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:


	June 30, 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	$	463	$	463	$	—	$	466	$	466	$	—
Non-farm, non-residential		8,831		9,211		—		5,705		6,049		—
Consumer real estate loans
Single family owner occupied		2,733		2,808		—		3,397		3,494		—
Owner occupied construction		356		357		—		—		—		—

Total impaired loans with no allowance		12,383		12,839		—		9,568		10,009		—

Impaired loans with a related allowance:
Commercial loans
Single family non-owner occupied		686		686		41		367		367		45
Non-farm, non-residential		5,396		5,411		1,657		3,772		3,772		1,000
Consumer real estate loans
Single family owner occupied		3,044		3,046		543		2,341		2,512		437

Total impaired loans with an allowance		9,126		9,143		2,241		6,480		6,651		1,482

Total impaired loans	$	21,509	$	21,982	$	2,241	$	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:


	Three Months Ended June 30,
	2015				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	$	—	$	—	$	293	$	17
Single family non-owner occupied		463		—		—		—
Non-farm, non-residential		8,831		60		6,379		89
Farmland		—		—		360		11
Consumer real estate loans
Home equity lines		—		—		—		—
Single family owner occupied		2,741		—		1,556		42
Owner occupied construction		352		—		—		—

Total impaired loans with no allowance		12,387		60		8,588		159

Impaired loans with a related allowance:
Commercial loans
Commercial and industrial		—		—		3,640		3
Multi-family residential		—		—		5,586		21
Single family non-owner occupied		684		20		369		1
Non-farm, non-residential		4,738		17		4,427		25
Consumer real estate loans
Home equity lines		—		—		—		—
Single family owner occupied		2,754		3		2,541		10

Total impaired loans with an allowance		8,176		40		16,563		60

Total impaired loans	$	20,563	$	100	$	25,151	$	219


	Six Months Ended June 30,
	2015				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	$	—	$	—	$	293	$	29
Single family non-owner occupied		461		1		210		1
Non-farm, non-residential		8,812		223		6,149		125
Farmland		—		—		362		22
Consumer real estate loans
Home equity lines		—		—		133		2
Single family owner occupied		3,190		100		1,829		93
Owner occupied construction		176		—		—		—

Total impaired loans with no allowance		12,639		324		8,976		272

Impaired loans with a related allowance:
Commercial loans
Commercial and industrial		—		—		4,399		50
Multi-family residential		—		—		5,595		43
Single family non-owner occupied		523		22		371		2
Non-farm, non-residential		4,401		36		4,413		50
Consumer real estate loans
Home equity lines		—		—		115		1
Single family owner occupied		2,564		13		3,561		44

Total impaired loans with an allowance		7,488		71		18,454		190

Total impaired loans	$	20,127	$	395	$	27,430	$	462

The Company determined that two of the six open PCI loan pools were impaired as of June 30, 2015, compared to two of seven impaired pools as of December 31, 2014. The following tables present additional information related to the impaired loan pools as of the dates, and in the periods, indicated:


	June 30, 2015		December 31, 2014
(Amounts in thousands)
Recorded investment	$	3,125	$	14,607
Unpaid principal balance		4,077		31,169
Allowance for loan losses		114		58


	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
(Amounts in thousands)
Interest income recognized	$	87	$	1,290	$	177	$	2,072
Average recorded investment		3,462		55,024		3,677		52,166

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:


	June 30, 2015
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	37,659	$	463	$	1,732	$	—	$	—	$	39,854
Commercial and industrial		80,195		536		1,390		—		—		82,121
Multi-family residential		88,256		6,946		1,033		—		—		96,235
Single family non-owner occupied		135,530		3,696		5,413		—		—		144,639
Non-farm, non-residential		429,895		9,203		19,227		—		—		458,325
Agricultural		1,859		—		4		—		—		1,863
Farmland		25,974		1,347		624		—		—		27,945
Consumer real estate loans
Home equity lines		105,153		1,371		1,437		—		—		107,961
Single family owner occupied		460,973		6,634		21,105		—		—		488,712
Owner occupied construction		36,833		—		601		—		—		37,434
Consumer and other loans
Consumer loans		71,799		90		205		—		—		72,094
Other		7,472		—		—		—		—		7,472

Total non-covered loans		1,481,598		30,286		52,771		—		—		1,564,655
Covered loans
Commercial loans
Construction, development, and other land		5,303		2,220		1,477		—		—		9,000
Commercial and industrial		1,396		22		31		—		—		1,449
Multi-family residential		500		—		348		—		—		848
Single family non-owner occupied		2,175		1,040		923		—		—		4,138
Non-farm, non-residential		11,450		2,582		7,372		—		—		21,404
Agricultural		35		—		—		—		—		35
Farmland		384		—		287		—		—		671
Consumer real estate loans
Home equity lines		19,423		34,276		866		—		—		54,565
Single family owner occupied		6,497		1,714		2,042		—		—		10,253
Owner occupied construction		—		85		101		—		—		186
Consumer and other loans
Consumer loans		85		—		—		—		—		85
Other		—		—		—		—		—		—

