Note 5.

Credit Quality

The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. 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.

The following tables present the recorded investment of the Company’s loan portfolio, disaggregated by class and credit quality, as of the dates indicated. Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately.


	March 31, 2016
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	50,378	$	883	$	1,268	$	—	$	—	$	52,529
Commercial and industrial		89,978		650		1,766		3		—		92,397
Multi-family residential		97,630		12,899		859		—		—		111,388
Single family non-owner occupied		141,932		4,189		5,474		—		—		151,595
Non-farm, non-residential		492,801		14,247		13,780		643		—		521,471
Agricultural		3,599		51		—		—		—		3,650
Farmland		25,453		1,392		168		—		—		27,013
Consumer real estate loans
Home equity lines		103,764		1,076		1,604		—		—		106,444
Single family owner occupied		471,097		6,530		19,838		—		65		497,530
Owner occupied construction		40,175		—		717		—		—		40,892
Consumer and other loans
Consumer loans		73,306		45		180		—		—		73,531
Other		7,451		—		—		—		—		7,451

Total non-covered loans		1,597,564		41,962		45,654		646		65		1,685,891

Covered loans
Commercial loans
Construction, development, and other land		3,671		1,281		1,177		—		—		6,129
Commercial and industrial		998		—		22		—		—		1,020
Multi-family residential		—		—		100		—		—		100
Single family non-owner occupied		1,458		371		429		—		—		2,258
Non-farm, non-residential		8,066		1,399		2,974		—		—		12,439
Agricultural		34		—		—		—		—		34
Farmland		356		—		276		—		—		632
Consumer real estate loans
Home equity lines		17,021		27,995		729		—		—		45,745
Single family owner occupied		4,440		1,945		1,452		—		—		7,837
Owner occupied construction		111		53		98		—		—		262
Consumer and other loans
Consumer loans		82		—		—		—		—		82

Total covered loans		36,237		33,044		7,257		—		—		76,538

Total loans	$	1,633,801	$	75,006	$	52,911	$	646	$	65	$	1,762,429


	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

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, unpaid principal balance, and related allowance for loan losses for loans considered to be impaired, excluding PCI loans, as of the periods indicated:


	March 31, 2016						December 31, 2015
(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	$	781	$	782	$	—	$	782	$	783	$	—
Non-farm, non-residential		7,983		7,983		—		8,427		8,427		—
Consumer real estate loans
Single family owner occupied		597		654		—		1,975		2,067		—

Total impaired loans with no allowance		9,361		9,419		—		11,184		11,277		—

Impaired loans with a related allowance
Commercial loans
Single family non-owner occupied		356		356		18		619		623		124
Non-farm, non-residential		5,348		5,361		1,529		5,667		5,673		1,568
Consumer real estate loans
Single family owner occupied		4,962		5,013		771		4,899		4,907		672
Owner occupied construction		346		354		3		349		355		7

Total impaired loans with an allowance		11,012		11,084		2,321		11,534		11,558		2,371

Total impaired loans	$	20,373	$	20,503	$	2,321	$	22,718	$	22,835	$	2,371

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


	Three Months Ended March 31,
	2016				2015
(Amounts in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance
Commercial loans
Single family non-owner occupied	$	779	$	8	$	459	$	9
Non-farm, non-residential		7,990		69		8,792		83
Consumer real estate loans
Single family owner occupied		603		—		3,640		18

Total impaired loans with no allowance		9,372		77		12,891		110

Impaired loans with a related allowance
Commercial loans
Single family non-owner occupied		358		7		361		7
Non-farm, non-residential		5,358		88		4,064		78
Consumer real estate loans
Single family owner occupied		4,961		38		2,374		18
Owner occupied construction		346		—		—		—

Total impaired loans with an allowance		11,023		133		6,799		103

Total impaired loans	$	20,395	$	210	$	19,690	$	213

The Company determined that two PCI loan pools were impaired as of March 31, 2016, compared to two as of December 31, 2015. The following tables present additional information related to the impaired PCI loan pools as of the dates, and in the periods, indicated:


	March 31, 2016		December 31, 2015
(Amounts in thousands)
Unpaid principal balance	$	3,664	$	3,759
Recorded investment		2,747		2,834
Allowance for loan losses related to PCI loan pools		24		54


	Three Months Ended March 31,
	2016		2015
(Amounts in thousands)
Interest income recognized	$	83	$	90
Average recorded investment		2,791		3,895

