Note 4. 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:


	March 31, 2014						December 31, 2013
			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
Commercial and industrial	$	292	$	292	$	—	$	292	$	292	$	—
Multi-family residential		—		—		—		—		—		—
Single family non-owner occupied		420		420		—		289		317		—
Non-farm, non-residential		5,559		5,903		—		5,352		5,682		—
Farmland		351		363		—		351		363		—
Consumer real estate loans
Home equity lines		254		264		—		257		264		—
Single family owner occupied		1,690		2,101		—		2,006		2,414		—

Total impaired loans with no allowance		8,566		9,343		—		8,547		9,332		—
Impaired loans with a related allowance:
Commercial loans
Commercial and industrial		4,943		5,319		3,504		4,897		10,244		3,794
Multi-family residential		5,601		5,601		500		—		—		—
Single family non-owner occupied		364		371		38		375		375		47
Non-farm, non-residential		4,458		4,459		377		600		600		114
Farmland		—		—		—		—		—		—
Consumer real estate loans
Home equity lines		208		229		171		215		230		52
Single family owner occupied		4,377		4,578		692		4,844		5,035		735

Total impaired loans with an allowance		19,951		20,557		5,282		10,931		16,484		4,742

Total impaired loans	$	28,517	$	29,900	$	5,282	$	19,478	$	25,816	$	4,742

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


	For the Three Months Ended
	March 31, 2014				March 31, 2013
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Amounts in thousands)	Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	—	$	—	$	2,195	$	43
Commercial and industrial		292		12		599		11
Multi-family residential		—		—		35		2
Single family non-owner occupied		420		1		841		79
Non-farm, non-residential		5,918		36		5,955		212
Farmland		363		11		88		9
Consumer real estate loans
Home equity lines		265		2		298		25
Single family owner occupied		2,101		51		547		70

Total impaired loans with no allowance		9,359		113		10,558		451
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		—		2,670		117
Commercial and industrial		5,157		47		3,217		—
Multi-family residential		5,603		22		376		7
Single family non-owner occupied		372		1		1,728		3
Non-farm, non-residential		4,399		25		2,756		26
Farmland		—		—		—		—
Consumer real estate loans
Home equity lines		229		1		222		3
Single family owner occupied		4,580		34		4,485		37

Total impaired loans with an allowance		20,340		130		15,454		193

Total impaired loans	$	29,699	$	243	$	26,012	$	644

The Company determined that 3 of the 7 PCI loan pools were impaired as of March 31, 2014, compared to 4 impaired pools as of December 31, 2013. The following tables present balance and interest income related to the impaired loan pools as of the dates, and in the periods, indicated:


(Amounts in thousands)	March 31, 2014		December 31, 2013
Recorded investment	$	47,382	$	52,033
Unpaid principal balance		62,325		69,320
Allowance for loan losses		485		747


	Three Months Ended March 31,
(Amounts in thousands)	2014		2013
Interest income recognized	$	782	$	84
Average recorded investment		49,276		20,233

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:


	March 31, 2014
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	41,707	$	1,138	$	2,664	$	152	$	—	$	45,661
Commercial and industrial		86,139		953		3,371		3,940		—		94,403
Multi-family residential		67,083		2,095		6,416		—		—		75,594
Single family non-owner occupied		123,772		4,021		9,812		364		—		137,969
Non-farm, non-residential		446,848		18,478		19,035		—		—		484,361
Agricultural		2,077		7		9		—		—		2,093
Farmland		29,277		1,307		1,826		—		—		32,410
Consumer real estate loans
Home equity lines		109,135		1,390		2,404		208		—		113,137
Single family owner occupied		454,285		10,179		27,999		164		—		492,627
Owner occupied construction		33,495		422		443		—		—		34,360
Consumer and other loans
Consumer loans		70,929		794		386		2		—		72,111
Other		3,968		—		—		—		—		3,968

Total non-covered loans		1,468,715		40,784		74,365		4,830		—		1,588,694
Covered loans
Commercial loans
Construction, development, and other land		9,607		1,465		4,837		47		—		15,956
Commercial and industrial		2,474		468		119		1		—		3,062
Multi-family residential		1,458		—		445		—		—		1,903
Single family non-owner occupied		3,832		1,474		1,478		10		—		6,794
Non-farm, non-residential		11,352		6,606		13,483		17		—		31,458
Agricultural		162		—		—		—		—		162
Farmland		512		—		305		—		—		817
Consumer real estate loans
Home equity lines		64,707		1,147		1,039		2		—		66,895
Single family owner occupied		10,117		201		4,969		—		—		15,287
Owner occupied construction		88		235		404		—		—		727
Consumer and other loans
Consumer loans		109		—		—		—		—		109
Other		—		—		—		—		—		—

Total covered loans		104,418		11,596		27,079		77		—		143,170

Total loans	$	1,573,133	$	52,380	$	101,444	$	4,907	$	—	$	1,731,864


	December 31, 2013
			Special
(Amounts in thousands)	Pass		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

Credit quality continued to improve in the covered loan portfolio with special mention and classified loans declining $2.75 million, or 6.63%, as of March 31, 2014, compared to December 31, 2013.

