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. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms.

•

Doubtful — This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is 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 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 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.


	September 30, 2016
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	48,015	$	992	$	792	$	—	$	—	$	49,799
Commercial and industrial		85,440		3,687		1,235		—		—		90,362
Multi-family residential		118,153		8,528		787		—		—		127,468
Single family non-owner occupied		133,550		4,644		5,829		—		—		144,023
Non-farm, non-residential		568,766		16,044		10,495		710		—		596,015
Agricultural		5,711		75		—		—		—		5,786
Farmland		29,653		1,820		501		—		—		31,974
Consumer real estate loans
Home equity lines		106,086		733		1,289		—		—		108,108
Single family owner occupied		471,389		5,725		20,102		479		—		497,695
Owner occupied construction		43,216		—		709		—		—		43,925
Consumer and other loans
Consumer loans		76,086		23		248		—		6		76,363
Other		3,029		—		—		—		—		3,029

Total non-covered loans		1,689,094		42,271		41,987		1,189		6		1,774,547

Covered loans
Commercial loans
Construction, development, and other land		2,830		872		997		—		—		4,699
Commercial and industrial		926		—		15		—		—		941
Multi-family residential		—		—		43		—		—		43
Single family non-owner occupied		1,056		65		207		—		—		1,328
Non-farm, non-residential		7,038		616		658		—		—		8,312
Agricultural		26		—		—		—		—		26
Farmland		143		—		269		—		—		412
Consumer real estate loans
Home equity lines		15,092		22,867		778		—		—		38,737
Single family owner occupied		4,810		945		1,303		—		—		7,058
Owner occupied construction		105		—		96		—		—		201
Consumer and other loans
Consumer loans		80		—		—		—		—		80

Total covered loans		32,106		25,365		4,366		—		—		61,837

Total loans	$	1,721,200	$	67,636	$	46,353	$	1,189	$	6	$	1,836,384


	December 31, 2015
			Special
(Amounts in thousands)	Pass		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 impaired.

The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the periods indicated:


	September 30, 2016						December 31, 2015
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Amounts in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with no related allowance
Commercial loans
Multi-family residential	$	292	$	297	$	—	$	—	$	—	$	—
Single family non-owner occupied		455		455		—		782		783		—
Non-farm, non-residential		5,210		5,352		—		8,427		8,427		—
Consumer real estate loans
Single family owner occupied		1,137		1,195		—		1,975		2,067		—
Owner occupied construction		342		353		—		—		—		—

Total impaired loans with no allowance		7,436		7,652		—		11,184		11,277		—

Impaired loans with a related allowance
Commercial loans
Single family non-owner occupied		676		677		107		619		623		124
Non-farm, non-residential		4,599		4,636		1,843		5,667		5,673		1,568
Consumer real estate loans
Single family owner occupied		4,083		4,129		853		4,899		4,907		672
Owner occupied construction		—		—		—		349		355		7

Total impaired loans with an allowance		9,358		9,442		2,803		11,534		11,558		2,371

Total impaired loans	$	16,794	$	17,094	$	2,803	$	22,718	$	22,835	$	2,371

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


	Three Months Ended September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
(Amounts in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance
Commercial loans
Multi-family residential	$	298	$	15	$	—	$	—	$	99	$	15	$	—	$	—
Single family non-owner occupied		460		7		792		27		565		22		571		28
Non-farm, non-residential		5,404		60		8,878		72		6,051		181		8,834		295
Consumer real estate loans
Single family owner occupied		1,159		13		1,353		—		829		13		2,578		100
Owner occupied construction		344		—		—		—		229		—		117		—

Total impaired loans with no allowance		7,665		95		11,023		99		7,773		231		12,100		423

Impaired loans with a related allowance
Commercial loans
Single family non-owner occupied		682		5		629		—		572		18		558		22
Non-farm, non-residential		4,658		45		5,417		15		5,108		215		4,740		51
Consumer real estate loans
Single family owner occupied		4,130		24		4,847		13		4,547		91		3,325		26
Owner occupied construction		—		—		357		1		115		—		119		1

Total impaired loans with an allowance		9,470		74		11,250		29		10,342		324		8,742		100

Total impaired loans	$	17,135	$	169	$	22,273	$	128	$	18,115	$	555	$	20,842	$	523

The following tables present information on impaired PCI loan pools as of the dates, and for the periods, indicated:


(Amounts in thousands, except impaired pools)	September 30, 2016		December 31, 2015
Unpaid principal balance	$	1,104	$	3,759
Recorded investment		1,104		2,834
Allowance for loan losses related to PCI loan pools		12		54

Impaired PCI loan pools		1		2


	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2016		2015		2016		2015
Interest income recognized	$	12	$	96	$	130	$	273
Average recorded investment		1,139		3,045		2,195		3,464

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:


