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:


	March 31, 2015						December 31, 2014
(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
Single family non-owner occupied	$	464	$	464	$	—	$	466	$	466	$	—
Non-farm, non-residential		8,878		9,243		—		5,705		6,049		—
Consumer real estate loans
Single family owner occupied		3,658		3,964		—		3,397		3,494		—

Total impaired loans with no allowance		13,000		13,671		—		9,568		10,009		—
Impaired loans with a related allowance:
Commercial loans
Single family non-owner occupied		364		364		40		367		367		45
Non-farm, non-residential		4,002		4,013		1,198		3,772		3,772		1,000
Consumer real estate loans
Single family owner occupied		2,402		2,404		517		2,341		2,512		437

Total impaired loans with an allowance		6,768		6,781		1,755		6,480		6,651		1,482

Total impaired loans	$	19,768	$	20,452	$	1,755	$	16,048	$	16,660	$	1,482

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
	March 31, 2015				March 31, 2014
(Amounts in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance:
Commercial loans
Commercial and industrial	$	—	$	—	$	292	$	12
Single family non-owner occupied		459		1		420		1
Non-farm, non-residential		8,792		163		5,918		36
Farmland		—		—		363		11
Consumer real estate loans
Home equity lines		—		—		265		2
Single family owner occupied		3,640		100		2,101		51

Total impaired loans with no allowance		12,891		264		9,359		113
Impaired loans with a related allowance:
Commercial loans
Commercial and industrial		—		—		5,157		47
Multi-family residential		—		—		5,603		22
Single family non-owner occupied		361		2		372		1
Non-farm, non-residential		4,064		19		4,399		25
Consumer real estate loans
Home equity lines		—		—		229		1
Single family owner occupied		2,374		10		4,580		34

Total impaired loans with an allowance		6,799		31		20,340		130

Total impaired loans	$	19,690	$	295	$	29,699	$	243

The Company determined that two of the six open PCI loan pools were impaired as of March 31, 2015, compared to two of seven impaired pools as of December 31, 2014, and three of seven impaired pools as of March 31, 2014. The following tables present balance and interest income related to the impaired loan pools as of the dates, and in the periods, indicated:


	March 31, 2015		December 31, 2014
(Amounts in thousands)
Recorded investment	$	3,640	$	14,607
Unpaid principal balance		4,733		31,169
Allowance for loan losses		114		58


	Three Months Ended March 31,
	2015		2014
(Amounts in thousands)
Interest income recognized	$	90	$	782
Average recorded investment		3,895		49,276

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:


	March 31, 2015
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	37,686	$	381	$	1,561	$	—	$	—	$	39,628
Commercial and industrial		76,535		592		1,355		—		—		78,482
Multi-family residential		89,366		6,977		952		—		—		97,295
Single family non-owner occupied		128,425		3,853		5,158		—		—		137,436
Non-farm, non-residential		433,629		11,988		17,418		—		—		463,035
Agricultural		1,666		—		5		—		—		1,671
Farmland		26,652		1,361		631		—		—		28,644
Consumer real estate loans
Home equity lines		105,913		1,531		1,714		—		—		109,158
Single family owner occupied		461,699		7,463		22,155		—		—		491,317
Owner occupied construction		35,077		—		247		—		—		35,324
Consumer and other loans
Consumer loans		68,348		467		269		—		—		69,084
Other		7,236		—		—		—		—		7,236

Total non-covered loans		1,472,232		34,613		51,465		—		—		1,558,310
Covered loans
Commercial loans
Construction, development, and other land		5,756		2,920		1,734		—		—		10,410
Commercial and industrial		2,272		82		17		—		—		2,371
Multi-family residential		490		—		188		—		—		678
Single family non-owner occupied		2,390		1,290		1,166		—		—		4,846
Non-farm, non-residential		12,476		4,153		8,043		—		—		24,672
Agricultural		42		—		—		—		—		42
Farmland		405		—		292		—		—		697
Consumer real estate loans
Home equity lines		20,385		36,143		887		—		—		57,415
Single family owner occupied		6,769		1,739		2,486		—		—		10,994
Owner occupied construction		190		219		103		—		—		512
Consumer and other loans
Consumer loans		87		—		—		—		—		87
Other		—		—		—		—		—		—

