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 table presents the recorded investment and related information for loans considered to be impaired, excluding PCI loans, as of the periods indicated:


	September 30, 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	$	1,258	$	1,439	$	—	$	292	$	292	$	—
Single family non-owner occupied		268		268		—		289		317		—
Non-farm, non-residential		5,468		5,812		—		5,352		5,682		—
Farmland		—		—		—		351		363		—
Consumer real estate loans
Home equity lines		—		—		—		257		264		—
Single family owner occupied		2,787		2,878		—		2,006		2,414		—

Total impaired loans with no allowance		9,781		10,397		—		8,547		9,332		—
Impaired loans with a related allowance:
Commercial loans
Commercial and industrial		—		—		—		4,897		10,244		3,794
Multi-family residential		5,567		5,567		500		—		—		—
Single family non-owner occupied		369		369		46		375		375		47
Non-farm, non-residential		4,382		4,382		623		600		600		114
Consumer real estate loans
Single family owner occupied		2,374		2,526		504		4,844		5,035		735

Total impaired loans with an allowance		12,692		12,844		1,673		10,931		16,484		4,742

Total impaired loans	$	22,473	$	23,241	$	1,673	$	19,478	$	25,816	$	4,742

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


	For the Three Months Ended
	September 30, 2014				September 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	$	—	$	—	$	6,375	$	40
Commercial and industrial		1,258		—		—		—
Multi-family residential		—		—		—		—
Single family non-owner occupied		321		7		317		—
Non-farm, non-residential		5,971		—		8,194		—
Farmland		—		—		667		3
Consumer real estate loans
Home equity lines		—		—		546		—
Single family owner occupied		2,880		10		2,794		—
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—

Total impaired loans with no allowance		10,430		17		18,893		43
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		—		463		—
Commercial and industrial		—		—		5,328		11
Multi-family residential		5,568		1		—		—
Single family non-owner occupied		369		1		365		—
Non-farm, non-residential		4,386		6		606		—
Consumer real estate loans
Home equity lines		—		—		535		9
Single family owner occupied		2,528		8		5,093		13

Total impaired loans with an allowance		12,851		16		12,390		33

Total impaired loans	$	23,281	$	33	$	31,283	$	76


	For the Nine Months Ended
	September 30, 2014				September 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	$	—	$	—	$	5,133	$	294
Commercial and industrial		614		17		834		11
Multi-family residential		—		—		24		3
Single family non-owner occupied		247		8		1,146		93
Non-farm, non-residential		6,089		89		7,739		296
Farmland		241		11		372		12
Consumer real estate loans
Home equity lines		88		2		518		25
Single family owner occupied		2,179		61		2,069		70
Owner occupied construction		—		—		20		5
Consumer and other loans
Consumer loans		—		—		4		—

Total impaired loans with no allowance		9,458		188		17,859		809
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		—		1,409		117
Commercial and industrial		2,932		47		4,009		11
Multi-family residential		5,586		23		126		7
Single family non-owner occupied		370		2		1,064		12
Non-farm, non-residential		4,404		31		1,791		26
Consumer real estate loans
Home equity lines		76		1		329		3
Single family owner occupied		3,216		42		4,318		54

Total impaired loans with an allowance		16,584		146		13,046		230

Total impaired loans	$	26,042	$	334	$	30,905	$	1,039

The Company determined that one of the seven PCI loan pools was impaired as of September 30, 2014, compared to four impaired pools as of December 31, 2013, and September 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:


(Amounts in thousands)	September 30, 2014		December 31, 2013
Recorded investment	$	1,208	$	52,033
Unpaid principal balance		1,223		69,320
Allowance for loan losses		196		747


	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2014		2013		2014		2013
Interest income recognized	$	82	$	721	$	2,154	$	839
Average recorded investment		1,416		23,538		35,063		15,799

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:


	September 30, 2014
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	40,408	$	1,107	$	1,260	$	—	$	—	$	42,775
Commercial and industrial		84,377		585		2,489		1,258		—		88,709
Multi-family residential		91,963		1,466		6,383		—		—		99,812
Single family non-owner occupied		133,860		3,361		6,683		—		—		143,904
Non-farm, non-residential		457,927		14,380		19,626		—		—		491,933
Agricultural		2,138		—		11		—		—		2,149
Farmland		28,991		1,585		1,362		—		—		31,938
Consumer real estate loans
Home equity lines		109,825		1,593		1,445		—		—		112,863
Single family owner occupied		467,381		10,182		20,960		—		—		498,523
Owner occupied construction		44,545		—		470		—		—		45,015
Consumer and other loans
Consumer loans		70,350		689		213		—		—		71,252
Other		7,308		—		—		—		—		7,308

Total non-covered loans		1,539,073		34,948		60,902		1,258		—		1,636,181
Covered loans
Commercial loans
Construction, development, and other land		7,467		2,750		2,967		—		—		13,184
Commercial and industrial		2,483		83		80		—		—		2,646
Multi-family residential		1,421		—		191		—		—		1,612
Single family non-owner occupied		2,907		2,123		1,182		—		—		6,212
Non-farm, non-residential		13,227		5,081		7,930		—		—		26,238
Agricultural		151		—		—		—		—		151
Farmland		431		—		298		—		—		729
Consumer real estate loans
Home equity lines		21,767		40,090		915		—		—		62,772
Single family owner occupied		7,619		1,565		3,320		—		—		12,504
Owner occupied construction		152		151		163		—		—		466
Consumer and other loans
Consumer loans		97		—		—		—		—		97
Other		—		—		—		—		—		—

Total covered loans		57,722		51,843		17,046		—		—		126,611

Total loans	$	1,596,795	$	86,791	$	77,948	$	1,258	$	—	$	1,762,792


	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		23,189		44,746		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		66,571		52,668		32,312		131		—		151,682

Total loans	$	1,513,274	$	94,981	$	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 $15.23 million, or 13.56%, and covered classified loans declined $16.22 million, or 19.06%, as of September 30, 2014, compared to December 31, 2013.

