agricultural		—		—		—		—		2,324		2,324
Farmland		245		—		—		245		32,369		32,614
Consumer real estate loans
Home equity lines		289		317		442		1,048		110,722		111,770
Single family owner occupied		7,428		1,228		145		8,801		487,211		496,012
Owner occupied construction		205		—		2,284		2,489		26,214		28,703
Consumer and other loans
Consumer loans		811		86		105		1,002		70,311		71,313
Other		—		—		—		—		3,926		3,926

Total non-covered loans		10,929		2,552		9,112		22,593		1,536,446		1,559,039
Covered loans
Commercial loans
Construction, development, and other land		479		—		453		932		14,933		15,865
Commercial and industrial		5		44		92		141		3,184		3,325
Multi-family residential		—		—		—		—		1,933		1,933
Single family non-owner occupied		—		—		184		184		7,265		7,449
Non-farm, non-residential		209		—		—		209		34,437		34,646
Agricultural		—		—		—		—		164		164
Farmland		—		—		301		301		572		873
Consumer real estate loans
Home equity lines		488		86		163		737		68,469		69,206
Single family owner occupied		197		120		1,466		1,783		15,136		16,919
Owner occupied construction		—		—		190		190		994		1,184
Consumer and other loans												—
Consumer loans		—		—		—		—		118		118
Other		—		—		—		—		—		—

Total covered loans		1,378		250		2,849		4,477		147,205		151,682

Total loans	$	12,307	$	2,802	$	11,961	$	27,070	$	1,683,651	$	1,710,721


	December 31, 2012
(Amounts in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total Past Due		Current Loans		Total Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	344	$	—	$	188	$	532	$	56,902	$	57,434
Commercial and industrial		387		84		1,432		1,903		86,835		88,738
Multi-family residential		624		—		—		624		65,070		65,694
Single family non-owner occupied		1,841		1,348		3,715		6,904		129,008		135,912
Non-farm, non-residential		2,702		936		3,621		7,259		441,551		448,810
Agricultural		—		—		—		—		1,709		1,709
Farmland		216		196		—		412		34,158		34,570
Consumer real estate loans
Home equity lines		315		93		495		903		110,178		111,081
Single family owner occupied		6,564		1,176		1,644		9,384		464,163		473,547
Owner occupied construction		382		—		—		382		15,841		16,223
Consumer and other loans
Consumer loans		715		73		47		835		77,328		78,163
Other		—		—		—		—		5,666		5,666

Total non-covered loans		14,090		3,906		11,142		29,138		1,488,409		1,517,547
Covered loans
Commercial loans
Construction, development, and other land		252		161		1,121		1,534		25,061		26,595
Commercial and industrial		45		—		—		45		6,903		6,948
Multi-family residential		—		—		—		—		2,611		2,611
Single family non-owner occupied		8		—		21		29		11,399		11,428
Non-farm, non-residential		501		—		927		1,428		47,137		48,565
Agricultural		—		—		—		—		144		144
Farmland		6		—		—		6		1,085		1,091
Consumer real estate loans
Home equity lines		217		112		204		533		80,912		81,445
Single family owner occupied		413		135		475		1,023		21,938		22,961
Owner occupied construction		—		—		59		59		1,585		1,644
Consumer and other loans
Consumer loans		—		—		—		—		3,674		3,674
Other		—		—		—		—		—		—

Total covered loans		1,442		408		2,807		4,657		202,449		207,106

Total loans	$	15,532	$	4,314	$	13,949	$	33,795	$	1,690,858	$	1,724,653

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. All restructured loans to borrowers experiencing financial difficulty 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. Specific reserves in the allowance for loan losses attributed to TDRs totaled $1.84 million as of December 31, 2013, and $1.87 million as of December 31, 2012. 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. The Company recognized interest income on TDRs of $551 thousand in 2013, $640 thousand in 2012, and $411 thousand in 2011.

Loans acquired with credit deterioration, with a discount, are generally not considered a TDR as long as the loan remains in the assigned loan pool. There were no covered loans recorded as TDRs as of December 31, 2013 or 2012. The following table presents loans modified as TDRs, by loan class, segregated by accrual status, as of the dates indicated:


	December 31,
	2013						2012
(Amounts in thousands)	Nonaccrual ⁽¹⁾		Accruing		Total		Nonaccrual ⁽¹⁾		Accruing		Total
Commercial loans
Construction, development, andother land	$	—	$	—	$	—	$	63	$	—	$	63
Commercial and industrial		1,115		—		1,115		1,119		—		1,119
Single family non-owner occupied		375		—		375		1,380		—		1,380
Non-farm, non-residential		128		5,490		5,618		764		5,897		6,661
Consumer real estate loans
Home equity lines		159		51		210		305		55		360
Single family owner occupied		423		6,670		7,093		197		6,095		6,292

Total TDRs	$	2,200	$	12,211	$	14,411	$	3,828	$	12,047	$	15,875

(1)	TDRs on nonaccrual status are included in the total nonaccrual loan balance disclosed in the table above.

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


	Year Ended December 31,
	2013						2012
(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		2	$	601	$	557		—	$	—	$	—
Below market interest rate andextended payment term Single family non-owner occupied		1		375		328				—		—
Non-farm, non-residential		1		511		511		2		5,822		5,822
Single family owner occupied		4		809		757		—		—		—

Total		8	$	2,296	$	2,153		3	$	6,173	$	6,141

The following table presents loans modified as TDRs, by loan class, that were restructured within the previous 12 months for which there was a payment default during the years indicated:


	Year Ended December 31,
	2013				2012
(Amounts in thousands)	Total Contracts		Recorded Investment		Total Contracts		Recorded Investment
Single family non-owner occupied		1	$	375		—	$	—
Single family owner occupied		1		359		—		—

Total		2	$	734		—	$	—