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


	March 31, 2014						December 31, 2013
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	816	$	127	$	943	$	1,187	$	761	$	1,948
Commercial and industrial		5,357		75		5,432		5,341		92		5,433
Multi-family residential		115		—		115		—		—		—
Single family non-owner occupied		2,407		114		2,521		1,966		222		2,188
Non-farm, non-residential		2,972		—		2,972		2,685		—		2,685
Farmland		432		—		432		441		301		742
Consumer real estate loans
Home equity lines		774		246		1,020		765		232		997
Single family owner occupied		7,890		582		8,472		6,567		1,555		8,122
Owner occupied construction		—		117		117		—		190		190
Consumer and other loans
Consumer loans		138		—		138		201		—		201

Total		20,901		1,261		22,162		19,153		3,353		22,506
Purchased impaired loans		8		—		8		8		—		8

Total nonaccrual loans	$	20,909	$	1,261	$	22,170	$	19,161	$	3,353	$	22,514

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 March 31, 2014, or December 31, 2013. Accruing loans contractually past due 90 days or more totaled $109 thousand as of March 31, 2014, and $86 thousand as of December 31, 2013 which were attributed to covered home equity lines.


	March 31, 2014
	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	$	113	$	217	$	441	$	45,220	$	45,661
Commercial and industrial		59		—		2,576		2,635		91,768		94,403
Multi-family residential		85		—		115		200		75,394		75,594
Single family non-owner occupied		432		254		1,527		2,213		135,756		137,969
Non-farm, non-residential		1,216		203		2,325		3,744		480,617		484,361
Agricultural		8		—		—		8		2,085		2,093
Farmland		—		—		432		432		31,978		32,410
Consumer real estate loans
Home equity lines		479		80		191		750		112,387		113,137
Single family owner occupied		4,771		2,951		3,390		11,112		481,515		492,627
Owner occupied construction		—		—		—		—		34,360		34,360
Consumer and other loans
Consumer loans		509		76		29		614		71,497		72,111
Other		—		—		—		—		3,968		3,968

Total non-covered loans		7,670		3,677		10,802		22,149		1,566,545		1,588,694
Covered loans
Commercial loans
Construction, development, and other land		178		10		74		262		15,694		15,956
Commercial and industrial		—		—		35		35		3,027		3,062
Multi-family residential		—		—		—		—		1,903		1,903
Single family non-owner occupied		—		—		114		114		6,680		6,794
Non-farm, non-residential		195		354		—		549		30,909		31,458
Agricultural		—		—		—		—		162		162
Farmland		—		—		—		—		817		817
Consumer real estate loans
Home equity lines		353		1		187		541		66,354		66,895
Single family owner occupied		148		58		434		640		14,647		15,287
Owner occupied construction		—		—		117		117		610		727
Consumer and other loans												—
Consumer loans		—		—		—		—		109		109
Other		—		—		—		—		—		—

Total covered loans		874		423		961		2,258		140,912		143,170

Total loans	$	8,544	$	4,100	$	11,763	$	24,407	$	1,707,457	$	1,731,864


	December 31, 2013
	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	$	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

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 $1.83 million as of March 31, 2014, and $1.84 million as of December 31, 2013. 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 $149 thousand for the three months ended March 31, 2014, and $240 thousand for the three months ended March 31, 2013.

Loans acquired with credit deterioration, with a discount, are generally not considered TDRs as long as the loans remain in the assigned loan pool. There were no covered loans recorded as TDRs as of March 31, 2014, or December 31, 2013. The following table presents loans modified as TDRs, by loan class, segregated by accrual status, as of the dates indicated:


	March 31, 2014						December 31, 2013
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accruing		Total		Nonaccrual⁽¹⁾		Accruing		Total
Commercial loans
Commercial and industrial	$	1,115	$	—	$	1,115	$	1,115	$	—	$	1,115
Single family non-owner occupied		364		—		364		375		—		375
Non-farm, non-residential		124		5,742		5,866		128		5,490		5,618
Consumer real estate loans
Home equity lines		—		50		50		159		51		210
Single family owner occupied		532		6,930		7,462		423		6,670		7,093
Owner occupied construction		—		246		246		—		—		—

Total TDRs	$	2,135	$	12,968	$	15,103	$	2,200	$	12,211	$	14,411

(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 periods indicated. The post-modification recorded investment represents the loan balance immediately following modification.


	Three Months Ended March 31,
	2014						2013
(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
Owner occupied construction		1	$	245	$	245		—	$	—	$	—
Extended payment term
Non-farm, non-residential		1	$	303	$	303		—		—		—
Single family owner occupied		1		134		134		—		—		—

Total		2		437		437		—		—		—
Below market interest rate and extended payment term
Single family owner occupied		2		266		266		—		—		—

Total		5	$	948	$	948		—	$	—	$	—

There were no payment defaults on loans modified as TDRs, that were restructured within the previous 12 months, for the three months ended March 31, 2014 or 2013.