Total covered loans		51,262		46,546		14,916		—		—		112,724

Total loans	$	1,523,494	$	81,159	$	66,381	$	—	$	—	$	1,671,034


	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

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


	March 31, 2015						December 31, 2014
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	—	$	39	$	39	$	—	$	18	$	18
Commercial and industrial		124		—		124		123		34		157
Multi-family residential		346		—		346		245		—		245
Single family non-owner occupied		557		77		634		601		77		678
Non-farm, non-residential		6,064		1,560		7,624		2,334		1,317		3,651
Agricultural		—		—		—		4		—		4
Farmland		57		—		57		—		—		—
Consumer real estate loans
Home equity lines		794		493		1,287		792		204		996
Single family owner occupied		7,311		508		7,819		6,389		682		7,071
Owner occupied construction		—		103		103		—		106		106
Consumer and other loans
Consumer loans		134		—		134		68		—		68

Total nonaccrual loans	$	15,387	$	2,780	$	18,167	$	10,556	$	2,438	$	12,994

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, 2015, and no non-covered or covered accruing loans contractually past due 90 days or more as of December 31, 2014. Covered accruing loans contractually past due 90 days or more totaled $60 thousand as of March 31, 2015.


	March 31, 2015
(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	$	21	$	—	$	—	$	21	$	39,607	$	39,628
Commercial and industrial		278		192		105		575		77,907		78,482
Multi-family residential		283		—		109		392		96,903		97,295
Single family non-owner occupied		1,204		302		368		1,874		135,562		137,436
Non-farm, non-residential		1,200		3,830		2,289		7,319		455,716		463,035
Agricultural		5		—		—		5		1,666		1,671
Farmland		6		—		57		63		28,581		28,644
Consumer real estate loans
Home equity lines		784		28		524		1,336		107,822		109,158
Single family owner occupied		4,960		1,259		3,818		10,037		481,280		491,317
Owner occupied construction		—		353		—		353		34,971		35,324
Consumer and other loans
Consumer loans		379		85		39		503		68,581		69,084
Other		—		—		—		—		7,236		7,236

Total non-covered loans		9,120		6,049		7,309		22,478		1,535,832		1,558,310
Covered loans
Commercial loans
Construction, development, and other land		43		18		5		66		10,344		10,410
Commercial and industrial		179		95		—		274		2,097		2,371
Multi-family residential		—		—		—		—		678		678
Single family non-owner occupied		10		—		77		87		4,759		4,846
Non-farm, non-residential		46		45		1,488		1,579		23,093		24,672
Agricultural		—		—		—		—		42		42
Farmland		111		—		—		111		586		697
Consumer real estate loans
Home equity lines		317		279		177		773		56,642		57,415
Single family owner occupied		178		33		241		452		10,542		10,994
Owner occupied construction		—		—		—		—		512		512
Consumer and other loans
Consumer loans		—		—		—		—		87		87
Other		—		—		—		—		—		—

Total covered loans		884		470		1,988		3,342		109,382		112,724

Total loans	$	10,004	$	6,519	$	9,297	$	25,820	$	1,645,214	$	1,671,034


	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

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 $482 thousand as of March 31, 2015, and $475 thousand as of December 31, 2014. 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 $148 thousand for the three months ended March 31, 2015, and $149 thousand for the three months ended March 31, 2014.

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, 2015, or December 31, 2014. The following table presents loans modified as TDRs, by loan class, segregated by accrual status, as of the dates indicated:


	March 31, 2015						December 31, 2014
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accruing		Total		Nonaccrual⁽¹⁾		Accruing		Total
Commercial loans
Single family non-owner occupied	$	—	$	829	$	829	$	—	$	1,088	$	1,088
Non-farm, non-residential		83		4,704		4,787		83		4,743		4,826
Consumer real estate loans
Home equity lines		—		46		46		—		47		47
Single family owner occupied		623		8,199		8,822		471		8,412		8,883
Owner occupied construction		—		247		247		—		244		244

Total TDRs	$	706	$	14,025	$	14,731	$	554	$	14,534	$	15,088

(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,
	2015						2014
(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		—	$	—	$	—		—	$	—	$	—
Owner occupied construction		—		—		—		1		245		245

Total		—		—		—		1		245		245
Extended payment term
Single family non-owner occupied		—		—		—		1		303		303
Non-farm, non-residential		—		—		—		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 during the three-month periods ended March 31, 2015 or March 31, 2014, related to loans modified as TDRs within the previous 12 months.

Other real estate owned (“OREO”) consists of properties acquired through foreclosure. The following table presents information related to OREO as of the dates indicated:


	March 31, 2015		December 31, 2014
(Amounts in thousands)
Non-covered OREO	$	7,032	$	6,638
Covered OREO		5,834		6,324

Total OREO		12,866		12,962

OREO secured by residential real estate	$	4,562	$	6,155
Residential real estate loans in the foreclosure process⁽¹⁾		5,007		4,561

(1)	The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction.