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. 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:


	December 31, 2015
(Amounts in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance:
Commercial loans
Single family non-owner occupied	$	782	$	783	$	—
Non-farm, non-residential		8,427		8,427		—
Consumer real estate loans
Single family owner occupied		1,975		2,067		—

Total impaired loans with no related allowance		11,184		11,277		—
Impaired loans with a related allowance:
Commercial loans
Single family non-owner occupied		619		623		124
Non-farm, non-residential		5,667		5,673		1,568
Consumer real estate loans
Single family owner occupied		4,899		4,907		672
Owner occupied construction		349		355		7

Total impaired loans with a related allowance		11,534		11,558		2,371

Total impaired loans	$	22,718	$	22,835	$	2,371


	December 31, 2014
(Amounts in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance:
Commercial loans
Single family non-owner occupied	$	466	$	466	$	—
Non-farm, non-residential		5,705		6,049		—
Consumer real estate loans
Single family owner occupied		3,397		3,494		—

Total impaired loans with no related allowance		9,568		10,009		—
Impaired loans with a related allowance:
Commercial loans
Single family non-owner occupied		367		367		45
Non-farm, non-residential		3,772		3,772		1,000
Consumer real estate loans
Single family owner occupied		2,341		2,512		437

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

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

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


	Year ended December 31,
	2015				2014				2013
(Amounts in thousands)	Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	—	$	—	$	—	$	—	$	294	$	3,850
Commercial and industrial		—		—		17		461		17		698
Multi-family residential		—		—		—		—		3		18
Single family non-owner occupied		34		626		8		301		99		939
Non-farm, non-residential		295		8,767		96		6,083		296		7,225
Farmland		—		—		11		181		12		370
Consumer real estate loans
Home equity lines		—		—		2		66		25		454
Single family owner occupied		136		2,432		73		2,508		70		2,156
Owner occupied construction		—		88		—		—		5		15
Consumer and other loans
Consumer loans		—		—		—		—		—		3

Total impaired loans with no related allowance		465		11,913		207		9,600		821		15,728
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		—		—		—		117		1,057
Commercial and industrial		—		—		47		2,199		18		4,281
Multi-family residential		—		—		23		4,190		7		94
Single family non-owner occupied		25		575		2		369		3		892
Non-farm, non-residential		65		4,987		31		3,386		29		1,494
Consumer real estate loans
Home equity lines		—		—		1		57		12		304
Single family owner occupied		26		3,731		48		3,897		54		4,498
Owner occupied construction		1		178		—		—		—		—

Total impaired loans with a related allowance		117		9,471		152		14,098		240		12,620

Total impaired loans	$	582	$	21,384	$	359	$	23,698	$	1,061	$	28,348

The Company determined that two of the six open PCI loan pools were impaired as of December 31, 2015, compared to two of the seven open PCI loan pools as of December 31, 2014, and four of the seven open PCI loan pools as of December 31, 2013. The following tables present additional information related to the impaired loan pools as of the dates, and in the periods, indicated:


	December 31,
(Amounts in thousands)	2015		2014
Recorded investment	$	2,834	$	14,607
Unpaid principal balance		3,759		31,169
Allowance for loan losses		54		58


	Year ended December 31,
(Amounts in thousands)	2015		2014		2013
Interest income recognized	$	364	$	3,081	$	1,966
Average recorded investment		3,309		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, 2015
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total

Non-covered loans
Commercial loans
Construction, development, and other land	$	46,816	$	974	$	1,106	$	—	$	—	$	48,896
Commercial and industrial		87,223		663		1,017		—		—		88,903
Multi-family residential		81,168		12,969		889		—		—		95,026
Single family non-owner occupied		139,680		3,976		5,695		—		—		149,351
Non-farm, non-residential		454,906		15,170		15,384		—		—		485,460
Agricultural		2,886		25		—		—		—		2,911
Farmland		25,855		1,427		258		—		—		27,540
Consumer real estate loans
Home equity lines		104,897		1,083		1,387		—		—		107,367
Single family owner occupied		468,155		6,686		20,368		—		—		495,209
Owner occupied construction		42,783		—		722		—		—		43,505
Consumer and other loans
Consumer loans		71,685		61		254		—		—		72,000
Other		7,338		—		—		—		—		7,338

Total non-covered loans		1,533,392		43,034		47,080		—		—		1,623,506
Covered loans
Commercial loans
Construction, development, and other land		3,908		1,261		1,134		—		—		6,303
Commercial and industrial		1,144		4		22		—		—		1,170
Multi-family residential		460		—		180		—		—		640
Single family non-owner occupied		1,808		457		409		—		—		2,674
Non-farm, non-residential		9,192		2,044		2,829		—		—		14,065
Agricultural		34		—		—		—		—		34
Farmland		364		—		279		—		—		643
Consumer real estate loans
Home equity lines		17,893		29,823		849		—		—		48,565
Single family owner occupied		5,102		1,963		1,530		—		—		8,595
Owner occupied construction		112		51		99		—		—		262
Consumer and other loans
Consumer loans		84		—		—		—		—		84

Total covered loans		40,101		35,603		7,331		—		—		83,035

Total loans	$	1,573,493	$	78,637	$	54,411	$	—	$	—	$	1,706,541


	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

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:


	December 31,
	2015						2014
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	39	$	54	$	93	$	—	$	18	$	18
Commercial and industrial		—		16		16		123		34		157
Multi-family residential		84		—		84		245		—		245
Single family non-owner occupied		1,850		29		1,879		601		77		678
Non-farm, non-residential		7,150		39		7,189		2,334		1,317		3,651
Agricultural		—		—		—		4		—		4
Farmland		234		—		234		—		—		—
Consumer real estate loans
Home equity lines		825		413		1,238		792		204		996
Single family owner occupied		7,245		96		7,341		6,389		682		7,071
Owner occupied construction		349		—		349		—		106		106
Consumer and other loans
Consumer loans		71		—		71		68		—		68

Total nonaccrual loans	$	17,847	$	647	$	18,494	$	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 December 31, 2015, or December 31, 2014.


	December 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	$	—	$	—	$	39	$	39	$	48,857	$	48,896
Commercial and industrial		281		66		—		347		88,556		88,903
Multi-family residential		302		76		84		462		94,564		95,026
Single family non-owner occupied		748		120		929		1,797		147,554		149,351
Non-farm, non-residential		347		676		4,940		5,963		479,497		485,460
Agricultural		—		—		—		—		2,911		2,911
Farmland		585		11		234		830		26,710		27,540
Consumer real estate loans
Home equity lines		668		195		468		1,331		106,036		107,367
Single family owner occupied		6,122		1,943		3,191		11,256		483,953		495,209
Owner occupied construction		—		—		—		—		43,505		43,505
Consumer and other loans
Consumer loans		278		71		23		372		71,628		72,000
Other		—		—		—		—		7,338		7,338

Total non-covered loans		9,331		3,158		9,908		22,397		1,601,109		1,623,506
Covered loans
Commercial loans
Construction, development, and other land		96		—		42		138		6,165		6,303
Commercial and industrial		—		—		16		16		1,154		1,170
Multi-family residential		—		—		—		—		640		640
Single family non-owner occupied		1,422		—		—		1,422		1,252		2,674
Non-farm, non-residential		—		—		39		39		14,026		14,065
Agricultural		—		—		—		—		34		34
Farmland		—		—		—		—		643		643
Consumer real estate loans
Home equity lines		489		37		225		751		47,814		48,565
Single family owner occupied		274		—		42		316		8,279		8,595
Owner occupied construction		—		—		—		—		262		262
Consumer and other loans
Consumer loans		—		—		—		—		84		84

Total covered loans		2,281		37		364		2,682		80,353		83,035

Total loans	$	11,612	$	3,195	$	10,272	$	25,079	$	1,681,462	$	1,706,541


	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

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 TDRs totaled $590 thousand as of December 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 following table presents interest income related to TDRs in the periods, indicated:


	Year Ended December 31,
(Amounts in thousands)	2015		2014		2013
Interest income recognized	$	608	$	597	$	551

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


	December 31,
	2015						2014
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accruing		Total		Nonaccrual⁽¹⁾		Accruing		Total
Commercial loans
Single family non-owner occupied	$	130	$	820	$	950	$	—	$	1,088	$	1,088
Non-farm, non-residential		—		4,600		4,600		83		4,743		4,826
Consumer real estate loans
Home equity lines		127		43		170		—		47		47
Single family owner occupied		733		8,256		8,989		471		8,412		8,883
Owner occupied construction		349		243		592		—		244		244

Total TDRs	$	1,339	$	13,962	$	15,301	$	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 after modification.


	Year Ended December 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
(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
Owner occupied construction		—		—		—		1		245		245

Total		—		—		—		5		2,095		2,095
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
Single family owner occupied		5		342		342		5		487		487

Total		5		342		342		6		742		742

Total		5	$	342	$	342		13	$	3,608	$	3,608

There were no payment defaults on loans modified as TDRs that were restructured within the previous 12 months as of December 31, 2015 and 2014.

OREO consists of properties acquired through foreclosure. The following table presents information related to OREO as of the dates indicated:


	December 31,
(Amounts in thousands)	2015		2014
Non-covered OREO	$	4,873	$	6,638
Covered OREO		4,034		6,324

Total OREO	$	8,907	$	12,962

Non-covered OREO secured by residential real estate	$	2,677	$	6,155
Residential real estate loans in the foreclosure process ⁽¹⁾		2,727		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.