	September 30, 2016						December 31, 2015
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	70	$	39	$	109	$	39	$	54	$	93
Commercial and industrial		405		14		419		—		16		16
Multi-family residential		306		—		306		84		—		84
Single family non-owner occupied		1,158		25		1,183		1,850		29		1,879
Non-farm, non-residential		7,075		34		7,109		7,150		39		7,189
Farmland		135		—		135		234		—		234
Consumer real estate loans
Home equity lines		527		440		967		825		413		1,238
Single family owner occupied		7,403		136		7,539		7,245		96		7,341
Owner occupied construction		342		—		342		349		—		349
Consumer and other loans
Consumer loans		66		—		66		71		—		71

Total nonaccrual loans	$	17,487	$	688	$	18,175	$	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 $62 thousand as of September 30, 2016. No non-covered accruing loans were contractually past due 90 days or more as of December 31, 2015.


	September 30, 2016
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	5	$	64	$	53	$	122	$	49,677	$	49,799
Commercial and industrial		121		31		171		323		90,039		90,362
Multi-family residential		283		71		306		660		126,808		127,468
Single family non-owner occupied		110		305		780		1,195		142,828		144,023
Non-farm, non-residential		4,726		277		2,451		7,454		588,561		596,015
Agricultural		255		—		—		255		5,531		5,786
Farmland		72		576		—		648		31,326		31,974
Consumer real estate loans
Home equity lines		377		169		394		940		107,168		108,108
Single family owner occupied		4,123		1,875		2,950		8,948		488,747		497,695
Owner occupied construction		251		—		342		593		43,332		43,925
Consumer and other loans
Consumer loans		576		114		32		722		75,641		76,363
Other		—		—		—		—		3,029		3,029

Total non-covered loans		10,899		3,482		7,479		21,860		1,752,687		1,774,547

Covered loans
Commercial loans
Construction, development, and other land		105		—		39		144		4,555		4,699
Commercial and industrial		—		—		—		—		941		941
Multi-family residential		—		—		—		—		43		43
Single family non-owner occupied		25		—		—		25		1,303		1,328
Non-farm, non-residential		—		—		—		—		8,312		8,312
Agricultural		—		—		—		—		26		26
Farmland		—		—		—		—		412		412
Consumer real estate loans
Home equity lines		333		43		24		400		38,337		38,737
Single family owner occupied		232		26		92		350		6,708		7,058
Owner occupied construction		—		—		—		—		201		201
Consumer and other loans
Consumer loans		—		—		—		—		80		80

Total covered loans		695		69		155		919		60,918		61,837

Total loans	$	11,594	$	3,551	$	7,634	$	22,779	$	1,813,605	$	1,836,384


	December 31, 2015
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		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. No covered loans were recorded as TDRs as of September 30, 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:


	September 30, 2016						December 31, 2015
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accrual		Total		Nonaccrual⁽¹⁾		Accrual		Total
Commercial loans
Single family non-owner occupied	$	39	$	898	$	937	$	130	$	820	$	950
Non-farm, non-residential		—		4,205		4,205		—		4,600		4,600
Consumer real estate loans
Home equity lines		—		162		162		127		43		170
Single family owner occupied		929		7,947		8,876		733		8,256		8,989
Owner occupied construction		343		239		582		349		243		592

Total TDRs	$	1,311	$	13,451	$	14,762	$	1,339	$	13,962	$	15,301

Allowance for loan losses related to TDRs					$	552					$	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 for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2016		2015		2016		2015
Interest income recognized	$	143	$	148	$	296	$	456

The following tables present 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 September 30,
	2016						2015
(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		—	$	—	$	—		4	$	307	$	307

Total		—	$	—	$	—		4	$	307	$	307


	Nine Months Ended September 30,
	2016						2015
(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	$	115	$	115		5	$	342	$	342

Total		1	$	115	$	115		5	$	342	$	342

The following table presents 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 September 30,
	2016				2015
(Amounts in thousands)	Total Contracts		Post-modification Recorded Investment		Total Contracts		Post-modification Recorded Investment
Commercial loans
Single family non-owner occupied		—	$	—		1	$	78

Total		—	$	—		1	$	78


	Nine Months Ended September 30,
	2016				2015
(Amounts in thousands)	Total Contracts		Post-modification Recorded Investment		Total Contracts		Post-modification Recorded Investment
Commercial loans
Single family non-owner occupied		—	$	—		1	$	78
Consumer real estate loans
Owner occupied construction		—		—		1		353

Total		—	$	—		2	$	431

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


(Amounts in thousands)	September 30, 2016		December 31, 2015
Non-covered OREO	$	4,052	$	4,873
Covered OREO		2,437		4,034

Total OREO	$	6,489	$	8,907

Non-covered OREO secured by residential real estate	$	1,688	$	2,677
Residential real estate loans in the foreclosure process⁽¹⁾		3,639		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