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. The Company generally deems loans impaired when it is probable the Company will be unable to collect all principal and interest amounts contractually due. The following tables present the recorded investment and related information for impaired loans, excluding PCI loans, as of the periods indicated:


	December 31, 2014
(Amounts in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Annual Recorded Investment
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	—	$	—	$	—	$	—
Commercial and industrial		—		—		—		461
Multi-family residential		—		—		—		—
Single family non-owner occupied		466		466		—		301
Non-farm, non-residential		5,705		6,049		—		6,083
Agricultural		—		—		—		—
Farmland		—		—		—		181
Consumer real estate loans
Home equity lines		—		—		—		66
Single family owner occupied		3,397		3,494		—		2,508
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—

Total impaired loans with no related allowance		9,568		10,009		—		9,600
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land	$	—	$	—	$	—	$	—
Commercial and industrial		—		—		—		2,199
Multi-family residential		—		—		—		4,190
Single family non-owner occupied		367		367		45		369
Non-farm, non-residential		3,772		3,772		1,000		3,386
Agricultural		—		—		—		—
Farmland		—		—		—		—
Consumer real estate loans
Home equity lines		—		—		—		57
Single family owner occupied		2,341		2,512		437		3,897
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—

Total impaired loans with a related allowance		6,480		6,651		1,482		14,098

Total impaired loans	$	16,048	$	16,660	$	1,482	$	23,698


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

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

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

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

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


	Year ended December 31,
(Amounts in thousands)	2014		2013		2012
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	—	$	294	$	3
Commercial and industrial		17		17		17
Multi-family residential		—		3		4
Single family non-owner occupied		8		99		56
Non-farm, non-residential		96		296		102
Agricultural		—		—		—
Farmland		11		12		—
Consumer real estate loans
Home equity lines		2		25		28
Single family owner occupied		73		70		113
Owner occupied construction		—		5		—
Consumer and other loans
Consumer loans		—		—		—

Total impaired loans with no related allowance		207		821		323
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		117		1
Commercial and industrial		47		18		948
Multi-family residential		23		7		3
Single family non-owner occupied		2		3		80
Non-farm, non-residential		31		29		317
Agricultural		—		—		—
Farmland		—		—		—
Consumer real estate loans
Home equity lines		1		12		1
Single family owner occupied		48		54		103
Owner occupied construction		—		—		—
Consumer and other loans
Consumer loans		—		—		—

Total impaired loans with a related allowance		152		240		1,453

Total impaired loans	$	359	$	1,061	$	1,776

The Company determined that two of the seven PCI loan pools were impaired as of December 31, 2014, compared to four impaired pools as of December 31, 2013. 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)	2014		2013
Recorded investment	$	14,607	$	52,033
Unpaid principal balance		31,169		69,320
Allowance for loan losses		58		747


	Year ended December 31,
(Amounts in thousands)	2014		2013		2012
Interest income recognized	$	3,081	$	1,966	$	—
Average recorded investment		30,007		35,220		—

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 annually and at various times during the year. 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. 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, 2014
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	38,858	$	1,384	$	1,029	$	—	$	—	$	41,271
Commercial and industrial		81,196		616		1,287		—		—		83,099
Multi-family residential		89,503		7,007		970		—		—		97,480
Single family non-owner occupied		126,155		3,333		5,683		—		—		135,171
Non-farm, non-residential		441,385		13,028		19,493		—		—		473,906
Agricultural		1,589		—		10		—		—		1,599
Farmland		26,876		1,432		1,209		—		—		29,517
Consumer real estate loans
Home equity lines		107,688		1,606		1,663		—		—		110,957
Single family owner occupied		454,833		8,884		21,758		—		—		485,475
Owner occupied construction		32,551		—		248		—		—		32,799
Consumer and other loans
Consumer loans		68,592		520		235		—		—		69,347
Other		6,555		—		—		—		—		6,555

Total non-covered loans		1,475,781		37,810		53,585		—		—		1,567,176
Covered loans
Commercial loans
Construction, development, and other land		7,598		3,227		2,275		—		—		13,100
Commercial and industrial		2,528		82		52		—		—		2,662
Multi-family residential		1,400		—		184		—		—		1,584
Single family non-owner occupied		2,703		2,059		1,156		—		—		5,918
Non-farm, non-residential		12,672		4,341		8,304		—		—		25,317
Agricultural		43		—		—		—		—		43
Farmland		420		—		296		—		—		716
Consumer real estate loans
Home equity lines		21,295		38,296		800		—		—		60,391
Single family owner occupied		7,094		2,040		2,834		—		—		11,968
Owner occupied construction		84		264		105		—		—		453
Consumer and other loans
Consumer loans		88		—		—		—		—		88
Other		—		—		—		—		—		—

