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:


	June 30, 2014						December 31, 2013
(Amounts in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance:
Commercial loans
Commercial and industrial	$	297	$	297	$	—	$	292	$	292	$	—
Single family non-owner occupied		—		—		—		289		317		—
Non-farm, non-residential		6,027		6,377		—		5,352		5,682		—
Farmland		345		360		—		351		363		—
Consumer real estate loans
Home equity lines		—		—		—		257		264		—
Single family owner occupied		1,337		1,560		—		2,006		2,414		—

Total impaired loans with no allowance		8,006		8,594		—		8,547		9,332		—
Impaired loans with a related allowance:
Commercial loans
Commercial and industrial		3,617		3,804		3,137		4,897		10,244		3,794
Multi-family residential		5,585		5,585		500		—		—		—
Single family non-owner occupied		369		369		30		375		375		47
Non-farm, non-residential		4,426		4,426		667		600		600		114
Consumer real estate loans
Single family owner occupied		2,386		2,539		517		4,844		5,035		735

Total impaired loans with an allowance		16,383		16,723		4,851		10,931		16,484		4,742

Total impaired loans	$	24,389	$	25,317	$	4,851	$	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
	June 30, 2014				June 30, 2013
(Amounts in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	—	$	—	$	6,828	$	211
Commercial and industrial		293		17		1,903		—
Multi-family residential		—		—		37		1
Single family non-owner occupied		—		—		2,281		14
Non-farm, non-residential		6,379		89		9,068		84
Farmland		360		11		361		—
Consumer real estate loans
Home equity lines		—		—		708		—
Single family owner occupied		1,556		42		2,867		—
Owner occupied construction		—		—		61		5
Consumer and other loans
Consumer loans		—		—		12		—

Total impaired loans with no allowance		8,588		159		24,126		315
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		—		1,095		—
Commercial and industrial		3,640		3		3,592		—
Multi-family residential		5,586		21		—		—
Single family non-owner occupied		369		1		1,098		—
Non-farm, non-residential		4,427		25		2,011		—
Consumer real estate loans
Home equity lines		—		—		230		—
Single family owner occupied		2,541		10		3,377		4

Total impaired loans with an allowance		16,563		60		11,403		4

Total impaired loans	$	25,151	$	219	$	35,529	$	319


	For the Six Months Ended
	June 30, 2014				June 30, 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	$	—	$	—	$	4,511	$	254
Commercial and industrial		293		29		1,251		11
Multi-family residential		—		—		36		3
Single family non-owner occupied		210		1		1,561		93
Non-farm, non-residential		6,149		125		7,512		296
Farmland		362		22		225		9
Consumer real estate loans
Home equity lines		133		2		503		25
Single family owner occupied		1,829		93		1,707		70
Owner occupied construction		—		—		31		5
Consumer and other loans
Consumer loans		—		—		6		—

Total impaired loans with no allowance		8,976		272		17,343		766
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		—		1,882		117
Commercial and industrial		4,399		50		3,350		—
Multi-family residential		5,595		43		188		7
Single family non-owner occupied		371		2		1,413		3
Non-farm, non-residential		4,413		50		2,383		26
Consumer real estate loans
Home equity lines		115		1		226		3
Single family owner occupied		3,561		44		3,931		41

Total impaired loans with an allowance		18,454		190		13,373		197

Total impaired loans	$	27,430	$	462	$	30,716	$	963

The Company determined that 4 of the 7 PCI loan pools were impaired as of June 30, 2014, compared to 4 impaired pools as of December 31, 2013, and 1 impaired pool as of June 30, 2013. The following tables present balance and interest income related to the impaired loan pools as of the dates, and in the periods, indicated:


	June 30, 2014		December 31, 2013
(Amounts in thousands)
Recorded investment	$	51,582	$	52,033
Unpaid principal balance		72,901		69,320
Allowance for loan losses		410		747


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
(Amounts in thousands)
Interest income recognized	$	1,290	$	34	$	2,072	$	118
Average recorded investment		55,024		3,588		52,166		11,865

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 $4.0 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:


	June 30, 2014
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	41,440	$	1,066	$	2,147	$	—	$	—	$	44,653
Commercial and industrial		87,752		1,114		2,983		2,510		—		94,359
Multi-family residential		80,561		1,478		6,417		—		—		88,456
Single family non-owner occupied		129,390		4,784		7,202		—		—		141,376
Non-farm, non-residential		463,388		16,972		17,736		—		—		498,096
Agricultural		2,435		—		8		—		—		2,443
Farmland		29,876		1,139		1,381		—		—		32,396
Consumer real estate loans
Home equity lines		108,936		2,127		1,558		—		—		112,621
Single family owner occupied		455,953		12,664		21,929		80		—		490,626
Owner occupied construction		39,319		455		438		—		—		40,212
Consumer and other loans
Consumer loans		72,991		873		236		—		—		74,100
Other		7,369		—		—		—		—		7,369

Total non-covered loans		1,519,410		42,672		62,035		2,590		—		1,626,707
Covered loans
Commercial loans
Construction, development, and other land		8,730		1,725		4,588		—		—		15,043
Commercial and industrial		2,700		82		73		—		—		2,855
Multi-family residential		1,442		—		220		—		—		1,662
Single family non-owner occupied		2,907		2,142		1,394		—		—		6,443
Non-farm, non-residential		12,549		5,433		9,496		—		—		27,478
Agricultural		153		—		—		—		—		153
Farmland		501		—		302		—		—		803
Consumer real estate loans
Home equity lines		62,088		1,154		1,018		—		—		64,260
Single family owner occupied		8,852		230		4,452		—		—		13,534
Owner occupied construction		56		—		329		—		—		385
Consumer and other loans
Consumer loans		101		—		—		—		—		101
Other		—		—		—		—		—		—

Total covered loans		100,079		10,766		21,872		—		—		132,717

Total loans	$	1,619,489	$	53,438	$	83,907	$	2,590	$	—	$	1,759,424


	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 non-covered and covered loan portfolios as non-covered classified loans declined $5.40 million, or 7.71%, and covered classified loans declined $10.44 million, or 32.31%, as of June 30, 2014, compared to December 31, 2013.