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


	September 30, 2014						December 31, 2013
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	—	$	90	$	90	$	1,187	$	761	$	1,948
Commercial and industrial		2,356		22		2,378		5,341		92		5,433
Multi-family residential		80		—		80		—		—		—
Single family non-owner occupied		761		77		838		1,966		222		2,188
Non-farm, non-residential		2,338		152		2,490		2,685		—		2,685
Farmland		—		—		—		441		301		742
Consumer real estate loans
Home equity lines		180		204		384		765		232		997
Single family owner occupied		5,497		471		5,968		6,567		1,555		8,122
Owner occupied construction		226		115		341		—		190		190
Consumer and other loans
Consumer loans		42		—		42		201		—		201

Total		11,480		1,131		12,611		19,153		3,353		22,506
Purchased impaired loans		—		—		—		8		—		8

Total nonaccrual loans	$	11,480	$	1,131	$	12,611	$	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 September 30, 2014, or December 31, 2013. There were no covered accruing loans contractually past due 90 days or more as of September 30, 2014, compared to $86 thousand as of December 31, 2013.


	September 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	$	27	$	—	$	—	$	27	$	42,748	$	42,775
Commercial and industrial		1,433		—		1,079		2,512		86,197		88,709
Multi-family residential		173		—		—		173		99,639		99,812
Single family non-owner occupied		1,074		280		667		2,021		141,883		143,904
Non-farm, non-residential		411		871		1,229		2,511		489,422		491,933
Agricultural		4		—		—		4		2,145		2,149
Farmland		—		—		—		—		31,938		31,938
Consumer real estate loans
Home equity lines		444		466		174		1,084		111,779		112,863
Single family owner occupied		4,770		2,423		3,881		11,074		487,449		498,523
Owner occupied construction		—		—		226		226		44,789		45,015
Consumer and other loans
Consumer loans		381		100		37		518		70,734		71,252
Other		—		—		—		—		7,308		7,308

Total non-covered loans		8,717		4,140		7,293		20,150		1,616,031		1,636,181
Covered loans
Commercial loans
Construction, development, and other land		226		—		72		298		12,886		13,184
Commercial and industrial		17		104		22		143		2,503		2,646
Multi-family residential		—		—		—		—		1,612		1,612
Single family non-owner occupied		100		40		77		217		5,995		6,212
Non-farm, non-residential		68		—		152		220		26,018		26,238
Agricultural		—		—		—		—		151		151
Farmland		—		—		—		—		729		729
Consumer real estate loans
Home equity lines		585		76		204		865		61,907		62,772
Single family owner occupied		125		13		389		527		11,977		12,504
Owner occupied construction		—		—		115		115		351		466
Consumer and other loans
Consumer loans		—		—		—		—		97		97
Other		—		—		—		—		—		—

Total covered loans		1,121		233		1,031		2,385		124,226		126,611

Total loans	$	9,838	$	4,373	$	8,324	$	22,535	$	1,740,257	$	1,762,792


	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 troubled debt restructurings (“TDRs”) totaled $653 thousand as of September 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 $188 thousand for the three months ended September 30, 2014, and $183 thousand for the three months ended September 30, 2013. The Company recognized interest income on TDRs of $466 thousand for the nine months ended September 30, 2014, and $422 thousand for the nine months ended September 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 September 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:


	September 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
Single family non-owner occupied		—		837		837		375		—		375
Non-farm, non-residential		103		5,370		5,473		128		5,490		5,618
Consumer real estate loans
Home equity lines		—		48		48		159		51		210
Single family owner occupied		382		8,652		9,034		423		6,670		7,093
Owner occupied construction		—		244		244		—		—		—

Total TDRs	$	485	$	15,151	$	15,636	$	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 September 30,
	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
Single family owner occupied		3	$	1,715	$	1,715		1	$	359	$	326
Extended payment term
Single family non-owner occupied		1		468		468		—		—		—
Below market interest rate and extended payment term
Single family owner occupied		2		84		84		2		642		600

Total		6	$	2,267	$	2,267		3	$	1,001	$	926


	Nine Months Ended September 30,
	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
Single family owner occupied		4	$	1,850	$	1,850		1	$	359	$	326
Owner occupied construction		1		245		245		—		—		—

Total		5		2,095		2,095		1		359		326
Extended payment term
Single family non-owner occupied		1		468		468				—		—
Non-farm, non-residential		1		303		303		—		—		—

Total		2		771		771		—		—		—
Below market interest rate and extended payment term
Single family owner occupied		5		487		487		2		642		600

Total		12	$	3,353	$	3,353		3	$	1,001	$	926

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 September 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	$	978
Consumer real estate loans								—
Single family owner occupied		2		312		—		—

Total		2	$	312		1	$	978


	Nine Months Ended September 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	$	978
Consumer real estate loans
Single family owner occupied		2		312		—		—

Total		2	$	312		1	$	978