Total covered loans		55,925		50,309		16,006		—		—		122,240

Total loans	$	1,531,706	$	88,119	$	69,591	$	—	$	—	$	1,689,416


	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		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

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


	December 31,
	2014						2013
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	—	$	18	$	18	$	1,187	$	761	$	1,948
Commercial and industrial		123		34		157		5,341		92		5,433
Multi-family residential		245		—		245		—		—		—
Single family non-owner occupied		601		77		678		1,966		222		2,188
Non-farm, non-residential		2,334		1,317		3,651		2,685		—		2,685
Agricultural		4		—		4		—		—		—
Farmland		—		—		—		441		301		742
Consumer real estate loans
Home equity lines		792		204		996		765		232		997
Single family owner occupied		6,389		682		7,071		6,567		1,555		8,122
Owner occupied construction		—		106		106		—		190		190
Consumer and other loans
Consumer loans		68		—		68		201		—		201
Other		—		—		—		—		—		—

Total		10,556		2,438		12,994		19,153		3,353		22,506
Purchased impaired loans		—		—		—		8		—		8

Total nonaccrual loans	$	10,556	$	2,438	$	12,994	$	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 December 31, 2014, or December 31, 2013. There were no covered accruing loans contractually past due 90 days or more as of December 31, 2014. 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.


	December 31, 2014
(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	$	39	$	46	$	—	$	85	$	41,186	$	41,271
Commercial and industrial		285		6		103		394		82,705		83,099
Multi-family residential		81		110		—		191		97,289		97,480
Single family non-owner occupied		914		513		425		1,852		133,319		135,171
Non-farm, non-residential		1,075		783		1,984		3,842		470,064		473,906
Agricultural		—		—		4		4		1,595		1,599
Farmland		89		—		—		89		29,428		29,517
Consumer real estate loans
Home equity lines		492		103		571		1,166		109,791		110,957
Single family owner occupied		5,436		1,931		4,564		11,931		473,544		485,475
Owner occupied construction		—		—		—		—		32,799		32,799
Consumer and other loans
Consumer loans		544		84		26		654		68,693		69,347
Other		—		—		—		—		6,555		6,555

Total non-covered loans		8,955		3,576		7,677		20,208		1,546,968		1,567,176
Covered loans
Commercial loans
Construction, development, and other land		120		17		—		137		12,963		13,100
Commercial and industrial		84		12		34		130		2,532		2,662
Multi-family residential		—		—		—		—		1,584		1,584
Single family non-owner occupied		122		—		77		199		5,719		5,918
Non-farm, non-residential		124		140		1,258		1,522		23,795		25,317
Agricultural		—		—		—		—		43		43
Farmland		3		—		—		3		713		716
Consumer real estate loans
Home equity lines		858		318		168		1,344		59,047		60,391
Single family owner occupied		134		34		415		583		11,385		11,968
Owner occupied construction		—		—		—		—		453		453
Consumer and other loans												—
Consumer loans		—		—		—		—		88		88
Other		—		—		—		—		—		—

Total covered loans		1,445		521		1,952		3,918		118,322		122,240

Total loans	$	10,400	$	4,097	$	9,629	$	24,126	$	1,665,290	$	1,689,416


	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

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 $475 thousand as of December 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 $597 thousand in 2014, $551 thousand in 2013, and $640 thousand in 2012.

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, 2014 or 2013. The following table presents loans modified as TDRs, by loan class, segregated by accrual status, as of the dates indicated:


	December 31,
	2014						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		—		1,088		1,088		375		—		375
Non-farm, non-residential		83		4,743		4,826		128		5,490		5,618
Consumer real estate loans
Home equity lines		—		47		47		159		51		210
Single family owner occupied		471		8,412		8,883		423		6,670		7,093
Owner occupied construction		—		244		244		—		—		—

Total TDRs	$	554	$	14,534	$	15,088	$	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 TDRs, by type of concession made and loan class, restructured during the periods indicated. The post-modification recorded investment represents the loan balance immediately after modification.


	Year Ended December 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
Single family owner occupied		4	$	1,850	$	1,850		2	$	601	$	557
Owner occupied construction		1		245		245				—		—

Total		5		2,095		2,095		2		601		557
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 non-owner occupied		1		255		255		1		375		328
Non-farm, non-residential		—		—		—		1		511		511
Single family owner occupied		5		487		487		4		809		757

Total		6		742		742		6		1,695		1,596

Total		13	$	3,608	$	3,608		8	$	2,296	$	2,153

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


	Year Ended December 31,
	2014				2013
(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