The Company generally places a loan on nonaccrual status when it is 90 days or more past due. PCI loans are generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. The following table presents nonaccrual loans, by loan class, as of the dates indicated:


	March 31, 2016						December 31, 2015
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	104	$	49	$	153	$	39	$	54	$	93
Commercial and industrial		96		16		112		—		16		16
Multi-family residential		67		—		67		84		—		84
Single family non-owner occupied		1,091		27		1,118		1,850		29		1,879
Non-farm, non-residential		6,450		1,466		7,916		7,150		39		7,189
Farmland		144		—		144		234		—		234
Consumer real estate loans
Home equity lines		925		307		1,232		825		413		1,238
Single family owner occupied		6,939		90		7,029		7,245		96		7,341
Owner occupied construction		346		—		346		349		—		349
Consumer and other loans
Consumer loans		34		—		34		71		—		71

Total nonaccrual loans	$	16,196	$	1,955	$	18,151	$	17,847	$	647	$	18,494

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. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled $243 thousand as of March 31, 2016. There were no non-covered accruing loans contractually past due 90 days or more as of December 31, 2015.


	March 31, 2016
(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	$	10	$	16	$	85	$	111	$	52,419	$	52,529
Commercial and industrial		28		147		—		175		92,222		92,397
Multi-family residential		74		67		—		141		111,247		111,388
Single family non-owner occupied		615		235		538		1,388		150,207		151,595
Non-farm, non-residential		11		544		4,861		5,416		516,055		521,471
Agricultural		—		—		—		—		3,650		3,650
Farmland		108		—		68		176		26,837		27,013
Consumer real estate loans
Home equity lines		294		163		726		1,183		105,261		106,444
Single family owner occupied		4,602		1,618		2,685		8,905		488,625		497,530
Owner occupied construction		346		—		—		346		40,546		40,892
Consumer and other loans
Consumer loans		320		82		6		408		73,123		73,531
Other		—		—		—		—		7,451		7,451

Total non-covered loans		6,408		2,872		8,969		18,249		1,667,642		1,685,891

Covered loans
Commercial loans
Construction, development, and other land		48		94		37		179		5,950		6,129
Commercial and industrial		—		—		16		16		1,004		1,020
Multi-family residential		—		—		—		—		100		100
Single family non-owner occupied		—		—		—		—		2,258		2,258
Non-farm, non-residential		—		—		1,466		1,466		10,973		12,439
Agricultural		—		—		—		—		34		34
Farmland		—		—		—		—		632		632
Consumer real estate loans
Home equity lines		274		142		129		545		45,200		45,745
Single family owner occupied		60		124		—		184		7,653		7,837
Owner occupied construction		—		—		—		—		262		262
Consumer and other loans
Consumer loans		—		—		—		—		82		82

Total covered loans		382		360		1,648		2,390		74,148		76,538

Total loans	$	6,790	$	3,232	$	10,617	$	20,639	$	1,741,790	$	1,762,429


	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

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. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain troubled debt restructurings (“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. PCI loans 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, 2016, or December 31, 2015.

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


	March 31, 2016						December 31, 2015
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accrual		Total		Nonaccrual⁽¹⁾		Accrual		Total
Commercial loans
Single family non-owner occupied	$	41	$	901	$	942	$	130	$	820	$	950
Non-farm, non-residential		—		4,558		4,558		—		4,600		4,600
Consumer real estate loans
Home equity lines		123		42		165		127		43		170
Single family owner occupied		692		7,890		8,582		733		8,256		8,989
Owner occupied construction		346		241		587		349		243		592

Total TDRs	$	1,202	$	13,632	$	14,834	$	1,339	$	13,962	$	15,301

Allowance for loan losses related to TDRs					$	590					$	590

(1)	Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.

The following table presents interest income recognized on TDRs in the periods indicated:


	Three Months Ended March 31,
	2016		2015
(Amounts in thousands)
Interest income recognized	$	78	$	148

There were no loans modified as TDRs during the three months ended March 31, 2016, or March 31, 2015. There were no loans modified as TDRs, within the previous 12 months, with a payment default during the three months ended March 31, 2016, or March 31, 2015.

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


	March 31, 2016		December 31, 2015
(Amounts in thousands)
Non-covered OREO	$	5,313	$	4,873
Covered OREO		2,279		4,034

Total OREO	$	7,592	$	8,907


Non-covered OREO secured by residential real estate	$	2,669	$	2,677
Residential real estate loans in the foreclosure process⁽¹⁾		1,609		2,727

(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.