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


	June 30, 2014						December 31, 2013
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	346	$	160	$	506	$	1,187	$	761	$	1,948
Commercial and industrial		5,022		—		5,022		5,341		92		5,433
Multi-family residential		197		—		197		—		—		—
Single family non-owner occupied		1,071		114		1,185		1,966		222		2,188
Non-farm, non-residential		2,951		73		3,024		2,685		—		2,685
Farmland		510		—		510		441		301		742
Consumer real estate loans
Home equity lines		328		70		398		765		232		997
Single family owner occupied		6,955		423		7,378		6,567		1,555		8,122
Owner occupied construction		—		115		115		—		190		190
Consumer and other loans
Consumer loans		76		—		76		201		—		201

Total		17,456		955		18,411		19,153		3,353		22,506
Purchased impaired loans		8		—		8		8		—		8

Total nonaccrual loans	$	17,464	$	955	$	18,419	$	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 June 30, 2014, or December 31, 2013. Accruing loans contractually past due 90 days or more totaled $109 thousand as of June 30, 2014, and $86 thousand as of December 31, 2013 which were attributed to covered home equity lines.


	June 30, 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	$	23	$	80	$	266	$	369	$	44,284	$	44,653
Commercial and industrial		221		—		2,463		2,684		91,675		94,359
Multi-family residential		174		—		114		288		88,168		88,456
Single family non-owner occupied		869		71		933		1,873		139,503		141,376
Non-farm, non-residential		1,444		218		2,276		3,938		494,158		498,096
Agricultural		—		—		—		—		2,443		2,443
Farmland		708		142		—		850		31,546		32,396
Consumer real estate loans
Home equity lines		399		41		267		707		111,914		112,621
Single family owner occupied		4,569		2,223		3,245		10,037		480,589		490,626
Owner occupied construction		—		—		—		—		40,212		40,212
Consumer and other loans
Consumer loans		231		33		30		294		73,806		74,100
Other		—		—		—		—		7,369		7,369

Total non-covered loans		8,638		2,808		9,594		21,040		1,605,667		1,626,707
Covered loans
Commercial loans
Construction, development, and other land		207		69		142		418		14,625		15,043
Commercial and industrial		19		—		—		19		2,836		2,855
Multi-family residential		—		—		—		—		1,662		1,662
Single family non-owner occupied		—		—		114		114		6,329		6,443
Non-farm, non-residential		117		—		73		190		27,288		27,478
Agricultural		—		—		—		—		153		153
Farmland		—		—		—		—		803		803
Consumer real estate loans
Home equity lines		162		78		150		390		63,870		64,260
Single family owner occupied		235		306		282		823		12,711		13,534
Owner occupied construction		—		—		115		115		270		385
Consumer and other loans
Consumer loans		—		—		—		—		101		101
Other		—		—		—		—		—		—

Total covered loans		740		453		876		2,069		130,648		132,717

Total loans	$	9,378	$	3,261	$	10,470	$	23,109	$	1,736,315	$	1,759,424


	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 $1.77 million as of June 30, 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 $129 thousand for the three months ended June 30, 2014, and $68 thousand for the three months ended June 30, 2013. The Company recognized interest income on TDRs of $278 thousand for the six months ended June 30, 2014, and $217 thousand for the six months ended June 30, 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 June 30, 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:


	June 30, 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		369		—		369		375		—		375
Non-farm, non-residential		206		5,613		5,819		128		5,490		5,618
Consumer real estate loans
Home equity lines		—		49		49		159		51		210
Single family owner occupied		475		6,998		7,473		423		6,670		7,093
Owner occupied construction		—		246		246		—		—		—

Total TDRs	$	2,165	$	12,906	$	15,071	$	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 tables present 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 June 30,
	2014						2013
	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
Owner occupied construction		—	$	—	$	—		—	$	—	$	—
Extended payment term
Non-farm, non-residential		—		—		—		—		—		—
Single family owner occupied		—		—		—		—		—		—

Total		—		—		—		—		—		—
Below market interest rate and extended payment term
Single family owner occupied		1		137		137		—		—		—

Total		1	$	137	$	137		—	$	—	$	—


	Six Months Ended June 30,
	2014						2013
	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
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		3		403		403		—		—		—

Total		6	$	1,085	$	1,085		—	$	—	$	—

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


	Three Months Ended June 30,
	2014				2013
	Total		Pre-Modification		Total		Pre-Modification
(Amounts in thousands)	Contracts		Recorded Investment		Contracts		Recorded Investment
Commercial loans
Non-farm, non-residential		1	$	510		—	$	—
Consumer real estate loans								—
Single family owner occupied		1		135		—		—

Total		2	$	645		—	$	—


	Six Months Ended June 30,
	2014				2013
	Total		Pre-Modification		Total		Pre-Modification
(Amounts in thousands)	Contracts		Recorded Investment		Contracts		Recorded Investment
Commercial loans
Non-farm, non-residential		1	$	510		—	$	—
Consumer real estate loans
Single family owner occupied		1		135		—		—

Total		2	$	645		—	$	—