Total covered loans		47,248		41,939		13,447		—		—		102,634

Total loans	$	1,528,846	$	72,225	$	66,218	$	—	$	—	$	1,667,289


	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:


	June 30, 2015						December 31, 2014
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	—	$	69	$	69	$	—	$	18	$	18
Commercial and industrial		113		17		130		123		34		157
Multi-family residential		182		—		182		245		—		245
Single family non-owner occupied		1,328		77		1,405		601		77		678
Non-farm, non-residential		6,804		124		6,928		2,334		1,317		3,651
Agricultural		—		—		—		4		—		4
Farmland		57		—		57		—		—		—
Consumer real estate loans
Home equity lines		423		459		882		792		204		996
Single family owner occupied		6,583		316		6,899		6,389		682		7,071
Owner occupied construction		356		—		356		—		106		106
Consumer and other loans
Consumer loans		90		—		90		68		—		68

Total nonaccrual loans	$	15,936	$	1,062	$	16,998	$	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 or covered accruing loans contractually past due 90 days or more as of June 30, 2015, or as of December 31, 2014.


	June 30, 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	$	139	$	56	$	—	$	195	$	39,659	$	39,854
Commercial and industrial		30		36		95		161		81,960		82,121
Multi-family residential		78		—		182		260		95,975		96,235
Single family non-owner occupied		708		687		818		2,213		142,426		144,639
Non-farm, non-residential		1,246		59		5,818		7,123		451,202		458,325
Agricultural		4		—		—		4		1,859		1,863
Farmland		174		—		57		231		27,714		27,945
Consumer real estate loans
Home equity lines		74		116		346		536		107,425		107,961
Single family owner occupied		2,760		1,489		3,473		7,722		480,990		488,712
Owner occupied construction		—		—		—		—		37,434		37,434
Consumer and other loans
Consumer loans		170		42		38		250		71,844		72,094
Other		—		—		—		—		7,472		7,472

Total non-covered loans		5,383		2,485		10,827		18,695		1,545,960		1,564,655
Covered loans
Commercial loans
Construction, development, and other land		94		—		42		136		8,864		9,000
Commercial and industrial		—		31		—		31		1,418		1,449
Multi-family residential		—		—		—		—		848		848
Single family non-owner occupied		10		4		77		91		4,047		4,138
Non-farm, non-residential		258		39		85		382		21,022		21,404
Agricultural		—		—		—		—		35		35
Farmland		—		—		—		—		671		671
Consumer real estate loans
Home equity lines		327		127		96		550		54,015		54,565
Single family owner occupied		26		85		78		189		10,064		10,253
Owner occupied construction		—		—		—		—		186		186
Consumer and other loans
Consumer loans		—		—		—		—		85		85
Other		—		—		—		—		—		—

Total covered loans		715		286		378		1,379		101,255		102,634

Total loans	$	6,098	$	2,771	$	11,205	$	20,074	$	1,647,215	$	1,667,289


	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. Restructured loans 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 $478 thousand as of June 30, 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 following table presents interest income related to TDRs in the periods, indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
(Amounts in thousands)
Interest income recognized	$	160	$	129	$	308	$	278

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, 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:


	June 30, 2015						December 31, 2014
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accruing		Total		Nonaccrual⁽¹⁾		Accruing		Total
Commercial loans
Single family non-owner occupied	$	—	$	826	$	826	$	—	$	1,088	$	1,088
Non-farm, non-residential		—		4,670		4,670		83		4,743		4,826
Consumer real estate loans
Home equity lines		—		45		45		—		47		47
Single family owner occupied		312		8,055		8,367		471		8,412		8,883
Owner occupied construction		356		245		601		—		244		244

Total TDRs	$	668	$	13,841	$	14,509	$	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 June 30,
	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 and extended payment term
Single family owner occupied		1	$	35	$	35		1	$	137	$	137

Total		1	$	35	$	35		1	$	137	$	137


	Six Months Ended June 30,
	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
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		1		35		35		3		403		403

Total		1	$	35	$	35		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,
	2015				2014
(Amounts in thousands)	Total Contracts		Pre-Modification Recorded Investment		Total Contracts		Pre-Modification Recorded Investment
Commercial loans
Non-farm, non-residential		—	$	—		1	$	510
Consumer real estate loans
Single family owner occupied		1		163		1		135
Owner occupied construction		1		353		—		—

Total		2	$	516		2	$	645


	Six Months Ended June 30,
	2015				2014
(Amounts in thousands)	Total Contracts		Pre-Modification Recorded Investment		Total Contracts		Pre-Modification Recorded Investment
Commercial loans
Non-farm, non-residential		—	$	—		1	$	510
Consumer real estate loans
Single family owner occupied		1		163		1		135
Owner occupied construction		1		353		—		—

Total		2	$	516		2	$	645

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


	June 30, 2015		December 31, 2014
(Amounts in thousands)
Non-covered OREO	$	7,434	$	6,638
Covered OREO		5,382		6,324

Total OREO	$	12,816	$	12,962


Non-covered OREO secured by residential real estate	$	3,533	$	6,155
Residential real estate loans in the foreclosure process⁽¹⁾		2,731		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.